Party City Announces Second Quarter 2016 Financial Results

  • Net sales increased approximately 5% to $515 million
  • Gross margin expanded 200 basis points
  • Reported EPS improved to $0.19 from a loss of $0.20; adjusted
    EPS increased to $0.24 from $0.12 in 2Q15
  • Brand comparable sales increased 3.8%

ELMSFORD, N.Y.–(BUSINESS WIRE)–Party City Holdco Inc. (NYSE:PRTY) today announced its financial results
for the quarter ended June 30, 2016.

“Our performance this quarter reflects our strong global vertical model
as well as the strength of our product category which has a steady
demand and is generally unaffected by economic conditions.” said James
M. Harrison, Chief Executive Officer. “On the retail side we are seeing
more normalized shopping patterns driven, in part, by a strong
summer/graduation season and positive customer reaction to our new
advertising campaign. On the wholesale side, we are making good progress
integrating our most recent acquisitions, which will continue to drive
margins. Additionally, we are increasing our penetration into
international markets and alternative customer channels. Based on our
results for the first half of the year, we are maintaining our full year
guidance.”

Highlights for the second quarter:

  • Total revenues of $519 million increased 4.8% on a reported basis or
    5.4% on a constant currency basis.

    • Retail sales increased 7.3% on a reported basis (7.7% on a
      constant currency basis) driven by higher brand comparable sales
      and 33 net new Party City stores added in the past twelve months.
    • Brand comparable sales increased 3.8%, driven by strong
      summer/graduation sales and larger average purchase, as well as
      the shift of Easter Sunday (a day on which our stores are closed).
      In fiscal 2015 Easter Sunday fell in the second quarter while in
      fiscal 2016 the holiday fell in our first fiscal quarter. Year to
      date, as of June 30, 2016, brand comparable sales totaled 1.3%.
    • Net third-party wholesale revenues decreased 1% on a reported
      basis (increased 0.1% on a constant currency basis) principally
      due to the impact of the acquisition of 23 franchise stores in Dec
      ‘15/Jan ‘16 (which resulted in the associated elimination of
      previously reported third party sales) as well as lower sales of
      Grasslands Road gift products due to the de-emphasis and
      reorganization of this division.
  • Total gross profit margin increased 200 basis points to 40.3% of net
    sales, compared to 38.3% of net sales in the second quarter of fiscal
    2015, primarily due to higher share of shelf and reduced product costs.
  • Wholesale share of shelf (the percentage of retail product cost of
    sales supplied by our wholesale operations) increased to 77.0% from
    75.6% in the prior year quarter.
  • Operating expenses were slightly favorable as a percentage of
    revenues, and increased 4.4% over the second quarter of 2015 to $153.1
    million, driven primarily by retail operating expenses resulting from
    the higher store count and additional advertising spend. Wholesale
    selling expenses declined 5.9% due to cost savings related to a
    reorganization of our gift sales group.
  • Reported net income improved to $22.5 million compared to a loss of
    $23.1 million in the second quarter of fiscal 2015. The second quarter
    of fiscal 2015 included certain one-time items associated with the
    Company’s initial public offering, including: 1) a management
    agreement termination fee of $30.7 million paid to THL and Advent and
    2) charges totaling $15.6 million associated with the redemption of
    notes. Net income year to date totaled $22.1 million.
  • Adjusted EBITDA increased 13.5% to $85.1 million compared to $75.0
    million in the second quarter of fiscal 2015, in line with
    expectations.
  • Adjusted net income improved to $28.3 million, compared to $14.2
    million for the second quarter of fiscal 2015. The current quarter
    adjusted net income includes interest savings of $9.1 million
    resulting from debt reduction and refinancing during 2015.
  • Reported earnings per share improved to $0.19 from a loss of $0.20.
    Adjusted diluted income per share improved to $0.24 compared to $0.12
    in the second quarter of fiscal 2015.
  • During the quarter, the Company opened four new stores and closed five
    stores. At June 30, 2016, there were 730 corporate stores and 183
    franchise stores for a total store count of 913, as compared to 697
    corporate stores and 205 franchise stores for a total store count of
    902 at June 30, 2015.

Balance sheet highlights as of June 30, 2016:

The Company ended the second quarter with $1,753 million in debt (net of
cash) resulting in net debt leverage of 4.5 times and approximately $374
million in availability under its asset-based revolving credit facility.

Fiscal 2016 Outlook:

The Company is reiterating its 2016 outlook and has also included
additional GAAP measures. For 2016, Party City anticipates results as
follows:

  • Total revenue of $2.35 to $2.42 billion
  • Brand comparable sales to be slightly positive
  • GAAP net income of $120 to $130 million
  • GAAP diluted EPS of $1.00 to 1.08
  • Adjusted EBITDA guidance of $390 to $405 million
  • Adjusted net income of $140 to $150 million
  • Adjusted diluted EPS of $1.17 to $1.25
  • Net debt leverage below 4 times by the end of 2016

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 2016 Outlook” for a more detailed
explanation, including definitions of the various Non-GAAP terms used in
this release.

