Party City Holdco Inc.
Q3 2016 Earnings Call Transcript

Published: 12 Nov 2016

[Operator:]

Good morning, my name is Nick, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Party City's Third Quarter Earnings Conference Call. [Operator Instructions] After the speakers' remarks there'll be a question-and-answer session. [Operator Instructions] Thank you, Debbie Belevan, VP of IR, you may begin your conference.

[Debbie Belevan:]

Thank you, Operator. Good morning, everyone, and thanks for joining us. This morning, we released our third-quarter financial results. You can find a copy of our press release on our website at investor.partycity.com. Now I'd like to introduce you to our executive team who are here on today's call. We have Jim Harrison, our Chief Executive Officer; Dan Sullivan, Chief Financial Officer; Gregg Melnick, President; Mike Correale, Chief Accounting Officer; and the newest member of our executive team, Ryan Vero, Executive Vice President and President of the Party City Retail Group. 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 the 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 this morning for our third-quarter earnings call. First, I'd like to welcome Dan Sullivan, our new CFO, and Ryan Vero, our new EVP and President of Party City Retail Group, both of whom are joining us for the first time on a quarterly earnings call. I'll provide more information regarding these organizational changes later in the call. Allow me to begin by reviewing our Retail sales for both the third quarter and the Halloween season, followed by a discussion of overall results for the quarter. Then I'll turn over the call to Dan, who will give a more in-depth review of our business and financial performance, while also providing an update on our full-year expectations. Consolidated revenue for the quarter increased by 1.7% on a constant-currency basis, to $557 million, and included a Retail comp-store sales increase of 1.2%, and through the first nine months, comp sales increase of 1.3%. For the five-week period ended November 5, which included Halloween, comp-store sales declined by 6.4%. In order to truly understand these results better, I will address each of the three major components of the sales mix that drove our results during this period. Each of these segments performed quite differently. Firstly, our everyday business for this period was up nearly 4% on a comp-store basis, continuing a trend of strong everyday growth that we've seen since March. This business, which is comprised of specific event-driven celebrations such as birthdays, bridal and baby showers, and anniversaries, is generally not susceptible to consumer sentiment or shifts in the day of the week. Secondly, the juvenile costume portion of our Halloween business was essentially flat, and the most competitive portion of this business, which is licensed juvenile costumes, actually comped up 5%. That leaves us with the third piece of the business during the period, adult costumes and accessories. We had anticipated and cautioned earlier in the year, as reflected in our guidance and our reduction in temporary Halloween store count from 335 to 275 stores, that the shift from the Saturday to Monday would have a negative effect on this portion of the business. Adult celebrations are much more discretionary, and as such, we felt that this piece of the business would be most adversely affected by the two-day shift away from Saturday. To address these headwinds, we were extremely well prepared for the season, both in terms of our product offering and our store conditions. Our expanded assortment of unique costume designs, focused marketing efforts, and our strong brand recognition as the Halloween destination, was supported by excellent in-stock positions and well-merchandised stores. What we hadn't fully anticipated was the negative effect that this presidential election cycle has had on consumer sentiment, and its impact on the more discretionary components of our business, like our adult Halloween offerings. To better understand the impact this has had on the U.S. consumer, we only have to look at our results in Canada, where we experienced an overall positive comp sales result, and a much smaller percentage decline in adult costume and accessories sales in the month of October. The significant advantage between our U.S. and Canadian businesses provides a unique view, and demonstrates the impact that election fatigue has had on the overall sentiment of the U.S. consumer. I will now shift and talk more holistically about the quarter. Overall, we had a solid third quarter, with continued top-line growth, further gross margin expansion, and low interest expense, all of which helped us to deliver adjusted earnings per share of $0.12, 20% increase over last year's third quarter. In addressing the specific drivers of our results, as mentioned earlier, consolidated revenues increased 1.7% on a constant-currency basis, gross margins increased 