Check out this morning's Herb on TheStreet.
This increasingly is becoming the fourth quarter from hell for many companies, as auditors continue to crack down on aggressive accounting used to make business look better than it might have been. The latest victim -- surprise, surprise -- is
, the party goods chain. It follows
, all of which reported fourth-quarter glitches that came as no surprise to short-sellers, who had been alleging that each firm was pushing the envelope in its accounting. All but Rite Aid suggested that the issues in question were audit-related.
Investors forget that the fourth quarter is the audited quarter. That means it's the quarter in which any attempt to fool shareholders in prior quarters should be caught, if the auditors are doing their jobs.
Which brings us to Party City. An item
here last August noted that not only had the company's debt tripled, but its inventories continued to balloon as if loaded with helium. To plagiarize from that column: "That's troubling for a company that says most of its business is done between Halloween and Christmas. Does the rising inventory merely reflect the company's fast growth? Perhaps, but with 20,000 different items in each store, it could also represent excess merchandise, in which case the company could be forced to dump the unsold goods at or below cost. Such an event, according to the company's financials, 'could have an adverse effect' on business.
"A boilerplate warning? Sure, but with a company that has as many possible pitfalls as Party City, boilerplates can't be taken lightly."
response to that column, CFO David Lauber said the company was comfortable with its debt, "which is at planned levels to support our aggressive store growth program."
As for the inventory, he said, "As you know, we are entering our peak selling season, during which time we traditionally increase inventories appropriately in order to be in a strong in-stock position to capture sales up through Oct. 31, and best serve our customers. Moreover, much of our inventory consists of 'evergreen' items that remain popular year after year. We have very limited exposure to 'faddish' merchandise."
As the holidays approached, the Party City story sizzled and the stock nearly doubled before losing steam in recent weeks. Can't help but wonder if some investors caught wind of what was about to happen.
Today Party City said that its year-end audit is taking longer than expected "due to various difficulties associated with implementing new and upgrading existing financial reporting and accounting systems that were required, in part, to accommodate the substantial growth of its business, as well as the time and difficulties associated with taking a physical inventory of the increased number of stores and recent turnover in its Finance Department. The Company is working diligently with its independent auditors to complete the audit as soon as possible."
Reading between the lines:
The place was outta control!
So outta control, in fact, that the company doesn't quite know when the audit will be completed.
Oh, and by the way, Party City also said it'll be in default of certain reporting covenants under its existing $60 million secured credit facility as well as certain other financial covenants.
With the stock down 3 9/16, or 49%, at 3 3/4, it seems like the party is over.
Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at firstname.lastname@example.org. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.