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Edited Transcript of PRTY earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Party City Holdco Inc Earnings Call

Elmsford Dec 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Party City Holdco Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley Morgan Weston

Party City Holdco Inc. - President

* Ian Heller

Party City Holdco Inc. - VP & Associate General Counsel

* James M. Harrison

Party City Holdco Inc. - CEO & Director

* Michael A. Correale

Party City Holdco Inc. - Interim CFO & CAO

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Conference Call Participants

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* Jacqueline Elizabeth Crawford

Jefferies LLC, Fixed Income Research - Analyst

* Joseph Isaac Feldman

Telsey Advisory Group LLC - Senior MD, Assistant Director of Research & Senior Research Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Seth Ian Sigman

Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

* Tami Zakaria

JPMorgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Party City Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ian Heller. Please go ahead.

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Ian Heller, Party City Holdco Inc. - VP & Associate General Counsel [2]

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Thank you, operator. Good morning, everyone, and thanks for joining us. This morning we released our third quarter 2019 financial results. You can find a copy of our press release on our website at investor.partycity.com.

Now I'd like to introduce our executive team who are here on today's call. We have Jim Harrison, our Chief Executive Officer; Brad Weston, our President and Chief Executive Officer of our retail group; and Mike Correale, our Interim Chief Financial Officer.

We'll start the call with some prepared remarks by Jim, Brad and Mike, before opening it up for Q&A. Please note that in today's discussion, management may make forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 regarding their beliefs and expectations about the company's future performance, future business prospects or future events or plans. 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 these forward-looking statements are reasonable, we can give no assurance that such expectations will be realized.

We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise. 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 refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For more 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 Jim Harrison.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [3]

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Thank you, Ian. Good morning, everyone, and thank you for joining us today. This morning we released our results of operations for the quarter and 9 months ended September 30th. Additionally, we reported our retail sales for the month of October reflecting Halloween. We also provided updated full year guidance to incorporate these results.

I'll begin with a brief overview of our financial performance for the third quarter and 9 months, followed by a discussion of our Halloween October results. I will then invite Brad Weston, our President and the CEO of Party City retail group to discuss our retail business and his preliminary thoughts around a go-forward plan to improve our retail operating model. Mike Correale will then discuss the financial results in detail, provide some additional color around our adjusted full year revenue and earnings guidance, and review several financial bridges to assist in interpreting the results, following which we will open up the call for your questions.

Both the third quarter revenue earnings results and October sales were disappointing as many of the expected tailwinds I spoke of in our previous call did not fully materialize. For the quarter, we continued to experience the negative impacts of the helium shortages in both the retail and wholesale segments. On a consolidated constant currency basis, revenue for the quarter decreased 1.5% and comparable store sales results were minus 2.6%, including a 210 basis point total helium headwind. For the 9-month period, consolidated constant currency revenues increased 50 bps, with a comp decline of 2%, inclusive of the total helium headwind of 290 basis points.

This includes the direct impact on our balloon business as well as the indirect impact in the form of related softness in other categories such as juvenile birthday and candy. On the consumer product side, our metallic balloon business Anagram also saw a decline in third party and intercompany sales for the quarter of $2.4 million year-over-year and $10 million year-to-date as global demand for balloons was adversely affected by these helium challenges.

It is important to note however that since we began the fourth quarter, the retail operations have approached 100% in stock helium position, resolving these helium headwinds that have existed for nearly 18 months. Our e-commerce business was a bright spot during the third quarter as we saw continued momentum in our digital business, including sales in the Amazon Marketplace. Total digital sales including Buy Online Pick Up in Store comped up 14.9% and 16% for the quarter and 9 months respectively. As of September 30th, we had closed a total of 34 of the 54 stores scheduled to be closed under our store optimization initiative. To-date, sales recapture rates continue to exceed expectations, and the reserves provided for internal liquidation remain adequate.

Total consumer product sales in constant currency after adjusting for the impact of franchisee acquisitions increased 20 basis points for the quarter and 10 basis points for the 9 months. Excluding the impact of metallic balloons as well as the impact of franchisee acquisitions, our North American consumer products wholesale revenues decreased 2.9% for the quarter and increased 2.4% for the 9 months. The decline for the quarter primarily reflects lower Halloween sales to the existing Party City franchisee group.

Internationally, the businesses in Mexico, Australia, Europe and the U.K. continued to perform on plan despite the challenges presented by the strong dollar, generally weak economic conditions and the uncertainty surrounding Brexit. For the quarter, our international business in constant currency increased 3.9% as we continued to grow our presence in these markets.

Gross margins for the quarter declined 590 basis points to 30.6%, reflecting the higher cost of helium and the impact of helium on the balloon business, inventory reserves related to our store optimization program, the final flow-through of excess freight and distribution cost which had been capitalized in inventory, unfavorable product mix and the impact of aggressive promotions of everyday and seasonal product designed to grow comp store sales via increased store foot traffic which ultimately proved unsuccessful. Mike will show the inputs of these components when he presents financial bridge.