110 basis points, and our adjusted EBITDA increased 13%, to $66 million. As you know, we have a well-diversified business model, with many aspects of our business that make us very unique, when compared to a pure retailer. Our Retail revenues grew 2.7% on a constant-currency basis in the quarter, and as I mentioned, comp sales grew at 1.2% in the quarter. With respect to our store expansion and growth plans, we remain on track to open approximately 30 new stores this year in the U.S., while also completing approximately 60 models and relocations. In 2016, we expect to invest over $40 million in capital in support of our fleet of stores, while strengthening overall brand equity. All of this will allow us to support our expectations of sustainable sales growth in our Retail business. In our Wholesale segment, overall we had a very solid performance, highlighted by our international business, where revenues grew over 11% in constant currency. We continue to see success in penetrating markets outside of the United States, as international consumers are increasingly embracing the party culture and holiday celebrations that we're known for here in the U.S. Markets such as the UK, Ireland, Mexico, Australia, France, and Spain are leading this trend. And because we sell our products in more than 100 countries, there's still plenty of opportunity for continued growth. In our domestic Wholesale business, where the retail market for party goods is more mature, our revenues were essentially flat to the prior year, after adjusting for the impact of our acquisition of 23 franchise stores over the last 12 months, and the de-emphasis of our gift business. Nonetheless, we continue to uncover terrific alternative market opportunities, as we look to leverage our product designs, sourcing, and production capabilities. The alternative market channels outside of the traditional party goods retail space allows us to market new venues such as theme parks, movie theaters, bars and restaurants, just to name a few. While this is a fairly new focus for us, we're seeing approximately 15% growth year to date with a lot of runway ahead as we ramp up this business. In support of our sustainable growth platform, we're excited with the progress we've seen in recent acquisitions, further establishing their role in our future growth. Efforts to integrate ACIM, our custom injection molded plastics business, continued in Q3, while we also ramped up production capacity at Festival, our costume-manufacturing business in Madagascar. Both of these businesses demonstrate our acquisition rationale of highly accretive, low-risk acquisitions that offer us predictable gross margin expansion, while also providing us with healthy third-party businesses with attractive growth potential. As the leading player in the growing part of this market, we remain the clear global leader in brand recognition and market share. We have many exciting opportunities in front of us, including tapping into new markets to further grow our global footprint, expanding our global offering beyond core party goods, growing our store base and enhancing the customer experience in our stores. Additionally, we'll continue to accelerate our efforts to identify accretive acquisitions that will enable sustainable growth, while helping us to achieve our goals of gross margin expansion by manufacturing 50% of what we sell at retail, and growing our full year share of shelf to 80% over the next three years. Now I would like to say a few words about our recent organizational changes, which we announced last week. First, I'd like to acknowledge Gregg Melnick's many contributions as President of the Party City Retail Group, and his role in leading this portion of our business to achieve great success. Gregg's experience and thought leadership have been invaluable for us, and now as President of Party City Holdings, Gregg will be assuming a more global role, leading and helping to develop a long term strategic direction for our supply chain and IT efforts, while also focusing on our international businesses, so that we can capitalize on tremendous growth profile of these underdeveloped markets. I'm equally excited to welcome Ryan Vero to the team as our new President of Party City Retail. Ryan joins us following broad commercial and retail roles at OfficeMax, and most recently at Sears Holdings. Ryan's deep retail roots and experience at gross merchandising, marketing and store operations make him the ideal addition to our Executive Team. These changes will position our Company very well, and ensure that we have the right experience and focus against our critical growth initiatives. With Gregg and Ryan in place, in addition to the recent announcement of Dan Sullivan as our CFO, I am convinced that we have the right leadership team in place to position the Company well for continued future success. And with that, I'd like to turn the call over to Dan to discuss our results and full year outlook.

