Q4 2021 Party City Holdco Inc Earnings Call
Good morning, and welcome to the party city fourth quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to 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.
Morning, We released our fourth quarter and full year 2021 financial result.
Can find a copy of our press release on our website at Investor at Party City.
Now I would like to introduce our executive team who are here on today's call.
Hey, Brad Weston, our Chief Executive Officer, and Todd Bogus, and our Chief Financial Officer.
We'll start the call with some prepared remarks by Brad and Todd before we open it up for Q&A.
Please note that in today's discussion management may make forward looking statements regarding their beliefs.
Spectation about the company's future performance.
Our business prospects.
Future events and 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.
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.
Or events or otherwise.
We urge everyone to review the Safe Harbor statements provided in our earnings release as well as our risk factors contained in our SEC filings.
During today's call, we'll refer to both GAAP and non-GAAP financial measures, the company's operating and financial results.
For more information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.
Please refer to the earnings release.
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 our financial and operational results for the fourth quarter and 2021, and then discuss our go forward plan on our strategic initiatives that support our purpose to inspire joy and make it easy to create unforgettable memories.
Todd will then elaborate on our financial results and provide some thoughts on how we're approaching 2022 before we open the call to your questions.
Our transformation process began in 2020, as we focused on executing strategies to stabilize their business and determined our path to market expansion.
2021 was an important year in our transformation process.
Despite the continued challenging and volatile backdrop, the business performed extremely well as the consumer return to social gatherings celebrations and parties, while we continued to implement significant operational and capital structure improvements.
We delivered a strong year of financial and operational results totaled.
Total sales increased 17%.
Retail sales increased 28%.
Adjusted EBITDA increased over 178% to $266 million and adjusted earnings per share increased to 68 seven per share compared to a loss last year.
Key among our operational accomplishments were.
We delivered strong results in our core categories at retail demonstrating traction of our overall strategy.
Enhance the in store experience for our customers with an increased focus on product quality and innovation, including five major category resets, while strengthening our pricing power.
We accelerated the rollout of next Gen stores.
Opening a remodeling 73 stores in 2021 with encouraging store economics and returns ending the year with a total of 95 Nextgen stores.
Drove continued improvement and increased traction in our omnichannel capabilities, including buy online pick up in store.
You got the curbside and delivery, making.
Making it easier for our customers to fulfill their celebration needs and resulting in an increase in digital sales.
Finalize the sale of our international wholesale operations, providing us the opportunity to increase our focus on our north American vertical model.
We completed an inventory write down at year end in support of our initiatives to rightsize and optimize inventory with this effort now fully behind us.
Operated with strong execution by the entire P. C J team securing merchandised manner.
Managing through the significant supply chain disruptions impacting the industry and staffing the stores to meet the demand.
Lastly, we strengthened our financial position and liquidity by refinancing our term loan at the beginning of the year.
Now, let me discuss the key highlights of our fourth quarter performance.
We are pleased with our fourth quarter performance with results that met our expectations for.
For the quarter consolidated sales were up seven 7% to $698 $3 billion with brand comparable sales of 17, 8%.
As you recall, we reported a brand comp of 16% for the month of October .
As mentioned in our Q3 call we experienced a really solid Halloween with October results that were better than expected.
Subsequent to Halloween in November and most of December we saw continued strength in our core business as we continued to build momentum in this area.
In the latter part of December , though we saw a softening in demand based on the reduction in social gatherings due to AUM abroad.
With these trends continuing into January most profoundly in the northeast.
However, as we have experienced with past searches and subsequent abating of cases, we've already seen a pickup in demand over the past few weeks.
E Commerce continued to perform well in the quarter as customers continue to use our expanded fulfillment capabilities.
Really enabled sales increased to 14, 5% of our sales in Q4 up 270 basis points versus Q4 2019.
In terms of our wholesale performance art domestic wholesale consumer products business continues to regain strength.
Inner Graham again performed very well in the fourth quarter and we're continuing to increase production capacity to keep pace with the increased demand.
Adjusted EBITDA was $105 $2 million, which was also in line with our expectations as Todd will discuss further in a moment.
Yeah.
Turning to our strategic initiatives.
In 2021, we made good progress advancing the fundamental building blocks of our transformation strategy across product innovation in store experience being celebration occasion obsessed and focusing on our north American vertical model.
Those investments have yielded important benefits and in 2022, we will build on this progress in two areas, including one ongoing enhancements in customer engagement as well as to <unk>.
