Q3 2019 Earnings Call

Good day and welcome to the party City third quarter 2019, <unk> earnings Conference call. All participants will be in listen only mode should you need assistance. Please signaling a cost, especially by pressing the star coupon by zero.

After today's presentation, there will be an opportunity to ask questions to ask a question to me Press Star then one when I touched on.

To withdraw your question. Please press Star then to.

Please note this event is being recorded.

I'd now like to tell the conference over to you. Another please go ahead.

Thank you operator, good morning, everyone and thanks for joining us.

This morning, we released our third quarter 2019 financial result.

You can find a copy of our press release on our website <unk> Dot Party city Dot com.

Now I'd like to introduce our executive team work here on today's call.

We have Jim Harrison, our Chief Executive Officer.

Brad West in our President and Chief Executive Officer of our retail group.

And my call reality, our interim Chief Financial Officer.

I'll start the call what's your prepared remarks by Jim Brad in my opening up for acuity.

Please note that in today's discussion management may make forward looking statements as defined under the private Securities Litigation Reform Act 1990 thought regarding their beliefs and expectations about the company's future performance fuchs business prospects or future events or players.

These statements are subject to risks and uncertainties that could cause actual results could 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 their risk factors contained in resi pilots.

During today's call, we will refer to both GAAP and non-GAAP financial measures of the company to operating financial results for more information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures. Please refer to the earnings release and with that I'll turn the call over to Jim Harrison.

Thank you, we and good morning, everyone and thanks for joining US today. This morning, we released our results of operations for the quarter and nine months ended September Thirtyth. Additionally, we reported or retail sales with local October reflecting Halloween.

We also provided updated full year guidance to incorporate these results.

Oh, beginning with a brief overview of our financial performance for the third quarter and nine months followed by discussion about Halloween October results. I will then it's like bread was done our president and the C. O <unk> retail group to discuss our retail business and its preliminary thoughts around a go forward plan to improve our retail operating model.

My Korea, we will then discuss the financial results in detail provide some additional color around or adjusted full year revenue and earnings guidance.

And we do several financial bridges to assist interpreting the results following which we will open up the call for your questions.

The third quarter revenue earnings results and October sales were disappointing.

Many of the expected Tailwinds I spoke out in our previous school did not fully materialize.

For the quarter, we continue to experience the negative impacts of the helium shortages in both the retail and wholesale segments.

On a consolidated constant currency basis revenue for the quarter decreased 1.5%.

Cobbles door sales results were minus toward 2.6%, including a 210 basis point total a deal even headwind.

But the nine month period consolidated constant currency revenues increased 50 bips.

With the comp decline of 2.2%.

Inclusive of the total healing headwind of 290 basis points.

This includes the direct impact on our blue business as well as the indirect effect in the form of related softness in all the categories, such as juvenile birthday and candy.

On the consumer product side or metallic balloon business anagram also saw a decline in third party and it's a company sales for the quarter of $2.4 million year over year and $10 million year to date as global demand for balloons was adversely affected by these helium challenges.

It's important to note I've ever since we began to fourth quarter. The retail operations have approaching 100% is document position resolving the these helium headwinds that have existed for nearly 18 months.

Our ecommerce business was a bright spot during the third quarter as we saw continued momentum in our digital business, including sales on the Amazon marketplace.

Total digital sales, including Byerlein pickup in store Comped up 14.9% and 16%.

Quarter and nine months respectively.

As of September Thirtyth, we'll close the totaled 34 the city of course, there were scheduled to be closed under our store optimization initiative.

The day sales recapture rates continued to exceed expectations and the reserves provided free what's really liquidation remain adequate.

Total consumer product sales in constant currency after adjusting for the APAC a franchisee acquisitions.

Increased 20 basis points for the quarter in 10 basis points for the nine month.

Excluding the impact of metallic balloons as well as you get back the franchisee acquisitions, our north American consumer products wholesale revenues decreased 2.9% for the quarter and increased 2.4% for the nine months.

The decline for the quarter, primarily reflects lower Halloween sales to the existing party city franchisee group.

Internationally, the businesses in Mexico, Australia, Europe , and the UK continues to perform on plan. Despite the challenges presented by the strong dollar.

Generally weak economic conditions and the uncertainty surrounding Brexit.

Well the quarter, our international business in constant currency increased 3.9 present as we continue to grow our presence in these markets.

Gross margins would quarter declined five to 90 basis points to 30.6%, reflecting the higher costs of helium and it back to Peel them on the balloon business.

Inventory reserves related to us drug conversation program.

The final flow through of excess freight and distribution costs, which have been capitalize in inventory.

They were product mix and the impact of aggressive promotions of every day and seasonal product designed to grow comp store sales the increase store foot traffic, which ultimately approved unsuccessful Michael show the inputs of these components when he present financial bridge.