Moving on to Halloween, overall the Halloween season was below expectations with a brand comp decline of 3.2% in sales of Halloween products for the third quarter and October selling season; and a decline of 4.9% in total October comp sales. This result is generally in line with our analysis of the broader industry results. The National Retail Federation reported that they expected retail Halloween sales this year to decline 2.2% from approximately $9 billion to $8.8 billion. Over the past 15 years, as retail sales for Halloween season have grown from $3.3 billion to $9 billion, there have been a number of years where there has been a year-over-year decline irrespective of the day of the week.

As I mentioned, several of the expected tailwinds for Halloween failed to materialize. In particular, the exceptionally better in-stock position for the Halloween selling season only produced minor increases in retail revenues early in the season. Additionally, the anticipated boost associated with the strong licensed portfolio year-over-year was not realized generally since several of these movie projects were not in theaters until later this year. There wasn't as much consumer awareness driving demand as we expected for properties such as Frozen and Lion King, whereas Descendants and Toy Story were active licensed properties that had strong results.

From a channel perspective, while our brick and mortar business was the driver of the year-over-year decline, it is important to note that based upon our initial review and discussion with others in the industry, we believe we have not lost market share in this channel. Our early analysis of the season reflects that more of the costume and the bag business has in fact shifted to online. We saw this play out in our own digital business which is heavily skewed towards costumes and including Buy Online Pick Up in Store was up 15.3% in October. Year-over-year our sales of Amazon and other marketplaces was up 151% in large part due to the inclusion of our licensed costume portfolio to this year's offering.

Buy Online Pick Up in Store sales for October represented approximately 40% of the total consumer demand on partycity.com. Clearly, our ability to provide in-store pickup to the online consumer is a very strong advantage. Our initial work as we analyze these results suggest that there are 2 fundamental shifts occurring as it relates to Halloween. First, as just mentioned, there has been an increase in costumes and the bags sold online. And secondly there is an increasing desire among young millennials, Gen Zers and Gen Xers to look for unique ways to dress up and display their creativity on social media.

According to a survey from CompareCards by LendingTree, 48% of millennials admit to purchasing Halloween articles so that they can include them in social media posts. 37% of Gen Zers and 30% Gen Xers said the same compared to only 5% of baby boomers. Similar research from the National Retail Federation shows social media as a growing source of both Halloween inspiration and display.

Party City's unique product offering for Halloween dress up outside of costumes is a perfect source of inspiration and product to meet this demand. We need to continue to build out this aspect of our portfolio, expanding the products available to consumers to create their own unique costumes and images. More importantly, we need to do a better job of communicating our offering to these generations of consumers going forward. The National Retail Federation has reported that the mix of spend is evolving and we will need to evolve with it. Brad will speak further to this in a moment.

With respect to our Halloween City operations, on average our stores declined 19% in revenues reflecting a softness in the adult category and the impact of the online penetration. As it relates to the previously announced Canadian Tire transaction, on October 1 we closed the transaction to sell the assets and business of our Party City Canada subsidiary to Canadian Tire Corporation. As we discussed last quarter, we anticipate that over the course of the 10-year supply agreement, which we have entered into with Canadian Tire, we will substantially replace the retail EBITDA that was sold in this transaction through growth in consumer product sales. Canadian Tire has communicated their intent to double revenues associated with the acquired Party City Canadian business by 2021 and as a result of our supply agreement, we will directly benefit from this growth. The net proceeds of the transaction of approximately CAD 174 million were used to pay down debt in October.

As I mentioned earlier, in October our retail operations saw us return to essentially 100% in-stock position in helium at store level. As a result, we posted a comp increase of over 12% for the month in balloon sales. We also saw an improvement in everyday categories, especially birthday as a result. Party City represents approximately 25% of Anagram's wholesale sales and we would anticipate a lift there over the next few months as well. Some of Anagram's third-party customers' business will continue to face helium challenges into 2020 after which all indications are the world will once again be flush with helium. At a retail level we anticipate the return of full helium availability will provide a positive lift to comps for the results of November-December.

On the topic of tariffs, during the quarter we continued to prepare for the proposed tariffs, which are scheduled to go into effect on December 15. We continue to resource some items out of China into other countries as well as our own operations in Mexico. Additionally, we are redesigning products as well to remove costs from the products without compromising quality. We have also been in discussions with many of our Chinese vendors to share with us the savings that they are receiving from lower RMB exchange rates. And finally, we are carefully reviewing all of our retail price points to see where we can pass along the impact of tariffs.

Our outlook reflects the impact of all announced tariffs as well as our mitigation efforts that are helping offset the tariff impact. With respect to our outlook, as a result of the third quarter shortfalls and the soft Halloween season, we have lowered our full year guidance. Mike will review all of this in greater detail, including a few financial bridges to provide more clarity on the underlying drivers of the revisions.

In looking at the 2019 headwinds that have impacted our results, the most significant ones are temporary, including the impact of helium shortages, both at Retail and Wholesale and the flow-through of excess freight and distribution expenses. Combined, these 2 factors are an EBITDA headwind of approximately $45 million to 2019, which on a pro forma basis would raise our adjusted EBITDA guide for 2019 to be $345 million to $355 million representing a proxy for normalized adjusted EBITDA.

