Party City Holdco Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Good morning. My name is Jack, and I'll be your conference operator today. I'd like to welcome everyone to the Party City Second Quarter 2018 Earnings Conference Call. At this time, 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 second quarter 2018 financial results. You can find a copy of our press release at 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. 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.

[James Harrison:]

Thank you, Ian. Good morning, everyone, and thank you for joining us today. I will begin by summarizing the highlights of the second quarter performance and then focus on the progress we're making is support of our growth initiatives, including today's announcement of the Amazon pilot. Dan will then discuss 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, we're pleased with the solid second quarter results that were largely in line with expectation on both the top and bottom line. Net sales grew 3% with a comp sales increase of about 1% on the underlying basis when adjusting for the headwind associated with the Easter calendar shift. Operating margins expanded 60 basis points, representing continued realization of the retail product gains. Adjusted earnings per share grew $.0.40 per share for the period, a 43% increase over the prior year. These results once again demonstrate the strength of the vertical model and our continued focus on approving the underlying productivity of the business. During the quarter, we also made good progress against the number of growth priorities including accelerating efforts to become a world-class retailer, expanding the reach of the consumer product business as the new channels of trade, deepening the commercial relationships with key financial retailers, and broadening our product strategy to Halloween pop-up store format. Additionally, we announced earlier this morning, we've also initiated the pilot program with Amazon rolling out path to market. I'll take more about this shortly. Just as the quarter ended, we finalized the first two previously discussed franchisee acquisitions further expanding the Party City brand at an attractive multiples. And finally, we took proven steps to strengthen our balance sheet by securing a new eight year unsecured note with a conjunction with extension of the existing ABL provides a much stronger laded maturity profile for our debt structures, while delivering a better balance between floating and fixed rate instruments. Dan will discuss this in more detail later. So all-in-all, it's a busy and productive quarter. As we look to systematically, sustainably and profitably grow our business. Retail revenue growth in the quarter was about 3%, despite 90 bps of headwinds associated with the Easter shift. Importantly, we are seeing clear evidence of progressing in many strategic priorities. The productivity initiatives are delivering meaningful efficiency gain from labor and we've begun to accelerate the reinvestment of a portion of these savings into the Party Planner program, which scales about 10% of company-owned stores in the second quarter. The program is meeting expectations and as such, we anticipate further expansion this year, which Dan will go into more detail. Expanding and enhancing our omni-channel capabilities, we remain key focus. The Party City at comps rate, redesign effect that began in 2017 is now complete as expected ahead of the important Halloween season. Following a functional side re-platform in January, we began piling the new site nature life consumers with enhanced product creative, site content, usability and improve check-out flow and mobile browsing. We expect full deployment in the site in mid to late August. Additionally, we continue to see some of the distractions from the buy online, pickup in-store program which is now reach about 15% of total USD counter [ph] and continues to grow. While work remains total North American digital comps including BOPIS grew 17% in the quarter. A clear reflection of the progress we've made over the last twelve months. We're also focused on improving direct relationship we have with consumers which the CRM initiatives help poster. During Q2, we strengthen in our CRM capabilities by further building out the customer data base and better the finding key consumer characteristic in the sites that are informing targeted marketing and promotion strategies. While we are assuming early stages program, these insights will increase connectivity with consumers and provide cadence for enhanced promotion effectiveness. And lastly, as we announced in late June, we'll leverage our expertise in the Halloween pop-up stores format and pursue assortment extension opportunities into toy category. This limited test of approximately 50 pop-up stores will take advantage of the current disruption in the category while supporting the objective of providing deepest most relevant product offering for consumers. In addition to the assortment benefit, this pilot provides a clear advantage in securing top tier location including many Toys 'R' Us and Babies 'R' Us sites. Moving on to consumer product businesses, revenue grew by 5% in the