Moving on to Halloween overall, the holiday season was below expectations with a brand comp decline of 3.2% sales, how we product for the third quarter and October selling season, and a decline of 4.9% until October comp sales.

This result is generally along with our analysis or the broader industries result.

The National retail Federation reported that they expected retail how do we sales this year to declined to two declined 2.2% for approximately 9 billion to 8.8 billion.

Oh, the past 15 years as retail sales flow in season have grown from 3.3 billion to 9 billion, there, but a number of years.

It's been a year over year decline irrespective of the day the week.

As I mentioned several of the expected Tailwinds for Halloween failed to materialize.

In particular exceptionally better in stock position for the holiday selling season, only produce minor increases in retail revenues early in the season.

Additionally, we anticipate a boost associated with the strong likes the portfolio year over year was not realized.

Generally since several these movie projects were not as theaters until later this year there wasn't as much consumer awareness driving demand as we expected for properties such as frozen in Lincoln.

Whereas the sentence enjoy story racked license properties that have strong results.

For a child perspective, while our brick and mortar business was the driver the year over year decline. It is important to note. The based upon our initial review discussion with others in the industry. We believe we have not lost market share in this channel.

Early analysis for the season reflects that more of the costume and a big business has in fact shifted to online.

We saw this play out in their own digital business, which is heavily skewed towards costumes, including byline pickup in store was up 15.3% in October .

Year over year, our sales of Amazon and other marketplaces was up 151%.

In large part due to an inclusion of our license caused some portfolio to the she is offering.

Well I pick up on sale pick up in store sales rock caliber represented approximately 40% or the total consumer demand on party city Dot com.

Clearly our ability to provide in store pickup so the online consumer is a very strong advantage.

Our next you work as we analyze these results suggest that there are two fundamental shifts occurring as it relates Halloween.

First as just mentioned there has been increasing cost him to the big sold online and secondly, there was an increasing desire among young millennials Jens years, and Genex's look for unique ways to dress up and display their creativity on social media.

According to a survey from compare cards by Lendingtree.

48% of millennials admit to purchasing Halloween articles so that they can include them in social media post.

37% agenda years, it's 30 percentage annexes said, the same compared to only 5% a baby boomers.

Similar research for the National Retail Federation shows social media as a growing source of both Halloween inspiration and display.

Parties G.'s unique product offering for Halloween dress up outside of costumes is a perfect source of inspiration and product to meet this demand.

We need to continue to build out this aspect of our portfolio expanding the products available to consumers to create their own unique costumes and images.

More importantly, we need to do a better job of communicating our offering to these generations of consumers going forward.

The National retail Federation has reported that the mix of spend is evolving and we will need to evolve with it.

So to speak further visit a moment.

With respect or how do we see operations on average our stores declined 19% in revenues reflected the softness in the adult category and the impact of the online penetration.

As it relates to the previously announced Canadian tire transaction October 1st we closed the transaction to sell the as isn't business about Party City, Canada subsidiary to can you talk Corporation.

As we discussed last quarter, we anticipate that over the course with a 10 year supply agreement, which we have entered into with Canadian tire.

We will substantially replaced the retail today that was sold in this transaction through growth in consumer product sales.

Canadian Saar has communicated their intent to double revenues associated with the acquired party city Canadian business by 2021, and as a result of our supply agreement, we will directly benefit from this growth.

The net proceeds of the transaction of approximately 172 Canadian dollars, we used to pay down debt in October .

As I mentioned earlier in October our retail operations source return to essentially 100% in stock position helium at store level.

As a result, we posted comp increase of over 12% for the month and balloon sales.

We also saw an improvement everyday categories, especially birthday as a result.

[noise] Party city represents approximately 25% Amanda games wholesale sales and we would anticipate a lift there over the next few months as well.

Some of that against third party customers business will continue to face you have a channel lajas into 2020.

After which all indications are the world. The once you get to be flush with him.

At a retail level, we anticipate the return a full helium availability, we provide a positive lift the comps to improve results in November December .

On the topic of towers during the quarter, we continued to prepare for the proposed tariffs which are scheduled to go into effect on December 15th.

We continue to resource somebody themselves, China, it's other countries as well as our own operations in Mexico.

Additionally, we are redesigning products as well to remove cost from the products without compromising quality.

We have also been discussions with many of our Chinese vendors to share with us the savings that they're receiving from lower RMB exchange rates.

And finally, we're carefully reviewing all of our retail price.

Points to see where we can pass along the impact the tariffs.

Our outlook reflects the impact of all else tariffs as well as our mitigation efforts data, helping offset the Telford back.

With respect to our outlook as result of the third quarter shortfalls and the swap Halloween season, we have lowered our full year guidance.

Mike Review all this in greater detail, including a few financial bridges to provide more clarity on the underlying drivers of the revisions.

