Party City Holdco Inc.
Q1 2017 Earnings Call Transcript

Published: 9 May 2017

[Operator:]

Good morning, my name is Emilie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Party City's First Quarter 2017 Earnings Call. [Operator Instructions] After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] Thank you. Deborah Belevan, VP of Investor Relations, please go ahead.

[Deborah Belevan:]

Thank you, Operator. Good morning everyone, and thanks for joining us. This morning, we released our first quarter 2017 financial results. You can find a copy of our press release on our Web site 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; Dan Sullivan, Chief Financial Officer; Ryan Vero, President of our Retail Division; Gregg Melnick, President; and Mike Correale, Chief Accounting 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 regarding their beliefs and expectations to the Company's future business prospects and results. 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 urge everyone 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 operating 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, Debbie. Good morning, everyone, and thank you for joining us today. I am pleased to report that we're off to a strong start this year and our business is performing generally in line with our expectations allowing us to maintain and reiterate a full year top line and adjusted earnings guidance. Let me begin by summarizing our performance for the quarter. And I will focus on the progress we have made against our strategic growth objectives. I will then ask Dan to discuss our business performance, financial results in further detail. Our business of consumer products and retail delivered a solid first quarter with total revenue growth of over 4% on reported basis and nearly 5% in constant currency. In the retail business, strong seasonal performance, new product introductions and good in-store execution were all positive contributors. The consumer products business was fuelled by growth in the international markets. As a leader in our category with an unparalleled corresponding footprint, our powerful vertical model in our omnichannel retail platform enabled us to continue drive powerful growth. As a vertically integrated consumer products company, we have a competitive advantage in the form of multifaceted business that enjoys multiple revenue streams and as numerous opportunities to grow the bottom line. In the first quarter, the top line growth was also reflected on the bottom line. Adjusted EBITDA grew by approximately 6% driven by operational efficiencies and continued gross margin expansion resulting from the power of our business model. During the quarter, we also announced several acquisitions which will serve to further strengthen our vertical model expand margins and position us for sustainable growth in years ahead, more on this shortly. The Consumer Products to third-party wholesale businesses which constitute roughly a third of our revenues reported sales results that were flat year-over-year despite the negative effect of sales eliminations totaling almost $3 million due to the conversion of 36 franchise locations to company owned stores as well as the continued foreign exchange headwinds we talked over the past. After adjusting for these two factors, wholesale revenues grew by nearly 4%. International revenues grew by over 17% in constant currency driven by a combination of strategic acquisitions and strong growth in the European and UK markets, the growing consumer awareness of category fueled by successful store initiatives has helped contribute to this performance. Dan will provide greater insights in this shortly. The price of the sale of vertical model and our expanding international presence and capabilities position us well to capitalize on the growing global demand for party goods. Turning to the retail business for a moment, brand comps grew at 1.7% and right in line with our expectations. Our in-store execution continues to improve and in the quarter, traffic levels strengthened. As you heard me say improving our in-store experience and overall customer engagement remains one of our key strategic priorities. Offering our customers the deepest breadth of product assortments at compelling value is no longer enough, we must offer easy service oriented experience no matter where our consumer chooses shops, whether it's online or in our stores. Because we uniquely merchandize our products as coordinator collections, our consumers have demonstrated a strong desire to use shop at partycity.com or simply use our website to plan the parties and then purchase in store. At which time to discover additional items when they arrive, encouraging and supporting that discovery process will be key element of our retail growth strategy through greater in-store customer engagement service. As I mentioned at the start in the first quarter, we have aggressively pursued many initiatives that will support our future growth objectives. We have a long and proud track record of identifying and integrating accretive acquisitions. These transactions over the past 12 years have created retail entity which has no peers and further expanded our vertical reach. This key element of our growth strategy continues and is reflected in our efforts during the first quarter. In the quarter, we completed the acquisition of two separate franchise groups comprising a total of 36 stores located in Louisiana, Alabama, Mississippi, Florida and the Carolinas. As I've mentioned in the past, acquiring franchisee stores strengths our brand position, widens our company owned footprint and increases options within markets for us to optimize our stores and potentially add new retail square footage. Additionally, the economics are attractive and the risk profile is limited providing a near term opportunity for us to meaningfully grow shareholder value. Also we announced during the quarter, the acquisition of Granmark, a leading manufacturer and wholesaler of party products in Mexico. Granmark is a well established business and maintains an impressive portfolio of club licenses. This addition will allow us to expand our Latin American product offerings, capitalize on some inherent cost and revenue synergies while growing our manufacturing capabilities. Additionally, our strength and presence in this dynamic market will allow us to substantially increase our potential in the broader Latin American market and extract the market trust given a successful culture. These recent acquisitions reinforce our unique ability to identify and require assets fuel growth book topline and EBITDA and Predecessor Company for continued success. And finally I'd like to announce that we have entered into agreement with an apology and investment firm that builds out innovative business ideas in partnership with large brands. Party City is partnering with [indiscernible] to create centralized digital platform for Party planning called [indiscernible]. This is an online, easy to use Party marketplace come let's our customers design a party with this broad spectrum of embedded party service providers including activities, entertainment, catering and of course Party supplies. We believe that [indiscernible] will help solve a myriad of consumer pin points, inline the party planning process and wrote both the total party wallet as well as our share of it. We are very early in the development stage of new exchange platform but believe it presents a good opportunity to further leverage our strong interested brand. We will keep posted our progress here. Before turning it over Dan and I'd like to make a couple of comments regarding some recent organizational changes. Firstly we have realigned our retail field manage structure as well as our store management structure enable us to improve upon our ability to serve and engage our customers. While maintaining appropriate levels of supervision expands authority. Additionally we announced our Chairman Gerry Rittenberg as rescission to consulting role from the executive position. As many of you know over the past 20 plus years Gerry has been a partner and a friend for me personally. These significant contributions to our business our strategies and our growth cannot be understated. I'm very pleased that we remain involved in the business of both the directory consulting capacity. Finally I regret announced the development of the VP of Investor Relations have leaving us for a new opportunity. Debbi joined us prior to the IPO and it was an important contributor to that process, as well as ever since managing in our shareholder and investor communications. We wish her best in new endeavors. And now I'd like to turn the call over to Dan to discuss the results of the quarter and our full year guidance.

