Party City Holdco Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Good morning, everyone. And welcome to the Party City Q1 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. At this time, I’d like to turn the conference call over to Ian Heller, Vice President and Deputy General Counsel. Please go ahead.

[Ian Heller:]

Thank you, Operator. Good morning, everyone, and thanks for joining us. This morning we released our first quarter 2021 financial results. You can find a copy of our press release on our website at investor.partycity.com.

[Brad Weston:]

Thank you, Ian. Good morning, everyone, and thank you for joining us today. I’ll start by reviewing our financial and operational results for the first quarter of 2021 and then discuss our progress and plans around our purpose to inspire joy and make it easy to create unforgettable memories. We will deliver on this purpose through advancing the fundamental building blocks of our strategy. Todd would then elaborate on their financial results and provide some thoughts on how we’re approaching the remainder of 2021. We are pleased with our first quarter performance with consolidated total sales of 2.7% on a constant currency basis to $427 million. As a reminder, we anniversary the onset of the pandemic and subsequent store closures late in Q1, and social gatherings were suppressed for a significant portion of the quarter this year. To that end, we are enthusiastic about how the business transition post-Christmas with a strong New Year’s Eve performance and the cadence of our business improving as we move through the quarter. Compared to 2019, March was the strongest month and this momentum carried into April. The strength in the business was broad-based, with continued strong performance from our core everyday categories and better than expected performance from our seasonal categories. I am pleased with how our teams are executing against our strategic priorities and navigating the challenges of the environment, including tight supply chain conditions.

[Todd Vogensen:]

Thanks, Brad, and good morning, everyone. Today I’ll focus on the key highlights of our first quarter performance and then I’ll discuss how we’re approaching the rest of fiscal 2021. For details regarding our financial results, please refer to our earnings press release and the accompanying slides, which are available on the Investor Relations section of our website. As Brad discussed, we’re pleased with our first quarter results and the broad-based strengthen our business trends. So I mentioned on our last call, the 53rd third week in 2020 shifted a significant portion of New Year’s Eve sales into the fourth quarter of fiscal 2020, which would otherwise have fallen in the first quarter of fiscal 2021. This resulted in first quarter headwinds of approximately $32 million in sales and $9 million in EBITDA compared to last year. Please also note that our first quarter results include the impact from the divestiture of our international wholesale and retail operations, which closed at the end of January. With that in mind, for the first quarter consolidated revenues were up 3.1% versus 2020. Brands comparable sales increased approximately 35.9%, driven primarily by strong performance in our core categories, which were up 49% in the quarter versus 2019 brand comparable sales increased to 0.4% including an 11.2% increase in our core categories. Wholesale revenue declined 15.8% on a reported basis versus first quarter 2020 and 29.6% versus 2019, primarily driven by the January sale of our international operations.

[Operator:]

And our first question today comes from Seth Sigman from Credit Suisse. Please go ahead with your question.

[Seth Sigman:]

Hi, everybody. Good morning. Great quarter and nice progress. I am curious, obviously, Party City is positioned to benefit from the reopening across the country. I am more curious about market share performance specifically in March and April. Do you feel like the improved execution and the many strategic initiatives that’s helping you take more than your fair share and how are you thinking about that? Thank you.

[Brad Weston:]

Thanks, Seth. We certainly saw an uptick in our business as we mentioned in March and April versus January and February. What we tried to keep a close eye on is the difference between our core business and our seasonal business. Our core business has remained strong even through Q3 and Q4 of last year and into Q1 of this year. And that has been a tremendous focus for us and we feel like we’re doing really well from a market share perspective. Our seasonal businesses have continued to beat our expectations. They’ve gradually improved through Q3, Q4 and into early spring. So really anticipate that as we things open up, people start returning to normal celebrations that will continue to see that trend.

[Seth Sigman:]

Okay. All right. That’s great. And then my follow-up question is around the flow-through of the business. For Q2 you are guiding to higher sales versus 2019, which is encouraging, but slightly lower adjusted EBITDA margin. I think, Todd, you mentioned international and maybe transportation costs as part of that. Any other drags that we should be thinking about here versus 2019 and how did those ease, I guess, as we move through 2021?