Little platforms information technology and supply chain.
First customer engagement.
We will continue to enhance the way in which we engage with our customers as we remain focused on increasing relevancy and our mission of being customer and celebration obsess, ensuring we deliver on our purpose to inspire joy and make it easy to create unforgettable memories.
We will support this initiative at retail through various strategies, including.
Continued rollout of our next Gen stores, we are extremely pleased with customer response with our nextgen stores as we enhance and refine the prototype.
Remodeled stores are continuing to average a mid single digit sales increase with improved gross profit compared to control stores with a run rate that delivers a payback period on each door of less than 24 months on average.
As a result of this strong performance, we remain committed to an aggressive rollout plan in 2022 and beyond with approximately 100 to 125 Nextgen Remodels are reopening is targeted for 2022, which would result in about a third of the fleet being converted by the end of 2022.
As we've gained insights from the first generation of our Nexgen prototype, we will be introducing several enhancements to the format to increase the level of inspiration in the store experience. This will be introduced beginning in March and will quickly studied the results and rollout enhancements as they meet our required financial threat.
<unk>.
As we demonstrated in 2021.
Polity improvements and innovation brought life through category resets that drove significant improvements in our retail business contributed to our comp sales performance of up 34, 2% compared to 2020.
We will continue to aggressively lead in both product innovation and quality improvements to solidify our position as an authority in the celebration space.
In 2022, we plan to improve quality of over 500 items introduced 250 innovative items.
Introduce new platforms to customers two examples occurring in Q1, including a new yard sign program and the introduction of both traditional snacking items and better for you options in our Candy Department.
Leverage brands, clearly segment quality and occasions to consumers improving the overall shopping experience. Our first brand launch will be in our tableware category in Q2.
We look forward to telling you more in the coming quarters.
This year, we're enhancing our customer engagement on our website by transforming the experience from just selling party supplies to providing the bowl party solution.
The site will pivot from shopping to skew by skew to also providing an inspirational and empowering celebration building experience.
Instead of having to search and find product for your celebration on the site. The user will now be able to browse and customized curated party assortments.
The customizable balloon arrangement.
Symbolisms like you would flowers.
Build a complete customized celebration and get assistance from a certified party planner.
The new flexible website platform and the development of specialized patent pending digital tools such as the balloon builder are designed to drive more quality traffic increased conversion and grow average order value.
It will now allow us to offer <unk> video content seamless social commerce experience.
Cross category shopping improved omni channel shopping journey.
And enrich search results.
After the launch of the New site later this spring, we'll continue to add even more enhancements.
In the meantime, we already piloted the customizable balloon arrange but builder for new year's Eve Valentine's day.
Both seasonal test experienced higher conversion rates and larger average order values and site averages and provided customer insights that gives us confidence.
Spanned the digital tools capabilities.
Within our wholesale business, we bolster our capabilities to provide actionable consumer insights to our partners, which is beginning to manifest ensure expansion within existing accounts and securing new customer opportunities. We expect strong growth from the consumer products division in the year ahead.
In our integrated balloon business unit, we significantly increased capacity throughout 2021 to meet customer needs further solidifying anagram as the leader in this category.
This translated into record Valentine's day performance with strong double digit growth.
In 2022 will continue to expand our leadership in the category with an aggressive innovation plan that both supports traditional balloon usage and expand usage occasions by introducing products in rapidly growing sub segments, such as do it yourself options.
We've invested in the service team dedicated to our largest customer Canadian tire, which owns the party city brand in Canada.
This investment is critical to partnering with them to continue to drive growth in Canada.
Business with our independent party store customers and other third party customers grew in Q4 versus both 2019 and 2020.
Second.
Digital platforms information technology and supply chain.
Our vertical model is the powerhouse of our brands and we read many benefits from the integration of our retail and wholesale business, including unparalleled category expertise operating synergy and elevated margins.
Going forward, we will continue to fortify these advantages and take incremental actions to further mitigate supply chain challenges.
These enhancements include.
Investing in our supply chain to enhancing continuously improve in stocks and service levels across selling channels.
Supply chain investments include.
Further integrating supply functions to drive operational synergy.
Adding sourcing talent and capabilities in the U S and Asia.
Leveraging transportation and logistics opportunities, namely chartering vessels and leasing our own containers utilizing east coast ports with lighter traffic to deliver to D. C is predominantly on the east coast.
