Party City Holdco Inc.

good morning or good afternoon all and welcome to the party city 3q22 earnings call my name is adam and i'll be your operator today if you'd like to ask a question during the q a portion of today's call you may do so by pressing star followed by one on your telephone keypad i will now hand over to ian heller to begin so ian please go ahead when you were ready thank you operator good morning everyone and thanks for joining us this morning we released our third 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 Vogelson, 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 forward-looking statements regarding their beliefs and expectations about the company's future performance, future business prospects, or future events or plans. 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 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 will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For more information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to the earnings release. And with that, I'll turn the call over to Brad Weston.

Thank you, Ian. Good morning, everyone, and thank you for joining us today. We started our strategic transformation work just prior to the pandemic. and have continued to make good progress against the key supporting initiatives, despite the headwinds our industry has faced. As part of this journey, we've focused on bringing all of our business functions together into one PCHI, fully integrated to focus on the end consumer in the celebration space across all of our channels. Our position in the market is unparalleled, and being celebration occasion obsessed has improved our brand relevancy and our revenue trajectory versus the pre-transformation period. Consumers recognize and appreciate our ability to inspire joy and help them make easy-to-create, unforgettable memories. And we look forward to our transformation work continuing to drive performance improvements and growth over the long term. For the third quarter, we achieved results that were broadly in line with our expectations against a macro backdrop that has our core customer facing significant inflationary pressures. In addition, despite these challenges, we delivered a flat comp sales retail performance for the month of October, and our Halloween revenue was up across the enterprise on top of a strong 2021 Halloween. Turning to our Q3 highlights. Overall, during Q3, we saw top line results largely in line with expectations, generating total sales of $502 million, down 1.6% from last year. Our gross margin was in line with our expectations. We saw continued cost pressures in Q3 as we continued to navigate through the global helium dynamics and increased freight costs. These temporary headwinds negatively impacted gross margin and adjusted EBITDA by approximately $34 million in the quarter. Adjusted EBITDA for Q3 was $2.4 million versus $42.4 million last year. Inventory at the end of Q3 was $746 million or up 43%. Importantly, the majority of the incremental inventory is replenishment or everyday product that doesn't carry markdown risk. Drilling down further, retail sales decreased 1% with brand comparable sales decreasing 3.2% or an increase of 11.2% versus 2019. Our core categories improved 180 basis points sequentially and continued to perform very well versus pre-pandemic. A number of our seasonal businesses saw solid performance in Q3, and we were pleased with our results in our patriotic and summer categories. For the quarter, Our overall seasonal sales were up 2.8% versus prior year. Our comparable sales in core categories declined 3.7% in the quarter versus 2021, but were up 23.6% versus 2019. Compared to 2019, our retail balloon business in particular performed very well, up nearly 62% due to the emphasis we have put on this category as a key differentiator in our strategy. Our focus on driving strong improvements to quality and innovation in our assortments, as well as thoughtful pricing as we seek to offset higher expenses, continues to strengthen sales performance versus the pre-pandemic timeframe. Our next-gen stores continue to perform very well. We opened 15 next-gen stores in Q3 totaling 174 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 continue to anticipate ending 2022 with 175 to 180 next-gen store remodels or openings in the chain. Customers continue to take advantage of our omnichannel capabilities and the convenience of multiple fulfillment options. Digitally enabled sales represented approximately 13% of our retail sales in Q3 as we continue to deliver an enhanced customer experience through new digital offerings. We again achieved a very strong 2.9% conversion rate, which we expect to continue to accelerate with continued optimization within our new web platform. The new balloon builder continues to build momentum. Our conversion rates and average order value continue to improve as customers increasingly enjoy the experience. While the demand backdrop in our wholesale business remains relatively stable, our wholesale business was down 3.6% in Q3 with continued sales strength at Canadian Tire, offset by declines at Anagram. As the industry manages the tight helium supply conditions, which I will address further in a moment. Moving on to October and Halloween performance. For the month of October, comparable sales were flat versus prior year and up 12.3% versus October 2019. Given the challenging environment we are in, we're pleased with the results. The positive Halloween season performance can partially be attributed to our strong inventory position going into and throughout the season. Customers continue to respond to our efforts to improve product quality, drive meaningful innovation, and create a more immersive Halloween experience. Our focus on Halloween decor translated into strong sales throughout the season. We're also pleased with our costume accessory performance. We offered elevated quality and unique innovation in the Halloween category