Party City Holdco Inc.

Thank you for your patience. The Party City Q2 2022 Earnings Conference call will begin shortly. During the presentation, you will have the opportunity to ask a question by pressing star loaded by one on your telephone keypad. Hello and welcome to PartyCity Q2 2022 Earnings Conference Call. My name is Lauren and I will be coordinating your call today. There will be an opportunity for questions at the end of the presentation. If you would like to ask a question, you may do so by pressing star multiplied by one on your telephone keypad. I would now like to hand you over to your host, Eric Warren, Vice President, Treasurer and Head of Investor Relations to begin. Eric, please go ahead.

Thank you, Operator. Good morning, everyone, and thanks for joining us. This morning, we released our second quarter 2022 financial results. You can find a copy of our press release on our website at investor.partycity.com. Now I'd like to introduce our executive team who are here on today's call. We have Brad Weston, our chief executive officer, and Todd Vogensen, our chief financial officer. We'll start the call with some prepared remarks by Brad and Todd before we open it up for Q&A. Please note that in today's discussion, management may make poor-looking statements regarding their beliefs and expectation about the company's future performance, future business prospects, or future events and plans. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Though we believe that the expectations reflected in these poor-looking statements are reasonable, we can give no assurance that such expectations will be realized. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events, or otherwise. 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'll refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. More information regarding our non-GAAP financial measures and reconciliations to the most directly comparable gap measures, please refer to the earnings release. And with that, I'll turn the call over to Brad Weston.