And enhancing processes to shorten lead times.
Investing in integrated manufacturing capacity and innovation.
Adding printing and fabrication machinery to further enhance our supply and market differentiation and extend our lead in the bullet business.
Investing in digital technology, and infrastructure, including new talent and resources, creating foundational capabilities that allow us to drive operational synergies as well as the customer engagement enhancements I've framed a moment ago.
Significant upgrades in our digital capabilities and the technology that drives it further advance our ability to inspire joy and make it easy for customers to create their unique celebrations and create another key market differentiator.
New data architecture inventory management technology investments and increased space planning capabilities improve our knowledge and analytical capabilities and productivity benefiting our business as well as our partnerships across our wholesale channels.
Now turning to our outlook for 2022.
As anticipated the environment remains somewhat volatile and supply chain headwinds persist for the industry, which will be most evident in our Q1 results as Todd will outline.
Against this backdrop, we continued to be committed to 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 subject to change.
Rices.
The consumers' acceptance of our price actions, thus far bodes well for us as we continue to manage inflationary pressures through both price as well as cost mitigation actions.
We are excited to be beyond the latest omicron search and see customer demand in line with full year guidance.
We look forward to advancing our transformation and building on our success in 2022 and this is reflected in our outlook for adjusted EBITDA to increase in the high single digit range at the midpoint of our guidance range.
So in summary.
We are pleased with our 2021 performance and progress made as we continue to transform the business pivoting to a more customer oriented celebratory obsessed company.
One of the things. We're most proud of is the work with initiated on the ESG front.
In 2021, we made significant progress with our diversity and inclusion work focused on listening to the organization with empathy and evolved our strategy around three core components raising awareness.
We're learning culture, and developing our infrastructure to a bed diversity equity and inclusion and belonging into our people practices and everyday behaviors.
As we shifted into 2022, we established an ESG committee and are readying to issue. Our first ESG report later this year.
And now I'd like to turn the call over to Todd to discuss the fourth quarter and full year results and the 2022 outlook in greater detail.
Thanks, Brad and good morning, everyone.
Today I'll focus on the key highlights of our fourth quarter results and full year performance and then I'll discuss how we're approaching fiscal 2022.
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.
We're pleased with our fourth quarter results, which met our expectations and marked a solid end to 2021, a year in which we delivered strong financial results with both top and bottom line growth, while making meaningful operational progress as Brad discussed.
More importantly, we achieved this growth in the face of a volatile operating backdrop.
Now turning to a review of our results for the fourth quarter consolidated revenues increased seven 7% versus the prior year period with strong retail sales growth was partially offset by the divestiture of a significant portion of our international operations in the first quarter of 2021.
Retail net sales increased 12, 6% versus last year, and three 4% versus the fourth quarter of 2019.
Driven by our strong brand comparable sales increase in our core everyday categories and Halloween brand comparable sales increased 17, 8% year over year as strength in core categories, and Halloween was partially offset by omicron related softness in kids birthday, as well as new year's Eve categories in the last.
A few weeks in the quarter.
Versus 2019 fourth quarter brand comparable sales increased 10, 8%, including a 22, 8% increase in our core categories.
This strong core category performance has been a recurring theme in our results throughout the year and is a direct result of the work that we've been doing to increase our relevancy and improve the ease of purchase.
In terms of e-commerce the percent of our retail sales that originated online, including bogus was approximately 14, 5% of our retail sales mix, an increase of 270 basis points versus 2019.
Wholesale revenue for the fourth quarter decreased 13, 7% versus 2020, primarily due to the divestiture of our international operations in the first quarter of 2021.
Excluding the impact of the divestiture net third party wholesale revenues increased 33% versus the prior year period, driven by strong performance at our anagram balloon Division.
We continue to be pleased by the improving sales trends, we delivered with their franchise and independent customers in the fourth quarter.
Our Canadian sales have also shown meaningful improvement starting to reverse previous trends associated with lingering COVID-19 related restrictions.
Wholesale remains an important and strategic part of our business and we're pleased with the fourth quarter performance and are focused on driving continued growth into 2022.
Adjusted gross margin rate for the fourth quarter expanded approximately 120 basis points from the prior year period, driven primarily by the divestiture of our lower margin international operations and leverage on our retail occupancy costs, partially offset by higher freight and raw material input costs.
