Party City Announces Second Quarter 2017 Results

ELMSFORD, N.Y--()--Party City Holdco Inc. (NYSE:PRTY) today announced financial results for the second quarter ended June 30, 2017.

“During the quarter, we grew our vertical model, made good progress integrating recent acquisitions in both our retail and wholesale businesses, strengthened our digital assets and furthered our global presence by accelerating our growth internationally.”

James M. Harrison, Chief Executive Officer, stated, “We delivered strong second quarter revenue growth of just under 5% on a reported basis, or almost 6% in constant currency, and are pleased with how the quarter played out, as we met our topline and bottom line objectives. By focusing on our fundamentals of topline growth, gross margin expansion and solid cost control, Adjusted EBITDA increased 13.5% and Adjusted EPS increased 17%”.

Mr. Harrison continued, “During the quarter, we grew our vertical model, made good progress integrating recent acquisitions in both our retail and wholesale businesses, strengthened our digital assets and furthered our global presence by accelerating our growth internationally.”

Highlights for the second quarter:

  • Grew total revenues by 4.9% on a reported basis or 5.7% on a constant currency basis
  • Acquired a minority interest in Punchbowl, a leader in digital invitations and greeting cards
  • Expanded gross margins 30bps from the same period last year, largely driven by share of shelf1 gains of 150 bps to 78.5%
  • Increased reported net income by 11% and adjusted net income by 17.6%
  • Increased Adjusted EBITDA 13.5% to $96.5 million
  • Generated free cash flow2 of $77.1 million in the second quarter and $114.8 million year-to-date, and reduced net debt leverage ratio to 4.1 times3

“While retail comps were slightly softer than we had forecasted, which we have reflected in our updated full year comp outlook, we were very pleased with our revenue growth and our overall profitability. Given our first half performance, we are on track to deliver our previously provided full year total revenue and earnings guidance,” Mr. Harrison added.

Second quarter summary:

  • Reported net income of $25.0 million compared to $22.5 million in the second quarter of 2016.
  • Adjusted net income increased 17.6% to $33.3 million, compared to $28.3 million for the prior year quarter.
  • Adjusted EBITDA increased 13.5% to $96.5 million, compared to $85.1 million in the second quarter of 2016.
  • Reported diluted earnings per share totaled $0.21 compared to $0.19 in the prior year quarter. Adjusted diluted income per share improved 16.7% to $0.28 from $0.24 in the second quarter of 2016.
  • Total revenues of $544.9 million increased 4.9% on a reported basis and 5.7% on a constant currency basis.
  • Retail sales increased 6.3% on a reported basis (6.7% on a constant currency basis) driven primarily by increased store count through acquired franchise stores (36), one acquired independent store and new store growth (22 net new Party City stores added in the past twelve months) and modest growth in brand comparable sales.
  • Brand comparable sales increased 0.1% during the second quarter.
  • Net third-party wholesale revenues increased 1.8% on a reported basis (increased 7.8% on an adjusted basis when adjusting for the currency effect as well as the impact of eliminating $5.6 million in intercompany sales for the 36 franchise store acquisitions over the last twelve months).
  • Total gross profit margin increased 30 basis points (50 basis points when excluding the negative effects of foreign exchange) to 40.6% of net sales, primarily due to higher share of shelf and product mix shift.
  • During the quarter, the Company invested approximately $6 million into the development of Kazzam, its online exchange platform for party-related services. Despite such spend, operating expenses as a percentage of revenues, 29.8%, were relatively consistent with the second quarter of 2016. Excluding such start-up costs, operating expenses totaled 28.6% of revenues, a decrease of 90 basis points from the corresponding quarter of the prior year.
  • During the quarter, the Company opened five new stores, acquired one independent store and closed one store.

Balance sheet highlights as of June 30, 2017

The Company ended the quarter with $1,665 million in debt (net of cash) resulting in net debt leverage3 of 4.1 times and approximately $329 million in availability under its asset-based revolving credit facility.

