Q3 2021 Party City Holdco Inc Earnings Call
Good morning, and welcome to the party city third quarter 2021 earnings call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Eric Warren Treasurer, and head of Investor Relations at Party City. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us.
This morning, we released our third quarter 2021 financial results.
You can find a copy of our press release on our website at Investor <unk> Party City Dot com.
Now I'd like to introduce our executive team who are here on today's call we.
Yeah, Brad Weston, our Chief Executive Officer, Todd <unk>, our Chief Financial Officer.
We'll start the call with some prepared remarks by Brad and Todd before we open it up for Q&A.
Please note that in today's discussion.
If I may make forward looking statements regarding their beliefs and expectations about the company's future performance.
These are business prospects or future events plans.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
Although we believe that the expectations reflected in these forward looking statements are reasonable we can give no assurance that such expectations will be realized.
We expressly disclaim any duty to provide updates to our forward looking statements, whether as a result of new information future events or otherwise.
We urge everyone to review the Safe Harbor statement provided in our earnings release as well as the risk factors contained in our SEC filings.
During today's call, we'll refer to both GAAP and non-GAAP financial measures of the company's operating and financial results.
For more information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measure.
Please refer to the earnings release.
And with that I'll turn the call over to Brad West.
Thank you Eric Good morning, everyone and thank you for joining us today.
I'll begin our call with a review of the highlights of our third quarter results as well as our October and Halloween season performance.
Then I will discuss the operational progress, we're making against the strategic priorities that support our purpose to inspire joy.
And make it easy to create unforgettable memories I'll go.
I'll provide more detail on our financial performance as well as some outlook commentary before we open up the call to your questions.
Our Q3 results came in at the high end of our expectations with total sales of $510 billion brand comp sales up seven 5% year over year, and adjusted EBITDA of $42 $9 million.
Versus 2019 comp sales were up 14, 2%.
These solid results were fueled by continued strength in our core categories, demonstrating the traction of our overall strategy.
While we acknowledge macro tailwind based on consumer spending trends the superb execution by the entire PCH igene, securing merchandize managing through the significant supply chain disruptions impacting the industry and staffing the stores to meet the demand resulted in an excellent third quarter.
And exceptional beginning to the fourth quarter.
Some encouraging highlights of the third quarter to mention are.
Continued strength across all core categories, which experienced excellent growth on top of a strong 2020 performance during the same quarter.
This supports our mission of being customer and celebration obsess and demonstrates relevancy with consumers ensuring we are top of mind when it comes to anything celebratory.
Our domestic wholesale consumer products business is regaining strength as projected which is reflected in our Q3 results.
Anagram, a key piece of our wholesale business continues to perform extremely well achieving record sales and profitability in the quarter.
We're continuing to increase production capacity to keep pace with the increased demand.
From a profitability perspective as expected we saw inflationary pressures, we effectively manage the business in this environment, including implementing select price increases.
Our pricing powers reflected in the consumers' acceptance of our pricing actions, which bodes well for us as we navigate Q4 and soon 2022.
Our commitment to serving the customer through our Omnichannel focus accelerated our digitally enabled sales by 36% over 2019 and digital sales fulfilled in stores grew by 233%.
We are committed to making it easy by allowing customers to choose their preferred purchase fulfillment option.
We enhanced our digital experience with new exciting solutions, selling and customer engagement features an initiative that lifted our sales driving over a 60% increase in conversion versus 2019.
Now moving onto our October performance.
For the month of October comparable sales were up 16% versus prior year and up 14% versus 2019, which was ahead of our expectations heading into the season fueled by continued strength in our core categories sales performance as well as the strong performance of our Halloween business.
This result is a testament to the success of our overall strategy and positions us well for the remainder of 2021 and beyond.
Our performance in core categories continued to gain momentum into October with comp sales versus 2019, improving 130 basis points over Q3.
In particular, Faber pinata entertaining and candy solve the most significant improvement.
Our reset non seasonal candy produced the most exciting results as our customer is responding to the changes we've made in the recent reset what the 2500 basis point trend improvement.
And our marketing approach was also more balanced this October with non Halloween media spend in the mix, which positively influenced our non seasonal business. During one of the biggest birthday months of the year.
We are thrilled with our Halloween results this year.
Strong execution by our teams and our improved Halloween go to market strategy was evident across all four channels of our business.
This combination of party city retail Strollers Party city Dot Com and Halloween City stores, along with our wholesale business has given us a platform that is unmatched in the industry.