[Dan Sullivan:]

Thanks, Jim, and good morning. First, I'd like to say that it's been an exciting couple of months back with the Company, and I'm delighted to be a part of the Party City leadership team, and joining you on my first earnings call. I'll keep my prepared comments brief, so that we have plenty of time for Q&A, but I'd like to provide you with some insight on our financial and operating performance for the quarter that will add some color to what you've read in our press release. Additionally, I will touch upon our full-year outlook before opening up the call for questions. As you heard Jim mention, our third quarter results continue to reflect the strength of our business model. We delivered solid top-line growth, despite continued headwinds from the strengthening dollar, and organic growth in our Retail business was a key highlight. We also saw further strengthening of our gross margins as we expanded our vertical model, and demonstrated good cost controls across both our Wholesale and Retail businesses. And as a result, we increased our operating margins by over 90 basis points versus the third quarter last year. During the third quarter, consolidated revenues increased by $1.5 million or 30 basis points, to $557 million. The strengthening of the U.S. dollar continued to negatively impact our international sales, lowering reported sales by $8 million in the quarter. After adjusting for the negative foreign currency effect, total revenues increased $9.6 million, or 1.7%. In our Retail segment, sales increased 2.4% on a reported basis, driven by our positive brand comps, and the effect of our 33 net new stores, which include both acquired franchise and new stores. At quarter's end, our Company store network totaled 921 stores, 737 of which were corporate stores, as we opened 8 new stores and closed 1 during the quarter. Our brand comparable sales, which include our U.S. and Canadian permanent stores, and North American e-commerce, increased 1.2% for the quarter, this was driven by a 2.8% increase in basket dollars, which helped to mitigate the impact of a decline in transactions. The basket growth was driven by lower promotional activity in our stores, limited opportunistic price increases, and favorable product mix due largely to the strong performance of our everyday business, as you heard Jim discuss. The North American e-commerce same-store sales increased 8.6%, which reflects a 10.3% increase in transactions, offset by a slight decline in basket. Transactions are being driven in large part by our expanded online-only assortment, better customer conversions, and more freight-based promotions. Turning to our non-vertical Wholesale segment, total revenues increased 3.4% after adjusting for foreign currency and the elimination of over $6 million in sales due to the acquisition of 23 franchise stores earlier this year, as those sales are now recognized when sold in our retail stores. On a reported basis, these sales declined 2.9%. Within this segment, international sales rose 11.1% on a constant-currency basis, which was driven in large part by higher sales of costumes and accessories in the UK, as we see consumers in many of our international markets increasingly embracing our festive U.S. Halloween traditions. Our consolidated gross profit margin increased to 35.5%, or 110 basis points over the same period last year. The Retail segment saw a 60-basis-point increase, despite 20 basis points of currency headwind, principally driven by continued gains in our share of shelf metric, and further evidence of the benefit of our vertical integration model. In the quarter, share of shelf increased 160 basis points, to 75.1%, primarily in the categories of latex balloons, costume accessories, serveware and bakeware. Our Retail gross margins also benefited from less promotional activity in our stores and positive product mix. Wholesale gross margins improved 170 basis points despite a 50 basis-point currency headwind. And most of this was driven by lower product costs, which reflects further easing of commodity costs and the continued efficiency gained in our global sourcing efforts. Lower sales of licensed products and better leveraged distribution costs in our international operations also contributed to the Wholesale gross margin expansion. Operating expenses were relatively flat to last year from both a dollars and rate-of-sales standpoint, totaling $163 million and 29% of revenues in the quarter, despite inflationary pressures and continued advertising investment in our Party City brand. In the quarter, we were able to reduce our store labor costs versus last year, reflecting both efficiency and productivity gains in our stores, as well as the effect of cycling last year's store resets. For the quarter, our operating margin increased 90 basis points, to 6.6%. Net interest expense totaled $22.4 million in the quarter, representing a decrease of $7 million, or 24%, due to our August 2015 refinancing. Subsequent to quarter end, in October of this year, we repriced our term loan, lowering our LIBOR margin and LIBOR floor each by 25 basis points, to 3% and 0.75%, respectively. We also prepaid $100 million on the term loan with borrowings under our revolver. All in, if we assume current interest rates, this refinancing will result in annual interest savings of nearly $7 million. Our income tax provision in the third quarter is based on an estimated annual effective rate for the year of 37%. Our adjusted net income, which this quarter excludes items like amortization of intangibles, deferred financing costs, and original issue discounts, increased $2 million, to $14 million. Adjusted earnings per share increased from $0.10 to $0.12, and our adjusted EBITDA, which this quarter excludes items like foreign currency gains and losses, and deferred rent, increased $8 million, or 13%, to $66 million. Turning to our balance sheet, working capital was a use of $80 million this quarter, and a use of $108 million in the third quarter of last year, with the change mostly attributable to the impact our August 2015 debt refinancing had on accrued interest, as well as lower taxes payable. Working capital days improved by over eight days, versus the same period last year, driven largely by a seven-day reduction in inventory days. Our capital investments in the quarter were $21.6 million, or 3.9% of net revenue, and were $8.6 million lower than the same quarter last year. The lower spend this year was due to the timing of our store relos and remodels, as well as the fact that last year's CapEx included certain costs associated with our EMV-compliance efforts. We ended the quarter with net debt of $1.8 billion, a decrease of $153 million from the year-ago quarter, and a leverage ratio of 4.6 times. Given our third-quarter and October results, we are revising our full-year guidance, as you saw outlined in our press release this morning. Our revenue and comp sales guidance assumes that our everyday business will continue the positive trends that we've seen in Q3 and the month of October. Also, the Q4 operating margin decline implied by our full-year adjusted EPS guidance of $1.08 to $1.16 is due largely to occupancy deleverage from the expected negative Q4 comp sales. Given this updated outlook, we now expect to end the year at a debt-leverage ratio of approximately 4.2 times. With that, I'd like to turn the call back over to the operator, and open it up for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Stephen Tanal from Goldman Sachs. Your line is now open.

[Stephen Tanal:]

I guess, the way I'd ask it, I mean, the 1.2% comp in 3Q against what looks like a pretty easy compare, then an inflection to 4% in the everyday business, against seemingly a tougher compare, am I thinking about that right in general? And is that the way you're interpreting the core comp trend? And if that's the case, is that choppy, or any thoughts you could share on that would be pretty helpful?

