Party City Holdco Inc.

Q1 2021 Earnings Conference Call

5/10/2021

spk04: remainder of fiscal 2021. So in summary, we are extremely pleased with our financial and operational performance in the first quarter, and we believe the overall strength of our business and progress against our initiatives positions us well for the remainder of the year. And with that, I'll turn the call over to the operator to start the Q&A session.
spk05: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask you to please pick up the handset before pressing the keys to ensure the best sound quality. Once again, that is star and then 1 to ask a question. We'll pause momentarily to assemble the roster. And our first question today comes from Seth Sigmund from Credit Suisse. Please go ahead with your question.
spk02: Hey, everybody. Good morning. Great quarter and nice progress. I'm curious, you know, obviously Party City's position to benefit from the reopening across the country. I'm more curious about market share performance, specifically in March and April. Do you feel like the improved execution and the many strategic initiatives that's helping you take more than your fair share, and how are you thinking about that? Thank you.
spk04: Thanks, Seth. We certainly saw an uptick in our business, as we mentioned, in March and April versus January and February. What we try to keep a close eye on is the difference between our core business and our seasonal business. Our core businesses remain strong even through Q3 and Q4 of last year and into Q1 of this year. And, you know, that has been a tremendous focus recently. for us, and we feel like we're doing really well from a market share perspective. Our seasonal businesses have continued to beat our expectations. You know, they've gradually improved through Q3, Q4, and into early spring. So really anticipate that as things open up, people start returning to normal celebrations that we'll continue to see that trend.
spk02: Okay. All right. That's great. And then my follow-up question is around the flow-through of the business. For Q2, you are guiding to higher sales versus 2019, which is encouraging, but slightly lower adjusted EBITDA margin. I think, Todd, you mentioned international and maybe transportation costs as part of that. Any other drags that we should be thinking about here versus 2019? And how do those ease, I guess, as we move through 2021?
spk04: You captured the big ones.
spk02: We had mentioned last quarter that there is also just a little bit of helium cost pressure when you look back versus the last couple of years. That normalizes as we get into Q3.
spk04: And then omni channel costs includes a little bit of delivery costs that is embedded in the model. And those normalize as well as we get into, well, as more volume picks up into those categories. So those are really the biggest things that we look at. Truthfully, we've set up that cost structure so that we're in a position with our occupancy where we can gain leverage really quickly, where our costs are have been reset, say, at the wholesale level and the manufacturing level. So the flow through on the incremental sales should start to be very strong, particularly as we get into the second half. OK, that's great. All right, well, thank you very much.
spk05: Thank you. Our next question comes from Rick Nelson from Stevens. Please go ahead with your question.
spk01: Good morning. Brad, any insight into how you're planning for fourth quarter Halloween 2021? You mentioned some supply chain challenges. How significant those are to date and your expectations as to how you mitigate those challenges?
spk04: Yeah, thanks, Rick. There's still a lot of unknowns for the back half, you know, hence not providing guidance. With regards to Halloween, you know, we learned a lot last year. We made additional refinements to our go-to-market strategy, crossed our assortments, our in-store merchandising, our digital experience and marketing based on those learnings that are really designed to improve our results. So For everything in the back half, including Halloween, we've positioned our buys to prepare for a range of results. So we're confident that we've planned and positioned our inventory appropriately. And if consumer behavior continues to show the sort of rebound of celebrations and social gatherings, then were positioned really well. With regards to your supply chain question, this is obviously a broadly discussed issue in the industry. It's hard to say exactly how long it's going to last. However, one thing I would want everybody to note is that we were making supply chain investments to really help mitigate any circumstances that were coming. We were also working really hard on driving more efficiency into our supply chain before we entered this more difficult environment. And so, you know, as we drive our vertical model. So we are already focused on opportunities to really take time and cost out of the system, all of which are really mitigating any challenges. And thus far, we've only seen minor disruptions. You know, we feel good about the positionings. uh relative to delivery on on halloween is you know that product um leaves ports gets on the uh gets on the water and and has scheduled arrivals so uh we're we're feeling positive about that great thanks for that color also would like to ask you about the next gen uh stores how those
spk01: are performing, you know, from a comp standpoint, the economics compared to the rest of the chain?
