Party City Holdco Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Party City First Quarter 2016 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. Ms. Deborah Belevan, VP of Investor Relations, you may begin your conference.

[Deborah Belevan:]

Thank you, operator. Good afternoon, everyone, and thanks for joining us. This morning we released our first quarter financial results. You can find a copy of our press release on our website, at investor.partycity.com. On today's call we 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 by Jim and Mike, 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 such assurance that these expectations will be realized. We do 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.

[James Harrison:]

Thank you, Debbie. Good morning, everyone, and thank you for joining us for our first quarter 2016 conference call. I'm pleased to report that our first quarter results were generally in line with our expectations, and allowed us to maintain in reiterate our full year guidance. Overall, after adjusting for the Easter shift into the first quarter, retail comp sales were only slightly negative and the base wholesale party business up slightly. The consumer continues to be cautious, but we believe the resilient nature of our category and model provides an underlying stability to our business. With that as a backdrop to the current business climate, I'd like to discuss some of the exciting developments in the first quarter, which will serve to build upon the strong foundation which our industry-leading business enjoys. Starting with a look at our wholesale operations, in March we acquired Festival SA of Madagascar, a manufacturer of costumes. The Festival operation was already a resource of costumes for our business, as well as for several other well-known costume wholesalers. This acquisition is very similar to many others we have executed in recent history, building and enhancing our vertical capabilities. In addition to the margin benefits associated with manufacturing our own costumes, the Festival business is covered by the African Growth and Opportunity Agreement, otherwise known as AGOA. As a result, subject to certain conditions costumes produced in Madagascar will now be subject to the same duties previously incurred on similar costumes when sourced from other regions. While the impact in 2016 will be negligible, we anticipate that over the next three years, we will eventually be sourcing as much as 15% of our total costume requirements from Festival. We have also made significant strides at ACIM, last year's strategic acquisition expanding our competencies into injection molded plastic products. We have strengthened the management team, enhanced business systems and practices and added manufacturing capacity. We have also strengthened the sales team to build third-party business on top of the inherent demand that our own wholesale operations will bring to this acquisition. I'm very excited about the prospects of this business over the next several years. Also in the first quarter, we reached an agreement with Warner Bros. Consumer Products, whereby we will begin designing and manufacturing Warner Bros.' inspired costumes for ourselves under a direct-to-retail or DTR license. While we enjoy DTR licenses from many other licensing partners, this is our very first such license arrangement with Warner Bros. For 2016, our license rights will include the Wizard of Oz, the Flintstones, Scooby-Doo and Harry Potter. In 2017, the rights will expand to include the Superman and Batman franchises. Our ability to obtain rights such as these are a testimony to the strength of our retail presence, as well as the tremendous creative capability of our design team to develop, not only basic costumes but extraordinary accessories and separates. These capabilities differentiate us from the rest of the market, making Party City a distinct and special destination for costumes and accessories. It is these types of strategic transactions, along with our aggressive global sourcing strategies that have, and we believe will continue to allow us to expand gross margins on our existing base of business, while adding to our manufacturing competencies, and opening up new channels and areas for growth. During the first quarter of this year, our gross margin expanded 90 basis points over the prior year. Turning to our retail operations in January, we acquired a massive franchisee that held territorial rights for Arizona and New Mexico. This franchisee operated 19 stores in the territory. The purchase price paid for these stores of $27.5 million represented a multiple of approximately 4.3 times store level EBITDA. We have now purchased 137 franchise locations since 2005 at similar multiple variants. It is our belief that the acquisition of franchisees at these prices represents a good use of capital for our business. In addition to the obvious multiple arbitrage opportunities these acquisitions offer, in many cases they also create opportunities for additional stores in underdeveloped territories. The acquisition of franchisee-owned stores also allows us to upgrade and improve the store operations in physical appearance, thereby enhancing our overall brand at retail. We will continue to look to make similar acquisitions. During the first quarter in the United States and Canada, we approved 28 new store locations and executed over 20 new leases. We also began remodeling or relocating 16 stores. Even more excitingly in March our massive franchisee, Grupo Oprimax opened their very first store just outside Mexico City. This new store has been extremely well-received, and we are optimistic that it will outperform our initial expectations. We expect to open four more stores in Mexico by the end of the year. So although we're only a quarter the way through the year, we have made good progress in further building the foundation for our future growth. I look forward to reporting additional progress in the months and years ahead. Now I'd like to turn the call over to Michael Correale, our CFO to review the company's first-quarter financial performance.