The improvement in our overall Halloween go to market strategy includes upgrading our.
Our product assortments by significantly improving that newness, adding key items, improving quality and increasing innovation.
Inspiring customers through product vignettes, which combined costumes and related accessories and dedicated sections on our sales floor as well as expanded out to content online.
These efforts reduce friction points in the shopping experience and reinforce our position of making it easy for customers to create compelling looks that set us apart from the competition.
Reinventing our Halloween city pop up format based on tests conducted in 2020.
This change yielded the strongest results we've experienced within the format to date. These.
These results enabled us to translate new learnings into our party city experience and advance our execution of pop up stores.
And the improved Halloween execution also drove positive consumer product sales and strong sell throughs for wholesale customers.
Importantly, we were in a strong inventory position for the peak Halloween season.
We started flowing new receipts in June with most slowing just words in September and October.
And against an industry backdrop, where it was often challenging to find product. We were pleased to be able to deliver for our customers. This Halloween season.
And we enhanced our product margins year over year due to the work we've done to consistently reduce our carryover inventory as well as the reduction in promotional discounts. So overall it was a great October led by our core business and strong Halloween performance across all four channels.
Spike the market backdrop.
We're very encouraged by this year's results and believe we have even more opportunity for next year as we build on this year's success.
I will now discuss the progress we made in Q3 on advancing the fundamental building blocks of our transformation strategy, which a product innovation and quality.
In store experience.
In celebration obsessed and focusing on our north American vertical model.
Starting with product innovation.
Fresh product and innovation are important to inspiring fun and new ideas for celebrations, we're leveraging consumer insights and data to drive our assortment decisions, which is accelerating growth in important categories.
In 2021 we've reset five categories Party favors girls birthday boys birthday, Candy and solid tableware.
Within these resets we've introduced over 1000, new products driven by consumer led innovation.
During the remainder of 2021 and into 2022 we will reset the remaining categories of our portfolio and we'll watch it similar number of innovative items as well as significant quality improvements.
We're also investing in product quality, which is an important complement to the <unk>.
Work and innovation.
We're capitalizing on the consumers' desire to purchase higher quality items across products that can carry higher price points at similar or expanded margins and it has been very well received by the consumer.
We continued to see strong results from our effort to drive meaningful innovation and upgraded quality as an example in our Halloween season. The team established a partnership with Academy Award winning makeup artist Christian Tinsley.
These products featured innovative special effects makeup items that offered consumers the quality level similar to a movie production.
We supplemented these products with strong how to digital content that feature tutorials by Christian showing customers how to apply the product to achieve a realistic look.
The combined impact of quality innovation and strong digital content resonates with customers and reinforces our authority as a specialty retailer.
Moving to in store experience.
In Q3, we opened or remodeled 18, nextgen stores, bringing our total to 74 to date.
We plan to have 21 additional nextgen stores by the end of 2021, bringing our expected year end total to 95.
We continue to be pleased with the results. Our next gen stores are producing as we innovate and refine the prototype.
In fact, our remodeled stores are averaging a mid single digit sales increase compared to control stores.
Even when assumptions vary from the norm, we generally target payback period on each store of less than 24 months on average.
Based on the continued strength, we see in our next Gen store performance, we remain committed to an aggressive rollout plan in 2022 and beyond with the approximately 100 to 125, nextgen remodels or openings target for 2022 which would result in about one third of the fleet being.
Converted.
Next being celebration occasion obsessed.
We are steadfastly focused on our relevancy with consumers as we build trust and increasingly become their destination for all things celebrations.
This is strengthened by our commitment to our plan of introducing an unprecedented level of innovation across the major categories. This year.
Our focus on differentiating our core categories and paid off which we see in the core metrics that demonstrate improved relevancy.
And our seasonal categories are now achieving significantly improved sell throughs, resulting in an improved inventory turns and gross margin returns on inventory while exceeding sales plan.
In both our core and seasonal category. The improvements are driven by greater focus of current trends.
The items and more curated assortments, which improves not only shop ability for the consumer but also efficiency for store associates.
Our stronger integration of data into our processes and our improved understanding of consumer needs is accelerating our ability to execute and produce stronger results.
And our commitment to serving the customer and their preferred method is driven results in omnichannel sales that outpaced our overall performance.
And finally, focusing on our north American vertical model.
As we will leverage our North American Bertel go model, we're investing in our leadership infrastructure and resources throughout the supply chain network.
