Party City Holdco Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good morning. My name is Mathew, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Party City First Quarter 2018 Earnings Conference Call. All participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Ian Heller, Associate General Counsel of Party City. Thank you, Mr. Heller, you may now begin.

[Ian Heller:]

Thank you, operator. Good morning, everyone, and thanks for joining us. This morning, we released our first quarter 2018 financial results. You can find a copy of our press release on our website at investor.partycity.com. Now I’d like to introduce our executive team who are here on today’s call. We have Jim Harrison, our Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. We’ll start the call with some prepared remarks by Jim and Dan, before we open it up for Q&A. Please note that in today’s discussion, management may make forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 regarding their beliefs and expectations about the company’s future performance, future business prospects or future events or plans. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. And although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will be realized. We expressly disclaim any duty to provide updates to our forward-looking statements whether as a result of new information, future events or otherwise. We encourage everybody to review the safe harbor statements provided in our earnings release as well as the risk factors contained in our SEC filings. During today’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operation and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to the earnings release. And with that, I’ll turn the call over to Jim Harrison.

[Jim Harrison:]

Thank you, Ian. Good morning, everyone, and thank you for joining us today. I will begin by summarizing our performance in the first quarter and then focus on the progress we’ve made against some of our strategic growth initiatives. Dan will then discuss our financial and operational results in greater detail, as well as the outlook for 2018. After which, we will open up the call for your questions. Overall, I’m pleased with the solid start to the year, as we’ve met both top line and bottom line objectives. Results for the quarter reflect the continued momentum in both the Consumer Products and the Retail businesses. On a consolidated basis, we achieved total revenue growth of 6.5%, which included a solid retail brand comp of 2.4%, generally in line with our expectations. Focusing on the retail business, we saw continued strength in the Everyday segment. Additionally, we are pleased with the progress made towards in-store productivity improvements as well as the new selling initiatives that continue to gain traction. The Consumer Products business was fueled by accelerated growth in the international markets, reflecting efforts aimed at focusing on certain expansion and increased category management responsibilities with key retail customers. Gross margins expanded 20 basis points, reflecting continued leveraging in the vertical model. We also made good progress against many of our key growth strategies, realizing the benefits from various productivity improvements, all of which contributed to adjusted net income growth of approximately 14% and EBITDA growth of over 12%. Dan will go into Q1 financial performance in greater detail in a moment. I would like to spend a few moments highlighting the progress made against key strategic priorities for 2018. As I said before, our consumer research has clearly shown that the consumer prefers to shop as category in-store. In this regard, Party sees over 920 brick-and-mortar stores are a fantastic asset and a key competitive advantage which we will continue to refine. The profit improvement initiatives, which were identified last year, and we began many in the latter part of 2017 was scaled up in the quarter. A key tenet of these initiatives revolves around improving the productivity of store operations, while enhancing the in-store experience for customers. The operation improvement initiatives are now at a full run rate and are delivering the expected labor savings. We have also rolled out to about 50 stores the in-store selling pilot to increase our associates interaction with consumers, aimed at improving the in-store experience and building the basket. To-date, the comp sales in basket results are encouraging, and Dan will provide further details on this as well. Utilizing enhanced technology improving our in-stock position, while further tailoring the assortment, refreshing Everyday patterns and shovels and ensuring that we will remain well ahead of evolving consumer trends. These efforts and the continued growth of metallic balloon category have spurred solid growth in the Everyday business. Given