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Party City Holdco Inc (PRTY -60.00%)
Q4Â 2019 Earnings Call
Mar 12, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Party City Q4 2019 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Ian Heller, Vice President and Deputy General Counsel. Please go ahead.
Ian Heller -- Vice President And Associate General Counsel
Thank you, operator. Good morning, everyone, and thanks for joining us. This morning, we released our fourth quarter and full year 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; Todd Vogensen, our Chief Financial Officer; and Brad Weston, our President and Chief Executive Officer of our Retail Group.
We'll start the call with some prepared remarks by Jim, Todd and Brad, before we open it up for Q&A. Please note that in today's discussion, management may make forward-looking statements regarding their beliefs and expectations of 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.
James M. Harrison -- Director and Chief Executive Officer
Thank you, Ian. Good morning, everyone, and thank you for joining us today. I'd like to begin today's call by welcoming and introducing Todd Vogensen, our new CFO, who joined us on February 3. Todd brings nearly three decades of financial management expertise to the executive team, and we are very pleased to have him on board. I also want to take this opportunity to thank our Chief Accounting Officer, Mike Correale for all his hard work as Interim CFO over the last several months and for his continued help working with Todd to ensure smooth transition.
As always, I'll begin my remarks by providing an overview of the company's performance for the fourth quarter and fiscal 2019. Todd will then discuss our financial results in greater detail and our outlook for 2020. And finally Brad will discuss our 2020 priorities, including the actions we are taking to improve our retail operating model and performance, which are at the core of our plans to drive profit improvement, which the company enjoyed for 22 of the previous 24 years. Then we will open up the call for your questions.
Let me begin with a quick review of the financial results for the fourth quarter and fiscal 2019. For the quarter, sales was $731.6 million, compared to $805.6 million in the prior year. And adjusted EBITDA and adjusted EPS were $119.5 million and $0.51 per share respectively. For the year, total revenue was $2.35 billion as compared to $2.43 billion in 2018, including a comp sales decline of approximately 3%. While adjusted earnings per share was $0.46 per share and adjusted EBITDA was $269.2 million.
On the top line for the fourth quarter, as we discussed in our November call, Halloween did not meet our expectations. Additionally, our solids, Christmas and birthday businesses were not as strong as we would have liked. Our in-stock position in helium at retail was a bright spot in the fourth quarter, as it drove a ramp-up in our balloon business.
Our third-party consumer products business at Anagram continued to be adversely affected by the helium shortage, while the rest of our consumer products businesses, on a revenue basis performed relatively close to plan. However, margin headwinds from promotions and increased helium costs at retail, as well as unfavorable channel mix in the consumer products businesses impacted the bottom line.
As I reflect upon 2019, there is little denying it was a very difficult year. A confluence of events came together to create huge headwinds for the business significantly affecting both sales and margins. Some of these were external like the much discussed helium situation that was a significant headwind to our top and bottom line performance this past year. But others like Halloween performance was self-inflicted. The helium shortage negatively impacted our total revenue results by $45 million for the year, and was the source of 100 basis points of our annual gross margin decline of 470 basis points.
Throughout the course of the year, our procurement teams worked to find resources to alleviate the situation at retail. However, it wasn't so late in the fourth quarter of 2019 that we were able to develop a series of creative partnerships to provide Party City with access to additional resources to stabilize and restore adequate helium supplies to our retail supply chain. As many of you know, Party City is the go-to destination for balloons, and balloons representing a significant point of differentiation for our retail operations, clearly separating us from our competition.
So far this year, our stores are experiencing strong in-stock position for helium. In an effort to combat sales challenges caused by the helium shortages as well as excess freight and distribution expenses embedded in our inventory cost and carried over from 2018, and the soft Halloween season, we put in place significant couponing and discount promotional initiatives, which pressured margins, and we're not as successful as we would have expected.
2019 was also a challenging year for our consumer products businesses as both the impact of acquired franchisees in 2018, and the effects of helium in our metallic and latex balloon businesses in the broader market put pressure on third-party sales. Having a significant global market share in the metallic balloon category is a huge asset, but as a result of the 2019 impact of the helium issues, we felt them well beyond our retail business. Although not as severe as retail impact, helium represented approximately $13 million in revenue headwinds to our third-party consumer business.
