Q3 2020 Party City Holdco Inc Earnings Call
Good day and welcome to the party City third quarter 2000, <unk> earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a comfort specialist by pressing the star key followed by zero on your telephone keypad after.
After todays presentation, there will be an opportunity to ask questions.
Lastly questions from the press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Mr., Ian color, Vice President and Deputy General Counsel. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining US. This morning, we released our third quarter Twentytwenty financial results you can find a copy of our press release on our website at <unk> After the party city dotcom.
Now I'd like to introduce our executive team work here on today's call.
We have Brad weapon, our Chief Executive Officer, and Todd Vogensen, our Chief Financial Officer.
Well start the call with your prepared remarks by Bretton Todd before we open it up for <unk>. Please.
Please note 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. That's your plants.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements although.
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 express we disclaim any duty to provide updates to our forward looking statements whether as a result of new information future events or otherwise we.
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 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.
With that I will turn the call over to Brad West.
Thanks <unk> good.
Good morning, everyone and thank you for joining us today.
It's Goldman liking challenges continue and even escalate in many areas of the country and across the globe. Our Hearts go out to all who have been impacted.
As a company we remain focused on our number one priority, which is keeping our employees and customers say.
As the brand we're focused on our mission and purpose, which is creed enjoy by making it easy for consumers to create amazing celebration.
We're very pleased with our third quarter performance art.
Our results were better than our expectations and underscored the ongoing strength of our core business.
Pandemic impacted environment, we stabilized our topline sales and grew adjusted EBITDA almost threefold in third quarter.
There are three key themes that are reflected in this performance.
First the strides we are making to increase relevancy and elevate our customer experience across channels. So we reinforced and strengthen our position about the warranty when it comes to celebration.
Second the disciplines in control with which we are operating our business and third the consumers' desire and willingness to celebrate albeit in a unique and different way given the pandemic.
I will discuss these in more detail after reviewing our financial and operational performance for the third quarter as well as our October and Halloween season results.
Well then elaborate on our financial results and provide some thoughts on how we're approaching the fourth quarter.
I shared on our Q2 call in August we saw positive comp performance in July which continued through the quarter, resulting in a positive deep 0.3% comp increase for Q3, the largest cost we've delivered in nine years.
Importantly, our core categories like balloon birthday, and entertaining were up double digits collectively in Q3, which is a very encouraging indicator that our underlying business is strong.
In fact, even in the month of October what our business is skewed more towards Halloween sales. We saw a continued positive trends in our core categories.
We believe this strong performance is indicative of the underlying resiliency. This business has historically demonstrated even in recessionary environments.
It illustrates how Americans are prioritizing celebration and the marketing of milestones such as birthdays, even if they are being celebrated with smaller groups of people in the privacy of homes and just with family.
It also illustrates that the work that has been underway to reinvigorate our retail business increased our relevancy and elevating our customer experience across channels, it's happening at the multiple impacts.
Ecommerce continued to perform well and digitally enabled sales increased 36% as our customers continued to take advantage of our expanded fulfillment options, including buyer might pick up in store curbside pickup in same day delivery.
Our wholesale business also demonstrated strong resiliency in the third quarter with third party sales approximately flat to last year.
We still expect the wholesale business to lagged the recovery at retail and we were encouraged with the improvement in overall wholesale trends through third quarter, that's franchise customer volume returned to more normalized levels.
We benefited from strength in our Canadian wholesale business and our anagram metallic balloon business delivered significant growth.
Anagram total sales were up 30.6% for Q3, while third party sales were up 22.1% and.
Anagram innovative design and market strength have resulted in a particularly strong recovery.
Overall, anagram EBITDA increased 7.5 million or 164% over last year on.
On a consolidated basis third quarter total sales were down 1.2% were down 1.6% on a constant currency basis.
With gross margin expansion of approximately 250 basis points for the quarter and very disciplined expense management. Adjusted EBITDA was 49.2 million compared to 17.1 million in the prior year quarter and adjusted earnings per share was 10 cents versus a loss of 28 cents. It's Todd.
Thus further shortly.
Moving to our Halloween season results.
For the month of October comparable sales were down only 2.9%, which was well ahead of our expectations heading into the season, including significantly better than expected Halloween results, which were down 12.9% on a comp basis and continued strength in non Halloween sales during October which bodes well for the.
The remainder of 2020 and going forward.
Total sales decline for the month of October reflects the strategic reduction in party city Halloween. So these stores versus the prior year period.
