Q4 2020 Party City Holdco Inc Earnings Call
Good morning, and welcome to use of party city fourth quarter, 2020 earnings Conference call. All participants will be on listen only mode should you need assistance. Please take note of conference specialist by pressing the star key followed by zero. After today's presentation, there will be and opportunity to ask questions lots of question you made pricing.
And then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ian Heller, Vice President and Deputy General Counsel. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us.
At this morning, we released our fourth quarter and full year 2020 financial results you can find a copy of our press release on our website at Investor Day at Party City Dot Com.
Now I'd like to introduce our executive team who are here on today's call. We have Brad Weston, our Chief Executive Officer, and Todd Vogan, Chen our Chief Financial Officer.
We will start the call with some prepared remarks by Brad and Todd before we open it up for Q&A. Please.
Note that in today's discussion management may make forward looking statements regarding their beliefs and expectations about the company's future performance and future business prospects or future of eventual plans.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
Although we believe that the expectations reflected in these forward looking statements are reasonable we can give no assurance that such expectations will be realized we expressly disclaim any duty to provide updates to our forward looking statements, whether as a result of new information future events or otherwise.
Everyone to review the Safe Harbor statements provided in our earnings release as well as the risk factors contained in our SEC filings.
During today's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results for more information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures. Please refer to the earnings release and with that I'll turn the call over to Brad Watson.
Thank you Ian and good.
Morning, everyone and thank you for joining us today.
I'll review, our financial and operational results for the fourth quarter, and 2020 and then discuss our progress and go forward plan on our five strategic initiatives.
Todd will then elaborate on our financial results and <unk>.
Device of thoughts on how we are approaching 2021.
Before turning to our results I.
I wanted to start by expressing my deepest gratitude to the entire PC NHI team for their hard work and contribution throughout the year.
I could not be more proud of all day accomplished in 2020 rising to the challenges presented by the global pandemic and positioning us to win.
Right the environment.
And their grit and determination during these unprecedented times and allows us to maintain continuity of our retail and wholesale operations, while continuing to meet the changing needs of our customers, who look to continue celebrating and unique and different way.
And they did all of this while simultaneously executing against our strategic initiatives driving progress against each one enabling our improved financial performance and setting the stage for further progress and improvement in 2021.
Key amongst our accomplishments in 2020 at work.
Acceleration and expansion of our omni channel capabilities, including curbside pickup and delivery and dramatically improving fulfillment options and convenience for customer.
And more curated and edited assortment in store and online to better meet customers' changing needs.
It continued rationalization of the business and narrow our focus on our core North America and vertical model.
The initial rollout of next generation store formats, and 22 stores and pilot improved store experience and relevance with customer.
Successful completion of our debt refinancing, which combined with the additional refinancing of our term loan subsequent at quarter end significantly strengthens our financial position and flexibility.
Importantly, as a result of these transactions, we substantially reduced our debt and our next meaningful maturity is not until 2025.
Our diversity and inclusion work focused on listening to the organization with empathy and a bulk of our strategy around three core components.
Raising awareness training of learning culture, and developing our infrastructure to embed diversity equity and inclusion and belonging into our people practices and everyday behaviors.
2020 was certainly a year without precedent.
Our full year results reflect the significant impact of the pandemic to the business, including three months, where we operated and the closed store environment or with limited stores opened.
During that time, our response to COVID-19 was centered on supporting the safety and wellbeing of our employees and customers.
Importantly, though and the context of the pandemic, we successfully pivoted our operations and made meaningful progress on our five strategic initiatives as.
As we put in place the foundational building blocks to prepare ourselves for growth.
I will discuss in a few minutes.
This enabled of better than expected back half of the year with flat brand comps at retail despite the COVID-19 impact on our business that is centered around social gatherings.
Now, let me discuss the key highlights of our fourth quarter performance.
For the quarter sales were $648 million with brand comparable sales of negative five 9%.
As we shared in January the rapid surge and COVID-19 cases at a greater than expected impact on customer behavior and the months of November and December at.
As a result, we saw underperformance and regions like the northeast as well as in certain categories like tableware that are most impacted by the reduced size of social gathering.
Importantly, we were very encouraged by the strength of our core categories across the fourth quarter.
And celebration of occasions is a key focus and are central to expanding our relevance with customers and comparable.
Comparable sales and our core categories were up 6.5% in the fourth quarter, which bodes well as we look forward to the post pandemic normal we know will come eventually.
I will now briefly discuss the progress in 2020 on the five strategic initiatives that underpin our work to stabilize our retail business, which are having demonstrable impact and will continue to build momentum going forward.
I will then review our plans to advance our key priorities in 2021.
One developing a more relevant and store at spring.
In 2020, we executed work to determine optimal assortment and inventory level retail pricing seasonal transitions and a next generation store prototype.
We opened 22 next gen stores for the year, delivering a far superior customer and associate experience are.
Our work identified and eliminated approximately $88 million of seasonal product at the end of the year that was unnecessary to carry going forward and we will continue to optimize assortments across our core categories throughout 2020 one.
Because of inventory reductions and operational processes are essential to improving the customer shopping experience and create more time for our store associates.
On customers.
Shoe Wyndham balloons.
We saw significant success from our work around balloons last year and were rewarded with strong results and the category.
As the dominant player and the global balloon business from manufacturing and wholesale all the way through party city retail we are uniquely positioned and the category with an unmatched breadth of assortment innovation pipeline and distribution capabilities.
In 2020, we improved our go to market approach the customer inside led product innovation.
Inspiring experiences and expanded fulfillment capability.
We introduced new do it yourself balloon product supported by how to interactive content.
And easier for customers to realize their vision for their celebration.