While our financial performance was disappointing, there were some bright spots and progress made against some of our key initiatives. For example, as I mentioned we have sorted out the retail helium challenges and is seeing a pickup in our balloon categories. In 2019, we implemented a market optimization program, aimed at closing 55 retail stores to help optimize our performance at a market level, focusing on the most profitable locations and improving the overall health of our store portfolio.
We closed approximately 35 stores in 2019 and completed the rest in January of 2020. The sales recapture rates thus far, in excess of 35% have exceeded our expectations. And the reserves provided for inventory liquidation remain adequate. E-commerce was a bright spot for us in 2019, and we are pleased with the 14.8% growth we saw for the year. BOPIS has been very well received by consumers and represented 39.3% of e-commerce orders and 24.4% of e-commerce sales in 2019. We also continue to be pleased with the performance of our Amazon storefront, which grew over 300% in 2019, and our total marketplace which grew over 280% in 2019.
Within our consumer products business, our North American alternative markets revenue grew approximately 10%, and our global consumer products businesses delivered approximately $256 million [Phonetic] of consolidated adjusted EBITDA in 2019. Internationally, the businesses in Mexico, Australia, Europe and UK performed close to plan despite the challenges presented by the strong dollar, generally weak economic conditions and uncertainty surrounding Brexit. In terms of capital allocation, we reduced our total net indebtedness and trade payables by more than $235 million as of December 31, 2019 when compared to December 31, 2018.
Part of this reduction was accomplished through the sale of our 65 Canadian Party City stores to Canadian Tire at a double-digit multiple of 4-wall EBITDA. Additionally, this agreement included a 10-year supply agreement, which contemplates more than doubling our consumer product sales into Canada through the Canadian Tire Family of Companies. 2019 was also an important year as we significantly strengthened our leadership team throughout the organization, including the additions of Brad as President, Todd as our CFO, Sean Thompson as EVP of Merchandising, Julie Roehm is our Chief Experience Officer, and many others.
Our entire management team is executing with a sense of urgency and is committed to returning PCHI to levels of success that we enjoyed for so long. And speaking of leadership, before I turn over the call to Todd, I want to address one other announcement we made today. As many of you saw in earnings release today, we announced that effective April 1, Brad will be assuming the role as CEO, and I will transition to the new role of Vice Chairman. In this role, I will primarily focus on ensuring a smooth transition, helping Brad and team execute corporate development opportunities as well as provide other support to both Brad and Todd.
This leadership transition is the culmination of an almost two year succession plan, which the Board and I have worked on to identify the right individuals to lead our company forward and into its next chapter of growth. In conducting the search, we believed that my succession needed to possess a strong background in retail and have the bandwidth to embrace and lead to many other aspects of our business model. We believe that in Brad, we have found this unique leader. Brad has already put a stamp on the business during his seven months at Party City.
As the CEO of the Party City Retail Group, Brad has led all aspects of the company's retail operations and has developed a road map for change to improve Party City's retail experience, our long-term growth strategy to build value for shareholders. I'm extremely excited for the future of Party City and pleased to be able to support Brad and Todd in this next chapter. And with that, I will turn the call over to Todd. Todd?
Todd Vogensen -- Chief Financial Officer
Thanks, Jim, and good morning everyone. First, I'd like to say that I am very excited to have joined the Party City team. It's been a busy and productive six weeks, getting to know the business, and while the results for 2019 are disappointing, the entire team is committed to driving improved performance with a sense of urgency.
Now turning to our results, please refer to the accompanying slides available on the Investor Relations section of our website for further details on our financial performance. As Jim discussed, the fourth quarter did not meet our expectations as increased promotional activity was not as effective in driving sales as expected, resulting in softer sales performance. While we were successful in driving inventory decreases, the discount significantly impacted our gross margins and overall profitability.