the importance of the seamless customer experience across channels, a strong omni-channel presence remains an important priority, and I’m pleased with the progress we’ve made in the quarter. The buy online, pickup in-store program continues to scale and reinforcing the importance of shopping convenience and product availability. Additionally, the first phase of our web replatforming work was completed, providing important technical enhancements which will improve the overall functionality of partycity.com, and lay the necessary groundwork for a broader site design targeted for mid-summer. This redesign will enhance product creative and site content, support usability and improve check-out flow. Importantly, this project will also improve the mobile browsing experience for our consumers, allowing for the launch of BOPIS on the mobile platform. Finally, improving the direct relationship we have with our customers is a critical priority for the retail business. In this regard, we made good progress on our broader CRM initiatives during the quarter. Building the appropriate customer database and intelligent tools will allow us to better segment and target customers with enhanced offers. These efforts will strengthen the effectiveness of our promotional investments, optimizing the medium which we select to reach customers. Shifting gears to the Consumer Products businesses, Q1 results were solid and largely in line with our expectations. Internationally, the Consumer Products business grew 14% on a constant currency basis for Q1. This strong financial performance was led by our Granmark acquisition and double-digit growth in more key markets like the UK and Germany. We continue to collaborate with key retail partners in these geographies, sharing our deep category experience to help them build out their party goods and costume businesses. We continue to see significant growth opportunities ahead for this segment of the business. Domestically, we continue to expand our selling efforts in non-traditional retailer or as we call them alternative channels. As consumers increase their celebrations out of the home and into an assortment of new venues, we look to grow our participation in these celebrations. Given the company’s broad manufacturing capabilities and sourcing footprint, combined with its expansive licensed product portfolio, we are uniquely positioned to meet the consumers evolving needs. Also, in the first quarter we continued to leverage the manufacturing assets – our manufacturing assets, including those of the recent Granmark and Print Appeal acquisitions. These efforts contributed to the gross margin expansion experienced in the quarter, reflecting a manufactured Share of Shelf increase of 180 bps year-over-year. Utilizing the production capabilities of Granmark in Mexico has allowed us to improve consolidated gross margins, reduce our reliance on China for products such as banners, stickers, and other decorative items, and improve speed to market on trends and highlights products. In the first quarter, we completed the acquisition of 12 franchisee in independent locations, increasing retail square footage net of closures by 4%. Retail store acquisitions remain an important element of our strategy as it provides opportunity to enter or expand highly attractive markets. And from an off-site perspective these acquisitions are executed at highly attractive cash and cash multiples. Regarding future acquisitions, we’ve reached nine binding LOIs to acquire additional 37 franchise stores, and we anticipate these transactions will close within the next 90 days. The continued build out and exploitation of our digital assets are important elements of our long-term strategy as well. We continue to test and learn from the Kazzam pilot in Dallas-Fort Worth. After a successful been the launch in late 2017, the focus has been on our customer acquisition and improving the shopping experience of the site. Site visits and customer conversion continues to grow. Additionally, we have gathered thousands individual email addresses further our CRM efforts. These results have provided enough proof of concept that will be expanding the Kazzam business to an additional 50 markets over the balance of the year. These markets will be specifically identified purely as deployment plans are being finalized. And I look forward to providing you an update as part of the Q2 earnings call. So in summary, we are pleased with the results of the first quarter and we are reiterating our full-year 2018 guidance. Having made good progress against many strategic initiatives in the quarter, this management team looks forward to building on this progress throughout 2018. And now I’d like to turn the call over to Dan to discuss the first quarter results and the 2018 outlook in greater detail. Dan?

[Dan Sullivan:]

