Operator:
Good afternoon. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Party City Fourth Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be quarter-and-answer session. If you would like to ask a question during this time, simply press star, than the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you.
I will now turn today's call over Miss. Deborah Belevan, VP of Investor Relations. You may begin.
Deborah Belevan: Vice President, Investor Relations:
Thank you, Operator. Good afternoon, everyone, and thanks for joining us. This morning at 7:00 AM we released our fourth quarter financial results. You can find a copy of our press release on our website, at investor.partycity.com. Also supplement reference slides are available on Party City's Investor Relations site, within event listing. While management will note speaking directly to slides, they have provided to facilitate your review of the Company's results, and to be used as a reference document following the call.
On today's call, we have Jim Harrison, our Chief Executive Officer, Gregg Melnick, our President, and Mike Correale, our Chief Financial Officer. We will start the call with some prepared remarks, before we open it up for Q&A.
Please note that in today's discussion, management may make forward-looking statements regarding our beliefs and expectations to the Company's future business prospects and results. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no such assurance that these expectations will be realized. We urge everyone to review the Safe Harbor statements provided in our earnings release, as well as the risk factors contained in our SEC filings.
During today's call, we will also refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to the earnings release. And with that, I'll turn the call over to James Harrison.
James Harrison: Chief Executive Officer:
Thank you very much, Debbie. Good afternoon, everyone, and thank you for joining us for our year end 2015 earnings call. We are pleased to close out 2015 with the strong fourth quarter, which Mike will discuss with you shortly. It was certainly exciting and a successful year for our Company.
2015 was sixth consecutive year of record sales and EBITDA, while we are pleased with our full year financial performance. We are even more pleased with the progress made on many of our key strategic initiatives, which will position us to continue to delivering on our goal. As most of you know, best journey for ‘16, we reenter the public offering markets with an IPO. Soon thereafter in August, we refinance and extended the maturities of our entire debt portfolio. We capitalizing the business that extremely favorable course of capital. This refinancing along with the application of proceeds from the IPO, have resulted interest savings of $27 million in 2015.
We will realize an additional interest savings from these transactions of approximately $28 million in 2016 based upon current interest rates. From an operational standpoint, we also make strategy against the number of our long term goals initiatives. May you've heard me discussed our business model, and the way we look upon margin expansion zero offer to model, in base both terms of singles, doubles and triples. Doubles and triples represent the wholesale and manufacturing margins, we've realize when selling through their own stores. Doubles to lose wholesale products and triples when we manufacture our products.
All of which eventually flow through the vertical model, and the vertical portion of our business. Share of shelf how we measure and communicate how much of what is sold in our retail space, comprised with doubles and triples. While our share of shelf is now at 75% the break down is approximately 20% triples, and 55% doubles. During 2015 we took a huge step towards enabling ourselves to increase the percentage of triples, over the next year -- next couple of years, with the acquisition of Accurate Custom Injection Molding which is ultimately raise our triples from 20% to 30%.
Moving us closer to our goal of at least 50% triples.
The beauty of our model is that because of this dynamic. We will see profit improvement on our existing sales base, as well as on new sales. Another one of our long-term initiative, is to grow our wholesale and retail businesses is internationally. I am extremely pleased to report that in 2015 our international wholesale business grew by 5.4% in US dollars.
On a constant currency basis, the growth was approximately 15%, and how do we do it? By having the most comprehensive price offering any supplier. We have partnered with some major international retailers to development store-in-store party departments, which are growing the international consumers’ awareness for category, and this will undoubtedly position us for even greater success in the future.
On the retail side of our international growth strategies, we reach in agreement with Groupo Oprimax of Mexico, to become our massive franchise for Mexico. Oprimax has been a successful franchise of several US based retailers, and they have committed to opening at least 80 stores over the next 10 years, with the first three to be open by this June, and addition 2 stores are opening in the second half of this year.
Additionally they are also committed to sourcing no less than 50% of their product requirements from our wholesale businesses. This past year we also achieved our new store target opening 2017 stores and acquiring fifth franchises. As many of you know, when we remodel or relocate an existing store, we generally see a lift of approximately 6% over the date in the first year of following the remodel. Our domestic third party wholesale business has had a very solid year as well.
In total our global third party wholesale sales exceeded $650 million, on the Gala Balloon business as adjusting for the change in accounting treatment. But what is now into Company's sales because of our US Balloon acquisition in 2014 and joining the 9% increase.
We continue to be the true global leader in this category of products. Our domestic cashing business to other retailers which is really still in a sympathy continues to grow as a superior designing quality is cashing the attention of many retailers in this space.
Our third party business with e-commerce specialty retail continue to grow into the $10 million of 2015 an increase of over 20% year-over-year. Reflecting increase market share. Alternative market business outside party special channel continue to grow as well of approximately 7% in 2015. All of this has resulted in a strong year for our with adjusted EPS with $1, and free cash flow $300 million.
The strong free cash flow characteristics of our business, enabled us to reduce our leverage ratios from 5.7 time to EBITDA at the December 31, 2014, to approximately 4.6 times at the end of 2015. So far this year we continue to make it even more progress on initiatives. But before I discuss that, allow me to turn it over to our CFO, Michael Correale, who will summarize our 2015 financial result.