Fiscal 2017 Outlook

For 2017, the Company is adjusting brand comparable sales growth and reiterating guidance for all other line items:

  • Total revenue of $2.35 to $2.45 billion
  • Brand comparable sales growth of approximately 1.0%
  • GAAP net income of $123 to $133 million
  • GAAP diluted EPS of $1.02 to $1.10
  • Adjusted net income of $148 to $158 million
  • Adjusted diluted EPS of $1.23 to $1.30
  • Adjusted EBITDA of $400 to $417 million
  • Net debt leverage of approximately 3.5x times by the end of 2017

The Company has reconciled Non-GAAP outlook measures to the most directly comparable GAAP measures later in this release. See "Non-GAAP Information" and “Reconciliation of 2017 Outlook” for a more detailed explanation, including definitions of the various Non-GAAP terms used in this release.

_____________________

1 The percentage of our retail product cost of sales supplied by our wholesale operations

2 Defined as adjusted EBITDA less capital expenditures

3 Defined as net debt to adjusted EBITDA

Conference Call Information

A conference call to discuss the second quarter 2017 financial results is scheduled for today, August 2, 2017, at 8:00 a.m. Eastern Time. Investors and analysts interested in participating in the call are invited to dial (877) 201-0168 (U.S. domestic) and (647) 788-4901 (international), and enter conference ID#53279794, approximately 10 minutes prior to the start of the call. The conference call will also be webcast at http://investor.partycity.com/. To listen to the live call, please go to the website at least 15 minutes early to register and download any necessary audio software. The webcast will be accessible for one year after the call.

Website Information

We routinely post important information for investors on the Investor Relations section of our website, http://investor.partycity.com/. We intend to use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the Investor Relations section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this document.

Non-GAAP Information

This press release includes non-GAAP measures including Adjusted EBITDA and Adjusted Net Income/Loss and Adjusted Earnings per Share. We present these non-GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by eliminating items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because our credit facilities use Adjusted EBITDA to measure compliance with certain covenants. The Company has reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in tables accompanying this release. We also evaluate our results of operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We calculate constant currency percentages by converting our prior-period local currency financial results using the current period exchange rates and comparing these adjusted amounts to our current period reported results. We also provide free cash flow, defined as Adjusted EBITDA less capital expenditures, and net debt leverage, which is calculated by adding Loans and Notes Payable, Current Portion of Long Term Obligations and Long Term Obligations, Excluding Current Portion, subtracting Cash and Cash Equivalents and dividing by Adjusted EBITDA for the trailing twelve month period. Adjusted Earnings per Share is calculated by dividing Adjusted Net Income by the Weighted Average Number of Common Shares-Diluted. We believe providing these non-GAAP measures provides valuable supplemental information regarding our results of operations and leverage, consistent with how we evaluate our performance. In evaluating these non-GAAP financial measures, investors should be aware that in the future the Company may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. The Company's presentation of non-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. The Company has provided this information as a means to evaluate the results of its core operations. Other companies in the Company's industry may calculate these items differently than it does. Each of these measures is not a measure of performance under GAAP and should not be considered as a substitute for the most directly comparable financial measures prepared in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

Forward-Looking Statements

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance, and include Party City’s expectations regarding revenues, brand comparable sales, Adjusted EBITDA, Adjusted net income/loss, adjusted diluted earnings per share, average common shares outstanding and the effective tax rate. The forward-looking statements contained in this press release are based on management's good-faith belief and reasonable judgment based on current information, and these statements are qualified by important risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-looking statements. These risks and uncertainties include: our ability to compete effectively in a competitive industry; fluctuations in commodity prices; our ability to appropriately respond to changing merchandise trends and consumer preferences; successful implementation of our store growth strategy; decreases in our Halloween sales; disruption to the transportation system or increases in transportation costs; product recalls or product liability; economic slowdown affecting consumer spending and general economic conditions; loss or actions of third party vendors and loss of the right to use licensed material; disruptions at our manufacturing facilities; and the additional risks and uncertainties set forth in “Risk Factors” in Party City’s latest Form 10-K and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, outlook, guidance, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward looking statements. Except as may be required by any applicable laws, Party City assumes no obligation to publicly update or revise such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments or otherwise.

About Party City

Party City Holdco Inc. is the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is the leading player in its category, vertically integrated and unique in its breadth and depth. Party City Holdco designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Company’s retail operations include over 900 specialty retail party supply stores (including approximately 150 franchise stores) throughout North America operating under the names Party City and Halloween City, and e-commerce websites, principally through the domain name PartyCity.com.

