Party City Announces Fourth Quarter and Full Year 2017 Financial Results

Party City Holdco Inc. (NYSE:PRTY) today announced financial results for the fourth quarter and year ended December 31, 2017.

James M. Harrison, Chief Executive Officer, stated, "With fourth quarter results that were in line with our expectations, we achieved 4% topline growth and 8% Adjusted EPS growth in 2017. More importantly, we made strong progress against many of our key strategic priorities: expanding the reach of our unique vertical model; improving in-store efficiency and the shopping experience for our customers; elevating our digital capabilities; increasing our presence across multiple alternative market channels as well as in key international markets; expanding our manufacturing capabilities and entering new streams of business through acquisitions and finally, executing a highly accretive share buyback program.”

Mr. Harrison added, "We are well-positioned to build on this progress in 2018 as we continue to grow our consumer products businesses, focus on our retail initiatives and enhance our digital assets and omni-channel platform. We will also continue to deploy the strong cash flow this business generates with a disciplined approach that balances our growth objectives with the continued deleverage of our balance sheet and the return of capital to shareholders.”

Full Year Summary:

• Total revenues of $2,372 million increased 3.9% on both a reported basis and a constant currency basis.
• Retail sales increased 5.3% on both a reported and constant currency basis, driven primarily by 53 net new Party City stores added in the past twelve months.
• Brand comparable sales decreased 0.7% during 2017. After adjusting for the impacts of Hurricanes Harvey and Irma and a shift in the fiscal calendar of the Company’s retail operations which caused certain New Year’s Eve sales to fall into the first quarter of fiscal 2018, such sales were essentially flat.
• Net third-party wholesale revenues increased 4.9% after adjusting for the impact of currency and the acquisition of 36 franchise stores over the last twelve months. On a reported basis, these sales increased 0.7%.
• Total gross profit margin increased 40 basis points to 40.8% of net sales, principally due to a 300 basis points increase in share of shelf¹ and reduced product costs, partially offset by increased promotional activities.
• Operating expenses totaled 29.4% of revenues, and increased 5.7% over 2016 to $696.2 million. The increase in rate was principally a result of the Company’s investment in Kazzam, the online exchange platform for party related services. Wholesale selling expenses increased 9.0%, reflecting the acquisition of Granmark as well as inflationary cost increases. Retail operating expenses increased 1.6% due to higher store count and inflationary cost increases, largely offset by improved labor productivity and efficiency in our stores, as well as lower advertising expenses.
• During the year, the Company opened 16 new stores, acquired 36 franchise stores and 8 independent stores, and closed 7 stores.
• Reported net income increased to $215.3 million from $117.5 million in 2016. Reported net income and reported diluted earnings per share (see below) include approximately $90 million of non-recurring income tax benefits related to the Tax Cuts and Jobs Act of 2017 ("Tax Reform”).
• Adjusted net income rose 7.5% to $148.6 million, compared to $138.3 million for fiscal 2016.
• Adjusted EBITDA increased 4.9% to $409.2 million, compared to $390.0 million in fiscal 2016.
• Reported diluted earnings per share improved to $1.79 from $0.98. Adjusted diluted income per share improved 7.8% to $1.24 despite $0.04 of foreign exchange headwind and a $0.03 investment in Kazzam.
• Free cash flow² totaled $342.2 million.

Fourth Quarter Summary:

• Total revenues increased 5.4% on a reported basis to $789.6 million and 4.7% on a constant currency basis.
• Retail sales increased 4.6% on a reported basis (4.2% on a constant currency basis) driven primarily by increased store count through acquired franchise stores (36), eight acquired independent stores and nine net new Party City company-owned stores in the past twelve months.
• Brand comparable sales decreased 1.4% during the fourth quarter and were essentially flat after adjusting for the impact of the New Year’s Eve timing shift, as discussed above.
• Net third-party wholesale revenues increased 11.9% after adjusting for the impact of currency and the acquisition of 36 franchise stores over the last twelve months. On a reported basis these sales increased 9.7%.
• Total gross profit margin increased 50 basis points to 46.9% of net sales, primarily due to higher share of shelf¹.
• Operating expenses totaled $205.1 million or 26.0% of revenues, representing an increase of 40 basis points from Q4 2016 and largely the result of the investment in Kazzam.
• Reported net income of $185.0 million compared to $85.2 million in the fourth quarter of 2016. Reported net income and reported diluted earnings per share (see below) include approximately $90 million of non-recurring income tax benefits related to Tax Reform.
• Adjusted net income increased 3.2% to $94.1 million, compared to $91.2 million for the prior year quarter.
• Adjusted EBITDA increased 2.6% to $197.4 million.
• Reported diluted earnings per share totaled $1.58, compared to $0.71 in the prior year quarter. Adjusted diluted income per share increased 6.6% to $0.81 from $0.76 in the fourth quarter of 2016.

Balance Sheet Highlights as of December 31, 2017:

The Company ended the year with $1,777.1 million in debt (net of cash) resulting in net debt leverage³ of 4.3 times and approximately $172.0 million in availability under its asset-based revolving credit facility.

Share Repurchase Program:

During the fourth quarter, the company repurchased 23.4 million shares at a cost of $286.7 million. As of December 31, 2017, $55 million remained available under the original $100 million share repurchase program which was announced in November 2017.

Term Loan Repricing:

In February 2018, the Company completed a successful repricing of its Term Loan Credit Agreement, under which the applicable margin for ABR borrowings was lowered from 2.00% to 1.75% and the applicable margin for LIBOR borrowings was lowered from 3.00% to 2.75%. Additionally, under the terms of the repricing, the ABR and LIBOR margins will be reduced to 1.50% and 2.50%, respectively, when the Company’s Senior Secured Leverage Ratio (as defined by the Term Loan Credit Agreement) falls below 3.2x. The Company expects the repricing to result in 2018 interest expense savings of approximately $3 million. All other significant terms, including maturity, remain unchanged.

Fiscal 2018 Outlook:

For 2018, the Company is providing the following guidance:

• Total revenue of $2.44 to $2.49 billion
• Brand comparable sales growth of approximately 1%
• Adjusted EBITDA of $415 to $430 million
• Adjusted net income of $172 to $183 million
• Adjusted diluted EPS of $1.76 to $1.87
• Net debt leverage³ of approximately 3.8 times by the end of 2018
• GAAP net income of $143 to $154 million
• GAAP diluted EPS of $1.46 to $1.57

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 2018 Outlook” for a more detailed explanation, including definitions of the various Non-GAAP terms used in this release.

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¹ The percentage of our retail product cost of sales supplied by our wholesale operations

² Defined as adjusted EBITDA less capital expenditures

³ Defined as net debt to adjusted EBITDA

Conference Call Information

A conference call to discuss the fourth quarter 2017 financial results is scheduled for today, March 9, 2018, at 8:00 a.m. Eastern Time. Investors and analysts interested in participating in the call are invited to dial (833) 241-4256 (U.S. domestic) and (647) 689-4207 (international), and enter conference ID#4281209, 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 free cash flow, defined as Adjusted EBITDA less capital expenditures, and 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. 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 150 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.

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