_______________________________________

Conference Call Information:

A conference call to discuss second quarter fiscal 2016 financial
results is scheduled for today, August 4, 2016, 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#47471306, 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 a table 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 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. (the “Company” or “Party City Holdco”) 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 approximately 900
specialty retail party supply stores (including approximately 180
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.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

June 30,

December 31,
2016 2015
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $42,024 $42,919
Accounts receivable, net 113,919 132,287
Inventories, net 624,934 564,259
Prepaid expenses and other current assets 60,387 50,450
Total current assets 841,264 789,915
Property, plant and equipment, net 277,749 272,420
Goodwill 1,580,181 1,562,515
Trade names 567,503 568,712
Other intangible assets, net 80,990 89,157
Other assets, net 5,685 9,684
Total assets $3,353,372 $3,292,403
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable $138,911 $126,136
Accounts payable 149,423 111,616
Accrued expenses 137,895 146,319
Income taxes payable 9,547 8,504
Current portion of long-term obligations 14,438 14,552
Total current liabilities 450,214 407,127
Long-term obligations, excluding current portion 1,641,262 1,646,121
Deferred income tax liabilities 276,033 276,667
Deferred rent and other long-term liabilities 54,310 49,471
Total liabilities 2,421,819 2,379,386
 
Stockholders’ equity:

Common stock (119,329,354 and 119,258,374 shares issued and
outstanding
at June 30, 2016 and December 31, 2015,
respectively)

1,193 1,193
Additional paid-in capital 906,634 904,425
Retained earnings 62,310 40,189

Accumulated other comprehensive loss

(38,584) (32,790)
 

Total stockholders’ equity

931,553 913,017

Total liabilities and stockholders’ equity

$3,353,372 $3,292,403
 
                     

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data)

UNAUDITED

 
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
 
Revenues:
Net sales $515,426 $491,206 $969,712 $949,401
Royalties and franchise fees 3,987 4,314 7,441 8,224
Total revenues 519,413 495,520 977,153 957,625
 
Expenses:
Cost of sales 307,865 302,863 595,632 597,137
Wholesale selling expenses 15,273 16,235 31,115 33,360
Retail operating expenses 90,615 85,229 177,324 165,543
Franchise expenses 3,574 3,530 7,137 6,989
General and administrative expenses 37,930 36,417 76,856 74,069
Art and development costs 5,676 5,179 11,053 10,456
Total expenses 460,933 449,453 899,117 887,554
Income from operations 58,480 46,067 78,036 70,071
 
Interest expense, net 22,781 33,397 45,433 71,876
Other (income) expense, net (224) 48,810 (3,202) 47,389
Income (loss) before income taxes 35,923 (36,140) 35,805 (49,194)
Income tax expense (benefit) 13,408 (13,090) 13,684 (17,619)
Net income (loss) $22,515 ($23,050) $22,121 ($31,575)
 
 
Comprehensive income (loss) $14,788 ($16,331) $16,327 ($37,183)
 
Net income (loss) per common share-Basic $0.19 ($0.20) $0.19 ($0.30)
Net income (loss) per common share-Diluted $0.19 ($0.20) $0.18 ($0.30)
Weighted-average number of common shares-Basic 119,323,104 115,060,066 119,307,539 104,578,295
Weighted-average number of common shares-Diluted 120,323,581 115,060,066 120,232,590 104,578,295
 
                   

PARTY CITY HOLDCO INC.

RECONCILIATION OF ADJUSTED EBITDA

(In thousands)

UNAUDITED

 
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
 
Net income (loss) $22,515 ($23,050) $22,121 ($31,575)
Interest expense, net 22,781 33,397 45,433 71,876
Income taxes 13,408 (13,090) 13,684 (17,619)
Depreciation and amortization 20,282 19,650 41,171 39,801
EBITDA 78,986 16,907 $122,409 $62,483
Non-cash purchase accounting adjustments 2,288 3,937 3,689 5,755
Management fee (a) 30,697 31,627
Restructuring, retention and severance 95 1,505 162 2,145
Refinancing charges (b) 15,596 15,596
Deferred rent (c) 3,162 2,696 5,145 4,101
Closed store expense (d) 536 307 1,956 568
Foreign currency (gains) losses, net (2,014) 1,558 (5,178) 2,760
Equity based compensation 933 728 1,881 1,124
Undistributed non-cash loss in unconsolidated joint venture 120 126 267 35
Gain on sale of assets (e) (2,660)
Corporate development expenses (f) 946 994 1,212 1,129
Other 15 (101) 57 (218)
Adjusted EBITDA $85,067 $74,950 $131,600 $124,445
       