Thanks, Jim, and good morning, everyone. I’ll provide further insight on our financial and operating performance for the quarter, before discussing our outlook for the remainder of the year. Our first quarter played out largely as expected, with solid underlying trends across the business. We grew our consolidated revenues 6.5% or 5.1% on a constant currency basis, generated gross margin expansion of 20 basis points, grew income from operations by over 50%, increased adjusted net income 13.7%, and delivered adjusted EPS of $0.07 for the quarter. Importantly, we also continued to reinvest in our growth objectives and made considerable progress on our strategic initiatives. Looking more closely at our first quarter top line results. Our Retail segment sales increased 6.7% in constant currency, driven by a healthy balance of same-store sales and square footage growth. At quarter’s end, our store network totaled 942 stores, 808 of which were corporate stores. Grand comparable sales, which include our U.S. and Canadian permanent stores and North American e-commerce business, increased 2.4%, and included the beneficial timing shifts of both New Year’s Eve and Easter, partially offset by holiday compression as we had expected. On a run-rate basis, we estimate that comps grew just under 1% in the quarter and in line with our expectations. Our brick-and-mortar comps continued to improve, and our web comp performance was essentially flat after adjusting for BOPIS. Easter execution was solid, and the holiday performed in line with expectations. And metallic balloons continued to deliver accelerated comp sales growth. We were also pleased with the continued solid performance of our everyday category, which grew approximately 2% in the quarter, as we delivered freshness in our everyday assortment, improved our in-store merchandising and strengthened our in-stock position. Turning to the non-vertical consumer products businesses. Net revenue increased 4.3% in Q1 after adjusting for the impact of franchise acquisitions and foreign exchange, primarily driven by a continued strength in our international business. Our U.S. business increased 0.3% when adjusting for the impact of acquired franchise stores. International consumer products again delivered strong revenue growth of 14% in constant currency, benefiting both from the addition of Granmark and accelerated organic growth in the U.K. and Germany, where we expanded our product offering, leveraged our strength in the balloon category and deepened our penetration in key national accounts. Our consolidated gross profit margin was 37.2% or 20 basis points above the same quarter last year. The strong gross margin expansion in Retail as a result of increased share of shelf, leverage to fixed costs and the benefit of our productivity initiatives were partially offset by a decline in our wholesale division, due mostly to increased distribution costs and higher wages, as well as the negative impact of purchase accounting adjustments, mostly related to the Granmark acquisition. Importantly, manufactured share of shelf increased 180 basis points versus Q1 of last year to 26.8%, partially aided by the holiday shifts, as we grew our metallic balloon category, further leveraged up our manufacturing assets and accelerated the Granmark integration. The increase in manufacturing share of shelf helped fuel 70 basis points of growth in overall share of shelf to just over 78%. Operating expenses as a percent of revenue improved 110 basis points year-over-year, resulting from leverage on our retail operating expenses associated with the 2.4% comp growth, realized savings from our retail productivity initiatives and cycling of last year’s severance charges. After adjusting for one-off costs, principally Kazzam and other investments this year and the severance charges a year ago, OpEx rate improved 60 basis points. Retail operating expense is leveraged by 170 basis points on a normalized level versus Q1 of last year, despite inflationary pressures related to minimum wage increases. In addition to the benefit of sales leverage, the quarter saw improved store productivity across the fleet, more efficient labor management and the benefit of last year’s sales organization restructuring. Our program to simplify store operations and improve the productivity of our stores is performing well. And we are pleased with both the financial results and our associates adherence to the new operating