Importantly, we're increasing capacity in our manufacturing plants as we focus on strengthening our domestic capabilities and execution.
While there are broad based supply chain headwinds across the industry.
We're finding alternatives and working through the challenges.
As an example, we were adjusting our order timeline throughout the supply chain and continue to find transportation alternatives to mitigate what we expect will be continuing volatility.
We are less than two months away from the end of fiscal 2021, and what a year it has been.
I am very proud of how our teams have navigated an uncertain and dynamic environment across our manufacturing operations.
In supply chain as we continue to better leverage our unique north American vertical model.
They did this while making measurable progress against each of the fundamental building blocks of our transformation strategy, all of which better position us to strengthen our market position and further our share gains.
As we prepare to close out the year, we feel good about our positioning for the holiday season, and our teams across the business are heads down planning and getting ready for 2022.
We will continue to update and improve our product assortments and inventory position as we expand our relevancy with consumers and elevate their experience with us.
Given the still dynamic operating environment, we will remain flexible and agile with our learnings from this year, which gives us increased confidence in the trajectory of our business as well as our inflation mitigation strategies.
To that in as we sit here today, we anticipate supply chain headwinds.
Assist into 2022.
Importantly, we are heavily invested in delivering an improved customer experience as well as exercising our pricing power in the celebrations market by expanding our already strong understanding of where the consumer is receptive to increase prices. We have seen success already on this front as reflected in our strong recent result.
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And now I'd like to turn the call over to Todd to discuss the third quarter results and our 2021 outlook in greater detail.
Thanks, Brad and good morning, everyone today I'll focus on the key highlights of our third quarter results as well as our October and Halloween performance and then I'll discuss how we're approaching the last few weeks of our fiscal year.
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 are very pleased with our third quarter results that came in at the high end of our outlook and we're thrilled with our October and Halloween performance.
For the third quarter consolidated revenues were down approximately 4.4% versus the prior year period, driven by the divestiture of a significant portion of our international operations in the first quarter of 2021.
This was partially offset by strong core retail and wholesale sales growth.
Retail net sales increased eight 9% versus last year, and 8.0% versus the third quarter of 2019.
Our strong brand comp along with better performance within an increased number of Halloween city stores.
<unk> comparable sales increased approximately seven 5% year over year, driven primarily by strong performance in our core categories.
2019 brand comparable sales increased 14.2%, including a 27, 9% increase in our core categories.
In terms of e-commerce the percent of our sales that originated online were approximately 14, 2% of our retail sales mix, an increase of 140 basis points versus 2019.
Wholesale revenue for the third quarter decreased 33, 6% versus 2020, primarily due to the divestiture of our international operations in the first quarter of 2021.
Excluding the impact of the divestiture.
Sales revenues increased seven 8% versus the prior year period, or 14, 5% versus 2019.
We were pleased by the improving sales trends, we delivered with our franchise and independent customers in the third quarter wholesale remains an important strategic part of our business.
We're focused on driving continued growth and we are encouraged by the third quarter performance.
Adjusted gross margin rate for the third quarter expanded approximately 175 basis points from the prior year period drew.
Driven primarily by the divestiture of our lower margin international operations and leverage on retail occupancy costs.
Adjusted operating expenses were approximately $158 million or 31% of net sales.
230 basis point rate increase versus the prior year.
Really driven by the international operations divestiture as well as increased investments in store labor.
As a result, adjusted income from operations was $28 million compared to $32 million last year and adjusted loss from operations of $2 million in the third quarter of 2019.
Adjusted EBITDA was $43 million in the third quarter compared to $49 million last year and $17 million in the third quarter of 2019.
As a reminder, our divested international business generated adjusted EBITDA of approximately $8 million in the third quarter of 2020.
And $6 million in the third quarter of 2019.
And third quarter adjusted earnings per share was <unk> <unk> compared to 10 cents in the prior year period, and adjusted loss per share of <unk> 28 tenths in the third quarter of 2019.
Now turning to our balance sheet and cash flow.
Inventory was down approximately 17% year over year, driven primarily by two strategic items that we've discussed previously.
Namely the disposal of seasonal inventory in the fourth quarter of 2020 in order to drive higher in season sell through and less annual inventory carryover.
As well as the international inventory that was sold as part of the international business divestiture.
Together these items accounted for approximately $154 million of reduced inventory.
<unk> in a year over year increase of approximately 7% excluding these two items.
We continue to prudently manage our working capital and we expect ongoing opportunities for improved working capital levels.