Adjusted operating expenses were approximately $197 $5 million or 28, 3% of net sales of 260 basis point rate decrease versus prior year, primarily driven by leverage on higher sales levels, and partially offset by increased retail wage rates.
As a result, adjusted income from operations was $89 $8 million compared to $58 6 million last year.
Adjusted EBITDA was $105 $2 million in the fourth quarter compared to $77 3 million last year.
And fourth quarter adjusted earnings per share was <unk> 40, compared to earnings per share of 25 in the prior year period.
For the full year consolidated revenues increased 17, 3%.
Which includes our retail sales increase of 28% and brand comparable sales increase of 34, 2%.
<unk> strengthened our core categories and highlighting the traction our strategies gain and.
Our wholesale revenue decline of 14.4% driven primarily by the sale of our international business in the first quarter of 2021.
Excluding the impact of the divestiture wholesale revenues increased 25, 3% versus the prior year.
Adjusted gross margin rate increased approximately 450 basis points to 38, 9%, primarily due to higher retail sales mix and the divestiture of lower margin International operations.
Partially offset by approximately 120 basis points of headwinds from freight and input cost inflation.
And adjusted operating expenses were $644 $6 million or 29, 7% of sales a decrease of 360 basis points versus the prior year.
Driven by leverage on higher sales, partially offset by approximately 50 basis points of headwinds from wage inflation.
For the full year. These measures resulted in adjusted income from operations of $201 million compared to $26 million last year adjust.
Adjusted EBITDA of $266 $3 million compared to $95 5 million in 2020.
And adjusted earnings per share of <unk> 68, compared to an adjusted loss per share of 49 in the prior year period.
Now turning to our year end balance sheet and cash flow.
Inventory was up approximately seven 5% year over year, driven in part by proactive delivery of 2022 seasonal merchandise increased unit cost driven by higher input and freight expenses as well as increases in transit times.
All of which were partially offset by the previously announced inventory write down in Q4 of 2021.
During the year net cash provided by operating activities decreased to $51 9 million from $77 $2 million in the prior year period, driven by an increase in seasonal inventory and the related freight.
As well as the repayment of rents that were deferred from 2020.
We ended the year with $255 million in liquidity comprised of $48 million in cash and $207 million of revolver availability.
Turning now to our capital structure, we ended the year with a principal balance of debt net of cash $1 million in.
In 2021, we took steps to strengthen our financial health and flexibility.
As a reminder, in February we completed the refinancing of our term loan that matures in 2022 through the offering of senior secured notes.
Currently we extended the maturity of our revolving ABL to 2026.
And we maintain considerable flexibility to further optimize our capital structure, having no material debt maturities until the third quarter of 2025.
Now, let me turn my comments to the outlook for 2022.
As Brad mentioned January was off to a slow start as omicron weighed on sales, particularly in the northeast as.
As the surge is slowly wane, we've seen a recovery in line with our full year guidance and we remain optimistic about the year as a whole.
Acknowledging that there still remains uncertainty around various macro factors, particularly supply chain and input cost headwinds.
We believe that we have enough flexibility at this point to provide annual guidance.
Please note that our guidance does not contemplate impacts from potential future COVID-19 variance or other macro disruptions.
We are assuming that the existing macro inflationary environment remains somewhat constant throughout 2022.
Our outlook includes the mitigation measures that we've put into place.
With that in mind, we're providing the following expectations for 2022.
Net sales of 2.2 dollars $75 billion to $2, three 5 billion or an increase of 5% to 8% versus 2021.
<unk> comp growth of approximately 2% to 4%.
100 to 125, new next generation stores with a combination of new openings and Remodels.
GAAP net income of approximately 64% to $83 million, assuming a full year tax rate of 27%.
Adjusted EBITDA of approximately 275 million to $300 million, which at the midpoint assumes percentage growth in the high single digit range and relatively flat adjusted EBITDA margin rate versus 2021.
Despite the significant inflationary pressures that we're facing and twenties joins too.
Please also note that included in our EBITDA estimate is approximately 40 basis points of impact from software expenses, which historically had been capitalized but will now be accounted for as an operating expense due to our continued migration to the cloud.
And cash interest of approximately $95 million to $105 million.
In terms of capital expenditures, we expect our 2022 spend to be in the $120 million to $130 million range with balanced spend across our next gen store rollout web and e-commerce enhancements store facilities capital and <unk>.
Ongoing investments in our manufacturing and supply chain assets as well as our new headquarter building with our HQ capital spend.
