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Party City Holdco Inc (NYSE:PRTY)
Q1 2019 Earnings Call
May. 9, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Party City Q1 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Ian Heller, Associate General Counsel of Party City, you may begin your conference.

Ian Heller -- Vice President and Associate General Counsel

Thank you, operator. Good morning, everyone, and thanks for joining us. This morning, we released our first 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 you to our executive team who are here on today's call. We have Jim Harrison, our Chief Executive Officer and Michael Correale, our Interim Chief Financial Officer. We will start the call with some prepared remarks by Jim and Mike before we open 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 other wise. 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.

James M. Harrison -- Director and Chief Executive Officer

Thank you, Ian. Good morning, everyone, and thank you for joining us today. I'll begin by summarizing the highlights of our financial performance for the first quarter and then focus on some of the key strategic initiatives under way to improve our overall performance and address some of the headwinds that we have faced. Mike will then discuss the financial results in further detail and provide some updated comments on our full year revenue and adjusted earnings guidance, which we are reiterating today, following which, we will open up the call for your questions.

Overall, first quarter results were generally in line with expectations. On a consolidated constant currency basis, revenue increased 2%. This result included a negative comparable store sales result of 1.4%, reflecting helium challenges, which represented a 200 basis point headwind and negatively affected the latex and metallic balloon sales. When combined with weather headwinds, offset by an overall positive holiday shift, adjusted comp store sales were a positive 70 bps. Continued positive momentum in our omnichannel web business as well as improved store execution were key highlights on the retail side in Q1.

Total consumer products segment sales grew 1% after adjusting for the impact of franchise acquisitions and foreign exchange. For the quarter, adjusted gross margin was 37%, adjusted net income was $1.1 million, and adjusted EBITDA was $51.5 million. We generated $39 million of free cash flow in the quarter. Debt reduction during 2019 remains a top capital allocation priority for this Company. There are a number of initiatives under way to achieve a substantial reduction in our overall leverage ratio.

In reviewing the first quarter, I want to begin by providing an update on helium. As most of you are aware, balloons are a key product category for both our consumer products and retail businesses. As expected, the shortages we saw in the second half of 2018 have persisted, and we continue to expect it to create a Q2 headwind as well. In response to the current cyclical shortages, we have been actively identifying additional potential resources in securing alternative suppliers. As of March 31, we have secured approximately 15% of our annual requirement from alternative sources. More importantly, as we reported today in our press release, we have signed a multi-year letter of agreement with a new source of helium, which subject to final execution of definitive contracts we believe will provide additional quantities of helium beginning in Q3, thereby, eliminating the shortfalls we are experiencing at current allocation rates. This helium should allow us to return to normal levels of sales in our balloon categories. While the average cost of helium is increasing over prior years, we have successfully put in place selective price increases, which will serve to mitigate these higher helium costs.

During the first quarter, we also completed a comprehensive review of the store portfolio, aimed at improving the overall productivity of the fleet. While we conduct this sort of analysis annually, this year we have centered the review around market level performance and productivity rather than on an isolated store review basis. Due to our unique vertical model, most of our stores when viewed independently are profitable on a four wall basis. This year, our approach was to provide with the opportunity to drive market level profitable improvement. Following the study, we have decided to close approximately 45 stores over the course of 2019 where our analysis has shown that we have the opportunity to recapture a substantial portion of the closed store sales as they transferred to other Party City stores in those markets. This decision will allow us to better leverage our operating spend in these markets, which would be accretive to adjusted EBITDA on a full year basis.

This disciplined market optimization also creates capital flexibility for selective new store openings in under-penetrated markets as we look to capitalize on those opportunities in 2020 and beyond. Our market analysis continues to reflect the white space opportunity in the United States and Canada of greater than 200 new stores. Additionally, this year we will be piloting four new smaller format concept stores in several markets. These 7,000 to 10,000 square foot test stores are designed to fill what we see as a void in the smaller markets or markets with distinct characteristics where we can offer unique curated and tailored assortment.

We are also actively developing new store concept that we will open this fall. Our store of the future prototype is designed to improve the overall shopping experience and product merchandising of our stores to provide a crisper, cleaner, and easier shopping environment in a more open footprint. As part of our continued focus on elevating the in-store experience for our consumers, we continue to refine the Party Planner program that is being funded by the efficiencies generated from store operational productivity efforts. The program continues in 100 City stores where we have seen the associated benefits in the form of higher customer engagement and satisfaction scores as well as basket growth and a comp improvement over non-Party Planner stores.

Finally, we are testing a number of pricing initiatives designed to improve our value perception with the consumer. While we are enjoying over 75% unaided brand awareness with the consumer, stimulated much in part by our unparalleled breadth and depth of assortment, our purchase consideration scores are much lower. The reason for this is generally convenience and price perception. While we look to address convenience with our comprehensive omnichannel strategy, we believe that an improved value perception will also drive traffic. These are just some of the major initiatives under way as we look to reinvigorate our unique retail concept and improve the shopping experience for consumers searching for the ultimate celebratory experience.

Finally, on the retail front, I'm excited to announce that we are opening our first European party specialty store in Ireland. Previously, our only retail presence here in Europe has been through the UK headquartered e-commerce business Party Delights as well as a chain of temporary Halloween pop-up stores branded Halloween Headquarters. This full-line store in Ireland will serve as a pilot for us to determine the consumer interest in the broader offering that only a party specialty retailer can offer at store level. We are extremely interested to see what this pilot tells us and how we can shape the learnings gained toward making the party conscious that are so popular here in North America a part of the European landscape as well.