Year to date through the third quarter net cash used in operating activities increased to $74 million from $57 million in the prior year period due to an increase in seasonal inventory and related costs as well as the repayment of deferred rents from 2020.
We were pleased with our ending liquidity position, which increased by approximately $90 million during the quarter to $356 million comprised of $61 million in cash and $295 million of revolver availability.
We ended third quarter with a principal balance of debt net of cash of approximately 1.3 dollars $7 billion.
<unk> was approximately $41 million higher than the prior year period.
Now, let me turn my comments to our outlook.
We remain optimistic about the trends throughout our business and the prospects for continued economic growth.
We also recognize that the macro environment is not without uncertainty given the current inflation and COVID-19 risks.
These factors are reflected in our sales and earnings outlook for the fourth quarter, which was included in today's press release.
In the fourth quarter on the heels of the strong October we expect our consolidated sales to be approximately $685 million to $700 million.
With the brand's comp sales percentage increase in the high teens versus the comparable 13 week period in 2020, and a low teens percentage increase versus 2019.
Lastly, we expect Q4 adjusted EBITDA to be in the range of $100 million to $110 million.
From $77 3 million in 2020.
There are a few items to highlight related to our expectations in the fourth quarter.
First for modeling purposes. It is important to note that the divested international business generated approximately $59 million in revenue in the fourth quarter 2020, and $65 million in 2019 with an immaterial amount of EBITDA in both years.
Second like many in the industry, we are experiencing heightened inflationary impacts on our business.
Cleaning freight and labor cost headwinds.
With the continued challenges facing all global supply chains, our logistics team has taken prudent actions to ensure high in stock rates for the holiday season.
We feel confident that we are well positioned to police support or holiday strategies, but we also expect to incur higher freight cost over the near term.
We are taking additional pricing actions as well as other cost mitigation actions to limit the overall impact on our profitability and.
And we expect our pricing actions to offset the majority of the fourth quarter headwinds.
While the nature of inflation is still quite dynamic based on our current plans. Our guidance includes the estimated fourth quarter impacting overall inflation net of our mitigation efforts.
In the range of $5 million to $10 million.
Note that in the third quarter total net inflation headwinds were approximately $9 million, which was in line with our expectations at 7% to 12 novel.
In terms of Capex, we're on track to finish the year with Capex spend in line with our prior expectation of $80 million to $90 million.
Which includes investments in our next generation stores as well as capacity investment and supportive anagrams growth as previously discussed.
So in summary.
Very pleased with our third quarter and October results as well as the outlook for the balance of the year, which highlights the improving trajectory of our business our.
Our fourth quarter guidance reflects strengthening top line, which will provide improved occupancy leverage as we also anniversary the sale of our international business.
Benefits should be partially offset by shrinking net input cost headwinds as our pricing actions began to have a more material mitigation impact.
These net input cost headwinds are down from the third quarter and expected to improve further as we go into 2022.
Overall, we were bullish in our positioning and our ability to capitalize on the many opportunities we see for the business in the final quarter of the year and beyond and with that I'll turn the call over to the operator to start the Q&A session.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Rick Nelson from Stephens. Please go ahead.
Sure Kevin.
What how.
How long.
October strength, but you pointed to can you break that down between Halloween sales and the non Halloween category.
Thanks, Rick So Halloween results are embedded in.
The October performance and we were extremely pleased with our Halloween results and it was positive on a comp basis.
To both 2020 in 2019, so we're focused on maximizing.
The season really leveraging all four of our <unk>.
Channel, which is a significant competitive advantage for us between party city stores Party city Dot Com Halloween city pop up stores and our consumer products wholesale business. So most importantly.
Our overall strategy is really focused on increasing relevancy for all things <unk>.
Celebratory and our core category.
This is key to that and as we've said.
The Cajun obsessed and focus being relevant to consumers across our core business and we're seeing a payback on that strategy.
Continued strong.
Performance of our core business.
And that business is less volatile than seasonal and in higher margin, which is positive. So very pleased with consistent strength in core and thrilled with our improved Halloween execution go to market.
Despite that drop in the us.
Everybody is facing.
Having left some business even on the table. So Halloween is now law.
Low double digit over annual performance versus over 20% just a few years ago and it's a function really of the success, we're seeing in our core business, where where we had and continue to have the most significant opportunity to differentiate.
Thanks for that Patrick.
Well Kurt.
Breakout.
Kurt core category comp.
For Q.
What you're seeing in October.
So this is tod so core category performance has been even improving as we've gone into the.