So in summary, the third quarter was disappointing, both in terms of revenues as well as margins. The resulting full year impact was compounded by a soft Halloween. We believe we have identified a number of the reasons behind this and are working to address them and take advantage of the opportunities they will present. Over the next few weeks, we will continue to do consumer research on the season and analyze the business to ensure that we are positioned to fully exploit next year's Saturday Halloween opportunity.

With that, I would like to invite Brad Weston, our President and the CEO of Party City retail group to give an overview of his thoughts around our retail business and the opportunities and strategies he sees ahead to return this portion of our business to positive comp territory and to top of mind relevance to the consumer.

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Bradley Morgan Weston, Party City Holdco Inc. - President [4]

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Thanks, Jim. As Jim stated, we did not have the Halloween results we expected, and we're dissecting this performance at a granular level as we speak. What we do know is consumer wants and needs continue to evolve in the Halloween category and we will take the learnings from this year to deliver an improved experience going forward. Consumers look to Party City to provide them with the products they need to decorate their homes, host parties and dress up for Halloween.

As we put the customer at the forefront of our assortment in operations decisions, we will enhance our Halloween experience on several fronts. In stores and online, we will curate assortments and develop merchandising and marketing techniques that will inspire and encourage customers to build out their own costume and decorating ideas in unique ways with everything they need provided in one place to make it easy and convenient. Jim shared our Buy Online Pick Up in Store growth this year. Consumers want the flexibility to shop and purchase online, but increasingly want to pick up their orders at the store. Moving forward, we will make it even easier to pick up and receive orders based on evolving customer expectations.

In my first 90 days, I've gained additional perspective on how Party City is advantageously positioned to increasingly meet the needs of consumers seeking to create memorable celebration experiences that are special and personalized. Whether they start weeks in advance and want to take a do-it-yourself approach, all the way to needing last-minute assistance to pull it off, we will be their resourcing guide to make them a hero party thrower.

We're listening more closely and intently to what our customers are telling us and how they want to shop. We've worked quickly to build out a new customer insights and data analytics team to better inform our strategy. The work being done on market basket and price optimization analysis will assist us in developing our playbook for improved performance.

Moving forward, our growth plan includes improving our product assortments; enhancing both in-store and online experiences as well as building out party services, including an updated version of our party planner offering with both in-store and digital components. We recognize that the product selection in our stores can be overwhelming. We see a significant opportunity to further curate and simplify our assortments to better showcase the party components that meet our customers' exact needs, while continuing to offer a unique breadth of assortment.

For example, our solid color tableware assortment has 32 colors. The top 15 colors, roughly half the assortment, generate 90% of the sales. We can reduce this to approximately 20 colors and not only still have the most dominant color assortment in the industry, but our data shows the remaining 10% of sales is transferable to the go-forward color assortment.

Two of our biggest trip driver categories are balloons and birthdays. In these 2 categories and throughout our assortments, we will optimize the strength of our vertical model to increase the availability of newness, trend-right product and innovative solutions that further differentiate Party City. As we curate and edit our assortments, we will appropriately decrease our inventory to drive productivity and create additional working capital to invest in our customer experience.

Importantly, the way in which we will merchandise and lay out our stores in the future will better showcase our product and services while making navigating the store and locating products simpler and more convenient.

We will also continue to invest in our digital experience. Not only will we make the shopping experience more seamless between online and stores, but we'll also inspire customers with new and easy to execute party ideas and services. We will be piloting a customer loyalty program and enhanced CRM capabilities, which will become strategic drivers as we use our web and mobile platform to attract more customers, build strong brand loyalty and increase overall revenue.

Finally, as part of this go-forward plan, I'm excited to announce that Sean Thompson recently joined Party City as Chief Merchandising Officer to lead our efforts in reinvigorating our merchandising strategies. Sean was most recently the chief merchant at 7-Eleven, where he also held marketing and product development roles. Prior to that, he held several merchandising positions of increasing responsibility at Target after beginning his career with the Farnsworth Group, a consumer market research firm. I look forward to relentlessly obsessing over our customers and building their confidence and reliance on the Party City brand.

With that, I'll turn it over to Mike to discuss our financials. Mike?

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Michael A. Correale, Party City Holdco Inc. - Interim CFO & CAO [5]

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Thanks, Brad. And good morning, everyone. I'll review our financial and operating performance for the third quarter and the fiscal October top line results before discussing our updated outlook for fiscal 2019. And then I'll open up the call for questions. Please refer to the accompanying slides available on the Investor Relations section of our website for further details of our Q3 results.

As Jim mentioned, our third quarter top and bottom line financial results continued to be negatively impacted by the ongoing helium shortage and its direct and indirect effect on balloon and other product sales. Looking more closely at our third quarter results, consolidated total revenue decreased 2.3% on a reported basis and 1.5% in constant currency. Our retail segment's net sales decreased approximately 1.7% on a reported basis, and 1.5% on a constant currency basis.