spk04: Yeah, I'll speak to the top line and talk a little bit about what we're seeing in CapEx. The next-gen stores are outpacing comp growth in the balance of the chain, and balloon comp growth continues to be about double of the balance of the chain. with quite a bit higher balloon sales penetrations. You know, when you think about the fact that we didn't really open the first one until last summer and the small number by the time we got into the fall season, you know, we're pleased with what we're seeing in terms of performance, you know, the returns we're seeing and the customer reaction. which is really supporting our decision to expand. We're still learning a great deal and constantly modifying the prototype. And if you digest the fact that we're, you know, over the last year we've been creating a new prototype in the midst of a pandemic and overhauling our assortment and inventory levels, you can appreciate the complexity. And I think that just lands two thoughts before Todd comments, and that's if, You know, if we weren't excited by the results, we certainly wouldn't be moving forward in the fashion that we are. But, you know, I'd also say that we aren't at the point where we should model those results. Yeah, I think that's exactly right. And, you know, at the same time, we are seeing those results that are encouraging. The stores are outperforming chain averages, and customer feedback has been very strong. From a landlord perspective, there are very few, if any, that have not participated in the cost of the remodels themselves. So that helps with the cost structure dramatically. A remodel already is significantly less expensive than a new store. But then with the landlord participation, it really does minimize that overall cost and The cost for next-gen stores from a capital perspective are included in our overall capital budget of $70 to $80 million. So we're not going to break them out specifically at this point and give more detailed economics. They're embedded in what is an overall normal run rate for us, and within that, I think Brad mentioned in his script, we're getting a payback of less than three years on these remodels. So the performance is such that they are paying back capital quite quickly. And I think if you look at how, you know, you look at the numbers of what we're implementing in Q1 and the Q2 numbers, as I mentioned, you know, we'll be continuing to expand in the back end.
spk01: That's great. Thanks for all the color and good luck as we push forward. Thank you.
spk05: Our next question comes from Joe Feldman from Chelsea Advisory. Please go ahead with your question.
spk03: Hey, guys. First on the top line, were there any other regional trends that you've noticed or any differences across the regions, maybe where things are a little more open than areas where they're less?
spk04: So it's for some side. We see potential growth opportunities really across all regions. On a two-year basis, the Northeast has trailed the pace of recovery versus the rest of the country. I'd say our geographic results are choppy on multiple levels. When you look at pandemic and helium history impacts, you know, etc. So, but we're not seeing anything in the current business that would lead to, you know, any outsized risk or opportunities with any of our regional performance.
spk03: Got it. That's good. And then on inventory, you know, again, I know you've talked about supply chain hiccups that, well, more than hiccups that are happening to the industry right now. But you mentioned, like, there's a few categories where it feels like you're a little lighter. And I was just curious if there's anything you could share detail-wise or maybe from a competitive standpoint you don't want to, but where you might be light and if you're actually missing some sales in those categories.
spk04: So I wouldn't say that we see anything where we're missing any sales. As you can imagine, You know, demand has changed a little bit by category versus where we were with, you know, pre-pandemic and even during the pandemic. So, you know, those aren't significant, but demand has a little bit of an impact on our supply chain flow. You know, and then there's some supply constraints in some areas. We're managing all of those. We are constantly looking at multiple sources of supply to ensure that we're covering our needs. So we're focused on demand, where it's been, where it is today, and where we see demand by category in the near term and long term, and then making the supply adjustments that we need to.
spk03: Got it. Okay, thanks, and good luck with the second quarter, guys.
spk05: Our next question comes from Jenna Gianelli from Goldman Sachs. Please go ahead with your question.
spk06: Hi, good morning. Thanks for taking my question. So I'm curious a little bit on just the strong brand comp and the retail sales. Obviously, you're better than expectations and a very strong print. I'm curious if you could just break that down a little bit more for us. Are you seeing some of the trends that you saw last quarter in terms of, you know, smaller gatherings, so different mix? Has pricing been a tailwind or transactions and traffic just up? Any color on some of the KPIs underlying those strong sales trends would be great.
spk04: Yeah, I think the biggest thing, as I said before, to pay attention to or, you know, what really encourages us is our core everyday categories, that being entertaining and balloons and solid tableware and birthday products. Those continue to be, you know, the strength of our business. And to me that tells me that, you know, gatherings and events the milestone celebrations that we want to be there for the customer, their destination for one-stop shop and our ability to sell solutions for those occasions that we're meeting those needs. You know, the big, if there's a drain in any categories, you know, this has been true through the pandemic is if it's related to social gatherings and it's a seasonal business where people typically gather for, I mentioned several in the first quarter, like Super Bowl and Mardi Gras and St. Patrick's Day. As you can imagine, those have been a little bit more challenged. We have seasonal products, specific seasonal products for those celebrations, as well as some of our core assortment is tie-ins for those. And those have been the most challenging. But the good news is, as things open up, we're seeing continued improvement and we saw they beat our expectations through the first quarter. I think they were the biggest challenge in Q4. We're not seeing any price resistance. Obviously, we did a lot of work last year in getting our prices right for the consumer and being properly competitive, and the unit productivity that we're seeing in those and the production of margin dollars combined with our reduction in promotions is really driving a good margin as well.
