Q2 2019 Earnings Call
If he would like to ask a question during this time.
Simply press Star then the number one on your telephone keypad.
We would like to withdraw your question press the pound key I would now like to turn the call over to Mr. <unk> Associate General Counsel at Party city. Thank you Mr. How are you may begin.
Thank you operator, good morning, everyone and thanks for joining us.
This morning, we released our second quarter 29, <unk> financial results.
You can find a copy of our press release on our website at Investor Day Party City Dot com.
Now I'd like to introduce our executive team who are here on today's call.
We have come Harrison, our Chief Executive Officer, Brad West and our President and Chief Executive Officer of a retail group, Mike Harrison Senior Vice President and General manager of our North American consumer products business, and Michael Kors reality, our interim Chief Financial Officer.
Well well start the call. This morning with prepared remarks by Jim and Mike reality before we open it up for Q1 <unk>.
Please note that today's discussion management may make forward looking statements as defined under the private Securities Litigation Reform Act of 95 regarding their beliefs and expectations about the company's future performance future business prospects or future events or 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 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 will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results.
For more information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures. Please refer to the earnings release and with that I'll turn the call over to Jim Harrison.
Thank you and good morning, everyone and thanks for joining us today.
Once again, we apologize for the delay as most of you probably know we normally tape our prepared remarks today in advance for some reason the surface the trouble uploading them. This morning, we do apologize.
I'll begin with a brief overview of our financial performance for the second quarter, and then focus on the key strategic initiatives and accomplishments during the quarter, which will improve our overall performance strengthened our balance sheet and address many of the headwinds that we're facing.
I will then discuss those factors, which have given rise to our adjusted full year guidance.
Mike will then discuss the financial results in detail and provide some additional color around or adjusted full year revenue the junket room guidance.
Following which we will put the call for your questions.
Overall, our second quarter revenue and earnings results were below expectations. We continue to experience the impacts of the helium shortages in many of our markets beyond what we had anticipated.
On a consolidated constant currency basis revenue in the quarter and for the six months increased 1.2% and 1.6% respectively.
These results for the quarter and six months include negative comparable store sales results of minus 2.1% and 1.7%.
Dealing challenges with respect to the Blue category alone.
Generally represented a 200 basis point headwind to comp over the entire first half of the year.
As both the latex and metallic balloon categories were negatively impacted.
In addition to the impact associated with the sales of balloons. We also continued to see related softness in other categories, especially in juvenile birthday.
Which we believe can be attributed to our inability to offer the full breadth of assortment that consumers have come to rely upon party city for.
We estimate this related effect on non balloon product sales the negative headwind of between 102 hundred basis points year to date.
On a positive note we continued but we saw a continued momentum in our digital businesses.
Excluding sales on the Amazon marketplace.
Total digital sales, including buy online pick up in store Comped up 14.7% and 16.6% for the quarter in six months respectively.
Total consumer product sales.
In constant currency after adjusting for the impact of franchise acquisitions.
Declined 70, bips for the quarter and were flat for the six months.
These results to adversely affect the body helium headwind as wholesale revenues from foil and latex balloon sales by our consumer products businesses slowed as well.
Excluding the impact of metallic balloons on North American consumer products wholesale revenues increased 6.7%.
After adjusting for the impact of the acquired stores in Q2.
Or 5.6% for the six months.
Internationally, the businesses in Mexico, Australia, Europe , and UK continued to perform on plan. Despite the challenges presented by the strong dollar and generally weak economic conditions.
For the quarter gross margins of 37.1% were a decline of 390 basis points due primarily to the flow through of previously capitalized freight costs associated with last year's supply chain issues ironed out helium course.
Cost arising from this through optimization initiative.
And unfavorable product mix and foreign exchange.
Adjusted EBITDA for the quarter was $81 million year to date, EBITDA totaled $133 million slightly below our expectations.
Despite the softer sales and margin pressures, we generated $101 million or free cash flow over the first half of the year.
Which is historically weaker than the second half of the year.
As I mentioned during our first quarter call debt reduction during 2019 is the significant capital priority for us this year.
We recently on the recently announced two specific transactions, which aligned with this priority.
The outcome of these transactions when coupled with other initiatives underway. This year will enable us to substantially reduce our leverage levels by year end.
Improving the long term streets of the business.
Firstly.
On June 20, Eightth the company filed a periodic reports on form 8-K, disclosing that we had entered into a sale leaseback transaction with spirit Realty.
Under the terms of this transaction, we reported that we successfully sold the real estate assets associated with our distribution center in Chester New York.
The underground for Blue factory in Eden Prairie, Minnesota.
And the injection molding facility in Albuquerque, New Mexico.
For an aggregate purchase price consideration of $128 million.
Concurrently.
We entered into lease arrangements for all three facilities with initial terms of 20 years.
We were able to complete this transaction at a multiple of 15 times EBITDA and an effective cap rate of 6.4%.
Monetizing these real estate assets, the proceeds of which were used to pay down debt will only further reduce our leverage levels at year end beyond our original guidance.
