Party City Holdco Inc.
Q3 2015 Earnings Call Transcript

Published: 13 Nov 2015

[Operator:]

Good afternoon. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Party City Third Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers, there will be quarter-and-answer session. [Operator Instructions] Thank you. I'll now turn the call over to Deborah Belevan, Vice President of Investor Relations for Party City. Please go ahead.

[Deborah Belevan:]

Thank you, Operator. Good afternoon, everyone, and thanks for joining us. Today after the market closed, we released our third quarter financial results. You can find a copy of our press release on our website, at investor.partycity.com. On today's call we will have Jim Harrison, our Chief Executive Officer, Gregg Melnick, our President, and Mike Correale, our Chief Financial Officer. We'll start the call with some prepared remarks, 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 these expectations reflected in such 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'll 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 James Harrison.

[James Harrison:]

Thank you, Debbie. Good afternoon, everyone. And thank you for joining us. Our company continues to be the clear global leader in our category, growing our market position both domestically and throughout various international markets. Our unique, vertically integrated retail, wholesale and manufacturing model continues to gain momentum on all fronts, growing our global retail presence, opening new stores, expanding our manufacturing capabilities, creating new and innovative product concepts and formats, broadening our global sourcing footprint, and offering the worldwide consumer an unparalleled shopping and product experience. During today's call, we will review our third quarter results, as well as our much anticipated Halloween season results. I will begin by discussing some key highlights and then turn it over to Gregg for more detail on retail, and finally, Mike who will provide further details on the financials and our outlook for the balance of the year and full year. Then we'll open up our call to any of your questions. Consolidated revenues for the third quarter were $555 million, up 2.3% compared to the prior year. If we back out the unfavorable impact of currency on this year's result – this year's revenues probably, revenues actually increased by 4.9% over the prior year period. For the year-to-date period, revenues were up 3.1%, to $1.513 billion, compared to $1.467 billion in 2014. Once again, if we adjust for the unfavorable impact of currency on this year's results, year-to-date revenues actually increased by 5.1%. Adjusted net income was $11.9 million or $0.10 per share, compared with $1.2 million or a $0.01 per share for the prior year quarter. Year-to-date, adjusted net income totaled $23.2 million or $0.21 per share, compared with $2.8 million, or $0.03 per share for the first nine months of 2014. Global wholesale sales to third-party customers for the quarter were $212 million, virtually flat with the prior year period, however, up 4.4% when adjusted for currency, as foreign currency exchange rate movements negatively impacted our wholesale business by $10 million. In addition, the acquisition of US Balloon had the net effect of reducing third-party revenues by $5 million. Adjusting for both of these impacts, you'll see that our wholesale business grew roughly 6.7% during the quarter. This performance is primarily driven by strong sales in international markets, where we continue to see growing demand for our product, particularly in Australia and Europe. In addition to our wholesale international sales growth, we are making good progress on several other initiatives in our wholesale businesses, including identifying acquisition opportunities to deepen our vertical model and allow us to manufacture more of our own product. During the quarter, we completed the acquisition of the assets of Accurate Custom Injection Molding. Our newest operation, ACIM, is poised to be a significant contributor to our goal of increasing our vertically manufactured product portfolio. Over the next three years, we anticipate that this operation will bring in-house approximately $45 million of product purchases currently sourced from third parties by our wholesale division, thereby driving margin expansion. We are also actively pursuing other similar opportunities to get us to our goal of manufacturing 35% to 40% of our own products. Our share of shelf, defined as the percent of product costs that Amscan supplies to our retail operations, represented 73.5% this quarter, up from 69.2% in the prior year quarter. Longer term, we look to increase our share of shelf to approximately 80%. We are also pursuing alternative market customers outside the party channel and exploring various white label party ship opportunities with other online retailers. This highlights the beauty of our diversified business model, in that because we are not just a retailer, there are multiple metrics to measure our growth in addition to comp store growth. In fact, we have multiple levers to pull which will grow our bottom line. This is our unique advantage and I look forward to providing updates on these initiatives in the coming quarters. For the third quarter, global retail sales of $339 million was up 4.1% over the same quarter in 2014 and 5.3% when adjusted for currency. These sales results were adversely affected by the lapping of the strong Frozen license in the prior year period and the disruption caused by a major store resets, both of which we discussed during our second quarter call. Additionally, we saw an exceptionally soft retail environment which accelerated in the latter part of the quarter. All of these factors culminating in a disappointing third quarter retail comp store revenue result. The increase in retail revenue, which I mentioned was principally driven by higher store count, as well as the shift in the weeks which comprised our retail fiscal third quarter. These increases were offset and resulted in a brand comp sales decline of 3.6% for the quarter, which brought our nine month branded comp to an increase of just under 1%. Note that because our comps compare the same calendar weeks year-to-year, they are not positively affected by the shift in weeks comprising the fiscal third quarter that I noted earlier. Our retail sales for the quarter were also negatively impacted by approximately $4 million as a result of the weakening of the Canadian dollar and the British pound sterling versus the dollar. Moving on to our retail performance for Halloween and the 2015 month of October ending November 7th. This year's brand comp increased 3.3% when compared to same period last year. In 2014, the year-over-year brand comp for the fiscal month of October was 8.3%. As a result, looking at the fiscal month of October on a 2 year basis, we have posted a cumulative comp increase in excess of 10%. We are pleased with the results of this year's Halloween season, especially in light of the forecasts by the National Retail Federation earlier in the quarter which had predicted a decline in Halloween sales of 7%. This performance, I believe, is a reflection of the strength of our brand, as well as the depth of our product assortment and value proposition to our customers. Factoring in the success of the Halloween season will bring our year-to-date brand comp through the end of October to 1.4%. In summary, let me say that we continue to be extremely positive about the overall outlook for the business and the progress we're making against key priorities, as demonstrated by our strong Halloween sales and execution within our wholesale businesses. Continued growth in store count, improved operating performance at remodeled and relocated stores, continuing to expand our wholesale market penetration outside of the party specialty channel, including internationally and increasing our share of shelf of manufactured and sourced products are all going to be significant drivers of increased revenue and earnings growth for the foreseeable future. Thank you. And with that, I'll turn it over to Gregg to provide some more detail into our retail results and what we are seeing at the consumer level, and then Mike will discuss our financial results and provide full year guidance.

