Party City Announces Third Quarter 2016 Financial Results and Brand Comparable Sales for Fiscal October 2016

ELMSFORD, N.Y.–(BUSINESS WIRE)–Party City Holdco Inc. (NYSE: PRTY) today announced its financial
results for the quarter ended September 30, 2016 and brand comparable
sales for fiscal October 2016.

For the quarter ended September 30, 2016 the Company reported
total revenues of $557 million, up 0.3% from the prior year period or up
1.7% on a constant currency basis. Income from operations increased
17.3% to $36.9 million and adjusted EBITDA (see “Non-GAAP Information”)
increased 13.4% to $66.0 million. Reported GAAP diluted earnings per
share increased to $0.08 from a loss of $0.37 in the third quarter of
fiscal 2015. Adjusted diluted net income per share increased to $0.12
from $0.10 in the third quarter of fiscal 2015 (see “Non-GAAP
Information”).

For the five-week period ended November 5, 2016 (fiscal October,
which comprises the majority of Halloween sales), the Company reported
retail sales of $399.4 million, a 7.0% decrease from the same period in
2015. Brand comparable sales, which include Company-owned Party City
stores in the US and Canada and North American e-commerce operations,
decreased 6.4%.

During the Halloween season, the Company operated 270 temporary
Halloween City stores, compared to 335 in 2015, with the reduction in
temporary stores a result of the shift from a Saturday Halloween last
year to a Monday Halloween this year.

“We are pleased with our third quarter results, which demonstrate the
competitive advantages of our unique, vertical model,” said James M.
Harrison, Chief Executive Officer. “While a portion of the third quarter
was impacted by a softer Halloween season, we continued to see strong
gains in our everyday categories, which delivered brand comparable sales
growth of almost 4%. In addition, in our international markets, in
constant currency, we grew total revenue over 12%.”

Mr. Harrison added: “With respect to the month of October, the two day
Halloween shift from Saturday to Monday this year, as well as the
backdrop of a more distracted consumer, resulted in the negative
Halloween brand comp, as we saw less overall participation on the adult
side of the business. The good news is that our juvenile Halloween
business was essentially flat, and our everyday business remained strong
in the month, with comp sales growth of around 4%. As we finish the
year, while we are well positioned to remain the top of mind choice for
the holiday entertaining season, leveraging our full assortment of
products and our omni-channel strategy, we are updating our outlook to
reflect our year-to-date performance. ”

Highlights for the third quarter:

  • Total revenues of $557 million increased 0.3% on a reported basis or
    1.7% on a constant currency basis.

    • Retail sales increased 2.4% on a reported basis (2.7% 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 1.2% in the third quarter of 2016.
    • Net third-party wholesale revenues decreased 2.9% on a reported
      basis (increased 0.5% on a constant currency basis) principally
      due to the impact of the acquisition of 23 franchise stores in
      December 2015 / January 2016 (which resulted in the elimination of
      $6 million of previously reported third party sales). When
      adjusting for both the negative currency impact and the effect of
      the acquired franchise stores, net third-party wholesale revenues
      increased 3.4%.
  • Total gross profit margin increased 110 basis points to 35.5% of net
    sales, primarily due to higher share of shelf, less promotional
    activity in our stores and lower product costs.
  • Wholesale share of shelf (the percentage of retail product cost of
    sales supplied by our wholesale operations) increased to 75.1% from
    73.5% in the prior year quarter.
  • Operating expenses were essentially flat as a percentage of revenues,
    and increased $1.0 million over the third quarter of 2015 to $163.4
    million. Retail operating expenses declined 1.6% due in part to
    improved labor efficiency in our stores, while general and
    administrative expenses climbed 8.3% principally driven by
    inflationary pressures and higher professional fees associated with
    Sarbanes-Oxley compliance.
  • Reported net income improved to $10.2 million compared to a loss of
    $44.5 million in the third quarter of fiscal 2015. The third quarter
    of fiscal 2015 included one-time charges associated with the Company’s
    debt refinancing (see GAAP to Non-GAAP reconciliation table at the end
    of this release for detail).
  • Adjusted EBITDA increased 13.4% to $66.0 million compared to $58.2
    million in the third quarter of fiscal 2015.
  • Adjusted net income improved to $14.0 million, compared to $11.9
    million for the third quarter of fiscal 2015. The current quarter net
    income benefited from interest savings resulting from our refinancing
    during 2015.
  • Reported earnings per share improved to $0.08 from a loss of $0.37.
    Adjusted diluted income per share improved to $0.12 compared to $0.10
    in the third quarter of fiscal 2015.
  • During the quarter, the Company opened eight new stores and closed one
    store. At September 30, 2016, there were 737 corporate stores and 184
    franchise stores for a total store count of 921, as compared to 704
    corporate stores and 204 franchise stores for a total store count of
    908 at September 30, 2015.