spk06: Great. Thanks. That's helpful and encouraging. I just have one more just on the inflationary pressures. I know you called out, you know, transportation costs is something to watch into the rest of the year. But I'm curious if you've seen, you know, labor and wages, availability of labor. Has that been a headwind, starting to be a headwind, you know, as we think about the rest of 21. And that's it from me. Thank you.
spk04: Sure. So as we look out there at wages, there's clearly wage pressure. And what we're doing is going along and measuring, making sure that we're maintaining a competitive position. but also mitigating where possible. So anything that we have seen, we have included in our guidance and it's in there. I'd also say on the wage side, just historically, Though federal minimum wage gets a lot of press, the truth is local minimum wage laws have been increasing fairly radically over time, and we've been keeping pace with that and with local markets. So the difference in minimum wage press or store feed is probably not as significant as you would expect. At this point, from everything we're seeing, the current trends seem manageable. And related to the freight side of your question, Jen, I would say that we stated in Q1 and restated again now that we've accounted for those. We've seen those stay fairly in line with what we've discussed, and so I feel like those are under our control of them right now.
spk06: Thank you.
spk05: Our next question comes from Carla Costello from J.P. Morgan. Please go ahead with your question.
spk07: Hi. I'm wondering if you could talk to your pop-up strategy, how you're looking at doing them in 2021 versus how that would compare to 2020 or 2019. in terms of just number and size and any different scope of the stores?
spk04: Yeah, and just to clarify, by pop-up you mean Halloween City, Halloween pop-up stores?
spk02: Exactly.
spk04: Yep, exactly. Yeah, for strategic reasons, I'm not going to disclose what our current plans are. As you know, in 2020 we reduced our number significantly for two reasons. One was not knowing what the conditions for 2020 Halloween were going to be in taking a conservative approach to our capital outlay. And then most importantly, though, we really wanted to retrench and test a few pilots that would allow us to understand how we could compete better with competition in that arena. And as I mentioned in past conversations that we really did learn a lot coming out of our pop-up pilots last year. That encouraged us to do more this year, and so we'll see significant growth, but can't get into specific numbers right now. We think those learnings will facilitate a better performance.
spk07: Okay, great. And then just you talked about Canada. Can you just give us a little bit of the magnitude? How big is that business now as a percentage of your total wholesale? And I'm assuming you don't have – I can't remember if you kept any retail in Canada.
spk04: We didn't. So we had 65 stores that we ended up selling in Canada. That would have been right – at the very beginning of Q4 of 2019. And then since then, we've expanded into some shop and shops with Canadian Tire. I would say the bulk of the volume at this point still coming through those Canadian stores, just given the fact that, well, That economy has been shut down due to COVID concerns for a good chunk of the last several months and continues to be. So we haven't given out specific metrics necessarily on how big the sales are, but if you extrapolate those 65 stores, you're going to get a good baseline to work from.
spk07: I guess I'm just trying to think more longer term. Is Canadian businesses at 10% of wholesale, 20% longer term, or maybe pro forma what it would have been before COVID, if it was a wholesale business?
spk04: Oh, if it was a wholesale business. So the Canadian stores have a very similar structure with U.S., where about 80% of what they're selling was coming through wholesale, so 65 stores. So it would have been proportional with, again, with what you would have seen for the U.S. stores. And, yes, that Canadian relationship called for a significant increase in the amount of sales of wholesale into Canada just because of the Canadian tire penetration. So to think about it growing and becoming our biggest, Wholesale customer is certainly where it was at on the short to medium term, Matt, had we not run into these issues with COVID.
spk07: Okay, that's helpful. Thank you so much. You bet.
spk05: Our next question comes from Karu Martinson from Jefferies. Let's go ahead with your question. Good morning.