The month of October it's up over 100 basis points as we went into the month and I had been running.
Almost 28%.
Going through Q3 so.
Strong performance across the core just like we've been seeing across cross all of the quarters. This year.
Okay.
Sorry for that Oh, how it connects Jang stores you provided some.
Curt could financial it was around that.
Curious about peer of late.
The earnings.
Categories are performing.
Youre seeing a comp lift above their control stores. If you could speak also to the profitability of those stores that would be helpful.
Let me quickly address the categories.
But to the the profitability component you know like we said, where we're seeing really strong.
Mid single digit cost increases versus the control stores.
It's been maintaining in that range to EBIT, improving these stores continue to get better.
The longer they are open and the more the consumer recognizes them.
The.
Outsized balloon performance continues which as we've talked about in the past was deliberate.
As we intended to continue to differentiate.
The experience with.
With the overall balloon.
Grades and the sales we can generate.
With that category, we continued to very be very pleased with each of the core categories.
Birthday continues to perform extremely well.
The resets.
That I talked about in our prepared remarks, particularly in T&D.
And in flavors have both been well received in the legacy store, but they're outstanding.
It really core components of of the Nextgen experience in addition to blue.
And from a performance perspective.
So as Brad said getting great customer reaction to these stores and we're really seeing it come through the financials. So.
Four remodels, we're seeing our sales growth compared to control stores growing in the mid single digits. So theres good lift on the top line.
And then on the bottom line, we're still targeting that payback period of less than 24 months on average for those stores. So.
With our our investment in Capex of about 150000, after tenant improvement allowances and the ability to lower our inventory by 100000, I, we're able to pay back that investment pretty quickly.
And continuing to see that good solid trajectory on the top line.
With those results as why we're bullish in proceeding with.
Executing over 100 of them next year.
Sure Kirk.
Hi, Liam.
Skip out of them.
<unk> share of shelf look like.
I would've gone up.
Sequentially, yes.
If you could speak to.
To those drivers.
Yes manufacturing share of shelf.
Little bit of timing in there and seasonal mix.
Coming into Q3.
Included in that manufacturing share of shelf are going to be things like balloons and paper plates and so forth.
Going into Q3.
We get a lot bigger lift in categories like candy costumes, and so just naturally from a mix perspective.
The share of shelf comes down we've also had.
A good run in a lot of our core.
Our core manufactured goods and party city so.
I would say nothing nothing thats longer term just more of the timing of the year and timing of shipments.
Very good.
Thanks, a lot.
<unk>.
Our next question comes from Joe Feldman from Telsey Advisory Group. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
Wanted to follow up on inflation that you had talked about and.
It sounded like if I heard right that the headwind will be a little less in the fourth quarter than the third quarter and I guess I was wondering if you could talk to that a little bit is that more.
A function of the pricing actions that you are planning to take.
Because you're just seeing a little less pressure out there.
Relative to where we were in the third quarter.
It really is just like we talked about in the third quarter. We were just getting going on our pricing actions and as we move into Q4 are those pricing.
Actions have a little bit more time to be in our stores. We have more time to to do the things that we're doing to test and make sure we're getting the right improvements in the rate increases.
At the right points.
And also from a wholesale perspective.
As you put in a price increase.
That's for new purchase orders. So it just takes time for those price increases to turn into actual shipments.
So what we're seeing now is a little bit more traction on the amount of time any price increases have been out there and that that's providing mitigation over the majority of our input costs.
And Thats, what youre, recognizing when youre seeing that the net impact is lower in Q4, it should be even lower as we go into 2022 and we get.
More time for some of those pricing actions to take effect.
The underlying input cost trends.
I have not been going down there's still is very definitely inflationary headwinds I think the key for US is we've been able to show we do have the pricing power to be able to offset those increases.
And put ourselves in a position where.
Any input cost headwinds it can be mitigated through price.
Got it Okay. That's helpful. Thanks, and then just to dig a little deeper on those pricing actions or are you.
Can you share I know youre selective where you do it and I'm curious just you know how much those increases are like on average are you taking prices up three 4%, 5% or.
Is there a way to look at it that way and also you know which is it starting to hit all categories or is it still selective.
Yes, I would just remind us that were green.
Greenlee price where we.
We have data not just at the category level, but at the SKU level that allows us to make really smart decisions for the business.
Customer providing us.
Rice and power.
We are monitoring price constantly.
It's fluid and ongoing an ongoing path to mitigating.
Any of the input costs.