[Michael Correale:]

Thanks, Jim. Good morning, everyone. I'll begin my remarks with a review of our first quarter performance, and then turn it back over to Jim to discuss our outlook for the remainder of 2016. Consolidated revenues for the first quarter of 2016 totaled $458 million, essentially flat with the first quarter of 2015, despite a $4.4 million negative impact from foreign currency, the loss of approximately $2.6 million in retail sales from the shift of Easter, and other factors that I'll discuss shortly, when I cover the details of our revenue by segment. Adjusted for constant currency and the loss of one day's retail sales from our closure on Easter, revenues for the quarter increased approximately 60 basis points. Breaking down revenues by segment, our retail or vertical revenues increased 3.3% or $11 million after adjusting for currency and Easter, while our wholesale or non-vertical sales decreased 5.4% or $8 million on a constant currency basis. During the first quarter of 2016, our brick-and-mortar sales increased 1.7% as reported, or 3.1% on an adjusted basis. Brick-and-mortar sales principally reflect additional store count and store conversions, partially offset by the lapping of the last of the Frozen phenomenon. Our global e-commerce sales increased 4.5% as reported or 6.8% on an adjusted basis, and reflect expanded digital marketing and online product assortment, as well as increased promotional activity. On the Party City brand basis, our same-store sales decreased 1.5% as reported or 60 basis points after adjusting for the shift in Easter. The reported Party City brand comp sales reflect a 2.1% decrease in transaction count, partially offset by a 0.6% increase in average transaction dollar size. The reported e-commerce same-store sales included in Party City brand comp increased 10.4%, reflecting a 12.2% increase in transaction count, partially offset by 1.8% decrease in average transaction dollar size. At the quarter's end, our company store network totaled 731 stores or a net increase of 19 additional stores compared to December 2015, as we acquired 19 stores from franchisees, opened 2 new stores and closed 2 stores during the quarter. Our non-vertical wholesale sales, decreased $8 million or 5.4% on a constant currency basis, reflecting the elimination of $5 million in sales to the 23 former franchise stores acquired in December 2015 and January 2016. A $4 million decrease in Q2 sales as a result of our de-emphasis of this product category in conjunction with the reorganization of our gift-sales force. A $2.7 million decrease in metallic balloon sales principally due to a shift in Valentine's Day shipments to a mass marketer into December 2015 and out of the first quarter of 2016. And lastly a decrease in Frozen product sales to mass markets and other retailers compared to the first quarter of 2015. After considering the elimination of sales and the timing shifts, our base wholesale party sales increased approximately $3.5 million year-over-year. Our overall gross profit margin for the quarter was 36.7% or 90 basis points higher than in the first quarter of 2015, despite a nearly 30 basis point negative impact from unfavorable foreign currency movement. The growth in margin was principally driven by the increase in our share of shelf within our vertical operations from 71.6% in Q1, 2015 to 75.4% in Q1, 2016, as well as a 20 basis point margin improvement from the diminishing impact of 2012 purchase accounting adjustments. Operating expenses for the first quarter of 2016 totaled $150 million, increasing approximately 180 basis points as a percentage of revenue, principally due to the increase in acquired stores, the deleveraging of retail operating expenses on lower same-store sales and the timing of additional broadcast and digital advertising spend. Wholesale selling expenses decreased $1.3 million driven by several factors, including cost savings associated with the reorganization of our gift sales group, and the impact of foreign currency movements on international operating expenses. For the quarter, net interest expense totaled approximately $23 million or nearly $16 million less than in Q1 2015, reflecting the application of our IPO proceeds to pay down debt and the subsequent refinancing of our debt portfolio during the third quarter of 2015. Our first quarter 2016 income tax provision is based on an estimated annual effective tax rate of approximately 38% for 2016, compared to the actual annual effective tax rate of 42% for 2015. The higher tax rate in 2015 principally reflects a disproportionate impact of additional foreign income taxes on a consolidated tax provision. Before I discuss net income and net income per share, I want to point out that for the quarter, 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. Non-cash purchase accounting adjustments, the amortization of intangibles, deferred finance costs and original issued discounts, and the gain or loss on the sale of assets. As a result of the adjustments I've just described, adjusted net income for the first quarter of 2016 was $4.8 million or $0.04 per share, compared to a net loss of $2.9 million or $0.03 per share for the first quarter of 2015. The impact of foreign currency on our first quarter 2016 operations was to lower net income by approximately $1 million, or just under $0.01 per share. However, due to movements in currency rates from December 31 to March 31, we experienced a net foreign currency transaction gain on international receivables and payables denominated in US dollars, which we report in other income. Thus the net effect of currency on operations and other income for the first quarter of 2016 when compared to 2015 resulted in an increase in net income of $1.8 million or $0.015 per share. Adjusted EBITDA for the first quarter, which is also provided in the financial tables of the press release, totaled $46.5 million or $3 million lower than in the first quarter of 2015 and was in line with our expectations. On a constant currency basis, adjusted EBITDA increased to $48 million. Looking at our cash flow and balance sheet, cash flow from operations was a use of $13 million in the first quarter of 2016, compared to a use of $91 million in the comparable quarter of 2015. The changes in working capital were a use of $37 million and $106 million in the first quarters of 2016 and '15, respectively. On a day’s basis, the components of working capital were comparable or better than at March 31, 2015. During the quarter, we had a net cash investment of $29 million in the acquisition of Festival and the 19 franchise stores. Capital expenditures were approximately $20 million, including $14 million for retail, and an additional $6 million for wholesale CapEx. The company ended the first quarter of 2016 with net debt of $1.8 billion, and a net leverage ratio of 4.8 times adjusted EBITDA, compared to approximately 6 times in the first quarter of 2015. Availability under our existing ABL credit facility at March 31, 2016 totaled $297 million. With that, I'd like to turn the call back over to Jim.