[Gregg Melnick:]

Thanks, Jim. And good afternoon, everyone. As Jim already indicated, our brand comp for the third quarter came in at a negative 3.6%, and conversely, our brand comp for fiscal October or what we refer to as our core Halloween season came in at a positive 3.3% for the month. In general, so far this year, we are seeing growth in our average ticket comparisons directly related to our product development efforts and collection based merchandising strategies. But at the same time, we're also experiencing consumer traffic trends below expectations related to last year's Frozen phenomenon and potentially the more macro pressures which continue to negatively impact traffic across the specialty retail sector. Looking at our Q3 sales results, the shortfall can be explained by essentially three factors. First, as we discussed in our second quarter call, in July and August, we underwent a significant store reset initiative to remove the costume shop wall from the back of our stores and open up access to improve our shopping experience. We completed this initiative in late August and the disruption is now behind us. When all said and done, we estimate that this disruption impacted Q3 by at least one full point in brand comp and will have at least a 25 basis point negative impact on the brand comp for the full year. Second, last year's Frozen phenomenon created an anomaly in our business. As a party specialty retailer, our consumers generally come to our stores as a destination purchaser of party supplies in connection with a specific celebration or party. However, last year's traffic included shoppers with a different motivation. Moms wanted to buy products incorporating the Frozen images and themes because of the popularity of the franchise and not necessarily because they were having a celebration. Now while we recognized this in our previous full year outlooks, we significantly underestimated its impact. For the quarter, we estimate that year-over-year impact that we felt from Frozen was probably as much as 150 basis points above what we had originally anticipated. And finally, as the quarter progressed, we saw retail in general soften and our Halloween customer delay their purchases. So now turning to Halloween and fiscal October. Our brand comp reached a positive 3.3% for the five week period this year and that's on top of 2014s 8.3% brand comp on a Friday Halloween. We continue to see very positive consumer reaction to our Halloween offering this year and our vertically integrated mix it, match it costume separate strategy continue to drive our growth. We introduced new separate costumes offerings in many women's licenses and also expanded our Color City coordinating wearables to include other colors, including gold and silver components and the consumers positively responded. But all of our growth for the season came in the last week. We continue to see customers shopping later and later, and this year was no exception. In fact, the shift was so significant that sales in the week leading up to the Halloween weekend increased more than 20% over the comparable period last year. Now while that's good that our in-store business model can withstand the surge in business in the end, this year's shopping pattern actually negatively impacted our partycity.com business, as consumers were less likely to opt for Saturday delivery, given the relative freight cost and the overall urgency of the holiday. So as for the components of our brand comp for the month of October, our internet business achieved a 2.2% comp for the month and our brick and mortar stores increased a 3.4% comp for the month, and in terms of traffic versus average ticket for the month, traffic grew 1.6% and average ticket grew 1.7%. So now on a year-to-date basis including Halloween, our brand comp for the first 10 months of 2015 is a positive 1.4%. That's comprised of a 3% increase in our internet business and a 1.3% increase in our brick and mortar stores. And in terms of traffic and average ticket for the 10 months so far, average ticket is up 2.3% and traffic is down 0.9%, reflecting the consumer’s positive reaction to our vertically integrated product offering amidst a softening in consumer traffic demand cycles. So turning to our temporary Halloween division, Halloween City. We operated 335 stores this year throughout the United States and Canada, compared with 315 stores last year. As a reminder, these stores generally open between the end of August and the end of September and operate until the first few days in November. For this season, we increased average store sales in these formats by 1.9% and that compares to 2014's15.4% average store increase, which again benefited from a Friday Halloween. As we look forward to 2016, where Halloween shifts to a Monday as a result of leap year, we anticipate that our 2016 Halloween season could possibly experience some contraction in adult spending on the holiday. Now while we haven't yet completed our plans for next year, one logical scenario may also include a reduction in the number of temporary stores we pursue - we'd pursue compared to this year. But nonetheless, as evidenced by our recent Halloween performances, we'd look to leverage the strengths of our product offerings and our marketing efforts to mitigate any negative impacts. As far as our overall retail development plans for the balance of 2015, they remain unchanged and we expect to acquire or open 30 new stores through year end. Through the end of October we're at 20. And we also expect to relocate or model 50 to 60 by year end; and through October, we're at 42. We also remain on track to open our first franchise store in Mexico by the first quarter of next year and anticipate having three open by May of 2016. And with that, I'd like to turn it over to Mike to cover our financial recap.