Looking at the 2019 headwinds that impacted our results the most significant ones or temporary including the impact of Hume shortages, both at retail and wholesale and the flow through indexes freight and distribution expenses.

Combined these two factors aren't EBITDA headwind of approximately $45 million.

2019, which on a pro forma basis would raise our adjusted EBITDA guide for 2019 to be 345 million to two engine 355 million, representing a proxy for normalized adjusted EBITDA.

So in summary, the third quarters disappointing both in terms of revenues as well as margins, resulting full year impact was compounded by itself Halloween.

We believe we identified a number the reasons behind this and I work is addressed them and take advantage of the opportunities that they were presented.

Over the next few weeks, we'll continue to do consumer research on the season and analyze the business to show that we are positioned to fully explain next year Saturday Halloween opportunity.

With that I would like to invite bread Weston, our president and CEO 40 see with your group to give an overview of his thoughts around or retail business and the opportunities and strategies. He sees ahead. Three turns this portion of our business the positive comp territory at the top of my relevance to the consumer.

Thanks, Jim.

As Jim stated, we did not have the Halloween result, we expected and were dissecting. This performance at a granular level as we speak.

Well, we do know is consumer wants and needs continue to evolve in the Halloween category and we will take the learnings from this year to deliver an improved experience going forward.

Consumers look to party city to provide them with the products they need to decorate their homes host parties and dress up for Halloween.

As we put the customer at the forefront of our assortment in operations decisions, we want enhance our Halloween experience on several fronts.

In stores and online, we will curated assortment and develop merchandising and marketing techniques that will inspire and encourage customers to build out their own cost him and decorating ideas in unique ways with everything they need provider to one place to make it easy and convenient.

Jim shared our buy online pick up in store growth. This year consumers want the flexibility the shop and purchase online, but increasingly want to pick up their orders at the store moving forward, we will make it even easier to pick up and receive orders based on evolving customer expectations.

In my first 90 days I've gained additional perspective on how party city is advantageous sleep position to increasingly meet the needs of consumers seeking to create memorable celebration experiences that are special and personalized whether they start weeks in advance and want to take a do it yourself approach all the way.

To meeting last minute assistance to pull it off we will be there Resourcing guide to make them a hero party thrower.

We're listening more closely and intently to what our customers are telling us and how they want to shop.

We were quickly to build out a new customer insights and data analytics team to better inform our strategy.

The work being done on market basket and price optimization analysis will assist us in developing our playbook for improved performance.

Moving forward our growth plan includes improving our product assortments and have seen both in store and online experiences as well as building out party services, including an updated version of our party plan are offering with both in store in digital components.

We recognized the product selection in our stores can be overwhelming.

We see a significant opportunity to further cure rate and simplify our assortments to better showcased the party component that meet our customers exact needs while continuing to offer a unique breadth of assortment for example, our solid color tableware assortment has 32 color.

The top 15 color roughly half the assortment generate 90% of the sale.

We can reduce this to approximately 20 colors and not only still have the most dominant color assortment in the industry, but our data shows the remaining 10% of sales is transferable to the go forward color assortment.

Two of our biggest trip driver categories are balloons, and birthdays and these two categories and threw out our assortments, we will optimize the strength of our vertical model to increase the availability of newness trend right product and innovative solutions that further differentiate party city.

As we cure rate and added our Assortments, we will appropriately decrease our inventory to drive productivity and create additional working capital to invest in our customer experience.

Importantly, the way in which we will merchandise and lay out our stores in the future will better showcase our product and services, while making navigating the store and locating product simpler and more convenient.

We will also continue to invest in our digital experience not only when we make the shopping experience more seamless between online and stores, but will also inspire customers with new and easy to execute party ideas and services, we will be piloting a customer loyalty program and enhance CRM capabilities, which will become.

Strategic drivers as we use our web and mobile platform to attract more customers build strong brand loyalty and increase overall revenue.

Finally, as part of this go forward plan I'm excited to announce that Sean Thompson recently joined party city as Chief merchandising officer to lead our efforts in reinvigorating our merchandising strategies, Sean was most recently the chief merchant at 711, where he also help marketing and product development role.

Prior to that held several merchandising positions of increasing responsibility at target. After beginning his career with the Farnsworth group a consumer market research firm.

I look forward to relentlessly obsessing over our customers and building their confidence and reliance on the party city brand with that I'll turn it over to Mike to discuss our financial Mike.

Thanks, Brad and good morning, everyone I'll review, our financial and operating performance for the third quarter and the fiscal October topline results before discussing our updated outlook for fiscal 2019.

And then I'll open up the call for questions.

Please refer to the accompanying slides available on the Investor Relations section of our web site for further details of our Q3 results.

As Jim mentioned, our third quarter top and bottom line financial results continued to be negatively impacted by the ongoing helium shortage and its direct and indirect effect on balloon and other products sales.

