Party City Holdco Inc.

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.

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.

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?