As mentioned on our last call we plan conservatively for Halloween this year, given the truly extraordinary environment as a result of the pandemic and election uncertainty.
We positioned ourselves for a decline from an inventory assortment and expense standpoint, as well as from a Halloween city pop up store perspective.
But then the Halloween category, our decor business saw positive growth as we expected and within costumes in costume accessories. The kids in license businesses were most negatively impacted due to the lack of kids activity and the postponed but most license properties into the future.
Well, we de leverage retail operating expenses, we anticipate that the challenges of optimizing operational efficiency during our highest store traffic time period.
In this call, but they didn't environment, we needed to manage store occupancy and to ensure the safety of our customers and our associates in.
In many instances, we need to manage the number of people in our stores and the lines that extended outside our stores.
As we reported earlier, we hired a quantity of seasonal employees to both manage these atypical mid pandemic circumstances and to improve our quality of service and overall I'm pleased with how we operated during our busiest time of year.
Needless to say this year, we dramatically improved our Halloween go to market strategy, including significant improvements to our assortment in store merchandising pricing marketing and digital experience as well as the in store customer experience, including our new curbside pickup and delivery options.
Many of these improvements were in response to our learnings from last year that we previously discussed.
Our biggest learning from last year was that we needed to expand the do it yourself options given customer growing preference for customizing their Halloween costumes, and look with increased personalization to make it their own.
We recognize that we didnt merchandise in market do it yourself well enough in 2019, especially given it is what makes party city. So you need.
This year the in store do it yourself merchandise was presented more clearly and intuitively for the customer with improved visual merchandising and assortment planning.
We also had Halloween marketing campaigns, such as you believe you to remind folks that we offer the largest breadth of assortment with the do it yourself accessories, which resonated with customers. These changes resulted in growth in both units per transaction and the average order value.
We also sought to improve our digital experience with more Halloween customers turning to online for cost him in a bag purchases on.
Party City Dot com, we converted customers at a rate 75% higher than last year as the result of several major user experience improvements such as shop, my store and a product and pricing strategy that highly motivated customers to buy.
In October we drilled 30% more revenue through digital sales over prior year, which included driving a higher volume of traffic into our stores as a result of our omni services offerings.
We engaged in several relevant pandemic related partnerships, both nationally and locally to make it easy for people to celebrate Halloween safely that's.
That store Halloween 2020, Dod work.
Onto the road drive thru experience in Orlando and have to lean in Los Angeles to name just a few.
Lastly on Halloween, our product sell through increased approximately 1000 basis points compared to 2019.
This improvement combined with our more conservative inventory approach going into the season resulted in significantly less carryover product compared to prior years positioning us well for assortment threats that in 2021.
During the quarter, we continued to advance the five strategic initiatives that underpin our work to stabilize our retail business let.
Let me now discuss the progress we made in Q3.
Number one.
Developing a more relevant in store experience.
We continue to make progress on our next generation store prototype as we pilot changes to provide a better shopping experience for our customers.
June we've opened 13 next gen stores, including our three original pilot stores or five Las Vegas stores three of our Kansas City stores and recently two new stores in North Carolina in Alaska.
In the fourth quarter, we will add an additional nine nexgen store remodels to new stores and one be located store, bringing us to a total of 22 next gen stores in 2020.
We're addressing the fact that our stores can be overwhelming and time consuming to navigate the changes to the in store experience. We are piloting include the new shop in shops store layout with improved product to Jason sees.
And then in more curated product Assortments right.
Inventory as well as new services and experiences.
New balloon shop and customer engagement center are now the focal point of the store and that significant theater to the entire experience.
The dedicated staff and placement of this new billing shop provides more personalized service, while simplifying balloon transactions and speeding up transactions for non balloon customers.
Customers are excited by the new blood experience, which we're seeing in both their comments and the incremental balloon purchases being made.
Balloon sales growth in our next Gen stores are almost doubled the trend in the balance of the chain.
Customers are also telling us they appreciate the de cluttering up the stores due to the lower side lives and the more curated assortment.
These attributes are also allowing our associates to more efficiently operate in the store.
I'm thrilled with the outcome of the new customer and associate experience in this next Gen store format.
Successfully addresses the friction points that exist in our legacy format and it has also enabled us to identify easy shopping experience enhancements, we can make in our legacy stores, while we continue to improve upon and strategize on the planned future rollout of our nexgen format beginning in 2021.
Number two when in Bolivia.
From manufacturing and wholesale all the way through to party city retail well doomed or a focal point of our growth strategy and with helium shortage behind as we began 2020 leaning into balloons as a key driver of our differentiated brand experience I am very pleased with our go to market improvements and our people.