Michael Correale: Chief Financial Officer:
Thanks James. Good morning everyone, I will begin my remarks with a review of our fourth quarter performance, and then conclude with the discussion of the financial highlights of 2015.
Before get into the details, I'd like to remind you that our fourth quarter and full year 2014 included an additional week to retail operations, when compared to 2015. In order to facilitate a cleaner year-on-year comparison I will be excluding the impact of extra wins from our 2014 revenues, when discussing our relative performance. Consolidated revenues for the fourth quarter of 2015 totaled $782 million, an increase of 3.1% compared to the fourth quarter of 2014.
On a constant currency basis, revenues for the quarter increased 4.4%, as changes in currency reduced reported fourth quarter 2015 revenue by approximately $10 million when compared to last year. Breaking down revenues by segment, our retail or vertical revenue increased 5.4% or $32 million on a constant currency basis. While our wholesale or non-vertical sales increase 1% or $2 million on the same basis.
During the fourth quarter of 2015 our brick and mortar same-store sales increased 2.5% and our e-commerce sales increased 6.5%, primarily driven by strong merchandising and execution during the all-important Halloween selling season. On a Party City Brand basis, our same-store sales increased 2.8%, reflecting a 2% increase in average transaction dollar size and a 80 basis point increase in new transaction count.
In addition to Party City Stores, during the fourth quarter of 2015, we operated 335 temporary Halloween City stores or 20 more than in 2014, and achieved an approximate increase of 2% in the average store sales at these temporary locations.
At year-end our company store network totaled 712 stores for a net 19 additional stores compared to 2014 as we opened 27 new stores, acquired six stores from franchisees and closed 14 stores during 2015. On our non-vertical wholesales sales grew 1% on a constant currency basis in spite of our lapping strong license sales in the fourth quarter of 2014 which included Frozen. Our overall gross profit margin for the quarter was 46.8%, or 230 basis points higher than in the fourth quarter of 2014, despite a 30 basis point negative impact from unfavorable foreign currency movements.
Our gross profit margin growth was principally driven by an increase in our share shelf within our vertical operations from 73% in 2014 to 77% in 2015, as well as a 40 basis point margin improvement from this diminishing impact of 2012 purchase accounting adjustments. Operating expenses for the fourth quarter of 2015 totaled $199 million, remaining relatively consistent year-over-year as a percentage of revenue, at 25.4%.
Increased cost and expenses associated with the operation of additional retail stores and the acquisitions of ACIM and Travis design limited will offset by several classes including cost savings associated with the reorganization of our party and gift sales and marketing group the timing of advertising expense and the impact of FX movements on our international operating expenses.
For the quarter net interest expense totaled approximately $22 million or nearly $17 million less than in the fourth quarter of 2014. Reflecting the application of our IPO proceeds to pay down debt and subsequent refinancing of our entire debt portfolio during the third quarter of 2015.
The effective income tax rate for the fourth quarter of 2015 of 40% compared to an effective rate of 33% for the fourth quarter of 2014, for higher tax rate in 2015 principally reflects this disproportionate impact of additional foreign income tax taxes on our consolidated provision. Before I discussed net income and net income per share. I want to point out that the -- for the quarter I will be referring to adjusted net income.
The adjustment to our IFS adjusted net income, and adjusted net income per share are provided in the financial table in today's press release, and include among other things was associated with our IPO subsequently financing, non-cash purchase accounting adjustments, management fees and the amortization of intangible asset.
As a result of these adjustments I just described, adjusted net income for the fourth quarter 2015 was $91 million or $0.76 per share up 8.2% from $84.1 million in the fourth quarter 2014. On a constant currency basis our adjusted net income and net income per share increased to $94 million or $0.78 per share up 12% when compared to 2014. Adjusted EBITDA for the fourth quarter which is also provide in the financial tables in our press release, totaled $198 million or 3.4% higher than in the fourth quarter 2014.
Again on a constant currency basis adjusted EBITDA increases to $201 million was 5.2% higher than in 2014. To highlight our full year financial results, consolidated revenue for 2015 totaled $2.3 billion up 4.1% on the constant currency basis compared to 2014. Our non-vertical wholesale sales grew 1.1% to $654 million on an as reported basis, and 5% on a constant currency basis.
Primarily driven by international sales of both party goods and costumes, principally in Europe and Australia. A $5 million increase in metallic balloon sales to third party retailers as a result of the October 2014 acquisition on US Balloon, was more than offset by the elimination of $19 million in balloon sales from our balloon manufacturing operations to US Balloon as those sales are now reported within company sales in 2015. Retail net sales for 2015 totaled $1.6 billion, an increase of approximately $45 million compared to 2014.
On a Party City Brand basis, same store sales increased 1.5% as we lapped the strong frozen driven comp sales increase of 5.8% in 2014. Our overall gross profit margin for 2015 was 39.7% or 80 basis points higher than in 2014 despite a 30 basis point negative impact as a result of unfavorable currency movements. Our share shelf within our vertical operations increased from 70% in 2014 to 75% in 2015 having a positive impact along with a 40 basis point margin improvement as a result of the diminishing impact of 2012 purchase accounting adjustments year-over-year.