[James Harrison:]

Thank you, Mike. Based upon our first quarter, we are reiterating our previously provided guidance for the full year, with revenues anticipated to range between $2.35 billion and $2.42 billion. Adjusted EBITDA is expected to total between $390 million and $405 million, and adjusted net income is expected to fall between $140 million and $150 million or $1.17 and $1.25 per share. I'd like to now open up the lines for any questions that you all may have.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Mark Becks from JPMorgan. Your line is open.

[Mark Becks:]

Thanks for taking the question. I guess, since this is the last quarter of fully lapping Frozen, I'll throw out the obligatory Frozen question. But any sense, in the press release you spoke to lapping that, any sense what the impact was on the quarter or perhaps how that compared to the full year?

[James Harrison:]

Sure. I'll ask Gregg to address a breakdown of the first quarter negative comp.

[Gregg Melnick:]

Great. Hey, good morning, Mark. So overall, in the shift of the Easter day, moving from the first quarter to the second quarter affected the comps about 90 basis points. So on a consistent basis we're talking about a 60 basis point decline for the first quarter. You'll also recall that we had a, what we call a holiday - a condensing of certain holiday seasons, where we had four holidays within seven days versus, this year versus four holidays within 14 days last year. So we call it the seasonal condense. That was about half of the impact. And the rest of the impact, while it is extremely difficult to understand what Frozen would have been, Frozen would - could be described as a major driver to the balance. But to really try to parse out how much Star Wars offset Frozen or to parse out how - what Frozen would have been incremental sales, versus party sales is really impossible to do.

[James Harrison:]

I think it's fair to say, that it was probably in the 30 to 40 basis points range, would be Frozen. I think even more relevant, as you know we do not generally give mid-quarter comp results. But I think it's important with the shift from - of Easter into the first quarter of this year, from the second quarter of last year, to look at the first four months. If we look at the first four months, our comp sales in total are essentially flat. So as we've said in our, previously in our full year guidance, we're looking at comp sales flat to slightly positive. And if we look at our comp sale performance through April, which includes the first month obviously, the second quarter, we're essentially flat.

[Mark Becks:]

Okay. That's extremely helpful. I guess, Jim, then the question going forward, within the context of that flat to up slightly comp guidance, how are you thinking about the trajectory in comps for the year? Do you think it is fairly consistent or would you expect some lumpiness over the next three quarters, just any thoughts there? You've got a few retailers that are speaking to a big deceleration in comps in April. And just curious if that's something that you might be seeing? I know you don't necessarily guide quarterly, month-to-month, but just wanted to get your thoughts? Thanks.