[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 rest of fiscal 2017. And then we'll open up the call for questions. We had a good first quarter with solid underlying performance overall we delivered what we set out to deliver from both a top and bottom line perspective. We grew consolidated revenues 4.2% to $477 million or 4.8% when adjusted for currency. We expanded our gross margin rate by 30 basis points, grew our adjusted net income by 27% and delivered adjusted EPS of $0.05 per share. We also generated $38 million in free cash flow up 40% year-on-year. In our retail segment sales increased 6.2% on a reported basis. Largely a result of growing our retail square footage over 11% versus the same quarter last year primarily through accelerated franchise acquisitions and we also delivered a healthy 1.7% comp sales increase. At quarter's end, our store network total 930 stores, 784 of which were corporate stores. As we opened two new stores acquired 36 franchise stores and closed four company owned stores during the quarter. As mentioned our brand comparable sales which include our U.S. and Canadian permanent stores and North American e-commerce business increased 1.7% for the quarter which was in line with our expectations. Transactions were flat which was a marked improvement over recent trend and was aided in part by the favorable calendar spacing between key holidays. We're also up against the minus 1.5% comp from Q1 last year largely reflection of how Easter fell in 2016. In addition our overall store execution improved. We continued to accelerate growth in our metallic balloon business and made some additional store assortments that were well received by our customers. Our seasonal business which in the quarter comprises Valentine's Day, Mardi Gras, St. Patrick's Day and early Easter business was strong and every day business performance was solid. Our North American e-commerce comp sales increased just over 5% in the quarter as increased traffic and slightly higher conversions helped grow transactions and offset slight declines in ticket. Turning to our non-vertical consumer products business, total revenues increased 4% after adjusting for foreign currency and the elimination of $3 million in sales through the acquisition of 36 franchise stores. International sales rose approximately 17% on a constant currency basis driven by a combination of strong organic growth across the UK, Germany and Australia as well as the recently announced brand mark acquisition in Mexico. If we eliminate the contribution from this acquisition our international business grew organically at a healthy 11% in constant currency with double digit growth in the UK and continental Europe and high single digit growth in Australia. In these markets our strong national retailer businesses with the likes of Morrison's, ASDA, Coflein and BigW driven in part by our expanding store in-store concepts filled our growth. Our consolidated gross profit margin was 37% or 30 basis points above the same quarter last year despite 20 basis points of currency headwind and this was in line with our expectations and driven primarily by a 200 basis point increase in share a shelf to 77.4% as well as the continued benefit of our sourcing efforts taken in 2016. Operating expenses increased about $13 million and 140 basis points in rate of revenue totaling $163.6 million and 34.3% of revenues respectively. $6 million of this increase was due to onetime charges associated with the changing role of our Executive Chairman and $3 million was related to the restructuring of our retail segment when we exclude these one off charges, operating expenses increase just over 2% but decreased by 50 basis points in rate of revenue versus quarter one of last year. We remain focused on continuing to improve our operating model and in the quarter we saw further gains in labor productivity across our retail business which served as a partial offset to the after mentioned areas of OpEx de-leverage. The restructuring charges reflected in the quarter are in support of our focus on simplifying our retail operations and redeploying our labor to deliver improve customer engagement and service. The run rate benefit of the actions taken is reflected in our overall guidance for the year. Our adjusted net income of $6.1 million represents growth of approximately 27% and margin growth of 30 basis points. And our adjusted EBITDA increased 5.6% to $49.1 million or an increase of 10 basis points in rate versus last year. During the quarter we delivered free cash flow defined as adjusted EBITDA less CapEx of $38 million dollars an increase of $11 million versus Q1 of last year. CapEx total $11 million while we allocated $3 million towards debt pay down and $62 million towards acquisitions. We ended the quarter with net debt of $1.7 billion resulting in a debt leverage ratio of 4.4 times. And at the end of the quarter we had approximately $299 million available in our existing asset base revolver. Looking forward to the rest of the year our strategic priorities and growth objectives remain unchanged. As Jim mentioned we continue to believe in the multiple leaders of growth that our business offers and have made meaningful acquisitions in Q1 to augment our core business. As such we continue to expect revenue for 2017 to be in a range of $2.35 billion to $2.45 billion with comp sales growth in the range of 1% to 1.5%. We continue to project full year adjusted net income of $148 million to $158 million or $1.23 to a $1.30 per share and we still expect adjusted EBITDA to be in the range of $400 million to $472 million. We also anticipate further gross margin improvement this year a share of shelf games and sourcing savings continue and are partially offset by anticipated commodity cost headwinds and further negative effects impact. Additionally, we remain focused on structurally addressing our cost base and as mentioned we made good progress in both our consumer products and retail businesses in the quarter and these efforts will continue in 2017 allowing us to simplify our operations and eliminate waste across our business, while also providing the necessary catalyst for further investment in improving our in-store service and customer engagement. Finally we expect our debt leverage at the end of 2017 to be approximately 3.5 times. For all other detail around our outlook including updates to GAAP net income and GAAP EPS now that now reflects the one off charges I discussed 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] And our first question comes from the line of Matt McClintock from Barclays. Your line is open.