Our consolidated total revenue for the fourth quarter was slightly below the implied outlook that we provided in our third quarter earnings call, down 9.2% on a reported basis and 9.1% in constant currency. In total, our retail segment's fourth quarter net sales decreased 12.4% on both reported and constant currency basis, with retail comparable sales down 5.1% and net store count down 11% from last year.
As we discussed in our third quarter conference call, Halloween results were soft. In addition, our solid party supplies and Christmas categories underperformed, which more than offset the improved results in the balloon category. In the Christmas category, our assortments lacked the necessary newness and innovation, and in the solids category, our pricing structure was not aligned with the market. In a few minutes, Brad will discuss the initiatives that we're focused on to stabilize our retail business and to recapture momentum.
Turning to our third-party wholesale segment, net revenue increased 5%, driven by incremental wholesale volume from our Canadian Tire agreement and international growth of 13.7% on a constant currency basis. For the fourth quarter of 2019, consolidated gross profit margin was 40.3% or 500 basis points below the same quarter of last year. The gross margin decline was primarily driven by increased promotions in the fourth quarter. In addition, gross margins were negatively impacted by the company's store optimization program and the impact of increased helium costs.
Total share of shelf at our Party City stores and our North American retail e-commerce operations was 82.8% during the quarter or 210 basis points higher than Q4 of 2018, driven by an increase in internally supplied costumes, gifts and Halloween products. Compared to last year, our manufacturing share of shelf improved by 60 basis points to 17.2%, primarily due to an increase in the penetration of self-manufactured birthday products.
Operating expenses excluding store optimization, goodwill and trade name impairment charges and sale leaseback transactions totaled $216.7 million or 29.6% of revenue, which was $9.2 million higher than the fourth quarter of 2018. The increase primarily reflects a $6.5 million legal settlement and increased marketing costs. Overall, the bottom line impact of these changes is adjusted net income of $47.8 million in Q4 of 2019, down from $103.4 million last year. Adjusted EPS was $0.51 compared to $1.08 in the prior year, and adjusted EBITDA was $119.5 million this year compared to $188.9 million in Q4 2018.
Turning to our full-year results. Consolidated revenue was $2.35 billion, which represented a decline of 3.2% on a reported basis and 2.7% on a constant currency basis. Retail operations posted a decline of 3.4% on a reported basis and 3.2% in constant currency, which includes the impact of 35 store closures and the sale of 65 Canadian stores to Canadian Tire. Reported comps declined 3% for the year. Gross margin rate declined 470 basis points for the year, primarily due to clearance markdowns from our store optimization program, increased promotional discounts in the second half of 2019, and increased helium costs. Our total share of shelf at retail was 79.6%, up 70 basis points compared to 2018.
In addition, our manufacturing share of shelf increased 60 basis points to 23.5% for the year. Operating expenses excluding the store optimization program, goodwill and trade name impairment and the gain on the sale leaseback transactions totaled $732.2 million or 31.2% of revenue, and were $18.4 million higher than 2018. The increase was primarily result of the wraparound on franchise acquisitions in late 2018.
Adjusted net income was $43.4 million versus $156.8 million in the prior year. Adjusted EPS was $0.46 per share versus $1.61 in 2018. And adjusted EBITDA was $269.2 million versus $400.1 million in the prior year. We ended the year with net debt of $1.6 billion, down by $210 million from year-end 2018. The reduction in our debt was primarily driven by the proceeds from our sale of 65 stores to Canadian Tire and our sale-leaseback transactions.
Importantly, at year-end 2019, we had $35 million in cash and cash equivalents, and approximately $350 million of borrowing capacity under our ABL credit agreement. Before discussing our 2020 outlook, I'd like to review a few items that we've factored in to our full year guidance. First, we anticipate that 2020 will be a year of stabilization for the company. We're focused on improving our financial and operating results at retail through various initiatives that Brad will talk about shortly.
