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spk03: for retail and wholesale sales growth. Retail net sales increased 8.9% versus last year and 8.0% versus the third quarter of 2019 due to our strong brand comp along with better performance within an increased number of Halloween 30 stores. Brand comparable sales increased approximately 7.5% year over year, driven primarily by strong performance in our core categories versus 2019 Brand comparable sales increased 14.2%, including a 27.9% increase in our core categories. In terms of e-commerce, the percent of our sales that originated online were approximately 14.2% of our retail sales mix, an increase of 140 basis points versus 2019. Wholesale revenue for the third quarter decreased 33.6% versus 2020, primarily due to the divestiture of our international operations in the first quarter of 2021. Excluding the impact of the divestiture, wholesale revenues increased 7.8% versus the prior year period, but 14.5% versus 2019. We were pleased by the improving sales trends we delivered with our franchise and independent customers in the third quarter. Wholesale remains an important and strategic part of our business. We're focused on driving continued growth and we're encouraged by the third quarter performance. Adjusted gross margin rate for the third quarter. Expanded approximately 175 basis points from the prior year period. driven primarily by the divestiture of our lower-margin international operations and leverage on retail occupancy costs. Adjusted operating expenses were approximately $158 million, or 31% of net sales, a 230 basis point rate increase versus the prior year, primarily driven by the international operations divestiture, as well as increased investments in store labor. As a result, Adjusted income from operations was $28 million compared to $32 million last year and adjusted loss from operations of $2 million in the third quarter of 2019. Adjusted EBITDA was $43 million in the third quarter compared to $49 million last year and $17 million in the third quarter of 2019. As a reminder, our divested international business generated adjusted EBITDA of approximately $8 million in the third quarter of 2020 and $6 million in the third quarter of 2019. And third quarter adjusted earnings per share was $0.02 compared to $0.10 in the prior year period and adjusted loss per share of $0.28 in the third quarter of 2019. Now turning to our balance sheet and cash flow. Inventory was down approximately 17% year over year, driven primarily by two strategic items that we've discussed previously. namely the disposal of seasonal inventory in the fourth quarter of 2020 in order to drive higher in-season sell-through and less annual inventory carryover, as well as the international inventory that was sold as part of the international business divestiture. Together, these items accounted for approximately $154 million of reduced inventory, resulting in a year-over-year increase of approximately 7%, excluding these two items. We continue to prudently manage our working capital, and we expect ongoing opportunities for improved working capital levels. Year-to-date, through the third quarter, net cash used in operating activities increased to $74 million from $57 million in the prior year period, due to an increase in seasonal inventory and related costs, as well as the repayment of deferred rents from 2020. We were pleased with our ending liquidity position, which increased by approximately $90 million during the quarter to $356 million, comprised of $61 million in cash and $295 million of revolver availability. We ended the third quarter with a principal balance of debt net of cash of approximately $1.37 billion, which was approximately $41 million higher than the prior year period. Now, let me turn my comments to our outlook. We remain optimistic about the trends throughout our business and the prospects for continued economic growth. We also recognize that the macro environment is not without uncertainty given the current inflation and COVID-19 risks. These factors are reflected in our sales and earnings outlook for the fourth quarter, which was included in today's press release. In the fourth quarter, on the heels of a strong October, we expect our consolidated sales to be approximately $685 to $700 million. With a brand comp sales percentage increase in the high teens versus the comparable 13-week period in 2020, and a low teens percentage increase versus 2019. Lastly, we expect Q4 adjusted EBITDA to be in the range of $100 to $110 million, up from $77.3 million in 2020. There are a few items to highlight related to our expectations in the fourth quarter. First, for modeling purposes, it's important to note that the divested international business generated approximately $59 million in revenue in the fourth quarter of 2020 and $65 million in 2019, with an immaterial amount of EBITDA in both years. Second, like many in the industry, we are experiencing heightened inflationary impacts on our business including freight and labor cost headwinds. With the continued challenges facing all global supply chains, our logistics team has taken prudent action to ensure high in-stock rates for the holiday season. We feel confident that we are well positioned to fully support our holiday strategies, but we also expect to incur higher freight costs over the near term. We are taking additional pricing actions as well as other cost mitigation actions to limit the overall impact on our profitability. and we expect our pricing actions to offset the majority of the fourth quarter headwinds. While the nature of inflation