[Matt McClintock:]

Hi, yes. Good morning everyone. Congrats on the quarter.

[Jim Harrison:]

Thank you.

[Matt McClintock:]

I was just wondering if we could focus on Granmark, you know, and actually [indiscernible] marketplace, how do you think about that investment evolving? And how do you think about that integrating into your overall strategy of trying to improve the in-store execution and get close to the consumer to buy more of a service as opposed to the selling products? Thanks.

[Jim Harrison:]

Thank you, Matt. I think first of all, as I said in my comments, it's really early in the game for us to try and really put a fence around [indiscernible] and determine with average true potential, there is a lot of investment and time to meet the spend developing it. Obviously we believe that has potential great benefit to us as we look to expand our share of the party wallet. And I think if we can do this, it will certainly help go a long way to include more us in important [indiscernible] universe.

[Matt McClintock:]

Okay. And then, if I could have a follow-up on Granmark actually, now that you completed the acquisition, how should we think about that strategic piece helping your overall Latin American business in terms of stages, should we [technical difficulty] over the next several years?

[Jim Harrison:]

Sorry, Matt. Could you repeat the last part of your question?

[Matt McClintock:]

I apologize. On Granmark ,how do we think about the impact of that now, now that it's been integrated into the business, how should we think about the impact on overall growth rates in Latin America?

[Jim Harrison:]

Sure. So, Granmark is a nice piece of the puzzle for us, Granmark is essential the [indiscernible] skin of Mexico in terms of market position, their license portfolio. The opportunities for us obviously are to improve our distribution capability within the Mexican market as we grow the franchisee network, it gives us the opportunity to become closer to the Latin American market in the standpoint of design and execution of product, it also provides us with additional manufacturing capacities for our share-of-shelf discussion, we talk about expanding our manufacturing share-of-shelf between Granmark now and ACM, we feel [indiscernible] substantial portions of the puzzle in place to help us get more current level of share-of-shelf up to our target of 50% manufactured. So Granmark is a very important acquisition for us over the long-term, it will take us probably 24 months before we integrate it but we're excited about the potential it offers.

[Matt McClintock:]

Thanks a lot, and best of luck.

[Jim Harrison:]

Thanks so much.

[Operator:]

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

[Simeon Gutman:]

Thanks, good morning, and good start. First a clarification question, the brand comp 17 I believe you mentioned that transactions were flat and I think you said what the website was up if can you just repeat those and then within the store component, I'm assuming then units are traffic was down, can you talk about how that played out over the months, what was the cadence and any diagnosis of the consumer based on it or it's just merely a function of the year calendar and sort of the party schedule?