However, the rollout and impact of these initiatives will take time. As such, we do not expect to see the full benefits of these initiatives in our 2020 performance. We anticipate that our non-comp sales will be impacted by the sale of 65 stores to Canadian Tire in 2019, and last year's store optimization program, offset partially by modest growth in 2020 in our wholesale segment. We expect gross profit margin rate to improve relative to 2019, as we return to a more normalized level of promotions and the clearance headwinds from our 2019 store optimization program.
We expect adjusted EBITDA headwinds of approximately $4 million from the sale of our Canadian stores to Canadian Tire and approximately $5 million in incremental costs from our sale leaseback transactions in 2019. We completed our 2019 store optimization plan in January 2020 with the closure of 20 stores in the month. We expect the results of our store optimization plan to benefit 2020 EBITDA by approximately $5 million. During the remainder of 2020, we plan to continue strategically rationalizing our store base, opening approximately 12 stores and closing approximately 21.
In terms of any potential impact from COVID-19 otherwise known as the coronavirus, at this point, we do not anticipate any material supply chain impacts to our financial results in the first quarter. But as you all know, the situation is very fluid and we are closely monitoring developments. As a result, please note that our outlook excludes any potential impact from COVID-19. Taking these factors into account for 2020, we expect revenue to be down in the mid single-digit percentage range, and comparable retail sales to be down in the low single-digit percentage range.
Net income to be in the range of $38 million to $54 million, or $0.41 to $0.58 per share, and adjusted EBITDA to be in the range of $250 million to $270 million with interest expense of $104 million to $106 million for the year. We are planning to invest approximately $65 million in capital expenditures, with approximately half invested in our retail segment and half invested in enhancing our manufacturing and distribution capabilities.
In terms of our quarterly results, during 2020, we expect our comp sales declines relative to 2019 to be roughly similar across the year. For all other detail around our outlook, please refer to our press release. And with that, I'd like to turn the call over to Brad.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Thank you, Todd. Before I dive in, I want to say that I am incredibly excited for the opportunity to lead this fantastic organization. I'd also like to take a moment to thank Jim for his leadership of the business over the last 24 years. Under Jim's stewardship, Party City has firmly established itself as an industry leader with a differentiated vertically integrated wholesale business. I greatly look forward to working alongside our Board, our management team and our very talented employees as we focus on executing against our strategic priorities to drive sustainable long-term growth. I firmly believe that we have a great platform in place.
However, I'm also acutely aware that customer needs and shopping experiences are constantly evolving toward an organization, we must make strategic changes to adapt to. In this spirit, over the last several months, I've had the opportunity to roll up my sleeves on our retail business and work closely with the team to identify the areas where we can improve. These opportunities span merchandising, marketing, store operations and e-commerce to increase our relevance to our customers, improve our value perception, driving engagement and elevate our customer experience with the Party City brand.
While I shared some initial observations with you on our retail business last quarter, today I'll recap the five key retail initiatives we are focused on and the actions we are taking to drive growth and recapture momentum. Number one is developing a more relevant in-store experience. We believe our stores can be overwhelming and time-consuming to navigate, which provides a natural opportunity for us to simplify the shopping experience in order to better meet the needs of our customers. This begins with piloting changes to the in-store experience through curated product assortments, reduced inventory, new store layouts and product adjacencies along with new services and experiences.
These changes will help de-clutter the store and also provide the customer with a greater assortment of products that are presented in a more visually appealing way. Building on the insights we learned from a successful two store test in December, later this month, we will launch the first three of what we plan to be 30 to 45 next generation stores. These stores will be a combination of remodels, relocated stores and new stores executed in 2020. In addition to reducing SKUs, inventory reductions and product adjacency changes, we will be recalibrating these store layouts to shop-in-shop concepts, focused on end use, which moves us away from the current long grocery style aisles.
These shop-in-shop concepts will include kid's birthday party supplies and favors, party hosting products like colored tableware, and serveware, the costume shop for year-round wearable products and candy.
The biggest focal point will be balloons, including a separate checkout to provide balloon customers with more personalized service and speed of transactions for non-balloon customers in the existing queue. These stores will also have balloon delivery, party planning services and digital experiences available, taking us to the next level in terms of creating differentiated customer experiences. We plan to extend this pilot to two markets in Q2 2020, which will allow us to further test our experience, offerings and gain deeper insights into consumer preferences to better inform our go-forward in-store strategy.