Moments in this core category.
As the dominant player in the global balloon business with an unmatched breadth of balloon assortment, we continue to bring innovation in product.
It yourself options and how to guidelines along with new access points to balloon through new digital engagement and new additional fulfillment options through curbside pickup and delivery.
Fine balloons online with the ability to pick them up in store at curbside or have them delivered the same day is increasing balloon demand.
In Q3 balloon for more than 53% of our buying online pickup in store curbside pickup in same delivery sales.
Moving forward winning in the balloon category will remain a top strategic priority across our enterprise growth initiatives and business disciplines.
Number three.
Address price value perception in key categories.
Customer behavior and insights have told US we were overpriced on t. value indicator items across our assortment to.
To address this and sharpen our price value perception since fall of 2019, we introduced party city retail prices on approximately 9400 skews or almost one third of our total current active skewed go.
The customers notice and has responded favorably with their feedback and the unit sales volume increases we intended.
As projected these reductions in price across product categories have proven to drive increased enterprise margin dollars and increased retail margin rate when coupled with a reduction of previously ineffective promotional author.
But the majority of the necessary retail price reductions now behind US, we will continue to monitor and react to price related customer insights and price elasticity data on a regular basis rebuilt.
Rebuilding trust with the customer on price is critical to our broad efforts to gain relevancy with consumers and we are extremely pleased with our progress to date.
Number four improve.
Improve our customer engagement selling culture.
Improving customer engagement across our marketing messages, our product and merchandising approach as well as digital experiences with our brands is also critical to driving greater relevancy.
Our dramatic shifts in digital content, including new more relevant content formats carefully curated product Assortments and new technology has driven growth in consumer engagement as well as online conversion rates.
We launched digital workshops in live video formats across our social platforms for the first time, which have garnered hundreds of thousands abuse and reach millions of consumers.
And it did to the Halloween season, we produced dozens of pieces of content featuring new ways to celebrate such as blue baskets try.
After treat options in candy huts, all of which drove increased engagement and our highest conversion rates as well as earning regular news media attention.
As we continue to drive digital innovation, we also tested three d. shoppable technology to help consumers not only find the right costume, but also build the perfect Halloween scene in their backyard front porch or any room in their home as we quickly sold through the featured items.
Number five build on our omni channel platform.
We saw a 278% growth in violent pick up in store curbside and same day delivery during Q3.
As key components of increasing our omni channel capabilities. They are now core to our customer experience.
We will relentlessly optimize and add to these experiences as we obsess over the customer experience with our brands and continue to find new and innovative ways to make it easy to create celebrations.
In Q3, we rolled out and enhance curbside delivery experience in all of our stores, allowing customers to now communicate their expected pickup time arrival and vehicle information, albeit a text message, which creates a more intuitive and efficient experience for our customers.
We continue to optimize the program with the focus on increasing customer adoption and enabling our associates to more seamlessly deliver curbside orders.
Its customer see same day delivery options, we focused on improving the customer experience with improved speed and reliability. We invested in improved technology to enable more proficient orchestration of delivery process and expanded our last mile delivery partner network.
Shifting gears to the important topic of governance during.
During the quarter, reflecting our focus on continuing to strengthen and diversify the background and skill set of our board we announced the placement of two independent directors and a third in October.
We are delighted to have added three highly qualified directors, who collectively bring significant digital capital markets financial and legal experience. We look forward to leveraging their expertise as we advance our strategy of building a leading marketplace for celebration services and products.
In summary, we are very pleased with our third quarter performance for October performance and the ongoing progress against our strategic priorities.
Our results demonstrate that we are operating from a position of authority in the category as we continued to deliver not just the industry, leading assortment for celebrations, but increasingly author the inspiration for celebrations with increased content and engagement initiatives.
The strides we are making on increasing our relevancy is evident in our business results, which bodes well for our future.
Our purpose is to create joy by making it easy to create unforgettable memories.
It is our reason to be and we will relentlessly pursue this mission as we increasingly obsess over customers and their experience with party city.
With our successful capital structure reset and having successfully moved beyond Halloween Twentytwenty, we look to finish the year in a substantially stronger competitive and financial position than just nine months ago.
This is a testament to our brands position in the marketplace and the lit and resiliency of the entire party city team to who I would like to extend my gratitude.
We look forward to building on this progress as we close out the year and move into 2021.