quarter when adjusting factor of franchise acquisitions. We remained focused on expanding into new channels of trade in the U.S. Consumer Products business and have seen initial signs of progress in multiple new venues. Partially offsetting continues sluggish performance of the metric franchisees, and independent businesses, we are trying to gain real traction in penetration of new channels of trade. I've spoken the opportunity to leverage up existing manufacturing assets for products that largely set outside of the core Party space including new cups [indiscernible] and branded popcorn for movie theaters for example. Finally, the personalized products category remains an attractive new opportunities the business following the acquisition of Print Appeal last year. And I'm very pleased with the 37% sequential growth we seen in the quarter versus Q1 of this year. The international consumer products businesses top line increased 8% in constant currency, underpinned by a 13% constant currency growth in the core markets of U.K., Germany, Australia and Mexico. We're executing key category strategies, we find the assortment on leveraging our deep product assortment in innovative ways to generate strong revenue growth. Omni acquisition front, we recently announced the first of two plans as the franchisee acquisitions there were disclosed in the Q1 earnings call. This acquisition of 16 stores in broader Philadelphia market, the ports of retail growth strategy and importantly provide opportunity for deeper brand penetration in a very attractive DNA. We anticipate closing the second transaction considering the 22 stores generally integrated in total market early September. Franchisee acquisitions which are highly accretive are an integral part of the strategy to improve brand integrity and operational efficiency while growing value for our shareholders. Turning for a moment to provide services markets place project, the Kazzam pilot, in Dallas-Fort Worth continue evolve engage tractions with vendors and customers alike. Having that proof of concept, we are expanding to the markets. Since the Q1 call, we have expanded into over 20 new markets and demonstrated the ability to successfully scale up the number of parties executed. As site visits and consumer conversion continues to grow, we're also growing the database of customer data and characteristics, providing a potentially meaningful tailwind to our broadest TRM efforts. We remain on track to reach 50 new market by the end of the year and will continue to update you on our progress. And finally today, we announced the expansion of our digital initiatives with the creation of Party City strong front on Amazon marketplace. This will allow us even further expand the reach of our brands and our unique product offerings. We view this as an excellent conference with partycity.com for leader in the space. In the Halloween season, we initially focus on a period offering our proprietary costumes. Following the Halloween season, we likely broaden the store that include Christmas and New Year's Eve products. We expect our limit every day product offering in fiscal 2019. We will utilize the learnings we gain over the next several quarters to form a disciplined ramping of product availability as we leverage our opposition as the leading manufacturer, supplier and retailers consumer party goods which we grow overall market share long term. As we enter the third quarter, the progress made across both brick-and-mortar and the digital retail businesses that was well-positioned for the upcoming Halloween season. The Wednesday Halloween provide the growth. Nevertheless, these are improved enhancements to our business store acquisition our key trend items, we design and enhanced customer world and improved value offering for costumes are big will support successful season. We also anticipate the buy online, pick up store be available for consumers this year throughout the Halloween season and the Amazon pilot will further extend our reach. As you know, Halloween represents about 25% of our annual retail sales and is obviously important event for us. And I am very pleased with the steps we taken across the businesses in advance to the Halloween. Finally, I'd like to conclude my remarks by discussing the change within the management team. Gregg Melnick, the President of PCHI have resigned the position with the company and will be leaving at the end of the month. Gregg has been a value contribute for the success of this business over the past 13 years, initially leading the retail organization and most recently the financial consumer product business. Over that time, Gregg has been a very valued partner and friend. On behalf of the Board of Directors, the management team and our entire organization, I like to thank him for many contributions and wish him well in his future endeavors. So in summary with the solid quarter for us with performance that was largely in line with expectations, based on performance to date and the progress made on key growth initiatives, we have reiterated of full year guidance. And now, I'd like to turn the call over to Dan to discuss the second quarter results and the 2018 outlook in greater detail.