[Jim Harrison:]

Yes. So, the comp in the quarter was up 17 as you mentioned and that was driven by a flat traffic pattern which is an improvement from last which we were encouraged by and it was driven by AUR growth largely driven by the mix benefit as we continue to grow our balloon business, if we look at e-commerce we had 5.3% comp in e-commerce and a couple of really nice underlying metrics there. We saw traffic increase on the web 3%, we saw customer conversion increase on the web at 6%, so more folks came to the site and we converted those folks at a stronger rate. What we have to remember is last year in Q1 particularly on the web we were extremely promotional and we ran quite attractive freight offers and a lot of consumer offers buy more, save more. And well that drove healthy comp last year and it drove units, it wasn't sustainable, it wasn't we wanted to be, so we better balanced our offering on the web and comp growth in the more sustainable way.

[Simeon Gutman:]

And regarding cadence, I mean is there anything to tell about the consumers, its status quo relative to fourth quarter just curious any observations you can provide?

[Jim Harrison:]

I mean we don't get into breaking down the quarter by month but there is nothing in the cadence of the quarter we are commenting on different than our overall comp performance.

[Simeon Gutman:]

Okay. And then just one more on profitability and leverage, this is a relatively small quarter by comparison I think the smallest of the year and the adjusted Rev was up I think 4.8 and the EBITDA 5.6, it looks like decent operating leverage for a small quarter, again can you talk about how this look relative to your expectations on flow through? And then should flow through improve as we go through the balance of the year?

[Jim Harrison:]

Yes. No, you are absolutely right. It was a good quarter on leverage and actually in line with our expectations. We continue to see increased labor productivities in our stores. We saw -- if we exclude the one off charges, we saw a 50 basis point gain in SG&A leverage. Nothing unusual about the quarter when we think about our full year guidance in line what we had expected.

[Simeon Gutman:]

Okay. Thanks. Good luck.

[Jim Harrison:]

Thanks.

[Dan Sullivan:]

Thanks.

[Operator:]

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

[Rick Nelson:]

Thanks. Good morning. I would like to ask you about the acquisition pipeline. You have been pretty aggressive here in the first quarter. How you see as the remainder of the year unfolds, are there more of franchises opportunities or opportunities on the supplier side?

[Jim Harrison:]

Sure, Rick. As you know, we're constantly looking to build the pipeline of opportunities both in terms of retail and wholesale. We see additional franchise opportunities. I would anticipate those probably would be 20 -- 18 items as opposed to 17 as we get further [indiscernible] Halloween it becomes difficult to execute those transactions. In terms of acquisitions on the manufacturing and wholesale side, we may have some small things later on this year. I wouldn't anticipate anything large, anything else large this year. As you know, we look for acquisition -- nice bolt-on acquisitions with a very low beta and very high return, and we want to make sure we do those in a way that's very thoughtful, and we integrate them and get to maximize the synergies. So we try to do it in a very measured and paced way so that we don't put too much on plate at once.

[Rick Nelson:]

Thanks for that color, Jim. [Indiscernible] with manufacturing share-of-shelf at this point?

[Jim Harrison:]

Our current manufacturing share-of-shelf…

[Jim Harrison:]

So, was just over 20% at year end. Again you got to be careful when you look at quarters over quarters because of the mixed impact. At the end of Q1, it was about 24%. Gain about 100 basis points over Q1 of last year.

[Jim Harrison:]

And if we put what we have in place today in terms of capabilities and obviously it's going to take a lot to fully realize those synergies as we have to develop product and develop product and develop artwork and develop [indiscernible] et cetera. So, it's probably an 18 to 24 month timeframe. We should be in a position to get 20 to 40 plus within the next 18 to 24 months in terms of manufacture share-of-shelf. In terms of wholesale manufacturing, we will be closer to 50 in terms of the wholesale business.

[Rick Nelson:]

And e-com, what percent of revenue it had account for, and if you can speak to the economics there [indiscernible] to bricks and mortars stores?

[Ryan Vero:]

Yes. So the e-commerce business is still roughly in a 7 - 8% range of retail revenue. Obviously, we came off last year with a 10% comp. And as I mentioned, Q1 was a 5.3% comp, absolutely in line with what we expected for the quarter. I am not going to get into the specifics of the profitability in the business model of e-commerce versus brick and mortars. The obvious differences that you is e-commerce platform is more promotional so it has a higher promotional intensity as does whole e-commerce business. But then you have a different economic model when you think about distribution and brick and mortar. So -- but again, I think the important thing on e-commerce that we saw in the quarter which strengthens customer traffic on the web, increased conversion, and a comp that I was in line with our expectations for the year.