On the consumer products front, during the first quarter, we added a new competency to our manufacturing footprint, with the addition of paper straw manufacturing. We invested in new equipment to allow us to manufacture our own paper straws. By adding this competency, we look to eliminate all plastic straws from our assortment by the end of 2020. This talks to sustainability. Sustainability is a big deal. Over the past several months, our management team has focused heavily on improving and communicating our efforts to ensure that we are an environmentally responsible corporate citizen. We are modifying and testing many injection molded and extrusion molded plastic products including plastic plates, cups, bowls, and other products to conform to new European standards, so that they will be reusable and dishwasher-safe.

We are looking to source paper tissue and paperboard which is either compostable or biodegradable from Forest Stewardship Council Certified sources. We are also actively discouraging intentional balloon releases and in conjunction with the worldwide Balloon Council encouraging consumers to (inaudible) their balloons and dispose of them responsibly. We continue to actively support environmental organizations such as Wounded Nature both financially as well as through organized cleanup staff by many of our associates.

While the helium shortage continues to affect our consolidated top line performance, our North American consumer products business continues to gain new customers in both the grocery and mass channels. This itself partially offset continued sluggish franchise and independent party specialty retail performance, which has also been affected by helium issues. We are pleased with the traction we're gaining in non-traditional venues as well as alternative party goods retailers.

Internationally, sales in constant currency grew approximately 1% in the quarter as we continued to deepen relationships with key retailers in Australia, Europe, and U.K. As move toward the all-important Halloween season, I'm very pleased to report that our retail and consumer product teams have closely partnered to change the cadence by which we designed, select, source, manufacture, and distribute our seasonal product offerings. This has been a major focus and effort following the challenges we encountered last year. By the end of this month, more than 75% of our 2019 Halloween offering will either be in-store, in our warehouses or on containers to United States. Additionally, another 8 % will be completed and on the way by the end of June. This is a huge change from anything the Company has ever done improving our likelihood of success for the holiday seasons.

Online, we continue to be pleased with the performance of our site replatform and expanded omnichannel capabilities. Our customers have been very responsive to the improvement created around our product presentation, site content, usability, and checkout flow as well as far better mobile browsing experience. Buy online, pickup in store continues to gain traction with penetration now reaching 40% of all e-commerce orders. The consumer is often buying online and picking up in store, taking advantage of this capability to increase their own peace of mind around having everything that they need for their celebration.

The Party City storefront on Amazon Marketplace has also been successful and has provided us the ability to expand the reach of our brand and unique product offering. Given the growing level of traffic to the site and strong conversion rates, we have expanded our product offering and now have a broader assortment on the site that includes birthday and other seasonal celebrations. We are particularly excited about our marketplace offering for this coming Halloween where, for the first time, many of our proprietary licensed costumes and accessories will be featured and available.

Regarding digital assets, our Kazzam marketplace is now live in over 50 markets. In the first quarter we selected five markets and moved to the second stage of the pilot, focusing on customer acquisition by leveraging the Party City brand and business assets to build awareness and drive traffic to the site. As our retail customers become more aware of Kazzam, they discover the convenience this marketplace provides in securing third-party providers for their celebration needs.

We are now deploying in markets covering about 15% of the stores a combination of in-store initiatives as well as digital efforts in limited above-the-line marketing to drive consumer awareness and help scale the business. We anticipate further market roll out later this year. We will also utilize data from the Kazzam site to support and form our CRM efforts as it provides customer data against which we can create targeted and personalized marketing strategies.

On the topic of CRM, we continue to collect customer data to stay engaged and relevant to our consumers. We've begun to leverage and segment our customer database of over 25 million identifiable customers which has helped create targeted promotional campaigns as we shift our marketing spend to more digital and less traditional. We are pleased with the initial results of our CRM efforts.

One last operational line I would like to address is tariffs. As the subject of increased China tariffs is once again finding the headlines, I believe it is important for us to reiterate that the proposed current duties of 25% had been largely mitigated via resourcing through non-China factories, both third-party as well as Company-owned, product reengineering, renegotiated pricing within China and pricing pass-throughs. We believe the annual impact of the move to 25%, if it occurs, will be immaterial to our 2019 results.

Finally, as I stated during our last call, generating free cash flow and paying down debt is a principal goal for our entire Company in 2019. In addition to the strong cash flow generally generated by our business model, we are targeting a reduction of between $75 million and $100 million net working capital year-over-year by 12/31/19. We are also keenly focused on exploring other opportunities to free up capital throughout the business to pay down debt as well. Currently, we are targeting to have our leverage ratio below 4 times by the end of the year and hope to exceed that target.

In summary, our first quarter played out largely as expected, including the helium headwinds, which we believe should be behind us by the end of the current quarter. We have made progress on many fronts operationally and remain encouraged by the tailwinds that we believe will present themselves later this year, including greater helium availability and extremely strong IP calendar, a Thursday Halloween and benefits from supply chain investments that we made following the disruptions that impacted the business in 2018.

And now, I'd like to turn the call over to Mike to discuss the first quarter results and provide the 2019 outlook in greater detail.

