Party City (PRTY) Reports In-Line Q1 EPS, Revenues Miss; Offers FY19 EPS/Revenue Guidance

Party City (NYSE: PRTY) reported Q1 EPS of $0.01, in-line with the analyst estimate of $0.01. Revenue for the quarter came in at $513.1 million versus the consensus estimate of $519.69 million.

First Quarter Summary:

• Total revenues increased 1.0% on a reported basis to $513.1 million and 2.0% on a constant currency basis.
• Retail sales increased 4.0% on a reported basis (4.4% on a constant currency basis), driven primarily by square footage growth from store acquisitions.
• Brand comparable sales decreased 1.4% during the first quarter due to approximately 200 basis points of headwinds from the helium shortage. A net benefit from the timing of holiday shifts was more than offset by the negative impact of weather headwinds.
• Net third-party wholesale revenues decreased 6.1% on a reported basis. However, net third-party wholesale revenues increased 1.0% on an adjusted basis when excluding the impacts of franchise store acquisitions and currency. Strong domestic sales to the non-party store channel and strong sales in continental Europe more than offset the impact of the helium shortage on the segment’s metallic balloons business.
• Total gross profit margin decreased 350 basis points to 33.7% of net sales. 340 basis points of the decrease was due to provisions against inventory recorded in conjunction with our store optimization program, discussed below.
• Operating expenses totaled $184.4 million or 35.9% of revenues, representing an increase of 270 basis points from first quarter of 2018 due to $18 million of impairment and restructuring charges from our store optimization program. Excluding these charges and non-recurring consultant costs incurred during the first quarter of 2018, our operating expenses rate was relatively flat with the first quarter of 2018, driven by disciplined cost control that partially offset the impact of the helium headwinds.
• Interest expense was $29.3 million during the first quarter of 2019, compared to $23.3 million during the first quarter of 2018, driven by the impact of higher LIBOR rates and the Company’s August 2018 high yield refinancing.
• The reported GAAP net loss of $30.3 million included approximately $36 million of pre-tax charges (approximately $27 million net of tax) related to the store optimization program.
• Adjusted net income was $1.1 million, compared to $6.9 million in the first quarter of 2018. The decrease was almost entirely due to the higher interest expense. (See “GAAP and Non-GAAP measures”)
• Adjusted EBITDA was $51.5 million. (See “GAAP and Non-GAAP measures”)
• Diluted loss per share totaled ($0.32), compared to ($0.01) in the prior year quarter, primarily driven by the store optimization charges. Adjusted diluted income per share decreased to $0.01 from $0.07 in the first quarter of 2018, primarily due to the higher interest expense.

James M. Harrison, Chief Executive Officer, stated, “Overall, our first quarter results were largely in line with our expectations on the top and bottom lines, inclusive of the helium shortage, which negatively impacted our latex and metallic balloon categories. Despite these helium challenges in the first quarter, we made progress on many fronts operationally and our global team continued to execute against our key strategic priorities including: developing plans to test new store concepts, implementing pricing initiatives designed to improve value perception, and increasing product competency in the area of paper straws as part of our focus on environmental sustainability.”

Mr. Harrison continued, “Most importantly, we have signed a letter of agreement for a new source of helium which, subject to final execution of a definitive contract, would provide for additional quantities of helium beginning this summer and continuing for the next 2.5 years. We believe this new source should substantially eliminate the shortfall we are experiencing at current allocation rates and improve our ability to return to a normal level of latex and metallic balloon sales. We remain encouraged by the 2019 tailwinds that will present themselves later this year, including a strong IP calendar, a Thursday Halloween and anticipated benefits from supply chain investments that we made following disruptions that impacted the business in 2018.”

GUIDANCE:

Party City sees FY2019 EPS of $1.61-$1.72, versus the consensus of $1.66. Party City sees FY2019 revenue of $2.49-2.54 billion, versus the consensus of $2.51 billion.

For 2019, the Company is updating its GAAP net income and EPS outlook to reflect the aforementioned store closings and it is reiterating its revenue, brand comparable sales, Adjusted EBITDA and Adjusted EPS outlook:

• Brand comparable sales of about 1%
• GAAP net income of $108 to $118 million
• GAAP diluted EPS of $1.15 to $1.26
• Adjusted EBITDA of $405 to $418 million
• Adjusted net income of $152 to $162 million
• Net debt leverage1 by the end of 2019 under 4 times Adjusted EBITDA

For earnings history and earnings-related data on Party City (PRTY) click here.

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