[Daniel Sullivan:]

Thanks, Jim, and good morning, everyone. I'll provided further insight on our financial and operating performance for the quarter before discussing our outlook and guidance for 2018 and then we'll open up the call for questions. As Jim said, our second quarter top and bottom line financial results were largely in line with expectations, driven by strong execution of our core fundamental, solid top line growth, further gross margin expansion and disciplined cost control filled by strong execution of our retail productivity initiatives. In the quarter, we grew consolidated revenues at 3% to $561 million or 2.3% growth when adjusted for currency. We expanded our gross margin rate by 40 basis points and reported operating income rate by 60 basis points. Grew our adjusted net income by almost 18% and delivered adjusted EPS of $0.40 per share. We also generated approximately $70 million in pre-cash flow. Looking more closely at our second quarter top line results, our retail segment net sales increased 2.9|% on a reported basis or 2.6% in constant currency, despite of our 90 basis point of holiday calendar headwind and largely driven by a 4% increase in retail store footage over the last twelve months. At quarter's end, our store network totaled 948 stores, 814 of which were corporate stores, as we opened one new store and acquired five independent storage during the quarter. Brand comparable sales which include our U.S. and Canadian permanent stores and our North American e-commerce business increased 10 basis points in the quarter and included about a 90 basis point headwind from the Easter shift we mentioned in our Q1 call. On a run rate basis, we estimate that comps grew by 1% in the quarter and in line with our expectation and recent trend. Our North American web comp sales were up 17% when including BOPIS sales and reflective of a 6% growth in traffic, our strongest traffic again in over a year. We once again saw a solid performance from our everyday category which grew about 2% in the quarter and served as a strong reminder of the importance and inherent resiliency of this core category for our business. Additionally, our graduation business performed well up over 3% year-over-year. Turning to the non-vertical consumer product businesses. Net revenue increased about 4% in Q2 after adjusting for the impact of franchise acquisitions and foreign exchange, primarily driven by continued strength in core international markets and strong performance in our foil balloon category. The U.S. business decreased 2% when adjusting for the impact of acquired franchise stores reflecting continues softness in the franchise and independent channels. As we previously disclosed, these results were negatively impacted by a slight shift in the timing of certain direct from plant Halloween shipments. Importantly, Anagram, our foil balloon manufacturing business grew high single-digit in the quarter reinforcing the role this category plays involve top line and vertical expansion. International consumer products delivered solid revenue growth of nearly 8% in constant currency, driven by the further deployment of our category management strategies across markets. We continue to benefit from our refined assortment, deeper SKU penetration and innovative merchandising. In the quarter, Amscan U.K., Europe and Australia all grew double-digits in constant currency. Our consolidated gross profit margin was 41% or 40 basis points above the same quarter last year. Continued strong gross margin expansion in retail as a result of increased manufacture Share of Shelf, the benefit of our retail productivity efforts and positive product mix was partially offset by the decline in our wholesale division due mostly to increased freight and distribution costs higher wages in our distribution centers and to a lesser extent commodity cost pressures. While total Share of Shelf was essentially flat the last year at just over 78%. We saw the benefit of our strategy to leverage our manufacturing assets and drive gross margin accretion through Share of Shelf mix and converting doubles to triples. Manufactured Share of Shelf increased to 180 basis points versus Q2 of last year to just under 28%, primarily driven by growth in the foil balloon category, further leveraging our manufacturing asset including ACIM and acceleration of the Granmark integration. Operating expenses of a percent of net revenue leverage 20 basis points year-over-year, reflecting our continued emphasis on improving productivity and efficiencies across the business. Retail operating expenses all the leveraged by 20 basis points, despite inflationary pressures related to minimum wage increases and a shift in broadcast media spend. We continue to see improved store productivity across our fleet of stores and more efficient labor management, all of which contributed to a 100 basis point decrease in retail labor costs year-over-year. This focus on productivity in our stores remains the catalyst of our reinvestment in improving the shopping experience for customers. As Jim mentioned the Party planner initiative is performing well and was operating in 75 stores at the end of Q2. Based on the continued strong results highlighted by solid comp sales and basket growth, we will essentially double this amount in the third quarter and plan to be in just under 150 stores for about 18% of our fleet by the end of August. Reported income from operations was $65.5 million or 11.7% of net revenue, representing an increase of almost $5 million and 50 basis point in rate. These gains were driven by solid top line growth, further gross margin improvement and better labor productivity. Interest expense for the second quarter with $25.5 million or $4.2 million above the same quarter last year with the increase attributable both increase borrowings under our ABL facility, due to the share repurchases during the fourth quarter of last year and the impact of increasing LIBOR rates on both term loan and ABL facilities. In the quarter, our reported effective tax rate was approximately 25% and it's lower than 2017 to the benefit the Tax Reform. Our adjusted net income of $39.2 million represents growth of about 18% compared to last year's second quarter. Adjusted EPS was $0.40 per share compared to $0.28 per share last year. With the increase largely driven by a 13% Halloween from Tax Reform and share buybacks, partially offset by a $0.2 headwind as a result of the higher interest rate. Adjusted EBITDA of $96.6 million was slightly positive versus the second quarter last year, as we cycled about $4 million of non-recurring add backs. During the quarter, we delivered pre-cash flow defined as the adjusted EBITDA less CapEx at $70 million which was approximately $7 million below the second quarter of last year. As we celebrated capital investment in the quarter, in support of our web replatforming efforts, our retail productivity initiatives and distribution center automation effort. Cash flow from operations with the use of $26 million inclusive of $26 million in CapEx in the quarter and working capital with the use of $51 million in the quarter. We ended the quarter with net debt of about $1.9 billion resulting in a debt leverage ratio of 4.5 times. At the end of the quarter, we had approximately $111 million available in our existing asset based revolver or $200 million on a pro forma basis following the application of proceeds from our subsequent bond offering that took place in late July. This leverage neutral transaction secured 8 year money attractively priced at fixed and simultaneously extended our existing ABL to 2020 frame. Importantly, we improved our maturity profile across our debt structure providing much needed security and better aligning this maturities with anticipated free cash flow generation. Additionally, for small premium, we improved our floating to fixed rate debt profile, gaining interest rates certainly at a time of likely prolonged rate increases. As a result, roughly 45% of our debt is now made up of fixed rate instruments versus only 20% prior to the transaction. Turning to our full-year guidance. Based on our performance to date and our outlook for the second half of the year, we are reiterating our previously provided fiscal 2018 outlook. We continue expect revenue to be in the range of $2.44 billion to $2.49 billion and comp sales to be up 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 $1.76 to $1.87 per share and adjusted EBITDA to be in the range of $415 million to $430 million. We continue to expect about 30 basis points of GAAP operating income margin improvement over the 11.8%, we've reported for fiscal 2017 and supported by about 20 basis points of gross margin rate increases. Finally, we expect interest expense to be in the range of $103 million to $106 million for the year. In terms of capital allocation priorities, we continue to plan to spend about 3.5% of net revenue on CapEx and anticipated ending the year with a net debt leverage ratio of about 3.8 times. For all other details 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:]