[Jim Harrison:]

Sure, Stephen. September is a month that also includes Halloween. We talk about Halloween in terms of November 5 week period, but in fact Halloween begins in September. So when we look at the month of September on a more granular basis, what we see is that the decline of the Halloween sales, as it relates to adults and in accessories really started in September. And we actually had a very strong everyday comp in September of almost 5%. So I think, as we look at September, we should look at it holistically really with October as well, and see a basically a trend of strong everyday business, solid juvenile costume business, and some disruption to the adult side from the factors mentioned during the earlier commentary.

[Stephen Tanal:]

Got it. And I guess, one of the things that I'm having trouble wrapping my head around is, if maybe the election is impacting the adult participation, it seems like the everyday business is still pretty strong, so maybe it's more of sort of a celebratory effect? I'm not sure if you have any comments there, but more to the point as well, then thinking about the deltas between the Halloween comp and the everyday comp. Can you talk about maybe the impact of the shift to Monday, have you guys been able to estimate what you think that did here for the comp?

[Jim Harrison:]

Sure. I think, well, it's not a perfect parallel, when I mentioned earlier, talking about Canada where there was no election effect, the decline in the Halloween business was roughly mid single-digits as opposed to very, very low double-digits at store level in October for the U.S. market. So I would say about half of the decline probably was associated with the shift, and we believe the other half of the decline in the U.S. was principally associated with the shift, as well as the part of impact to the election. And the fact is, the adult portion of the business, adults don't go trick-or-treating, adults have parties, right? And as a result, the party component which is very discretionary, because you don't have to have a Halloween party, was adversely effected. Going trick-or-treating which is a child's right, and not just a privilege, but a right, is not affected by the shift of the day, nor is it affected by elections. It is a key component of being a child.

[Stephen Tanal:]

Got it. And then, a last one for me, as you think about gross margin, obviously much better than the guidance. And I think about the fact that your inventory turns are what they are, so you probably knew what commodities we're going to do. So then, what was the surprise here, in terms of the quarter? How did you end up delivering such a strong performance there?

[Jim Harrison:]

Great, I'll ask Dan to address that.

[Dan Sullivan:]

Yes, I think that part of the gross margin picture is, of course, not a surprise. We've seen it, we continue to see healthy share of shelf gains in our business, number one. As we peel back retail versus wholesale, on the retail side, we were slightly less promotional in our stores than we anticipated, and we did the benefit of a positive mix. On the wholesale business, we continue to sustain gains. A couple of key reasons, none of which is a surprise. One, the commodity cost easing that we saw earlier in the year, mostly around resin continued. And two, we continue to make great efforts in our global sourcing, where we continue to look for ways to optimize our sourcing efforts. Most notably, we've moved away from trading agents, and more into a source direct to factory which helps as well. So those elements on the wholesale side, helped to increase the margins in the quarter year-over-year.

[Stephen Tanal:]

I'm sorry. All of that sounds like it can continue into 4Q, or do you think you maybe, some of that wears off a bit here?

[Dan Sullivan:]

No, I think on the wholesale side it, we expect it to continue into 4Q. I think on the retail side, a couple of things will present some headwind for us. One, with the holiday shift to a Monday, we anticipated it being more promotional, number one. And I think secondly, as we think about the retail side of the business, we'll probably have some negative mix effect, as we saw lower sales, mostly around the accessories in Halloween.

[Operator:]

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

[Matt McClintock:]

I actually just wanted to focus a little bit of on what you just said, in terms of the shift to Monday, anticipate it being a little bit more promotional. It seems like overall Halloween came in maybe softer than expected, for most of the main players out there in the competitive environment. I mean, did you see any incremental or promotions that were maybe a little bit higher than you had originally anticipated for this Halloween, given the softness?

[Jim Harrison:]

I'll ask Gregg to address that.

[Gregg Melnick:]

Yes, I mean, I think what happens when you have a 2 day shift, especially so much of the volume actually moves from the beginning part of the season, the middle part of the season, and it's very heavily weighted towards the end of the season. So certain retailers out there went a little more promotional, because they just didn't understand, the balance of the shift of the business, and I think we saw some additional promotions there. But they were short, and not long-lived. For our business, I think we just kept true to focusing on what we do, as buy more, save more promotions, and so the consumer gets to benefit as they purchase more. But we didn't necessarily change much of our discounting strategies as we went through the season.

[Matt McClintock:]

Okay. And then, I know, it's relatively early, but just looking forward to next year, can you give us some understanding of how Halloween on Tuesday, is it just kind of a similar impact as Halloween on a Monday? Is it better or worse, or just so we can think about next year, and the relative day?

