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Friday, May 15, 1998
Paper Warehouse Inc.
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Phone: 612-936-1000
Price (5/14/98): $5
"The party is over, I have gone away."
- Journey
HOW DID IT FIND TROUBLE?
Have you ever hosed down confetti? Something once so festive, suddenly so cumbersome and a soggy mess. That was the kind of celebration new shareholders have found at Party Warehouse.
The company's coming out party was in November, with 1.8 million shares offered at $7 1/2. It was a boisterous affair with the debutante shares going as high as $9 1/4 a month later. Those who RSVP'd were in for a rude reality -- every good bash must eventually come to an end.
While revenues ended up 23% for the year on impressive 8% same-store sales growth, the conga line to the bottom line was a bit of a noisemaker. Operating income was shaved in half, even before considering charges for the early retirement of debt and a botched acquisition. For the January quarter, the company reported an operating loss.
The shares, like flying streamers, fell in the process. It's their party and the shareholders will cry if they want to.
BUSINESS DESCRIPTION
Minneapolis-based Paper Warehouse owns the Paper Warehouse and Party Universe chains of party supplies and paper goods stores. With 124 outlets, 73 of them company-operated, the company announced the acquisition of Party Factory, a Gibson Greetings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GIBG)") else Response.Write("(Nasdaq: GIBG)") end if %> subsidiary in December, only to call off the deal a month later.
FINANCIAL FACTS
Income Statement
12-month sales: $52.9 million
12-month income: ($0.2 million)*
12-month EPS: ($0.08)*
Profit Margin: N/A
Market Cap: $19.5 million
(*Pro forma, includes non-recurring items)
Balance Sheet
Cash: $2.1 million
Current Assets: $13.8 million
Current Liabilities: $4.4million
Long-term Debt: $0.9 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.37
HOW COULD YOU HAVE SEEN IT COMING?
Time and again we have been spoon fed that in the retail world increasing revenues at existing stores, or same-store sales growth, is the ultimate indicator of success. On the surface it makes sense. If you sell more, your store is more popular.
Yet that is never a shoo-in for improved efficiency. For Paper Warehouse, operating margins went from 4.9% in 1996 to 1.9% this past year. The company explains it as short-term pain to improve the company's inventory control system and to issue company credit cards. The company even singles out the initial public offering as a source of management distraction -- as if the alternative, managing a cash crunch by incurring more debt, would be any less taxing on the minds of the corporate executives.
The problem was that investors figured this would be an easy encore to the successful Party City <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCTY)") else Response.Write("(Nasdaq: PCTY)") end if %> gala, whose shares had doubled last year. But even before Paper Warehouse's charge-ridden fourth quarter, the first three quarters had shown a company where earnings were not keeping up with revenues, and reality not keeping up with expectations.
WHERE TO FROM HERE?
This year Paper Warehouse plans on opening 25 new stores. Like most retail chains, the company has expanded through strategic clustering, placing several units in the same metropolitan area to cash in on local economies of scale. This year the new markets will be Omaha and Seattle.
So, the company continues to grow, and with healthy same-store sales comps, revenues will definitely go higher, but will earnings? The answer is not as simple as deciding between light blue or pink pastel for baby shower decor. If some of the costly ventures the company has embarked upon with the IPO funds prove fruitful -- that being that the new inventory management software makes the company more efficient and the credit card programs make the clients more faithful -- things could turn around for the company and its shares in a hurry. As it stands, the lone estimate for the company to earn $0.42 a share this year appears too generous if the malaise continues, but also too conservative if the company returns to 1996 margins.
There is also the aspect of acquisitions. In a scattered sector like this, where regional chains and mom and pop stores make up most of the outlets, one should expect buyouts. The bigger companies that can use stock as legal tender will no doubt continue to buy up the smaller competition. If so, will Paper Warehouse be the buyer or the buyee?
"Our industry is going through a period of consolidation that could benefit Paper Warehouse," said company President and CEO Yale Dolginow. True, but keep in mind that this buyout hunger also cost Paper Warehouse $261,000 over the botched deal with Gibson. Still, the good shot of a fiscal turnaround with the added kicker of sector consolidation makes this a party to at least consider driving by one night.
-Rick Aristotle Munarriz
([email protected])
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