Thank you. [Operator Instructions] Your first question comes from line of Rick Nelson with Stephens. Your line is open.

[Rick Nelson:]

Thanks. Good morning. Like to get some more color about the Amazon relationship, what motivated that and how much of your Halloween assortment will be on Amazon?

[James Harrison:]

Sure. Rick. Good morning. With respect to Amazon, I think the best way to frame it is argue with Amazon really is probably the world's largest and most trafficked mall. If you think about our business model, our business model really speaks to the consumer and so on the consumer help we consumers celebrate life special moment to the events. We enjoy as you know almost 80% brand awareness. That doesn't mean that 80% were customer buying, party goods going to Part City. And when we recognize that and our business mile sales to the broad market virtually anybody who's a Party City business is a customer of ours. It's our party shops we hold maybe 35% Share of Shelf in those moments. So our mission our goal is to eventually be for the consumer to get to the consumer and help consumers celebrate life special moments in advance. And we look at, the Amazon opportunity is really just an extension of that thought process. To review Amazon marketplace really a storefront, we're just going to another store front and trying two in through those store front on the Amazon platform that's the easiest way can explain it. In terms of how much of our home assortment, we primarily focused on the costumes to the big. So we're probably somewhere in the 25% of our costume is what we will be there. And once again remember our culture is what it is proprietary over 95% of what is in Part City and customer will designed by us and toward manufactured by us. So provide to consume with quite a differentiation with everything else with it on Amazon. So we are excited about the opportunity we were said you were goes.

[Rick Nelson:]

Right. Okay. Thanks for that. Also like to get an update on this party planner pilot. What sort of same store sales left are seeing and what the actually like stores branding up?

[James Harrison:]

I'll turn on to the Dan. We haven't we're not disclosing the list because we still in pilot days and obviously varies from associate to associate, but I'll let Dan answer this question.

[Daniel Sullivan:]

Yeah so Rick we are by the end of Q2 we're in about 75 stores but that obviously scaled up over the course of Q2. So to Jim's point where we're very much in early pilot stage, we're seeing comparable results between the third party action link model and the internal model and really with a broad brush we can say we're seeing encouraging comp performance and basket growth all of which has led us to continue to expand the pilot. So we think that will go from 75 stores by the end of Q2 will double that in Q3 more going to close to 150 for the year. So I think although we're not yet ready to disclose the results because it's still too early the results are encouraging and certainly informing the expansion.

[Rick Nelson:]

Okay. I know if I can ask in orders to Share of Shelf that number fell year-over-year. What was driver there if you could comment also the manufacturer Share of Shelf where you're at first it's a year ago or prior quarter.

[Daniel Sullivan:]

Yeah, absolutely. I think it reinforces I think what we've been talking about which is the absolute Share of Shelf numbers far less relevant than the mix of Share of Shelf right. And so further margin accretion through the Share of Shelf is going to come from manufactured Share of Shelf games and that's what we saw in Q2 another 180 basis points of gains so all total Share of Shelf was essentially flat for the quarter this model continues to drive margin expansion through manufactured Share of Shelf gains. In the quarter, that was a result essentially of three primary drivers we saw continued accelerated growth in our foil balloon business. We continue to leverage up our manufacturing assets including ACIM and then we've celebrated the Granmark integration so those three points drove the gains.