[Michael Correale:]

Thanks, Gregg. Good afternoon, everyone. I'll begin my remarks with a review of our third quarter performance and then discuss our outlook for 2015. As Jim mentioned earlier, our consolidated revenues in the third quarter of 2015 totaled $555 million, an increase of 2.3% compared to the quarter of 2014. On a constant dollar basis or constant currency basis, revenues increased 4.9%, as changes in foreign currency year-over-year reduced our reported Q3, 2015 revenue by approximately $14 million. Retail sales for the third quarter of 2015 totaled $339 million, an increase of 4.1% or 5.3% on a constant currency basis, with the increase primarily driven by a net 17 store increase year-over-year and a shift in our retail fiscal calendar. To be specific, retail's third quarter 2015 started on July 5th and ended on October 3rd, as compared to the third quarter of 2014, which started on June 29th and ended on September 27th. So the third quarter of 2015 benefited from dropping the weekend of July 4th and adding the stronger week of October 3rd for a sales gain of approximately $18 million. And just to reiterate Jim's earlier statement, this shift benefited the fiscal quarter comparison, but had no effect on the third quarter same store sales comp, as comps are based on the comparison of the same weeks in each calendar year. As Jim and Gregg have already covered the various factors affecting our third quarter revenues and same-store sales, I will focus my comments on the margin and expenses. Overall gross profit margin for the quarter was 34.4% or 20 basis points higher than in Q3, 2014. Our retail gross profit margin increased to 37.7% or 120 basis points, with approximately 90 basis points attributable to an increase in wholesale share shelf at retail and the balance of 30 basis points attributable to a decreasing impact of 2012 purchase accounting adjustments affecting our cost of goods sold. A 20 basis point negative impact from currency movements was offset principally by the need for fewer markdowns in the third quarter of 2015. During the third quarter of 2015, our wholesale share of shelf increased approximately 4 percentage points to 73.5%, principally as a result of our acquisition of US Balloon in 2014 and now sits at approximately 74% year-to-date. On the wholesale front, our gross profit margin was 29.2% and when adjusted for purchase accounting was 160 basis points lower than in the third quarter of 2014. The decrease in margin year-over-year reflects the strengthening of the US dollar and its adverse impact on our international subsidiaries that purchase products denominated in US dollars and sell in local currency, competing with local producers. The adverse impact was a $2 million increase in product cost of goods sold for the quarter and lowered our overall wholesale margin by 90 basis points. In addition, the 2015 margin percentage was impacted by changes in sales mix, which included an 11% increase in international sales and the elimination of approximately $5 million net of higher margin metallic balloon sales due to the acquisition of US Balloon. Our operating expenses increased 2% to $162 million for the third quarter of 2015 and remained relatively consistent as a percentage of revenue at 29.2%. Adjusting both revenue and expenses to a constant currency basis, operating expenses dropped slightly to 29% even of revenue. Within operating expenses, wholesale selling expenses decreased nearly $3 million compared to the quarter of 2014, principally as a result of foreign currency and cost savings associated with the reorganization of our sales and marketing group. Retail operating expenses increased $7 million, reflecting an increase in our store base and a higher payroll cost associated with the calendar shift and store resets. General and administrative expenses decreased $1 million, as several factors, including the impact of foreign currency, the cessation of management fees post-IPO and lower executive compensation, more than offset inflationary and other increases. Net interest expense of approximately $30 million decreased nearly $10 million compared to the third quarter of 2014. The decrease reflects the repayment of our $350 million PIC notes with the proceeds from our IPO and to a lesser extent the benefit of our August refinancing of our loan portfolio. Note that the timing of the refinancing and the repayment of existing debt caused a temporary increase in our total debt, which decreased our interest savings by $2 million in the quarter. For the three months ended September 30th, 2015, other