Michael Correale -- Interim Chief Financial Officer and Chief Accounting Officer

Thanks, Jim. Good morning, everyone. I'll provide further insight on our financial performance for the quarter, before discussing our outlook for the remainder of fiscal 2019 and then we'll open the call for questions. Before I get started, I want to note that our first quarter results include $36 million of store impairment and restructuring charges related to the approximately 45 store closures, which Jim discussed. Approximately $18 million of the charge will be reflected in cost of goods sold with the remainder in operating expenses. The entire $36 million has been added back for both adjusted EBITDA and adjusted net income reported for the first quarter.

Looking more closely at our first quarter top line results, we grew our consolidated revenue 1% or 2% on a constant currency basis. Our retail segment sales increased over 4%, driven by the acquisition of franchise and independent stores over the last 12 months. At quarter's end, our network totaled 966 stores, 868 of which are corporate stores. Brand comparable sales, which include U.S. and Canadian permanent stores and North American e-commerce business declined 1.4% versus last year's first quarter comp of 2.4%. This year's comp included a 200 basis point headwind for helium. In addition, we had a positive net holiday shift impact with certain New Year's Eve sales shifting into the first quarter and Easter shifting out. However, the net holiday shift was more than offset by adverse spring weather across many of our markets. On a run rate basis, we estimate the comps grew 0.7% in the quarter, after adjusting for helium, holiday shift and weather. Web comps, when adjusted for the impact of BOPIS increased 19.1%.

Turning to the non-vertical consumer products business, net revenue increased 1% in quarter one after adjusting for the impact of franchise and independent acquisitions and foreign currency. Our U.S. business excluding sales of mylar balloons increased 4.5% after adjusting for the impact of acquired franchise and independent stores. Our non-party store business continues to be a bright spot with double-digit growth achieved through the strength in grocery and mass channels. We continue to leverage the breadth of our assortment and manufacturing capabilities to meet third-party independent customers' requirements in a cost effective manner. Sales of mylar balloons at wholesale were down approximately 8% as a result of the helium shortage. International consumer products grew 0.9% in constant currency, due to strong sales in Continental Europe and Canada and low single-digit growth in the U.K. and Australia. The U.K. growth continues to be negatively impacted by soft direct-from-plant FOB business.

Consolidated reported gross profit margin was 33.7% or 350 basis points below the same quarter last year. Excluding the $18 million of inventory reserves related to our store optimization program, gross profit margin was 37.1% or a 10 basis point decrease compared to last year. Pressures from helium and negative balloon mix were partially offset by cost savings from productivity initiatives and favorable manufacturing share of shelf. Manufacturing share of shelf increased 80 basis points versus Q1 of last year to 27.6% primarily due to the further integration of our Granmark acquisition. Our overall share of shelf during the first quarter was flat with the prior year at 78.1%, including a negative 20 basis point impact from helium.

Operating expenses as a percentage of revenue increased 270 basis points year-over-year due to the impairment charges and severance related to the store optimization program. After adjusting for these non-recurring charges in Q1 of 2019 and non-recurring consulting charges in Q1 2018, our operating expense rate was principally consistent with the first quarter of 2018, as we were disciplined in managing our operating costs in order to minimize the impact of the helium headwinds.

Income from operations was a loss of $10.3 million. Excluding the $36 million of charges associated with store closures, income from operations was approximately $25 million compared to $22.3 million in the prior year period. Interest expense for the first quarter was $29.3 million or $6 million above the same quarter of last year with the increase attributable to increased LIBOR rates on our term loan credit agreement and our ABL facility and the impact of the Company's August 2018 high yield the refinancing.

In the quarter, our reported effective tax rate was 25.8% and our adjusted tax rate was approximately 9.4%. The adjusted rate was impacted by stock option exercises. Adjusted net income decreased to $1.1 million from $6.9 million in Q1 last year, principally due to the higher interest expense. Adjusted EPS decreased to $0.01 per share from $0.07 per share, inclusive of a $0.05 headwind related to the higher interest rates. Adjusted EBITDA was $51.5 million during the quarter.

Finally, for the quarter, we delivered free cash flow defined as adjusted EBITDA less CapEx of $39 million, which was $2 million above first quarter 2018. We ended the quarter with net debt of about $2 billion, resulting in a net debt leverage ratio of 5 times. Subsequent to the amendment of our ABL facility in April, we have approximately $185 million of borrowing capacity.

Turning to our guidance, we are reiterating our previously provided fiscal 2019 outlook for revenue and adjusted earnings. We continue to expect revenue to be in the range of $2.49 billion to $2.54 billion and comp sales to be about 1%. Excluding the impairment and restructuring charges related to the store closures, we continue to anticipate adjusted operating income margin to be slightly positive when compared to 2018. We expect full year adjusted net income to be in the range of $152 million to $162 million or $1.61 to $1.72 per share. We expect adjusted EBITDA to be in the range of $405 million to $418 million and interest expense to be $115 million to $120 million for the year. In terms of capital allocation priorities, we continue our plan to spend about 2.8% of our net revenue on capital expenditures and anticipate ending the year with net debt leverage below four times. 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.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Seth Sigman of Credit Suisse. Your line is open.