We expanded the category by capitalizing on customer trends, making balloons of more accessible and relevant part of everyday celebrations.
Great.
Address value perception and key category.
In 2020, we address price perception head on.
Enforced by customer awareness and new price elasticity modeling along with trip driver and basket builder product profiling data, we've reduced party city retail prices on over 9000 Skus are almost one third of the total current active SKU count.
The customers notice and responded favorably.
With unit sales volume, increasing as projected driving incremental gross profit dollars for the enterprise.
As a result, we now have this critical work behind US. However, we will monitor and analyze price and data correlated with customer data on an ongoing basis to ensure we maintain relevance and based on price perception.
For <unk>.
Improve our customer engagement selling culture.
At the pandemic emerged we quickly pivoted and adapted our operating and go to market approach to meet our customers' evolving needs and enabling them to celebrate life's important milestones in a safe manner.
Improving customer engagement across our marketing messages are product and merchandising approach as well of digital experiences with our brands became critical to driving greater relevancy.
Our dramatic shift and digital content, including new and more relevant content format.
Carefully curated product assortment and inspirational solutions, and new technology has driven growth and consumer engagement as well as online conversion rate.
Digital workshops, and interactive content across our social platforms garnered hundreds of thousands of views and reached millions of consumers reinforcing our authoritative position at the celebration leader.
Five.
Built on our omni channel platform.
I already touched on the expanded fulfillment options, whose launch was accelerated by the pandemic and spring 2020.
We also fast tracked and improvements to our website experience.
Omnichannel purchase options simpler and more seamless.
This focus generated by online pickup and store curbside and delivery growth of approximately 35% in 2020, making these capabilities core to our customer experience.
As we look to 2021 armed with greater consumer insights and with a strong foundation to build upon and we're continuing our evolution and transformation.
We will take significant steps and furthering our mission to deliver the party platform by advancing the following fundamental building block.
Product innovation in store experience being celebration of obsessed and continued leverage of our vertical model.
Product innovation.
Our focus on product innovation is grounded in consumer insights and data.
Our goal is to stay extremely relevant with the consumer fortifying our position number 40, when it comes to celebration.
We have significant opportunity to advance our product relevancy with both increased innovation and quality.
Our teams are building and aggressive and more expansive innovation pipeline that will make us a better product manufacturer wholesaler and retailer.
We're also investing and quality.
Our focus is not to drive retails higher with more expensive product, but to bring product to market that is even more relevant and better resonates with the end consumer enhancing the joy and celebration.
And in store experience.
We will continue our relentless focus on improving the in store experience for customers and making it easier to shop.
The customer and operational insights we generated in 2020 are allowing us to both modified the go forward prototype for our next gen stores as well as improve the experience and our legacy stores.
These include new editing and Curating assortments across the chain with corresponding reductions in inventory needs and improve product adjacency low.
Our plan of Graham pipe as well as new services and experiences.
While we've not yet finalized the exact number of Nextgen store will open in 2021.
All new relocated and remodeled stores will be and the Nextgen prototype.
We're bullish on the results we have seen thus far with this new prototype and are planning to be aggressive with the number of stores, we remodel annually at this point.
By the end of this quarter, we will have 20, nextgen store remodel or opened thus far and 2021.
Bringing our total of 42.
We rolled out a comprehensive plan in February to elevate our engagement with customers and our stores.
This initiative will support and positioned team members to better partner with customers to of virus celebration of ideas and facilitate solutions for every party need.
Enabled by Curating, our assortments and and eliminating unnecessary task.
And our team members will be better position and partner with customers, increasing satisfaction and basket size.
These celebration occasion obsessed.
New customer insights of basket data illustrate our ability to reinforce our authority and leadership as the celebration occasion destination.
It starts with how we marketed occasion and communicate with our customer as of specialists versus that of generalists and the marketplace.
Which highlights our unique capability.
The focus on our core categories Brookfield balloon and entertaining has significantly contributed to our recent performance.
And when consumers want to make their celebration and special.
Our unique value proposition of the best assortment newest innovation party planning knowledge relevant pricing convenient fulfillment options, including delivery and one stop shop availability puts us in solid position to take market share.
And enhanced social and Influencer strategy will introduce celebration inspiration into the consideration set of more consumers building greater visibility for the complete party solutions and unique one stop shop opportunity, we provide demonstrating why the brand is the category leader.
The selection and purchase process for celebration of party city Dot Com will also improve significantly this year.
And then UX design includes the ability for customers to build their own customizable party package ready to be picked up and store or delivered to their home exactly the way they designed it.
We are also focused on our north American vertical model.
Following progress on rationalizing our international operations with a 2019 sale of our retail business and Canada combined with the sale of a substantial portion of our MCT and international business announced in December 2020, we enter 2021 with a streamlined focus on our core North American Party platform.
And with the goal of operating of more effective and customer led vertical model.
At key building blocks to achieving this and improve supply chain, which will be working on and 2021.
This includes driving new efficiencies and transportation and distribution and inventory levels throughout the vertical model.
We will add new demand forecasting and planning capabilities, along with expanded use of warehouse management systems and.
Importantly, we expect these efficiencies to help offset some of the increasing transportation and distribution cost headwinds the industry is facing which Todd will discuss.
And finally, we see continued market expansion opportunity as we further evolve our omni channel capabilities and extend our leadership position in key categories further and deeper across channel.
We will begin to deploy new digital commerce channel, particularly and social commerce, enabling us to make it easy for customers to shop us and their channel of choice.
We'll continue to keep you updated on our progress on this front as we have more to share.
Turning to our outlook.
The operating environment remains far too dynamic to provide any sort of formal outlook for 2020 one.