expenses net totaled $79.1 million, all of which relate to the refinancing of the company's debt. The effective tax rate for the third quarter 2015 of 42.4% compares to an effective rate of 47.6% for the third quarter of 2014 and is based on the company's estimated consolidated effective income tax rate for the full year December 31st, 2015 of 40.1% which is before discretionary items - discreet items and the impact of adjustments to net income. And before I discuss net income and net income per share, I want to point out that for the quarters, I will be referring to adjusted net income. The adjustments to arrive at adjusted net income and adjusted net income per share are provided in the financial tables in today's press release and include among other things, costs associated with our IPO and subsequent refinancing, non-cash purchase accounting adjustments, management fees, and the amortization of intangible assets. As a result of the adjustments I just described, net income for the third quarter of 2015 was 111.9 – excuse me, $11.9 million or $0.10 per share, as compared to income of $1.2 million or $0.01 per share in the third quarter of last year. Looking at our balance sheet and cash flow, changes in working capital were use of cash of $108 million in the third quarter of 2015 compared to a use of $129 million in the comparable quarter of 2014, both quarters principally reflecting additional stores and seasonal working capital builds. On a day's basis, inventories, receivables and payables, each were approximately three days lower than at September 30, 2014. During the quarter, we invested $10 million in the acquisition of ACIM and $30 million in capital expenditures of which $25 million was spent on retail, including new stores, relos and remodels, and in-store maintenance. The company ended the quarter with net debt of $2 billion, a decrease of $128 million from year end. At September 30th, 2015, we had approximately $256 million in availability under our ABL. Given our year-to-date performance and current expectations for the fourth quarter, we are generally tightening our outlook on revenue, adjusted EBITDA and adjusted net income. The company expects fiscal 2015 total revenues of $2.27 billion to $2.32 billion, which includes a brand comparable sales increase of 1% to 1.5% and our targets for 19 net new stores and 50 to 60 remodels and relos. Adjusted EBITDA is expected to be in the range of $375 million to $385 million. Interest expense is expected to range - in the range of $125 million. We are tightening our outlook on adjusted net income and diluted net income per share to $112 million to $118 million in net income and $0.99 to $1.04 per share, respectively. Diluted net income per share is based on an estimated weighted average of approximately 113 million common shares outstanding. We still expect to incur capital expenditures between $75 million and $80 million for the year. We also expect net debt at December 31st, 2015, to range between $1.75 billion and $1.8 billion, based on the scheduled payments of our term debt and the application of additional free cash flow to our revolver. With that, I'd like to turn the call back over to the operator and open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Seth Sigman with Credit Suisse. Your line is open.

[Seth Sigman:]

Great. Thanks. Thanks for taking the question. When you look at the Q4 outlook, it implies low single digits, about 2% at the mid point. You guys are coming off a good Halloween where sales obviously improved, and I think you're mostly through the quarter, at this point. But just want to understand some of the drivers and what gives you confidence, given some of the challenges you saw in Q3 from a retail traffic perspective. I guess, what gives you confidence that you can kind of keep that comp in the low single digit range as we look out?

[James Harrison:]

Okay. I'll ask Gregg just to give you the various scenarios for comp and where it ends up. Gregg?

[Gregg Melnick:]

Well, I mean, I think you did your math pretty good in that range. I think what gives us the confidence is two fold. One, the reset is behind us and all of our new programs are out there that were effectively introduced in the back half of the year and got momentum during the Halloween season we see that. And I think that's probably the biggest driver of what we're going to see be able to build comp along with the continued benefit from our new stores and our remodels. But if you take a look at the overall scenarios, 1% would imply flat comp for November and December.