Seth Sigman -- Credit Suisse -- Analyst

Thanks, guys. Good morning. So we're trying to assess the underlying trends in the business. Comps were down slightly on an adjusted basis in the fourth quarter and then, I guess, up slightly this quarter on adjusted basis if you normalize for calendar shifts and the helium and the weather. I guess, two questions. One, during the periods within the quarter where the weather was favorable, I assume that was late in the quarter, I guess, how would you categorize the demand trends and if you could sort of speak to what you've seen as the weather has normalized. And then just taking a step back, we appreciate all the moving pieces, but at what point do you think that you start to see some cleaner comp trends? Thanks.

James M. Harrison -- Director and Chief Executive Officer

Sure, Seth. Good to talk to you. I will flip that question over to our Head of -- our Retail Group -- President of Party City Retail Group Ryan Vero. Ryan?

Ryan Vero -- President-Retail

Yeah, good morning. For the quarter, you mentioned some of the big impacts, but clearly we saw the weather primarily hitting in February, but keep in mind also, as we moved into March, we had a different impact which was the shifting of the Easter and that shifting of Easter moving out of March and into April. And so now that we've sort of anniversaried all those seasonal shifts, the weather impacts, we're just now sort of getting into the normalized period that will run through basically the summer time. So nothing significant other than the holiday shifts and the weather impacting the core underlying trend, but we'll really see that start normalizing at this point.

Seth Sigman -- Credit Suisse -- Analyst

Okay. And I would think that Easter and the weather should be more positive in the second quarter relative to the first quarter. Any shifts or anything we should be aware of as we're thinking about the second quarter?

Ryan Vero -- President-Retail

After Easter, there is no material shifts going on in the second quarter.

Seth Sigman -- Credit Suisse -- Analyst

Got it. Okay. And then my primary follow-up is around the store closings, which make a lot of sense. It sounds like on the back of this market level analysis, you have a feeling that you can recapture substantial part of the closed store sales. Can you help us better understand how you're thinking about that? What that recapture rate may look like? And if there's any sort of benefit to the adjusted EBITDA that you've embedded for this year from closing those stores? Thanks.

James M. Harrison -- Director and Chief Executive Officer

I'll take the EBITDA question first, Seth, and then I'll have Ryan talk to you about the recapture and how we think about that. With respect to EBITDA, the closure is going to occur over the course of the entire year. So we've got stores that are closing now, we have stores that will close a little later in this Q2, and we'll also have stores that close after Halloween. So when we look at the EBITDA impact, we look at it on a pro forma annualized basis and it's accretive. With respect to the implications for this year, it would be fairly de minimis and definitely be within the context of our range on EBITDA. With respect to the actual expectations on recapture as we looked at the closure of the store market, Ryan will tell you what we used in our thought process.

Ryan Vero -- President-Retail

Yeah, sure. So just a little bit of commentary and then specifics on your question. Over the years, the individual store profitability as we mentioned is very solid in our stores, given the vertical model and the margins that we're generating. But over the years we've acquired a lot of independents and large acquisitions as well, Factory Card, party stores, iParty, et cetera. And in some cases, these stores were in markets that Party City was already in. And so while individually all of these stores look good on a piece of paper, for the most part, when you really pull back and look at the total market, there is an over-saturation in some areas of party retail stores that we now are the owner of. And so really a great opportunity for us to pull back, look at the market dynamics, look at where we can transfer sales from one store to another store and put together a strategy of closings that's accretive to the total Company bottom line. And so that's what we did. We're not breaking out the specifics of the recapture rates, but I would suffice it to say that we wouldn't be closing the stores unless we felt that we would recapture enough sales and flow through profitability in the sister stores to make it economically beneficial to do so.

Seth Sigman -- Credit Suisse -- Analyst

Understood. Makes sense. Thank you very much.

James M. Harrison -- Director and Chief Executive Officer

Thanks, Seth. Thank you.

Operator

Your next question comes from Matthew McClintock of Barclays. Please go ahead.

Matthew McClintock -- Barclays Capital -- Analyst

Hi. Yes, good morning, everyone. Just a follow-up on the store closures. I was just wondering if you could kind of give us -- as you went through this market analysis and you looked at these individual stores, what changed in those specific industries? I know that you're trying to become more efficient with accessing your customers and trying to transfer sales to other stores, but what changed in those specific markets that made those stores less attractive? I mean, was -- did more sales go online, did more sales go to some of your wholesale partners? Just what actually changed in those markets? That will be my first question. Thanks.

James M. Harrison -- Director and Chief Executive Officer

Sure, Matt. The truth is, nothing changed in the markets per se. It's really how we've elected to do the analysis of our fleet and how we've elected to look at the performance of the fleet from a different prism. So like I said in my prepared remarks, the stores themselves on a sell-in basis are profitable on a four wall basis and as we look at them, certainly some of them are extremely profitable. It's the market dynamic as Ryan mentioned of having made a number of acquisitions. Remember, we rolled up essentially the retail business -- the retail industry between 2007 and 2013 and as we've looked now at the fleet and looked at it on a market level basis, we believe there's an opportunity for us to become accretive on EBITDA, reduce our investment in inventories in specific markets, take that invested capital in those markets and now we invest that back into our new store programs, which is better -- which is a more effective capital allocation. So I think it really is driven by our overall focus on capital allocation, debt reduction and moving our leverage ratio toward our target of 3 times.