Looking more closely at our third quarter results consolidated total revenue decreased 2.3% on a reported basis and 1.5% in constant currency.

Retail segments net sales decreased approximately 1.7% our reported basis and 1.5 on a constant currency basis.

Brand comp sales, which include our U.S. permanent stores and our North American ecommerce business decreased 2.6% in the quarter driven by approximately 210 basis points of total headwind from the helium shortage.

Notably brand comp improved sequentially throughout the quarter as additional helium came online.

By the end of September metallic in latex balloons were comping in the low to mid teens compared to 2018.

Looking at how sales by product category during the quarter everyday product sales comp, 4.8% lower than in 2018.

Again, the decline principally occurred and juvenile solid commodity products and candy those categories that we believe our most impacted by the indirect effects of the helium shortage that we face for the past 18 months.

Seasonal product sales increased 10% versus 2018, driven principally by early in stock positions on costume cost them accessories and other Halloween products.

Our north American digital sales, including Amazon marketplace in BOPUS performed well during the quarter, increasing 14.9% over 2018.

Turning to the non vertical consumer products businesses net revenue in constant currency and adjusted for the impact the franchise and independent store acquisitions increased 20 basis points.

The helium shortage continues to affect latex and metallic balloon businesses, especially metallic balloon business that anagram.

Third party sales of metallic balloons that wholesale were down approximately 6.2% as a result as the shortage.

The adjusted net revenue about North American party business, excluding store acquisitions and sales of metallic balloons decreased 290 basis points.

This decrease in non vertical consumer products principally occurred in sales to party specialty as similar to our corporate stores. They also experienced reduced foot traffic as a result of the helium shortage.

Our non party store business continues to perform well with double digit growth driven by the mass and grocery channel and despite agee's decision to exit the party category.

We continue to leverage the breadth of assortment and manufacturing capabilities to meet third party independent customers requirements in a cost effective manner.

International consumer product sales increased $3.4 million in constant currency. Despite generally weak economic environments. As we continue to increase our market share in Europe , and Australia, gaining share shelf with existing accounts and adding new customers with a refined product assortment.

For the third quarter of 2019, retail and wholesale margins with 34.8% and 21.5% respectively. Our consolidated gross profit margin was 30.6% or 590 basis points below the same quarter last year the drivers of the gross margin.

Decline principally temporary in nature.

The drivers noted in our supplemental bridge on our Investor Relations website are as follows.

180 basis points as a result, as a two pronged impact from the temporary helium shortage, resulting in both higher helium costs and a decrease in high margin balloon sales that both wholesale and retail.

160 basis points from store optimization related reserves.

130 basis points from higher freight cost associated with product imported during the second half of 2018 as the Chinese tires cause temporary operational disruptions.

100 basis points as an impact of increased promotion of both everyday and seasonal product and lastly, 20 basis points from product mix and other items.

Our manufacturing share shelf was consistent with the third quarter of 2018 at 25.4%.

Our wholesale share shelf at a party city stores now North American retail ecommerce operations was 78.3% during the quarter or 110 basis points higher than the third quarter of 2018.

As a result of a sustained decline in <unk> and the company's market capitalization during third quarter. The company recognize the noncash pretax impairment charge of $259 million against the goodwill associated with our reporting units.

Operating expenses, excluding store optimization, and goodwill impairment charges totaled 182.7 million or 33.8% of revenue.

280 basis points higher than the third quarter of 2018.

The increase principally reflects higher retail operating expenses on at higher average store count as well as a nonrecurring amortization adjustment reducing franchise expense in the third quarter of 2018.

During the quarter, we incurred a reported loss from operations of $277.5 million, excluding the $259 million for goodwill impairment and 2.6 million of charges associated with store closures. The loss from operations was approximately 15.9.

Million dollars compared to 31.7 million of income from operations in the prior year period.

Interest expense for the third quarter was $29.4 million and was $1.7 million above the same quarter last year are result of the company's August 2018 high yield refinancing and both higher average borrowings and rate from a b L and term loan credit facility.

In the quarter I reported effective tax rate was approximately 8.8% and our adjusted tax rate was approximately 26.9%.

These quarterly rates are affected by certain discrete items occurring in the first nine months in 2019, including the impact of goodwill impairment. The full year effective income tax rate, excluding the impact of both goodwill impairment and the October sale of party City, Canada to CTC is estimated at 27.5%.

On an adjusted basis net income decreased to a loss of $25.7 million in Q3 2019 from income of $7.4 million in Q3 2018.

Adjusted EPS represents a loss of 28 cents per share compared to income of eight cents per share in the prior year period with substantially all of this decline related to the revenue and margin factors just discussed and the remainder of the change principally related to higher interest expense.

Adjusted EBITDA of 17.1 million compares to adjusted EBITDA of 59.4 million in the third quarter of last year.