Earlier today, we announced that we have entered into an agreement with Canadian Tire Corporation, one of Canadas largest and most respected retailers whereby they acquired the retail assets and business Our party city Canadian subsidiary.
The transaction, which is subject to customary closing conditions, including government approval.
Is expected to close by October Onest.
In addition to the transfer of the Canadian retail assets. This transaction also establishes an ongoing relationship between the AMSC and consumer products business.
Canadian tire.
Through a supply agreement with an initial term of 10 years.
The agreement contemplates that on average the North American consumer products will nearly double the sales into the Canadian parties relocations and Canadian tire over the term of the agreement.
Canadian Saar will look to leverage this acquisition to their network of over 500 dealers, while expanding party city brand throughout Canada.
With locations within a 15 minute drive of 90% of the Canadian population.
Canadian tire is truly uniquely positioned to grow the brand and the category.
This transaction similar to a master franchise relationships in Mexico.
And our European and Australian stores store partnerships aligns with our overall international strategy of identifying and partnering with strong domestic retailers to grow the party market positioning ourselves as the primary resource for product innovation.
The proceeds of this transaction of approximately $174 million Canadian.
Like those are the aforementioned sale leaseback transaction will serve to reduce our leverage levels.
Finally.
We believe this partnership with Canadian tire is a huge endorsement of the party city retail concept.
And the party's party supply category overall.
Having one of Canadas premium premier retailers make this investment in the business and partner with us in a long term vendor relationship.
Is an affirmation of our faith and belief in the long term growth and viability of our position in the category.
Our full year guidance has been adjusted to reflect the effects of both these kind of transactions with respect to revenues and earnings.
As I stated during our last call. In addition to the strong cash flow generated by our business model. We are targeting a reduction of between 75 million and $100 million in net working capital year over year by 12 31 2015.
We expect to see the majority of this reduction.
Manifested in the fourth quarter.
As we significantly reduce our fall seasonal inventory carryover.
Well the progress achieved to date to reduce our leverage is quite significant.
We continue to be focused on exploring other long term strategic opportunities.
Which will free up capital throughout the business and pay down debt.
Currently we are targeting to reduce our consolidated debt by approximately $400 million on a year over year basis, and hope to exceed that target.
We continue to make progress regarding our ability to procure adequate quantities of helium to satisfy our consumers' demands for this brand defining category.
As I mentioned earlier, the expected shortages persisted, creating a second quarter headwind.
More importantly, however, these headwinds are rapidly abating.
During the second quarter, we entered into an agreement with a source to provide us with approximately 2 million cubic feet a month of helium over the next four years.
This represents approximately 35% of our average multi demand.
And we will provide a significant tailwind to our business in the second half of the year.
As we speak helium from these wells is beginning to be distributed into our stores.
This helium along with our existing allocations from our primary suppliers and other third party providers are expected to put us north of 90% of our needs.
Additionally, we have reached a tentative agreement with another provider, which is which is expected to come online in early October and would put us at over 100% of our requirement.
As pleased as we are to be able to share. This news we are truly mindful that we must read the faith and trust.
Of our consumers the party city is in stock on helium and once again the primary go to for all of the celebratory needs.
I want to take this opportunity to thank and commend the members of our retail procurement management team, who have done a terrific job of attacking the cyclical supply challenge.
It is also important to recognize that the average goes or helium, which is a commodity has continued to increase.
While we have successfully put in place selective price increases, which served to partially mitigate these higher costs.
We have and will continue to see an adverse effect upon our margins.
During the second quarter. These high higher healing cost represented a 50 basis point gross margin headwind.
And we have reflected this in our full year guide.
As mentioned during the first quarter call.
We conducted a comprehensive review of the store our store portfolio aimed at improving the overall productivity of the fleet.
Our approach was to evaluate the opportunity to drive market level profitability improvement.
This resulted in our decision to close approximately 45 stores over the course of 2019.
We believe there was an opportunity to recapture a substantial portion the still held the closed door sales as they transfer to other stores in those markets.
As of July 31st we have fully close and liquidate 34 stores.
Another tenant currently in liquidation mode, and we will close by the end of November .
I am pleased to report that the initial results are indicating that the sales recapture rates are being achieved and the impact on since the stores during liquidations less than anticipated.
In addition, we have now decided to accelerate the closure of 10 stores originally slated for closure in 2020.
Into the fourth quarter of this year.
So as to have a clean slate of new stores as a focus for our teams in 2019.
During the quarter, we opened three new smaller format quote the concept stores in several markets.
These 7000 to 10000 square foot test stores are designed to fill what we see as a void in small markets or markets with distinct characteristics such as college towns, where we can offer unique curated and tailored assortments.
These stores require approximately 30% less inventory.
And we are looking to achieve sales performance of 90 plus percent of what a largest still would provide.
If successful this format will augment the white space opportunity, while providing better inventory turns greatest sales per square foot.
Improved ROI say.
And most importantly free up associates have more time available to interact with our customers.
During the quarter. We also continue to pile silver pricing initiatives using deferring deferring media strategies aimed at driving customer traffic.
The results have been extremely encouraging and as we enter the Halloween selling season, you will see these strategies in our approach to media advertising around the season.