Matthew McClintock -- Barclays Capital -- Analyst

Okay, that's helpful. Thanks for that. And then just on the new source of helium, congratulations on establishing that or securing that. I was wondering, structurally, I believe helium or balloons were -- was one of your more profitable businesses. How does that change going forward, just given the constraints in the business itself? Does it make it -- does that squeeze your margins because the cost of helium goes up or are you able to pass that along to the consumer? Thank you.

James M. Harrison -- Director and Chief Executive Officer

Sure, that's great question. With respect to the new quantities that are coming on-board or that have come on-board, that 15% I alluded to also in my remarks, that helium is more expensive than what our previous contracted price was. We have for several reasons, one being helium, second just in terms of managing the process, selectively increased prices at retail, reflecting higher helium cost. During the last -- I would say, over the last four plus months, we've seen within the category one size does not fit all. There are some elements of the offering where there is inelasticity with respect to pricing, and we've been able to see very little consumer reaction to the buying pattern or to the demand based upon the additional helium cost. There are other elements of the offering, which are perhaps more commoditized by nature, where we see the receptivity of the consumer to higher pricing as you pass through helium as being a little bit more difficult. On balance, we believe that between price increases and some of our initiatives going back to our project a year ago when we looked at the efficiency at store level which included improving the productivity of the helium operations within our store and recovering helium -- higher yield if you would of helium that we used in our stores, that on balance we will, for the most part, be able to mitigate the higher cost. That being said, over time, will helium come back down in price? Nobody knows, we'll see.

Matthew McClintock -- Barclays Capital -- Analyst

I appreciate the color. Best of luck.

Operator

And your next question comes from Rick Nelson of Stephens. Please go ahead.

Rick Nelson -- Stephens -- Analyst

Thanks. Good morning.

James M. Harrison -- Director and Chief Executive Officer

Good morning, Rick. How are you?

Rick Nelson -- Stephens -- Analyst

Good. Thanks, Jim. The helium headwind that we saw in 1Q, as we move into 2Q does that get more pronounced? I know it's a big graduation period. If you could talk about retail balloon sales or what proportion of revenue that might account for.

James M. Harrison -- Director and Chief Executive Officer

Sure, that -- Rick, it's a great question. Obviously graduation is a big season for balloons, no doubt about that. As I mentioned in our remarks, we have procured some incremental quantities of helium for Q2 outside this more recent development. So while it's a big part of the business in Q2, I would expect it to have somewhat of a similar impact on Q2 to what we saw in Q1 with hopefully helium going in the rearview mirror sometime around the end of Q2 into the Q3.

Ryan Vero -- President-Retail

Yeah, Rick, just to add to that. This is Ryan. If you look at the balance of balloons, as Jim mentioned, graduation being very big, Q1 also has some big balloon seasons with New Year's and Valentine's Day and the mix of balloons in Q1 and Q2 are actually very, very similar as a percent of the total sales in those quarters.

Rick Nelson -- Stephens -- Analyst

All right. Thank you for that. I also noticed that net debt to EBITDA you're now targeting below 4 times. I think your prior guide was 4.2 times. What is -- your EBITDA forecast really haven't changed, what is driving that?

James M. Harrison -- Director and Chief Executive Officer

Sure. So the -- one of the principal drivers of that, Rick, is we've throughout the entire organization created a mandate for all of our operating units. Remember, we have 28 different operating business units, all the different manufacturing plants, and everything else, we've really mandated all of the organization to take a really sharp pencil and a really fine look at working capital and capital allocation and how we can perhaps become more efficient with respect to how we manage our inventories and take cash off the balance -- cash out of working capital and put it against debt. I'll give you one example, which I think is kind of indicative of the type of things we're talking about. Historically, over the last year or so, we've maintained two different stocks of white tissue, one being Forest Stewardship Council Certified white tissue, the other being non-certified white tissue. Certain customers require the certified tissue. We are moving all of our white -- all of our tissue to certified. So that will eliminate duplicate stocks. Also, we're taking and looking at our levels of replenishment in our min/maxes at store level as well as our min/maxes in terms of safety stock in our warehouses and just refining those to make sure that we balance off our inventory effectively.

And then finally, we ended up last year with fairly substantial high inventories in carryover on Halloween and Christmas, both of which were OK. So Halloween was OK, Christmas actually was quite strong, but that carryover inventory is all perfectly good inventory. And so as we look at our seasonal buys this year for Halloween and Christmas, in particular, there is the opportunity for us to be sharp there as well. And so we'll be driving working capital by reducing the amount of carryover that we'll see going into next year out of those two seasons. So it's really a matter of focusing the entire organization on stronger capital allocation.

Rick Nelson -- Stephens -- Analyst

That's helpful. Thanks a lot and good luck.

Operator

Your next question comes from Tami Zakaria from JPMorgan. Please go ahead.

Tami Zakaria -- JPMorgan -- Analyst

Hi, thanks for taking my question. So with the new helium source identified, so my question is, will helium supply in the back half of this year be similar to last year's back half or do you actually expect a net increase in capacity and go back to normal helium supply before the shortage began?