Operating expenses for 2015 totaled $651 million or 28.4% of 2015 revenue as compared to 28.7% of revenues in 2014. Net interest expense totaled $123.4 million or $32.6 million lower than in 2014 reflecting the application of our IPO proceed to pay down and the subsequent refinancing of net debt portfolio. Other expenses net totaled 131 million in 2015 and was $125 million higher than in 2014 principally due to the costs associated with our 2015 IPO and debt refinancing The Company's consolidated effective income tax rate for the year ended December 31, 2015 was 41.5%, driven as noted in the fourth quarter, by the disproportionate impact of foreign income taxes. Adjusted net income for 2015 was $114.2 million or $1.01 per share, up 31.6% compared to adjusted net income of $86.8 million in 2014.
On a constant currency basis, our adjusted net income and net income per share increased to $121.8 million or $1.08 per share, and that's up over 40% from 2014 adjusted net income. Adjusted EBITDA for 2015 totaled $380 million or 5% higher than in 2014. On a constant currency basis, adjusted EBITDA increases to $389 million or 7.5% higher than in 2014.
For the full year 2015 we generated free cash flow defined as adjusted EBITDA less capital expenditures totaling $3.2 million. Changes in working capital were a use of cash of $61 million principally reflecting a reduction in income taxes payable and other accrued liabilities. During 2015 acquisitions accounted for $26.4 of cash outflows.
Capital expenditures totaled just under a $79 million of which $60 million was spent on new retail stores, relos and remodels and in-store maintenance. We ended the year with net debt of $1.7 billion, a net decrease of $330 million from our 2014 year-end balance, and a 1.1 times decrease in our leverage ratio to 4.6 times. At December 31, 2015, we had approximately $349 million availability under our existing asset based revolving credit facility.
With that I'd like to turn the call back over Jim.
James Harrison:
Thank you Mike. So while we are still in the first quarter of 2016, we already had a number successes that we were look to build on to this year and beyond. In January this year we announce the acquisition of 23 franchise stores in the Southwest at in effective multiple of earnings below 4.2 times.
In February we enter into agreement with Staples, we're by we have become their fulfillment partner for party goods played and sold on staples.com. We expect to roll this relationship out not only to other Staples, Staples sponsor sites, such as -- staples premium.
But two additional retail partners as well. We will certainly keep everyone informed on our progress against this initiative over the course of the year. We continue to focus on increasing in our share shelf. Last week we announced that we have successfully secured a license from Warner Brothers to reduce costumes and accessories from on our stores.
Along with previously secured similar rights from many other major character license orders. We now hold the broad comprehensive portfolio.
More importantly I believe the ability to secure this such licenses, reflects the strength of our product offering into our unique mix and match concepts which continue to enhance the costume experience for our consumers. These license rights to accrued to our in stages over next two years. In addition to the previously mentioned franchise acquisitions, we are well on way towards our new store targets to this year having already identified 25 insights.
Finally as we continue to look to turning doubles into triples, I am pleased to announce today that we have just acquired -- a manufacturer of costume located in -- this is our first center in Madagascar and our initial costume manufacturing efforts.
We anticipate that next is we will eventually disclosing as much as 15% of our cost requirement through -- operation. -- will continue to supply costumes to the broader market including its previous owners desire under a supply which was ended into as part of this transaction. In addition to large increase associated with manufacturing own costumes subject to certain condition on to the African growth organizational agreement or AGOA.
So these costumes will not be subject to the same duty previously paid on costumes through a Salvager. So unlike I said are those still early in the year good things have been happening. So looking at to the full year, we are providing the following guidance. We expect full year revenues to range between $2.35 billion to $2.42 billion.
Regarding the same store sales for the full year we are conservatively projecting slight to slightly positive comp sales for those. I stay conservatively, because we want to new advertising campaign begin just as we which optimistically. We believe we could drive additional sales.
Additionally we anticipate negative com sales in Q1 in a range of minus one to minus two as we grow up against the final frozen phenomena effect, and moves 170 day as Easter Sunday moves into the first quarter of this year from the second quarter last year. We are projecting full year adjusted net income to be between a $140 million and $150 million or $17 to $25 per share. With EBITDA in the range of $390 to $405 million. Finally we expect our debt leverage at the end of 2016 to below 4 times.
Once again thanks for joining us today and we would now like open from any questions.
Question & Answer
Operator:
And as reminder if you would like a ask question over the phone simply press star then the number one on your telephone keypad. Your first questions comes from the line Karru Martinson from Deutsche Bank. Your line is open.
Karru Martinson: Deutsche Bank:
Good morning, when we look at the tuck in acquisitions that you've guys have done in that 75% of share itself, and what you think that will end kind of here at 2016 and does that represent a change and what do you think you can do?
James Harrison:
That's great question Karru. First of all in terms of 2016 as we mentioned in our first press release week, with the acquisition of the Warner Brothers DTR we will be converting similar singles into doubles .Over the course of next two years that should represent approximately 2% increase in share of shelf.
Our goal as we've stated is 80% and that continues to be our goal, and one thing to remember with that share of shelf. As we grow business and as we grow our product assortment, than the main up or down as we bring other program to try that perhaps we don't current source that will reduce our share of shelf.