Adjusted EBITDA margin 16.4% 15.1% 13.5% 13.0%
 
(a)   In 2012, the Company entered into a management agreement with THL
and Advent under which THL and Advent provided advice to the Company
on, among other things, financing, operations, acquisitions and
dispositions. Under the agreement, THL and Advent were paid an
annual management fee for such services. In connection with the
initial public offering, the management agreement was terminated and
the Company paid THL and Advent a termination fee. Such amount was
recorded in other expense, net in the Company’s condensed
consolidated statement of operations and comprehensive loss for the
three months ended June 30, 2015.
(b) The Company used proceeds from the initial public offering to redeem
the Nextco Notes. The redemption required a prepayment penalty,
$7,000. The Company recorded the prepayment penalty in other
expense, net in the Company’s condensed consolidated statement of
operations and comprehensive loss for the three months ended June
30, 2015. Additionally, in conjunction with the redemption, the
Company wrote off $8,596 of capitalized debt issuance costs and
original issuance discounts related to the Nextco Notes. Such charge
was recorded in other expense, net in the Company’s condensed
consolidated statement of operations and comprehensive loss for the
three months ended June 30, 2015.
(c) 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.
(d) Charges incurred related to closing unprofitable stores.
(e) During January 2015, the Company recorded a gain on the sale of
certain assets obtained in the October 2014 acquisition of U.S.
Balloon Manufacturing Co., Inc.
(f) Third-party costs related to acquisitions (principally legal
expenses).
 
                   

PARTY CITY HOLDCO INC.

RECONCILIATION OF ADJUSTED NET INCOME

(In thousands)

UNAUDITED

 
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
 
Income (loss) before income taxes $35,923 ($36,140) $35,805 ($49,194)
Intangible asset amortization 3,988 4,747 8,133 9,516
Non-cash purchase accounting adjustments (c) 3,137 4,817 5,093 7,475
Amortization of deferred financing costs and
original issuance discount (b) 1,270 11,377 2,544 14,451
Management fee (a) 30,697 31,627
Refinancing charges (b) 7,000 7,000
Equity based compensation 933 728 1,881 1,124
Gain on sale of assets (d) (2,660)
Adjusted income before income taxes 45,251 23,226 53,456 19,339
Adjusted income tax expense (e) 16,904 9,022 20,350 8,022
Adjusted net income $28,347 $14,204 $33,106 $11,317
 
Adjusted net income per common share – diluted $0.24 $0.12 $0.28 $0.11
Weighted-average number of common shares-diluted 120,323,581 116,197,981 120,232,590 105,561,342
 
(a)   In 2012, the Company entered into a management agreement with THL
and Advent under which THL and Advent provided advice to the Company
on, among other things, financing, operations, acquisitions and
dispositions. Under the agreement, THL and Advent were paid an
annual management fee for such services. In connection with the
initial public offering, the management agreement was terminated and
the Company paid THL and Advent a termination fee. Such amount was
recorded in other expense, net in the Company’s condensed
consolidated statement of operations and comprehensive loss for the
three months ended June 30, 2015.
(b) The Company used proceeds from the initial public offering to redeem
the Nextco Notes. The redemption required a prepayment penalty,
$7,000. The Company recorded the prepayment penalty in other
expense, net in the Company’s condensed consolidated statement of
operations and comprehensive loss for the three months ended June
30, 2015. Additionally, in conjunction with the redemption, the
Company wrote off $8,596 of capitalized debt issuance costs and
original issuance discounts related to the Nextco Notes. Such charge
was recorded in other expense, net in the Company’s condensed
consolidated statement of operations and comprehensive loss for the
three months ended June 30, 2015.
(c) 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.
(d) During January 2015, the Company recorded a gain on the sale of
certain assets obtained in the October 2014 acquisition of U.S.
Balloon Manufacturing Co., Inc.
(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 2016 OUTLOOK

(In millions)

UNAUDITED

 
Full year 2016
Outlook
Net income: $120 $130
Intangible asset amortization, net of tax:

 

11

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

 

3

Equity based compensation, net of tax:

 

2

Non-cash purchase accounting adjustments, net of tax:

 

3

Adjusted net income (a): $140 $150
 
 
 
 
Net income: $120 $130
Income taxes: 76 82
Interest expense, net:

 

90

Depreciation and amortization:

 

83

EBITDA: $369 $385
Deferred rent:

 

14

Foreign currency gains, net:

 

(5)

Equity based compensation:

 

3

Non-cash purchase accounting adjustments:

 

4

Other (b):

 

4

Adjusted EBITDA (a): $390 $405
 

Contacts

Party City Holdco Inc.
Deborah Belevan, 914-784-8324
VP of
Investor Relations
InvestorRelations@partycity.com

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