During the quarter, we had free cash flow defined as adjusted EBITDA less capex of $2.5 million, which was approximately 36 million below the third quarter 2018.

We ended the quarter with net debt of about $2 billion. It should be noted that the trade and taxes payable.

And accrued expenses at 930 were 89 million below year end 2018, and 128 million below the same period last year, reflecting the much earlier receipt of and payment for a Halloween goods.

At September Thirtyth, we had approximately 152 million of borrowing capacity available under our ABL credit agreement and currently capacity approximate 470 million.

Turning to our fiscal October results net revenue for the month with 432.6 million, which represent the 7% decline over last year's revenue after adjusting for the sale of our Canadian stores to CTC.

Total retail revenue decreased 8% in the quarter and brand comps decreased 4.9%.

We operated 256 temporary stores this year or 10% more than last year and sales of four hollowing city stores decreased 20.8% on a like for like store basis.

We're pleased with our North American E Commerce business, which grew 15.3% when including the impact of BOPUS for the month of October .

Our Amazon marketplace performed well in October reflecting the benefit of full license custom offering versus last year.

This is a small portion of our overall Halloween business, but we are encouraged by the strong performance.

Turning to our full year guidance before discussing our outlook I would like to review a few items that impacted our fiscal 2019 guidance.

We still expect the full year negative impact of our June sale leaseback transaction on adjusted EBITDA to be $4 million, an 8 million on an annualized basis.

The net impact of the Canadian tire transaction is expected to reduce 2019 total sales and adjusted EBITDA by approximately 32 million and 5 million respectively.

The total impact of the helium shortage is expected to be a full year headwind on adjusted EBITDA to the tune up $44 million.

Higher freight cost recognizes we sell through inventory associated with last year supply chain disruption is expected to be at full year headwind of $13 million to adjusted EBITDA.

Based on a year to date performance, including October results. We are revising our previously provided fiscal 2019 outlook.

We now expect revenue to be in a range of 2.35 billion to 2.38 billion and comp sales to be down 2% to 3% versus last year.

We've provided a bridge of revenue from our previous guidance to our current guidance in the supplemental slides on our website.

We now expect full year adjusted net income to be in the range of 79 million to 86 million or 84 to 91 cents per share.

We expect adjusted EBITDA to be in the range of 300 to 310 million and interest expense of 114 216 million for the year.

We have included the bridge of our revised adjusted EBITDA guidance versus our previously provided adjusted EBITDA guidance for your reference on our website as well as a bridge of 2019 expected adjusted EBITDA versus 2018.

As you'll see 45 million of the adjusted EBITDA decline in 2019 is driven by what we perceive to be temporary headwinds.

In terms of capital allocation priorities, we continue our plan to spend about 2.8% of net revenue on Capex. We will continue to work to Delever the business and are on track to pay down approximately $400 million by year end from our first quarter high.

For all other details around our outlook. Please refer to our press release with that I'd like to turn the call back over to the operator to open up the call for questions.

Thank you.

We'll now begin the question answer session to ask a question you. My Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your hands up before press Nicky if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.

This time, we will pause momentarily to assemble arrow stuff.

The first question comes on the line of Seth Sigman with Credit Suisse. Please go ahead.

Hi, good morning.

My main question, it's really for Brad it's helpful to hear some of the early focus areas, but really want to get your observations on what you've seen since you joined up what do you see is the fundamental issue that has limited the comps for the business and I'm looking at the everyday business, that's grown slightly historically, but you know what.

Should it be growing it sounds like it's a little bit of a traffic issue, but also maybe some conversion and so what are you seeing at the store level in terms of execution and merchandising and some of the opportunities that you think you can address and did you can put some numbers around that around that retail sales opportunity.

That would be helpful. Thank you.

Great. That's a that's a big question and multi pronged and let me address it in a couple of buckets.

I think our biggest opportunity is really around our store experience.

I think its challenged to to an extent due to over assortment.

It really makes the shopping and purchased more difficult for the consumer than it should be I think the party preparation checklist is probably in the consumers mind when they come into our store, but we don't make it is intuitive as we could for them to really navigate the store I find the components or to complete.

There their party.

And I think as you know one.

Honestly I think we can improve our category.

Adjacent sees I think a we can make our most important categories, specifically balloons and birthday.

More importantly in the items the key items within them more important and make them standout make it more shoppable.

Moving forward, we're going to start piloting formats that will dramatically improve that experience and we're in the south we're in the laboratory right now collecting and analyzing the data that's really going to provide us the science that goods combined with the art to cure rate those assortments.

I also think that you know we have a significant opportunity to start providing our consumer with with services and that's a component that we can then we'll start to provide I'm not going to go into detail on what each of those are but as you know we had previously rolled out an initial wave of in store party planners.

To elevate that experience in our stores, we put that experience for the customer under the microscope and realize it could be better than it then it is today.