We're excited to inspire consumers, a new differentiated and aspirational ideas and solutions to their holiday and new year celebrations for.
For New year's Eve, we will offer customers, our boldest assortment of seasonal balloons to make the holiday special and have developed products that captured the consumer enthusiasm to lead this unique year behind.
And now I'd like to turn the call over to Todd to discuss our financial results in greater detail.
Thanks, Brad and good morning, everyone today I'll focus on the key highlights for our third quarter and our October and heavily in performance.
And then I'll discuss how we're approaching the last few weeks of our fiscal year.
The full details regarding our third quarter and 2020 year to date financial results.
Please refer to our earnings press release, and the accompanying slides, which are available on the Investor Relations section of our website.
As Brad discussed third quarter in October results demonstrate that we are delivering on our strategic priorities.
And that our business is resilient in this challenging macro environment.
For the third quarter consolidated revenues were down 1.2%, which includes the divestiture of 65 Canadian retail stores in October of last year, and 2019, and 2020 closures related to our store optimization program.
Mostly offset by an increase of 8.3% and brand comparable sales are.
Our largest comp sales improvement in nine years.
Adjusted gross margin rate was up 250 basis points in the quarter.
The 34.4% from adjusted gross margin rate of 31.9% in the prior year period primary.
Primarily due to lower sales promotions occupancy leverage on the 8.3% comp and favorable sales mix.
Adjusted operating expenses were $152.4 million, a decrease of 23.6 million or 13.5% from the prior year period, driven largely by our prudent management of expenses as well as the temporary benefits from cost cutting related to the pandemic.
As a result.
Adjusted income from operations was $32.1 million compared to adjusted loss from operations of 2.4 million last year.
Adjusted EBITDA was $49.2 million compared to 17.1 million in Q3 2019.
And adjusted earnings per share was 10 cents 38 cents from an adjusted loss per share of 28 cents in the prior year period.
Turning to our balance sheet.
Inventory was down 20% year over year again to the third quarter as we continued to manage our working capital prudently realize the benefits from an optimized brick and mortar store base.
And to improve sell through on key categories.
Looking forward, we continue to plan for improved inventory turns through more curated assortments and improved seasonal sell throughs.
As we discussed last quarter.
We completed our debt refinancing in July the accounting treatment for the refinancing results in a significant amount of future interest payments being recorded to debt on the balance sheet, causing our balance sheet debt to be significantly higher than the underlying principle balances.
We've included a reconciliation in our press release to bridge balance sheet debt to the principal amount outstanding.
This accounting treatment also means that interest expense recorded on our income statement will differ from our actual cash interest payments.
So we've got to do both income statement and cash interest in our press release.
As we previously discussed last year, we generated $130 million and proceeds from the sales of our Canadian stores to Canadian tire.
The $17 million. So the proceeds from this transaction that were not reinvested.
We're committed for reinvestment by October one 2020.
Were used to pay down our term loan par value under the terms of the agreement.
Our balance sheet and liquidity position is significantly improved as a result of our successful exchange offer transaction last year sales of our Canadian stores and our ongoing working capital management.
At the end of the third quarter, we've reduced the principal balance of debt net of cash by $700 million.
A quarter ending liquidity position of $349 million was comprised of 171 million in cash and 178 million of revolver availability.
Year to date during these unprecedented times, we took important steps to strengthen the business and our financial health.
We have been very disciplined in managing expenses working capital and capital expenditures as we push forward on our key strategic priorities to drive business improvement.
We reduced payroll expenses, including salary reductions as well as non payroll expenses by working with landlords on rent relief and negotiated payment deferrals.
Additionally, in an effort to increase our financial strength, we successfully completed our debt exchange offer at the end of July which accomplished the three financial goals, we set out to achieve which were.
One to extend our debt maturity.
To reduce our leverage and three increase our liquidity.
We're reaping the benefits of these actions as well as the strides being made against our strategic initiatives as reflected in third quarters, adjusted EBITDA improvement of nearly 188%.
As we get ready to close out the final quarter of the year, we provided our outlook for the fourth quarter in today's earnings press release.
We expect our consolidated sales for the fourth quarter to be approximately $675 million to $695 million with brand comparable sales flat to down low single digits.
With the majority of the fourth quarter now behind US we continue to be pleased with the performance of our core products.
Also please note that our 2020 retail calendar includes a 50 threerd week this year.
Which we estimate will try to $35 million in sales.
The calendar shift does provide a small headwind to comparable sales since a large portion of our pre new year's Eve sales moved from week 52 to the Noncomp 50 Threerd week.