is still quite dynamic, based on our current plans, our guidance includes the estimated fourth quarter impact of overall inflation, net of our mitigation efforts, in the range of $5 to $10 million. Note that in the third quarter, total net inflation headwinds were approximately $9 million, which was in line with our expectations of $7 to $12 million. In terms of CapEx, we're on track to finish the year with CapEx spend in line with our prior expectation of $80 to $90 million, which includes investments in our next-generation stores as well as capacity investment in support of Anagram's growth, as previously discussed. So in summary, we're very pleased with our third quarter and October results, as well as the outlook for the balance of the year, which highlights the improving trajectory of our business. Our fourth quarter guidance reflects a strengthening top line, which will provide improved occupancy leverage as we also anniversary the sale of our international business. These benefits should be partially offset by shrinking net input cost headwinds as our pricing actions begin to have a more material mitigation impact. These net input cost headwinds are down from the third quarter and expected to improve further as we go into 2022. Overall, we are bullish in our positioning and our ability to capitalize on the many opportunities we see for the business in the final quarter of the year and beyond. And with that, I'll turn the call over to the operator to start the Q&A session.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Rick Nelson from Stevens. Please go ahead.
spk00: I'd like to follow up on the October strength that you pointed to. Can you break that down between Halloween sales and the non-Halloween categories?
spk01: Thanks, Rick. So, Halloween results are embedded in the October performance and we were extremely pleased with our Halloween results and it was positive on a cost basis to both 2020 and 2019. So, you know, we're focused on maximizing this season, really leveraging all four of our channels, which is a significant competitive advantage for us between Party City stores, PartyCity.com, Halloween City pop-up stores, and our consumer products wholesale business. So, you know, most importantly is Our overall strategy is really focused on increasing relevancy for all things celebratory, and our core category business is key to that. And as we've said, you know, we're occasion obsessed and focused being relevant to consumers across our core business, and we're seeing a payback on that strategy and, you know, continued strong performance of our core business. And that business is less volatile than seasonal and higher margin, which is positive. So very pleased with consistent strength and core and thrilled with our improved Halloween execution, go-to-market, and despite backdrop that everybody's facing and having left some business even on the table. So Halloween is now a low double digit of our annual performance versus over 20% just a few years ago. And, you know, it's a function really of the success we're seeing in our core business where we had and continue to have the most significant opportunity to differentiate.
spk00: Thanks for that. Are you willing to break out the core category comps? for 3Q and what you're seeing in October.
spk03: This is Todd. So core category performance has been even improving as we've gone into the month of October. It's up over 100 basis points as we went into the month and had been running up almost 28% going through Q3. So A very strong performance across the core, just like we've been seeing across all the quarters this year.
spk00: Great. Thanks for that. Also, at the next-gen stores, you provided some good financials around that. I'm curious about the early learnings, what categories are performing the best, and And you're seeing a top lift above the control stores. If you could speak also to the profitability of those stores, that would be helpful.
spk01: Let me quickly address the categories. I'll let Todd talk to the profitability component. You know, like you said, we're seeing really strong mid-single-digit cost increases versus the control stores. You know, it's been – maintaining in that range to even improving. These stores continue to get better the longer they're open and the more the consumer recognizes them. Outsized balloon performance continues, which as we've talked about in the past was deliberate as we intended to continue to differentiate the experience with the overall balloon experience and the sales we can generate with that category. We continue to be very pleased with each of the core categories. Birthday continues to perform extremely well, and the resets that I talked about in our prepared remarks, particularly in candy and in favors, have both been well-received in the legacy store, but they're outstanding and really core components of the NextGen experience in addition to balloons.
spk03: And from a performance perspective, so as Brad said, getting great customer reaction to these stores and really seeing it come through the financials. So for remodels, we're seeing our sales growth compared to control stores growing in the mid-single digits. So there's good lift on the top line. And then on the bottom line, we're still targeting that payback period of less than 24 months on average for those stores. So with our Our investment in CapEx of about $150,000 after tenant improvement allowances and the ability to lower our inventory by $100,000, we're able to pay back that investment pretty quickly and continuing to see that good, solid trajectory on the top line.