[Rick Nelson:]

Good to know. Thanks a lot and good luck.

[Daniel Sullivan:]

Thank you, Rick.

[Operator:]

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

[Matt McClintock:]

Hi, yes. Good morning, everyone. So Jim I was wonder if we could focus on toys for a second. Just can you help us think about what type of to your product you're getting? How your relationship with the vendors is evolving? And can you also maybe just update us on the competitive landscape for toys this fall, we've heard from other retailers that they're building inventory levels and anticipation of going after that market share? Can you just kind of just talk overall a bit more about your plans for towards business fall? Thanks.

[James Harrison:]

Sure. Matt. I'll tell Ryan Vero, who is President for Retail Group is here with me. I will turn it over to him for question of toys. Just quickly though in terms of the competitive landscape, we're not going to overview the convertible landscape. That's not for us to evaluate this point of time in this call. But I'll turn over to Ryan to answer your questions, specific questions on our toys strategies.

[Ryan Vero:]

Sure. So as we've previous announced we're going to be opening roughly 50 Toy City pop-up stores, many of which will be side-by-side and conjunction with our Halloween City locations beginning in the fall and then running through the holiday season. From an assortment standpoint, building a toy store we're obviously focused on putting in that store the products of the consumers want now this season. And so if you listed the top toy suppliers to the toy industry those with those suppliers products will be in Toy City. It's a pop-up store, it's a specialty seasonal store and so obviously we're focused on really the top items and really meeting the needs of the consumer that shopping for toys on holidays.

[Matt McClintock:]

Okay. Thank you. That's helpful. And then Jim just one more question just on franchises fully you required that another major one as well coming down the pipeline. And I just if there's some type of generational thing going on here that's creating the opportunities for you to buy back on these franchisees or what's really the driver behind the extension for franchises to sell at least at this point and I would say a greater amount versus last year or some prior years? Thanks.

[James Harrison:]

Yeah, that's you've really nailed it. It's really a legacy issues for most part. We've not added any new franchisees I think we've may have been one just we required for Party City in 2005 so most of the operators and owners go back. Well over 20 years with the business understand one basis it is a very difficult business, it was a very tough business. And we have a right of first refusal and at the end of day with a really the most natural buyer for their operations. And we want to have relationship with our franchisees. So as they as they reached and face those legacy issues and generational issues there are more inclined to want to do want to talk to us about acquiring them so I would I would see say that we we've acquired quite a few last 10 years and it will be about 100 remaining after the next transaction. That 100 is dispersed for the most part amongst a pretty large number of owners and I would anticipate that we would continue to buyback franchise a bit and in a smaller number of rooftops on an annual for a prime basis, I would suspect that we continue to be doing that of next several years.

[Matt McClintock:]

Perfect. Thank you very much for the color, first of all.

[Operator:]

Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

[Simeon Gutman:]

Good morning, guys. I want to follow-up on first Amazon. Can you talk about the diligence did you speak to other retailers who have marketplace website about their experience on how the marketplace business evolves relative to their own, just thinking about you know risks and opportunities and then at the economics as we know as far as third party fees I mean is that it simply is the way it works for you paid those fees and you're the one who's putting the stamp and shipping the item?

[James Harrison:]

Right. So it was especially first for the question Simeon. We engaged the help and assistance of a very, very well-known consulting firm, who on our behalf conducted quite a bit of research, consumer research as well as a great deal of due diligence on how marketplace works and how we would be perceived on marketplace so this was not something we did spur of the moment casually. In terms of the structure, it will be filled by the market of manufacture which is us so we'll be going to fulfillment of our new bill facility. And you're absolutely right because if we associated with the sales generated on the site.

[Simeon Gutman:]

Okay. And maybe just maybe for Dan on financial question in detail and maybe a bigger picture one. Just to clarify the interest expense is going up by $7 million but net income outlook is not changing?

[Daniel Sullivan:]

That's right.

[Simeon Gutman:]

And then the other piece. Okay. And then there's another question just about….

[Daniel Sullivan:]

We took up our interest expense range to $103 million to $106 million for the year, largely result of the debt transaction but have not adjusted our guidance on adjusted income for the year.