Number two is wedding balloons. Balloons are a key differentiator for Party City, and we have an unparalleled foothold, given our numerous licenses and unique manufacturing capabilities, providing us with a clear and achievable opportunity to better leverage our platform. We will incorporate relevant services to maximize our balloon opportunity as well as the ancillary categories we know this important purchase drives. Our goal is to significantly enhance the balloon customer experience to drive increased sales, transactions and average order value, which have begun with two key initiatives.
First, we began piloting balloon delivery service with the delivery partner in a few markets starting in December 2019. Next, we rolled out our Balloon 365 training to all stores in January 2020, and also certified experts in every store in February. Our initial results are exceeding expectations and driving incremental sales. And we're currently planning the full chain wide rollout in Q2. Number three is, address value perception in key categories. In reviewing our portfolio of categories, we believe there is a tremendous opportunity to drive increased sales volume and margin dollars across our product portfolio.
Accordingly, we have taken a close look at our pricing to determine areas where we think we can more effectively meet the needs of our customers and drive sales. For instance, solid paper and plastic tableware is an important business for us. This is a heavily shopped category for our customer, as evidenced by the fact that tableware is almost 20% of our sales and in more than 40% of baskets. Beginning last September, we began strategically lowering prices and we're pleased with the results in increased units and gross margin dollars. We continue to seize comp sales increases in the baskets that includes solid tableware, which is the desired result.
We've already begun to test additional categories such as kid's birthday and balloons and as we look ahead, we will continue to review and test other key value indicator items and categories such as Halloween costumes. We expect it will take time for this effort to really start showing progress but we're pleased with the early returns. Number four is improve customer engagement selling culture in stores. Our customers are increasingly looking to create a complete party experience, and we need to do more than just sell party supplies.
There is a clear opportunity to play more of a party planner role with customers who are shopping our stores for party supplies. If we're to successfully capitalize on this growing trend, we need to get better at engaging with our customers in store. In order to do that, we have to pivot from a store operations and maintenance culture to a customer engagement and selling culture. This pivot is driven by leading, hiring and training store management and associates with a higher level of accountability for sales and customer engagement metrics.
In addition, as we reduce our SKU count in inventory levels, this frees up time for our sales associates to focus on customer engagement. We're also in the strategic planning stages of pivoting our party planner program to a physical and digital ecosystem of on-demand party planning professionals available via telephone, online chat or in person appointment in the store.
Number five is building on our omnichannel platform. We will continue to add key omnichannel capabilities to keep pace with customer expectations and to create a competitive advantage. As Jim mentioned, Buy Online Pickup In Store performance continues to be very strong, and now represents a significant portion of our total digital sales, but we see opportunity to enhance and improve multiple customer touch points throughout the process. While we are in the early innings of the test and learn phase for many of these initiatives, we're encouraged by the preliminary results we've seen so far.
As we continue to generate learnings and incorporate them, we expect to see the associated positive impact on the business become more evident in our financial results. That being said, these changes and their impact do take time. In addition to these five core initiatives, we're working on a number of ways to transform our operations, including utilizing new customer data, insights and analytics to develop new product and marketing tactics to drive acquisition and retention initiatives, accelerating CRM and loyalty initiatives to increase personalized engagement, continuing to explore store optimization opportunities to maximize market results and identifying enterprise wide savings to reinvest in our growth initiatives.
Party City's purpose is to create joy by making it easy to create unforgettable memories. We know we have our work cut out for us, but we also know the opportunity for improvement is substantial. I strongly believe that if we view our decisions through the lens of the customer while exercising the full benefits of our vertical product supply chain model, which is the unique power of this brand, we will enjoy great success as a fully integrated vertical retailer too.
With that I'd like to now turn it back over to Jim.