spk01: Obviously, with those results is why we're bullish in proceeding with executing over 100 of them next year.
spk00: Sounds good. Finally, if I could ask you about the manufacturing share of shelf. It looked like that was down a bit sequentially and year over year, if you could speak to those drivers.
spk03: Yeah, manufacturing share of shelf, you get a little bit of timing in there and seasonal mix. Coming into Q3, included in that manufacturing share of shelf are going to be things like balloons and paper plates and so forth. Going into Q3, we get a lot bigger lift in categories like candy and costumes. And so just naturally from a mixed perspective, the share of shelf comes down. We've also had a good run in a lot of our core manufactured goods in Party City. So I would say nothing this longer term, just more of the timing of the year and timing of shipments.
spk00: Very good. Thanks a lot, and good luck.
spk02: Our next question comes from Joe Feldman from Tulsi Advisory Group. Please go ahead.
spk03: Yeah. Hey, guys. Thanks for taking the question.
spk02: Wanted to follow up on inflation that you talked about.
spk03: And it sounded like, if I heard right, that the headwind will be a little less in the fourth quarter than the third quarter. And I guess I was wondering if you could talk to that a little bit. Is that more a function of the pricing actions that you're planning to take? Because you're just seeing a little less pressure out there relative to where we were in the third quarter? It really is. Just like we talked about in third quarter, we were just getting going on our pricing actions. And as we move into Q4, those pricing actions have a little bit more time to be in our stores. We have more time to do the things that we're doing to test and make sure we're getting the right improvements and the right increases at the right points. And also, from a wholesale perspective, as you put in a price increase, that's for new purchase orders. So it just takes time for those price increases to turn into actual shipments. So what we're seeing now is a little bit more traction on the amount of time any price increase has been out there, and that's providing mitigation over the majority of our input costs. And that's what you're recognizing when you're seeing – that the net impact is lower in Q4. It should be even lower as we go into 2022 and we get more time for some of those pricing actions to take effect. The underlying input cost trends have not been going down. It still is very definitely inflationary headwinds. I think the key for us is we've been able to show we do have the pricing power to be able to offset those increases and put ourselves in a position where any input cost headwinds, it can be mitigated through price. That's helpful. Thanks. And then just to go a little deeper on those pricing actions, are you – can you share – I know you're selective where you do it, and I'm curious just, you know, how much those increases are. Like, on average, are you taking prices up 3%, 4%, 5%? Or is there a way to look at it that way? And also, you know, is it starting to hit all categories, or is it still selective?
spk01: Yeah, I would just, you know, remind us that we're – we're extremely price aware and we have data not just at the category level but at the SKU level that allows us to make really smart decisions for the business and customer providing us that pricing power. You know, we're monitoring price constantly. It's fluid and ongoing, an ongoing path to, you know, mitigating any of the input costs. And, you know, we've talked a lot about our pricing methodology over time, and we're constantly monitoring competition and have detailed elasticity data and basket data that we leverage to make those pricing decisions. Really, whether we're reducing prices or increasing prices, we do that, you know, based on that algorithm of inputs. And so we're constantly testing prices. to understand the impact of any decisions we make before we execute anything. So we're heavily invested in understanding where the consumer is receptive to price adjustments, and how they'll impact our performance. Obviously, we've had success with price increases already as reflected in our strong Q3 results. We have more tests underway, which will be a lever as we continue to thoughtfully and strategically deploy price increases to help mitigate any cost headwinds as we move into next year. I would not put a percent on it necessarily, but more how we're reacting with the methodology and we realize that we need to offset a significant amount of the input costs with price. We're happy with the customer's reaction to this point. Obviously, as we look at different categories, each category has different elasticity, you know, based on competition and based on, you know, supply and demand in a lot of ways. And so it's fluid and, you know, it's going to continue to be fluid.