We have spoken about the various tailwinds that we see in the second half the year, which we expect will help improve our comp store sales performance.
Perhaps none is more significant than our year over year in stock position heading into the Halloween season.
As of July 31st 95% of our Halloween inventory requirements are either in stores in our warehouse or in transit.
This is an overwhelming improvement.
Not only from last year, we faced the tariff driven supply chain challenges.
But also in compared to any previous Halloween season.
As a result, our full Hollywood assortment will be in store and on the web by September Onest.
And we will be ready to capture the early sales this season.
Additionally, our store associates, we will be better able to serve our customers and not be overwhelmed by largely deliveries.
This will be the case not only for our 940 C stores, but also for our Halloween city pop up stores.
We are currently planning on opening 200 C fives tendency 500 cities towards for the season.
This is an increase of 10% over last year.
We are excited about our pop up stores. This year as we have made major changes the store environment.
Making it an even greater Hollywood experience.
With expanded animatronics and other exciting additions to the in store experience.
In addition to improved supply and our Halloween inventory availability there are several other tailwinds as well for the back half of the year.
Starting with Halloween moving to Thursday.
Historically as the holiday moves closer to the weekend, we have seen an increase in adult celebrations.
We would expect that to be the case this time around as well.
From a juvenile effective the intellectual property available. This year is by far one of the strongest lineups we have seen.
Beginning with frozen, which product first becomes available on October 4th.
There was an amazing portfolio of licensed properties.
Lion King Captain Marvel Avengers, Spider Man Toy story, four Aladdin descendants it and many more.
And that's just the movie properties.
This year, we will also be offering a broad range of gaming inspired costumes in wearables firm will be soft to Microsoft.
Including assassins Creed years of war and Dragon ball Super.
Party City in Halloween City will be in stock and have something for everyone, whether they choose to shop in our party C stores Halloween City stores Party city Dot com or in any of the marketplaces, where you can find the party city store front, including Amazon.
During the second quarter net third party revenues than what North Americans, who products business.
Excluding anagram and adjusted for the acquisition of stores grew 6.7%.
For the six months adjusted revenues grew grew 5.6%.
In addition to the growth of third party revenues me. In addition to the drug to this growth the growth third party revenues grew and our main factor share of shelf also grew 10 bips to 27.3%.
As most of you are aware growing our manufacturers show shelf is important for several reasons.
First obviously as we grow the manufacturer shelf, we harvest to manufacturing margins along with wholesale profit.
And improve the consistent quality of our products.
Equally important in these times of global trade tensions.
Controlling our manufacturing allows us to continue to diversify our sourcing base into most multiple geographies away from China.
As a case in point, we have just concluded the final shipments costumes from a new joint venture with one of our premier suppliers of costumes from our company car Cambodian factory.
Reducing our dependence on China supply and diversification.
Continues to be a core element of our strategy.
On the subject of towers, our total annual purchases from China subject to the new 10% duties are approximately a $150 million.
As with the earlier tariffs, we will look to mitigate these tariffs through resourcing self manufacturing better vendor prices and where necessary look to pass these increases on in the form five prices.
For the second half of the year.
Absent any mitigation efforts, we believe that the potential impact from these tariffs to be less than $2 million.
The final, but certainly not least important developments during the quarter quarter was the addition of bread west into our executive team as president of Pricey Holdings.
And CEO the party city retail group.
I am extremely excited and pleased to have Brad joined party see holdings in this significant leadership position.
Breads deep.
Experience and knowledge of specialty retail.
From his many years in key executive roles at both Petco and Dick's Sporting goods.
Uniquely positions him to lead our business with the next chapter of growth and success.
Breads initial focus will be primarily on the retail side of the business.
Well, he will develop and put into motion the processes and strategies, which will drive sales growth and stuff and comp store performance.
During this time he will also begin to develop a broader understanding and knowledge of our consumer product operations and business to help shape those future strategy as well.
I look forward to all of you again getting to know bread better as the next few quarters of off.
In summary, the second quarter was softer than we had anticipated both in terms of revenues as well as margin with much of the shortfall is being attributed to helium.
These factors have been incorporated in our adjusted full year guide.
Looking forward to the second half of the year from a retail perspective.
The helium headwinds are abating.
And this month helium availability should start to become a tailwind.
We are closely reviewing our promotional calendar and strategies, given the looming tailwinds, which I mentioned earlier.
We have made progress in many operational fronts.
And remain encouraged by the growth opportunities that we believe will present themselves later this year.
Including greater availability of helium extremely strong IP counted a Thursday Halloween.
And benefits from supply chain investments that we made following the disruptions that impacted the business in 2018.
And with that I will turn the call over to make reality will provide further details around our financial results and our expectations for the balance of the year.
Thanks, Jim and good morning, everyone.
I'll provide further insight into our financial and operating performance for the quarter discuss our outlook and guidance for 2019, and then open up the call for questions.
As Jim said second quarter top and bottom line financial results were negatively impacted by the ongoing helium shortage and its direct and indirect effect on balloons and other products, including our juvenile birthday product.
