PRTY Stock Alert: Is Party City Going Bankrupt?

One under-the-radar title that took a big hit this year is party town (NYSE:PRTY). Shares of the holiday gift retailer struggled more than many company peers. The underperformance has seen PRTY stock plunge more than 90% year-to-date (YTD), with a sharp decline seen in Friday’s session amid reports circulating of creditors rallying ahead of a restructuring of the company.

Party City, like other major retailers, has felt the pinch of inflation. Indeed, soaring helium prices and other factors have hit the company much harder than others in this industry. However, it’s Party City’s track record that worries many investors and creditors. With $1.8 billion in debt and only $92 million in free cash in the third quarter, it’s a company in dire straits.

As a result, with the company’s bonds now trading at pennies on the dollar, common stock investors don’t want to fish the bottom. Let’s examine whether PRTY stock could be a compelling buying opportunity – or a value trap – at these depressed levels.

Is it time to buy PRTY shares?

The macro environment has not been favorable to many retailers. With inventory issues and the possibility of a slowdown in consumer spending this holiday season, investors are generally in sell mode in this sector. However, for Party City, the company-specific issues mentioned above raise even more concerns.

Given the company’s heavily indebted balance sheet and its apparent inability to climb out of its hole, questions remain about the viability of this business as an ongoing concern. Indeed, when bondholders come together to pursue repayment, it is usually not a good sign. For shareholders, who are usually the last in line in the event of a restructuring/bankruptcy, it is even worse. Thus, this selling pressure seems justified.

Right now, I think PRTY stock looks more like a value trap than a value stock at these levels. The company might not survive until 2023. And if it does, it’s unclear how negatively impacted shareholders will be. As a result, it may be best for investors to wait for the dust to settle with this name.

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As of the date of publication, Chris MacDonald did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.