spk03: Got it. Thanks for that description. That's helpful. And then just maybe to shift gears to Halloween for a minute, I was just curious if you could, share what you saw from a competitive standpoint this halloween were there any surprises any newness was it generally a strong season for everyone or do you think you maybe took some share during the season
spk01: Well, you know, I'd say that with our increase in our Halloween city presence versus last year in strong party city performance, you know, we had a great Halloween. It's difficult to know exactly, you know, what the market did given, you know, this particular event has pretty spotty data. But we're very pleased with our overall Halloween performance across the all four channels. We believe our multi-channel approach is a huge advantage for us. Clearly, you saw a mix of those who seemed to struggle with product throughout the season, and you saw those who were in better shape from the beginning, and we certainly saw a lot of late deliveries everywhere. But as I mentioned in our prepared remarks, You know, we were very pleased with our inventory prep, and while some product came later than original plan, it ended up flowing really nicely to meet the demand for the season.
spk03: Okay. No, that's great. Thanks, and good luck with the rest of the quarter, guys. Thank you.
spk02: The next question comes from Jenna Gianelli from Goldman Sachs. Please go ahead.
spk04: Hi there. Thanks for taking my question. I just wanted to talk about inventories a little bit overall, the health and just the mix down quite a bit versus last year. I was curious how much of this was sort of delivered as part of your efforts around inventory reduction and how much is supply chain related? And then as we think about the 4Q sales guide, is there any constraints embedded in that number as we think about modeling into next year and potential upside? Thanks so much.
spk03: Sure thing. And on inventory, looking at the reported numbers, there's a couple of things that you probably just need to normalize for. Last year, you'll recall in Q4, we took a write-off for seasonal inventory that we're no longer going to carry over from year to year. That plus the fact that international is no longer a part of our inventory is Those two things together are about $150 million worth of inventory that's just out of the system and permanently out of the system at this point, so giving us a better invested capital going forward. Once we normalized those, our inventory actually was up year over year by about 7%, so up in line with our comp sales. And I think going back to Brad's point, And in looking at a lot of other folks as we went through the Halloween season, we felt like we had really done the right things to be in stock in Halloween, to have the right product. And while everyone wishes they would have more, I think we actually felt like we were in good position and we're in good position going forward into the holiday period.
spk04: I think that's helpful context. And then just on wholesale, it looks like we're starting to see the pace of that recovery, you know, pick up. Is that fair? And just kind of talk a little bit about what's driving that. Are you seeing an increased volume with your existing customers who once come in, old ones return? Just the pace of the recovery on the wholesale side of the business. Thanks.
spk03: Sure. So, Wholesale, actually, you're right. It's seen good traction. We ended the quarter with wholesale sales up by almost 8% to last year and continuing to see really an increase in trajectory across the wholesale business. Anagram continues to do well, really, with record sales and record profits at Anagram. That's been a great story for us. But then broadly across the overall wholesale business, all the balls are moving in the right direction.
spk01: Yeah, I would just add that, you know, we're also taking advantage of this point in time to really make investments in all-star capabilities in wholesale business to support future leadership or future growth, excuse me, through, you know, adding and supporting sort of upgrading our leadership talent, our own capabilities, and our capacity in our manufacturing facilities. So we feel good about the anticipated rebound and pleased with the wholesale business trajectory.
spk04: Great. Thanks. And then just one final one, just a clarification question to make sure I heard accurately. Was that a 60% increase in conversion or digital conversion that I heard relative to 2019? Yes, it was. Oh, okay. That's a big number. I mean, so maybe some of the key initiatives or things that you've changed to drive that number, and could there be even more on that front? And that's it from me. Thank you.
spk01: Yeah, it is a big increase, and, you know, we've talked – a little bit over the balance of last year into this year on some of the digital changes that we've made. We continue to really evolve and improve our entire digital experience with some new exciting features and initiatives, which customers are responding to that, and we saw that in our sales results and obviously being impacted by that strong conversion trend. We also launched enhanced solution selling capabilities We really allow customers to shop by a theme or family of products, which brings products to life on the web in a highly curated manner that matches stores' visual merchandising. And for Halloween, we really focused on engagement with consumers in some fun new ways, and that included an introduction of an interactive social chat bot, the use of augmented reality, allowing customers to virtually try on masks and then share their looks in social media and shoppable videos of some of our top licensed costumes. So we continue to invest in our digital experience, and we'll continue to roll out improvements that really enhance the inspirational content, the engagement, and always our pursuit to make it easy for the customer to achieve what they want.