But hopefully those with intend be to the be accretive to our total revenue, and increase our revenue. So our share of shelf percent would go down our revenue or profitability to grow. So I think that's a little dynamic that number. But you continue to say 80% is a reasonable target based upon current product configuration we have.
Karru Martinson:
Okay, and then your guidance for 2016 a little bit ahead of my number was there, and how should we think about use of the cash free cash flow as we go forward here.
James Harrison:
Well, we will continue where we see opportunistic acquisitions that enables us to take double to triple we will continue to look at that -- and will obviously continue to grow us store base. But other than that we are going to pay down debt. As I said at the end of my remarks we intend to bring our leverage ratio down below 4 times by the end of the year.
Karru Martinson:
Thank you very much guys, appreciate it.
James Harrison:
Thank you, Karru.
Operator:
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Simeon Gutman: Morgan Stanley:
Thanks. Good morning everybody. Hey Jim on the costume manufacturing piece, can you just remind us what's the percentage whether it's end you know retail sales or wholesale sales what's percentage of the business is costumers and then you said you can expect to manufacture I believe up to 15% of that overtime. I just want to clarify those two items?
James Harrison:
Sure, so I will answer your second question first. The reason I haven't given you in number as we give 50% of our requirements is that when looking at costume manufacturing in Madagascar. We believe that we can produce approximately 2 million units in that operation has quality figure with some minor additional investment, and we believe that we'll have about 1.2 million of units available for around consumption, and that's about 15% of what we produce.
So if you think about where we are in terms of manufacturing today, we are not sure what costumes we will produce there, and obviously the price on costumes varies. So, we do all $5 costumes that will be $6 million and if we grow all $10 costumes to be $12 million. So as a percentage of our costumes total demand we look at in terms of unit. In terms of our total costume purchases it's about $120 million $124 million in that range.
Simeon Gutman:
Got it so I guess the follow up is if you think about either share of shelf and our share manufacturing. Because, right that's what this would end up being, and if you think about the progress that you're making now I guess this is a good question around costumes, is there something about the costume business where the vertical margin to you, you know ends up being better than the embedded right vertical margin just because may be costumes, costumer either more to make there is a higher mark of you are paying for costume.
In other word thinking about the incremental vertical margin on some of this items which are going into should have any better than what we've seen in the past or this costumes a little worst. ?
James Harrison:
It should be about the same and the reason for that is with the acquisition of -- we took costumes from single to double, and in doing so we took over to design as well as the sampling process and we went straight two factory. So we've driven the large bulk of the embedded margin with going from the single to double. So as you go for the double triple the implication should be roughly the same as an ACIM.
The only differences being as I mentioned on under Madagascar and the AGOA legislation. We are able to hopefully get some duty relief on some of the cost and we bring in which would be newly to the costume business.
Simeon Gutman:
Got it. Okay, and my last question just for clarification if you can. The flat up slightly on the brand comparable brand revenue growth is there progression that you can help us outwards just think about how you know the thinking about Halloween specially for next year's fourth quarter.
James Harrison:
Sure so, as you know Simeon, we try not to give quarterly guidance in terms of comp sale. We look it on a full year basis, if you look at our businesses historically we been in 2% to 3% on an average basis as we look at. If we were look at three years stack comp this is an outcome from 2014, ‘15 and a projection for ‘16 laid on top I think that two and a half average numbers probably delay of thinking about it. In terms of looking at the individual quarters and talking specifically about Halloween.
We will not give Halloween comp because we don't want from a competitors standpoint we don't want our competition to understand how we are looking at the season.
Simeon Gutman:
Okay, fair enough. Thanks a lot.
James Harrison:
Thank you Simeon. I appreciate it.
Operator:
Your next question comes from the line of Steven Grabling from Goldman Sachs. Your line is now open.
Steven Grabling: Goldman Sachs:
Hey good morning.
James Harrison:
Good morning Steven. How are you?
Steven Grabling:
Good, how are you? Just follow up on the last question on I guess guidance can you just give us any more detail on you thinking about gross margin SGA or even just the EBITDA margin by segments?
James Harrison:
EBITDA margin segment we have not given that sort of guidance in the past even on not try be I think it's level of detail that we just soon going time.
Steven Grabling:
Well any kind of major put and takes that we should be thinking about or that you would think we should be flagging as we think about throughout the year?
James Harrison:
Sure. Let's talk about margin perhaps that's probably best place to focus. As we look at margins as we continue to take singles doubles we know what that means. I think we have given some guidance as to what we think over the next three years the ACIM and the now the -- acquisition will meaning terms of margin accretion associated with doubles to triples.
Additionally as we look at our base cost of product we have had some margin release you will see on numbers from fourth quarter. On oil based products and transportation we anticipate that continuing through this year. So we do see some margin expansion 2016 in and in terms of SG&A we had substantial decrease in SG&A last year as a percent as we can figure out selling effort particularly at the wholesale level, and so we put all things together there is also some aspect implications which I will let Michael to talk about.