[Jim Harrison:]

Sure. I think one of the things to bear in mind, is this year we -- normally we would go from a Friday to a Saturday, Saturday being the strongest to a Sunday, which is a little less robust, to a Monday which is more -- or less robust, pardon me, and then to a Tuesday. This year we jumped from Saturday to Monday, so the impact was in terms of the shift is obviously, quite a bit more dramatic. We're not giving guidance yet with respect to next year, but on a macro level we would look at Monday to Tuesday being a far less consequential sort of shift, than from Saturday to Monday. And as we expect -- as we pull together our guidance for the next year, we'll certainly try to firm that up for everybody, to give you more perspective.

[Operator:]

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

[Seth Sigman:]

If we just go back to the third quarter and how it played out, when you look at the retail business, can you give us a sense of just cadence throughout the quarter? I think you indicated that there was some Halloween effect here in September. But there were perhaps signs that the base business or the everyday business had improved sequentially, and I think that's a trend that we've seen with some other companies. So just trying to understand how the curve looked, and how we should be thinking about that everyday business here in the fourth quarter? Thank you.

[Jim Harrison:]

Sure. Dan, can give you some statistics.

[Dan Sullivan:]

Yes, so you're absolutely right, we saw a very healthy everyday business. Actually going back to late Q1 through Q2 and over the course of the quarter, the third quarter that you referenced, we actually saw the everyday business growth rates actually increase, some were low single-digits in the start of the quarter, and as you heard Jim say, up over 5% for the month of September. So your instinct is right, when we look at Q3, there was a healthy growth in our everyday business that actually accelerated as the quarter went on.

[Seth Sigman:]

And then, just to clarify, the lower guidance for the fourth quarter, is that just the Halloween performance that you saw?

[Jim Harrison:]

Correct.

[Seth Sigman:]

And then, just a follow-up question on expenses. Pretty good SG&A leverage this quarter in the retail business on a 1% comp, it seems a little bit better than what we've seen in the past. Is there anything specific you can point to that maybe has changed there?

[Dan Sullivan:]

Yes, I think, a couple of things on the retail side of the business, and I'll also let Gregg comment. We saw a very good labor productivity and efficiency gains within our stores in the quarter. And we also saw the positive benefit of cycling, you'll recall last year's resets where we had to put more labor into the stores. So both of those factors together, both of the strong performance and the cycling of last year helped to deliver a very healthy OpEx rate as you mentioned.

[Operator:]

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

[William Reuter:]

I was just hoping to get a little bit more clarity on what you may have seen from some of your mass competitors, or non-specialty guys? How did they, how did their focus on Halloween this year change on a year-over-year basis? You noted that they got promotional earlier, but just in terms of the breadth of their offering?

[Jim Harrison:]

Let me address the question on a couple different levels. Obviously, we're the only public company that reports Halloween as Halloween. Our largest private competitor, our largest competitor is private, the mass market also sells Halloween as does major internet players. So most of our industry information is really anecdotal. We don't have specific numbers, but we have every reason to believe that the performance of our competitors, very much reflected ours, in terms of how the juvenile performed versus how the adult performed. And we feel pretty good about the fact, that we don't think we've lost any market share, that's for sure. We just think that the market changed this year because of the dynamics we mentioned. In terms of their offering, the offerings were generally consistent with what's been, what they've carried in the past, as has been their pricing and promotional strategies. Some mass market players perhaps advertised a little bit more than in the past. But we don't believe that had a material effect, in terms of share.

[William Reuter:]

And then, as a follow-up, in your prepared remarks you talked about accelerating acquisitions. Maybe if you could talk just a little bit about what you guys are seeing there, how we should think about where those opportunities might be, and how focused you're going to be in 2017 on them?

[Jim Harrison:]

We are always on the lookout for opportunistic acquisitions that help round out our product portfolio, in terms of our ability to add triples to our existing doubles, or add doubles to our current singles, or even enter into new opportunities, and opportunistic alternative markets. So there's a lot of runway, because of the type of acquisitions we look for tend to be small, bolt-on, very, very low beta, very, very high fully synergized opportunity, and very, very low effective multiple once fully synergized. And I think we see runway in that area, and I would anticipate that we would continue to do as we have in the past, of adding one or two acquisitions a year, in this range, this size that would be accretive, and to their shareholders. As well as continuing to look at opportunistic acquisition opportunities in the franchise area, where we can add to our store base at 4.5 times effective multiple, which is obviously well below our trading level.

[William Reuter:]

Okay. But they will be kind of more tuck-ins, and more of what we've seen recently, as opposed to a large transformative acquisitions?

[Jim Harrison:]

Yes, I think if you look at our history, with the exception of the move forward in 2005 into retail, which was rather major, everything else really has been very much of a tuck-in nature, but extraordinarily profitable and very, very accretive.