[James Harrison:]

To where we are.

[Gregg Melnick:]

Yes, to where we are.

[Seth Sigman:]

Got it. Okay. And then just to clarify on those resets, is that different than the remodels that you've talked about in the past, the 50 or so…

[Gregg Melnick:]

Yes, it's actually very different. Our remodel would be one specific store, and of that, relo and remodel would be 50 to 60 stores combined on a year-to-date basis. This reset occurred in all of the corporate Party City stores that we operate. And we effectively took a wall that went horizontally and bolted it on to make it all vertically and open up access to the entire store in all of our stores.

[Seth Sigman:]

Okay. And just as you look at the store, sounds like you're done for the year in terms of resets. But any other areas within the store that you guys are focused on where you see some opportunities over the next year or so?

[Gregg Melnick:]

Nothing that stands out. All of our programs are in anticipation of the back half of the year and hopefully poise us for a strong holiday.

[Seth Sigman:]

Okay. Thanks and good luck.

[Gregg Melnick:]

Thanks.

[Operator:]

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

[Simeon Gutman:]

Thanks. Good afternoon and thanks for the extra color on Halloween, Gregg. So just a follow-up question. So Halloween, as we know, fell on the Saturday versus Friday, and I think if you look at the entire Halloween period, I'm guessing its same number of day’s year-over-year. But there was clearly favorability in that the last couple of selling days you had a Friday-Saturday, versus last year a Thursday-Friday. So I know that's sort of embedded in what you mentioned, Gregg, for next year, it lands on a Monday. But there should have been some favorability for that this year and rightfully so. Was it better or worse than the way you thought, can you say how it played out versus how you thought it would play out?

[James Harrison:]

Simeon, this is Jim. When we had given our earlier guidance at the end of Q2, we had really looked for a Halloween for an October, if you would, in the 5 plus range. So it actually played out a little lower than our expectations.

[Simeon Gutman:]

And to what do you, I guess, to what do you attribute, was it just retail traffic was a little slower?

[James Harrison:]

I think if we look at our performance for June, July, and August and September, we see that traffic in retail generally slowed down in July, more so in August and even more so in September. If we look at our comps over those three months, there was just a general softening in retail generally.

[Simeon Gutman:]

Got it. Okay. And then so your guidance has some implicit assumption for profitability, which seems fine. But thinking about Halloween in general, Jim, for a moment, are they getting more profitable over time, you've been - you're more vertical, so on that basis, yes, advertising is moving more digital. Are there other factors that offset any headwinds to drive the same type of comp? Is it going to get more expensive or it should actually be more profitable down the road?

[James Harrison:]

Once again, as we take over more share shelf on Halloween, it becomes more profitable. I don't know exactly. Gregg may know off the top of his head. This year the percent of the costume wall that was vertical through the Amscan model was much higher than it was last year. Gregg, do you have that number in front of you?

[Gregg Melnick:]

Yes. It was probably in – it was I think, 85%.

[James Harrison:]

Yes…

[Gregg Melnick:]

Versus in the high 70s the year before.

[James Harrison:]

Right. And so remember, at 85% we're picking up the double and a little bit extra for the fact we do our own sampling and our own templates and our own design. So that will continue to grow. As we look at our DTRs, as those become more prevalent, obviously we gain traction. Gregg mentioned the mix and match on adult female costumes this year. If you were in our stores, you saw we had lots of separates that you could build your Wonder Woman or your Spider Woman around and add more accessories. So we look at all that as increasing our opportunities. Additionally, with the ACIM acquisition, there are elements of Halloween that we will also be able to now make a triple on, not just a double. So I think we see the profitability on a per unit basis as a percentage continuing to expand. And in terms of where we fall in terms of total sales next year, moving from a Friday, Saturday to a Monday, as Gregg mentioned, we think we have the opportunity through our assortment and various other marketing strategies to mitigate the negative impact of that. The key impact there will obviously be on the adult. The juvenile very rarely changes.

[Simeon Gutman:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Mark Becks with JPMorgan. Your line is open.

[Mark Becks:]

Hi. Congrats on the strong Halloween. Just kind of flushing out the acceleration from October from the third quarter, I know you talked about caught100 basis points getting back from the resets and then you talked about Frozen being a little bit more of a headwind than you anticipated. And then also just the benefit from the mix and match and then the Friday, Saturday shift. Can you kind of give a little bit more context or quantification around those or at least perhaps rank those? And then kind of a bigger picture Halloween question, obviously as traffic and sales get more condensed in that last week, it gets harder to move in and around your stores and shifting inventory around the chain. Is there anything that you can do longer term to alleviate some of that pressure?