       

PARTY CITY HOLDCO INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 
June 30, December 31,
  2017     2016  
ASSETS Unaudited
Current assets:
Cash and cash equivalents $ 69,018 $ 64,610
Accounts receivable, net 121,131 134,091
Inventories, net 642,469 613,868
Prepaid expenses and other current assets   70,552     68,255  
Total current assets 903,170 880,824
Property, plant and equipment, net 296,535 292,904
Goodwill 1,626,323 1,572,568
Trade names 567,171 566,599
Other intangible assets, net 68,857 76,581
Other assets, net   9,794     4,502  
Total assets $ 3,471,850   $ 3,393,978  
 
 
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable $ 185,132 $ 120,138
Accounts payable 156,763 163,415
Accrued expenses 164,780 149,683
Income taxes payable 8,182 46,675

Current portion of long-term obligations

  13,177     13,348  
Total current liabilities 528,034 493,259
Long-term obligations, excluding current portion 1,535,287 1,539,604
Deferred income tax liabilities 280,689 278,819
Deferred rent and other long-term liabilities   73,987     65,507  
Total liabilities 2,417,997 2,377,189
 
Redeemable securities 3,000 -
 
Stockholders’ equity:
Common stock (119,528,409 and 119,515,894 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively) 1,195 1,195
Additional paid-in capital 913,721 910,167
Retained earnings 177,965 157,666
Accumulated other comprehensive loss   (42,028 )   (52,239 )
 
Total stockholders’ equity   1,050,853     1,016,789  
Total liabilities, redeemable securities and stockholders’ equity $ 3,471,850   $ 3,393,978  
 
       

PARTY CITY HOLDCO INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except share and per share data)

 
Three Months Ended June 30, Six Months Ended June 30,
  2017         2016     2017       2016  
 
Revenues:
Net sales $ 541,653 $ 515,426 $ 1,015,616 $ 969,712
Royalties and franchise fees   3,225     3,987     6,261   7,441  
Total revenues 544,878 519,413 1,021,877 977,153
 
Expenses:
Cost of sales 321,900 307,865 620,619 595,632
Wholesale selling expenses 16,045 15,273 31,672 31,115
Retail operating expenses 90,512 90,615 181,242 177,324
Franchise expenses 3,713 3,574 7,030 7,137
General and administrative expenses 39,655 37,930 87,792 76,856
Art and development costs 5,942 5,676 11,740 11,053
Development stage expenses   6,412     0     6,412   0  
Total expenses   484,179     460,933     946,507   899,117  
Income from operations 60,699 58,480 75,370 78,036
 
Interest expense, net 21,294 22,781 41,986 45,433
Other expense (income), net   (895 )   (224 )   267   (3,202 )
Income before income taxes 40,300 35,923 33,117 35,805
Income tax expense   15,318     13,408     12,818   13,684  
Net income $ 24,982   $ 22,515   $ 20,299 $ 22,121  
 
 
Comprehensive income $ 31,985   $ 14,788   $ 30,510 $ 16,327  
 
Net income per common share-Basic $ 0.21   $ 0.19   $ 0.17 $ 0.19  
Net income per common share-Diluted $ 0.21   $ 0.19   $ 0.17 $ 0.18  
Weighted-average number of common shares-Basic 119,528,147 119,323,104 119,526,007 119,307,539
Weighted-average number of common shares-Diluted 120,943,745 120,323,581 120,903,032 120,232,590
 
 

PARTY CITY HOLDCO INC.