spk04: Good morning. Just circling back to the Halloween inventory, it's certainly positive. We're feeling good of what's on the water now. But when does that inventory kind of have to be in your warehouses so that it can reach the stores just from a timing perspective? Well, as you can imagine, Halloween really starts to get out on the floor. Early sets are in August. And then that set grows through August and September. And so product starts to really hit those stores over the course of June and July. Okay. And given the shipping cadence here, you don't have any concerns about that inventory getting incorrect? Correct. Well, as like everybody, we've had to manage, you know, those, you know, the timing. And, you know, with a different environment than we've seen over the last couple of years, it's certainly taken quite a bit of teamwork, but very proud of the team on the execution that we've seen thus far and feeling very positive about where we are right now. Okay. And when you look at the reopening trade, are you seeing your digital remaining as strong as it had been? And how are customers responding to the offering that you have? Yeah, we continue to see strength in our digital business, digitally enabled sales, whether that is shipping out of our D.C., Or, you know, what we've all seen is the activity around buy online, pick up in store, and buy online, pick up at curbside in our delivery business, you know, continuing to be something that the consumer sees as very favorable. And in this category, seeing favorability there as well might not be as big as some other categories from a penetration perspective because Our stores are often the hub of getting helium and getting balloons and the ability to come in and pick your balloon bouquet, fill it with helium, and take it home has and will be a driver to store traffic. But we're certainly seeing growth in penetration of our digital business and substantial growth. And just on helium, we're – fully stocked we have no supply issues correct that is correct and we have a good outlook on helium thank you very much guys appreciate it our next question comes from william reuter from bank of america please go ahead with your question good morning
spk03: I'm curious to hear if you have seen any sort of a boost in your retail sales around the timing of when stimulus checks are sent out. Do you see any sort of indicators there?
spk04: So, you know, that's a good question. We certainly have not had anything that would allow us to sort of tie. You know, we've seen some retailers talk about the fact that they've seen an uptick in business and stores where they've been able to track where stimulus checks have dropped, and that is not something that we have seen. Obviously, the consumer is spending. We're seeing that broadly across retail. We know that that is some combination of pent-up demands combination of stimulus checks, combination of, you know, increased savings accounts, and we certainly expect that we are a beneficiary of some combination of that. Our ability to parse out the amounts that you would sort of attribute to each of those would be extraordinarily difficult, but we, you As discretionary income, we believe we're the beneficiary of that, like every other category, and also believe that the consumer is continuing to celebrate. Obviously, during the pandemic, they found different ways to celebrate, which contributed to our overall good results, and we would anticipate that now, as things open up, that we'll be the beneficiary of that as well.
spk03: Okay. And then I know you weren't willing to share a whole lot on the pop up stores. But the last I'd heard in terms of your permanent stores, it was 15 new ones offset by five closures. I didn't hear any reference that program works. Did I miss it? Or is that still the plan?
spk04: No, that is still the plan. We had given guidance last time for 15 new stores and five closures, as well as capex of $70 to $80 million for the full year. And those still are valid estimates. Perfect. Thanks a lot. Thank you.
spk05: And our next question comes from Hale Holden from Barclays. Please go ahead with your question.
spk00: Good morning. Thanks for taking the call. I just had to follow up on Bill's question on helium. I understand your supply is good, but I was wondering if you could give us an update on what your sourcing costs were and kind of what you were thinking for the remainder of the year.
spk04: Sure. So for helium, we have put ourselves into a position where we have longer-term contracts for our supply that give us little bit of flexibility, a fair amount of flexibility actually on the upside if demand increases. We have the supply there. With those contracts, we're largely in a state where we know what our prices are going to be. There's some up and down, but as a general statement, we have good visibility into those costs depending on mix of which suppliers we use. So we saw an increase in our average costs as we went into the second half of 19 that was pretty significant in the 40% to 50% range. And since then, within a certain realm, we've generally stayed in that range and would expect to across the rest of this year.
spk00: Great. And then my last question was about Understanding that you don't want to talk about how many pop-up Halloween city stores you're doing, but generally I was hoping you could talk about how competitive you think Halloween will be this year. It feels like it could be fairly explosive growth, but a lot of people chasing it. And I was wondering how you thought the competition was going to react.
spk04: I would say that it's hard to know what the competition is going to do. The biggest challenge with 2020 was the lack of trick-or-treaters and Halloween school activities. We would anticipate this year being more kid and family-friendly if the pandemic allows more normalized activity, and we would anticipate being the beneficiaries of that.
spk00: Okay, great. Thank you very much.
spk05: And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.
spk04: Thank you, operator. Let me close by saying that, you know, each of our efforts over the past five quarters have been focused on increasing our relevancy with consumers as the destination for Celebration Solutions as we inspire joy and make it easy to create unforgettable memories. Our entire PCHI team, which continues to grow in talent and capability, is driving performance that increasingly exceeds expectations across our business. Our strategy is producing the desired outcomes, and I'm proud of the team's execution. We appreciate your interest in Party City and look forward to updating you on our progress next quarter. Thank you.
spk05: And, ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.
Disclaimer

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