[Gregg Melnick:]

That's great. So you asked a few questions. I'm going to try to deal with the, I'll call it the Q3 October shift. I think that was your question, right, on sales, yes. So generally, I would say because we had so much traffic in the last week of the season, I would say about 1% of the 3% moved from September into October, if you were to talk about our traffic pattern. As you think about box size, you are right, pushing that much activity through our stores during that period of time is tremendous. And so that's part of the reason why we're seeing our initiative to take relocations and take those relocations and go from 12,000 square feet to 15, 000 to 18,000 square feet. That's definitely part of the thesis as not only our product development, but opening up the activity to have - to continue to grow our Halloween assortment as we move forward. And then in addition, Jim, did you…

[James Harrison:]

Yes. I think your other question about what we can do to make the stores or help the stores handle that sort of later shopper. One of the things we did this year, and Gregg and his team did this year, was add substantial payroll to our stores the last 10 days of the season, because we saw this coming in terms of the delay and we saw the consumer not shopping. Halloween always happens, so we know it's going to happen. And so we said we needed to be prepared for a surge, which we got at the last minute. So Gregg and his team added substantial payroll dollars to the stores. And if you were in our stores, you may have noticed we had people actually guiding folks from the checkout line to available registers. We had additional staff at the registers to help expedite the consumers experience through the checkout. We added staff at the store level on the floor to expedite the movement of costumes to consumers. And to Simeon's earlier point about margin, one of the beauties of our model is the additional margin enables us to do this without seeing any detriment or degradation in our profitability, which is why as you look at our full-year completed, our full-year guidance, while we've guided a blip with respect to the comp sales, we've not had a substantial move off the profitability that we anticipate for the full year. So I think that’s - those are the things that we can do, other than adding 10,000 square feet to the store just for the month of October.

[Mark Becks:]

Yes. Understood. And then just one follow-up on the wholesale side. You guys obviously making a lot of progress with the ACIM acquisition and there seems to be some pretty juicy margin potential. Do you think that's fully flowing through at this point or is there more to come? And then as we think about next year, clearly, you're past Halloween but you have a lot on your plate, with Travis and ACIM and the franchise stores. How should we be thinking about acquisitions going forward, both near term and then the long-term, what else you might be looking at? Thank you.

[James Harrison:]

Sure. So to answer the first question about ACIM, we are in the infancy of the impact of ACIM. So we're not even close to seeing any impact. On an annual basis this year, including the period prior to acquisition, ACIM will do about $7 million of sales. Our goal is to get to $45 million within the next three years. I think it's a reasonable expectation for us to be thinking about $20 million of ACIM next year and similar growth over the next two years. So I think all of that really translates into a three year process to maximize the vertical nature of the ACIM. One of the nice things about ACIM is it opens up for us a product category which we've not been primary before. So in addition to being able to take over share of shelf from wholesale, if you would, to make the double or triple, there are additional third-party opportunities that ACIM will provide which we're really excited about. So we think the ACIM story is a story that's going to be told for a number of years, providing significant impact on our business. In terms of our ability to do additional acquisitions, the USB acquisition is fully integrated, fully digested, that's behind us. ACIM is operating as a freestanding business. We built an organization underneath it. We put in ERP systems. Our Senior Vice President of Manufacturing is an extremely strong individual who has taken ownership of ACIM and moving it forward in the right direction. So we continue to see the opportunity for us to do these bolt-ons. I think the story of Party City Holdings is one of incremental acquisitions that bolt on and add profitability and add capability and competencies, and that's a story that will continue to be told.

[Mark Becks:]

And then just to clarify the additional third party opportunities, that would be with respect to theme parks and restaurants and other things of that nature?

[James Harrison:]

The third party wholesale, yes, theme parks, restaurants, white label opportunities to work in conjunction with other online retailers providing the back end to party offerings that would access our product portfolio and represent another channel of distribution for our wholesale business.

[Operator:]

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

[Mike Baker:]

Thanks. Just wondering historically, has Halloween been any kind of good or bad indicator for Christmas and how important is that to your business?

[Gregg Melnick:]

Yes. So Christmas probably ranks as maybe fifth-ish in the seasons, and I would not correlate Halloween with Christmas, per se. I think that people know us for Christmas and they know us for New Year's. So that's probably more of a benefit and that's definitely a product offering that differentiates us.