James M. Harrison -- Director and Chief Executive Officer

That's great question, Tami. So our new or additional resource that we are talking about today is predicated upon the productivity of certain fields. That productivity is not certain because obviously when folks drill for gas or they drill for oil, they drill for helium, they are doing so with the expectation -- with the geological expectation of what that field holds. So we've committed to take a certain amount of product from those fields. Those fields are committed to produce that product for us. Mother nature will ultimately determine whether or not those fields have the adequate amount helium to reach the goals that we've set. We feel very comfortable that the expectations and the estimates made are solid. As we look at helium, though, for the second half of the year, last year we began to feel helium really in August. Somewhat I'll call that ironic or coincidentally, more ironic. We would expect that we would see that start to flip where our helium supplies become stronger in July and then gets -- and our overall balance of helium at store level continue to improve over the course of the fourth quarter. So I would say that on balance we would expect a slightly improved helium position versus last year, certainly in Q4.

Tami Zakaria -- JPMorgan -- Analyst

Got it. That's super helpful. And one quick follow-up. The 45 stores that you're closing this year, were these -- are these stores four wall EBITDA positive at the moment?

James M. Harrison -- Director and Chief Executive Officer

Generally, yes. There's a handful that perhaps weren't, but generally they are all four wall profitable. And so we would -- we obviously expect that profitability to result in transferred sales to stores that remain in the territory as well as the operating improvement we get from leveraging up the OpEx. That's what drives the incremental annual EBITDA.

Tami Zakaria -- JPMorgan -- Analyst

Got it. Thank you so much.

Operator

Your next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Hi, everyone. Good morning. To hone in on again the underlying business, can you tell us so -- if the business adjusted, Jim, was around plus 70 basis points, is that -- that's a good proxy or that is the right number to think about for the everyday business, or is it -- I don't know if you've said that on the prepared remarks?

James M. Harrison -- Director and Chief Executive Officer

Yeah, it's fundamentally the everyday business. I mean, there is some noise in Q1 whether it's Valentine's Day or St. Pats. But we did adjust for the shift of the extra day from New Year's in, we also did adjust for the shift of the Easter out, so it is pretty pure in that respect. So it is generally the everyday business, yes.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. And then, back on helium, can you tell us what the unit comps were, meaning how it will just give us a sense of the unit, I guess, headwind that you're facing versus some of the pricing actions you've taken? And just to clarify, the 200 basis point headwind to comp, that was inclusive of the pricing changes you took, that was just the shortfall in the balloon category that occurred relative to what you would have expected normally?

James M. Harrison -- Director and Chief Executive Officer

Correct. So relative to what we would have expected and also measured against stores where we had helium, which gives us a great proxy for what the fundamental impact of no helium is. That is the 200 basis points. With respect to units, Simeon, that's a very difficult conversation to have, because there is such a wide, wide disparity within the balloon category, everything from 18 inch circles up to these giant 48 inch numbers. I mean, so it's a function of really where the profitability resides and what we try to promote to maximize our profitability. So we saw -- when I was talking about inelasticity, where we saw a lot of flexibility in pricing, it was in numbers, numbers and letters where people are using those to provide the backdrop, if you would, for their social media posts and for a statement around their celebrations. So we see that those continue to perform extremely, extremely well and we've had the -- that's where we've had the greatest opportunity to really think about pricing. And so when we look at units, it would be a little misleading to give you pure unit numbers.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it, OK. And then on the timing of the IP, as it improves, is there a particular quarter this year where a lot of it hits, is it progressive now through the end of the year?

James M. Harrison -- Director and Chief Executive Officer

We will see the greatest impact in the IP obviously in Q4, at the end of Q3, Q4. The impact on Halloween will be material. And in terms of the IP around birthday, that happens pretty much beginning in June, at the end of May, early June with lot of the particularly Disney properties coming out with Aladdin and Toy Story and Lion King and then ultimately, Frozen.

Simeon Gutman -- Morgan Stanley -- Analyst

And then just my last question, you mentioned improving price perception. Do you know the -- is the elasticity in the certain number of categories and once you get those categories, you improve the perception? And then the other question is, how you funded and it doesn't sound like this is an everyday low price type strategy, it's just improving in certain, but how do you fund it and especially since it seems like you're already getting some savings or some movement in supply chain vis-a-vis the tariffs, so does that make it extra hard in this particular year?

James M. Harrison -- Director and Chief Executive Officer

First to answer your first question, it is really in those high visible commodity perceived categories. And I think solids is a great example of that, right. So if you look at a Party City store, we have 24, Ryan, give or take or more different style of colors compared to the rest of the market, which generally would be anywhere from four to maybe eight and the breadth and depth of what we have is rather expansive compared to anybody else. So it's really a matter of looking at where are the high perceived component parts within that type of category and where do we fit vis-a-vis the market where perhaps in the past we had a little bit of a halo of the breadth and depth and got a lot of credit for 26 colors where now maybe a little less credit for that. And so the way to get there is to look at the colors, how do we create the assortment, how do we not just create the assortment, but create the SKUs, what's our account, what's our put up, what's our shape, what's our configuration and we've spent the better part of the last six months plus redoing that and playing with that. And we are now piloting the results of that study and that will help guide us ultimately toward what we think is the right answer to improve the value perception to our customers.

In terms of funding it, we have some flexibility because of our vertical model to fund it. So we can adjust within the configuration of the product category and also adjust within the breadth and depth of the offering to help mitigate some of that. There will be some margin pressure, but we believe that we're going to take that margin pressure and turn it into dollars as we improve our perception with the consumer and sell more. So, to me, at the end of the day, it's really about making money, not making margin points. And if we can make more money then...

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. Thanks, Jim.

