Shares of Party City (PRTY) are trading lower but trying to stabilize after reporting second-quarter earnings per share (EPS) of $0.22 vs. $0.40, which was $0.19 below expectations.

The reasons behind the shortfall are the same ones that have been bothering the stock all year. First, comparable stores sales fell 2.1%, with practically all the shortfall coming from a helium shortage.

Second, higher freight costs that were capitalized into inventory in the fourth quarter of last year due to disruptions from the start of Chinese tariffs squeezed gross margin by 200 basis points. Finally, gross margins were also hurt by 100 basis points by the write-down of inventory with the company closing stores.

Sales mix changes from the helium shortage also lowered margins by 90 basis points. Because of the weakness, the company lowered EPS guidance for the year to $1.26-$1.36 a share, versus expectations of $1.65

However, amid this bad news, PRTY is making progress on what is really important for the company — improving cash flow and the balance sheet. The company has not released its 10Q yet, but it has reduced debt through the sale/leaseback of manufacturing and distributing facilities.

PRTY also claims to have had $100 million in free cash flow in the first half of the year. While I am assuming $126 million of this came from the proceeds of the sale, the $26 million in negative free cash flow in the first half, excluding this transaction, is a big improvement after more than $100 million was burned in the first quarter. Cash flow should improve significantly in the seasonally stronger second half of the year.

PRTY continued to be hurt by several factors beyond its control. However, the company Is making the necessary changes. While its reduced stock price today adds to the pain, I think there is a light at the end of the tunnel with cash flow starting to improve. Continue to buy PRTY. My new buy under is $5.50. My target price is now $9.