[Rick Nelson:]

Great. Thanks a lot, and good luck.

[Jim Harrison:]

Thank you.

[Ryan Vero:]

Thank you.

[Operator:]

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

[Seth Sigman:]

Thanks a lot and good morning. One follow-up question on the organization on the organizational changes down at the store level, the field level, can you elaborate on the changes you made, and if there is a way to quantify what you had contemplated in the guidance in terms of the cost savings?

[Jim Harrison:]

I will defer that. I'll defer the first part of your question to Ryan Vero who is with us here who is our President of the Retail Group, and then in terms of the economic impact, and [indiscernible] to Dan. Ryan?

[Ryan Vero:]

Yes, sure. So, two levels of changes in the field; the first being in the field management structure, so our regional and district managers, we changed some spans of control there to get more in line with industry standards and specialty retail. And secondly on the in-store management side really looking at the structure within store and providing flexibility from a more top heavy structure to a little bit lighter weight management structures within the stores providing us a more flexibility during the off-peak selling seasons. Dan, do you want to talk?

[Dan Sullivan:]

Yes. So the savings from the work Ryan and team have done show up in two places, right. They show up in G&A when we talk about the leadership changes that were made. Some of those savings are being reinvested as Ryan thinks about his organization and the needs there. And then, the lion share of the saving for shop and resale OpEx and that's related to the changes we've made in store leadership. I am not going to get into the specifics of the economics and how many folks effected by it and the like. But again as we mentioned, further in our cost control efforts and really taking a look at how we operate the business is a focus area for us. This is important first step in that. And the savings generated on the run rate basis are fully embedded in our guidance for the year.

[Seth Sigman:]

Dan, that's helpful. I mean just a follow-up, is there a way to maybe frame what inning we are in from a cost productivity perspective? And should we read this as bit of a shift in the strategy more of a focus in this area?

[Dan Sullivan:]

No, I don't think it's a shift in the strategy. I think it's an acceleration in the strategy. And I won't try use the baseball analogy what inning ran; I would say this is an important first step which is around structure which has obviously a cost savings element it but also a simplification element to it. Further work continues in our areas in Ryan's organization around how we think about changing the work, how we simplify the operations of the store. And then, how we redeploy a piece of that labor into driving a customer selling, customer engagement environment. So it's an important first step reasonably early in the game at this point.

[Seth Sigman:]

Okay. Thanks very much.

[Operator:]

Your next question comes from the line of Stephen Tanal from Goldman Sachs. Your line is open.

[Stephen Tanal:]

Hey, good morning, guys. Thanks for taking the questions. So one thing that was quite encouraging with the share-of-shelf in the quarter, but it didn't seem like at least relative to how we modeled it that you got the upside in gross margin. I guess maybe we are missing something there or maybe the FX impact. But I was hoping you could maybe quantify the puts and takes in gross margin rate?

[Jim Harrison:]

Yes. We saw a 200 bps gain in share-of-shelf as mentioned. And we actually saw a strong manufacturing share-of-shelf gains. We have 20 basis points of FX headwinds. So that's one piece. And we are starting to see a bit of commodity cost creep. Nothing material at this point providing I would say less of a tailwind than it had provided perhaps over the last 12 to 18 months.

[Stephen Tanal:]

Got it. That's helpful. And then just thinking about the comp guide, I mean obviously pretty solid quarter in line with your expectations. Can you remind us kind of why the potential decel at the midpoint? Do you think that's conservatism at this point or when in the year would you see risk of a potential deceleration?

[Jim Harrison:]

Just the thing is clarified, what do you mean a decel at the midpoint?

[Stephen Tanal:]

To comp outlook, 1 to 1.5 versus the 1.7 in the quarter like how are you thinking about that at this stage? Are you thinking it's just conservatism? Or, are you thinking maybe on hedge for 4Q obviously still lot of unknown something like that?

[Jim Harrison:]

Yes. No, I don't think it's a hedge at this point. I think our outlook for the year is pretty balanced. And I think Q1 was in line with that balance. We have to remember when we get to Q4, we will cycle up against losing on New Year's Eve which we have talked about in our Q4 earnings call. So that will have an effect on our Q4 comps. But overall, I think Q1 was a pretty good reflection of our expectation for the year which we said 1 to 1.5. And then, it will play more like a 1.5 to 2 when we adjust for the New Year's Eve shift.

[Stephen Tanal:]

Got it. That's helpful. Thank you.

[Jim Harrison:]

Thanks.