We've talked a lot about our pricing methodology over time, and we're constantly monitoring competition and have <unk>.
Detailed elasticity data basket data that we leverage to meet those pricing decisions really whether we're reducing prices or increasing prices, we do that based on that algorithm.
Inputs and so we're constantly testing prices.
To understand the impact of any decisions, we make before we before we execute anything so we're heavily invested in understanding where the consumer is receptive to price adjustment.
How though.
Back to our performance.
Obviously, we've had success with price increases already is reflected in our strong Q3 results we have more tests underway.
Which will be a lever as we continue to thoughtfully and strategically deploy price increases to help me.
Mitigate any cost headwinds as we move into next year I would not put a percent on it.
<unk> necessarily but more how we're reacting with the methodology and we realize that we need to offset a significant amount.
Of the.
The input costs with with price we're happy with.
The customer's reaction to this point, obviously as we look at different categories. Each category has different elasticity.
Based on competition.
And based on supply and demand.
In a lot of ways and so it's fluid and it's going to continue to be fluid.
Got it thanks for that description that's helpful.
And then just need to shift gears to Halloween for a minute and I was just curious if you could.
What you saw from a competitive standpoint, this Halloween where there are any.
Apprises any new news was it generally a strong season for everyone or do you think you maybe took some share during the season.
Well I'd say that with our increase in our Halloween city presence versus last year.
Strong Party city performance, we had a great Halloween.
It's difficult to know exactly.
What the market did given.
This particular.
Event has pretty spotty data.
But we're very pleased with our overall Halloween performance across all four channels. We believe our multichannel approach is a huge.
Advantage for US clearly you saw a mix of those.
Who seem to struggle with product throughout the season and you saw those who were in <unk>.
Shape.
The beginning and we certainly saw a lot of late deliveries.
We're but as I mentioned in our prepared remarks.
We were very pleased with our inventory prep Ben milestone product.
Came later than original plan.
Ended up flowing really nicely to meet the demand.
For the season.
Okay, No that's great. Thanks, and good luck with the rest of the quarter guys.
Thank you.
Sorry. The next question comes from China GNL from Goldman Sachs. Please go ahead.
Hi, Thanks for taking my question I, just wanted to talk about inventories a little bit overall, the health plan.
Nick.
<unk> done quite a bit last year.
Curious comments on this one.
Inventory.
Inventory reduction.
How much is supply chain related and then as we think about before you sell died.
Is there any constraint.
We think about modeling next year potentially.
How much.
Sure thing and an inventory looking.
Looking at the reported numbers there is a couple of things that probably just need to.
Normalized for last year, you'll recall in Q4.
We took a write off for seasonal inventory that we're no longer going to carryover from year to year.
That plus the <unk>.
Fact that international is no longer a part of our inventory.
Those two things together about $150 million worth of inventory Thats just out of the system and permanently out of the system at this point, so giving us.
Better invested capital going forward.
Once we normalize those are inventory actually was up year over year by about 7% so up in line with our comp sales.
I think going back to Brad's point.
And looking at a lot of other folks as we went through the Halloween season, and we felt like we had really done the right things to be in stock in Halloween to have the right product.
Well everyone wishes they would have more I think we actually felt like we were in good position and we're in good position going forward into the holiday period.
Okay. Thanks, that's helpful.
And just on wholesale it looks like gross.
Thanks, a lot.
Recovery.
Is that fair.
Can you talk a little bit about what's driving that.
Okay.
For customers.
Although over time.
Right.
Okay.
Sure So wholesale actually you're right is seeing good traction.
We ended the quarter with wholesale sales up by almost 8% to last year and continuing to see really an increase in trajectory across the wholesale business anagram continues to do well really with record sales and record profits at anagram that's.
Been a great story for us.
Then broadly across the overall wholesale business.
All the all the balls are moving in the right direction, Yeah, I would just add that we're also taking advantage of.
At this point in time to really make investments and bolster our capabilities in.
Wholesale business too.
Support.
Future leadership.
Our future growth excuse me through adding in.
Sort of upgrading our leadership talent, our own capabilities and our capacity at our manufacturing facility. So we feel good about the anticipated rebound in I'm pleased with the wholesale business trajectory.
And then just one final one just quick clarification question.
Accurately with Vogtle.
60 per phone increase conversion.
Conversion that I heard volatile until 2019.
Yes, it was.
That's a big number.
And then maybe some of the.
The key initiatives or things that you see.
<unk>.
Drive bottler.
Even more.