RECONCILIATION OF ADJUSTED EBITDA

(In thousands)

       
 
Three Months Ended June 30, Six Months Ended June 30,
  2017         2016     2017         2016  
 
Net income $ 24,982 $ 22,515 $ 20,299 $ 22,121
Interest expense, net 21,294 22,781 41,986 45,433
Income taxes 15,318 13,408 12,818 13,684
Depreciation and amortization   21,124     20,282     41,825     41,171  
EBITDA 82,718 78,986 116,928 122,409
Non-cash purchase accounting adjustments 3,000 2,288 4,850 3,689
Restructuring, retention and severance (a) 813 95 8,627 162
Deferred rent (b) 2,552 3,162 2,915 5,145
Closed store expense (c) 1,512 536 2,879 1,956
Foreign currency gains, net (1,183 ) (2,014 ) (1,720 ) (5,178 )
Employee equity based compensation (d) 824 933 3,222 1,881
Non-employee equity based compensation (e) 3,265 - 3,265 -
Undistributed (income) loss in unconsolidated joint ventures (942 ) 120 (226 ) 267
Corporate development expenses (f) 3,721 946 4,444 1,212
Other   260     15       478       57  
Adjusted EBITDA $ 96,540   $ 85,067     $ 145,662     $ 131,600  
 
Adjusted EBITDA margin   17.7 %   16.4 %   14.3 %   13.5 %
 
(a) During the first quarter of 2017, the Company recorded $7,814 of restructuring charges. This amount excludes a $1,362 stock option modification charge for Gerald Rittenberg, which is included in “Employee equity based compensation” in this table.
 
(b) The deferred rent adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items.
 
(c) Charges incurred related to closing underperforming stores.
 
(d) The first quarter of 2017 includes a $1,362 stock option modification charge for Gerald Rittenberg.
 
(e) Principally represents shares of Kazzam awarded to Ampology as compensation for Ampology’s services.
 
(f) Primarily represents start-up costs for Kazzam and third-party costs related to acquisitions (principally legal expenses).
 
       

PARTY CITY HOLDCO INC.

RECONCILIATION OF ADJUSTED NET INCOME

(In thousands, except share and per share data)

 
Three Months Ended June 30, Six Months Ended June 30,
2017     2016 2017     2016
 
Income before income taxes $ 40,300 $ 35,923 $ 33,117 $ 35,805
Intangible asset amortization 4,112 3,988 7,825 8,133
Non-cash purchase accounting adjustments (a) 3,920 3,137 5,924 5,093
Amortization of deferred financing costs and
original issuance discount 1,226 1,270 2,459 2,544
Restructuring, retention and severance (b) - - 7,814 -
Non-employee equity based compensation (c) 3,265 - 3,265 -
Employee equity based compensation (d)   824   933   3,222   1,881
Adjusted income before income taxes 53,647 45,251 63,626 53,456
Adjusted income tax expense (e)   20,318   16,904   24,246   20,350
Adjusted net income $ 33,329 $ 28,347 $ 39,380 $ 33,106
 
Adjusted net income per common share - diluted $ 0.28 $ 0.24 $ 0.33 $ 0.28
 
Weighted-average number of common shares-diluted   120,943,745   120,323,581   120,903,032   120,232,590
 
(a) On July 27, 2012, PC Merger Sub, Inc., which was our wholly-owned indirect subsidiary, merged into Party City Holdings Inc. (“PCHI”), with PCHI being the surviving entity (the “Transaction”). As a result of the Transaction, the Company applied the acquisition method of accounting and increased the value of certain property, plant and equipment. The impact of such adjustments on depreciation expense increased the Company’s expenses. These property, plant and equipment depreciation amounts are included in “Non-cash purchase accounting adjustments” for purposes of calculating “adjusted net income,” but are excluded from “Non-cash purchase accounting adjustments” for purposes of calculating adjusted EBITDA since they are included in depreciation expense.
 
(b) During the first quarter of 2017, the Company recorded $7,814 of restructuring charges. This amount excludes a $1,362 stock option modification charge for Gerald Rittenberg, which is included in “Employee equity based compensation” in this table.
 
(c) Principally represents shares of Kazzam awarded to Ampology as compensation for Ampology’s services.
 
(d) The first quarter of 2017 includes a $1,362 stock option modification charge for Gerald Rittenberg.
 
(e) Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
 
   

PARTY CITY HOLDCO INC.