[James Harrison:]

Well, first off, with respect to April, since I've said we're essentially be flat through April, we essentially had a positive April, right, to offset the first quarter. As we look at the full-year, our business as you know, Mark, for the most part is pretty stable, in terms of celebrating life's events, and there's a tempo, and pretty much a predictability to it. The only place where we would see a little bit of lumpiness, and it's incorporated in our guidance of flat to slightly positive, would be in the month of October, with the shift of Halloween from the weekend to a Monday. But once again, as we look at the full year, flat to slightly positive incorporates that thought process.

[Mark Becks:]

Okay. And then, just last follow up there, with that October shift, how do you think about the impact of say, the Saturday versus a Monday Halloween this year, versus the Frozen, I guess, drag from last year, do you expect one to be more material than the other? And then just another last side question, the debt pay down has obviously been a big part of the story. I think you've talked about getting close to 4 times by end of year. According to our math, that's just roughly $250 million of debt pay down. But maybe how you might be thinking about potential debt pay down? I think the term loan is where you might have earmarked, but just any additional color would be very helpful? Thank you.

[James Harrison:]

Okay. I'll ask Mike to address the debt pay down in a second. With respect to, delineating the Frozen effect and the store reset effect, and the Halloween effect this year, I think on balance looking at it, on a macro level, it probably all pushes out to essentially neutral. But I think in terms of trying to give a specific number, we really have not provided that level of granular detail on a monthly basis. We're looking at the full horizon of the remaining nine months of the year to get to the flat to slightly positive. With that, I will ask Mike to talk about the debt pay down.

[Michael Correale:]

So first, your estimate of the amount of the pay down is a fairly accurate estimate. Obviously, look, we have a revolver balance today. That's where the majority of the pay down occurs. To the extent that there is excess cash beyond what's in the revolver, we pay down the term. The notes still have a pre-payment penalty. So all excess cash would go against the term loan.

[Mark Becks:]

All right.

[James Harrison:]

Thank you, Mark.

[Operator:]

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

[Simeon Gutman:]

Thanks, good morning. Building on the last question about I guess, the consumer, can you just tell us in general how the baskets look, are you seeing the consumer still - excuse me, with the same number of items, at the same price points?

[James Harrison:]

Essentially, yes. For the most part, the basket continues to be very consistent, in terms of the number of units per basket, as well as the average value price, average value per basket, pardon me.

[Simeon Gutman:]

And just hypothetically, if the consumer were to get a little weaker, what would be the sign in your basket or item that they're not spending as much or they're being a little more cautious?

[James Harrison:]

You know, Simeon, in the 10 years that we've been in retail, I would say that we've not seen dramatic changes in the basket. Once again, it gets back to the nature of what we do. Our price points are all generally very nominal, in the scheme of things, and we are celebrating special events. So I think we're not going to see a dramatic shift in the basket, based upon economic conditions or consumer sentiment. It's a different emotional experience, I think shopping for our products.

[Simeon Gutman:]

Okay. And then a follow-up, I think in Mike's remark, he mentioned that the online business, I think related to sales, there was some increased promotional activity. My question is, if you can explain the dynamic, is that because the consumer is leading themselves to the website with an offer or are they just buying more on sale items? What's the dynamic that's creating the more promotional aspect online?

[Gregg Melnick:]

Hey, Simeon, it's Gregg. So I think what happened to us, that centered more around the holiday compression time period in February, as we were realizing that the consumer didn't need to come in for parties over that period of time. What we tried to do, was offer her some promotions on ancillary items as it relates to candy and as it relates to other things, combined with more, buy more, save more promotions, just to continue to be top of mind.

[Simeon Gutman:]

And is there - how is the interplay between, how the consumer shops online with promotions versus in-store, is there any connection?

[Gregg Melnick:]

So all of our offers are available both online and in-store. Our email database is effectively managed as a omni-channel database. And so, we think about it as one big connection, and the consumer can shop in either place. The offers are valid online or in-store. So we're not trying to promote one channel over the other, and that seems to work for our consumer.

[Simeon Gutman:]

But the incidence of in-store promotions, I mean, you didn't seem that same jump, I guess, vis-à-vis what you saw online?

[Gregg Melnick:]

We did not, and it's - not all of our consumers go online, our offers are available online, not all of our consumers go online and check our offers and come into the store. So you're not going to see the order of magnitude when we promote, it magnify in-store, as it might online.