Thank you.
Yes. It is it is a big increase and we've talked a little bit over the balance of last year into this year on some of the the digital changes that we've made we continue to really involve evolve and improve our entire digital experience.
Some new exciting features.
Initiatives, which customers are responding to that and we saw that in our sales results.
Obviously being impacted by that strong conversion, we also launched.
Solution selling capabilities that really allow customers to shop.
A theme or our family of products, which which brings products to life on the web in a highly curated manner.
Matches stores' visual merchandising and for Halloween, we really focused on engagement with consumers and to fund new ways.
That included the introduction of an interactive social chat bot, the use of augmented reality, allowing customers to virtually try on masks and then share their looks in social media and <unk>.
<unk> videos of some of our top license costumes. So we continue to invest in our digital experience.
We will continue to rollout improvements that really enhance the inspirational content engagement.
Always our pursuit to make it easy for the customer to achieve what they want.
Thanks, so much good luck.
Thank you.
Our next question comes from Carla Casella from J P. Morgan. Please go ahead.
Hi, great. Thank you for taking my question.
Just on the anagram side of the business.
Did you disclose the anagram EBITDA performance it sounds like balloons are doing very well and then is there any thought about refinancing out that expensive and anagram debt.
So anagrams performance. This year has been actually phenomenal. So I already just nine months into the year have have record EBIT performance for anagram, which is terrific.
In terms of looking at our debt really what we've tried to do with the term loan refinance that we did in the first quarter is to set us set ourselves up where we have a.
Longer runway to go for the next major maturity that comes up in the in the debt stack. So.
At this point, we're very focused on executing against our strategies.
And we'll obviously continue to look to pay down debt, but those are those are the major priorities for us right now.
Okay, Great and then just following up on Shannon's wholesale question.
Have you disclosed the number of wholesale doors to your service today versus where that would've been pre pandemic.
We have not updated that number it's a it's just.
Still [laughter] thousands upon thousands of doors. So we have a very broad reach and and continue to.
Okay, Great and then just some granularity in the Halloween the same store sales or the strength and the growth that you saw.
Much of that was and is there any way you can give us a sense for whether your costume comparisons were up year over year or if it's another product or if it was.
Driven by just the pop ups.
Specifically.
Yes.
Yes, the pop ups are not in our.
In our number.
And so those are those sit outside.
Of that number I would say just a little bit of color on.
Halloween year over year, we continued to see increased demand for decor and decorating elements a lot of our.
Core profit was actually amongst.
The latest to deliver.
And for us in the market overall in that business usually develops earlier in the season. So while we're pleased with the core we're bullish.
We're bullish on the future.
I would say that Halloween is increasingly adult driven business.
From our vantage point that really plays to our strength.
Focus to be more more more trend right.
Okay, Great and just one last one if you how is the helium supply in the quarter or did you see any of your stores or your customers.
Sure.
Trebled by any helium supply chain issues.
No, we're not seeing any helium supply.
Issues currently or.
On the horizon.
Every now and then you may have an isolated incident.
Based on.
A late delivery or some other isolated issue.
We have no we.
Really don't see any helium supply issues at this point.
And is the price of helium today is that comparable to 20.
I'm, assuming it's below 19 type levels, but is it comparable to 20 or or pre.
<unk>.
Pandemic.
Yeah, the beauty of what the company did back in 19 win.
There were shortages is to enter into long term supply agreements. So with those supply agreements. That's kept the the actual cost of helium pretty consistent quarter to quarter to quarter.
And continues to be the case.
Great. Thank you.
Thank you.
Our next question comes from Karun Martinson from Jefferies. Please go ahead.
Good morning, just on the inventory front.
Good positioned for holiday and where do you see the.
Supply chain is starting to normalize.
As we come up for the seasonally slow first quarter do you see yourself catching up at that point.
And how should we think about pricing going into 'twenty two.
Yes so.
<unk> chain regarding supply chain disruptions I think we all know that.
It's pretty broadly discussed.
The issue in the industry and what we see is the bottleneck really created by the pandemic. So it will subside eventually.
Big swings in supply and demand kind of need to smooth themselves out at each of the touch points and the logistics progress process, it's hard to say exactly how long. It will last however, we're making supply chain investments to help partially mitigate the impact of the teams are doing an excellent job of of.
Now the gating the difficult supply chain.
Environment as Todd mentioned as we sit here today, we anticipate.
The supply chain headwinds.
Into 2022.
And we continue.
To use price to mitigate.