Brand comp sales, which include our U.S. permanent stores and our North American e-commerce business, decreased 2.6% in the quarter, driven by approximately 210 basis points of total headwind from the helium shortage. Notably, brand comp improved sequentially throughout the quarter as additional helium came online. By the end of September metallic and latex balloons were comping in the low to mid-teens compared to 2018.

Looking at our sales by product category, during the quarter everyday product sales comped 4.8% lower than in 2018. Again, the decline principally occurred in juvenile, solid commodity products and candy, those categories that we believe are most impacted by the indirect effects of the helium shortage that we've faced for the past 18 months.

Seasonal product sales increased 10% versus 2018, driven principally by early in-stock positions on costume, costume accessories, and other Halloween product. Our North American digital sales including Amazon Marketplace and BOPIS performed well during the quarter, increasing 14.9% over 2018.

Turning to the nonvertical consumer products businesses, net revenue in constant currency and adjusted for the impact of franchise and independent store acquisitions increased 20 basis points. The helium shortage continues to affect our latex and metallic balloon businesses, especially our metallic balloon business at Anagram. Third party sales of metallic balloons at wholesale were down approximately 6.2% as a result of the shortage. The adjusted net revenue of our North American Party business, excluding store acquisitions and sales of metallic balloons, decreased 290 basis points. This decrease in nonvertical consumer products principally occurred in sales to party specialty as similar to our corporate stores, they also experienced reduced foot traffic as a result of the helium shortage.

Our nonparty store business continues to perform well, with double-digit growth driven by the mass and grocery channel, and despite AG's decision to exit the party category. We continue to leverage the breadth of assortment and manufacturing capabilities to meet third-party independent customers' requirements in a cost-effective manner.

International consumer product sales increased $3.4 million in constant currency despite generally weak economic environments, as we continue to increase our market share in Europe and Australia, gaining share of shelf with existing accounts and adding new customers with a refined product assortment. For the third quarter of 2019, retail and wholesale margins were 34.8% and 21.5% respectively. Our consolidated gross profit margin was 30.6% or 590 basis points below the same quarter of last year. The drivers of the gross margin decline are principally temporary in nature.

The drivers noted in our supplemental bridge on our Investor Relations website are as follows; 180 basis points as a result of the two-pronged impact from the temporary helium shortage, resulting in both higher helium cost and a decrease in high margin balloon sales at both wholesale and retail; 160 basis points from store optimization-related reserves; 130 basis points from higher freight costs associated with product imported during the second half of 2018 as the Chinese tariffs caused temporary operational disruptions; 100 basis points as an impact of increased promotions of both everyday and seasonal products; and lastly 20 basis points from product mix and other items.

Our manufacturing share of shelf was consistent with the third quarter of 2018 at 25.4%. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations was 78.3% during the quarter, or 110 basis points higher than the third quarter of 2018. As a result of a sustained decline in the company's market capitalization, during the third quarter, the company recognized a noncash pretax impairment charge of $259 million against the goodwill associated with our reporting units.

Operating expenses, excluding store optimization and goodwill impairment charges, totaled $182.7 million or 33.8% of revenue, 280 basis points higher than the third quarter of 2018. The increase principally reflects higher retail operating expenses on a higher average store count as well as a nonrecurring amortization adjustment, reducing franchise expense in the third quarter of 2018.

During the quarter, we incurred a reported loss from operations of $277.5 million. Excluding the $259 million for goodwill impairment and $2.6 million of charges associated with store closures, the loss from operations was approximately $15.9 million compared to $31.7 million of income from operations in the prior year period. Interest expense for the third quarter was $29.4 million and was $1.7 million above the same quarter last year, a result of the company's August 2018 high-yield refinancing and both higher average borrowings and rates from our ABL and term loan credit facilities.

In the quarter our reported effective tax rate was approximately 8.8%, and our adjusted tax rate was approximately 26.9%. These quarterly rates are affected by certain discrete items occurring in the first 9 months of 2019, including the impact of goodwill impairment. The full year effective income tax rate, excluding the impact of both goodwill impairment and the October sale of Party City Canada to CTC is estimated at 27.5%.

On an adjusted basis, net income decreased to a loss of $25.7 million in Q3 2019 from income of $7.4 million in Q3 2018. Adjusted EPS represents a loss of $0.28 per share, compared to income of $0.08 per share in the prior year period, with substantially all of this decline related to the revenue and margin factors just discussed, and the remainder of the change principally related to higher interest expense. Adjusted EBITDA of $17.1 million compares to adjusted EBITDA of $59.4 million in the third quarter of last year.

During the quarter, we had free cash flow defined as adjusted EBITDA less CapEx of $2.5 million, which was approximately $36 million below the third quarter of 2018. We ended the quarter with net debt of about $2 billion. It should be noted that the trade and taxes payable and accrued expenses at 9/30 were $89 million below year-end 2018 and $128 million below the same period last year, reflecting the much earlier receipt of and payment for our Halloween goods. At September 30th, we had approximately $152 million of borrowing capacity available under our ABL credit agreement, and currently capacity approximates $470 million.