[Simeon Gutman:]

Okay. Thanks, guys…

[James Harrison:]

I'm sorry, it's much easier to communicate those offers via the online consumer versus the in-store consumer. Thank you, Simeon.

[Simeon Gutman:]

Thanks.

[Operator:]

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

[Seth Sigman:]

Thanks, good morning, guys. A couple of quick questions on the wholesale business. You gave us some of the drivers that dragged it down for the quarter, but it sounds like the base business is up, I think you said $3.5 million or so. Can you give us a sense of what you're seeing, within those other categories where there is growth, maybe what are you seeing from a customer perspective, or how the channel mix maybe evolving? And then, in just general, what do you think the right run rate is for that business going forward?

[James Harrison:]

Okay. So in looking at our base wholesale business, our international business continues to be quite strong. We were up 6% in dollars in Q1, and on a constant currency basis, up even more substantially. Our independent business continues to be strong. We're building our relationships out with the independents further, with a new partnership program we've developed, that some of the independents that they're starting to pick up on. And our alternative markets business continues to gain traction, both in terms of injection moldable plastics, as well as expanding the distribution of some of our store for categories like balloons. We're starting to see acceptance of the balloon category in channels, where we've never really pursued sales before, such as entertainment things, movie theaters, zoos, parks. It's still nascent as to where we are in the development of that distribution, but the reception has been extremely strong, where we've been able to get in front of folks. So I think as we look at our wholesale business, low single-digit growth is our expectation domestically, and we continue to expect to have in constant currency basis 10%-plus growth internationally.

[Seth Sigman:]

Okay. That's helpful. And just wondering, like have you seen any major change in ordering trends or behavior, maybe just following up on some of the prior questions about the consumer, and the overall environment right now?

[James Harrison:]

No, because I mean, the consumer is not robust as everybody knows, but in our business that's not necessarily a significant impact in terms of our performance. We did have a decline at our wholesale business at the mass market level, primarily driven by the decline in the Frozen franchise. And so, as the business of the mass market that goes through American Greetings was down in Q1, consistent with what we see at our own stores. But other than that, our consumer acceptance continues to be pretty good.

[Seth Sigman:]

Got it. Okay. And then, just in SG&A, when I look at retail expenses up, I think you talked about advertising being one of the big components there. Can you just elaborate on some of the changes that you were making, and how that impacted the first quarter, and if there is a way to quantify, the impact that may have had?

[James Harrison:]

Sure. It was roughly $2 million. And essentially what happened was, as we mentioned in our fourth-quarter call, we have begun initiating a new ad campaign, emphasizing the difference between the Party City shopping experience, and what is available at Party City versus the broader market. We had a substantial amount of production costs for those new commercials in Q1, that we recognize on an as occurred basis, as opposed to spread out over the year. That's essentially the big difference.

[Seth Sigman:]

And is the increase in advertising, is it more heavily weighted to the first quarter because of that?

[James Harrison:]

Yes. Our full year spend is within our budget and our projections, it's just the timing.

[Seth Sigman:]

Got it.

[Michael Correale:]

By the way, in addition to the advertising spend, we also have the impact of the additional stores. We have 38 more stores versus last year, so that's running in your retail operating expense.

[Seth Sigman:]

Right. Okay, great. Thanks very much.

[Operator:]

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

[Rick Nelson:]

Thanks. Curious when you fully lapped Frozen, was there still some negative impact in April?

[James Harrison:]

A minor amount, yes, first couple of weeks.

[Rick Nelson:]

Got you. And store remodels, any comments there, as to how they are performing relative to the rest of the chain?

[Michael Correale:]

Yes. No, our store remodels and reloads continue to perform pretty much on pro forma and on expectation, 5, 6, depending on the store sometimes 10% up. And what we're seeing for the year is consistent in new stores, opening 30 new stores and being able to execute 50 to 60 remodels and reloads for the balance of the year. So all is on plan there.

[Rick Nelson:]

Thanks. And then, manufacturing share of shelf, where do you stand there? And…

[Michael Correale:]

It's…

[Rick Nelson:]

And gross opportunity?

[James Harrison:]

It's essentially still in the 20% range. The implication, the impact of ACIM and Madagascar will take a period of time to roll out and have that hit. As I think I may have said, we expect ACIM to be about a 10% effect, and Madagascar would be much smaller about 2%. And the other part - the other thing that will obviously effect us also, is the Warner Bros. DTR. That should represent about a 2% to 3% increase in manufactured portion of the offering as well.