And we'll share that we are pleased with our quarter to date performance and Todd will provide some additional detail on our expectations from first quarter result.
As we think about the remainder of the year, we see more opportunity and the back half as vaccinations take hold and followed by a gradual return to more normal social gatherings.
Regardless, we will remain disciplined and agile as we demonstrated we have the ability to be in 2020.
So in summary, despite the challenges of the pandemic presented we are pleased with how our organization navigated the environment.
Quickly pivoting to meet the evolving needs of our customers all while prioritizing the health and safety of both our associates and our customer.
We made important strides on our five strategic initiatives in 2020 and significantly improved our financial position through the successful completion of our debt exchange offering in July and then the term loan refinancing in February of 'twenty one.
I am proud of all of that has been accomplished thus far and the hard work and commitment demonstrated by the entire PCH at team as we continue to transform the business.
As a result of all of this work, we are and a substantially stronger position today as we enter 2021.
We see significant opportunity to further strengthen and leverage our position of authority and the industry and now I'd like to turn the call over to Todd to discuss the fourth quarter and full year results in more detail and share some thoughts on 2021.
Thanks, Brad and good morning, everyone.
And I'll focus on the key highlights of our fourth quarter and full year performance and then I'll discuss how we're approaching fiscal 2021.
For full details regarding our 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, we're pleased with how the organization and navigated the environment during the fourth quarter and throughout 2020, as we swiftly pivoted to meet the needs of the evolving customer demand.
The challenging operating environment.
Strong progress and advance our strategic initiatives, both operationally and financially.
Despite the pandemic, we generated higher free cash flow and 2020 than we did in 2019, and we ended 2020 with approximately $296 million and total liquidity.
The fact that we were able to improve our cash flow during this challenging environment.
Speaks highly to the discipline and focus with which we operate our business.
Now turning to our results as a reminder.
2020, and our retail segment included a 50 <unk> week, creating a calendar shift.
And the full year retail calendar ending on January <unk>, and 'twenty 'twenty, one versus December 28, and 2019.
This pulled a significant portion of new year's Eve sales into the fourth quarter of fiscal 2020.
Which would have otherwise falling into the first quarter of fiscal 2021.
So in 2020 at 50, <unk> week contributed $40 million and revenue approximately $12 million and adjusted EBITDA and approximately eight and adjusted diluted EPS.
For the fourth quarter consolidated revenues were down 11, 4%, which includes brand comparable sales decline of five 9%.
And the impact of 77 store closures from our 2019 and 2020 store optimization program.
And of wholesale revenue decline of 24% on a constant currency basis.
The brand comparable sales decline was reflective of the rapid surge and COVID-19 cases that Brad discussed and importantly, though comparable.
Comparable sales for our core everyday categories during the quarter were up six 5%.
The Q4 of wholesale decline included four primary components first international revenues include and Canada, which declined sharply due to government mandated lockdowns throughout the quarter.
Second mass and value customers domestically, who had been performing solidly but were also impacted by the overall softness and party supply and demand during the quarter.
Next franchisees and independent too.
General savings and glad you of party city of retail stores throughout the Covid time frame.
And finally, our balloon manufacturing based on standard Graham.
<unk> said before and agree and innovative designs and market strength K resulted in strong relative category performance, but and.
We did have changed shipments moving out of Q4 and into Q1, resulting in third party revenues down six 2% and the third quarter fourth quarter excuse me.
Adjusted gross margin rate for the company declined 50 basis points and the quarter to 39, 7% from adjusted gross margin of 42% and the prior year period, and primarily due to fixed cost deleverage on the sales decline.
Adjusted operating expenses were approximately $200 million, a decrease of $5 million from the prior year period, largely from our expense management and response to the revenue declines and the quarter.
So as a result adjusted income from operations was approximately $59 million compared to adjusted income from operations of $91 million last year.
Adjusted EBITDA was approximately $77 million compared to $120 million and Q4 of 2019 and.
And earnings per share was 25 on an adjusted basis compared to adjusted EPS of at 51 and the prior year period.
For the full year consolidated revenues declined 21, 3% and at constant currency basis.
Which includes brand comparable sales decline of 16, 5%, primarily reflecting the impact of COVID-19 on our business.
77 store closures in 2019, and 2020 related to our store optimization program.
And of wholesale revenue decline of 21, 7% on a constant currency basis as both domestic and international customers contended with the same pandemic headwinds to demand and store operations.
Throughout the year.
Adjusted gross margin rate declined 290 basis points to 34, 2% from adjusted gross margin of 37, 1% and the prior year.
Primarily due to deleverage on fixed cost and the sales declines.
Adjusted operating expenses were approximately $616 million, a decrease of $82 million from the prior year.
Driven largely by our prudent management of expenses throughout the year as well as temporary benefits from cost cutting relating to the pandemic.
As a result for the full year.
Adjusted income from operations was approximately $21 million compared to adjusted income from operations of $178 million last year and.
Adjusted EBITDA was $96 million compared to 269.002 million 19.
And adjusted loss per share was <unk> 49, compared to adjusted earnings per share of <unk> 46 cents and the prior year period.
Turning to the balance sheet inventory.
Inventory was down 37, 4% year over year due to three primary drivers first.
We had $88 million and our previously disclosed disposal of seasonal inventory and the fourth quarter as we made the strategic decision to target higher in CS and sell through and less annual inventory carryover.
And next $66 million and international inventory that we sold as part of the previously announced sale of the substantial portion of our international business and then finally.
Ongoing working capital management, which included realizing the benefits of an optimized brick and mortar store base.
The details of the inventory write down and the sale of international operations will be included in the 10-K, which will be filed later today.