[Todd Vogensen:]

Let me capture the big ones. We had mentioned in the last quarter that there is also just a little bit of helium cost pressure when you look back versus the last couple of years. That normalizes as we get into Q3 and then omnichannel costs a little bit of delivery cost that is embedded in the model in those normalized, as well as we get into, well, as more volume picks up into those categories. So those are really the biggest things that we look at. Truthfully, we’ve set up that cost structure so that we’re in a position with our occupancy where we can gain leverage really quickly, where our costs are then reset, say, at the wholesale level and the manufacturing level. So the flow through on the incremental sales should start to be very strong particularly as we get into the second half.

[Seth Sigman:]

Okay. That’s great. All right. Well, thank you very much.

[Brad Weston:]

Thank you.

[Todd Vogensen:]

Thanks, Seth.

[Operator:]

Our next question comes from Rick Nelson from Stephens. Please go ahead with your question.

[Rick Nelson:]

Hi. Good morning. So, do you have any insight into how you’re planning from fourth quarter Halloween 2021? You mentioned the supply chain challenges. How significant those are to-date and your expectations as to how you mitigate those challenges?

[Brad Weston:]

Yeah. Thanks, Rick. There are still a lot of unknowns for the back half, hence not providing guidance. With regards to Halloween, we learned a lot last year. We made additional refinements to our go-to-market strategy, crossed our assortments, our in-store merchandising, our digital experience and marketing based on those learnings that are really designed to improve our results. So, for everything in the backpack including Halloween, we positioned our bias to prepare for a range of results. So we’re confident that we’ve planned and positioned our inventory appropriately, and if consumer behavior continues to show the sort of rebound of celebrations and social gatherings then we’re positioned really well. With regards to your supply chain question, this is obviously a broadly discussed issue in the industry. It’s hard to say exactly how long it’s going to last. However, one thing I would want everybody to note is, that we were making supply chain investments to really help mitigate any circumstances that were coming. We were also working really hard on driving more efficiency into our supply chain before we entered this more difficult environment and so as we drive our vertical model. So we were already focused on opportunities to really take time and cost out of the system, all of which are really mitigating any challenges. And thus far we’ve only seen minor disruptions. We feel good about the positioning relative to delivery on Halloween, as that product leaves port gets on the water and has scheduled arrival. So we’re feeling positive about that.

[Rick Nelson:]

Okay. Thanks for that color. Also I would like to ask you about next-gen stores. How those are performing from a comp standpoint, the economics compared to the rest of the chain?

[Brad Weston:]

Yeah. I’ll speak to the topline and Todd can talk a little bit about what we’re seeing in CapEx. The next-gen stores are outpacing comp growth in the balance of the chain and balloon comp growth continues to be about double the balance of the chain with quite a bit higher balloon sales penetration. When you think about the fact that we didn’t really open the first one until last summer and a small number by the time we got to the fall season. We’re pleased with what we’re seeing in terms of performance. The returns we’re seeing and the customer reaction, which is really supporting our decision to expand. We’re still learning a great deal and constantly modifying the prototype. And if you digest the fact that we’re, hope for the last year, we’ve been creating a new prototype in the midst of a pandemic and overhauling our assortments and inventory levels, you can appreciate the complexity. And I think that just lands two thoughts, as far Todd comments, and that’s if we weren’t excited by the results, we certainly wouldn’t be moving forward in the fashion that we are. But I’d also say that we aren’t at a point where we should model those results.

[Todd Vogensen:]

I think that’s exactly right. And at the same time, we are seeing those results that are encouraging. The stores are outperforming the averages. Customer feedbacks have been very strong. From a landlord perspective, really, they are very few if any that have not participated in the cost of the remodels themselves. So that helps with the cost structure dramatically. Remodel already has significantly less expensive than the new store, but then with the landlord participation, it really does minimize that overall cost and the cost for next-gen stores from a capital perspective are included in our overall capital budget of $70 million to $80 dollars. So we’re not going to break them out specifically at this point and give more detailed economics. They’re embedded in what is an overall normal run rate for us. And within that, I think, Brad mentioned in his script, we were getting paid back of less than three years on these remodels. So, the performance is such that they are paying that capital quite quickly. And I think if you look at how -- if you look at the numbers of what we’re implementing in Q1, and the Q2 numbers as I mentioned, we’ll be continuing to expand in the back half.

[Rick Nelson:]

That’s great. Thanks for the color and good luck as we push forward.

[Brad Weston:]

Thank you.

[Operator:]

Our next question comes from Joe Feldman from Telsey Advisory. Please go ahead with your question.

[Joe Feldman:]

Yeah. Hey, guys. First of all, on the topline, were there any other regional trends that you’ve noticed or any differences across the regions maybe where things are a little more open than areas where they’re less?