processes. Both of which reinforce our belief in the sustainability of this program. Similarly, the results of our selling pilots, which are focused on improving the in-store shopping experience for customers, remain encouraging. Operating in just under 50 stores, and now with about 14 weeks of clean data and valuable customer insights, we are seeing solid comp sales and basket growth, which have been in line with our expectations. These pilots also continue to inform our go-forward operating model, as we continue to refine our investment strategy with our party planners. Based on both the results to date and the strong learnings provided from the pilots, we have begun the second wave of pilot store deployment, initially focusing on expanding in adjacent markets with ActionLink, the third-party provider who is currently supporting about 22 stores. Over the next quarter, we will roll the program out to about 50 additional stores. By enhancing our presence in these key DMAs, we will also be able to augment the rollout with local media to more actively market the program to customers. Therefore, by the end of Q2, the pilot will be operational in about 10% of our fleet. And we look forward to sharing more information about the performance of these stores as the program scales. Income from operations was $22.3 million and 4.4% of net revenue, representing an increase of almost $8 million and 130 basis points in rate. Strong top line growth, further gross margin improvement and better labor productivity fueled these gains. Interest expense for the quarter was $23.3 million or $2.5 million above the same quarter last year, with the increase attributable to both increased borrowings under our ABL facility due to the share repurchase program of the fourth quarter of last year and the impact of increasing LIBOR rates on our term loan credit agreement. In the quarter, our reported effective tax rate was approximately 37.7% and our adjusted tax rate was approximately 22.8%. Our effective tax rate of 37.7% is primarily due to discrete items related to stock option exercises and state tax rate changes. Adjusted net income of $6.9 million represents an increase of 13.7% compared to last year’s first quarter, despite the headwinds associated with higher interest expense and the investments in Kazzam. Adjusted EPS increased $0.002 to $0.07 per share, inclusive of $0.03 of headwind related to a combination of Kazzam and higher interest rates, and partially offset by $0.02 of tailwind from tax reform and lower share count versus the prior-year period. Adjusted EBITDA increased 12.3% versus the first quarter to $55.1 million or 10.9% of revenue, up 60 basis points in rate from Q1 of last year. And finally, for the quarter, we delivered free cash flow, defined as adjusted EBITDA less CapEx, of $37 million, which was flat with the first quarter of last year, as we accelerated capital investments in the quarter in support of our retail productivity initiatives and warehouse automation efforts. Consistent with historical Q1 trends, cash flow from operations was a use of $25 million, including a working capital use of $48 million. CapEx totaled $18 million, while we allocated $17 million towards acquisitions. We ended the quarter with net debt of about $1.8 billion, resulting in a net debt leverage ratio of 4.4 times. At the end of the quarter, we had approximately $124 million available in our existing asset- based revolver. Turning to our guidance. We are reiterating our previously provided fiscal 2018 outlook. We continue to expect revenue to be in the range of $2.44 billion to $2.49 billion and comp sales to be approximately 1% for the year. We still anticipate full year adjusted net income to be in the range of $172 million to $183 million or $0.76 to $0.87 per share, and adjusted EBITDA to be in the range of $415 million to $430 million. For the full year, we continue to expect about 30 basis points of operating income margin improvement over the 11.8% we reported last year, supported by about 20 basis points of gross margin rate gains. In terms of capital allocation priorities, we continue to plan to spend about 3.5% of net revenue on CapEx and anticipate ending the year with a net debt leverage ratio of 3.8 times. For all other detail around our outlook, please refer to our press release. And with that, I’d like to turn the call back over to the operator and open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