For the fourth quarter, we anticipate that adjusted EBITDA will be $80 million to $90 million inclusive of the estimated $7 million apps when the 50 Threerd week.
Down from $119 million last year.
Given our forecast for flat to down low single digit Q4 comps, we would anticipate some occupancy de leverage and resulting gross margin pressure in Q4.
Also in October we were invested in store labor, because we manage store traffic to prioritize safety of our customers and associates.
As a result, SGN is expected to be the primary driver Q4 operating margin decline implied by our outlook.
In terms of capital expenditures, we now expect our 2020 spends to be $45 million to $50 million or 10 million above our prior estimate.
We pulled forward some of our spend from 2021 into the current year as part of our plans for rolling out additional next Gen stores and also technology to support our strategic priorities on the heels of these very encouraging results.
Please refer to our press release for all other items related to our outlook.
In summary.
Very pleased with the performance of the business in the third quarter and the underlying momentum of our core business. The continued into October.
Halloween results were better than expectations as we plan conservatively and her team did an exceptional job executing during a pandemic impacted Halloween.
We're looking forward to delivering new differentiated and aspiration ideas and solutions for our customers holiday and new year celebrations as we close out the year.
Our strategic growth priorities combined with our strengthened financial position and continued focus on managing expenses and working capital.
Have us well positioned as we approach the end of our fiscal year and into 2021.
With that I will turn the call over to the operator to start the Q and a session.
We will now begin the question and answer session to ask a question you May Press Star then one.
On your telephone keypad.
If youre using a speaker phone please pick up your handset before pressing the keys.
If at any time your question, it's been a dress and you would like to withdraw your question. Please.
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Again, that's star then one to ask a question.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Simeon Gutman of Morgan Stanley. Please go ahead.
Hi, Thanks, good morning, everyone.
Mike first question short term one on gross margin can you talk about how much you're saving from lower promotion versus how much it's getting dragged by price investments.
Sure thing this time so.
I, we have spent a lot of time actually looking at overall pricing and looking at it from both the promotional angle as well as looking at what customers are looking for from just plain pricing compared to what they would see that other retailers and.
As Fred mentioned, we did make those adjustments on a number of skews as we went through.
The course of the quarter the promotional savings, though are well more than offsetting the price decreases that we had we should continue to see that tailwind.
Really through the middle of next year. So I said that any price decreases from a rate perspective more than offset by promotional decreases and.
As an added benefit.
We really are generating exactly what we thought out of the price decreases which is.
As we get more competitive pricing, we are seeing the volume improve on those units and the volume then throws close through too.
Hi, more units in our manufacturing wholesale business that gives us better leverage there. So it it ends up being a nice strong flow through to the bottom line.
Got it and and now that you've gotten through this keep period and the business is generating EBITDA. Again are you are step closer can you talk about where you think the normalized EBITDA power of this business is and maybe a rough time frame to getting there and just one more component to that is it how much of it.
At least 21 or the recovery will be more margin dependent versus top line dependent.
Sure. So we are.
Obviously early in the recovery.
From having stores being closed in coated and so we're going through a lot of planning right now, particularly around 2021, it's early to provide a true framework for next year and and go forward.
We do continue to see opportunities across the business and the fact that the strength. We're seeing is coming through those core products I think bodes very well.
Really for all areas of the piano, but I don't want to get ahead of us and I think we'll be providing more more of a framework as we get into next quarter's call.
Okay. Thanks, guys. Good luck.
Thanks Simeon.
The next question comes from Rick Nelson of Stephens. Please go ahead.
Okay. Thanks, a lot Kevin good morning.
To follow up on that mix or traffic.
<unk> stores, how you're thinking about those you know the current timeline current value away or what.
Sort of where.
You're getting work early on.
And that cost.
Our route.
Oh.
<unk>.
Yeah as I said, we're we're very pleased with the results of our our Nexgen pilots of course, we would have liked to open the 35 to 45.
That we stated we would open at the beginning of the year, but we continually modified of.
The elements of the prototype.
Each new learning and we're excited by their performance we're.
We're really working through our 2020 work strategy.
Our continued plan to test and learn while we remodel or more of these stores.
We're thrilled with the outcome, thus far and look forward to the continued evolution and we are seeing a lift the lift is varies by category. So we continue to learn from that from a capex perspective, we also continue.
To improve the cost of these as we get increased increased learning.
You know I think we'll see as we move into 2021 and think about the development of these we're keeping them as capital light as possible, we're engaging landlords based on increased traffic to have conversations.