Turning to our fiscal October results, net revenue for the month was $432.6 million which represents a 7% decline over last year's revenue after adjusting for the sale of our Canadian stores to CTC. Total retail revenue decreased 8% in the quarter and brand comps decreased 4.9%. We operated 256 temporary stores this year, or 10% more than last year, and sales of our Halloween City stores decreased 20.8% on a like-for-like store basis.

We are pleased with our North American e-commerce business which grew 15.3% when including the impact of BOPIS for the month of October. Our Amazon Marketplace performed well in October reflecting the benefit of a full licensed costume offering versus last year. This is a small portion of our overall Halloween business, but we are encouraged by the strong performance.

Turning to our full year guidance, before discussing our outlook, I would like to review a few items that impacted our fiscal 2019 guidance. We still expect the full year negative impact of our June sale leaseback transaction on adjusted EBITDA to be $4 million and $8 million on an annualized basis. The net impact of the Canadian Tire transaction is expected to reduce 2019 total sales and adjusted EBITDA by approximately $32 million and $5 million respectively. The total impact of the helium shortage is expected to be a full year headwind on adjusted EBITDA to the tune of $44 million. And higher freight cost recognized as we sell through inventory associated with last year's supply chain disruption is expected to be a full year headwind of $13 million to adjusted EBITDA.

Based on our year-to-date performance, including our October results, we are revising our previously provided fiscal 2019 outlook. We now expect revenue to be in a range of $2.35 billion to $2.38 billion and comp sales to be down 2% to 3% versus last year. We provided a bridge of revenue from our previous guidance to our current guidance in the supplemental slides on our website. We now expect full year adjusted net income to be in a range of $79 million to $86 million or $0.84 to $0.91 per share. We expect adjusted EBITDA to be in the range of $300 million to $310 million and interest expense of $114 million to $116 million for the year.

We have included the bridge of our revised adjusted EBITDA guidance versus our previously provided adjusted EBITDA guidance for your reference on our website as well as a bridge of 2019 expected adjusted EBITDA versus 2018. As you'll see $45 million of the adjusted EBITDA decline in 2019 is driven by what we perceive to be temporary headwinds.

In terms of capital allocation priorities, we continue our plan to spend about 2.8% of net revenue on CapEx. We will continue to work to delever the business and are on track to pay down approximately $400 million by year-end from our first quarter high. For all other details around our outlook, please refer to our press release.

With that, I'd like to turn the call back over to the operator to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Seth Sigman with Credit Suisse.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [2]

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My main question, it's really for Brad. It's helpful to hear some of the early focus areas, but I really want to get your observations on what you've seen since you've joined. What do you see as the fundamental issue that has limited the comps for the business? And I'm looking at the everyday business that's grown slightly historically, but what should it be growing? It sounds like it's a little bit of a traffic issue, but also maybe some conversion. And so what are you seeing at the store level in terms of execution and merchandising and some of the opportunities that you think you can address? And if you can put some numbers around that retail sales opportunity that would be helpful.

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Bradley Morgan Weston, Party City Holdco Inc. - President [3]

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Great, that's a big question and multi-pronged and let me address it in a couple of buckets. I think our biggest opportunity is really around our store experience. I think it's challenged to an extent due to over-assortment that really makes the shopping and purchase more difficult for the consumer than it should be. I think the party preparation checklist is probably in the consumer's mind when they come into our store. But we don't make it as intuitive as we could for them to really navigate the store, find the components to complete their party.

And I think as -- and honestly, I think we can improve our category adjacencies. I think we can make our most important categories, specifically balloons and birthday more important, and the items, the key items within them more important and make them stand out and make them more shoppable. Moving forward, we are going to start piloting formats that will dramatically improve that experience and we're in the -- Seth, we're in the laboratory right now collecting and analyzing the data that's really going to provide us the science that gets combined with the art to curate those assortments.

I also think that we have a significant opportunity to start providing our consumer with services, and that's a component that we can and will start to provide. I'm not going to go into detail on what each of those are, but as you know we had previously rolled out an initial wave of in-store party planners to elevate that experience in our stores. We'd put that experience for the customer under the microscope and realized it could be better than it is today. It's missing the digital components that could make it great. So we're updating it before we expand it any further. But we absolutely believe that combined in-store and online party planning experience for consumers is a critical component of the Party City brand and really what consumers are looking for.

And then if I address sort of the digital component, we're taking an omni-channel approach in every customer touchpoint on the path to the celebrations they're trying to create. We're close to better enabling our digital communications that will create both a more personalized and localized journey for our customer by optimizing our CRM data and really leveraging the power of marketing cloud. Our digital toolset is limited to some extent today, but we can expand it including party planning checklist to help streamline the process for the customer and really create a seamless journey from online to the store.