Operator

Your next question comes from Mike Baker of Deutsche Bank. Your line is open.

Michael Baker -- Deutsche Bank -- Analyst

Hi, thanks. I think with couple of the questions trying to get out here is the pace of comps, and maybe I know you don't give quarterly numbers, but your guidance, the implied guidance here, it only suggests positive comps in the back half of the year, probably even in the 2% to 3% range. So I guess a couple questions with that as a preamble. Should we expect comps to still be negative in the second quarter because of the helium, but then turn positive in the back half. And then of few of the comp drivers, which are most important? Does that shift to positive comp because of the helium, because of what you are doing around Halloween or simply because of easy comparisons, intellectual property, et cetera? What are the biggest reasons to expect costs to turn negative in the back half?

James M. Harrison -- Director and Chief Executive Officer

First off, we expect it to turn positive in the back half, which is OK. Yeah, Mike, a great question. I mean, I believe when we did our full year guide back with our year-end call, we indicated that we expected the first half of the year to be negative or to be tougher in terms of the headwind on comps and that we expected the second half to definitely be, we'll call it, back-loaded in terms of positive comp implications. And that continues to be the case. I look at the look first quarter and as I said in my comments, it was generally in line with expectations and that refers to comps as well. As we look at Q2, we had anticipated the whole first half to be -- to have a bit of a headwind primarily driven by helium, and then obviously, we continue to see that. And as I said in my prepared remarks, we expect Q2, for the headwinds of helium to continue. We now see the headwinds of helium or we believe and hope and expect that headwinds of helium will substantially subside and perhaps even turn into a tiny bit of a tailwind in the second half of the year. And then I mentioned the other elements that are going to be strong for second half, the IP which we talked about a moment ago, the move -- the slight implications with respect to move from a Wednesday to a Thursday Halloween. The breadth and depth of our stronger offerings, both through the IP and the in-stock position in our own stores as well as the improved breadth and depth of what we will be offering on marketplace with the proprietary costumes. So there is a number of very positive elements that we believe create that tailwind that will drive a positive result in the second half to mitigate -- more than mitigate the first half. And I'm not going to comment on your 2% or 3%, but I'll go back to our guidance, which is around 1% for the full year.

Michael Baker -- Deutsche Bank -- Analyst

Fair enough. If I could ask one follow-up, I believe the original comments and correct me if I am wrong, but I think it was first half expected to be flat to slightly negative. So would the minus 1.4% be sort of consistent with that or in my mind maybe running a little bit lower? And then, yet you kept the full-year guidance, so something sort of now expected to get better than you had originally thought.

James M. Harrison -- Director and Chief Executive Officer

Yeah, I think on balance, you're probably right, because it was probably a little bit higher because of helium, and we expect to be a little bit better in the second half, because of helium.

Michael Baker -- Deutsche Bank -- Analyst

Understood.

James M. Harrison -- Director and Chief Executive Officer

I think when we talk, we are really talking about on the edges in terms of absolute numbers at the end of the day.

Michael Baker -- Deutsche Bank -- Analyst

Yeah, fair enough. Okay. Appreciate the color. Thank you.

James M. Harrison -- Director and Chief Executive Officer

Thanks, Michael.

Operator

Your next question comes from Chris Prykull of Goldman Sachs. Your line is open.

Chris Prykull -- Goldman Sachs -- Analyst

Good morning, guys. Thanks for taking the questions. I just wanted to go back to the store optimization for a second. If I look back, you've had years of franchise acquisitions, large acquisitions, organic store openings and generally have always been fairly positive, I guess, on the potential for new stores. Is that view changing now? Is 800 stores too many? And if so, how does that alter the growth algorithm of the retail segment over the next three to five years?

James M. Harrison -- Director and Chief Executive Officer

Terrific question. So, first off, let's address looking backwards, respectively. We've acquired a number of franchisees over the last several years. The store rationalization does not really include those acquisitions. It really relates back to the earlier stage of acquisitions and some of the decisions we made, quite honestly, with respect to real estate, looking at the opportunities within the demographic and perhaps undershooting the amount of reverse cannibalization, probably the amount of cannibalization that would occur. With respect to our store openings, as I mentioned in my prepared remarks, our analyses that we continually do them, continue to show white space for 200 more stores and the Party City format as it exists today in US and Canada. Additionally, as I mentioned, we're piloting a smaller store format, which, if successful, and we expect it to be successful, will redefine how we look at the geography in total. And so 200 becomes a much larger number if the small format store can be profitable and work. At the end of the day, we also see that the consumer really likes the idea of buy online, pickup in store and exploiting our omnichannel presence to be able to order online, go to the store, pickup and make sure that he or she has their party goods in their possession the Friday night or the Saturday night before their party. So I think there is a very symbiotic relationship between our e-commerce business and our brick and mortar business as it relates to consumer and how the consumer wants to shop our category. So I think as we look going out into the future, as I said, in 2020 and beyond, I would expect us to return to a more normal cadence of new store openings for the foreseeable future.

Chris Prykull -- Goldman Sachs -- Analyst

Great. That's really helpful color. And then maybe just a quick follow-up to the authorization and the annual store review that you do. How do you factor in e-commerce to that annual store market review and do you factor in recapture through your online channel too for the closed stores?

James M. Harrison -- Director and Chief Executive Officer

I'll let Ryan take care of that one.