[Rick Nelson:]

Thanks for the color, and good luck.

[Operator:]

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

[Michael Baker:]

Hi, thanks. Just a couple. So if the first three months were down 1.5%, and now you're flat, that implies April up about 4.5%, assuming the months are all pretty equal in size. So can you confirm if April was up about that amount? And then, I guess, the follow up there is, what does that - where should that put our expectations for the full quarter?

[James Harrison:]

Okay. So I'm not give you a forecast for the fourth quarter, Mike. That's a good try. But what I will tell you is that, to get to about flat, was about 3% for the month. And once again, it was the fact that we had the full Easter day in April this year, as opposed to having that…

[Michael Correale:]

In March.

[James Harrison:]

In March.

[Michael Baker:]

Okay. So then adjusting for that, then April would have been up something a little bit, less than the 3%, right?

[James Harrison:]

No, it was up. Oh, yes, I'm sorry…

[Michael Baker:]

No, less, okay.

[James Harrison:]

Unto itself, it's probably a little bit over 1%.

[Michael Baker:]

Okay. And then, is there anything that we should think about in terms of lapping, anything regarding the calendar, or things that would make May or June that we should contemplate in our forecast for the rest of the quarter?

[James Harrison:]

Nothing material.

[Michael Baker:]

Okay. One more question if I could. So you had - intra-quarter, you put out some specific EPS guidance of low single-digit EPS. To me $0.04 is maybe slightly above the high end. I think of low single-digits as 1, 2 or 3. So where did you come in better, than you expected?

[James Harrison:]

Yes, I would say that we're - the currency gave us a little bit more than we had earlier anticipated.

[Michael Baker:]

Okay. And currency you said, including both the transaction and translation…

[James Harrison:]

Currency net was a little over 1%, or $0.01, pardon me.

[Michael Baker:]

Understood. Okay, great. Thanks. Appreciate the color.

[James Harrison:]

Thank you.

[Operator:]

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

[Curtis Nagle:]

Great, thanks. It's Curt Nagle in for Denise Chai. Just a quick question on the reorg on the gift business. I guess, what is driving that, is it just not meeting profitability thresholds? And then as a quick follow up, I guess, how much of recent FX reversals are factored into sales guidance for the year?

[James Harrison:]

I'll answer the first question, and Mike will try to address the second one. With respect to the gift business, our gift business is a business that we started many years ago, and it's called Grasslands Road, and it sells into the broader gift market, Hallmark stores of Bed, Bath and Beyond, folks like that. It's a challenging business. And it's roughly a - last year I think it was roughly a $38 million business, plus or minus a few million. And it was not -- has not been profitable. So what we did over the last 12 months is, we made some significant changes to how we conduct the business. We've gone to more of a mix of shelf goods and designed goods, whereas previously we were 100% self-designed goods, and we also changed how we go to market. We had a 65 person direct sales force, paid salary, commission and full benefits and travel expenses, and we changed go-to-market to a rep organization. We have a rep organization selling that line for us. At the bottom line, it's been a positive. We've improved the profitability of that business unit substantially. Going from to a rep model, however, changes the dynamic as to how much - how often, pardon me, your product gets in front of potential customers. And as a result, we've had, as anticipated some declines the top line. But overall, the profitability of that business has improved dramatically. And we would expect to continue to have some slippage in the top line, with continued improvement on the bottom line. It's a very, very small, and really unrelated part of the rest of our business.

[Curtis Nagle:]

Great. And then, just on the FX?

[Michael Correale:]

Sure. Our revenue guidance assumes a $22 million negative, as a result of FX full year.

[Curtis Nagle:]

And has it changed from, I guess, when you gave guide in - from 4Q?

[Michael Correale:]

No, not significantly.

[Curtis Nagle:]

Okay. Thanks very much. I appreciate it.

[Michael Correale:]

All right.

[Operator:]

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

[Joe Feldman:]

Yes, hi, guys. Thanks for taking the question. I wanted to ask, there was a comment that you Jim, you made in the - actually in the press release. You said you saw positive momentum in international markets. And I just want to get a little more color on that? I apologize if I missed it during the call, but I do not think I heard any comment on that.