It's missing the digital components that could make it great. So we're updating it before we expanded any further but we absolutely believe that combined in store online party planning experience for consumers is a critical component of of the party city brand and really what consumers are looking for.

And then if I address sort of the digital component.

We're taking an omni channel approach in every customer touch point on the path to the celebrations are trying to create a we're close to better enabling our digital communications that will create both a more personalized and localized journey for our customer.

By optimizing optimizing our CRM data and really leveraging the power of of marketing cloud.

Our our digital tool set.

It is limited to some extent today, but we can expand it and including party planning checklist.

To help streamline the process for the customer and really create a seamless journey.

From online to to the store and in addition, we're working on the potential of same day delivery.

Customizable balloon bouquets online a loyalty program pilot.

And you know a suite of party tools, including party planners and party planning guide. So I think it's really a combination of how does how do we get our inventories to the point by editing RF Soi Assortments and it's more shoppable, how do we start to add services and how do we create a digital platform that's significantly more.

Relevant as is today and creates the omni channel customer that that others are delivering and the customer should expect from us.

Okay. Thank you for that it's a lot of color appreciate that I guess related follow up would be on market share you talked a lot, but the opportunities given the knowledge that you have from your wholesale customers and the fact that digital was has been strong is there any evidence that there is more of a channel shifts.

Happening here that may be negatively impacting party city I mean, there's clearly a shift online that you're seeing in your own direct business and through some of the partners who work with but is there a shift to some other channels to and need to address that.

Well, our biggest shift to online as we observe the last the in the end of the third quarter and then talk tober is really in cost him in a bag and our opportunity is in costuming really as a whole and there is the trend to create your own costume and we use accessories to mix.

To match with or without customers included and it is there definitely is a do it yourself trend and we need to merchandise the store in the market.

Marketing this trip to make this trend more yes, we can market in merchandise this trend more effectively and we'll do that so.

So we have not seen the online share shift outside the Halloween that we've seen in Halloween, which was which was dramatic in over 400 basis points in our overall Halloween business in higher than that obviously in our cost him in a bag business.

Okay. Thanks for that I, just want to sneak in one final question just around the guidance and how to think about it. So what do you guys implying for trends after Halloween here. It seems like embed some improvement, but obviously comp still down so I'm curious what you're seeing in the base business since Halloween, how we should be thinking about the trajectory. Thanks.

Sure. So as we as we look at November December the as you know the although it's Christmas that's not really big season for Us and we do have a one day shift on new year's in December which is which is the headwind. So as we look at November December .

We are more or less looking at being having a flat comp for the balance of year.

Okay. Thanks.

Thank you.

Okay.

Question comes from the nine of Karru Martinson with Jefferies. Please go ahead.

Hi, This is actually Joslin Crawford on for Chris So just to follow up and guidance I noticed that a leverage target was not included in this updated guidance and that's helping to follow up on that.

We still expect in your previous four times leverage target I'm, just looking at the midpoint of EBITDA guidance and that that expectations. It looks like that's a pipeline virtually any closer to five times at your end. So is that correct and if so is there an updated timeline, they're expecting too cheap that four times leverage target at this point.

Sure so.

Correct, obviously with the lower EBIT was below EBITDA number for the year.

To get to four times leverage would be very very difficult as Mike mentioned that we're looking to pay down $400 million between.

From where we were at the beginning the year to net to the every year and we're on target to do that.

That would have gotten us well under four times that our previous guide.

In terms of getting under four times, we would fully expect to be under four times, but into next year.

Okay Alright. Thank you and then just a follow up on that in regard to that $1.5 billion not that figure.

Can you just round up from the drivers.

The remaining debt reduction or you still expecting that to me $500 million and working capital reduction to the entity or or what's driving.

Yes, we'll look we're looking we're looking at a you've got a couple of things going on right. So firstly as I mentioned in my commentary we closed the Canadian tire transaction in October October 1st So that generated 170 mean Canadian dollars of cash that was used to gogan cell lines.

Additionally, we are continuing to liquidate and reduce our inventory and at the same time, obviously as Mike mentioned success substantially reduce our our payables. So as those working capital movements go through the balance sheet, Oh, we'll continue to see the pay down debt.

Okay, well thank you.

Thank you.

Next question comes on the line of Seamount put money with Morgan Stanley . Please go ahead.

Good morning, Hey, everyone. My question is cause I follow up to one of sets questions regarding Halloween.

As we've been waiting for the the calendar and get more favorable and I I realize the IP wasn't there yet, it's it's coming but not there yet so thinking about Halloween you know is there an inflection point happening where the customer seems to be shopping more online. It seems like the beginning of that this year.

And does this change Halloween going forward I mean, I know, it's hard to call. It out just one one year, but it seems like it's been on somewhat of a decelerating path over the last several Halloween.

And this year was the culmination of in theory calendar and somewhat product, but I guess product didn't come through so.