Ryan Vero -- President-Retail

Yeah. We look at basically the total recapture that is generated from the stores. The largest share of it obviously is coming into the retail store, less so on the delivered side. But as Jim mentioned, 40% of our orders now online are buy online, pickup in store. So there is that relationship where even if a customer is physically walking into a store to pick up the product, they are starting their experience with Party City or their purchase experience with Party City on the partycity.com website. So it really is a nice symbiotic relationship between the two.

Chris Prykull -- Goldman Sachs -- Analyst

Great. Then if I could just squeeze one more in, just on the changes in the timing of your Halloween inventory imports. I think you mentioned 75% of that inventory should be in your hands by the end of this month. How does that compare versus prior years? What are the working capital implications of holding that much inventory and how does that foot with your goal of improving working capital for the full year?

James M. Harrison -- Director and Chief Executive Officer

Sure. So, there was more than one question. With respect to your first question, it's probably -- at this time last year, we were probably about 50% by the end of May. So that gives you a -- so it's a 50% improvement over where we were or a increase where we were. In terms of working capital for the full year, we would expect it to actually fundamentally be a reduction in working capital, because the amount that we're bringing in new over the balance of -- so far this year, end of balance of the season is substantially less than what we brought on last year. So we expect to be liquidating out of our carryover some quantities of inventory and it's consistent within all the numbers we've run and all the expectations we've done with respect to looking at reductions in that working capital, take into account our everyday inventories, our retail inventory positions, our manufacturing inventory positions as well as our seasonal inventory positions as we foresee them at the end of the season. So I think it's certainly a function built it into our thought process. So I think I've got your questions. If I missed one, feel free to repeat, I apologize.

Chris Prykull -- Goldman Sachs -- Analyst

You nailed it. Thanks so much. Good luck this year.

James M. Harrison -- Director and Chief Executive Officer

Thanks so much.

Operator

Your next question comes from Joseph Feldman of Telsey Group. Your line is open.

Joseph Feldman -- Telsey Group -- Analyst

Yeah. Hi, guys, good morning. Thanks for taking the questions. Actually I wanted to follow-up on that working capital question. Where are the biggest opportunities for you guys to improve the net working capital? I mean, you discussed a big number to get to that improvement and I was just wondering where the biggest areas of improvement will come from.

James M. Harrison -- Director and Chief Executive Officer

The biggest area of improvement, Joe, is really in inventory, undoubtedly. We had a big build last year in inventory and we see the opportunities for us to address inventory. As I mentioned earlier, that inventory carryover we have and the inventory position we have is fundamentally a very, very good inventory. It's probably -- our inventory today is probably, to be candid, substantially better than -- balanced than it's ever been historically in terms of its freshness, its newness and its ability to be receptive by the consumer as being on trend and relevant, but it's really inventory. The bulk of that $75 million to $100 million of working capital reduction is with respect to inventory.

Joseph Feldman -- Telsey Group -- Analyst

Okay, thank you. And then just a follow-up. On the e-commerce business, it definitely seems like you guys continue to find areas of expansion and opportunity. And I'm wondering what you guys are thinking about profitability and how profitability has been playing out for this channel. Has it been on an improving trend or is it, we've not quite built it out yet to where we can start to then see the improvement?

James M. Harrison -- Director and Chief Executive Officer

I will let Ryan to address that one.

Ryan Vero -- President-Retail

Yeah, sure. So from a profitability perspective, the business you have to look at a little bit differently than looking at a straight store, because it's not only a channel that generates revenue on its own that we end up delivering for customers, but, as I said earlier, 40% of the orders that are coming through that channel aren't resulting in a sale on what we look at as the web or straight web sales. So they are carrying the burden of the cost within that business for many of the operating components of it. They are just not carrying the distribution side that's going into the stores. So it's really about the mix of where those sales are going. Obviously distribution costs, as we've said in previous quarters, have been a headwind in general. And so the delivery cost for those orders that we are shipping to customers that cost has increased over the last year or so, but it's really -- looking at it on an omnichannel level, clearly the sales growth helps to offset some of those fixed costs in the business and shifting it to retail in general should be a positive contributor to the bottom line because we're leveraging many more of the operating costs that are already existing in a store.

Joseph Feldman -- Telsey Group -- Analyst

Got it. That's helpful. Thanks, guys. Good luck with this quarter.

James M. Harrison -- Director and Chief Executive Officer

Thanks, Joe. Thank you.

Operator

That was our final question for today. I will now return the call to management for closing remarks.

James M. Harrison -- Director and Chief Executive Officer

Thank you, operator, and thank you everyone for joining us today. We appreciate your continued interest in our business and we look forward to talking to you all again soon. Thank you. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 57 minutes

Call participants:

Ian Heller -- Vice President and Associate General Counsel

James M. Harrison -- Director and Chief Executive Officer

Michael Correale -- Interim Chief Financial Officer and Chief Accounting Officer

Ryan Vero -- President-Retail

Seth Sigman -- Credit Suisse -- Analyst

Matthew McClintock -- Barclays Capital -- Analyst

Rick Nelson -- Stephens -- Analyst

Tami Zakaria -- JPMorgan -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Michael Baker -- Deutsche Bank -- Analyst

Chris Prykull -- Goldman Sachs -- Analyst

Joseph Feldman -- Telsey Group -- Analyst

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