[Brad Weston:]

So it’s subsiding. We see potential growth opportunities really across all regions. On a two-year basis the Northeast has trailed the pace of recovery versus the rest of the country. Their geographic results are choppy on multiple levels when you look at pandemic and helium history impacts, et cetera. So but we’re not seeing anything in the current business that would lead to any outsized risk or opportunity with any of our regional performance.

[Joe Feldman:]

Okay. Got it. That’s good. And then on inventory, again, I know you talked about supply chain hiccups bit well more than hiccups that are happening to the industry right now. But you mentioned like there’s a few categories where it feels like you’re a little lighter and I was just curious if there was anything you could share detail wise or maybe from a competitor standpoint you don’t want to, but where you might be right and if you’re actually missing some sales in those categories?

[Brad Weston:]

So, I wouldn’t say that we see anything where we’re missing any sales. As you can imagine, demand has changed a little bit by category versus where we were with pre-pandemic and even during the pandemic. So those are significant. But demand has a little bit of an impact on our supply chain flow. And then there’s some supply constraints in some areas. We don’t -- we’re managing all of those. We’re constantly looking at more multiple sources of supply to ensure that we’re covering our needs. So, we’re focused on demand, where it’s been, where it is today and where do we see demand by category in the near-term and long-term, and then making the supply adjustments that we need to.

[Joe Feldman:]

Got it. Okay. Thanks and good luck with the second quarter, guys.

[Brad Weston:]

Thank you.

[Operator:]

Our next question comes from Jenna Giannelli from Goldman Sachs. Please go ahead with your question.

[Jenna Giannelli:]

Hi. Good morning. Thanks for taking my question. So, I am curious a little bit on just the strong brand comp and the retail sales, obviously, better than expectations and a very strong trend. I am curious if you could just break that down a little bit more for us? Are you seeing some of the trends that you saw last quarter in terms of smaller gatherings, so different mix, has pricing been a tailwind or transactions and traffic just out? Any color in some of the KPIs underlying the strong sales trends would to be great?

[Brad Weston:]

Yeah. I think the biggest thing as I said before to pay attention to are, what really encourages us is our core everyday categories, that being entertaining and balloons, and solid tableware and birthday products. Those continue to be the strength of our business and to me that tells me that, gatherings and the milestone celebrations that we want to be there for the customers, their destination for one-stop shop and our ability to sell solutions for those occasions that we’re meeting those needs. The big -- if there’s a drain in any categories, you -- this has been true through the pandemic, is if it’s related to social gatherings and it’s a seasonal business, where people typically gather for parties, I mentioned several in the first quarter like Super Bowl and Mardi Gras, St. Patrick’s Day. As you can imagine those have been a little bit more challenged. We have seasonal products -- specific seasonal products for those celebrations, as well as some of our core assortment is tie-ins for those and those have been the most challenging. But the good news is, if things open up, we’re seeing continued improvement and we saw -- they beat our expectations through the first quarter. I think they were the biggest challenge in Q4. We’re not seeing any price resistance. Obviously, we did a lot of work last year in getting our prices right for the consumer and being properly competitive. And the unit productivity that we’re seeing in those in the production of margin dollars combined with our reduction in promotions is really driving a good margin as well.

[Jenna Giannelli:]

Great. Thanks. That’s helpful and encouraging. I just have one more just on the inflationary pressures. I know you called out transportation cost is something to watch to the rest of the year. But I am curious if you’ve seen labor and wages, availability of labor. Has that been a headwind, starting to be a headwind as we think about the rest of 2021 and that’s it for me? Thank you.

[Brad Weston:]

Sure. So, as we look out the wages, there’s clearly wage pressure. And what we’re doing is going along and measuring, making sure that we’re maintaining a competitive position, but also mitigating where possible. So, anything that we have seen, we have included in our guidance and it’s in there. I would also say on the wage side, just historically, though the federal minimum wage gets a lot of press, the truth is, local minimum wage laws have been increasing fairly radically over time and we’ve been keeping pace with that with local markets. So, the difference in minimum wage across our store is probably not as significant as you would expect. So, at this point, from everything we’re seeing the current trends seem manageable. And related to the freight side of your question, Jenna, I would say that, we’re -- we stated in Q1, restated again now that we’ve accounted for those. We see those staying fairly in line with what we have discussed and so feel like those are under our control right now.

[Jenna Giannelli:]

Very helpful. Thank you.