[Josh Kamboj:]

Hi, this is Josh Kamboj on for Simeon Gutman. Thank you for taking our question. In regards to the retail EBIT margin expansion in the quarter, can you parse out the difference between the leverage on the comp versus maybe your basis points productivity in initiative increase?

[Dan Sullivan:]

Yes, it’s Dan. I’m not going to get into the specifics of quantifying the pieces. Obviously, the main driver on the retail side of margin is leverage. And then we saw a pretty equal gains between the productivity initiatives that Ryan has put in place and the Share of Shelf gains. Those are your three main drivers on margin.

[Josh Kamboj:]

All right, thank you. And if I could just have a follow-up. Switching gears to the comps, I’m sorry if I missed this and it was addressed, but could you talk about the potential headwind you expect in Q2 as a result of the Easter shift?

[Dan Sullivan:]

Well, I’m not going to get into quarterly guidance. Obviously, we called out in Q1, the timing effects of holiday shifts, obviously, we’ll pay for that in Q2 on Easter, but that’s all contemplated in our full-year comp guidance of about 1%.

[Josh Kamboj:]

All right. Thank you, Dan.

[Dan Sullivan:]

Sure

[Operator:]

Our next question comes from line of Rick Nelson with Stephens. Your line is open.

[Rick Nelson:]

Hi, good morning. I’d like to follow-up on this, selling pilot comps, like results have been pretty encouraging there. How many stores do you think you could roll those out to potentially for Halloween – by the Halloween timeframe? And what sort of – do you still expect that will that be a comp driver this year and more or so next year?

[Jim Harrison:]

Okay, Rick, thanks a lot. In terms of this year, this really is a year of development for us on the selling pilot, customer engagement. As you know, we piloted two different models. One is a organic sales driven model, the other a third-party system model. And as Dan mentioned, we’re going to continue to roll it out this year. We don’t really expect it to have much impact at all, as we said earlier, in this year and that continues to be the case. We really look at this as a real driver for 2019.

[Rick Nelson:]

And how many stores are, potentially Granmark, at a Halloween timeframe might those be in?

[Jim Harrison:]

We don’t know right now. We’re looking to build it out. Probably, I would anticipate by the end of the year, we’d be somewhere in the neighbor of close to 100.

[Rick Nelson:]

Got it. And manufacturing Share of Shelf, you’re making progress there. Can you talk about the near-term target for that as well as the long-term opportunity?

[Jim Harrison:]

Sure. So as we look at the long-term, our long-term goal is 50% Share of Shelf manufactured. As Dan mentioned, we’re just a shade under 27% now. I would expect that, by the end of this year, we’d be looking at about a 30% effective run rate based upon where we are. As I’ve mentioned in the past, there is a process involved, even though we’ve got the manufacturing capacity to bring on product as we look at the life expectancy of the existing designs, the life expectancy of existing molds for injectable molded products, et cetera, plus the actual time it takes to create and develop molds for injection molding and other aspects of the business. But I think over the longer term, we continue to be very, very confident that 50% is very achievable goal within the next 36 months.

[Rick Nelson:]

All right. Great, thanks a lot and good luck.

[Jim Harrison:]

Thank you, Rick. Appreciate it.

[Operator:]

Our next question comes from the line of Matt McClintock with Barclays. Your line is open.

[Matt McClintock:]

Yes, good morning, everyone. I was wondering we could talk about Kazzam. Just – you talked about, in Houston, the focus is on customer acquisition. Could you maybe help us understand how you go about that process? How you build the awareness? And maybe give us a little bit more, I guess, numbers or some type of feeling for why you believe it’s right to roll that out to 50 more locations. Thanks.

[Jim Harrison:]

Sure. So in the Dallas market, we’ve been there since the latter part of the fourth quarter of 2017. We used that market really as a beta test site for us to, one, develop the process and the protocols for establishing the vendor inventory. If you think about Kazzam for a second, you’ve really got three different components, right? You’ve got the platform, and how the platform itself operates and how the marketplace operates in terms of both the vendor and the consumer. But then you’ve got to develop an inventory, and your inventory is the vendor base. And so we’re very successful in developing a strong vendor base in Houston, up on – just in Dallas market probably. And as a result, we feel very, very confident that we’ve gotten the formula for developing the vendor base. As we look at the platform itself, we’ve spent a number of great deal of time doing consumer and customer intercepts has been used in the platform, understanding why they do what they do in the platform, how they behave within the platform, what the decision process that the consumer goes through as they experience the platform and visit the site and look at the different opportunities within the site, understand why they may discontinue their activity within the site or dropped off the site, and understand what was causing that and making modifications to the site to make that all work. So we’ve spent quite a bit of time, energy, effort and money getting the site to the point where you say which is we think pretty close to right. And it’s that development of the site that ultimately takes the third piece of the equation and builds the third piece of the equation, which is customers and customer conversion. So that’s the process we’ve been going through. In terms of your question as to how we’re marketing the site, being in only one market, it’s very difficult for us to effectively market Kazzam to a broader marketplace because you’ve got a very finite population that you’re addressing. So as we rollout to the 50 markets, we’ll continue to build the vendor base, we’ll continue to attract visits and look to continue to increase conversion. Our conversion has been increasing. And then we’ll also look to continue to improve the site. And all of that will come together and leave us with an opportunity to not only create an effective marketplace where consumers can come under the Party City brand and experience lots of aspects of the Party and have all the other things in addition to Party supplies available to them. But also from our standpoint, it will give us the ability to really get to know our customer a lot better, know a lot more about our customer, build out our CRM base and really harvest a treasure trove of data about our customer as we develop this entire process.