[Operator:]

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

[William Reuter:]

Good morning guys. You had some relatively positive comments regarding what you guys are seeing in terms of your U.K. and international businesses, can you talk a little bit about how we should view that growth opportunity over the next couple of years? And how meaningful it's going to be to the overall business?

[Jim Harrison:]

Sure. Let me turn over to Gregg Melnick. Gregg is very intimately involved with all of these operations these days.

[Gregg Melnick:]

Great. Good morning. I think the quarter this year fell within line with some of the business trends that we have been experiencing. As Dan mentioned, strong double digit growth in the U.K. and in Australia, and high-single digit growth kind of everywhere else, meaning that around the world excluding acquisitions. So I think that the business as it goes with a combination of organic and inquisitive growth is going to be in line if not stronger with high double 11% to 12% growth on a go-forward basis. And there's a lot of opportunity whether it'd be new customers and/or penetrating each different region as the consumers get used to new offering that we have. And there are also opportunity think we share a self as we go around the world with our Granmark acquisition and continued growth in Australia with the acquisition of Balloon Agencies. So I think the business has momentum, has some tailwind behind it really in almost all geographies.

[William Reuter:]

Right. Okay. And then just secondly from me, as is the case of most of retail, your e-commerce business is growing faster your than brick and mortar business, can you talk a little bit about the competitive landscape in terms of e-commerce and what you see or seeing from existing participants, and then whether you're seeing new entrants? Thanks.

[Jim Harrison:]

Sure. As we look at e-commerce, one of the advantages we have is with our vertical model; we have some good visibility to the whole marketplace, not just our own e-commerce. And core e-commerce business on a wholesale basis pretty much is renewing [ph] our e-commerce business on a retail basis. So there are no new entrants of note to the marketplace e-commerce that we've seen in the first quarter. Our business with our e-commerce Internet customers is tracking pretty much in line with the growth we see at partycity.com. So I would say we've got a maintenance of the status quo in terms of overall market share, but I think if you look at e-commerce for our business, it's not quite the same as many other retailers where e-commerce is a major growing rapidly extending piece of the puzzle, in our business, because of the high SKU nature of low price point that need to really be in the environment and enjoy the buying experience that creates -- that brick and mortar creates -- our business will not behave like an apparel business when it comes to e-commerce.

[William Reuter:]

That's helpful. Thank you.

[Operator:]

Your next question comes from the line of Geoffrey McKinney from Deutsche Bank. Your line is open.

[Geoffrey McKinney:]

Hi, good morning. Thank you. A number of my questions have been answered, but to follow on the e-commerce side, curious, given the announcement for the development of the platform, I think you'd indicated CapEx in kind of the $80 million context on the last earnings call, is there any upside risk to that guidance given the potential investment here and how should we think about quantifying that?

[Dan Sullivan:]

We don't anticipate a material change from our CapEx guidance.

[Geoffrey McKinney:]

Okay. And then I guess, just kind of drilling down a little further on the e-commerce side; you mentioned the high SKU nature of the business, is there -- do you see a meaningful difference in kind of average retail online versus in-store such that the products mix might be significantly different in store versus online?

[Jim Harrison:]

There is a difference, because in store we obviously have candy that has a very low AUR in it. Additionally, we have other -- we have greeting cards in store, which we don't have online. So, the AUR will be slightly lower in store, andthebasketwill be higher on the web.

[Ryan Vero:]

Yes, and also in the store -- this is Ryan; you also have in the stores significant Balloon business that is not played out the same way online obviously. It's more of a difference in the average transaction size versus the average unit retail.

[Geoffrey McKinney:]

Okay, that's helpful. Thank you.

[Operator:]

Your next question comes from the line of Karru Martinson from Jefferies. Your line is open.

[Karru Martinson:]

Good morning. Just when we'd look at e-commerce relative to the rest of the retail space, I mean, where do you see that going to if it's not going to be a dozen apparel in other sectors?

[Ryan Vero:]

This is Ryan. I start that answer, but e-commerce will continue to be a growing piece of our business and a more and more important part of our business. We think we can get this to over 10% share of our business versus what it is today, and we have a number of initiatives underway right now to help facilitate that. Some core capabilities like buy online picked up in store on our roadmap for later this year, which is an offer that is very popular with our customers that they're asking us for. And so, we look forward to providing that to them. The other piece of it is, it really plays in a seamless way with our retail stores as a place where customers go to get inspiration before they come into the stores to buy things, and we are very focused on how we're communicating and engaging with customers in the digital space, not just to drive e-commerce sales, but also to drive physical retail sales, because that's where customers are going to get that inspiration even before coming into buy products in our stores.