Balance sheet highlights as of September 30, 2016:

The Company ended the third quarter with $1,813 million in debt (net of
cash) resulting in net debt leverage of 4.6 times and approximately $405
million in availability under its asset-based revolving credit facility.

Subsequent to the end of the third quarter, during October 2016, the
Company amended its Term Loan Credit Agreement. The applicable margin
for ABR borrowings under the Term Loan Credit Agreement was lowered from
2.25% to 2.00% and the applicable margin for LIBOR borrowings was
lowered from 3.25% to 3.00%. Additionally, the LIBOR floor was lowered.
In conjunction with the execution of the amendment, the Company borrowed
$100 million under its ABL Facility and used the proceeds to make a
voluntary prepayment of a portion of the outstanding balance under the
Term Loan Credit Agreement.

Fiscal 2016 Outlook:

The Company is adjusting its 2016 outlook. For 2016, Party City
anticipates results as follows:

  • Total revenue of $2.25 to $2.30 billion
  • Brand comparable sales to be flat to down 25bps
  • GAAP net income of $110 to $120 million
  • GAAP diluted EPS of $0.91 to $1.00
  • Adjusted EBITDA of $380 to $390 million
  • Adjusted net income of $130 to $140 million
  • Adjusted diluted EPS of $1.08 to $1.16
  • Net debt leverage approximately 4.2 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 third quarter fiscal 2016 financial results
is scheduled for today, November 10, 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#9980160, 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 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 over 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)
 
September 30, December 31,
2016 2015
ASSETS Unaudited
Current assets:
Cash and cash equivalents $47,617 $42,919
Accounts receivable, net 177,943 132,287
Inventories, net 683,655 564,259
Prepaid expenses and other current assets 68,752 50,450
Total current assets 977,967 789,915
Property, plant and equipment, net 282,666 272,420
Goodwill 1,580,551 1,562,515
Trade names 567,142 568,712
Other intangible assets, net 76,933 89,157
Other assets, net 5,269 9,684
Total assets $3,490,528 $3,292,403
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable $208,056 $126,136
Accounts payable 189,278 111,616
Accrued expenses 162,853 146,319
Income taxes payable 48 8,504
Current portion of long-term obligations 14,235 14,552
Total current liabilities 574,470 407,127
Long-term obligations, excluding current portion 1,638,643 1,646,121
Deferred income tax liabilities 277,358 276,667
Deferred rent and other long-term liabilities 60,166 49,471
Total liabilities 2,550,637 2,379,386
 
Stockholders’ equity:

Common stock (119,498,654 and 119,258,374 shares issued and
outstanding at
September 30, 2016 and December 31, 2015,
respectively)

1,195 1,193
Additional paid-in capital 908,942 904,425
Retained earnings 72,490 40,189
Accumulated other comprehensive loss (42,736) (32,790)
 
Total stockholders’ equity 939,891 913,017
Total liabilities and stockholders’ equity $3,490,528 $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 September 30, Nine Months Ended September 30,
2016   2015 2016   2015
 
Revenues:
Net sales $553,382 $551,380 $1,523,094 $1,500,781
Royalties and franchise fees 3,568 4,027 11,009 12,251
Total revenues 556,950 555,407 1,534,103 1,513,032
 
Expenses:
Cost of sales 356,662 361,530 952,294 958,667
Wholesale selling expenses 14,739 15,465 45,854 48,825
Retail operating expenses 100,746 102,432 278,070 267,975
Franchise expenses 3,370 3,608 10,507 10,597
General and administrative expenses 38,972 35,979 115,828 110,048
Art and development costs 5,543 4,913 16,596 15,369
Total expenses 520,032 523,927 1,419,149 1,411,481
Income from operations 36,918 31,480 114,954 101,551
 
Interest expense, net 22,424 29,554 67,857 101,430
Other (income) expense, net (905) 79,130 (4,107) 126,519
Income (loss) before income taxes 15,399 (77,204) 51,204 (126,398)
Income tax expense (benefit) 5,219 (32,715) 18,903 (50,334)
Net income (loss) $10,180 ($44,489) $32,301 ($76,064)
 
 
Comprehensive income (loss) $6,028 ($55,797) $22,355 ($92,980)
 