Partially offset by significant tenant improvement allowances and state tax incentives in the short term and largely offset by the same factors in the long term.
In addition to this annual outlook. We also want to provide some color around the first quarter to help you build your models.
First due.
Due to the temporary disruption from the AMA crime Varian earlier in the quarter combined with input cost headwinds for which additional offsets ramp up later in the year. We expect Q1, adjusted EBITDA would be down materially versus the prior year.
As a reminder, the divested international business generated approximately $18 million in revenue in the first quarter of 2021.
Since we sold the business in the first quarter of 2021. This is the last quarter, where we need to mention this year over year impact.
As highlighted earlier, we will also incur approximately $2 million of incremental software expense in the first quarter.
In line with our plans coming into 2022, and given recently improving demand trends, we expect to continue investing in the business to reinforce the foundation for long term growth, especially in the areas of digital platforms information technology and supply chain.
In the first quarter, we expect these strategic initiatives to impact EBITDA by approximately $2 million to $3 million.
The continued evidence of demand strength and traction in our initiatives outside periods and virus surges.
Gives us confidence in our strategy and our full year expectations importantly.
We expect adjusted EBIT trends to improve in the second half of the year as our mitigation and additional planned pricing actions take hold and as we anniversary some of the most significant increases from the prior year period.
While the pricing mitigation is expected to be well short of our input cost inflation in Q1 based on the current expected levels of input cost inflation and planned pricing actions that we have strong line of sight to we.
We expect to deliver our full year adjusted EBITDA growth, despite substantial inflationary pressures facing our industry.
So in summary.
We are very proud of our team's execution in 2021, and we're very pleased with the results for the year.
We're entering 2022, and a strong financial and operational position Andrew.
And are confident in our ability to continue to execute against our transformation strategy.
We look forward to building on our progress in 2022 and beyond.
And with that I'll turn the call back 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 telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time to your question has been addressed and you would like to withdraw your question. Please press.
Star than two at this time, we will pause momentarily to assemble our roster.
The first question comes from Rick Nelson with Stephens. Please go ahead.
Thanks, a lot.
Sure Charles.
It's Mike.
Or to get them to the first.
First quarter <unk> charms are better for you.
Good thank you.
You mentioned.
January got off to a slow start to serve.
Okay.
Or some more color around that.
Maybe it's a war game and Ukraine wherever you are.
Our change in sales trends.
Yeah.
Yeah, Rick good.
Good morning, So you know as we mentioned sales.
<unk> really started to.
Pick up and get traction beginning in the northeast really in the middle of December right before Christmas and so on.
That's when we started to see a little bit of pressure and demand as we've seen in the past when there are restrictions.
Our our localized or even broader or there are.
Pressure put on social gatherings. It certainly does impact our demand and we saw that at the very end of the last half of December .
As we all know that continued into <unk>.
January and really lasted the full month of January .
It was across the country, but as we said mostly most profoundly in the northeast that's when we saw the greatest.
The impact sort of right in line with.
How how cases are really played out.
And then since the since it is coming out of January coming into February .
We really saw demand pick up and in fact, we had an excellent Super Bowl and Valentine's day.
Period as we noted.
Did we did not see a tail off really in demand since the.
Ukraine, Russia situation elevated last week and so our eyes are really been on on the pandemic.
Related to demand.
Thanks for that.
Well, so like I said, they're going to Oh.
Product cost inflation and also on that labor.
Housing memory care.
Are these sort of inflationary.
Pressure.
Your ability to kind of froze hiring.
Hiring costs huh.
Absolutely. So we've talked about the net impact in Q4 being $5 million to $10 million and it was.
So.
Being an impact too.
Gross margin of about 120 basis points, and 50 basis points to SG&A.
What we're seeing thus far from all the testing we've been doing is that we do have a lot of pricing power.
So we do have the ability to.
Increased price and in certain areas of the stores, we're testing into it.
But theres not a lot of resistance. So that gives us a lot of confidence that as we roll out those price changes and we get further into the year I, we would expect the pricing to be offsetting inflation by the time, we get into the second half.
For the first half you know, we're just at the point, where all of those costs are really rolling through the P&L now they had gone into our inventory and now in Q1, we will get the full brunt of those costs. That's happening at the same time, the omicron who's weighing on our sales in January so that creates a.
A headwind in Q1 would be looking at $8 million to $12 million of inflation headwind in Q1.