Looking more closely at our second quarter results consolidated total revenue grew 1.2% in constant currency.
Retail segment net sales increased 2.9% on a reported basis or 3.2% in constant currency.
Principally driven by the additional square footage provided by 16 new store openings.
And 44 franchise and independent stores acquired over the last 12 months.
Partially offset by nine store closures closures completed during the same period.
Brand comparable sales, which include our us and Canadian permanent stores, and our North American E Commerce business decreased 1.2% in the quarter.
Driven by approximately 200 basis points of direct headwind from helium shortage.
The tailwind from Easter shifting into the second quarter was more than offset principally by the indirect effects of helium on juvenile product categories and declines in commodity product and candy sales.
Looking at our sales by category during the quarter everyday product sales comp, 4.1% lower than in 2018.
And consistent with Jim's comment that the indirect impact of the helium shortages felt in the categories, usually shop, along with Bloom purchases.
Again, the declines occurred in juvenile non solid commodity product and candy.
It should also be noted that the 2018 results included approximately $3 million of revenue.
From a clearance event, which has been delayed this year until the third quarter.
Seasonal product sales increased 9.1% versus comparable sales in 2018, driven by strong Easter and spring seasonal sales and early custom business.
Our North American web com.
Sales, including BOPUS were up 14.7%.
Turning to the non vertical consumer products business net revenues decreased 70 basis points after adjusting for the impact of franchise acquisitions and foreign currency.
As Jim mentioned this decline was attributable to the impact of helium on our latex and metallic balloon businesses in particular, our anagram metallic balloon business.
Sales of metallic balloons at wholesale.
Which had enjoyed single digit growth.
Prior to the helium shortage.
Were down approximately 17% as a result of the shortage.
The adjusted net revenue of our North American Party business, excluding sales of metallic balloons increased 6.7%.
This increase in non vertical consumer products occurred in multiple areas, including increased and accelerated orders from certain mass and grocery retailers modest sales gains that franchisee and independent stores and increased sales of personalized products for Mel print to Peel operations.
Our non party store business continues to be a bright spot with double digit growth achieved through strength in the mass and grocery channels. Despite the loss of sales are rising from American greetings deciding to exit the party category.
We continue to leverage the breadth of assortment and manufacturing capabilities to meet third party independent customers requirements in a cost effective manner.
International consumer product sales decreased 1.6% in constant currency in line with our expectations.
For the second quarter of 2019, retail and wholesale margins were 40.7% and 26.4% respectively.
Our consolidated gross profit margin was 37.1% or 390 basis points below the same quarter of last year.
Consolidated margin was negatively impacted by approximately 200% 200 basis points of higher logistics costs associated with product imported during the second half of 2018.
Flowing through both wholesale and retail cost of sales.
As you recall, the higher cost related to the supply disruption associated with China terrorists.
In addition, 150 basis points of the decrease was due to retail markdowns and provisions against inventory recorded in conjunction with our previously discussed store optimization program as well as the change in our personalization product offerings to improve our relevancy to the consumer.
Lastly margins the margin decline reflects it reflects a two prong impact from the temporary Halloween shortage, which results in both higher helium costs and a decrease in higher margin balloon sales at both wholesale and retail.
Operating expenses, excluding the gain on sale leaseback.
And store impairment and restructuring charges totaled 166.5 million or 29.5% of revenue consistent with the second quarter of 2018.
In terms of the sale leaseback Jim described during June we completed the sale of three operating facilities and recorded a gain of $58 million in the quarter, which is backed out of our adjusted results.
We used the net proceeds of the sale of $125 million to repay amounts outstanding under our ABL at June Thirtyth.
In July half the proceeds withdrawn from the BL to repay approximately $63 million of out term loan.
The lease commitment from the sale leaseback requires annual rent payments of $8.3 million for the first year, increasing by 2% annually.
As the lease associated with the Los Lunas, New Mexico property qualifies as a finance lease the present value of the related lease payments of $13 million is classified as debt, resulting in a net reduction to our reported debt of $112 million.
Income from operations totaled $97 million, excluding the 58 million benefit from the lease back transaction.
And $9 million of charges associated with store closures income from operations was approximately $48 million compared to $65 million in the prior year period.
Interest expense for the second quarter was $30.2 million or 4.7 million above the same quarter last year with approximately half the increase attributable to higher LIBOR rates on our ABL and term loan credit facilities.
And half as a result of the Companys August 2018 high yield refinancing.
In the quarter, our reported effective tax rate was 25%.
And once adjusted increased to 26%.
Reported net income totaled $48 million or $20 million greater than in the quarter second quarter of last year and reported diluted EPS increased to 51 cents per share from 29 cents per share.
On an adjusted basis net increase net income decreased.
To $20.2 million from $39.2 million in the quarter to 2018.
Adjusted EPS decreased to 22 cents per share from 40 cents per share with 15% 15 cents of this decline related to the revenue and margin factors previously discussed and the remainder of the change principally related to higher interest rates.
Adjusted EBITDA of $81 million compared to adjusted EBITDA of $96.6 million in the second quarter of last year.