Net income (loss) per common share-Basic $0.09 ($0.37) $0.27 ($0.69)
Net income (loss) per common share-Diluted $0.08 ($0.37) $0.27 ($0.69)
Weighted-average number of common shares-Basic 119,406,751 119,253,707 119,340,610 109,470,099
Weighted-average number of common shares-Diluted 120,472,297 119,253,707 120,312,492 109,470,099
 
   
PARTY CITY HOLDCO INC.
RECONCILIATION OF ADJUSTED EBITDA
(In thousands)
UNAUDITED
 
Three Months Ended September 30, Nine Months Ended September 30,
2016   2015 2016   2015
 
Net income (loss) $10,180 ($44,489) $32,301 ($76,064)
Interest expense, net 22,424 29,554 67,857 101,430
Income taxes 5,219 (32,715) 18,903 (50,334)
Depreciation and amortization 20,015 19,766 61,186 59,567
EBITDA 57,838 (27,884) 180,247 34,599
Non-cash purchase accounting adjustments 224 3,689 5,979
Management fee (a) 31,627
Restructuring, retention and severance 92 166 254 2,311
Refinancing charges (b) 79,011 94,607
Deferred rent (c) 7,095 5,479 12,240 9,580
Store closing expenses (d) 971 335 2,927 903
Foreign currency (gains) losses, net (1,767) (978) (6,945) 1,782
Equity based compensation 948 970 2,829 2,094
Undistributed non-cash loss in unconsolidated joint venture 113 342 380 377
Gain on sale of assets (e) (2,660)
Corporate development expenses (f) 683 414 1,895 1,543
Other 61 167 118 (51)
Adjusted EBITDA $66,034 $58,246 $197,634 $182,691
 
Adjusted EBITDA margin 11.9% 10.5% 12.9% 12.1%
 
(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
nine months ended September 30, 2015.
 
(b) During the third quarter 2015, the Company refinanced its debt.
In conjunction with the refinancing, the Company paid a call premium
and other third-party costs. The Company recorded such payments,
$56.4 million in aggregate, in other expense in the Company’s
condensed consolidated statement of operations and comprehensive
loss. Additionally, in conjunction with the refinancing, the Company
wrote off $22.7 million of capitalized deferred financing costs,
original issuance discounts and call premiums. During the second
quarter 2015, the Company used proceeds from the initial public
offering to redeem notes. The redemption resulted in a prepayment
penalty of $7.0 million. Additionally, in conjunction with the
redemption, the Company wrote off $8.6 million of capitalized debt
issuance costs and original issuance discounts related to the notes.
 
(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 September 30, Nine Months Ended September 30,
2016   2015 2016   2015
 
Income (loss) before income taxes $15,399 ($77,204) $51,204 ($126,398)
Intangible asset amortization 4,049 4,700 12,182 14,216
Non-cash purchase accounting adjustments (c) (102) 955 4,991 8,430

Amortization of deferred financing costs and original issuance
discount (b)

1,277 24,774 3,821 39,225
Management fee (a) 31,627
Refinancing charges (b) 58,338 65,338
Equity based compensation 948 970 2,829 2,094
Gain on sale of assets (d) (2,660)
Adjusted income before income taxes 21,571 12,533 75,027 31,872
Adjusted income tax expense (e) 7,568 623 27,918 8,645
Adjusted net income $14,003 $11,910 $47,109 $23,227
 
Adjusted net income per common share – diluted $0.12 $0.10 $0.39 $0.21
 
Weighted-average number of common shares-diluted 120,472,297 120,386,423 120,312,492 110,503,035
 
(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
nine months ended September 30, 2015.
 
(b) During the third quarter 2015, the Company refinanced its debt.
In conjunction with the refinancing, the Company paid a call premium
and other third-party costs. The Company recorded such payments,
$56.4 million in aggregate, in other expense in the Company’s
condensed consolidated statement of operations and comprehensive
loss. Additionally, in conjunction with the refinancing, the Company
wrote off $22.7 million of capitalized deferred financing costs,
original issuance discounts and call premiums. Further, as the
Company was required to provide 30 days of notice when calling its
old senior notes, during a portion of the third quarter 2015 both
the old senior notes and the new senior notes were outstanding. The
overlapping interest expense, $2.0 million, is included in
“Refinancing charges” in the adjusted net income table above. During
the second quarter 2015, the Company used proceeds from the initial
public offering to redeem the other notes. The redemption resulted
in a prepayment penalty of $7.0 million. Additionally, in
conjunction with the redemption, the Company wrote off $8.6 million
of capitalized debt issuance costs and original issuance discounts
related to such notes.
 
(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.
 

Contacts

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

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