[Matt McClintock:]

Thanks for that color, Jim. And then just one more follow-up question, it’s just on alternative markets. Can you describe or maybe just give us a little bit more color on the progress you’ve made in that business. Specifically, investments you’ve made in that business, specifically, and your optimism for further growth, or at least at some point when we can maybe see an inflection and growth in that business. Thanks.

[Jim Harrison:]

Sure, that’s a great question. The alternative markets continues to move in the right direction. I continued to be extraordinarily enthused as to where that’s going to go and where it’s headed. One of the things to remember is you look at our third-party business, as we acquire franchisees, that franchisee business becomes into company, then there is no around our top line, right? So it’s within our retail business, but the wholesale component of that disappears. So as we look at the consumer products business, it appears to be shrinking because of the acquisition franchisees. So to maintain that business really is a lot of progress, because what we’re doing is we’re replacing that consumer products business with third-parties with new customers, while maintaining the actual distribution to our own stores of the previous third-party business. So there is a confluence there that optically gives you the appearance that the consumer products business isn’t growing, but when in fact, it actually is growing. We’ve had a number of really nice significant wins on the alternative markets side of the business. We have a tremendous number of opportunities there in development of that. And I continued to be necessarily extremely enthused as to where we’re going with that business.

[Dan Sullivan:]

And Matt, just to maybe put a finer point on the quarter results. We have to also acknowledge, as Jim says, as we break into new channels of trade with new customers, with new accounts. The quarterly results will be a bit choppier than they were under a franchise independent focused sales model. So when we look at Q4, for example, we saw 8% growth in U.S. wholesale. As we reported today, we saw a slightly positive growth in Q1. We expect Q2 will move back to that mid- to high-single digits growth. So we just have to understand the natural dynamic as we move into new channels of trade with new customers.

[Matt McClintock:]

Jim, Dan, thanks a lot for the color.

[Jim Harrison:]

Thanks, Matt.

[Operator:]

[Operator Instructions] Our next question comes from the line of Curtis Nagle with Bank of America Merrill Lynch. Your line is open.

[Curtis Nagle:]

Great. Thanks for taking my question. So, I guess, the first one looks like – I think you’ve made what looks like the biggest acquisition to-date in terms of franchise stores. I guess curious if the size of the acquisition was indicative of improving performance and the conversions you’ve already done? Or was it perhaps just getting it at a price that was too attractive to ignore?

[Jim Harrison:]

The acquisition we made this year is not the largest. We’ve done a number that’s substantially larger than that in the franchise side. And obviously, years ago, as we rolled out the specialty channel and acquired Factory Card & Party and Party America and Paper Warehouse and Gags & Games and Night Party [ph], those were obviously all bigger than them as well. It really is part of our – this acquisition really is just another part of or another step along our path of looking to make accretive acquisitions of franchisees where we believe that we are by far and away the best buyer of those outlets, the best targeted customer for our franchisees in terms of selling those stores. And we look at the acquisition as very accretive, while a good deal for the franchisee, extremely accretive to us given the effect of multiple that we pay on the cash and cash basis of about 3.5 times. So it’s more opportunistic and more the availability and where the franchisee is in their mind as to where they want to continue with the business and where they are in their life’s journey. So we will continue to make franchisee acquisitions as the opportunities present themselves because we believe it’s a very, very good use of capital.

[Curtis Nagle:]

Very good. And then just a quick follow-up. Forgive me if this was stated, I didn’t catch you. But what was the retail or in-store performance versus online in the quarter?