[Simeon Gutman:]

Okay. And then just big picture on profitability I mean since you've been public. I think you really have a disappointed on EBITDA line it's been going in a pretty steady right. There are couple of factors that were called up this quarter, I think it was freight but I don't know if a got freight expense as well. Just to talk about these expenses temporary just thinking about the overall profitability of the business is anything changed or the stuff that we heard was temporary this quarter?

[Daniel Sullivan:]

No I think what you're seeing in this quarter we saw in Q1 and we expect to see it balance of year is some meaningful headwinds in margin mostly freight and distribution and a bit around labor although we've seen labor is a little bit over the summer. And those are cyclical right that something we're doing and I think what it points to in our business is the strength of our vertical because what we've said is despite the headwinds, we anticipate still delivering about 20 basis points of margin rate accretion for the year. So yes, we are faced with challenges as are our many folks in this industry but the vertical as have allowed us to actually compensate.

[James Harrison:]

Another think I'll add is obviously freight is something that everyone's dealing with and we're doing number of things to try to address that and ease the burden of that including pool point deliveries to less mile carriers. We've also invested very heavily of the last twelve months in our distribution center. Most recently in July going live with a new pick module process which is called goods to person which increases the pick efficiency on a fairly large swath of us of our of our skews by almost three fold which will improve our labor cost as it relates to the distribution centers. So I think there's a lot of a thing that we can do to address this and we are addressing it. I think freight will continue to be an issue for the perceived future. I believe distribution we can actually make some good inroads in over the next 12 to 18 months.

[Simeon Gutman:]

Okay. Thanks everyone.

[Operator:]

Your next question comes from the line of Seth Sigman with Credit Suisse. Your lines is open.

[Seth Sigman:]

Thanks a lot. Good morning, guys. My question is on the top line so you have a number of retail productivity initiatives in place. I'm just wondering if you could give us an example or a few examples of what you're working on and how that may be starting to show up in the results. And I guess the second part of that question is when I look at the underlying comps up 1% you highlighted a number of positives called out every day graduation, your web business was obviously well ahead of that and then again the productivity initiatives are helping you. What would be the offsets to those positives? Thank you.

[Daniel Sullivan:]

So the obvious offset to the positives in purely in the retail business we're going to comp obviously have Easter shift we can park that aside. I think the solid business continues to be challenging which is I think consistent we're been. And then again I think you see a little bit of shift and timing around summer and patriotic celebration so you're right we call that the highlights for the quarter would be around the everyday business and graduation so those are some of the offsets.

[Seth Sigman:]

And then just as relates to the retail productivity initiatives, what is actually happening in the box and if you could give us a couple of examples and how would starting to maybe show up in the results that would be helpful?

[James Harrison:]

I'll turn over to Ryan. But just of the top, obviously we talked about the party planner and we've also invested very, very heavily platform in the each side of our website and it was that as you have grown up. In terms of specifics within the box I throw out to Ryan.

[Ryan Vero:]

Yeah in sort of highlight three major pieces of our retail initiatives. First of all, our workforce productivity receiving process is put away processes just general operational practices within the stores moving tasks off hours, focused on both efficiencies and the labor model but also in improving customer service and allowing us to reinvest in party planners which is really the second major initiative that were pilot I mean. At the moment is as Jim and Dan mentioned in almost 100 stores in the last quarter and ramping that up as we speak. And then the third pieces really on helium and energy efficiency so we invested in some new efficiency programs for our LED lighting for our helium distribution systems also helping to improve margins and again highlighted earlier.

[Seth Sigman:]

Okay. Thank you for that. If I could just follow-up with one other question on the wholesale business I mean this is but the delays that you referred to. Are you able to quantify that and would you expect that to come back in the third quarter so should we be expecting the wholesale business to reaccelerate in the third quarter? Thanks.

[Ryan Vero:]

Yeah the issue or the timing issue we spoke of were alluding to in the U.K. was around delays in some of our direct from factory hollowing shipments is relatively small about 20 to 30 basis points of tailwind that'll come back in Q3.

[Seth Sigman:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Baker with Deutsche Bank. Your line is open.

[Michael Baker:]

Thanks. I just wanted to ask quickly about the same store sales outlook so you're up 1.2% year-to-date, you're saying approximately 1% for year so I will say similar second half comp versus the first half are always close enough. But you do it much easier comparisons so why wouldn't comps accelerate and I suppose it's another way of asking how we didn't go particularly well last year as I recall because the some website issues among other things and you see that in the negative comps in the back half of the year. Remind us what happened last Halloween and again why should this Halloween be a lot better such that we can expect accelerating back half comps?