During the quarter, we delivered free cash flow defined as adjusted EBITDA less capex of $62 million, which is approximately 8 million below second quarter of 2018.
We ended the quarter with net debt of about 1.9 billion.
It should be noted that the trade payables and accrued expenses at 630 were 58 million below year end 2018, and 29 million below the same period of last year. Despite much earlier receipt of our Halloween goods.
We have approximately $296 million of borrowing capacity under our ABL credit agreement.
Before reviewing our outlook I'd like to go over a few recent developments that will impact the fiscal 2019 guidance.
As discussed earlier in June we completed the sale leaseback transaction and use the net proceeds to pay down debt.
While the impact on pre tax income will be a headwind of approximately $3 million as rent expense recognized on a straight line basis exceeds the reduction in interest and depreciation and amortization.
The full year impact on adjusted EBITDA will be a negative $9 million for the full rent expense on the now leased facilities.
As you also saw in our press release. In addition to the previously announced planned closure of approximately 45 Party city locations. We now plan to close 10 additional stores during the fourth quarter for a total of 55 store closures occurring throughout the year.
And as Jim mentioned, we announced today, the Canadian tire transaction, which aligns with our international retail strategy and will be a key driver of long term wholesale growth in Canada.
We expect to use approximately 120 million us in proceeds to pay down debt in line with capital allocation priorities, we have outlined.
As a result of this transaction, we will see approximately 105 million reduction in retail sales on an annualized basis, which will partially be offset in the form of third party wholesale sales and profits.
The net impact of this transaction is expected to reduce 2019 retail sales.
And adjusted EBITDA by approximately $39 million and $8 million respectively.
Turning to our full year guidance based on our performance to date the sale leaseback transaction. The additional store closings the Canadian tire transaction and an updated view of the direct and indirect impact of helium availability and cost on both our retail and anagram business. We are revising our previously provided fiscal 2019 outlook.
We are now expecting to be in the range in the revenue range of $2.4 billion to $2.45 billion and comp sales to be flat to down 1% versus last year.
Excluding the impairment and restructuring charges related to store closures and sale leaseback transaction, we anticipate adjusted operating margin to be down approximately 100 basis points when compared to 2018 levels.
We now expect full year adjusted net income to be in the range of $118 million to $128 million or $1.26 cents to $1.36 cents per share.
We expect adjusted EBITDA to be in the range of $355 million to $370 million and interest expense to be $115 million to $170 million for the year.
In terms of capital allocation priorities, we continue to plan spend about 2.8% of net revenues on Capex and anticipate ending the year with net debt at approximately four times adjusted EBITDA.
For all the detail around our outlook. Please refer to our press release with that I'd like to turn the call over to the operator and open it up for questions.
And ladies and gentlemen at this time as a reminder, if you would like to ask an audio question. Please press star one.
And your first question comes from the line of Steph.
Men with credit Suisse. Please go ahead.
Hey, guys. Good morning, Thanks for taking the question I wanted to just follow up on the guidance here. So you lowered the full year comp guidance.
From up 1% previously to flat to down one now I think so implied back half comps.
Effectively down slightly to up one which seems to be lower than you. Initially thought as well you highlighted a number of tailwinds for the second half of the year. So just wondering what changed for the second half of the year relative to your expectations.
Sure Seth so.
The helium availability is a great story, it's happening a little slower than we had anticipated.
His coupled that with.
The.
The extended impact on other categories. The juvenile as I mentioned in my comments.
We think that that impact.
Other categories outside of balloons because of the failure that feeling is about 100 to 200 basis points.
And we're taking a conservative view with respect to our ability to get the consumer back in the mindset of thinking party city first because the balloons. There is going to have been education process, we have plans to.
But in place to spread the word through media as we see various markets get back in stock on a percent of helium so, but we've taken a bit of a conservative view is the speed with which that can happen. So it's really the impact of helium is to tell you. If you think you'd think about in terms of the tail of the impact of helium on the business as we get back in stock and get the consumer Bakken and the mindset of party city first because of our breadth of assortment, including balloons.
Okay got it and then just a follow up question on the gross margin I, just want to better understand the impact from higher freight costs related to the operational disruptions from last year it sounds like.
It is it right that these costs were capitalized into inventory. They are now flowing through Cogs as the inventory turns and that's why you're seeing the impact and if so I'm just curious what is incremental versus your expectations and then how should we be thinking about that 200 basis point impact.
Over the next few quarters.
Okay. So so the cost of freight actually gets capitalized in inventory. It also gets capitalized and the deferral between sales from wholesale to retail. So that concept is correct is capitalized it is flowing through.
We still have a little bit to go but by the end of this quarter. It should all flow through I think it's important to note is that.
Our original guide had that.
Margin impact in it we don't we don't guide on margin margin was developed through the consensus and we had attempted to communicate that obviously unsuccessfully we did we knew this was going to happen. So if you look at our the reconciliation of our EBITDA.
The 200 basis points from the.
Flow through.
It is not a reconciling item to the EBITDA guidance.
It is this merely within that within the margin percent, we had anticipated it wasn't our EBITDA.
Got it okay I understood. Thank you.