Thanks, and we look forward to 2021, we continue to came from improved inventory turns through more curated assortments and improved seasonal sell throughs and just overall core inventory management.
At the end of 2020, our balance sheet and liquidity position with significantly improved versus 2019 as a result of multiple actions that we took to strengthen our financial help this year.
These include the sale of a substantial portion of our AMC and international business, which closed in January and <unk>.
Accessible exchange offer transaction completed in July.
Last year's sale of our Canadian stores, and our ongoing working capital management.
As of the end of the year, we reduced your principal balances of debt net of cash by approximately $430 million versus prior year period.
Our year end liquidity position of approximately $296 million is comprised of $120 million of cash and $177 million of revolver and availability.
I'm very proud of all of that we accomplished this year and strengthening the business and our financial health.
Subsequent to quarter end and February we completed the refinancing of our 2022 term loans.
And the offering of senior secured notes.
Which is just yet another step to strengthen our financial health and flexibility and should provide the runway to implement our strategic priorities.
To that end we.
We feel confident as we're entering 2021 and an even stronger financial position.
So now let me turn my comments of how we're thinking about 2021.
While we're optimistic about the process of our prospects for sustained economic recovery in 2021, and the eventual return to normal.
We recognize the business risks remain elevated from the COVID-19 pandemic.
So given those factors and the interim we're not providing specific annual sales and earnings guidance. We are however, at providing select annual guidance for interest expense and capital expenditures.
We expect interest expense to be in the $90 billion to $100 billion range for the full year.
In terms of capital expenditures, we expect our 2021 spend to be and the $70 million to $80 million range with balance spend across our next gen stores web and E Commerce enhancements store facility investments and ongoing investments and our manufacturing and supply chain of assets.
And.
In terms of sales and earnings while we're not providing full year guidance. Since we are at about 75% of the way through our first quarter. We have provided our outlook for the first quarter and today's earnings press release.
Based on quarters and date results, we expect our consolidated sales for the first quarter to be approximately 397% of $410 million with a brand comp sales increase and the 26% to 31% range compared to the 13 week period in 2020.
Now as I mentioned in 2020 was at 53 week year for our retail segment, which creates a shift and the calendar weeks, causing new year's Eve.
Into the fourth quarter of 2020, and so the first quarter of 2021.
If we unshifted last year's new year's timing Q1 comparable sales that are in our guidance would still show an increase of 9% to 14%.
Quarter to date, we continue to see strength in our core categories as Brad mentioned earlier.
Of course strength has allowed us to drive strong demand for accordingly, traditionally heavy and many holidays that can end up being meaningful to our business, including things like Super Bowl Valentine's Day, 100 days at school, Dr. Seuss day, St Patrick's Mardi Gras and several others.
So to strengthen our core also bodes well as we look for a return to some form of normal as their current cost structure.
And enables strong leverage even on modest comparable sales growth.
For the first quarter. There are a few unique items that will impact our performance, which we did one of the highlight for your planning purposes.
First is the impact of new year's Eve, which we estimate of $9 million and EBITDA that was shifted into 2020 due to the 50 <unk> week.
Next area of couple of cost structures to evolving areas that we get asked about frequently our helium and omni channel and delivery costs and the total of those two elements. It was a headwind of approximately $6 million and the first quarter relative to 2018 and 2019 levels.
And as other sort of discuss search and transportation cost headwinds that we are working to mitigate also net of our mitigation work, we expect those headwinds to adjusted EBITDA to be $8 million to $10 million for the full year of fiscal 2021.
With the bulk of those costs expected to be recognized and the second quarter through fourth quarter.
And finally as we confirm today, we did complete the sale of a substantial portion of our international operations at the end of January.
The revenues for those operations were approximately $250 million from 2019 and.
And $55 million and the first quarter of 2020 with an immaterial amount of EBITDA in both periods and so those amounts are going to impact our revenue and metrics as we wrap around on the transaction and continued throughout 2021 to wrap around.
We clearly have a lot of moving pieces and our financials at the bottom line is that we are exceeding our expectations and 'twenty 'twenty, one thus far and the positive signs that we're seeing and our strategic initiatives and core business give us reason for optimism as we progressed through the year.
So in summary, 2020 was an unprecedented year, but we are very proud of all of that we've accomplished to advance our strategic priorities and.
And to enhance our financial health, while still maintaining the continuity of our retail and wholesale operations.
We finished 2020 as a better and stronger company and we are well positioned to capitalize on the opportunities ahead of us in 2021 and beyond.
And with that I'll turn it over to the operator to start the Q&A session.
We will now begin the question and answer session to ask a question you May Press Star then one on your touch on Tom If you are using a speakerphone. Please pick up your handset before pressing of key to withdraw from the question queue. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Seth Sigman of Credit Suisse. Please go ahead.
Hey, everybody good morning, and thanks for taking the question Hey, Brad you mentioned some regional differences I was hoping that you can elaborate on that what are you seeing and markets that are I guess considered more opened right now and are there any other leading indicators that you can point to for example, and I think most recently you talked about unit volume.
Being similar but sort of a trade down on lower ticket selling smaller kit is that something that youre starting to see reverse and I'm just curious how youre seeing the spring shape up here. Thanks, so much.
Yeah, as we said and our thanks, Seth as we said on our January release.
And 19 cases, having.
I had a greater impact.
And then than expected on customer behavior in the colder months.
Of November and December which was evidenced by underperformance.
Underperformance and regions like the northeast as we know outdoor activities are more conducive to social gatherings as we saw in Q3, so the cold weather impact.
And what was certainly there.
One of the questions you referenced about units.
And we did recently.
