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

    Read full story here

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