[Daniel Sullivan:]

Yeah so let's first talk about half one, it's a reported 1.2% comp you're right. But remember that benefitting from the New Year's Eve shift that took place in the early days of the year so on a run rate basis that's more like a 60 basis point run rate business. In terms of the back half of the year I'll highlight a couple of things, one well prepared for Halloween as you heard Jim mention, it moves to a Wednesday which we have already said is not a clear catalyst for growth and then when you combine that with the New Year's Eve shift that will take place this year which will move the 30 of December out into next year all of which we gave in our original guide. That's what that's worth about 100 basis points negative comp and Q4. So again, we think the business of performing largely in line with what we thought. We still feel very good about the guidance we've given on about a 1% comp there's just a lot of noise between holiday shifts and calendar shift make comparisons half one and half two a little bit difficult.

[Michael Baker:]

And it's follow-up on that Halloween try to pull my calendar here but I think it was a Tuesday last year as I recall this year Wednesday so I understand that's not a catalyst but it's not actually a negative either right, there's no - is there any big difference between middle of the week?

[James Harrison:]

Wednesday is probably the worst day for adult parties, right if you think about it. But if it's on a Wednesday, do have a party to Sunday before or the Saturday after Friday night after. It's from simply the indult elements of the celebration it's probably the worst day of the week. In terms of how much is that worth we are guide reflects what we think that is.

[Michael Baker:]

Okay. Thanks for the color.

[Operator:]

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

[Joseph Feldman:]

Thanks. Good morning, guys. Want to go back to something with the Toy City pilot you guys are going to be doing. I think in the prepared remarks, you mentioned there's possibly even some opportunity with some of the former Toys R Us sites. Can you explain a little more about that because I'm wondering about what size box you might be targeting or is it the rent is so cheap you can kind of wall off a store and take whatever size you need?

[James Harrison:]

Yeah, I will just talk about the pop-up store business in generally doesn't matter if it's Toys R Us store or Circuit City or DICK's Sports Authority. The landlord has a box, the landlord has a little box, landlord once you get some money for that box because it's not currently occupied and we take advantage of that at a flat rate, we don't pay on a per script basis generally. So the size of the box, the box - fundamentally the box can't be too big or the price of the rent is right we just got a temporary or we get need to selling area but those temporary was.

[Joseph Feldman:]

Got it. Okay, got it. So it's really just about the rent you can kind of think anything, okay. And then one of our as of yet there doesn't seem to be too much of an issue related to tariffs but I will ask the question I mean is there anything to be worried about down the road or I guess the research you guys have done where the government's thinking of placing tariffs is there anything that could be impacting you?

[James Harrison:]

Sure. With respect to the first round of tariffs that was virtually no impact with respect to the second round tariffs which really is turned into a 2A into 2B because with happened is the government chosen to accelerate a portion of the second round tariffs to be effective August, 23, which we need are having some time to temper when the coming period ends the accelerated tariffs on certain items without waiting for a full coming period to expire. The full-year impact is something that we think is very, very manageable and looking at the components of what would be a factor from a negative standpoint with respect or business and what percentage of the product actually is Halloween which gives us some opportunities to look at our the engineering products looking at our sourcing, looking at pricing - there are several items where China is the only vendor for product, I will give good example smart machine. And so everybody is so smart machines will be affected equally with respect to the impact of tariffs and so I would imagine that will just be reflected in pricing on a go forward basis probably getting lately to the latter part of the season and certainly next season. There are three almost over tariffs that are beneficial to us, one area with the tariffs are going to apply as paper plates and paper cups. But you're going to 0% to 25% tariff. As you know we may fracture on paper plates and cups here in the United States so we see an opportunity for us to potentially green some market share from a manufacturing businesses by virtue of the tariffs. So on balance it will not be material number of we expect that we can either resource, adjust price or reengineer to comp rate the impact of tariffs.

[Joseph Feldman:]

Got it. Thanks very much and good luck to this quarter, guys.

[James Harrison:]

Thanks so much.

[Operator:]

Your next question comes from line of Tami Zakaria with JP Morgan. Your line is open.

[Tami Zakaria:]

Hi, thank you for taking my question. So my first question is you're rolling out cut them in additional market and if they added in the DSW for some time now. So my question is, are you seeing any positive impact on your stores and those areas where you're rolling the service out?

[James Harrison:]

Not material at this point. I'm going to get - it's such a small fine example it's very difficult to determine the impact because them.