as consumers sought products to make their costumes truly unique and personalized. We have a number of strong core everyday categories, including solid tableware, candy, and categories that complete Halloween baskets such as cocktail, decorations, entertaining, and lighting. This year, we operated 149 Halloween City pop-up stores versus 90 last year. We continue to test, learn, and improve to deliver a better experience for the customer and remain bullish about our ability to grow sales and profitability in this channel and continue to see the immersive pop-up experience as a great compliment to our party city stores. As we said in July, the unevenness in the supply chain and our product flow has put short-term pressure on our EBITDA results. As expected, we saw continued elevated freight costs in the quarter, especially as we brought in Halloween product earlier than last year. In terms of the broader freight market, freight spot prices are moderating and well off their recent highs. However, given how our inventory turns, we would not expect to see the associated benefit until later in 2023. Helium costs have increased as global supply has been slower to recover than expected. As discussed last quarter, we are in an advantage position from a helium supply perspective given the work we have done to diversify our supplier base and enter into multiple well partnerships, as well as long-term supply agreements that have meaningfully improved our ability to source helium. Total industry supply, however, is not returning as rapidly as we would like to see, resulting in tight helium supply and some out of stocks for the rest of the industry, as well as higher costs for all. This is impacting anagram sales in the near term, which will impact Q4 revenue and EBITDA. In addition to these challenges, in October, our product sales mix with softer performance in our core everyday categories, coupled with positive performance in Halloween, resulted in a mixed headwind to margin. Based on our performance to date, and with two months remaining in the fiscal year, we are updating our full year expectations. This updated outlook takes into account third quarter results that were broadly in line with our expectation and October results, including Halloween performance, that while positive fell short of our expectations. And it factors in our expectation that inflationary headwinds will continue to persist over the balance of the year. Our updated outlook for adjusted EBITDA is between $130 to $150 million. Given the broad macroeconomic landscape, we are intently managing what is in our control and intensifying our focus on reducing structural costs and increasing operating efficiencies. To that end, we've begun implementation of annualized targeted cost reductions of $30 million, which are expected to be fully realized next fiscal year. These cost reductions will help offset inflationary expense pressures and the risk of recessionary consumer spending behavior. Work is underway to derive expense savings across various areas of the company, including retail store efficiencies, marketing expenses, information technology contracts, professional services, raw materials, logistics and operational costs, and corporate payroll. We reduced our corporate workforce by approximately 19%, which includes the elimination of 73 existing roles and 87 open roles that have not been backfilled over the past several months. In addition, we're continuing to evaluate strategic price increases to offset cost increases. This intensified focus includes streamlining our organization implementing new ways of driving synergy across our businesses with updated processes and systems, more robust and integrated inventory management capabilities, greater supply chain visibility and efficiencies, and enhanced IT capabilities that combined all significantly expand our ability to become more demand driven while simultaneously becoming more efficient and reducing SG&A expenses. At the same time, We're continuing to move forward in building on our top line momentum and are focused on the growth initiatives with the strongest near-term upside and market expansion opportunities, namely, continuing store conversions to the next generation prototype. Though in the near term, we are moderating the pace of conversions to reflect the current environment. Delivering more compelling solution selling offerings to our wholesale customers and continuing to evolve our Halloween City pop-up store channel to drive growth and market share. To support these efforts, we're making some organizational adjustments to further align with our strategy, including two senior appointments that I'll highlight now. Sean Thompson, our Executive Vice President and Chief Commercial Officer, has become President and Chief Commercial Officer of PCHI, continuing his leadership of our overall commercial go-to-market strategy, and now adding marketing and e-commerce to his leadership responsibilities. We've also hired Peter Smith as our Chief Operations Officer to increase efficiency in our end-to-end product pipeline, including manufacturing, sourcing, inventory optimization, and supply chain efficiency. Peter was most recently the Executive Vice President of Global Supply Chain at Carter's Children's Clothing. In closing, we are executing on a number of actions to best position PCHI to build on the progress we've made and navigate the continuing inflationary macroeconomic environment. This means an intensified effort on cost reduction while prioritizing a more focused set of strategic growth initiatives in the near to medium term. We expect to enter 2023 and this next phase of our evolution as a leaner, more efficient organization, sharply focused on driving profitable, long-term growth and value creation through our continued transformation. And now, I'd like to turn the call over to Todd to discuss the third quarter, October, and Halloween results, as well as our 2022 outlook in greater detail.