It sounds like you can execute better Brad talked about a couple of ways to do it but curious how you're thinking about Halloween holistic cleanup.

So you know.

Points on that.

Simeon Halloween category was with soft and you know certainly the driver of the month of bucked over.

My point of view as the shift to online is addressable when we have an improved merchandising and marketing program in place next year that really drives accessories through mix and match in and do it yourself.

The Halloween shift to online is like I said before conns costumes in a bag, which we always anticipated would would have somewhat of a month migration to online.

And the Miss this year was primarily in our accessories costume accessories business, which we can get back Oh, we can get that back and we can get that customer in our stores, we already have a larger and more penetrated costume accessories business that our mainline competitors, but we've not effectively use.

Got it has the competitive weapon that it is.

In other words, we haven't merchandise costumes and accessories in store or online in a way that makes the mix and match or accessorizing intuitive to a consumer we didnt market. It with the level of authority or credibility that we have a and we haven't use digital or social media really enough to inspire Creek.

With that how to make it your own.

No one and retailers continue to demonstrate that omnichannel capabilities, when done well and tailored to their customers needs have success and then Halloween as we see in particular the growth in buy online pickup in store, we can dramatically improve that experience and that's going to continue to be come.

An integral part of the way they shop us.

For Halloween and for other categories.

I'll just said something if you look at the a 15 year trend line.

That's an answer at retail Federation.

As a has out there on on Halloween census growth from 3.3 billion to $9 billion, you'll see that during the that growth period, there's been peaks and valleys and ups and downs, there's been a fits and start as its continuing trend at higher so I don't look at the Halloween, having a system.

Nick or.

Structural issue as much as our adapting to evolving consumer being the kid.

Okay. My follow up is you're selling on Amazon due to the marketplace.

You have or any of your items are eligible for next day and can you talk about what you're seeing or have you seen any step up from that business. As next day, you know since become more prevalent.

Yes, we do have costumes that are available for next day and you know as we think about not just buy online pickup in store, but also starting to we piloted ship from store.

And are very happy with with the results of those pilots and we'll be expanding it.

Which we'll certainly give us the ability next year to get much closer to the consumer from a ship point and be able to execute against a next day delivery yeah, I'll just add some in that this year.

And looking at our party Si Dot com business the business, we transacted on pricey Dot com during Halloween, 40% of those sales ended up being buying online pickup in store, which is.

This is obviously a growing trend in every business, but I think our business probably more so where the customer wants the certitude around the party goods. Because this is I want to cautions is case, because there's a very finite date for that celebration I've been really excited about the buy online pickup in store. It was it was much bigger than we expected.

And you know the way we will treat that next year is creating the ability when a consumer uptake set approach to getting their costume, we have significant opportunities to then upsell and cross sell not just within the Halloween category, but within our brought our party supplies category.

Great. Thank you both.

Next question comes from the line of Rick Nelson with Stifel. Please go ahead.

Thanks, Good morning.

To follow up.

Helium.

Shortage.

You talked about someone that collateral damage to other categories like candy and juvenile now that you're in stock.

Are you seeing those categories I respond positively.

Plan to Martin can turn around.

I am availability.

Seem like same stores sales driver.

Others are short and you've got.

Okay.

So we are.

No. We're certainly seeing somewhat of in a positive impact on everyday categories as balloons come back in as we look at a by store I think though in the consumers mindset when you've been out of helium to a large degree for 18 months that doesn't just come back immediately and that's going to take.

Take some time for us to really restore the consumers' confidence that we have helium.

We're contemplating ways that weekend, a market or the fact that were back in the helium business in markets that were the most challenged by it which I think will help but you don't when you have a consumer that shop to 1.8 times a year and for 18 months you've been in a challenge position. It just does.

Turn we can't turn that SPIC it on right away.

Lastly, I'll ever to the extent that the consumers coming from balloons, we will no longer be disappointing them, which is very important.

Okay. Thanks.

Also with Sarah.

<unk> can you speak to inventory levels.

To do with.

Well when product impact going away for next season there.

Accelerate markdowns here.

Oh, we have we have historically packed away major seasons, such as how Halloween graduation in summer. We will continue to do so our packaway. This you're actually will be less than it was last year as part of the inventory reduction you'll see in the balance sheet at your end.

In terms of markdowns, we take the markdowns as they as they arise.

And we provided we believe we provide adequate reserves for the inventories as they sit on our balance sheet.

Yes.

Got a store base <unk>, how many stores are unprofitable on a trailing 12 month basis.

Sorry.

I would have looked at as of the end of October , but very very few because the family margin. Most as I mentioned during early call when we discussed our strong position.

Very few of our stores on four wall basis, well with complete family margin flow through or unprofitable is the optimization of the market that we see opportunity as opposed to closing unprofitable stores.

Thanks, and good luck.

Thank you Rick.