And at ICR in January talked about how our business improved when we got past that Christmas holiday, where we know that in November and December school and office activities and holiday gatherings were a drag on on Q4.
But our core business was really good.
The New year's Eve example.
Is that we sell party kits.
And for New year's Eve and increments of 10, and 25 5100 party guests.
We just experienced lower sales because in a little bit lower sales and new year's Eve, because we saw a significant increase in the 10 person kit.
While the larger.
<unk> had had declined as.
As we moved at the celebration that Todd mentioned.
Such as Valentines day Super Bowl et cetera, those were impacted by smaller gatherings Mardi Gras, obviously very large gatherings.
And now we're right and that St Patrick's day period.
But our core business remains really strong.
And so the notion that we can.
Have a really good result, with our core categories driving our business around the celebration of occasions versus seasonal really bodes well for us.
Okay. Thank you for that that's very helpful. My follow up question is around the gross margin and the recovery opportunity because I do think that's one of the biggest long term opportunities here.
If you think about your pricing work seems like based on what you said is largely behind your inventory. It sounds like it's cleaner hopefully sales are on a better trajectory I mean, how should we be thinking about the opportunity for gross margin I guess in 'twenty, one and then thinking longer term as well.
Chicken and its Todd.
So in terms of gross margin at this point.
We have done a number of things that put us in a good position from a margin perspective.
We continue.
Continue to rationalize some of the promotions and retail.
We've looked at how we optimize cost structures across our wholesale and manufacturing plant. So.
Margin at this point.
Comment that Brad made earlier, we really have set that cost structure, so that even with modest sales increases we.
We see that leverage start to flow through really quickly so.
The big driver of margin improvements likely will be the top line, but it just does not take that much on the way of topline growth to result, and leverage that does flow through and does drive leverage to the bottom line.
Okay. Thanks very much.
The next question is from Rick Nelson of Stephens, Inc. Please go ahead.
Kirk good morning, Kurt.
Heck of a question.
Brian.
And I tend to how you are planning for Halloween 2020 at.
And because corn and I realize you don't have guidance out there but.
And any.
Color around that would be helpful.
Yeah, you know clearly, we're not going to talk too much about any detail.
Around Halloween and there's a big period at our back half of our year of what I'll tell you is that we had a lot of really great learnings last year.
We made some changes to our in store experience to our digital experience into our marketing, which all created a better than expected Halloween for us we're going to take those learnings.
Our inventories are obviously cleaner as we mentioned is a write down on seasonal was had at Halloween is a piece of it and so are our newness and freshness and some of the innovation that will come into all of our categories will.
And we'll be improved this year and you know to answer your question on Halloween City, we had a lot of really good learnings and Halloween city as well and as we talked about before.
And we piloted.
Several different ways to be more competitive.
With with that experience and we're going to take those learnings and and turn that into a more aggressive posture. This year.
And kind of ex.
Sharon stores.
You could.
Big ticket comps.
There maybe versus the rest of the of train and you can share on economics.
And I know you mentioned new stores.
Incorporate at Nextgen kind of trouble.
And how many new stores are you thinking about for 2020 one.
Yes, let me address a little bit of.
Sort of the experience on our reaction and Cogs and talk a little bit about.
Cost and return and how we're thinking about that.
We are we really focused as I've talked about before on optimizing those assortments optimizing.
The inventory levels, and getting shop and shop environment, where.
We really focus on celebration occasions and end use vs.
Just categories of product.
As we set out to do that and more.
Most of in the back half of the year last year, we opened 22.
And next Gen stores.
And had quite a bit of learnings clearly we would have liked to have learnings from the entire year and.
Instead of just the back half, but those results as we've modified with made us increasingly optimistic and bullish about the concept of especially based on the customer reactions.
That we're getting as well as the.
And the easier operating model that it provides to our associates.
We've opened where we're bullish enough to tell you that we opened in 'twenty.
And we will of opened 20 and in Q1, not ready to discuss exactly what the final number is going to be for 'twenty. One because we're we're still working through that but.
And we're getting a lift we're finding optimization by category, we're finding optimization.
And in cost and we're excited to continue to be aggressive.
With this rollout.
Scott.
Yeah, and the only things that I would add are.
The overall capital expenditure guidance, we gave of $70 million to $80 million does include the cost.
And the Nextgen remodels or new stores this year.
So that tells you we're on.
Hi.
We're bullish as Brad said, we're marching forward, but we're also managing the overall cost and a very efficient way of Remodels costs day.
Pretty significant amount less than new stores, and so we're making sure that we're doing things and getting to the point and.
And the process, where we can cost engineer and maybe some of the things that we're doing much more effectively.
We do have and the plans for the coming year 15, new stores, approximately and approximately five closures.
So we continue to do our real estate work around where we might have white space or nodes of opportunity and.
And where it's probably better to the optimizing out of space I would say at this point and that is going to be and ongoing part of the strategy. We continue to see opportunities on both sides of that equation, where.
Our store footprint has really.
And I E.
Is in a position, where it's spread out appropriately and we can fill in and markets where there is a demographic that's growing that's an opportunity for us.
Once the of Rick I might add to that is we were certainly expecting that the customer reaction would be very positive to nextgen stores. Our associate reaction would be very positive and the nextgen stores and one thing that's really been exciting is as landlord response to our Nextgen stores people are they're obviously eager and this.
Environment to have something new.
And when we're at brick at win win.
Our stores are the hub of our omni channel experience and our ability to draw consumers in at their centers with helium and helium balloons and the excitement that comes with family shopping and that environment.
And there they are coming to the table.
And with a tenant allowances.
And that keeps us in line and tie back to what Todd said about our overall capital expenditure with this rollout.