And your next question comes from the line of Rick Nelson with Stephens. Please go ahead.
Thanks, Good morning.
Tim can you.
Hey, guys.
Supply agreement when it began.
And is there an opportunity here to capture share.
Others are short overview.
Yes so.
I'm going to say this past week give or take a couple of days.
The most recent.
Agreement, we entered into.
Began flowing tanks of liquid helium to transfer stations primarily in the.
Florida, Georgia, and Houston markets, and so thats flowing as we speak we're seeing substantial improvement in the in stock position the healing in in in those markets.
And we would anticipate that by.
The middle of August give or take somewhere between the 15th and the Twentyth.
We should be in a position to actually broadcast to the broader brought to market within those markets broadcast widely that party city as the place to compete for balloons with helium and you are absolutely correct. Rick that this should represent an opportunity for us to.
Have an advantage over competition, obviously through the anagram results, we see that helium is not unique to the party city.
And being in a position as we expect to be by the.
Middle of October of being close to 100% stock on helium should should should be a tailwind for us, but like I said the said earlier, it's a matter of one getting that message out and then reestablishing our relationship with the consumer.
As being the the place to go for everything for parties.
Okay.
Thanks for that color.
So.
Like to ask you about the tariffs you talked about the impact and 20, Meg and does that incorporate the west for.
Exposure.
And how will you might see that impacting 2020 is that flows through inventory.
Okay. So with respect to the yes, that's it.
There's there's two parts so with respect to the absolute impact on earnings for 20.
19, as I mentioned earlier, we modeled out to be under $2 million.
Your point is well taken that there will be some tariff impact that ends up being deferred in 2019 and to flow through in 2020.
That number would be probably somewhere in the neighborhood of.
Three $3 million give or take.
We have every expectation that we will aggressively address the impact of this 10% tariff similar to what we did earlier with the 10% and subsequently 25%.
Where weve substantially mitigated it.
No it's going to be more challenging I think it's it's it would be foolish to think that we could address it as.
Effectively it as quickly as we did in 2018 and 2019 in terms of the first couple of tranches.
But we have been actively looking to resource at in many geographies and we will continue to do so there are opportunities we believe for us to to resource. We believe there's opportunities now and some of our core manufactured categories, which had not been affected by the duties earlier on.
Things such as napkins in place, where we now have the opportunity we believe to have a distinct advantage in the U.S. marketplace with folks who are been historically sourcing those products from from China.
Also to the extent that we have China competition metallic balloons, we see that as an opportunity and from a resourcing were partly from a from a vendor negotiating standpoint.
Clearly, although the Chinese have stabilized their currency there are certain elements of our vendors cost that is denominated in RMB.
Labour overheads, while they make while they source most of the materials in US dollars. There is still an element of their cost debt is denominated in RMB and we expect to receive price adjustments from our vendors with respect to the movements in the currency and as I mentioned.
Our last resort is looking at pricing I mean, we do have a huge advantage in that we have and you are of $2 and the not so our price points are nominal into the rhetoric to whatever extent, we are affected by tariff tariffs so to our competitors both on the wholesale as well as on the retail side. So we believe that we've got the leverage within our business and the leverage within the marketplace for us to successfully address this headwind and managed and managed down the exposure.
Okay. Thanks for the update Thats helpful. Good luck. Thank you Rick good talking to you.
And your next question comes from the line of Mark Rittenbaum with Neuberger Berman. Please go ahead.
Hey, Jim Hey, Mike.
Hi, My question very good my question relates to the Canadian tire announcement strategic rationale sounds compelling value unlock seems pretty straightforward.
So my question is can you provide us with the dollar amount of wholesale sales the company does to Canadian Party city stores are approximately.
Sure.
Currently on an annualized basis, it's a little bit above and kidney in Canadian dollars.
A little bit about $50 million million dollars year.
Got it so.
So it is fair to say if my math is correct.
You have a goal that you said in the press release, a double those sales over a period of 10 years, we're talking about potentially.
$1 billion 1 billion Canadian dollar wholesale revenue deal for the fall timeframe. In addition to that the cash proceeds am I understanding that correctly.
You're in the ballpark absolutely absolutely and then we would expect that that incremental revenue would substantially replace and provide the proper provide us the opportunity to substantially replace.
A good portion of the EBITDA, which we sold in this transaction.
Great and I guess that sounds great and as a follow up.
Jim are there are there other markets, where you think you can pursue a similar sort of asset light approach.
Today.
Yes.
That's it that's it that's that's that's a that's a good.
Thank you for that question.
As I've said, when we look at the retail marketplace outside the us.
I think having us focus on the us market.
It is important for us.
Our.
Long term strategy is important part of our long term strategy and important for our overall success clearly the us market is the most.
Developed markets for this category by far.
For lots of reasons, some of which are cultural some of which are the cost of real estate.
So which is just the availability of product itself and I think having us focus our efforts in terms of our retail pure retail business here in the U.S.
And then partner with people in geographies like we've done in Australia with Big W. What we've done with Morrisons, the UK or our massive franchisee in Mexico, I think gives us the ability to leverage up our retail knowledge through that partnership while allowing the.