Michael Correale:
Although we have substantial amount of that where purchase obligation hedge one of the things we can see is little bit flow though of the 2015 effect we getting inventory 0.21 as going to on as results we expected to see somewhere in near $7 million negative impact as a result to currency and that include with they are not getting inventory and also what's not hedge
Simeon Gutman:
And I guess one related follow-up would be on wage pressures there is been lot to talk out there in the retail landscape are you seeing any wage pressures specifically or is anything you are doing to try to offset some of those potential headwinds
James Harrison:
Sure always I will ask Gregg to answer that question.
Gregg Melnick: President:
Great, so every year individual stack raise, minimum wages and force us in those state look at entry level wages and deal with compression, and so this year was consistent with last year and the years prior. But generally we pay competitive wages in our stores and so we haven't yet seen an increase in turn over or any delay in hiring to any extent. But we continue to monitor the situation step by step but we are not really seeing this headwind yet.
Simeon Gutman:
And if I can speck one last one and just on the acquisition from the recent acquisitions of primary in built on to improve the share of shelf for the most part are these still the primary opportunities out there or there is been anything from more of transformational opportunities that could potentially be done
James Harrison:
Okay so actually acquisitions from most part recently have been to take and increase our share of shelf that's vertically manufacturing more or so than the share of shelf. But in terms of transformation acquisition we're confident looking at all the opportunities out there not just from -- on standpoint but we see continue tremendous opportunity in the -- space which kind why you see mostly those are sorts of acquisitions should transformational opportunity represent itself. We certain would look at it, from a stand point of they can sure they make sense for us from an investing standpoint. Obviously currently looking at our capital structure we are focused to arguably on improving our leverage ratios, and so a transitional opportunity would have to be obviously very accretive for us to pursue it.
Simeon Gutman:
Fair enough. Thanks so much best of luck this year.
James Harrison:
Thanks so much.
Operator:
Your next question comes from the line of Seth Sigman from Credit Suisse. Your line is open.
Seth Sigman: Credit Suisse:
Thanks. Good morning nice quarter guys. I just want to clarify one of the earlier point. So you talked about gross margin is being up in 2016 you are guiding to EBITDA margins flat up just slightly it seems some imply SG&A would be an offset year and deleverage potentially on a similar sales outlook.
So, anything else we should be considering within SG&A any investments or are there may be some pockets of conservative and accretion that we should be considering. Thanks.
James Harrison:
Sure, so one of the things that, we will currently see with the acquisition and with the acquisition of the retail groups there will be some, movement and some increase in our SG&A. But nothing dramatic that we should focus on.
Seth Sigman:
Got it. Okay, and then you know just shifting to the advertising campaign you alluded to can you just talk a little bit about the changes that you are making there, maybe anyway at the cost associated with that plan, and then if you factored in any other benefits on the top line from that?
James Harrison:
Okay, so I am glad you ask this question, we are very, very excited about our new advertising campaign. If you look at our history of advertising when we acquired Party City back in 2005 their advertising spend was primarily focused on SSI free standing inserts in the newspapers, advertising come get to paper table covers this weekly or -- table covers this week for $0.29 and it would drive traffic but it wouldn't necessarily drive meaningful traffic from standpoint building consumer base. When we bought Party City in 2005, we had unedited brand awareness under 25% someone would say where to buy your party goods and they say I go to the Party store and the answer would be -- Party store. So in 2009 we launched the very aggressive media campaigns shipping our strategy from free standing in search to a media campaign, gear toward building brand awareness.
Today our unedited brand awareness is over 85% that campaign that begin in 2009 was extremely successful in achieving our primary goal of building brand awareness. In our business it's difficult to make somebody want to have party. You going to have a party or you not. So now we feel the next step for us is to drive towards colt action, and the colt action for us needs to be having people understand that if you going to have party the only place to get everything you can possibly need to have the very best party possible is party city.
So our new campaign is geared towards throw just that message. Basically on messages it's not a party unless it is Party City party. So if you want to have party through a Party City party and I think as you see our commercial you see a change in the whole messaging we sent to the consumer to stress the differentiation between buying a party good at Party City as suppose buying them anywhere else in the market place.
Simeon Gutman:
Okay that's.
James Harrison:
I am sorry and additionally another big change in this campaign is we are not only going to traditional media or television we are also going to lot of digital. So we did a lot of digital and social messaging as well going out there with the same campaign and same message.
Simeon Gutman:
I hope you are not abandoning the Party City trailer video. .
James Harrison:
Calling the process of evaluating our Halloween campaign. Well keep your, we will keep that under advisory. Thank you.
Simeon Gutman:
Okay, so should we consider that there is any top line benefits as a result of these efforts or could that be a source of upside as we move through the year?
James Harrison:
We have put some in there obviously, but we do believe its successful could do the needle for sure.
Simeon Gutman:
Got it, okay, and let me just clarify one other point on the Q1 outlook the comps down 1 to 2 does that include the effect from the last selling day if so what is the impact from that?
James Harrison:
Sure yes it is, yes it does for me, that's roughly $2 million or just say it under 1% additionally at least you've asked for the first quarter --- in the first quarter there is a little bit of an phenomenon as well, which we didn't really call out in our comments. But it's difficult to actually put your arms around, because they are fairly minor season. But if you look at this year Super Bowl was on Sunday Chinese New Year which is small event. But still a season was on a Monday, Mardi Gras which is a slightly bigger event was on the following Tuesday and then the following weekend which was present day weekend was Valentine's Day.