[Karru Martinson:]

Okay. Just on the commodity front, you mentioned headwinds, you know, how should we think about those challenges? Will they kind of be more second half weighted, or will be kind of a continuous pressure on that front?

[Jim Harrison:]

Pardon me. This is Jim. Overall, we expect for the balance of the year the commodity headwinds would be very much like we had in the first quarter. It will bemuted by the beginningto make insurers shelf and the gauge we are making efficiency at manufacturing. So we don't expect any material impact from the commodity changes over the balance of this year. Obviously it's something what we will be watchful of and thoughtful about for the balance of the year and going into next.

[Karru Martinson:]

Thank you very much guys, appreciate it.

[Operator:]

Your next question comes from the line of Wayne Hood from BMO Capital. Your line is open.

[Wayne Hood:]

Yes, good morning. Jim, I just wanted to -- wondering if you could drill down into the trends in your adult business to the extent you can get any in the first quarter versus the every day business, and does that give you more or less confidence that as we get into the back half of the year the adult business will start to flatten out or maybe even grow again?

[Jim Harrison:]

The mix between juvenile and adult in Q1 was pretty much in line with our expectations and our stock of performance. The real impact for adult really encourage with the Halloween season, and last year as we saw in Q4 with Halloween we had a real impact on our adult side of the business because of the shift in Saturday to the Monday. We would expect this year going from Monday to Tuesday, to be somewhat in line with last year in terms of the mix as Tuesday pretty much behave they like a Monday when it comes to Halloween.

[Wayne Hood:]

Okay. And then, Dan, could you comment a little bit, I think your occupancy costs were up in the quarter, was there something unique about the quarter that would cause that to increase?

[Dan Sullivan:]

Yes, just the acquisitions, Wayne. So remember, we had 36 franchise stores acquired, so what you're seeing there is just the impact of new stores both in the quarter and over the last 12 6months.

[Wayne Hood:]

Okay. And my last question, I guess, comes to the retail side; are there opportunities where as you look at inventory flow and how that works into labor model that you could streamline that, make it easier for the stores relative to how they've been doing in the past and therefore your inventory productivity would improve? Thank you.

[Ryan Vero:]

Yes. So, this is Ryan. As Dan mentioned, we're sort of in the early innings of really looking at our retail operating cost structures in the stores, obviously beginning by addressing the structural opportunity that we have within the field and store management. We are diligently working on, also looking at all the activities and work that goes on the stores to find opportunities for us to be more efficient in our operation. And obviously freight flow and handling is a piece of that.

[Operator:]

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

[Mike Baker:]

Hi, thanks. Two questions; one, just on how we should take about the brand comps for the rest of the year, you're pretty much in line with the full year guidance now, but as we look ahead to the next three quarters, the comparisons are much different. And in fact if we streamline or straight line the two-year comp for the second quarter, we're going to be pretty negative. So, should we expect that kind of volatility over the next three quarters or should we expect the brand comps to be sort of in line with the full year guidance each quarter? Thanks.

[Ryan Vero:]

Yes, I think in general in line with the full year guidance in each quarter. We're obviously well aware of what we're cycling up against last year, both in Q2 and then in Q3. I think using Q1 as a proxy, we don't expect that the volatility quarter-over-quarter. I think the 1.5% comp target is a good proxy again until we get to Q4, and then we have the seasonal impact of New Year's Evening, but I'm going to leave it there, because I don't want to get into quarter-by-quarter guidance on comps.

[Mike Baker:]

Okay, but to be clear, that would imply a pretty strong acceleration in the two year comp in the second quarter if I'm thinking about that right?

[Ryan Vero:]

Again, not going to comment on the quarters.

[Mike Baker:]

Okay. One more -- so that's sort of a short-term question, here is a longer term question; how should we think about what you guys believe is the ultimate EBITDA margin for the business? I think if you are out about 17% on a trailing 12-month basis right now, how high can that go as you improve this year's shelf, and I guess related to that, how should we think about the - sort of earnings algorithm going forward this year you are talking a lot about 5% increase in EBITDA and 10% increase in EPS, is that sort of what we should think about going forward over a three year basis?

[Dan Sullivan:]

I will just read EBITDA margin first, we said that our longer term goal is 18% to 20% on the EBITDA margin. We believe we can get there through better efficiencies at store levels, better efficient fees manufacturing. Improved manufacture share of shelf gains as well as infusions in at store level in terms of our selling creating more of a selling organization I have stored. We think that 18% to 20% EBITDA margins a reasonable and it's very achievable target for us. In terms of the EPS gains and that we are talking about. We think that that's very sustainable as we pay down debt and they have in beginning margin that should be completely fall through with EPS.