[Operator:]

Our next question comes from Carla Casella from JP Morgan. Please go ahead with your question.

[Carla Casella:]

Hi. I am wondering if you could talk to your pop-up strategy. How many you -- how you’re looking at doing them in 2021 versus how that would compare to 2020 or 2019, in terms of just number and size and any different scope of the stores?

[Brad Weston:]

Yeah. Just to clarify, by pop-up, you mean Halloween City, Halloween pop-up stores?

[Carla Casella:]

Exactly.

[Brad Weston:]

Okay.

[Carla Casella:]

Yes. exactly.

[Brad Weston:]

Yeah. For strategic reasons, I am not going to disclose what our current plans are. As you know in 2020, we reduced our numbers significantly for two reasons. One was not knowing what the conditions for 2020 Halloween were going to be and taking a conservative approach to our capital outlay. And then most importantly though, we really wanted to retrench and test a few pilots that would allow us to understand how we could compete better with competition in that arena. And as I mentioned in past conversations that we really did learn a lot coming out of our pop-up pilots last year that encouraged us to do more this year and so we’ll see significant growth. But I can’t get into specific numbers right now. We take those learnings will facilitate a better performance.

[Carla Casella:]

Okay. Great. And then just you talked about Canada. Can you just give us a little bit of the magnitude how big is that business now as a percentage of your total wholesale and I am assuming you don’t have, I don’t -- I can’t remember you kept any retail in Canada?

[Todd Vogensen:]

We didn’t. So we had 65 stores that we ended up selling in Canada. That would have been right at the very beginning of Q4 of 2019 and then since then, we’ve expanded into stop-and-shops with Canadian Tire. I would say the bulk of the volume at this point still coming through those Canadian stores just given the fact that, well, that economy has been shut down due to COVID concerns for a good chunk of the last several months and continues to be. So we haven’t given out specific metrics necessarily on how big the sales are, but if you extrapolate those 65 stores, you’re going to get a good baseline to work from.

[Carla Casella:]

I guess I am just trying to think more longer term is Canadian businesses is that 10% of wholesale, 20% longer term or maybe pro forma what it would have been before COVID, if it was a wholesale business?

[Brad Weston:]

Oh! If it was a wholesale business. So the Canadian stores have a very similar structure with U.S., where about 80% of what they’re selling was coming through wholesale, so for those 65 stores. So it would have been proportional with again with what you have seen for the U.S. stores. And yes, that Canadian relationship called for a significant increase in the amount of sales of wholesale into Canada just because of the Canadian Tire penetration. So to think about it growing and becoming our biggest wholesale customer is certainly where it was at on the even short- to medium-term math had we not run into these issues with COVID.

[Carla Casella:]

Okay. That’s helpful. Thank you so much.

[Brad Weston:]

You bet.

[Operator:]

Our next question comes from Karru Martinson from Jefferies. Please go ahead with your question.

[Karru Martinson:]

Good morning. Just circling back to the Halloween inventory. It’s certainly positive. We’re feeling good of what’s on the water now. But what -- when does that inventory kind of have to be in your warehouses, so that it can reach the stores, just from a timing perspective?

[Brad Weston:]

Well, as you can imagine, we -- the Halloween really starts to get out on the floor, early sets are in August and then we -- that set grows through August and September. And so product starts to really hit those stores over the course of June and July.

[Karru Martinson:]

Okay. And then there’s…

[Brad Weston:]

It hit everyone else in that month .

[Karru Martinson:]

And given the shipping cadence here, you don’t have any concerns about that inventory getting in, correct?

[Brad Weston:]

Well, as like everybody, we’ve had to manage those -- the timing and with a different environment than we’ve seen over the last couple of years, it’s certainly taken quite a bit of team work. But I am very proud on the team on the execution that we’ve seen thus far and feeling very positive about where we are right now.

[Karru Martinson:]

Okay. And when you look at the reopening trade, are you seeing your digital remaining as strong as it had been and how are our customers responding to the offering that you have?

[Brad Weston:]

Yeah. We continue to see strength in our digital business, digitally enabled sales, whether that is shipping out of our DC or what we’ve all seen is the activity around buy online, pickup in store and buy online and pickup at curbside and our delivery business continuing to be something that the consumer sees as very favorable. And in this category, seeing favorability there as well, might not be as big as some other categories from a penetration perspective, because our stores are often the hub of getting helium and getting balloons and the ability to come in and pick your balloon bouquet fill it with helium and take it home is -- has and will be a driver to store traffic. But we’re certainly seeing growth in penetration of our digital business and substantial growth.