spk04: Thanks so much. Good luck.
spk02: Thank you. Our next question comes from Carla Casella from J.P. Morgan. Please go ahead.
spk05: Hi, great. Thank you for taking my question. Just on the Anagram side of the business, did you disclose Anagram EBITDA performance? It sounds like balloons are doing very well. And then is there any thought about refinancing out that expensive Anagram debt?
spk03: So Anagram's performance this year has been actually phenomenal. So I already, just nine months into the year, have record EBITDA performance for Anagram, which is terrific. In terms of looking at our debt, really what we've tried to do with the term loan refinance that we did in the first quarter was is to set ourselves up where we have a longer runway to go for the next major maturity that comes up in the debt stack. So at this point, we're very focused on executing against our strategies and, you know, obviously continue to look to pay down debt, but those are the major priorities for us right now.
spk05: Okay, great. And then just following up on Jenna's wholesale question, have you disclosed the number of wholesale doors you service today versus where that would have been pre-pandemic?
spk03: We have not updated that number. It's still thousands upon thousands of doors. So we have a very broad reach and continue to.
spk05: Okay, great. And then just some granularity in the Halloween, the same store sales or the strength and the growth that you saw. How much of that was – is there any way you can give us a sense for whether your costume comparisons were up year over year or if it was another product or if it was driven by just the pop-ups specifically?
spk01: Yeah, the pop-ups are not in our – in our top number, and so those sit outside of that number. I would say just a little bit of color on Halloween. Year over year, we continue to see increased demand for decor and decorating elements. A lot of our decor product was actually amongst the latest to deliver for us and the market overall. And that business usually develops earlier in the season. So while we're pleased with Decor, we're bullish on the future. I would say that Halloween is an increasingly adult-driven business from our vantage point, and that really plays to our strength to focus to be more trend-right.
spk05: Okay, great. And there's one last one. How is the helium supply in the quarter? Did you see any of either your stores or your customers' stores troubled by any helium supply chain issues?
spk01: No, we're not seeing any helium supply issues currently or on the horizon. You know, every now and then you may have an isolated incident, you know, based on, you know, a late delivery or some other isolated issue. But we have no, we really don't see any helium supply issues at this point.
spk05: And is the price of helium today, is that comparable to 20? I'm assuming it's below 19 type levels, but is it comparable to 20 or pre-pandemic?
spk03: Yeah, the beauty of what the company did back in 19 when there were shortages is to enter into long-term supply agreements. So with those supply agreements, that's kept the actual cost of helium pretty consistent quarter to quarter to quarter and continues to be the case.
spk05: Great. Thank you.
spk02: Thank you. Our next question comes from Karu Martinson from Jefferies. Please go ahead.
spk03: Good morning. Just on the inventory front, good position for holiday. Where do you see the supply chain starting to normalize? As we come up for the seasonally slow first quarter, do you see yourself catching up at that point? And how would we think about pricing going into 2022?
spk01: Yeah, so, you know, supply chain, regarding supply chain disruptions, I think we all know that it's a pretty broadly discussed issue in the industry. And, you know, what we see is a bottleneck really created by the pandemic. So, you know, it will subside eventually. The big swings in supply and demand kind of need to smooth themselves out in each of the touch points in the logistics process. It's hard to say exactly how long it'll last. However, you know, we're making supply chain investments to help partially mitigate the impact, and the teams are doing an excellent job of navigating the difficult supply chain environment. You know, as Todd mentioned, as we sit here today, we anticipate supply chain headwinds to persist into 2022. And, you know, we continue to use price to mitigate those headwinds. We started that price work in Q3, which had a positive impact on netting those mitigation costs down. We'll see additional impact through price in Q4. And that will increase as we move into 2022.