And so that's that's the short term long term, obviously much better story as we do get into the back half and we were able to roll out the pricing changes more quickly.
Yeah, and I would just add to that that we've become as we've talked about in the past extraordinarily price to where we have a good understanding of our pricing data.
Price elasticity it both as a category level as well as the SKU level and so our pricing actions are really ongoing.
And we continue do test price continued to maintain an understanding and as Todd said a.
We're demonstrating that we do have pricing power and the customer has been responsive and all that bodes well as we continue to.
To navigate this dynamic environment.
Thanks, very much Brad.
Alright, good luck or the sweet spot where it.
Thanks, Rick.
The next question comes from Joe Feldman with Telsey Advisory. Please go ahead.
Yeah, Hey, good morning, guys. Thanks for taking the question.
Wanted to ask about the Nextgen stores and yeah. Thanks for the updated color on what you're seeing and the progress there.
What are the some of the enhancements that you are planning to make this spring you talked about you know trying a few new things and I was just kind of curious if you could share any little preview of that with us.
Sure as I mentioned, we're extraordinarily pleased with the next Gen stores.
That we've opened thus far and I think one of the things we've talked about is that we will relentlessly learn.
Relentlessly.
Improve in that that should be something that is always ongoing as we've accumulated a lot of customer feedback a lot of data around the performance. So a lot of insights from our customer.
We're perpetually as I've said assessing.
How we continued to improve we see the biggest opportunity is to continue to create.
More inspiration.
The store in one of the things that the customer gets excited about in their feedback is their ability to visualize the art of the possible.
You know I think in the past, we've maybe been less inspirational online and in our stores and our.
When theyre able to see something that they can create that they've maybe did not think was possible on their own they love to take that as inspiration and they loved the aspirational elements of what they can do and so we're going to continue do create additional digital and merchandising.
Elements in the store that that helped them.
To do that.
We've talked a lot about our success with balloons in that store and have an opportunity to continue to expand our balloon assortments and continue to add to the do it yourself.
Elements that the customers really responded too we also see an opportunity to enhance the seasonal presentations at.
At the front of the store featuring newness.
And in key items that are working really well for us and then the last thing I would add is continuing to add ease of the shopping experience in this case, particularly around the checkout process and.
Building on the separate balloon checked out as that has been.
A win for us as well.
Yeah.
Got it that's really helpful. Thank you.
And then.
With regard to the.
The year and we thank you for the guidance that you gave I guess, maybe Todd within the guidance you know how should we think about the complexion of it maybe gross margin versus SG&A.
Is it.
I guess it sounds like maybe more pressure on the gross margin in the first half versus the second half given the pricing.
That you talked about or I'll, let you.
Answer, but just I guess the complexion of those two line items would be helpful.
Absolutely so when we step back and look on a full year basis.
We actually expect to improve gross margins, resulting both from fixed cost leverage on the sales increase as well as the benefit of the pricing and other inflation mitigation factors. So our gross.
Gross margin, you're right a little bit of pressure in the very short term, but as we go across the year a lot of good news stories there.
Operating expense.
Since the midpoint of the guide was about flattish margin rate I would say operating expense.
We'd see a little bit of pressures, we go across the year, but the two big drivers really are and.
And we talked about 40 basis points of headwind from.
The SaaS move where we have software that used to be capital that now will be expense as we move to the cloud.
As well as in investments that are meant to support our strategy growth initiatives that Brad discussed.
Along with wage inflation. So when you add up those three operating expense, probably going to see a little bit more pressure than gross margin.
Roughly offsetting each other as we go across the year.
Got it that's really helpful. Thanks, and then I guess, just one final quick one with.
With regard to the Capex you did call out that the new headquarters is a decent chunk I was just wondering.
How much of a chunk of it.
Capex that is is it you know 20 30 million or can you share that with us.
You know I think the best way to think about capital is once you take out there's two ways to think about it one core that headquarters.
Hi, it's gonna be partially offset by tenant improvement allowances and state tax incentives in the short term and long term actually.
Hi, all but less than $5 million of it is going to be offset by.
That funding so the net cash out it actually ends up being a very small piece.
To take a step back up until now we really have had a pretty difficult challenge of operating in four office buildings in three states.
Really opposite sides of the country. So I, what we're looking to news bring the teams together from Rockaway, and New Jersey, Elmsford, New York Pleasanton, California into one location and so a lot of unrealized synergies that come out of that.