So within the span of roughly 8 days we had 4 holidays all be generally minor holidays, last year those holidays were spread out over almost two and half week period. So holiday compression those have some effect on these minor seasons, we didn't call out because it is very difficult very they really put a and around each one of them, and trying to determine how much was compression
Simeon Gutman:
Okay, thanks so much.
James Harrison:
Thank you.
Operator:
Your next question comes from line of Mark Back from JP Morgan. Your line is open.
Mark Back: JP Morgan:
Hi just a follow up on that last point in terms of the timing of holidays observances et cetera. Clearly with your wholesale business you are able to kind of diversify, but is this something as you looking your business it's, it's always generally can and be successful to the timing of holidays or is what can you do to business in yourself to produce more kind of stable results against kind of like a Saturday Halloween and other factors like that?
James Harrison:
Well if we could get Congress to pass a Law is stating that Halloween is always a last Saturday of October. Unfortunately I don't think I think they've got other things in their mind right now. I think I think the nature of our business on the on the retail side of our house is that there is always going to be these elements are shifting and understanding the implication to this ship and hopefully us doing a good job and communicating those ships.
We will help provide some comforts and stability to those following our story, and you are absolutely right with respect our wholesale business. We tend to not see that quite as much because of how we ship goes and how there is could the -- ship over a period of time that avoids the new one answers of a week or two.
Mark Back:
Okay great, and then on the margin side can you kind of give your thoughts on, on longer term what you think you can see on a margin side. So, I think with 80% shares of shelf you are thinking about 44% gross margins. But may be how you are thinking about the opportunity in both the retail side and the wholesale side longer term?
James Harrison:
Okay, so I think I may hopefully you've been there when I talked about it before. I like to avoid talking till solely about percentages, because as we build the business and we make this incremental acquisitions and now use ACIM as a great example. With this ACIM is roughly $45 million of purchases that our that the wholesale side of business does today with other folks that we will self-manufacture. Now that's 45 million main approaches does not all go to Party City it goes to abroad throughout customers.
But that becomes incremental on the Party City margin, since we only recognize the one margin which is the wholesome manufacture and retail margin on consolidated basis.
As we report to retail results. As we report the wholesale results there is to be center that $45 million due to some margin accretion. Because we now have the manufacture margin.
But with these acquisitions we also pick up the opportunity to do additional new business in new channels that we haven't had before. So one of the channels for instance there ACIM has some in movie theaters, and ACIM produces for other people cups injection molded cups with in mold labels that are tied into the movie feature being shown in the theaters. Star wars is the model whatever it might be.
Now that is the purely incremental and not business that we enjoyed before, that business also utilize the capacity helps observe the overhead of an ACIM or another manufacturing operation.
As a result the incremental margin there is pure incremental dollar margin on a percentage basis if it wondered to be material it would have a mitigating or declining effect or reduction effect on the percentage margins. But as Company's cash flow and the absolute cash margin goes up. So I'd like try to talking about so as we in terms of trying to talk this percentages, as we look at our business going forward we see the elements of our retail margin growing.
Because we doing more third party moreover fashion party. We see our third party existing third party wholesale business margins growing because we doing more our own manufacturing, but we will also see this new business, this new dollars falling into our Company which as on percentage basis. We do the aggregate margins, but obviously represents more dollars that was along needed explanation. But I think it's important to understand there is a lot of moving parting and still be focusing on a percentage number doesn't tell the story.
Mark Back:
No that's very helpful seems that you think there is definitely opportunity on both sides and then with the acquisitions clearly a little bit impact full on the on the retail sides. Just one last clarification you mention the percent mix from costume, have you said what that mix on the adult side. Just trying to get us sense of what might be give back from Saturday to Monday transition. Thanks.
James Harrison:
Sure, I will ask Gregg, if I can repeat the question, it's with respect to party sheet on a retail business. What percent of our Halloween or costume business is -- versus adult.
Mark Back:
Yes and how you are thinking about maybe a potential give back from the day in a calendar?
James Harrison:
But we are we won't answer the second question for competitor reasons, but we certainly answers the first question. Go ahead.
Gregg Melnick:
So for the kids business represents about 55% and adult business represents by 45%.
Mark Back:
Perfect.
James Harrison:
But, remember that 45% includes the young-adult and teens in that Jubnai was just real Jubnai.
Mark Back:
I understood, so necessarily adult, adult like ourselves is obviously much lower.
James Harrison:
Correct, correct.
Gregg Melnick:
That's how we, we bucketed in our in our sales analysis.
Mark Back:
Okay.
Operator:
And our next question comes from the line of Rick Nelson from Stephens. Your line is open
Rick Nelson: Stephens, Inc.:
Thanks and good morning nice quarter.
James Harrison:
Thank you Rick.