[Mike Baker:]

Okay. Thanks. I appreciate it.

[Operator:]

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

[Joe Feldman:]

Yes, hi guys couple of quick questions. I wanted to ask about the balloon business that maybe the in store pickup efforts that you guys were testing and just spending updates there. If that plans to be extended or if there is other categories you are thinking about doing in-store pickup with?

[Jim Harrison:]

I'll turn over to Ryan for that one.

[Ryan Vero:]

Yes, the in-store pickup front. We have not yet launched a [indiscernible] pick up in-store as I mentioned earlier we are planning on launching that this year and we do believe that balloons will be a big beneficiary of that because of the nature of how that business works with the large orders and one in the few order that was, but the balloon business continues to be very healthy for us. We continue to drive it with some of the new formats that have been out there and this more and more inspiration happening online that are getting more people into the balloon business. So we look forward to see in that continued momentum throughout the year.

[Joe Feldman:]

Thanks. And then, on follow-up, a more -- a little bigger pictures, I guess with in terms of the product trend that you are seeing. Are there any changes or shelf shares and things where maybe the nature of what people are putting in the basket or the licenses that people are gravitating towards or many opportunities within that like that you are just seeing and I'm just kind of curious about the merchandising shifts that you are experiencing and how you are dealing with it?

[Jim Harrison:]

Sure the biggest change we've seen over the past several years actually is the growth of the wearable category. As social media becomes more and more fundamental part of our culture in our society, people's desire to share with the friends. Their experiences and decorate not only the room but the table for the party but also themselves. The growth in wearable category has been a big driver in changing the overall product mix and the expertise we develop the customer initiatives has positioned us to do to really exploit this and take advantage of this change in the strength.

[Ryan Vero:]

Yes, I think. Just to add what Jim said I think you saw that actually in the first quarter with some of our big seasonal things like St. Patrick's Day, Mardi Gras et cetera that really very successful seasonal businesses for us driven in large part by the wearable's categories.

[Joe Feldman:]

Got it. That's helpful. So thanks guys and good luck with this order?

[Jim Harrison:]

Thank you.

[Ryan Vero:]

Thank you.

[Operator:]

Our next question comes from the line of Chris Horvers from JP Morgan. Your line is open?

[Tami Zakaria:]

Hi, good morning. This is Tami Zakaria on Chris Horvers. Thanks for taking my question. So there has been some press reports on another potential LBO of the company, so would please remind us what level of leverage from a debt to EIBTA perspective. Did you go to at the time of the last LBO and also to Jim what do you think the public markets are not appreciating about the party business?

[Jim Harrison:]

First let me say that it's company policy that we do not comment on numerous speculations. So that's the response to the overall tone of your question. In terms of our leverage at -- back in 2012, we were somewhere north of six times leverage.

[Tami Zakaria:]

Great, thank you. So if I could ask a follow-up, I know you are not commenting on quarterly cadence but could you share some are very high level, what you been sitting in the stores and in the second quarter meaning. Have you seen any focus or strength or weakness is specially given Easter has shifted into April.

[Jim Harrison:]

We are in the midst of the quarter and we generally do not talk about the conquer on this call, we are talking, sorry about the first quarter.

[Tami Zakaria:]

Good. Thanks.

[Jim Harrison:]

You're welcome. Thank you.

[Operator:]

Your last question comes from the line of Curtis Nagle from Bank of America. Your line is open.

[Curtis Nagle:]

Thanks very much for taking the question. Just a very quick follow-up on the question of inflation, just curious, which materials you are seeing. I guess more pressure or where you are seeing the most inflation and then a follow-up. Are you guys expecting growth in the wholesale business including FX in the impact from moving over the franchise stores?

[Jim Harrison:]

Okay. So first question in terms of commodities, we've seen slightly recent resin and we've also seen movements in big [indiscernible] those are the two primary inputs that we've seen some movement in the terms of increased cost, like Dan said, nothing dramatic, but logical on it in terms of a wholesale business overall, we continue to expect the wholesale business. Despite the acquisitions the franchise to continue to grow Gregg mentioned international where we had a 17% growth rate in the first quarter in constant currency an we have continued opportunities to grow our wholesale business and also end markets in North America.

[Curtis Nagle:]

Okay. Thanks very much.

[Jim Harrison:]

Thank you.

[Operator:]

There are no further questions at this time. I would like to turn the call back over to Deborah Belevan.

[Deborah Belevan:]

Thank you, operator, and thanks for everyone for joining us today. And just as a reminder, we will have a replay of this webcast available on our Web site shortly. Thanks and have a great day.

[Operator:]

This concludes today's conference call. You may now disconnect.