About their level of support for them with our prototypes, we didnt have a level of support and so we're looking forward to making them.
You know, having a a good payback and.
We wont venture ahead, unless they have the proper return on investment.
Okay [laughter] her about current.
Core CAD cataract core it is called <unk> <unk> go strong growth there.
Can you talk about.
Those categories represent <unk> of total sales.
What sort of growth, you're just saying I guess couple or category quicker manner.
What.
Charge our.
So.
Sure.
[laughter] Kirbys court category.
Yeah, those core categories.
Really the bulk of our of our business.
You know we have seasonal businesses that are.
You know I think we've talked about in the past.
That Halloween has represented as high as 20% of our total business and.
And we have seasonal businesses that are not as large as you might think so really the vast majority of our business is those core everyday businesses.
So as we think about what the consumer.
You know considers that the destination before it really is balloons and birthdays and entertaining and those milestone a case.
Asians and.
We're very pleased with our third quarter results in those and then as we move into October.
October we saw continued strength in those despite the fewer transactions in our Halloween business and even in the baskets of Halloween, we continued to see more of the core elements.
Core categories in the Halloween baskets.
And those that that core business continued to be strong throughout October.
[laughter] parents <unk>, if I could ask you about.
The story is our hybrid part done about that.
So, we expect growth or more stores closer and as her.
No no trader Joe's or port controller.
Yeah. So you know I want to be Super consistent with this overt overtime.
We're constantly examining our store fleet from a sales and profitability optimization perspective. We're regularly engaged is you would anticipate in rigorous analysis.
Both at store level and that market level.
As we look at population changes and shifts co tenancy.
Viability of the center repositioning of stores.
Obviously, those those are are a little bit of moving targets right now.
With the state or retail the challenges around co that so our rigor just increases and we looked thoroughly what opportunities we have to recapture share if we close stores.
And gained share where we can.
It is this process that has really resulted in a store openings store relocations and store closures.
In the past as it will you know and that will continue.
You know the good news is stores are required for curbside pickup they facilitate delivery in their extraordinarily convenient for balloons with regard to the school 2020, I would say that that is to be determined.
It's something that we're in.
In the process of as we speak.
And we continue to look at areas the white space.
And analyze it on a market by market basis.
Great [laughter].
Thanks, a lot and good.
Good luck.
Thanks, Rick.
The next question comes from timing the Korea of JP Morgan Chase. Please go ahead.
Hi, Thank you so much for taking my questions and congrats on a very strong been solid us.
So just continuing on the last question.
Do you expect to acquire the remaining franchise stores in the coming years or what's your plan with those.
Sure. So we have had in the past reduce the number of franchise stores by acquiring stores I think in this environment.
Hi.
It is it is all about making sure that we're being financially disciplined. So if there are franchise locations, where there's a particular opportunity where.
It's the geography that we would want to be and for a variety of reasons we can.
I have good economics on our side and we're certainly not close to it but also understanding the environment, we're being very cautious on cash so I wouldn't look for a wholesale broad plan.
Either way at this point, we're just approaching it very cautiously.
Got it that's that's super helpful. And then with the price reductions that you have taken a <unk> are those now are more or less complete or do you see more opportunity for price reductions and a quick follow up on that Oh I see.
The price reductions are you now more.
Price competitive versus the mass, whereas or less is a specialty basically I'm trying to understand your position in the price ladder in terms of the.
Competition out there.
Yeah, So I would say that our.
We we've taken on and impacted the skews that are data showed us initially.
Had price elasticity opportunities and whereas we really examined the price value of the product we had opportunities to either reduce price.
Or opportunities to increase.
Increase quality weird are not focused on price in any one competitor.
None of them are really specialty retailers.
Our who offer a one stop shop opportunities that we do.
We make it easier than most convenient.
Because we have all the categories of the party our competition does does not know the skew level.
We're highly aware of how competition is priced.
And we really balance that with our more comprehensive.
Levels of assortment, our knowledge and service as we consider our overall value proposition and.
And we do this with a constant eye on customer feedback.
Insights balanced by by data and analysis of price elasticity.
You know we have the heavy lifting in terms of the reductions behind us.
And as we cycle through the balance of this year and trends position into next year.
We'll we'll continue to evaluate.
You know we've gotten through the majority of it.
Got it Super helpful. Thank you so much.
Thank you.
The next question comes from Joe Feldman of Telsey Advisory. Please go ahead.
Hey, guys. Thanks for taking the question.