Very good.
Oh.
Store count.
And <unk> 'twenty 'twenty, one at lower or about <unk> <unk>.
Where you are at today.
And we would expect to see a net 10 increase across the course of the year.
So not a material and move one way or the other and like I said, we've gone through our our geographies and feeling like we're we've got good spacing on our stores and relative good density and it's more on an opportunistic move.
And for Us.
We've got the question about franchisees and would we look at acquiring franchisees.
And at the same concept.
Applies.
I think while.
While there may be opportunities where.
There is a franchisee that we can work with to two to get a deal that gets us in a market and owning stores.
And I efficiently.
Something we are opened two but.
There's certainly there's no big push to go out and spend money on franchise stores.
Or anything like that.
Great.
Kind of transparency.
Question good.
And what goes where you push forward.
Thanks, Alright, thanks Robert.
The next question is from Carla Casella of Jpmorgan. Please go ahead.
Hi, and my question relates to the inventory and Kathleen E check at.
It's a little higher than what you had guided and can you just say what changed and depending of last time, he got it and killed at today's reporting.
Yeah. Thanks for asking the question and this is tod so.
We had said that we were going we had disposed of about $80 million and inventory and we did.
As we were going through and doing.
And this final tie out of we identified a little bit of additional inventory.
And what we were not able to physically disposals, but wanted to reserve for that was in exactly the same category of seasonal inventory that we didn't see.
And the need for next year.
And especially as we were going through and doing all of her at Postmortems on Halloween. So I would characterize it more of his final reconciliation and cleanup and anything more more broad.
And can you give us any sensor and what kind of inventory how much of it is halloween or cost and this versus how much of it maybe party goods and say that you've changed the SKU assortment.
And.
It's.
So all.
All of those the vast majority of the inventory that we're talking about with seasonal inventory so that would cut across everything from.
And I Valentine's, New year's Easter So of course, the bulk of it was Halloween Halloween is obviously the bulk of our seasonal sales but also.
And also as we're shifting the focus of our Halloween city stores.
There was opportunity within that as well so large portion of that is indeed Halloween inventory.
And then are you done with the process of evaluating at or do you think we could see further charges end to 2021.
Oh.
And I wouldn't.
So far as to predict if there may or may not be charges. If we knew there was a charge we would take it but I.
We are absolutely continuing to look at inventory I think.
There continues to be opportunity, particularly.
We've looked at seasonal but as we go more into some of our core categories theres opportunity to be more efficient with our inventory and.
And we're going through that process of analyzing it and figuring out what that might look like going forward at the very lease.
Without a doubt we are committed to turning our inventory quicker, having more newness and.
Ensuring that.
We have what it is that she is looking for on our shows and it's easily shop bubble.
Okay. That's great and then did you provide and I know you have and the past same store sales excluding E com.
I do not believe that we provided that specifically the digitally enabled sales were up 27%.
So we did have that in there.
And to be really honest I think we would love to move away from segregating stores versus digital because the overlap is getting.
And so intense.
The amount of digital sales that are ending up being fulfilled in store at curbside is becoming.
Pretty significant portion of our digital sales so.
So that that dynamic means we will probably move away from segregating and this year given COVID-19 and it just felt like the right thing that we had to do to show what the true digital orders were but.
But we would probably shift away from that and the future. Okay and did you say that digital penetration this quarter.
No we did not break that out separately.
We have said it was 10% and the past at clearly, we're getting more activity online and and so the goal for US is really to translate those online interactions into ideation into.
Party planning that can then be.
And the drag of store tripling order online.
I don't know that we have.
And our strong preference on that it's we're really she wants to buy from them. So.
So no we didn't break out specifically the amount of e-commerce penetration, but the online activity clearly growing significantly.
Okay, and I said one of their financing question, so and you've got some cap of it and you guided to Capex and you've got some of them exciting investments between nextgen and and renovating stores how much of your Capex would you call maintenance at this point.
Yes, it's always such a hard thing.
And the past we've said, we're in the $30 million to $40 million of maintenance Capex.
2020, clearly, we pulled back pretty significantly and you saw our capex get down to 50, there was a little bit of what I would call growth or initiative Capex and there. So that 30 to 40 for modeling purposes is probably a good good starting point for you.
Okay. Thank you so much.
Absolutely Thanks Carla.
The next question is from Joe Feldman of Telsey Advisory Group. Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions actually I wanted to comp and some of them the inventory questions and kind of was asking so.
Your time of turning it faster and.
Even again in 'twenty, one and I guess my question is down 30%, 38% for the year.
And that seems low to me.
And I guess I'm curious as to where it should end up maybe but could you give us like should it be down 5% at the end of 'twenty, one or is it going to be up a little.
Relative to 'twenty, and 'twenty or how should we think about the level of inventory at the end of the year.
Yeah, we're not say probably getting a little bit further than where we're at at this point since we're still going through the analytics.
I would say as you look at cash flow for the year.
We did carryover some deferred grants from 2019, but $40 million that we'll be paying back and of course of 2020.
More front half weighted.
And that should be at least offset by inventory efficiencies as we go through the year.
On the exact amount and we're like I said and still working through some of the details, particularly and the core categories, but.
But there is opportunity there and I would say just a day.
And maybe making that number of seem a little bit more tangible we did have the $88 million of seasonal inventory we wrote off.
There is about $66 million of inventory and international which now obviously moves outside of the company.
And then we did have on 77 and store closures so I.
Roughly 10% of of the chain where are at.
Is that inventory, obviously goes away with with the stores.
And we did have some structural elements as well as just plain core inventory management, which should be ongoing.
Yeah that makes sense, thanks for clarifying that and then.