Our next question comments on the line of Joe Feldman with Telsey Advisory Group. Please go ahead, hi, thanks, guys.

I wanted to go back to the comments about market share.

I guess, we what gives you confidence that you're not losing market share I mean like that Halloween city the down 21.

You know it seems like that's a lot more than what the market was it feels like.

Do you think Halloween was was.

Down.

Okay shock percent overall.

We I've spent the better part of the less.

10 days speaking to everybody that I know in industry, including some of the.

Some of the major wholesalers into the into the broader market. The general consensus is that the season was down.

Low single digits in the 5% range give or take but that then varied by by format with ecommerce being up slightly.

With independence and brick and motor.

Down and in the five 6% range.

And then with the pop ups being being down much more significant than that we had anticipated Halloween city to be down.

This year because last year, we had 31 toysrus locations, a great visibility and had a consumer familiar with that location.

As a place to shop, we did not have that real estate available to us. This year. So the real estate available was not as strong so we had anticipated being down.

And I think what we've seen is we've seen pretty much the impact of the cost of in the big.

Play out under attempt as much as anything along with the DIY.

So as we look at where our Halloween cities were when they were in lower income were dense population. They did well when they were in higher income.

Suburban populations they didn't do as well.

Obviously being down.

No. It was actually the season ended up because it's the which Chris will still selling it's about 90% now year over year, but as we never anticipated, 19%, we've never seen that kind disparity between the party C stores and how many cities in the past. So I think it's a combination of the do you I think the combination of the online.

Correct.

And I think there's probably also some competition elements associated with the continuing growth.

Bumps in the category.

So as we look at next year, we'll be taking a hard look at how we see strategy and we'll discuss that probably in greater detail at our next call. When we start talking about 2020 in our guidance between 20.

Hi, Thanks, and then second I never thought, but as far as the BOPUS goes I guess, how where are the inventory systems like which how real time, I guess or you're in store inventory with what's display to the customer online like a you know I guess, how often do customers come in and get told.

We I know it shows online, but we didn't actually have that are or they couldn't find it because as you said the store, maybe not organized as well as it should be.

So we are not as sophisticated and buy online and pick up in stores, we will be.

In the future of and I can tell you that are as we look into next year we are.

In the process of determining what new order management system, we're going to put in place that will bring a improvement to our buy online pick up in store a visibility to our inventory.

And then with our our experience of what consumers can see online relative to what they're going to shop or also is an opportunity improvement. So not only did it grow this year, but we can optimize it even further next year with an investment in you know a mess.

Thanks, if and if I could just sneak one last one I know, it's early and typically don't do it just really but like any.

Initial thoughts on 2020, it sounds like there's a lot of initiatives and presumably capex might go little bit higher but just thoughts on the framework I know how long we moved to a Saturday you also have the election, there's just a lot of more you know things going on next year.

Yes.

We're we've now put together our guidance for next year at this point time, we're finishing up our analysis of this season and we've just begun our planning.

And pen to paper for next year's forecast. So we will certainly provide that when the next cool.

Thanks, guys. Good luck. Thank you for severe thanks.

Your next question comes on the line of Tommy's Acaria with JP Morgan. Please go ahead.

Hi, Thank you for taking my question.

So as you look into that come in quite good now that helium is back in stops how should we be thinking about the gross margin had been is seen as throughout this year, meaning are you having to buy helium at a much higher price, but I'm not passing through the cost to the consumer.

[laughter] because as we've mentioned before the price and the cost appealing has risen.

Our Union now is under of coming from multiple sources generally under contract.

As a percent of the cost as a percent of gross margin is does have some effect where possible we've been through price increases, but there are some some formats, where it's very difficult to pass through price increase.

Perception of relative value to the consumer so we'll continue to have some slight margin headwind not from the loss of the balloon sales, but really for just the absolute cost the helium.

Given the profitability Blues, we were happy to make that tradeoff.

Got it doesn't make sense and in terms of my second question is how much of the EBIT does shortfall that you had this yeah from helium another temporary disruptions I do you expect your reasonably get back next year.

Roughly 180, Bips might get hundred 80 basis points coming in.

Sure.

So you expect to get back hundred and 80 bets next year.

We would the loss balloon business, we've estimated about 180 bips.

Okay got it in terms of gross margin.

No in terms of revenue I apologize.

Okay.

Okay got it and if I may ask that final question.

Can you.

So if you think about the costumes in a bad category could you remind us what percent of your business is is coming from that category and any any strategy going ahead with that a piece of the business.

We really not disclose that a in the past for competitive reasons.

Got it. Thank you so much thank you.

[laughter].

Ladies and gentlemen bodies all the time, we have for questions I'll now turn it back to management for any closing remarks. Thank you.

Once again, everyone. Thank you joining us today, then should you have any continuing questions or concerns. Please reach out to I see our two to speak with us. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.