With balloons can you talk a little bit about the attachment rate of other categories or are you seeing it.
Improve lately or is it you know similar.
Similar or even worse potentially but I would think it would be better. It just seems like this there's a lot of strength in the category how is that driving things.
Yeah.
Yeah. So balloons is obviously a very strong category.
In the past we have talked about the fact.
That it does have a strong attachment rate.
It is also really a key.
The key driver of trips in in balloons are core to our long term growth.
Gross strategy, obviously, it was one of our five strategic initiatives to stabilize retail.
2020, and it will be it will continue to be a constant focus across our enterprise as we look to drive innovation in product and services.
Balloons to continue to drive relevancy.
Got it. Thank you and then I know you kind.
I kind of wanted to ask about with COVID-19.
Have you seen a change in trends and with the surge recently you know I know it would probably be in literally the last week or two that you might notice it in your business, but have you seen any difference in behavior.
Like that maybe we saw early in <unk>.
The pandemic when things were initially surging and then in the summer when they surged again.
You know, we have not seen dramatic sensitivity to.
Two co bids.
Third related issues, we we it that said.
I would say geographically.
You know if there has been spikes in certain geographies or we've seen some ebb and flow in those but have not seen them really at a at a macro level is is the environment as bulk.
Hi, Joe its helpful. Thank you.
An important point.
Got it I wouldn't covert first popped up there was there.
Lot of folks delayed some of their celebrations and so we did see that big pop down I think we're at the point where behavior underlying behavior is changed and there's still a great desire to celebrate and that has very definitely played into the trends for those core categories. So it is a little bit of a different time.
In terms of consumer reaction to two kobin.
That's helpful. Thanks, guys and good luck with this quarter.
Thank you.
The next question comes from cover Martinson of Jefferies. Please go ahead.
Good morning.
Look at the net guidance.
Guidance for the year, and that's kind of flat to the third quarter, how should we think about the working capital as you guys worked out for your Halloween inventory not so much back away.
And cash flow generation here as we close out the year.
Sure. So I two elements really on both sides of the equation for working capital on inventory you're right sell through on Halloween was much much better than last year.
So we are ending with less Halloween inventory specifically.
And I think we're broadly we are looking to be to have higher inventory turns going through the store to buy more prudently.
And manage that inventory tighter really over time.
And so you should continue to see that inventory have seasonal swing down.
Maybe a little bit even more than normal and the flip side of that is going to be we have managed accounts payable very tightly as we've gone through the year and our conversations with their vendors had been we want to match up the timing on payables with the timing on its cash inflows for for sales from.
Losing.
So versus prior years, we probably do have more of a buildup in accounts payable that will also I, Oh, hey itself down as we go across the rest of you.
Before and those two things should roughly offset.
And then the real driver being the EBITDA that we drive in the fourth quarter.
Okay, and then when we look at the the pilot stores.
Roll out of that.
What are the thoughts on the balloon shop being the focal point here is that something that can independently be expanded out to your store base.
Or is that something that is part of the pilot remodel if you will.
Today, it's part of the pilot and remodel.
As we tried to continue.
To learn about the power of that and as I've mentioned, we're we're very pleased with that one of the things that fit the nexgen pilots of have shown us is they've highlighted some of the friction points in our current legacy stores.
And so we are getting learnings.
We are not at this point planning on taking the full shop.
To the legacy stores. They are the centerpoint the nexgen Remodels and so we'll continue to think about them that way. However.
However, we get a lot of balloon look a lot of learnings around balloons from those and we are still in many of those learnings.
Okay, and then just lastly.
Great job in terms of managing your capital structure and the piece that remains is the term loan with the maturity coming up how are you looking at the structure today.
Sure so.
You're right. The next maturity up and our overall capital structure is that term loan a little bit less than $700 million now and coming due in August of 22, so little bit less than two years from now.
We continue to look at it I think as we show results like we did today. It just continues to build confidence in the long term.
In the <unk> long term trajectory of the business and confidence behind that.
The recovery in our financials and ability to drive cash flow.
Just inherently makes it.
Hey, easier as we look to either extend or refinance.
That debt and we'll be looking at which options are the better options for us as we get into next year.
Hi, but you.
You know not feeling like we have a gun to our heads today and we're looking to just manage it prudently based on.
Based on what options the market presents.
Thank you very much guys appreciate it all.
All right. Thank you.
The next question comes from William Reuter of Bank of America. Please go ahead.
Good morning, guys.
The first is I'm wondering if you have any data on the industry in terms of Halloween and how you think that your share may have fared over this period.