[Dan Sullivan:]

We don’t – we didn’t actually break it down. What we did say was the brick-and-mortar comp performance continued to strengthen from what we’ve seen coming out of last year. So again, what we said we had an underlying comp growth of just under 1% for the quarter on a normalized level. So I would put the store base, the brick-and-mortar base right around that number.

[Curtis Nagle:]

Okay. Thanks very much and good luck for rest of the year.

[Dan Sullivan:]

Thank you.

[Operator:]

Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Your line is open.

[Cristina Fernandez:]

This is Cristina Fernandez for Joe Feldman. I wanted to follow up on the last question. Can you talk about buy online, pickup in store? I know last quarter, it was around $3 million. Are you seeing an acceleration in that revenue stream? And how is it, I guess, performing overall relative to the e-commerce growth?

[Jim Harrison:]

Buy online, pickup in-store continues to gain momentum. It’s performing actually probably a little bit higher level than we actually anticipated. We’re extremely enthused by it. Just following up a little bit on e-commerce. Obviously, we replatformed our site in January, and we experienced the expected normal disruption you would get with that sort of replatforming. But as we look at filing the replatforming, including the BOPIS, we had a – we were very pleased with the overall results of e-commerce, actually. The buy online, pickup in store is a huge advantage, and we it continuing to grow.

[Cristina Fernandez:]

And then on the acquisition pipeline, you mentioned nine LOIs. Should we assume most of those are for franchisees? Or are you also looking at other companies you can purchase for further vertical integration?

[Jim Harrison:]

Sure. So in the LOIs we mentioned are franchisee and also one independent in terms of individuals. In terms of total number of stores, it’s just a shade under 40 stores.

[Cristina Fernandez:]

And then a last one. On the wholesale gross margin which was down during the quarter, should we continue to expect that trend to continue over the next couple of quarters? Or was there anything one-time in this quarter?

[Dan Sullivan:]

Yes. So as we’ve said, there is some structural pressure in the wholesale gross margin, mostly related to the freight and logistics challenges that we’ve talked about, whether that be in higher distribution costs or increased wages within our distribution centers. So that’s the structural element of it. We did have a one-off, as I mentioned in my earlier comments, around purchase accounting adjustments related to Granmark that affected and provided a bit of headwind to wholesale in the quarter.

[Jim Harrison:]

And I think we should also keep in mind that as we build out the alternative market opportunities, a lot of those opportunities will be direct from plan. And as a result, the margin profile on a percentage basis of those opportunities is different than our historic margin profile. However, we need to bear in mind that this is incremental business, and it’s additive to where we are. And as a result, the absolute dollars are really what counts.

[Operator:]

Okay. Our next question comes from the line of William Reuter with Bank of America Merrill Lynch. Your line is open.

[William Reuter:]

Good morning, guys.

[Jim Harrison:]

Good morning.

[William Reuter:]

In terms of the acquisition of the franchise stores, did you say what is either the pre- or post-synergy multiple was for those stores?

[Jim Harrison:]

No. But historically, we’re buying them – when we acquire franchise stores, there’s not a lot of synergy because, fundamentally, we’re acquiring a Party City box, so they’ve really got to profile in terms of the product within the stores. They’ve got to similar operations. There’s not a lot of costs down associated with a client franchisee. The real opportunity lies in the effect of multiple, which is about 4.5 times EBITDA, and on the cash and cash equivalents, about 3.5.

[William Reuter:]

Okay. And then earlier, you declined to break down what the growth rate of brick and mortar was versus e-commerce. Can you tell us what percentage of your sales were e-commerce in the quarter? And then with these two investments in your e-commerce platform this year, what type of growth rates you might expect in that business?