[Operator:]

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

[Simeon Gutman:]

Thanks. Good morning. Just a couple of clarifications, and then maybe a couple of questions within. First, Jim, last year, you provided some context of what internal expectations for Halloween looked like versus reality. I think here, the implied guide was maybe negative low single-digit for this quarter, for the fourth, and brand comp was down minus 6.4. And so can you give us color on, how it underperformed relative to expectations, and you mentioned distracted, anything about price points? Was there any trade down, or was it more just traffic and trips?

[Jim Harrison:]

It was 100% traffic, which makes by the way, the corollary to that is, since it was traffic, for our everyday business to be up in light of the traffic patterns, I think speaks well to the strength of our core business. But to your other question with respect to how far it shifted for, more than we had anticipated, I think if you look at our earlier guidance at the beginning of the year, our guidance, we started the year at flat to slightly positive. And now our guidance is flat to marginally negative. So it hasn't been a tremendous shift, but there's been some shift.

[Simeon Gutman:]

And then, the implied pick up for the rest of the fourth quarter, has that changed at all from where you were guiding a quarter ago? I mean, it seems like it's about in line, or even a little better with that every day run rate, is that about what you were expecting?

[Jim Harrison:]

Yes, you're absolutely right. It's pretty much in line, perhaps a little bit better, but pretty much in line with what we had been expecting.

[Simeon Gutman:]

Okay. And then, and one more on, just on Halloween, the store centricity or store traffic versus online. Can you talk about any shifts that you are seeing, and how the consumer is shopping? I guess, the calendar shift may have obscured it a bit, and it may be hard to sort out versus a year ago, but any shifts or shopping patterns versus store, versus online?

[Gregg Melnick:]

You're right on that, because the cut off period this year was consistent, really with the cut off period last year. So the overall trends on Halloween online were relatively consistent with last year, as we didn't experienced as much of a shift as we did in the stores. I think that the only thing that the consumer just continues to respond to free freight. The consumer is very focused, and Amazon has trained the consumer, that especially in this holiday, free freight is an expectation. And so, I think we are able to compete for pretty well, given that as a little bit of a headwind. But the traffic patterns in the stores shifted very much off of Thursday and Friday to about a four or five day period in the stores, being Thursday, Friday, Saturday, Sunday and Monday.

[Simeon Gutman:]

Okay. And my last question, I know it's, Jim you mentioned not providing much on next year, just very high level on just EBITDA growth expectations, because you do have a normal, or it normalizes year-over-year Halloween, that is. But there was some mention of higher inflation in SG&A. You have some good drivers on gross margin. I just wanted, high level, is next year going to look more normalized from an EBITDA growth perspective, or are there any headwinds or tailwinds we should think about?

[Jim Harrison:]

I would expect next, this year's growth on EBITDA is skewed somewhat by some of the adjustments, going into the adjusted EBITDA, and how we calculate it. So if we look at a more -- I would expect next year would be much more normalized, as that sort of noise now is out of the numbers.

[Simeon Gutman:]

And normalized being like mid-ish single-digit EBITDA growth or mid to high single digit EBITDA growth?

[Jim Harrison:]

We, now you're looking for next year guidance. So I'm going to defer answering that question until we have our year-end call.

[Operator:]

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

[Karru Martinson:]

Good morning. Just to follow-up on Bill's questions for acquisitions. When you look at your leverage target for this year, 4.2 a little bit higher than you were originally looking at, how are you guys balancing acquisitions versus your leverage targets, longer term?

[Jim Harrison:]

I think, once again, Karru, I think because of the size of acquisitions we're looking at, we're talking in the $25 million to $35 million range. If we do a couple of franchisees, we do a tuck-in for the manufacturing, we're looking at less than a quarter [ph] turn on EBITDA. So I think, I don't see that as being material as we think about getting our leverage targets down. I think that's built into our model as to how we delever. To move to 4.2 versus where we had anticipated, which is being just under 4, really is a function of just the additional working capital investment we have this year, now carrying over, out of Halloween.

[Karru Martinson:]

Okay. And then when we look at your everyday business being up, I mean, do you feel that the consumer is healthier today, and is actually kind of opening up the wallet and spending money, and that will kind of continue, or do you feel that was a little bit more of an anomaly?

[Jim Harrison:]

I think the consumer sentiment is yet to be determined. Clearly, the election in our view, and the view of many people was a distraction to the consumer, suppressing retail spending, not just at retail, but also in restaurants and other places. Whether or not the fact that the election cycle is now over, is going to change the consumer sentiment, or that there's still consumer unrest out there. We've got 50% of the country vigorously supporting one candidate, and 50% vigorously supporting the other candidate, and not exactly a steady-state just now in terms of political mindset. I think there's going to be -- my personal opinion is there's going to continue to be a little bit of consumer wariness for the foreseeable future.