Opportunities for collaboration and innovation along the way so it's really that big driver towards creating a one P. C. H I One party city holdings.
Culture and so.
So it'll be one of those things that is.
Very foundational for us as a corporation and it does end up being.
Less than $5 million over the long term from a capital perspective.
That's great. Thank you so much and good luck with this quarter.
Thank you. The next question comes from William Reuter with Bank of America. Please go ahead.
Hi, the first is.
In the prepared remarks, when you discussed the inventory write downs there was some sort of kind of conclusion aerie statement that seem to indicate that given where we are with evolving strategies. We shouldn't expect to see that these write downs next year or the year after did I understand that correctly.
Yeah, if we back up to the work that we did in 2020 one 'twenty.
'twenty, we really addressed our our seasonal inventory challenges and learned to run our seasonal business.
[noise] differently.
By bringing in the.
The amount of receipts, we needed to drive a really and optimize our sell throughs and really optimize productivity yeah, Jim Roy and as we went into 2021, we were extraordinarily focused on our everyday categories.
Categories, we talked during the year about resets in major categories that turned out to be very positive.
To our overall business are very positive from both a revenue.
As well as an inventory turn in from Jim Malloy perspective, and so after those two significant pieces of.
Work, we've now right sized our inventory to the operating level.
We believe this will drive the right level of efficiency and so it's fantastic to have those behind us.
Okay. That's helpful and then Todd I appreciate your discussion around first half second half gross margins as well as operating expenses I guess I'm curious.
What level of sequential improvement, we're going to see from the first to the second and really on the margins here I'm sure that the first quarter on what kind of impact on sales is gonna be greater but based on the timing will we see a substantial improvement from one to two or is it really the third quarter, where we start to see big improvements.
Yeah, I think Oh, I'm a crime in Q1 clearly.
It was a significant.
Temporal.
Anomaly for us so.
So that was going to have a much bigger impact than anything else in our guidance and yeah. So you would expect to see.
Improvement in that year over year trend as we go into Q2 second half is where it really all starts to come together, where you really do see the pricing.
Offsetting the.
Inflationary costs and and.
See all of those mitigation actions really starting to take hold but.
But you should see incremental improvement as we do go into Q2.
Okay, and just to be clear the incremental improvement is not just in sales incremental improvement is also on gross margins.
That is correct, yes, okay cool alright, thank you.
Thank you.
Our next question comes from Jenna Giannelli with Goldman Sachs. Please go ahead.
Hi, there good morning, Thanks for taking my question Omnicare, a 4% comp side I guess I just wanted to understand I mean is that mostly pricing is that the best way to think about it or should we I guess wanted to better understand the underlying volume demand next question. Please.
And how to balance.
Pricing benefits wholesale recovery next gen six size, but.
What kind of underlying.
How youre thinking about it.
Absolutely. So there is an element of pricing built into the comp for sure.
Yeah, we would expect from a comp perspective to be looking at let's call. It.
A.
100 to 150 basis points.
Benefit for comp sales, a little bit larger than that on total sales as we get the benefit from wholesale and everything else.
But from a comp sales perspective, you get call. It 100 to 150 basis points of benefit off of pricing.
There is a little bit of benefit baked in from our next Gen stores. We do we're continuing to see that mid single digit growth in those stores and looking at doing conversions.
Conversions, mostly of 100 to 125 stores this year.
So that does help but then above and beyond that the guidance does assume that demand is continuing to increase so.
So when you look at that midpoint of the 2% to 4%. It does still include.
Especially as we get past omicron.
Seeing underlying unit demand continued to increase across the company.
Okay. That's.
That's helpful I appreciate that as well.
And one other one I have I'm, just kind of thinking about the full year given some of the puts and takes in 'twenty one when factoring in the write down of inventory and working capital I guess, when we think about the normalization of some of these items. How are you thinking about your propensity to generate great cash flow this year and if positive.
Potentially used its been accurate cash flow that's it for me.
You bet.
So I so.
So yes, we would look at generating positive free cash flow this year or I or capital spend like I mentioned before we do have a significant amount of it that is offset by tenant improvement allowances.
And with the $275 million to $300 million of EBITDA.
It should put us.
And in good stead, we would look for our working capital to be about flattish with the end of this year.
So.
So that puts us in positive territory and we would number one uses of cash after our internal capital is always going to be debt pay down so.
So I think.
We're continuing to look at how we can continue to improve.
Our debt position and leverage ratio.