[Dan Sullivan:]

Yes. So what I said on comps, on an adjusted basis, we said comp run rate was just under 1%. And we also said, on an adjusted basis, the web performed flat to slightly positive. So you can kind of see that the stores then were right around that just under 1%, adjusting for all of the holiday noise and movement. I’m not going to get into guiding or giving outlook on these figures, but hopefully, that clears up anything on the comps for the quarter.

[Jim Harrison:]

And as I said earlier, following the replatforming, we saw the comp in the web return to more normal historical levels.

[William Reuter:]

Okay. And then just lastly for me. In 2017, you had a handful of acquisitions that were meant to increase your manufactured share of shelf. Are you continuing to see additional acquisition opportunities in this element? Or are there other M&A targets that you guys were thinking about other than franchisees right now?

[Jim Harrison:]

Sure. We’re constantly looking at opportunities to find accretive bolt-on acquisitions, primarily in the manufacture space outside of retails and – outside of franchisees and independents. In the consumer products side, mostly on the manufacturing, small bolt-ons when we acquire them, take our demand which perhaps has been sourced from China or some other nonaffiliated company. And lay that demand into the plant, we can make a very accretive acquisition with no real risk associated with that at all. That’s something we’re constantly looking for and looking at. And there’s always a pipeline out there. I’m not talking about anything specific. If there is anything worth announcing, we’ll be announcing it, but we’re constantly looking for opportunities.

[William Reuter:]

Okay, that makes sense. Thank you and best of luck.

[Jim Harrison:]

Thank you.

[Operator:]

Our next question comes from the line of Chris Prykull with Goldman Sachs. Your line is open.

[Chris Prykull:]

Good morning, guys. Thank for taking my question. I just had one on the international wholesale opportunity. Which regions do you see the most sales upside overseas longer-term? And maybe give us just a strategy update on pushing further into maybe new international markets versus selling more into existing markets.

[Jim Harrison:]

Sure. So I mean, historically, our business has been dominated primarily in Europe. We’ve had good growth in Australia. We continue to see growth in Australia. We continue to see good growth in UK., Germany and throughout most of Europe. Russia continues to be an interesting target for us. We have a good base of business in Russia, mostly around metallic balloons. We see a longer-term opportunity there. We continue to look at the Asian market and see opportunities there. And we’ve opened up some opportunities in the Asian market, and obviously, that’s a lot of people, a lot of opportunity. And finally, I think the biggest opportunity we have in the near-term is actually in South and Latin America. We have our master franchisee in Mexico, and they’re opening up more stores. And we see the Latin market as probably longer-term the greatest opportunity for us.

[Chris Prykull:]

Great. That’s helpful. And then just one quick follow up on retail operating expenses. You saw some less leverage there in the quarter, and it actually outright declined year-over-year on an absolute basis by, I think, 1.8%. Can you maybe just walk me through your expectations there for the rest of the year? I know you have some impact from tax-free investment in that segment coming online. How should we think about either the year-over-year growth rate or leverage going forward?

[Dan Sullivan:]

Yes. So I think important to understand the drivers in the quarter because that will help also identify what’s structural versus what came from leverage. So in the quarter, in retail OpEx, we saw three main drivers to the improved performance. One was the benefit of the restructuring initiatives that were put in place a year ago. Two is the productivity initiatives that Jim talked about earlier. And then three, of course, is the benefit of leverage. All of those worked together to offset the challenges that came from minimum wage pressures. So we’ve got some structural improvements baked in to how we’re running the business now, which we continue to expect to gain the benefit from, and we’ll also continue to manage that up against the minimum wage pressures for the rest of the year.

[Chris Prykull:]

Got it. Thanks and good luck for the rest of the year.

[Dan Sullivan:]

Thank you.

[Operator:]

And with that, there are no further questions. I’d like to turn the call back over to management for closing remarks.

[Jim Harrison:]

Thank you, operator. Once again, I’d like to thank you for joining us on today’s call. And as always, we look forward to hearing from you. If you have any further questions, we’re more than happy to chat. Okay. Have a great day. Thank you.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.