[Daniel Sullivan:]

Yeah remember, Tami, we're not yet doing any real customer acquisition work. We're focused more on vendor acquisition and executing party successfully we'll begin to pivot to customer acquisition work when we scale the program up.

[Tami Zakaria:]

Got it. Thank you so much. So my question is more long term, do you see any opportunity down the line to manufacturer toy or toys related items now that you're testing the category in your stores.

[James Harrison:]

We look at manufacturing everything we sell. Was then we'll do it, will Dan will tell. But there may be certain elements of the assortment that does make sense for us ourselves. But that's definitely in the way down in the year in the future.

[Tami Zakaria:]

Got it. Thank you so much.

[James Harrison:]

Thank you.

[Operator:]

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

[Chris Prykull:]

Good morning, guys. Thanks for taking the questions. So the domestic wholesale business or sales for the domestic party good retailers has been a bit soft over the past year. And I know all of that is just noise from your franchise acquisitions but you did mention softness and franchise an independent channel. Can you maybe just walk me through what you're seeing out there? Why is the softness? What are you seeing from some of your larger domestic customers and that's just a function of the larger players are getting stronger and is independent operators going away?

[James Harrison:]

Yeah it's a little bit of the latter for sure. Certainly there's pressure from Party City. Presence in the marketplace on the independent party's store retailer as the biggest supplier we've been trying to support them. A lot of their businesses probably we are more focused on the commodities side of the business i.e. the solids and we see that our solids business outside the Party City to the broader market. And we were in a lot of lot of visit places were like others as a category seems to be under some pressure as people look to upscale higher and plastics and actually just reduce their consumption on the solid color side. So I think it's more a function of the price of party in terms of the it depends on Party City, evolving consumer and the inability of them to evolve their stores as successfully in as we have ours because they like the resources to do so quickly.

[Chris Prykull:]

Great. That's helpful color. And then just one quick follow-up on the toy business, sort of more high level, how did you make the decision to enter the toy category and walk me through your thought process at a high level. How does a complement your current brand your offering, how can you leverage a vertical integration and maybe lastly more specific how the margins look like in that business relative to party gets the gross margins?

[James Harrison:]

So in terms of the strategy we been work for toys in our stores for the last couple of years really a larger format stores that carried a selection of two ways I can get exact number one with me towards to use couple of 100 skills in the larger stores. So we've actually been carrying toys in some of the larger footprint stores. And so we have toys have been on our radar as their extension of a product portfolio for quiet sometime obviously we sure become disrupted option in the marketplace is an opportunity for us to expand that and to see good work in the pop-up format. In terms of the margin, we will not be as an extract of the party goods because with our party goods we make wholesale and we can became a faction product. In this case, we are neither the manufacturer nor the distributor of them at the current time. So the margin profile is not as attractive as it is party.

[Chris Prykull:]

Thanks so much. Good luck to the rest of the year.

[James Harrison:]

Thanks a lot.

[Operator:]

Your final question comes from the line of Curtis Nagle with Bank of America Merrill Lynch. Your line is open.

[Curtis Nagle:]

Great. Thanks very much for taking the question. So forgive me if you answered this but in terms of I guess the offset from the higher interest expense in the guidance which is unchanged I guess what the comparators at the inclusion of the toy business or is it something else?

[Daniel Sullivan:]

Now so again we reiterated our guidance within our preexisting ranges right and so I guess the short answer to that is based on half one performance and expectations for have to we think that we can mitigate the higher interest expense.

[Curtis Nagle:]

Okay. And just to the follow-up. Are you guys planning to replace Gregg's role or we do not have the present role anymore?

[James Harrison:]

There are no plans at this point time to fill that role. We've been as you know we've been building a really strong competency most of the last several years additional Dan, Ian, Ryan build the very, very strong team and retail rebuild entirely retail team. Michael Harrison, on consumer products side is really started to take good hold of that business. So we're pretty comfortable where we are. We're always looking to build the bench strength in the buildup the organization and if there are good candidates out there and we see an opportunity in need then they will look to do something.

[Curtis Nagle:]

Very good. Thanks very much. Appreciate it.

[James Harrison:]

Thank you.

[James Harrison:]

Thank you everybody. I appreciate you joining the call. Once again, we're pleased to report a good second quarter and we look forward to talking with you in the third quarter as well. Thanks very much.

[Operator:]

This concludes the Party City second quarter 2018 earnings conference call. We thank you for your participation. You may now disconnect.