Rick Nelson:
Want to ask you about Frozen do you fully wiped out kind of wipe to the first quarter, and any comments on Star Wars how that performed you know relatively to Froze will be helpful
James Harrison:
Sure there is some there is still some effect in April, but pretty much starts to normalize or stabilize after that. One point on Frozen which we should talk about we also talk about Frozen in terms of impact in on comp sales. It also had an impact obviously on our third party business, as many of you know. We have an exclusive relationship with American Greetings they are our distributor into certain parts of mass market, and obviously Frozen was a very successful property in those channels as well.
So that's had digital effect on both our Balloon business as well as their third party manufacturing and the sourcing business. In term of Star Wars, Star Wars is great property it's great movie it's very strong Balloon property. Not quite as strong not in close to the stronger party for property as Frozen. Although it has performed well, it just the nature of boys license generally boys license although Disney is doing a great job to trying to make it gender neutral.
It's still very much proceed as a boys property, it is also proceed and excuse older than Frozen which also as a different implications with respected to party side of the business so our Star War has been really strong property it is not even come close from party stand point of replicating Frozen, and when I say party I also mean the costume set to dress up costume side of the business.
Rick Nelson:
Again -- looks like maintained at time same store strength in the quarter Halloween I am curious what sort of categories that momentum came from.
James Harrison:
I will ask Gregg to judge that
Gregg Melnick:
Yes, so you know I think that we have very strong holiday season. So when you think about our Thanks Giving business or Fall Business, our Christmas business and as well as New Year's business.
New-year is actually like a two day Halloween in pretty amount of volume we put thorough in the excitement that goes in on in our stores. So that momentum did continue through November and December as you indicated.
Rick Nelson:
Gotcha, that's and by the way you are generating $3 million or $2 million of free cash flow this year. I would assume you expect strong free cash in the current year, what is when is the next potential debt pay down?
James Harrison:
With our refinancing in August, we actually extended our maturities out roughly 6 years. So, we have no, we have no debt pay down requirements, we did put a fairly sizeable amount of our debt into our revolver to give us the flexibility to pay down debt.
Michael Correale:
Okay that 1% of term loan this year.
James Harrison:
And our mandatory pay down is 1% a term. So we will continue to generate free cash flow and look to here invested smartly or pay down debt.
Rick Nelson:
Gotcha. Thank you, good luck.
James Harrison:
Thank you, Rick.
Operator:
Your next question comes from the line of Mike Baker from Deutsche Bank. Your line is open.
Mike Baker: Deutsche Bank:
Hi. Thanks two questions I have one, how many more relos do you think you have to do and how many in of those will be in 2016.?
Gregg Melnick:
Yes, so every year we evaluate based on we follow the real -- our real estate strategy. So we look at stories that are coming up for renewal , and if we can look opportunities in the market place where we have landlord B against landlord A helps us with negotiating rent helps us negotiating space, and when we do that as normal ordinary course every year, and I think this year is consistent with what we did in 2000. As we look forward where we consistent what we did in 2015 which is we relocate or remodel 50 to 60 stores a year.
Mike Baker:
Okay and so that sorry.
James Harrison:
You also question in terms of runway on that the number of new models runway.
Gregg Melnick:
No. The runway is strong right now. So as we look out what we have booked today is actually ahead of what we have booked last year.
Mike Baker:
So in presumably the roughly 6% rent from those 50 to 60 stores which you think you could do this year is presumably and your guidance for your comps for the year.
Gregg Melnick:
Correct.
Mike Baker:
Okay. Great. One of the question just on the first quarter, so given if we putting your guidance and you spoke to a three year comp if we putting your guidance. So three year stock comp does thus far pretty significantly in the first quarter versus the fourth quarter.
I get the flows in the compression of the holiday the Eastern all that kind of. But I guess question is, what you think just in general from consumer spending have you seen any kind of change in the way you think the consumer is behaving to cause that big fall off in the three year stock comp. Or is it really because of those three items as you mention the compression eastern cycle first.
James Harrison:
I believe in those three items. I don't think the consumer substantially change.
Mike Baker:
So then presumably that three stock comes back at some point.
James Harrison:
Correct.
Mike Baker:
Thank you very much.
James Harrison:
Thank you, Mike.
Operator:
Your next question comes from the line of Daniel Hofkin from William and Blair & Company. Your line is open
Daniel Hofkin: William Blair & Company:
Good morning guys
James Harrison:
Good morning.
Gregg Melnick:
Good morning.
Daniel Hofkin:
Good, how are you? Just I wanted to clarify that last question little bit, and a follow up most my other questions on margins have been asked. But can you just specify specifically so in the negative, it's something like a negative one to two for the first quarter, what is the Ester impacts specifically the fact that's laid in your first quarter this year versus second quarter last year, and then you know looking it sounds your still thinking a 2 to 3 just so I am clear and you are talking about the like a typical annual comp of 2% to 3% against a normalized comparison is what you would expect overtime is that fair to say?
Michael Correale:
Okay so the first question Ester Sunday moving from second quarter last year to the quarter this year is roughly $2 million impact.
Okay, and on full year basis if we think about 1% comp and full year basis to the $16 million. So a 2% negative comp in Q1 is roughly a $5.5 million to $6 million impact.
Daniel Hofkin:
Okay
Michael Correale:
And just so I am trying to frame it from it from the standpoint of materiality, you know obviously Halloween fourth quarter is our big sale quarter in terms of looking at the long term outlook for comp.