Thank you, Eric. Good morning, everyone, and thank you for joining us today. Before we begin our review of our second quarter results, it is important to recognize that we have been adeptly managing a broad range of challenges, including the pandemic. Over the past two-plus years, And we are confident in our transformation strategy focused on increasing our relevancy with consumers and strengthening our operating structure. In an unprecedented environment, our teams have been laser focused on our customer and the experience they have with our brands. We have been and will continue to be celebration occasion obsessed to ensure we are inspiring our customer to create joyful celebrations beyond what they imagined, and making it increasingly easy to create unforgettable memories that will last a lifetime. With that as context, in light of the macroeconomic environment we are all monitoring, further burdened by the continuing broad-based supply chain volatility, we have lowered our outlook for the year. We expect our sales performance will continue to exceed 2019 levels, reflecting the consumer's recognition of the progress we have made improving their experience. Overall, during Q2, we saw top-line results largely in line with expectations, generating total sales of $527 million, decreasing 1.5% year over year. This is on top of a very strong second quarter last year, resulting in double-digit sales growth over pre-pandemic levels. This was achieved despite the multitude of macro factors impacting consumer spending, including inflationary pressures, rising interest rates, geopolitical instability, as well as annualizing last year's stimulus payments. Our gross margin was below our expectations, driven by unique pressures in Q2 as we navigated the helium shortage I described last quarter, along with much higher than expected freight costs, important storage fees. While these cost headwinds are predominantly transitory, they negatively impacted gross margin in adjusted EBITDA by approximately $32 million in the quarter. Adjusted EBITDA for Q2 was $46 million versus $86 million last year. Our inventory at the end of Q2 was $677 million. We continue to strategically bring in inventory early given the continued broader supply chain challenges to ensure we are well positioned ahead of Halloween and as we rebuild in stocks which were too low last year. Importantly, this additional inventory is evergreen in nature, limiting any markdown risk. And outside of the logistics challenges associated with the larger receipt volume, we feel very good about the quality of our inventory. Before continuing, let me underscore the temporary nature of incremental costs impacting our margins. I'll begin with the largest challenge, the freight storage import fees. Coming into this year, we anticipated elevated freight costs, but actual conditions and costs have been more challenging than expected. In addition to unanticipated changes in demand, our focus on improving our in-stocks and wholesale customer service levels combined with ensuring we received our critical Halloween product, have caused our receipts to temporarily exceed our distribution center capacity. This creates incremental charges as containers await processing and unloading. We are pleased to have Halloween product here and available for customers earlier than last year, but there is an associated expense. Turning to helium costs. In light of the helium shortages in the market, meet our customers' needs during the critical graduation time period, we elected to make spot purchases. The outlook for helium supply has now improved as expected. In the U.S., the Bureau of Land Management plant is now up and running, and in Qatar, plants resumed operations in April after being taken offline for maintenance earlier in the year. Given this, the timing of spot purchases, and that balloon demand peaks dramatically in graduation season, followed by a drop-off the rest of the year, we believe the vast majority of the impact is behind us. As we have previously discussed, we have also significantly diversified our helium supplier base and entered into multiple well partnerships as well as long-term supply agreements that have meaningfully improved our ability to source helium. Moving to sales. In this environment of shifting consumer demand, we also see shifts in our channel and category sales. Retail sales decreased 4.6%, with brand comparable sales decreasing 5.6%, or an increase of 12.2% versus 2019. Our core categories are performing very well against pre-pandemic levels, while being more challenged versus last year's strong performance. Compared to 2019, our balloon business in particular is performing very well, up nearly 60%, due to the emphasis we have put on this category as a key differentiator in our strategy. A number of our seasonal businesses saw solid performance in Q2, and we were extremely pleased with Easter, Mother's Day, Father's Day, Pride, and graduation results. For the quarter, In aggregate, the seasonal businesses I just mentioned comped up approximately 30%, and our overall seasonal sales were up 1.3% versus prior year and 3% versus 2019. Our comparable sales in core categories declined 5.5% in the quarter versus 2021, but were up 21% versus 2019. Our focus on driving improvements in quality and innovation in our assortments, as well as thoughtful pricing as we seek to offset higher expenses, continues to strengthen performance. Graduation, which is an important season for us, performed very well, driven by new product innovation and higher priced items, meeting customer demand for products that make their celebration unique and special. While growth in our core categories remained up significantly compared to 2019 levels, we experienced some pullback versus 2021. Our balloon business was impacted by helium constraints in select markets. While our team was able to mitigate the shortage compared to previous years through a stronger supply network, markets where we experienced temporary outages saw a negative sales impact. Other key categories, like birthday, were impacted by an increase in travel and away-from-home celebrations compared to 2021. We continue to leverage our full omnichannel capabilities and the strength of each of our channels to provide customers flexibility and the convenience of multiple fulfillment options. Digitally enabled sales represented approximately 13% of our retail sales in the quarter as we continued to deliver an enhanced customer experience through new digital capabilities. Our new website launched in June and enhances our mission of moving from selling party products to providing the full party solution. We are excited to deliver a digital experience that shifts from our transactional experience of shopping SKU by SKU to an inspirational and empowering celebration building experience. We are already achieving a very strong 3.5 conversion rate which will only accelerate with continued optimization. The new balloon builder continues to build momentum. We experienced 150,000 total balloon builder visits for graduation season, which delivered almost 20% of seasonal digital balloon sales. Our conversion rates and AOV continue to improve as customers increasingly enjoy the experience. Our wholesale business had a strong quarter with sales growth of 13% driven by two factors. First, we experienced growth with existing customers as our product supply position improved. Our wholesale shipments to Canadian Tire continued to accelerate as we invest in our partnership with them. We expect this growth to continue through the back half of the year. Second, we were able to partially offset helium challenges by leveraging our expansive air-filled balloon portfolio, which we have been strategically expanding since 2018. Within our wholesale segment, our Anagram business again delivered growth on a standalone basis. Anagram did experience some softening due to the broader helium supply challenges. We expect continued wholesale sales growth in the second half of the year, driven by a continuation of growth from our traditional customer base increasing Canadian tire business, and larger Halloween orders from customers that experienced unprecedented sell-through levels last season. With our vertical model, we are uniquely positioned in the celebration space with unrivaled consumer insights, manufacturing assets, and sourcing capabilities. This positions us to broadly serve consumers where they shop, knowing they are driven to different retailers for specific shopping occasions. To capitalize on this opportunity, our team has created branded selling solutions that leverage our deep understanding of the consumer. As a result, we are able to offer an expanded wholesale customer base a more comprehensive party solution to meet the needs of their customers and complement their business. These solutions, which we have branded GoBrightly and Party Impressions, were introduced to the market in Q2. The initial response has met our expectations, and we're beginning to secure tests. The benefit of these efforts will begin primarily in 2023, as we seek to learn from our tests and expand accordingly. Across all of our channels, we continue to utilize our pricing power to create margin opportunities without compromising our leadership position in the celebration space. In June, we implemented another significant round of strategic retail increases and have been pleased with both sales and margin impact. Even as we navigate to improve profitability amidst these short-term challenges, we are focused on our customer experience and important improvements to fortify our operating model. We continue to invest in our next-gen stores, which continue to perform very well. We opened 29 next-gen stores in Q2, totaling 159 next-gen stores as of the end of the quarter. These stores continue to average a mid-single-digit sales increase versus control stores, with a run rate that delivers a payback period on each store of less than 24 months on average. We anticipate ending 2022 with 180 to 195 next-gen store remodels or openings in the chain. lower than our initial 200 stores by year end plan, as we are more tightly managing capex and expenses in the back half of the year given our revised outlook. We are taking incremental actions to further mitigate supply chain challenges to enhance product visibility, additional inventory planning capabilities, demand and supply forecasting improvements, and enhance capacity planning. We are also adding new talent and further integrating supply chain functions. Additionally, we continue to implement new data and reporting platforms that will improve our insights, analytics, and productivity. As it relates to EST, in September, we will release our initial environmental, social, and governance report entitled Inspiring the Future of Celebration. In the report, we will outline our priorities, which stem from our initial priorities assessment and provide insights into each of our major initiatives. We are committed to advancing our ESG program, which we believe will drive meaningful value for all of our stakeholders. Finally, we are ready for the important Halloween season and remain cautiously optimistic. We will have an improved year-over-year experience for the consumer, and are planning to operate 130 to 150 Halloween City stores this year, which is up from last year's 90 stores. In closing, our top line results were in line with our expectations, while the bottom line continues to face elevated cost pressures that are predominantly transitory in nature. As the macro environment continues to evolve, we continue to navigate the dynamic operating environment and proactively manage what is in our control. We remain confident in our strategies and ability to deliver long-term sales and earnings growth. Our financial results are not where we expected them to be this year. Our sales continue to be higher than they were pre-pandemic, despite the headwinds we have faced. We have a unique and powerful position in the market, and we believe we are able to inspire customers and make it easy for them to create unforgettable memories in ways no one else can. Celebrations and joy are important in all times, and now more than ever. Importantly, the progress we have made and continue to make against our transformation strategy to increase our relevancy with consumers and strengthen our operating structure is serving us well in building the Party City brand for the future. And now I'd like to turn the call over to Todd to discuss the second quarter results and our 2022 outlook in greater detail.