The the local retailer to build the brand with their expertise in the marketplace.
Allow us to keep our cap our capital.
Dry powder dry powder to invest in our consumer products businesses and other associated parts of the business and while they build out the brick and mortar or the infrastructures for those for those markets I think as we as we think about it we think Latin America over the long term is clearly an ideal.
Market for us to develop these sorts of relationships.
And I think to the extent that we can do that it should should bode well I think ecommerce we view e-commerce , a little differently. We as you know we have an e-commerce business in Europe and in the UK and in the UK, we seek ecommerce on his views on a b to C basis has has a lot of merit, but in terms of brick and mortar in physical presence in heavy investment in stores and heavy investment in the geography is better is better served by a good premier partner that we can partner with and supply product through.
Terrific. Thanks, Jim.
Thank you Mark.
And your next question comes from the line of Korea Martinson with Jefferies. Please go ahead.
Good morning.
So to get to the four times leverage target that you have for that.
Year.
Another turn off here.
Can you break down the combination of asset sales and free cash flow that that's going to get you there.
Sure. So there is some moving parts crew in terms of the ultimate depth.
Disposition of taxes, and the ultimate resolution of the tax exposures are so it moves around a little bit but there are there is there is the free cash flow from operations.
Which is somewhere in the neighborhood.
Of the 100 and.
$50 million.
Which money, we'll pay down debt then there's buyout.
Jimmy in dollars from the.
Work is 75 being the symphony those working capital and then from the.
A sale lease back into Canadian type transactions, probably both to somewhere in the neighborhood of 100 on the sale of these approaches to 58 million sorry in sale leaseback and then that's again hundreds and sale leaseback and then about a 100 on the Canadian tire transaction. However.
The taxes on that will be will be will be a bit higher because.
We have to.
Write off goodwill.
And the transaction, which will give us the cash but it increases the amount of it's not tax deductible. So there is the gain on that will actually be tax a little bit higher rate.
Those are the those are the big elements and then the other side of it is.
Accounts payable will be substantially lower at year end. So I think if if we looked at our total indebtedness.
I mentioned in my comments, we think will generate roughly $400 million of cash to pay down debt.
Okay, and when we look at the guidance.
We can look at the 50 million kind of reduction here at the at the low point here, we know that any color from the rent increase.
And in this step up from our side of the disposition of the Canadian business.
Is the right way to think about it.
The rest of that really is coming from those freight costs that are capitalized gross margin challenges.
No no.
Our original guidance Ed had the different freight costs. It's in it's in the it's in the consensus on the margin that we tried to communicate.
To get adjusted that Didnt get adjusted to be perfectly candid.
The movements on EBIT da are essentially this essentially four big components, the Canadian tire transactions about in this in us dollars about $8 million against the previous guide the movement. The comp is about $16 million from our original guide the impact of helium, an anagram, which was not on our list guide because we really hadn't begun to see the impact on the underground business because most of the problems have been isolated to us, but it's it's been because there's been more contagion to Europe as well as other parts of the us market. So the impact on the underground business is about $13 million and then the sale leasebacks five and those are the those are the largest components of the movement.
No. It is up to that ends up to like 43 of the 50.
Okay.
And just lastly on e-commerce .
It's been an area that folks have talked about the same.
You close stores continue to grow that channel channel what are you seeing there on the competitive front for you guys.
Well, we as I believe you know.
Most of the players in E Commerce space.
Our customers of ours.
We hold license rights on party goods as well as obviously the strength of our balloon category and in our breath roll line generally.
We've seen that business remain relatively stable growing in low single digits.
The challenge the challenge for US is as we talk about our ecommerce business.
From a GAAP standpoint, both this is considered a brick and mortar sale from a logical standpoint, BOPUS is really digital sale. So when we give our our ecommerce results. We include BOPUS in there from a digital standpoint, because the sale initiated on the web.
And I think Thats one of the huge advantages we have over other e-commerce players because in our category we believe that.
Our shopper color mom for right now mom likes to have the certitude around having her party goods in her hands and make sure. She has everything she needs.
A day or two in advance of the party. So as she enjoys the convenience of shopping online having the ability to physically garner the product and have it in her possession and make sure. She has everything she needs in advance of the party is a huge advantage of party city has over I believe.
Okay anybody else in the category is on ecommerce and as you know run the marketplaces, we're an Amazon marketplace as well as number of other marketplaces.
So we have visibility to the performance of our category there as well.
Thank you very much guys appreciate it.
Your next question comes from the line of Simeon Gutman with Morgan Stanley . Please go ahead.
Thanks, Good morning.
Quick question on Caris.
To the first round of terrorists Jim were there any price increases that you had to make at the to the end user and then are you seeing any price increases across the category.
From any competitors.
So with respect to tariffs.
As it affected our wholesale business.
We did have some price increases I believe the total amount of price increases we've seen at retail are probably somewhere in the neighborhood of three me $3 million to $4 million in total for the whole year.
So we've been able to mitigate most of that.
On our AMSC in business, we increased our pricing.
In the in the mid to low single digits, primarily associated with tariffs.