Yes, well.
We knew going in that NRF was forecasting Halloween I'm to be down approximately 10% down to 8 billion.
From an expected or from 8.8 billion.
In 2019.
You know, we anecdotally know that spirit opened 1400 stores this year, but.
But do not have data or data around there.
Results and so you know our strategy was really to increase our relevancy.
By growing our core.
Core categories.
And satisfy motor, though the total party occasion during the month of we did so and our Halloween.
Performance came in.
You know as as we expected.
And we're looking to learn we're looking to learn more as we get more results out of the marketplace.
Okay, and then on a related note given the commentary about the NRF estimate expect et cetera.
How do you feel that the competitive environment was this year.
I guess in terms of either mass hurt commerce cloud competitors.
Do you think that they changed their strategy in terms of the amount of time inventory advertising that they devoted.
To the took the event.
You know I think going into this season. It was it was clear the decor.
Would likely be the strongest part.
Part of of.
The Halloween season, UBS, we as a reserve the trend of how consumers are.
Our celebrating we anticipated that it looks like those who are particularly strong in the core.
Like a home depot or lowes.
Appeared to be bullish of the category.
In in decor, you know it appears as we anticipated with uncertainty around activities uncertainty around the trick or treating.
And especially kids activities.
With with regard to trick or treating or school activities, and then really with a lack of of licenses. This year with most license properties being pushed out till next.
Next year, you know it appears that people were more conservative in the costume and the costume accessory categories.
Great good numbers. Thanks.
Well.
The next question comes from Carla Casella of JP Morgan. Please go ahead.
Hi, I'm.
I'm wondering if you can give us some more color on the gross margin improvement you saw how much has it may have been driven by.
Less clearance first this mix shift and if there is any helium impact gross margin this year.
Sure so within gross margin I really had the biggest two factors being reduced.
Reduced promotions, which are significant I with a partial offset from the initial price reductions and then occupancy leverage was significant as well. So I think those two but at hand in hand, and we're the biggest by far.
We did see so from a helium perspective cost year over year. It was up very slightly enough not enough to really even make a difference in total.
We've reached that point of stabilization at least in the near term on pricing.
Balloons inherently are at slightly higher product margins. So when you look at helium cost at least at this point, it's still nets out to a healthy margin for us. So I that dynamic actually has been a net positive for us.
Really it does come down to a combination of.
Hi occupancy.
And promotional mix being Oh, roughly even in there. So we go into Q4 and look at the comps being down a bit I. That's why we say, we see a little bit of pressure coming on gross margin. It's just the occupancy de leverage going the other direction.
But.
Good good balanced progress really across the board on gross margin.
That's great and then just one question on wholesale and all of your wholesale customers fully reopened in do you see any permanent closures coming out of coal.
Cove, Ed and I'm, just wondering if any of your balance sheet items for receivables there or any of the other accrued there related to you know kind of weakness there pressure at the wholesale customer level.
[laughter].
So from a customer perspective, there are isolated I cases, within especially independence and franchisees the smaller.
Oh chains.
Where it clearly had pressure on their economics, I think a lot of those folks didn't have some of the benefit that we have coming out of of Cowen.
That national recognition the programs, we have around omni channel and balloons and so forth. So.
So there are a few isolated incidents there.
That are playing out I wouldn't say that significant in total so.
From a wholesale perspective I do we continue to see our customers building back.
We have had a couple of reserves, we taken on accounts receivable I wouldn't say that's anything that is going to move the dial significantly on our our net receivables or overall expenses, but we have made sure that were recovered from the perspective of anyone that.
<unk> has told us there's there's challenges.
So.
No we continue to see wholesale recovering.
And I headed back to a level that we feel is the more sustainable level going forward.
This concludes our question and answer session I would like to turn the conference back over to Brett Larsen Chief Executive Officer for any closing remarks.
I want to thank everybody for joining us today in conclusion, our third quarter in October results have been encouraging despite this challenging backdrop.
We're particularly pleased with the performance of our core non seasonal business during the quarter and into October, which demonstrates the strength and resiliency of our underlying business and our team's ability to execute against our strategic priorities, which have strong traction and are delivering very positive results.
We're also operating the business with greater discipline and control, which combines with our strengthened which combined with our strengthened financial position as a result of the recent debt exchange offer and continued progress on our strategic priorities helps reinforce our position of authority in the category for both the near and long term.
We continue to improve our relevancy and to position ourselves at the destination for all things Salvatore and thanks again, everybody for joining us this morning.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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