Two of the quick ones the Nexgen prototype.
Yes.
I guess the question I have is more about are there things I know you are learning a lot in those stores, but are there things that you've learned that you can quickly rollout to the rest of the chain you know.
And that might actually have a nice impact this year.
In terms of the business.
Yeah.
Made a comment on our prepared remarks that.
Many much of those learnings are.
We can roll into our.
Legacy stores at doesn't quite provide the environment or the lay out debt, we'd like to but a reduced assortment our reduced inventory can bring our plan of graham's down quite a bit and make them more shop of bowl more reachable for the average consumer debt.
We're not.
Werent executing too in.
In the past so the fixtures might still be higher but at the height of the product.
And we'll we'll be reachable and instead of going all the way.
And to the top that'll be the most significant change and the shopping experience, but we will continue to roll all of our assortment rationalization and our curated assortments across the chain.
Got it. Thank you and then just at the one other one.
I know you'd mentioned and more to come on it but I'll ask anyway, you mentioned social commerce.
And b make making more of a play there and selling through social media I guess, if you could share of any more color like at.
Is it particular.
As of since the Gram or I don't know you know Facebook or how are you guys kind of approaching that.
On to go forward. Thanks.
Well, if you think about the places that are category shows up.
Sort of the best and the most yes, pinterest, yes, Instagram, yes space booked.
And now even Tictoc R L.
Elements, where our brand shows up so when we look at that and we looked at the inspiration and we're able to provide and the amazing ideas and the innovation and product and and the ability to showcase customers using the product.
And doing amazing things really gives us the ability to translate those at some levels of of Commerce, where that's available on our brand shows up great on social media and.
And so that remains an opportunity for us.
Got it and that makes sense and thanks and good luck with this quarter. Thank you.
Thanks, Joe.
And next question is from General <unk> of Goldman Sachs. Please go ahead.
Hi, Thanks for taking my questions.
First one is just on the wholesale business you outlined at four factors that really from the decline I guess first question and that's where all of those roughly equal on did that include any divestitures and there and then I guess just a follow on and this is the first quarter. It seems that we saw that level of divergence between retail and.
And wholesale so granted the comparability versus the prior year was a little bit different but was there anything that kind of change for one versus the other or do you see it and more temporary or permanent in nature, specifically related to the value of customer you spoke about.
Certainly.
So I definitely not all equal.
And it's fair to say as a franchise and independent stores has had a record of go of it versus our retail stores.
And true really throughout.
<unk> done at.
And it makes sense because theres just not at the same infrastructure around.
On the channel and so forth so.
It has been a little bit slower go on that footprint.
We're still working closely with those teams.
International has had a lot of headwinds and.
International I'm, including Canada, and and and that and we've gone back and forth on methods and the past.
So.
For both Canada as well as our European.
And Australia businesses, there just have been a lot of cash.
Currently a significant government and shutdown and regulations requirements and so that's just a natural barrier for wholesale debt.
Didn't necessarily see and the U S store base.
And then from the others at kind of follows along a similar path with what we see at our in our retail business. There is.
During the quarter.
Clearly as we got into more of the seasonal timeframe more of that celebration timeframe, where theres, both work and family celebrations that we're scaled down.
And there were just headwinds there and that the translators itself across all of the customers.
Okay. Thanks, that's Super helpful. And then just a follow up to make sure I understood correctly.
The 6 million headwind expected that's it for the first quarter from helium and on me is that.
That's correct, yes, yes, that's the total of this at yes.
Okay, and then would you feel comfortable breaking these out and if it leans more toward one of the other I mean, I guess, because I've been thinking about 'twenty, one helium at sort of flattish relative to 19 at is not an incremental headwind does that not wrong is that not the right way to think about it and then I guess based on the visibility that you have should we in fact model at <unk>.
And as of as a headwind for the full year off of and 19 day.
And if you're comparing back to 2019, there is an increase and cost there.
2019 was.
Uh huh of a lot of ups and downs.
But as of as a general rule.
Helium cost of kind of settled into a level that is lots of good 40%, 50% higher than where it historically had been pre the shortage.
And so.
And there will be a little bit of headwind there I would say for the $6 million.
So it was one that was dramatically more or less then we probably would have put more emphasis on that so you can.
And you can assume it's relatively spread.
Okay, Great and then another way to think about helium too is and back in 19.
Helium shortage really extended through the first half of 2019 and the recovery really started.
In late Q3, and Q4 of 2019.
Okay, Alright, perfect that's helpful.
And then just finally on Capex I know you gave the broad strokes breakdown on the spend but and just.
And just maybe a little more granularity on what.
And typically you'll be spending on this year that you didn't spend on last year and how that might flow through the top.
Top line I think that's at the back of the year.
I'm not sure.
And.
From a capital spending perspective.
Hi.
A few things versus last year first.
And obviously pulled back quite a bit on store facilities, what I would call semi and maintenance spend.
And so.
You know youre going to see a little bit more investment on things like air conditioners, and things that make our stores.
Fresh and the way that they should be.
And it will be pretty spread and that we are going to have more on the way of E Commerce and technology spend as we get going more on some of the e-commerce capabilities that Brad talked about.
And then <unk>.
Next Gen stores are we would expect to ramp up across this year with 15, new stores is hired and you've done a little bit so at a little bit of new stores, but I would just.
At a general rule of thumb technology.
It was probably a little bit more meaningful to the overall total.
And I mean, you can imagine we're doing quite a bit of work as we planned.
Our capital expenditures to really ensure that they are focused on the investments that are going to drive.
Future results and and.
A little bit more of a surgical way and then we may have done and the past.
Thanks for all of the car.