[James Harrison:]

Yes. Our Christmas offering, Mike, really is more celebratory in nature. So it's not gifting and it's not trim a tree.

[Gregg Melnick:]

But it's dress up.

[James Harrison:]

But it is dress up and it is celebration.

[Mike Baker:]

Understood. So, interesting. Fifth biggest, Halloween's your biggest. What's two, three, and four, is your biggest…

[Gregg Melnick:]

You have summer, you have graduation, and New Year's.

[Mike Baker:]

New Year. Got it. Okay. Another follow up question. You said that Frozen was 150 basis points worse than you thought it be. What did you think it would be, so in other words, we can figure out what the total drag from…

[James Harrison:]

Sure. When we looked at our guidance in the third quarter, we were looking at about 100 basis points drag from Frozen.

[Mike Baker:]

So then it was actually, what you're saying a 250 basis point drag, if I understand correctly?

[James Harrison:]

Somewhere in that ballpark, right. It's difficult to measure it precisely, but we believe it's somewhere in that neighborhood.

[Mike Baker:]

Understood. One more follow-up. You had said that November and December was expected or at a 1% comp for the year, that would imply November and December flat to where you are, in other words flat to that 3% that you've done – that you did in October, not flat year-over-year?

[James Harrison:]

No, no. No, we're at 1.4% year-to-date. Year-to-date we're 1.4%.

[Mike Baker:]

And so the…

[James Harrison:]

Well, right, our guidance is 1 to 1.5.

[Mike Baker:]

Correct.

[James Harrison:]

And a 1% comp for November and December would imply roughly staying where we are through October.

[Mike Baker:]

Understood. Okay. Thanks.

[Operator:]

Your next question comes from the line of Rick Nelson with Stephens. Please go ahead.

[Nick Zangler:]

Hi, guys. This is Nick Zangler in for Rick. So for Halloween, I dressed up as Darth Maul and I got my Star Wars gear at Party City. And I'm wondering, obviously, Frozen was a big driver last year. Can you talk about Star Wars here coming up and maybe what that can do for the upcoming quarter? I envision it kind of like Frozen, in that obviously you could get incremental parties and not just from girls, but also from boys, teenagers, adults. So I'm wondering perhaps how Star Wars merchandise performed over Halloween and what you can expect possibly a lift from that going forward?

[James Harrison:]

Sure. I think you need to delineate the business between costume, dress-up and party. The Frozen phenomenon was costume, dress-up and party. The Darth Vader, Star Wars impact probably, once the movie comes out for the most part will be party. And currently, it's performing as a high average pattern. So one of the things to remember is that within the juvenile business, boys tend to age out of licensed table wear for their parties earlier than girls. And the idea last year of Frozen was the Frozen parties, which were not necessarily all birthday parties, obviously, involved little girls really dressing up as Elsa and Anna for tea parties at home. So it's a little different than what you're going to see with Star Wars and Lucas.

[Nick Zangler:]

Understood. Okay. And then just on the remaining Halloween merchandise, curious what percent of that are you guys trying to liquidate and discount now? I think I saw an advertisement for 80% off on some costumes here and what percent Halloween merchandize can just be tacked up and used again next year?

[Gregg Melnick:]

Great. So we actually did not, I am not sure we would have seen that 80% of customers, that was not from us, not online, nor our stores. So we pack it all up, and actually, if you were in our stores on November 1, you would have seen the shelves begin to be wiped. We are now fully transitioned, not all the merchandise is there, but all the pegs have been fully transitioned and Halloween is packed up and out of the building. We pack up 100% of it, except the candy and we buy around it for next year.

[Nick Zangler:]

Okay. Great. Thanks for that clarification.

[Gregg Melnick:]

Yes.

[Operator:]

Your next question comes from the line of Denise Chai with Bank of America. Your line is open.

[Denise Chai:]

Okay. Thank you. Could you please break out in terms of wholesale, could you break out international versus domestic in constant currency? And how should we think about organic growth for both businesses going forward?

[Michael Correale:]

Okay. So the currency impact, excuse me, was - unfortunately, this is full year. $10 million for the quarter.

[Denise Chai:]

Okay. Do you have growth rates for domestic and international?

[James Harrison:]

For the quarter or for - you're talking for the quarter year-to-date or go forward?

[Denise Chai:]

Whatever numbers you have handy?

[James Harrison:]

Okay. So on a constant currency basis, our total growth rate was 5.3% for the quarter.