[Karru Martinson:]

And just on helium, we’re fully stocked, we have no supply issues, correct?

[Brad Weston:]

That is correct and we have a good outlook on helium.

[Karru Martinson:]

Thank you very much, guys. Appreciate it.

[Operator:]

And our next question comes from William Reuter from Bank of America. Please go ahead with your question.

[William Reuter:]

Good morning. I am curious to hear if you have seen any sort of a boost in your retail sales around the timing of when stimulus checks are sent out. Do you see any sort of indicators there?

[Brad Weston:]

So, that’s a good question. We certainly have not had anything that would allow us to sort of tie. We’ve seen some retailers talk about the fact that they’ve seen an uptick in business in stores where they’ve been able to track where stimulus checks have dropped and that is not something that we have seen. Obviously, the consumer has some spending. We’re seeing that broadly across retail. We know that that is some combination of pent-up demand, a combination of stimulus tax, checks, a combination of increased savings accounts and we certainly expect that we are a beneficiary of some combination of that. Our ability to parse out the amounts that you would sort of attribute to each of those would be extraordinarily difficult. But we are happy that the consumer has discretionary income. We believe we’re the beneficiary of that like every other category and also believe that the consumer is continuing to celebrate. Obviously, during the pandemic they found different ways to celebrate, which contributed to our overall good results and we would anticipate that now as things open up that we’ll be the beneficiary of that as well.

[William Reuter:]

Okay. And then I know you weren’t willing to share a whole lot on the pop-up stores, but the last I’d heard in terms of your permanent stores it was 15 new ones offset by five closures. I didn’t hear any reference that in the prepared remarks. Did I missed it or is that still the plan?

[Todd Vogensen:]

No. That is still the plan. We have giving guidance last time for 15 new stores and five closures, as well as CapEx of $70 million to $80 million for the full year and those still are valid estimates.

[William Reuter:]

Perfect. Thanks a lot.

[Brad Weston:]

Thank you.

[Operator:]

And our next question comes from Hale Holden from Barclays. Please go ahead with your question.

[Hale Holden:]

Good morning. Thanks for taking the call. I just had two, following up on Bill’s question on helium. I understand your supply is good, but I was wondering if you would give us an update on what your sourcing costs were and kind of what you were thinking for the remainder of the year?

[Brad Weston:]

Sure. For helium, we are -- we have put ourselves into a position where we have longer term contracts for our supply. They give us a little bit of flexibility, let’s say, amount of flexibility actually on the upside if demand increases. We have the supply there. With those contracts, we’re largely in a state where we know what our prices are going to be. There’s some up and down. But as a general statement, we have good visibility into those costs depending on mix of which suppliers we use. So I -- we saw an increase in our average costs as we went into the second half of 2019, that was pretty significant in the 40% to 50% range. And since then, within a certain realm, we’ve generally stayed in that range and would expect to across the rest of this year.

[Hale Holden:]

Great. And then my last question was, understanding that you don’t want to talk about how many pop-up Halloween City stores you’re doing. But generally, I was hoping you could talk about how competitive you think Halloween will be this year? It feels like it could be fairly explosive growth, but a lot of people chasing it? And I was wondering how you thought the competition was going to react?

[Brad Weston:]

I would say that, it’s hard to know what the competition is going to do. The biggest challenge with 2020 was the lack of trick-or-treaters and Halloween school activities. We would anticipate this year being more kid and family-friendly, if the pandemic allows more normalized activity and we would anticipate being the beneficiaries of that.

[Hale Holden:]

Okay. Great. Thank you very much.

[Operator:]

And ladies and gentlemen, at this time, I am showing no additional questions. I’d like to turn the call back over to the management team for any closing remarks.

[Brad Weston:]

Thank you, Operator. Let me close by saying that each of our efforts over the past five quarters have been focused on increasing our relevancy with consumers as the destination for celebration solutions as we inspire joy and make it easy to create unforgettable memories. Our entire PCHI team, which continues to grow in talent and capability is driving performance that increasingly exceeds expectations across our business. Our strategy is producing the desired outcomes and I am proud of the team’s execution. We appreciate your interest in Party City and look forward to updating you on our progress next quarter. Thank you.

[Operator:]

And ladies and gentlemen, with that, we’ll conclude today’s conference call. We thank you for attending today’s presentation. You may now disconnect your lines.