You bet.
The next question William.
I'm sorry. The next question is from William Reuter of Bank of America. Please go ahead.
Hi.
Thanks for taking the question. It was good to hear about the retail tailwind here and the first quarter I think it implies that wholesale is going to be a little bit weaker than maybe I was expecting.
In the guidance for both revenue and brand comps what does that imply for wholesale.
While we were probably getting further then.
We would normally go and.
In terms of guidance.
I would say are at.
And this helps the.
And.
Oh.
We would expect to continue to see.
Portions of the business like the franchise and independence.
Perform short.
And what our retail performance days until there is more of a come back from the pandemic. That's just I think of structural thing that will correct over time.
Yeah.
And we have seen ongoing.
Ongoing.
Pulled back there were shutdowns really I.
And Canada.
And that have extended into the quarter as well so I tough to overcome when the economy is shut down those are probably at two of the more meaningful pieces and yes, I think we see.
Wholesale of having a lot more opportunity as we get further into the year.
So hopefully that gives you a little bit.
Yeah, and certainly one stack things take hold and celebratory behavior. If you will be returned to normal.
Not only would we expect increased improvement and our retail business, but then.
And broader retail businesses than the wholesale business follows.
Okay, Yes, some companies have calculated comparable brand sales differently based upon when stores were opened and closed but I guess it does imply that wholesale is down and the second quarter or sorry on the first quarter is that right.
I think that would be fair with the revenue guidance we gave.
And I think it does clearly imply that there's headwinds there.
Look there have been as we've gone through the last several quarters.
Okay, and then just thinking about the lack of or I guess.
Potential port congestion are you expecting that you are actually short on inventory and it may be tough.
To get inventory to the places you need at over the next couple of quarters if demand increases.
We actually have put a lot of work and to supply chain part of the capital that we're spending is around supply chain. This year to improve our overall efficiency and effectiveness. There is cost center wins that were there we talked about on the call.
From a timing perspective, there are little things around availability of shipping containers, but by and large most of our goods come into the U S through east coast ports and.
And because of that we don't face the same level of pressure and congestion that maybe a lot of other retailers do.
The team of really has actually been doing a good job from on importing perspective, making sure that things are getting through the ports and to us.
And I on a timely basis so.
Feel we feel good about the flow of supply there.
Great Alright, that's all from me. Thank you.
Thank you.
And.
The next question is from <unk> Martinson of Jefferies. Please go ahead.
Good morning.
Certainly hear you on the colder months hitting the outdoor gatherings and I was wondering though and the first quarter the impact kind of and quantify the impact of the Texas storms and the weather up here and that we've had in the northeast kind of of what was the drag on the performance.
So there has clearly been and impacts always quantifying whether as of as much or at a science, but.
Based on what we've seen so far at has been a little bit more than a percentage point of impact.
The impact on our quarter to date sales are.
We are wrapping around on a year that didn't have a lot of weather impact last year. So so that does that.
Of an impact on us and it's if you think about it as of about 1% that's probably a good range.
Okay and then.
Yes, there were some of them.
And there was a period of time and we had approximately 200 stores that were.
Closed or had limited hours over a few days based on.
The severe weather that we saw which.
Drove a that's a fair piece of the chain that was impacted for a few days.
Okay and I noticed there was an income tax receivable of about 57, and a half million I was kind of of is that cash that's coming in here during 2021, and how should we think about cash taxes for the year.
Yeah. So.
We do coming off of.
<unk> thousand 20 has.
And.
Taxable loss that will be claiming as part of the tax return process that typically takes place.
And the back half of the year and then there is a normal.
Refund process the IRS goes through it.
All of those according to plan and that means that we would get that cash back this year.
Probably towards the later part of the year.
From a.
Looking at estimated payments going forward, probably the best way to think about future cash or 2021 other cash taxes.
As we get back into and income position, we will be making estimated payments, where our cash taxes should roughly reflect the amount of.
Tax expense of 50 years that at 25 ish percent tax rate.
Going through the year.
Okay and.
And then just post the refinancing and where.
Do we stand today on the on the revolver balance and the liquidity having cleared clear.
Cleared the structure now with the refinancing that you did.
Yeah.
And I think we gave a specific update on and exactly where we're at from a liquidity perspective, but part of what we did do.
Was to also extend out our ABL. So we've got the ABL in place for another five years.
And with similar borrowing base and calculations and so forth.
And of course structure has stayed the same.
We did pay off day.
700 million dollar of little less and that term loan with $750 million. So that also helps provide just a little bit of of liquidity to cover the cost of the transaction and a little extra so.
So as a general statement, we're feeling good about where we're at and liquidity perspective.
We continue to manage cash tightly.
But with the positive signs, we're seeing as we go towards the back half of the year.
And we're feeling like we're in a solid position.
Thank you very much guys I appreciate it.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Brad Watson for closing remarks.
Thank you everybody for joining us today.
In conclusion, 2020 was a monumental year for us and I'm extremely proud of all of that we accomplished we were keenly focused on stabilization of our retail business to which our flat brand comp at retail on the back half of the year is a testament, despite the pandemic impact on social gatherings.
On the financial side, we made.
And we made significant efforts to address our debt, which drove down the overall amount of debt and dramatically increased our financial flexibility, including the extension of our first maturity out to 2025.
As we begin 2021.
And a very different position as a company both operationally and financially than we were just a year ago with the building blocks for future growth that we put in place and 2020, we have a strong foundation upon which to build this year, we remain intensely focused on the consumer and more effectively operating and leveraging.
Our unique north American vertical model as we continue our transformation and further strengthen our industry leadership position. So thanks again, everyone for joining us this morning.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.