And in addition, we're working on the potential of same-day delivery, customizable balloon, bouquets online, a loyalty program pilot and a suite of party tools including party planners and party planning guides. So I think it's really a combination of how do we get our inventories to the point by editing our assortments so that it is more shoppable; how do we start to add services; and how do we create a digital platform that's significantly more relevant than it is today and creates the omni-channel customer that others are delivering and the customer should expect from us.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [4]

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Okay. It's a lot of color. Appreciate that. I guess a related follow-up would be on market share. You talked a lot about the opportunities. Given the knowledge that you have from your wholesale customers and the fact that digital has been so strong, is there any evidence that there's more of a channel shift happening here that may be negatively impacting Party City? I mean there's clearly a shift online that you're seeing in your own direct business and through some of the partners you work with. But is there a shift to some other channels too and you need to address that?

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Bradley Morgan Weston, Party City Holdco Inc. - President [5]

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Our biggest shift to online as we observe the last -- the end of the third quarter and into October is really in costume in a bag. And our opportunity is in costuming really as a whole and there is the trend to create your own costume and we use accessories to mix and match with or without customers included, and there definitely is a do-it-yourself trend and we need to merchandise the store and the market -- marketing to make this trend more -- we can market and merchandise this trend more effectively and we'll do that. So we have not seen the online share shift outside of Halloween that we have seen in Halloween which was dramatic and over 400 basis points in our overall Halloween business and higher than that obviously in our costume in a bag business.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [6]

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Okay. I just want to sneak in one final question just around the guidance and how to think about it. So what are you guys implying for trends after Halloween here? It seems [you] embed some improvement, but obviously comps still down. So I'm curious what you're seeing in the base business since Halloween and how we should be thinking about the trajectory.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [7]

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Sure. So as we look at November-December as you know the -- although it's Christmas, that's not really a big season for us, and we do have a 1 day shift on New Year's in December, which is a headwind. So as we look at November-December, we are more or less looking at being -- having a flat comp for the balance of the year.

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Operator [8]

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The next question comes from the line of Karru Martinson with Jefferies.

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Jacqueline Elizabeth Crawford, Jefferies LLC, Fixed Income Research - Analyst [9]

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This is actually Jacqueline Crawford on for Karru. So just to follow up on guidance, I noticed that a leverage target was not included in this updated guidance and I was hoping to follow up on that. Are we still expecting your previous 4x leverage target, just looking at the midpoint of your EBITDA guidance and net debt expectations, it looks like this implies leverage may be closer to 5x at year-end, so is that correct? And if so is there an updated timeline you're expecting to achieve that 4x leverage target at this point?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [10]

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Sure. So you're correct, obviously with the lower EBITDA number for the year, to get to 4x leverage would be very, very difficult. Mike mentioned that we're looking to pay down $400 million between -- from where we were at beginning of the year to net -- to the end of the year, and we're on target to do that. That would have gotten us well under 4x at our previous guide. In terms of getting under 4x we would fully expect to be under 4x by the end of next year.

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Jacqueline Elizabeth Crawford, Jefferies LLC, Fixed Income Research - Analyst [11]

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Okay. And then just to follow up on that. In regard to that $1.5 billion net debt figure, can you just remind us of the drivers of the remaining debt reduction? Are you still expecting about $75 million to $100 million of working capital reduction through the end of the year or what's driving that?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [12]

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Yes, we're looking at -- you've got a couple of things going on. So firstly as I mentioned in my commentary we closed the Canadian Tire transaction in October, on October 1st, so that generated CAD 170 million of cash that was used to go against our lines. Additionally, we are continuing to liquidate and reduce our inventory and at the same time obviously as Mike mentioned, substantially reduce our payables, so as those working capital movements go through the balance sheet, we'll continue to see the paydown of debt.

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Operator [13]

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Your next question comes from the line of Simeon Gutman with Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [14]

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My question is a quasi-follow-up to one of Seth's questions regarding Halloween because we've been waiting for the calendar to get more favorable, and I realize the IP wasn't there yet, it's coming, but not there yet. So thinking about Halloween, is there an inflection point happening where the customers seems to be shopping more online, it seems like the beginning of that this year? And does this change Halloween going forward? I mean I know it's hard to call it out just 1 year, but it seems like it's been on somewhat of a decelerating path over the last several Halloweens, and this year was the culmination of in theory calendar and somewhat product, but I guess product didn't come through. So it sounds like you can execute better, and Brad talked about a couple of ways to do it, but curious how you think about Halloween holistically now.

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Bradley Morgan Weston, Party City Holdco Inc. - President [15]

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So a couple of points on that, Simeon. Halloween category was soft and certainly the driver of the month of October. My point of view is the shift to online is addressable when we have an improved merchandising and marketing program in place next year that really drives accessories through mix and match and do-it-yourself. The Halloween shift to online is, like I said before, costumes in a bag, which we always anticipated would have somewhat of a migration to online. And the miss this year was primarily in our accessories -- costume accessories business, which we can get back -- we can get that back, and we can get that customer in our stores.