And some other increased cost so in terms of the build our business both from the vertical as well as retail as well as it relates to the vertical most of the most the impact has been mooted.
From other third party suppliers the party city than the impact has not been that great either.
Most folks were able to either pass along get concessions from vendors resource or redesign.
Got it yeah, I'm trying to assess in the next round. If you have to raise prices. If your hypothesis is right that the low you are should should be should.
Help consumers absorb it a little bit better to the end result shouldn't be that terrible.
Didn't know if you have any evidence of that thus far.
No. We have we have not raised prices for this next round rich enterprise products rates over the next round of products.
Yes, there is.
It's more difficult as I said earlier with Rick it's more it's more difficult to do because.
It's generally product that has a lot more hand labor in it.
And therefore more difficult to just resource automatically.
Outside of China.
That coupled with labor availability and supply chain that being said that then ties back to my earlier comment that those are costs that are associated with and denominated in RMB. So we would expect to get some some some significant relief.
On the price increases.
At at at that level.
I think its important remember.
If we totaling you're talking about something that we buy for 20 550 cents.
Which ultimately becomes close to a $2 retail I guess, we just Keystone things.
10% tariff increases five cents on that item.
And if we get.
Two or three cents relief on that item, we've pretty much moved the entire product problem.
Right.
Can I ask you about Q3 comps.
I guess I don't care about the comps to date as much as the traffic trends, we just heard from a couple of companies that.
The July business looks a little different from their June business.
Trying to.
And then on why and any thoughts if you can talk about what you've seen so far.
We don't we don't as you know is a good news to me, we don't give guidance for.
We don't give guide by quarter on comp, we don't guide quotas.
July was a bit more challenging than than than than had been seen in June .
Not to the point, where it's dramatic but it has been it has been more challenging whether that's the timing of the holiday or just the consumer in general it's hard it's hard to say right now.
But July also but you should bear in mind July is a very very soft month for us and when I say soft I mean in terms of our aggregate sales for the whole year, it's a pretty light month.
Our business starts to crank up the second half of this month and into September and October October October November December that's when our business is most significant and as I said, we've got some.
Fairly fairly meaningful and sizeable tailwinds I believe we have time for one more question operator.
Thank you.
And your final question comes from the line of Joseph Feldman with Telsey Advisory Group. Please go ahead.
Hi, guys. Thanks for taking my question I apologize for my voice.
Can you talk about on the leverage ratio with about 400 million of debt pay down.
Why wouldn't you guys be a little below four times ended the year.
Yes, the yen based upon the current guided we youre exactly right Joe.
Okay. Thanks, and then the other thing I was curious about can you kind of provide the same type of bridge you did for EBITDA.
Sales.
I just wanted to get a little better clarity on like how much sales getting removed sure sure.
Ill give Mike that yes, so so the primary components when it comes to sales is the Canadian tire transaction.
As I said earlier, it's $39 million actually in the reconciliation it nets to 32, because there are wholesale sales previously into company that now become third parties. So you've got $32 million for the Canadian tire transaction, you've got the 1% comp becoming flat to down 1%. That's a $32 million movement, and then you've got anagram and anagram, although sales sales ultimately being forecasted from our previous guidance down $15 million those are the three major components.
Got it. Thank you and then just one final one on so you talk about where we are with the party planner and the kind of lift you're seeing from that end.
I may have missed it you said it earlier, but like how many you have now I figure was 150 as of last quarter.
Right, it's roughly still the same.
The party planner has been it has been a successful experiment.
Standpoint that we know when we interact with our customer and we know when we provide customer service, we can and we will build the basket I'm going to introduce.
Mr., Brad West in proceeds.
Bread is a terrific experience as a merchant and the terrific has a great track record of building comp sales and building and building traffic I'm going to ask him to talk a little bit about the party plan a program from a little bit different perspective thinking about it more globally in terms of our full full full organization being sales conscious and customer centric.
Thanks, Jim.
As I've looked at our business our prior to joining in now in the eighties, they've been with the company.
Clearly our biggest opportunity is to drive customer centric mindset throughout our business. Obviously it starts with how we curated assortment includes how we merchandise our stores.
Most importantly, how we engage the customer in our store and I can tell you I'm already focused on how we raise the average order value in our stores and online as we serve his party co hosts for consumers to need solutions in party components that we provide.
As I look at the party planner strategy I think it's right on.
It's a 150 stores today I think we can continue as I gain additional understanding.
And apply some additional strategy work to that party planner program.
We will continue to roll it out.
And build it as a strength of our in store experience.
Thank you Brett.
Great. Thanks, guys good luck with the quarter.
Thank you Joe Thanks, so much.
And I would now like to turn it back over to management for closing remarks.
Thank you operator, once again, everybody we apologize for the for the technical difficulties that led to the delay but as always thank you for your interest and support in the business and we look forward to.
Speaking with you later on one on one or whenever you want as you know my my my Phone's always open should feel free to reach out to me. If you have any questions to Mike and have a great day. Thank you all very much.
And ladies and gentlemen, thank you for participating in today's party City Q2 2019, earning call. This does conclude today's conference call you may now disconnect.