Party City’s capital structure and equity plummeted today as the company reported a steep decline in earnings for 3Q19 ended 30 September and a weak outlook for the fourth quarter, according to four sources following the company. The company attributed its 71% year-over-year quarterly EBITDA dive to macro dynamics like a global helium shortage and Chinese tariffs – but investors were most spooked by the company’s poor sales during its critical Halloween selling season, the sources said.

“I would’ve thought [Halloween sales were] a bread-and-butter part of their business, but I guess not. Now, they’ll have to wait until next year to fix it,” one of the sources said.

The issuer’s USD 500m 6.625% senior unsecured notes due 2026 fell more than 15 points today to 80.5 yielding 10.773% from trades in 96-97 yesterday (6 November), according to MarketAxess. The USD 350m 6.125% senior unsecured notes due 2023 dropped to 91.375 to yield 8.868% from trades at 100.75 yesterday.

The company’s USD 1.2bn Libor+ 250bps TLB due 2022 (repriced in February 2018) dropped seven points to 91.083/92.458 today from the 98.875/99.444 context yesterday, according to Markit.

In the equity market, Party City’s stock dove 67% today to USD 2.00 per share and a market cap of USD 188.87m.

The company provided a glimpse of its post-3Q October sales, since Halloween typically comprises a significant chunk of the issuer’s annual revenue (Debtwire credit analysts estimate that in 4Q18, October contributed roughly 55% of 4Q sales, and that 4Q sales made up more than one-third of annual sales).

During October of this year, sales per store at its Halloween City pop-ups decreased 20.8% from the prior year. Total monthly revenue was down 7% year-over-year to USD 432.6m for its retail segment, excluding Canadian retail revenue.

The lower sales per store for Halloween imply that the company is losing market share to other retailers such as dollar stores, two of the sources said.

Party City lowered its 2019 adjusted EBITDA guidance for the second time this year. In 2Q19, it reduced guidance to USD 355m-USD 370m from USD 405-USD 418m. Now, the company is expecting USD 300m-USD 310m.

Investors are unsure what to make of the about-face. “It’s hard to predict, because this was such a bad miss,” one of the sources said.

The 3Q19 quarterly results showed adjusted EBITDA fell 71% year-over-year to USD 17.1m, while revenue for the quarter fell 2.3% to USD 540.2m. Total gross profit margin decreased 590bps to 30.6% of net sales, which the company credited to the helium shortage, cost inventory markdowns, higher freight costs linked to Chinese tariffs, increased promotional activity and sales mix shifts.

At FY19 adjusted EBITDA guidance, leverage would come in at 6.7x at year end – compared to 5.1x at the end of 2Q19. On an LTM basis, the company generated USD 155m of free cash flow (7.6% of total debt), based on USD 339m of adjusted EBITDA, 66m of capex and USD 118m of interest expense.

As of 30 September, liquidity stands at USD 186.5m through USD 152m of revolver availability and USD 34.5m of cash. Proceeds from the of USD 132m sale of its Canadian business, which closed 1 October, boost liquidity to 318.5m.

The company plans to close at least 21 more locations in the fourth quarter.

Party City did not respond to a request for comment.

2019 Debtwire