We already have a larger and more penetrated costume accessories business than our mainline competitors, but we've not effectively used it as the competitive weapon that it is. In other words, we haven't merchandised costumes and accessories in-store or online in a way that makes the mix and match or accessorizing intuitive to a consumer. We didn't market it with the level of authority or credibility that we have and we haven't used digital or social media really enough to inspire or create that how to make it your own. And retailers continue to demonstrate that omni-channel capabilities when done well and tailored to their customers' needs have success, and in Halloween as we see in particular the growth in Buy Online Pick Up in Store, we can dramatically improve that experience and that's going to continue to become an integral part of the way they shop us for Halloween and for other categories.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [16]

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And I'll just add, Simeon, if you look at the 15-year trend line that the National Retail Federation has out there on Halloween, as it's grown from $3.3 billion to $9 billion, you will see that during that growth period there has been peaks and valleys and ups and downs. There's been fits and starts as it's continually trended higher, so I don't look at Halloween having a systemic or a structural issue as much as our adapting to the evolving consumer being the key.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [17]

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Okay. My follow-up is you're selling on Amazon through the marketplace. You have -- are any of your items eligible for next day and can you talk about what you're seeing or have you seen any step up from that business as next day has become more prevalent?

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Bradley Morgan Weston, Party City Holdco Inc. - President [18]

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Yes, we do have costumes that are available for next day and as we think about not just Buy Online Pick Up in Store, but also starting to -- we've piloted ship from store, and are very happy with the results of those pilots and we'll be expanding it, which will certainly give us the ability next year to get much closer to the consumer from a ship point and be able to execute against next day delivery.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [19]

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Yes, I will just add, Simeon, that this year in looking at our partycity.com business -- the business we transacted on partycity.com during Halloween, 40% of those sales ended up being Buy Online Pick Up in Store, which is obviously a growing trend in every business, but I think in our business probably more so where the customer wants the certitude around the party goods because there's a -- or the costumes in this case because there's a very finite date for that celebration.

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Bradley Morgan Weston, Party City Holdco Inc. - President [20]

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I've been really excited about the Buy Online Pick Up in Store. It was much bigger than we expected and the way we will treat that next year is creating the ability when a consumer takes that approach to getting their costume, we have significant opportunities to then up-sell and cross-sell, not just within the Halloween category, but within our broader party supplies category.

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Operator [21]

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The next question comes from the line of Rick Nelson with Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [22]

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I'd like to follow up on the helium shortage. You talked about some of the collateral damage to other categories like candy and juvenile. Now that you're in stock on helium, are you seeing those categories respond positively? And do you plan to market around helium availability to -- would seem like a same-store sales driver when others are short and you've got product?

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Bradley Morgan Weston, Party City Holdco Inc. - President [23]

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So we are -- we're certainly seeing somewhat of a positive impact on everyday categories as balloons come back and as we look at it by store. I think though in the consumer's mindset when you've been out of helium to a large degree for 18 months, that doesn't just come back immediately and it's going to take some time for us to really restore the consumers' confidence that we have helium. We are contemplating ways that we can market the fact that we're back in the helium business in markets that were the most challenged by it, which I think will help. But you don't -- when you have a consumer that shops you 1.8x a year and for 18 months you've been in a challenged position, it just doesn't turn -- we can't turn that spigot on right away.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [24]

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Obviously however to the extent that the consumers coming for balloons we'll no longer be disappointing them, which is very important.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [25]

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Also with the sales shortfall, can you speak to inventory levels and what to do with Halloween product? Do you pack it away for next season? Or do we accelerate markdowns there?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [26]

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We have historically packed away major seasons such as Halloween, graduation in summer. We will continue to do so. Our pack-away this year actually will be less than it was last year as part of the inventory reduction you'll see in the balance sheet at year-end. In terms of markdowns, we take the markdowns as they arise and we provide -- we believe we provide adequate reserves for the inventories as they sit on our balance sheet.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [27]

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And then as you look at the store base, how many stores are unprofitable on a trailing 12-month basis and is there --?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [28]

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We haven't looked at it as of the end of October, but very, very few because of the family margin, most -- as I mentioned during the earlier call when we discussed our store optimization, very few of our stores on a 4-wall basis with complete family margin flow through are unprofitable. It's the optimization of the market that we see the opportunity as opposed to closing unprofitable stores.

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Operator [29]

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The next question comes from the line of Joe Feldman with Telsey Advisory Group.

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Joseph Isaac Feldman, Telsey Advisory Group LLC - Senior MD, Assistant Director of Research & Senior Research Analyst [30]

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Wanted to go back to the comments about market share. I guess what gives you confidence that you're not losing market share? I mean, like that Halloween City down 21%, it seems like that's a lot more than what the market was. It feels like -- do you think Halloween was down 3% or 4% overall?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [31]

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Okay. I've spent the better part of the last 10 days speaking to everybody that I know in the industry, including some of the major wholesalers into the broader market. The general consensus is that the season was down low single-digits in the 5% range, give or take, but that then varied by format with e-commerce being up slightly with independence and brick and mortar being down in the 5% to 6% range. And then with the pop-ups being down much more significantly than that. We had anticipated Halloween City to be down this year because last year we had 31 Toys "R" Us locations that had great visibility and had a consumer familiar with that location as a place to shop.