[Karru Martinson:]

All right. Well, my children are certainly happy to hear they have an inalienable right to trick-or-treat so. Thanks for your time, guys.

[Operator:]

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

[Mike Baker:]

Thanks, so a couple of questions on the comps. So can you tell us, what is your -- what is embedded in the November, December outlook for comps? I mean, I guess, we can make some estimates, but we really don't know exactly how much October is as a percent of the quarter. So it's really just estimates, but if you could help us there? [Multiple Speakers] Are you expecting positive comps in November and December?

[Jim Harrison:]

Yes, in the 3% range.

[Mike Baker:]

For the whole -- okay. And then, working backwards, in the third quarter, just to be clear, so the everyday business was up 4% in the third quarter, yet the total quarter was up 1.7%. So the delta there is really just the adult business, the adult Halloween business in September, that's big enough, even though we're still a month away from Halloween, to drop the total comp by more than 2 percentage points?

[Dan Sullivan:]

Yes, so just to clarify, the everyday business for the quarter was up 3.5%. The 4% that Jim quoted was for the month of October, so we just have to be careful with that. But your other point, around the relativity of seasonal versus every day and the 1.2% comp for the quarter is right.

[Mike Baker:]

I guess, I was just quoting from the press release that says almost 4%. So you're saying that almost 4% is actually 3.5%?

[Dan Sullivan:]

No, no. So the almost of 4% is everyday business month of October. So we're two different time periods, right? Quarter three, which is what I thought with the question was, everyday business is up 3.5%, and it was approaching 4% for the month of October.

[Mike Baker:]

I understand. Okay. It's a little unclear from the release. Okay, one last question of -- forgetting about comps longer term. Where do you guys see your EBITDA margins over let's say, the next three years? I think at times, you've commented on the ability to get margins to 18% to 19%. Is that still the right longer-term outlook?

[Jim Harrison:]

Absolutely. Once again, as we look to grow the manufactured component of our share of shelf to 50%, that coupled with the really, the really strong and very successful sourcing efforts we have outside of China in total markets, as well as moving away from agents in some of the China businesses we do today, we think we can definitely get to that level.

[Mike Baker:]

And what kind of annual comp outlook would you need to get to that kind of level? I mean, will flat to down slightly get you there?

[Jim Harrison:]

Remember, it's much more than comp to get to that margin. Most of that margin accretion actually occurs at the manufacturing, the wholesale side of the business, and not at the retail side. In order to cover expense growth at retail, we need a 1% comp, right? So a 2% comp would certainly be accretive.

[Operator:]

Your next question comes from Rick Nelson, Stephens. Your line is now open.

[Rick Nelson:]

I'd like to ask you about the web business, what that accounted for in terms of sales in the quarter, and also for the October period? And if we can look at that year-over-year, if there's any meaningful changes?

[Dan Sullivan:]

Yes. So our web business remained healthy, both through the year, and in the third quarter, right around the range of double-digit, 10%, 11% year-to-date, September with similar results in the quarter. You heard me mention in the original comments, we had about an 8.6% comp for the quarter on our web business.

[Rick Nelson:]

And for the October period, was there a meaningful change there?

[Dan Sullivan:]

Well, for the October period on the web itself, as you heard us earlier, it was down slightly. But overall for the year, we remain in the double-digit growth.

[Rick Nelson:]

And also curious, if you hit your EPS and EBITDA targets, where you see the cash flow, and the deployment there, and you've targeted net debt EBITDA of 3 to 3.5 times in the past for 2017. And I'm wondering if that range is still doable?

[Jim Harrison:]

I believe the 3.5 was the goal for 2017. We will continue to make that a goal. We may be moving slightly north of that into the 3.6, 3.7 range with the shortfall from 2016. But I think it's still a little too early for us to really give you a finite number on that, Rick. But I would definitely say 3.5 to 3.7 for next year, which is in line with what we had said for 2017, I think is definitely doable.

[Operator:]

Your next question comes from Joseph Feldman from Telsey Group. Your line is now open.

[Joseph Feldman:]

Great, thanks. Good morning, guys. I wanted to go back to the comp for a minute on Halloween. I'm sorry if I missed it, but can you share with us the impact of having 65 fewer temp stores? I know it was part of the plan, but how much of a drag was that, if you excluded that, what would Halloween sales have looked like?

[Jim Harrison:]

Sure. The temps are not in our comp. Our comp is a brand comp, the temps are not included in comp. I'll ask Gregg to address what the impact of the fewer stores was, just in terms of an absolute number?

