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Party City is facing a helium shortage. It's also closing 45 stores

Balloons are big business for Party City.

Posted: May 10, 2019 1:44 PM

(CNN) -- Helium is the second-most abundant element in the galaxy, yet Party City is struggling to find enough of the gas to fill balloons.

Balloons are big business for Party City. The company's mylar balloon sales fell 8% last quarter, dragging overall sales down 1.4% at Party City stores open at least a year. Sales would have risen if not for the balloon problems, the company said Thursday.

Filling balloons with helium is among the company's most profitable services, according to Barclays' Matt McClintock. Helium brings people into the store, and those customers usually buy other items instead of buying on Amazon or at another store. But with the earth's (and Party City's) helium supplies dwindling, potential balloon customers have been searching elsewhere for party goods.

Party City also said it will close 45 stores this year. That's triple the number of stores the company typically closes in any given year. In a worrisome sign, almost all of those stores are profitable, the company said. The company is closing the stores to boost overall profitability, hoping customers will shop at nearby Party City stores. It has about 900 across North America.

Whither the world's helium?

Helium supplies been running out for several years. Helium is formed by the atom-smashing power of the sun and other stars. But on Earth, helium is a finite resource.

The Earth holds pockets of helium buried under rock, but it's notoriously hard to capture because it, well, floats. When drilling or fracking for natural gas, energy companies capture some helium and sell it. But helium makes up a tiny percentage of the gasses trapped under rock formations.

Over the past few years, some drillers have claimed to find troves of helium buried underground, but those haven't always panned out. Party City said it really started feeling the pinch in August 2018.

Good and bad news for Party City

The good news for Party City is it signed an agreement with a new helium supplier. Party City believes the new supplier can help it return its balloon business back to normal starting in the summer, and it hopes the supplies will last for the next two-and-a-half years.

"We believe this new source should substantially eliminate the shortfall we are experiencing," said Party City CEO James Harrison in a statement.

The bad news is Party City said its helium shortage will continue through the spring. That's bad timing: May is a big month for balloons.

"Obviously graduation is a big season for balloons, no doubt about that," said Harrison on a conference call with Wall Street analysts Thursday.

And once Party City gets its helium back, its new supplier will charge more than its last provider. So it will have to raise balloon-filling prices.

Helium still remains cheap, and Party City doesn't expect the higher prices to hurt sales in the long-run. It may also be able to eat some of that cost over time, Harrison predicted. But he said higher helium prices may be here to stay.

"Over time, will helium come back down in price? Nobody knows. We'll see," Harrison said.

Harrison cautioned, however, that the additional helium wasn't a sure thing. Party City's new supplier might believe it is sitting on a lot of helium, but it can't know for sure until it bottles and sells it.

"Mother Nature will ultimately determine whether or not those fields have the adequate amount helium to reach the goals that we've set," Harrison said. "We feel very comfortable that the expectations and the estimates made are solid."

Still, the stock price soared 10% Thursday, because investors were pleased that Party City was able to secure another helium supplier. The stock fell 3% Friday, dragged down by the broader market.

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