spk03: Okay. And then when you look at the ratings for the bonds here, triple C on both sides, given the improvement and given the key Halloween season now behind us, are you in discussions with the rating agencies in terms of that upgrade? Well, I'd say as a general statement, we're consistently in conversations with rating agencies just as a matter of course to make sure that – They're staying updated on our business and keeping lines of communication open, so we obviously clearly are always talking to them about what our profile looks like as well as where we're headed, and that should continue to be the case. Okay. And just housekeeping-wise, the extra week last year, that $12 million EBITDA benefit, that flows into the first quarter of 2022 then this year or next year? That would have – it was in Q4. We had an extra week effectively in the fourth quarter because of the retail calendar. So you can look at it as just being purely incremental to Q4 last year and and then it normalizes out. Okay. Thank you very much, guys. Appreciate it.
spk02: All right. Thank you. Our next question comes from William Reuter from Bank of America. Please go ahead. Good morning.
spk03: You talked about increasing manufacturing domestically or potentially shifting. You know, last time I knew you had about $250 million of product that came from Asia. Is the number similar to that as of today? And I guess what types of shifts are you discussing here?
spk01: So, yeah, and I don't have the exact number sitting here with me, but we don't see any significant changes in our age of production. We're constantly looking at at what sourcing options that we have, constantly looking at opportunities to upgrade or establish additional long-term partnerships, particularly as we're focusing on quality and innovation within the supply chain. The references to increased capacity in our U.S. manufacturing plants is really around how do we continue to increase capacity to meet demand in our business because the categories that we do manufacture domestically are amongst our best, including anagram. And so it's important for us to ensure that we have the right level of capabilities to and the right resources to continue to expand capacity in those plans.
spk02: Okay.
spk03: And then in two ways, you discussed kind of pricing. You discussed, you know, increasing prices to offset inflation. And then you also talked about increasing the quality of your products. Can you talk about how units were in that context and what types of changes you're making in those two pricing, I guess, factors?
spk01: Yeah, I would say that if there's innovation or quality that we're adding to the product that drives costs any higher, then we know that the marketplace will take on the higher average unit retail for that quality and for that innovation. We've seen that in our results and You know, the consumer has a strong appetite for newness, and when we introduce within our curated assortment additional upgraded quality or new innovation, the consumer really responds, and often those demand a higher price. And the good news is we can deliver those at the same or higher gross margins based on the elasticity associated with the quality and the innovation. There are places throughout our assortment where we do have cost increases on product related to freight, materials, and labor. And so, you know, we're looking at price as another lever to mitigate a significant portion of those items.
spk02: Okay. And then just lastly for me, on the Halloween pop-ups,
spk03: you did more than last year, you're still way below what you did in, you know, years past, it sounds like they were successful, I guess, I am I right in hearing that they were EBITDA positive.
spk02: And I certainly know that there's a lot of variables there in terms of how many stores you open next year.
spk03: But in the event that the real estate opportunities were similar to this year, would you expect to be expanding the number? Thanks.
spk01: Yeah, and we're not prepared with the number at this point, but I will tell you we are very pleased with our Halloween City performance. Our sales in the average store at Halloween City were at record levels. You know, our learnings from last year when we pulled back and chose to really lean into edgier, scarier, more adult-oriented products than we do in our Parting City stores, along with updated store merchandising techniques, all really resonated with the customer. And so given the success in the business that was established, you know, we think was potentially even left on the table. With the increase in demand and the implications of shifting to the adult business and weekend parties that will still exist with a Monday Halloween, we feel very good about 22. Thanks, Tom.
spk00: That's all for me.
spk02: There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Brad Weston for any closing remarks.
spk01: Thank you for all of your questions. In closing, I want to reiterate my gratitude to the entire PCHI team for their commitment to our vision and strategy and the extraordinary execution and superior results during a volatile operating environment. In particular, I'm extremely proud of our supply chain leadership and the entire supply chain team throughout the network for their execution in creating availability of Halloween products for consumers that exceeded the performance of the broader market. And coming out of the dynamic Halloween season, we're also now well-positioned for Christmas and New Year's Eve as consumers continue to create joyful celebrations with friends and family. Have an excellent day.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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