Excellent. Thank you appreciate it.
Thank you.
The next question comes from Carol Martinsen with Jefferies. Please go ahead.
Morning, just on the free cash flow do we get the tax reform here in the fourth quarter or is that something that's going to drop in the first quarter.
Yeah.
Hi.
Tax refund we filed for in Q3.
We're expecting to receive shortly actually.
So it is something that likely should flow into Q1 and for everyone's.
In memory, we do have a receivable from the IRS to $55 million. So.
I expecting to see that shortly.
Okay, good and.
Then when you said you pulled forward some seasonal inventory.
How is the landscape out there are I think the big question is how how far in advance do you guys have to plan for Halloween and others big seasonal events and how should that cadence go through the course of the year for working capital.
Yeah. So for working capital. We are you saw at the end.
In Q4, our inventory was up and it was up really driven by three big factors I part of it is buying ahead on seasons and so we have gotten ahead of it it's got a much more proactive calendar this year than we've had in the past.
And so that'll that'll allow us an extra call it.
30 days or so.
Longer on some seasons, where we can be buying ahead and.
Making sure that inventory comes in on time.
And then.
Then from a overall inventory value perspective, there's of course input costs that are now built into that inventory base are there were there at the end of Q4. So we'll just be wrapping around on it as we get to Q4 this coming year.
So all of that leads us back to that flattish working capital.
Okay, and then in terms of getting products. You you mentioned the 30 days when we look out to Halloween and the all important seasonal period at year end when do we need to kind of placed those orders get that product on ships in order to make it.
For this year.
When you think about Halloween those orders have.
Have all been placed are they're actually placed.
Sort.
During and pretty pretty closely following.
The Halloween time period as soon as we've analyzed and digested fully digested.
Our results so they're well in production as we speak.
And then the timing of the shipping.
Varies obviously, we put a little a little bit more slack in the rope.
This year on all of the timelines of quarters, all the way through production that gives us a little bit of a a.
A little bit of cushion like I said and then obviously, we have learned and continue to learn all of the elements of logistics.
The learnings from last year.
In past years.
Our firmly put into place now to ensure we have product.
Thank you very much guys I appreciate it.
Okay.
The next question comes from Oliver Bachman with J P. Morgan. Please go ahead.
Hey, Good morning. This is Oliver brought mint on for Carla Casella. Thanks for the question. So my first question I'm currently your capitalized through Anagram and party city.
Do you see benefit of keeping those structures separate or benefit to consolidating them in 'twenty five 'twenty six when the bonds mature.
Yeah, I think we're continuing to look at.
With the overall structure is this right for us.
The structure, we have with the anagram notes was exactly what we needed it at the time, which was really at the peak of the pandemic when stores were closed in.
And I and we were looking to reduce the amount of debt outstanding So was really positive.
What's really positive move for us whether we need that long term I think we would love to move to a more traditional debt structure.
But we're gonna have to just evaluate what the opportunities are that are available for us and make sure we're making the right long term move for the company.
Great. Thanks for that and then.
Sorry, My second question is on.
Marketing and promotional cadence in 2022, I'm just will it change given the strength you're seeing of balloons and changes you made to Halloween assortments.
Yeah.
We've learned quite a bit about promotional activity over the last couple of years and what it.
What it does for traffic and for revenue and one of the guiding principles in our business. That's most important to understand related to promotions is we're very occasion based and.
When you have a need for our our product in.
Services.
Then youre not driven by promotional activities and if you don't have.
Sort of an occasion need then.
Promotions aren't necessarily going to.
Get you off the Couch shop Party city.
So we've been able to really ramped down our promotional activity, we do do some small promotions online but.
Our focus is mostly to be priced right.
For the customer and every day and be there when we need when they need us.
Thanks, So much that's all for me.
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 operator.
Closing I would like to again, thank our entire team for their dedication to our mission and strategy and their extraordinary execution in a challenging operating environment.
We're so proud of all they've accomplished in.
In 2021 across our manufacturing operations, our stores e-commerce and supply chain, while continuing to better leverage our unique north American vertical model and navigating an uncertain and dynamic environment as.
As we transition into 2022, and we feel great about what has been put in place over the course of the last two years during the pandemic, which has increased our relevancy improved our brand and reinforced our ability to positively impact our customers' lives.
With new capabilities. So thank you for your time for your questions and have a joyful day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Yes.
Yeah.
Yes.
Yes.
[music].