RECONCILIATION OF 2017 OUTLOOK

(In millions)

UNAUDITED

 
Full year 2017
Outlook
Net income: $ 123     -     $ 133
Intangible asset amortization, net of tax:

 

8

Equity based compensation, net of tax: 5
Restructuring, retention and severance, net of tax: 5
Non-cash purchase accounting adjustments, net of tax:

 

5

Amortization of deferred financing costs and original issuance
discount, net of tax:  

 

   

2

     
Adjusted net income: $ 148     -     $ 158
 
 
Net income: $ 123 - $ 133
Income taxes: 74 - 80
Interest expense, net: 86 - 84
Depreciation and amortization:   83     -       82
EBITDA: $ 366 - $ 379
Corporate development expenses: 7 -

9

 

Restructuring, retention and severance: 8
Equity based compensation:

 

8

Deferred rent: 5 -

7

 

Non-cash purchase accounting adjustments:  

 

   

6

     
Adjusted EBITDA: $ 400     -     $ 417
 
               

PARTY CITY HOLDCO INC.

SEGMENT INFORMATION

(In thousands except percentages)

 
Three Months Ended June 30,
2017 2016
Dollars in Percentage of Dollars in Percentage of
Total Revenues thousands     Total Revenues thousands     Total Revenues
Net Sales:
Wholesale $ 276,705 50.8 % $ 268,863 51.8 %
Eliminations   (134,853 )     (24.8 %)   (129,536 )     (25.0 %)
Net wholesale 141,852 26.0 % 139,327 26.8 %
Retail   399,801       73.4 %   376,099       72.4 %
Total net sales 541,653 99.4 % 515,426 99.2 %
Royalties and franchise fees   3,225       0.6 %   3,987       0.8 %
Total revenues $ 544,878       100.0 % $ 519,413       100.0 %
 
 
Six Months Ended June 30,
2017 2016
Dollars in Percentage of Dollars in Percentage of
Total Revenues thousands     Total Revenues thousands     Total Revenues
Net Sales:
Wholesale $ 547,397 53.6 % $ 528,684 54.1 %
Eliminations   (270,851 )     (26.5 %)   (254,627 )     (26.1 %)
Net wholesale 276,546 27.1 % 274,057 28.0 %
Retail   739,070       72.3 %   695,655       71.2 %
Total net sales 1,015,616 99.4 % 969,712 99.2 %
Royalties and franchise fees   6,261       0.6 %   7,441       0.8 %
Total revenues $ 1,021,877       100.0 % $ 977,153       100.0 %
 
 
Three Months Ended June 30,
2017 2016
Dollars in Percentage of Dollars in Percentage of
Total Gross Profit thousands     Net Sales thousands     Net Sales
Retail $ 173,872 43.5 % $ 162,080 43.1 %
Wholesale   45,881       32.3 %   45,481       32.6 %
Total $ 219,753       40.6 % $ 207,561       40.3 %
 
 
Six Months Ended June 30,
2017 2016

 

Dollars in Percentage of Dollars in Percentage of

Total Gross Profit

thousands     Net Sales thousands     Net Sales
Retail $ 306,453 41.5 % $ 286,106 41.1 %
Wholesale   88,544       32.0 %   87,974       32.1 %
Total $ 394,997       38.9 % $ 374,080       38.6 %
 
                             

PARTY CITY HOLDCO INC.

OPERATING METRICS

Three Months Ended June 30, LTM
2017 2016 2017
 
Store Count
Corporate Stores:
Beginning of period 784 731

 

730

 

New stores opened 5 4

30

 

Acquired 1 -

37

 

Closed (1) (5)          

(8)

     

 

End of period 789 730

789

 

Franchise Stores:
Beginning of period 146 181

183

 

Opened 1 2

4

 

Sold to Party City - -

(36)

 

Closed - -          

(4)

     

 

End of period 147 183          

147

     

 

Grand Total 936 913          

936

     

 

 
           
Three Months Ended June 30, Six Months Ended June 30,
2017     2016 2017     2016
 
Share of Shelf (a) 78.5% 77.0% 78.0% 76.3%
 
 
 
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
 
Brand comparable sales (b) 0.1% 3.8% 0.9% 1.3%
 
(a) Share of shelf represents the percentage of our retail product cost of sales supplied by our wholesale operations.
 
(b) Party City brand comparable sales include North American e-commerce sales.
 

Contacts

ICR
Farah Soi and Rachel Schacter
203-682-8200
InvestorRelations@partycity.com

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