If we look at how our business generally performances we generally earning 2% to 3% rang on comps basis if you look at last ten years on the over a 10 year horizon in 2 to 3 is a reasonable expectation for how our business performs.
Daniel Hofkin:
Okay, and I guess given you just stated obviously you get it obviously you hit it with a nice upward move in the fourth quarter and I know top -- first quarter.
I guess for the year overall you did a 15 those are something else that kind a holds you back as a percentage of full year basis this year from being above the flat up slightly guidance that you are giving for 2016.
James Harrison:
Right so when we look at this year we've got on a year-over-year basis. We still have little bit of the lapping Frozen impact additionally, we have Halloween moving from Saturday to Monday, and because of that we do have some fair we should some favorable comparisons in the third quarter where we have some impact not just from frozen but from a major store we set which won’t repeated itself this year.
So we put all those things together and we look we do our best that evaluate where we think the, the comp sales will be and our best guidance this point time is flat to slightly positive.
Daniel Hofkin:
Okay, all right. Thanks very much, appreciate it.
Gregg Melnick:
Thank you.
Operator:
Your next question comes from the line of Denise Chai with Bank of America. Your line is open.
Denise Chai: Bank of America:
Okay. Thank you. You have some very nice steady growth for most of this year can you talk about some other drivers there, would have be trade up or kind of add on from your mix in match costume initiative for example, and what should we expect going forward. ?
James Harrison:
Sure I will ask Gregg to address that question.
Gregg Melnick:
Yes, so I mean I think there are there are few things. As we begin to extend our line and we innovate products they are designed to be additive to the basket. So a lot of our business and our product development is always aimed at adding another item to the consumers back to back that matches in co-relate to the Party that you having, and so where that the innovation and Candy innovation in Balloons innovation, things like that. We continue to see growth there and generally our balloon business has been very strong, as we continuing in our Candy business is strong in color wearable business continuous to be strong as consumers realize that they can use color wearable throughout the year not necessarily just dressed up for a Halloween time.
There is also price opportunities within the stores that add to the basket and those are probably be the general drivers.
Denise Chai:
Okay, got it thanks and then just back to Share of shelf for a moment could you talk about how much that contributed to margin in the fourth quarter full year and just I do we think about margin telling wind going forward given that you already at pretty high level.
James Harrison:
Sure I will let Mike to address that.
Michael Correale:
Sure. On a share of shelf basis we picked roughly a half of percent margins on consolidated margin both in the quarter and for the full year.
Denise Chai:
Okay and going forward.
Michael Correale:
We as we are expecting to see similar growth in 2016.
Denise Chai:
Alright, got it. Okay, thank you very much.
Operator:
The final question today comes from the line of Joe Feldman with Telsey Advisory. Your line is open.
Joe Feldman: Telsey Advisory:
Yes, hi guys. Good morning and congratulations, I wanted to ask are you seeing any changes in the competitive landscape. We have seen some others talking about expanding the party category a little bit and just want to get sense what you seeing out there on horizon.
Gregg Melnick:
We really haven't seen much of changes in competitive landscape. I think one of the things about our businesses since we're not just retailer we are also the major wholesaler in the space. We have pretty good visibility to the whole market as the Halloween market is performing in the category, and we've not seen the substantial change in the competitive dynamics at retail and with respect the wholesale our business continues to be the clear leader.
Joe Feldman:
Got it, and then can you talk a little bit like about international just can you help us frame what type of growth you're kind of forecasting for 2016, and maybe growth for retailer wholesaler or do you even combined to sign.
James Harrison:
Right well internationally we have our stores in Canada, we do our ecommerce business in UK and Mexico is going live this year as I said in my earlier remarks. We expect that free stores in operational open by June and five in total by the end of the year.
But for most part of international business is relative too small to our total business. Our wholesale business continue to grow with store and store and concepts and as I said in my remarks on constant currency basis we had very strong year with 15% growth our long-term growth targets are roughly 10%.
Joe Feldman:
Got it thanks, so it will should and be increasing percentage of next presumably a little bit of drag in the margin because it is low margin business.
James Harrison:
It's a low margin business, because it is just also we don't have the retail margin that's part of it. Additionally there is lot headwinds obviously with respect FX since more of our goods are source in the UA dollars and in some market we are up against local competition where about the natural currency hedge. So well that creates some margin pressure as well.
Denise Chai:
Got it, thanks. If I could just ask one other one is do you guys have your leverage target for the end of 2016 let's say and I think you said 4.6 as where you ended for this year.
James Harrison:
Right our goal is --- I am sorry I apologies. Our goal is to be under 4.
Denise Chai:
By the end of this year.
James Harrison:
Correct.
Denise Chai:
Great, that's terrific thanks guys and good luck with this quarter.
James Harrison:
Thank you so much.
Operator:
We have no further questions at this time so I will turn the call back over to the presenters for concluding remarks.
James Harrison:
Once again I wanted you to thank you for joining us on the call today. As always we remain available to the folks who like to re-chat at any point in time. You should feel to give for a call.
Operator:
And as a we will have replay of this call on our website. Thanks everyone and have a great day.
Operator:
This concludes today's conference. You may now disconnect.
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