We did not have that real estate available to us this year. So the real estate available was not as strong, so we had anticipated being down. And I think what we've seen is we've seen pretty much the impact of the costume in a bag play out on the temps as much as anything along with the DYI. So as we look at where our Halloween Cities were, when they were in lower income, more dense populations, they did well. When they were in higher-income, suburban populations, they didn't do as well. We had -- obviously being down -- it was actually the season ended up because we're still selling, it's about 19% now year-over-year, but as -- we never anticipated 19%.

We've never seen that kind of disparity between the Party City stores and the Halloween Cities in the past. So I think it's a combination of the [DYI], a combination of the online effect. And I think there's probably also some competition elements associated with the continuing growth of pop-ups in the category. So as we look at next year, we'll be taking a hard look at the Halloween City strategy. And we'll discuss that probably in greater detail at our next call, when we start talking about 2020 and our guidance for 2020.

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Joseph Isaac Feldman, Telsey Advisory Group LLC - Senior MD, Assistant Director of Research & Senior Research Analyst [32]

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And then I had another follow-up. As far as the BOPIS goes, I guess how -- where are the inventory systems like with -- how real time I guess are your in-store inventory with what's displayed to the customer online? Like, I guess how often do customers come in and get told, oh, we -- I know it shows online, but we didn't actually have that. Or they couldn't find it because as you said, the store may be not organized as well as it should be?

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Bradley Morgan Weston, Party City Holdco Inc. - President [33]

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So we are not as sophisticated in Buy Online and Pick Up in Store as we will be in the future. And I can tell you that our -- as we look into next year, we are in the process of determining what new order management system we're going to put in place that will bring improvement to our Buy Online Pick Up in Store visibility to our inventory, and then with our experience of what consumers can see online relative to what they're going to shop for also is an opportunity improvement. So not only did it grow this year, but we can optimize it even further next year with an investment in [OMS].

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Joseph Isaac Feldman, Telsey Advisory Group LLC - Senior MD, Assistant Director of Research & Senior Research Analyst [34]

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And if I could just sneak one last one. I know it's early and you typically don't do it this early, but like any initial thoughts on 2020? It sounds like there's a lot of initiatives and presumably CapEx might go a little bit higher. But just thoughts on the framework. I know Halloween moves to a Saturday, you also have the election. There's just a lot of more things going on next year.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [35]

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Yes, we've not pulled together our guidance for next year at this point in time. We're finishing up our analysis of this season. And we've just begun our planning, putting pen to paper for next year's forecast. So we will certainly provide that in the next call.

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Operator [36]

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The next question comes from the line of Tami Zakaria with JPMorgan.

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Tami Zakaria, JPMorgan Chase & Co, Research Division - Analyst [37]

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So as you look into the coming quarters, now that helium is back in stocks, how should we be thinking about the gross margin headwind you've seen throughout this year? Meaning, are you having to buy helium at a much higher price, but are not passing through the cost to the consumer?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [38]

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As we've mentioned before, the price and the cost of helium has risen. Our helium now is under -- coming from multiple sources generally under contract. As a percent of the cost, as a percent of gross margin, it does have some effect. Where possible we've passed through price increases. But there are some formats where it's very difficult to pass through price increase from perception of relative value to the consumer. So we'll continue to have some slight margin headwind, not from the loss of the balloon sales, but really for just the absolute cost of the helium. Given the profitability of balloons, we're happy to make that trade off.

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Tami Zakaria, JPMorgan Chase & Co, Research Division - Analyst [39]

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Got it. That makes sense. And in terms of -- my second question is how much of the EBITDA shortfall that you had this year from helium and other temporary disruptions do you expect to reasonably get back next year?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [40]

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Roughly 180 bps, Mike?

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Michael A. Correale, Party City Holdco Inc. - Interim CFO & CAO [41]

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Yes, 180 basis points combined.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [42]

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Yes.

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Tami Zakaria, JPMorgan Chase & Co, Research Division - Analyst [43]

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So you expect to get back 180 bps next year?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [44]

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We would -- it would -- the lost balloon business, we've estimated at about 180 bps.

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Tami Zakaria, JPMorgan Chase & Co, Research Division - Analyst [45]

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Okay, got it. In terms of gross margin?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [46]

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No, in terms of revenue, I apologize.

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Tami Zakaria, JPMorgan Chase & Co, Research Division - Analyst [47]

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Okay. Okay, got it. And if I may ask a final question, can you -- so as you think about the costumes in a bag category, could you remind us what percent of your business is coming from that category? And any strategy going ahead with that piece of the business?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [48]

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We've really not disclosed that in the past for competitive reasons.

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Operator [49]

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Ladies and gentlemen, that is all the time we have for questions. I will now turn it back to management for any closing remarks. Thank you.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [50]

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Once again everyone, thank you for joining us today. And should you have any continuing questions or concerns, please feel free to reach out to ICR to speak with us. Thank you.

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Operator [51]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.