Those headwinds we started that price work in Q3.
Which had a problem.
The positive impact of netting those mitigation costs down we.
We will see additional impact through price in Q4 and that.
Will increase as we move into 'twenty two.
Okay and then when you look at the ratings for the bonds here is triple C. On both sides given the improvement in given the key Halloween season now behind us.
Are you in discussions with the rating agencies in terms of that upgrade.
Well I'd say as a general statement we're.
Consistently in conversations with rating agencies, just as a matter of course to make sure that they're.
They are staying updated on our business and keep in minds as communication opened so.
We obviously clearly we are always talking to them about what are.
Profile looks like as well as where we're headed and that's that.
It should continue to be the case.
And just.
The housekeeping wise, the extra week last year that $12 million EBITDA benefit does that that flows into the first quarter of 'twenty two than this year or next year.
Is that would have it was in Q4, we had an extra week effectively in the fourth quarter because of the retail calendar. So you can look at it as just being purely incremental to Q4 last year and then it normalizes out.
Okay. Thank you very much guys I appreciate it.
Alright, thank you.
Our next question comes from William Reuter from Bank of America. Please go ahead.
Good morning.
You talked about increasing manufacturing domestically or potentially shifting.
Last time I knew you had about $250 million of product that came from Asia.
Is the number similar to that as of today and I guess what types of shifts are you discussing here.
So yes I.
I don't have the.
The exact number.
Sitting here with me, but we don't see any significant change.
Changes.
In our Asia production.
It's <unk>.
We're constantly looking at what sourcing options that we have constantly looking at opportunities.
To upgrade or establish.
Additional long term partnerships, particularly as we're focusing on quality.
And innovation within the supply chain the references to increase capacity.
Our U S manufacturing plants is really around.
How do we continue to increase capacity to meet demand.
In our business.
Because the categories that we do manufacture domestically are amongst our best including.
Anagram and so it's important for us to ensure that we have the right level of capabilities.
And the right resources to continue to expand capacity in those in those plans.
Okay and then.
Two ways, you discussed kind of pricing you discussed increasing prices to offset inflation and then you also talked about increasing the quality of your products can you talk about how units were in that context, and what types of changes you're making in those two.
Pricing.
Factors.
Yes, I would say that if there is innovation or quality that we're adding to the products that drive cost any higher.
And then we know the marketplace.
We'll take on the.
The higher average unit retail for that quality for that innovation.
We've seen that in our results and the consumer has a strong appetite.
For newness and when we introduce within our curated assortment additional upgraded quality or new innovation, the consumer really responds and often those demand a higher higher price and the good news is we can deliver those at the same or higher gross margins based on the elasticity associated.
With the quality and the innovation.
There are places throughout our assortment, where we do have cost increases on.
Product related too.
Freight materials.
And labor and so we're looking at price as another lever.
To mitigate a significant portion of those headwinds.
Okay and then just lastly for me on the Halloween pop ups, you did more than last year Youre still way below what you did in years past it sounds like they were successful I guess.
Am I right in hearing that they were EBITDA positive and I, certainly know that theres a lot of variables. There in terms of how many stores you opened next year, but in the event that the real estate opportunities were similar to this year would you expect to be expanding the number.
Thanks.
Yes.
We're not prepared prepared with a number at this point, but I will tell you we are very pleased.
With our Halloween City performance, our sales and the average store.
Halloween city were at record levels.
Our learnings from last year, when we pulled back.
And chose to really lean into Edgier scarier more adult oriented product than we do in our party city stores along with.
Updated store merchandising.
Techniques really resonated with the customer and so given the success in the business that we.
We think was potentially even left on the table.
With the increase in demand.
The implications of.
Shifting to the adult business.
And weekend parties that will still exist with the Monday.
We feel we feel very good about 'twenty two.
Thanks, that's all for me.
There are no more questions in the queue.
This concludes our question and answer session I would like to turn the conference back over to Brad Weston for any closing remarks.
Thank you for all of your questions in closing.
Want to reiterate my gratitude to the entire <unk> team for their commitment to our vision and strategy and the extraordinary execution and superior result, during a volatile operating environment in particular I am extremely proud of proud of our supply chain leadership and the entire supply.
<unk> team throughout the network for their execution and creating availability of Halloween products for consumers that exceeded the performance of the broader market and coming out of the how the dynamic Halloween season. We're also now well positioned for Christmas and New year's Eve as consumers continue to create joyful celebration.
With friends and family have an excellent day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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