[Michael Correale:]

I'm sorry. The international was 11%, the international was 11% and the domestic was pretty much flat.

[James Harrison:]

Correct.

[Michael Correale:]

Sorry.

[James Harrison:]

And on a constant currency basis, our growth of 339 was 5% over the same quarter of last year. If we look at the businesses separately, wholesale was up 4.4% when adjusted for currency, flat when unadjusted. And the wholesale currency impact was $10 million on revenue and the retail was $4 million on revenue.

[Denise Chai:]

Okay. Great. Thank you. And just looking, going back to Frozen for a second here, what was the margin impact that you experienced last year?

[Michael Correale:]

It was consistent with our total.

[James Harrison:]

It would be consistent, there was no special margins. It's consistent with the blend of margin rates.

[Denise Chai:]

Okay. All right. And just lastly then, could we get an update then on alternative markets? Could you kind of size up the business and also the growth rate?

[James Harrison:]

Sure. So alternative market business is up about 6% year-to-date.

[Denise Chai:]

Okay. How big is it now?

[James Harrison:]

It's $55 million, roughly.

[Denise Chai:]

Okay. Thank you very much.

[James Harrison:]

That's year-to-date.

[Denise Chai:]

Got it. Thank you.

[Operator:]

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

[Joe Feldman:]

Great. Thanks, guys. Just to follow up on Frozen, are you - what kind of drag are you guys expecting for the fourth quarter of this year in the numbers?

[James Harrison:]

Well, wait that one second, I apologize, Denise, I had said 5. I misspoke. It's 15. Alternative markets up 15% on 55. In terms of Frozen drag for the fourth quarter?

[Joe Feldman:]

Yes.

[Gregg Melnick:]

For the fourth quarter, would probably be less than a point, because it's not Halloween affected. I actually would say it's about half a point.

[James Harrison:]

When Gregg's talking fourth quarter, he's now talking November, December impact.

[Joe Feldman:]

Yes. Got it. Good point. Thanks. Then another - you guys mentioned before, you talked a little bit about 2016 Halloween falling on a Monday. Just two questions around that. I know it's a little far out. But what kind of initiatives or what are you thinking about initially right now for 2016 to help potentially offset any pressure from a Monday Halloween that you alluded to on the prepared remarks?

[James Harrison:]

Sure. So what we will do is we need to do a diagnostic and a reflection on what worked and what didn't work in our marketing and advertising strategies, figure out what levers we should be pulling there and how we should redirect our marketing dollars to be more in tune with where the consumer will be in 2016. So that's one thing we'll do. The other thing we'll do is we will do the diagnostic and analyze that which worked in our mix and match approach, both at the adult and juvenile level, and once again, looking to our marketing efforts to see how we can better reinforce the differentiation that exists within Party City, as well as within Hollywood City, to be the provider of choice, if you would, on the adult side of the business, which probably will be a little bit lighter than it was this year.

[Joe Feldman:]

Got it. Because I guess the question then I had around this, in addition, was even though it's a Monday Halloween, wouldn't people just shift the party they go out to on Saturday anyway? I guess in past years when you've had a Monday Halloween, do you really see, like you do you have, kind of a chart, like each day of the week and what Halloween looks like if it falls on different days or?

[James Harrison:]

I think you can talk about it on a macro level, but Halloween itself, spending on Halloween itself, has grown so dramatically over the last, let's say, 15 years that it's very difficult to trend it to one specific number, one specific adjusting factor, because it's just grown.

[Gregg Melnick:]

But the benefit of our vertically integrated model allows us not to be beholden to what's in the marketplace. It allows us to drive and create opportunity that doesn't exist. And that's really what we continue to do year-after-year. So with the playing field changes for us every year, whether you moved from a Friday to a Monday or a Monday to a Tuesday, and that's really what Jim's talking about.

[Joe Feldman:]

Okay. Got it. That's helpful. Just to clarify one point you guys mentioned about the comp for November, December, you said if it stays consistent with where it is at the end of October, you'd be flat. I guess I'm still a little confused. I know you're running year-to-date 1.4%, right?

[James Harrison:]

Right. So if we sent in November and 1% in December, we would end up at about 1.4%.

[Joe Feldman:]

Got it. That's helpful. Thank you.

[James Harrison:]

You're welcome.

[Joe Feldman:]

Thanks. Good luck, guys.

[James Harrison:]

Thank you.

[Operator:]

There are no further questions. I turn the call back to the presenters.

[Deborah Belevan:]

Thanks, operator. And thanks, everyone, for joining us tonight. Have a great evening.

[Operator:]

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