[Gregg Melnick:]

Just on the terms of an absolute number, it's somewhere in the vicinity of about $25 million.

[Joseph Feldman:]

Got it, thanks. And then, another question I wanted to ask about, so a lot of the others have been asked on the alternative market business that you're doing, going after the theaters and theme parks, and sporting venues, can you just share a little more color there like, I know it's still early stage, but have you kind of given thought to what that model looks like, staffing of that, what the sales force, or presumably it's like an outbound sales force? I would think the potential is fairly large, but maybe you could help size that a little for us?

[Gregg Melnick:]

Sure. I can give you a size on it, is really extraordinarily difficult, because there's several components. There's an existing base of business, which is to some degree promotional products. So if you go to Madison Square Garden, for instance, on many of the promotional items, we're actually enjoying that business today on giveaways. You take the Nicks and the Rangers, that's two teams out of, and combine both leagues, over 60 teams. And you add to that, the baseball leagues, the football leagues, then go into the minor leagues, so the opportunity there is extraordinarily large, as a promotional products business, leveraging up our capabilities. Going into the area of theme parks and movie theatres, for instance, I'll just focus on one element, which is our metallic balloon business, right? As everyone knows, we have a 60% worldwide metallic balloon business, and that business, for the most part has been sold through distributor over the years, with the primary channels being grocery, floral, and then party and drug. And yet, if you look at movie theatres as a potential venue for metallic balloons, think about all the little girls two years ago, leaving movie theaters having seen Frozen, and the ability to take a little Frozen shaped balloon or character shaped balloon from the Frozen theme home with them, a huge opportunity, yet it didn't exist. So that's actually creating more demand in the market. So we look at these venues as, one, representing existing opportunities where we can gain share, grow the base business within that with product concepts and ideas and our design capabilities. And then, also be able to bringing to bear new venues, and new distribution points for products that haven't been thought of before, or exploited before. So it's tough to size it, but we do think it is a substantial opportunity, as you said.

[Joseph Feldman:]

Great. Thank you. And then just maybe one follow-up question I understand the leverage ratio targets doesn't change too much for next year. Can you share with us your thoughts on free cash flow, maybe for this year and next, and where that stands?

[Jim Harrison:]

Okay, so free cash flow for next year would be giving you guidance, so we're going to move past that question.

[Joseph Feldman:]

Okay.

[Jim Harrison:]

I'll let Dan [Multiple Speakers] free cash flow for this year.

[Dan Sullivan:]

Yes, our free cash flow for this year, I mean, the underlying principles behind our business remain strong. Obviously, the Halloween business was down, so that impacts our free cash flows. But we still remain committed to paying down debt in the fourth quarter, as we committed to do. And as you heard Jim say, continue to invest both in our business -- Jim mentioned in the comments, $40 million was spent behind our stores. We'll continue to invest capital in the fourth quarter. So our underlying capital -- or our underlying free cash flow for 2016 will remain healthy

[Joseph Feldman:]

Great. Thanks guys, and good luck with this quarter.

[Operator:]

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

[Denise Chai:]

Thanks. What drove the decision to be less promotional, especially with traffic being soft? And do you see that continuing into the fourth quarter?

[Gregg Melnick:]

I think that you have to look at the relative ability for us to drive traffic from a promotional standpoint. And it's very hard, as we've said in the past to actually get somebody, to motivate somebody to throw an additional party, right? You can possibly put some other general merchandise on sale, and force people to come in to buy commodity goods in other retailers. But from our perspective, it's difficult to have somebody celebrate a holiday or celebrate a party that they weren't otherwise going to do. So I think that, you take that into consideration, and we stay true to the promotional strategies that we've done before.

[Denise Chai:]

Okay. Understood. And go ahead, please.

[Jim Harrison:]

I was just going to say, Denise, I think, if you look once again, if you look at the nature of Halloween, our juvenile business, which is not party-related, was essentially flat year-over-year, even with the shift from the weekend to the Monday. And as Gregg said, the promotional part of the business, I mean, or the party part of the business is not going to respond to promotions necessarily.

[Denise Chai:]

All right. Okay. Got it. And then, can you just comment on the size of that everyday business, and also profitability compared to Halloween, if you could do that on a full-year basis, please?

[Gregg Melnick:]

I think, the everyday part of our business has always been in the high 70s as a percent of our business, and the margins are relatively consistent with our annual margins. So I think that on -- obviously is a smaller percentage during the month of October, but high 70s is a good percent for the full year.

[Operator:]

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

[Debbie Belevan:]

Thanks everyone for joining us today. And just a reminder that we will have a replay of this call on our website later today. Thanks, everybody. Have a great day.

[Operator:]

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