[James Harrison:]

That's fine. I think I may have mentioned just top line headlines on it. But essentially, we've had a lot of success over the last 12 to 18 months in developing store-in-store concepts in Australia, and in the UK specifically, and we've begun to develop some success - successful concepts, pardon me, in Europe as well. And so, as I think most folks know, the Party City market is much more less mature outside of the United States, and a lot of opportunity for growth, because it's an under-developed and under-informed consumer. And we find that the store-in-store concepts are an opportunity for us, to get in front of the consumer not items, but programs, and give them lots of choices, and lots of new experiences with respect to the product assortment that's available through our brand. And we've had good success with the program at Big W, and now we've just rolled a program out with Morrison in the UK that's doing well. So we're seeing good momentum and good acceptance to the store-in-store category in the foreign markets.

[Joe Feldman:]

That's great. Thank you. And then, one other question I had was, with regard to the Warner Bros. licensed deal that you have, how - can you quantify that at all? Like how, and maybe compare it even to like past deals that you've had, like should we expect 100 basis point lift over time or a 50 bp? Like how does that work, or is it more about the profitability of that business, that we should expect to see more gross margin, how can we think of that? Thanks.

[James Harrison:]

So we would expect that the DTRs on the Warner Bros. costumes would increase our share of shelf roughly 2% to 3%. The key there obviously, is we then also enjoy the wholesale margin, not just the retail margin. So we pick up a layer of margin there. More importantly, by virtue of having the DTR, it gives us a really tremendous ability to differentiate our product, and our costumes from the broader market. And if you take a look at what we offered last year for instance in Spiderman or what we offered in other properties from Disney and Marvel, you'll see that we had a tremendous amount of accessorization and customization and separates that were available to the consumer, to really differentiate themselves from other costumes, in respect to the fact that they were using the same basic premise in terms of the character. And I think that is a very unique opportunity for us, to really differentiate ourselves in the marketplace, and differentiate ourselves from the mass and differentiate ourselves from the larger e-commerce players who are selling costumes in a bag, and really don't have the design resources or the access to product that we have, to develop this. And I think that's the real advantage is, is really just continuing to make our brand special.

[Joe Feldman:]

Got it. That's helpful. Thanks, and good luck with the second quarter.

[James Harrison:]

Thanks very much.

[Operator:]

Your next question comes from the line of Jeff Feinberg from Feinberg Investments. Your line is open.

[Jeff Feinberg:]

Thank you very much. Good morning, and great job, guys. I apologize, my line was broken a little bit, when you gave the commentary surrounding April and timing. Could you please kindly repeat that, and the sort of comp outlook?

[James Harrison:]

Sure. We generally don't give mid quarter comp results, but I think given the unique nature of having Easter shift between quarters here, and it being one of the few days during the year that we're closed, I think it's important to try and develop a level playing field, and get all four months - a view on all four months. And so, if you look at our results, our comp store sales results through April were essentially flat. So the negative in Q1 was essentially offset by positive comp sales results in April. So through four months, our comp sales are essentially flat, consistent with our full-year guidance of flat to slightly positive.

[Jeff Feinberg:]

And that's how - if I understand correctly, the communication from the prior questioner, about a 3% comp in April, made sense?

[James Harrison:]

Correct.

[Jeff Feinberg:]

Okay. And then there were some - just trying to understanding the follow up, because that was the part that I did hear - the underlying trend is a positive comp, whatever it is, 1% or 2%, when you exclude this shifting, when you look at the month of April alone?

[James Harrison:]

If we look at the month of April in isolation, and eliminate the Easter impact, it's about a 1% positive comp, correct.

[Jeff Feinberg:]

Wonderful. Because with that as a context, if I understand correctly, I think you've talked in prior calls about a big opportunity in the third quarter with regard to easy comparisons?

[James Harrison:]

In the third quarter last year, we had the negative impact of the lapping of Frozen, as well as store resets and that's really what happened in third quarter. And obviously, as we look at the full year, we've got the movements of Halloween from the weekend to a Monday, which brings us back to our expectation of flat to slightly positive.

[Jeff Feinberg:]

Okay. Thank you very much. Appreciate your time.

[James Harrison:]

Thank you.

[Operator:]

There are no further questions at this time. Ms. Belevan, I turn the call back over to you.

[Deborah Belevan:]

Thank you, operator. We appreciate everyone joining us today. And just a reminder, a replay of our call is going to be available shortly on our website. Thanks, everyone, and have a great day.

[Operator:]

This concludes today's conference call, you may now disconnect.