James M. Harrison -- Director and Chief Executive Officer
Thank you, Brad. In closing, I want to thank you all for joining our call today. I would also like to thank and recognize on more than 25,000 associates who are dedicated to our growth and success. While 2019 was an extremely challenging year, I believe that our response to these challenges will only serve to make us a better, strong company over the longer term. I'm excited about and look forward to seeing what Party City can do under Brad's leadership.
And with that, I'd now like to open the call up for questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Seth Sigman with Credit Suisse. Please go ahead.
Seth Sigman -- Credit Suisse AG -- Analyst
Hey guys, good morning. Jim, wishing you all the best and Brad congratulations and good luck to you. I wanted to first start with just the guidance, and Brad some of the color on the initiatives, it's really helpful. Just curious, and really, it's going to take some time for some of this to play out, but guiding to low-single digit negative comps for the year. I think this in our math, you have 100 basis points to 200 basis points or so from lapping helium and all the indirect impacts from last year. So I guess what are some of the other considerations we should be thinking about that offset maybe both positive and negative. Thanks.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So -- I appreciate that, Seth. Obviously, retail is continuing to evolve. I think many of the initiatives are not going to just be a flip of the switch. As I mentioned relaying stores, improving the value perceptions, those things, those things take time. We're going to be very disciplined and physically responsible. We're really in a test and learn environment and test and learn mode. We won't put with that testing, we won't put any harm in the business long term. In fact, they are all focused on how we create stabilization that can lead to long-term growth. So we see this more as a transition period. So those are -- that's how we see it at this point.
Seth Sigman -- Credit Suisse AG -- Analyst
So just, I guess it's early with some of the tweaks that you are making to the stores, there's a lot of testing and learning that's happening right now. Can you talk about the level of disruption I guess as you are making these changes and if that's one of the things that may be reflected in the guidance. And then also from a financial perspective, how do we think about sort of the level of investment to affect some of the changes that we're talking about here.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So there will be very little disruption, when you can create a test and control environment and you know as we pilot some of these major in-store changes, as I mentioned in my remarks, we're starting with three stores, we will gain a significant series of learnings, we'll try those then in a couple of markets where we can expand those learnings and then roll out additional stores based on the learnings. So we have a very organized and planned components to not just the pilot, but all five of the initiatives.
Relative to investment, it's very, very small and reflected in our guidance, whether it's the capital expenditures around pilot stores. Not only are we testing the sales impact but we're also understanding the cost implications and how to continue to control cost around those. So we can do them in a very physically responsible way. And when you think about price, like I said, where we're testing and learning related to the price. We're not proceeding unless they have a sales -- unit sales and family margin upside. So those are all very much under control in any of the other investments are really minimal or if they have any relative of investments, we are self-funding them.
Seth Sigman -- Credit Suisse AG -- Analyst
Okay, thanks for that. And my follow-up question, just to clarify on the guidance that COVID-19 impact. I think you said that there is no impact embedded here. Is that related to both supply and demand and then if you can also just talk about what you are seeing from a demand perspective? I guess we're pretty deep here into the first quarter. So, any more color on, I guess the trends in the business on the back of what's happening out there.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So in terms of the guidance going forward, yes, we did look at excluding both supply chain and demand, what I'd tell you is we're hearing positive things out of our suppliers in terms of their ability to get back up and going, we continue to monitor it. I mean this is a very fluid situation, but Seth, at this point, feeling good about Q1 and continuing to monitor later in the year. In terms of demand, I'm going to say it's just way too early. I think we've seen a big ramp-up in the amount of news, just very recently and again, we're continuing to monitor it keeping obviously safety of our customers and our associates toward the forefront of what we're doing. And we will just have to wait until we get further into the quarter to really understand.
What you heard in the guidance was low single digit comps across the year and then relatively even for us across the quarters, which means that reflected the run rate that we were seeing before any concerns about the coronavirus.
Seth Sigman -- Credit Suisse AG -- Analyst
Okay, understood. Thanks again, and best of luck to everybody.
James M. Harrison -- Director and Chief Executive Officer
Thanks.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Thank you, Seth.
Operator
Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Simeon Gutman -- Morgan Stanley -- Analyst
Thanks. Good morning, everyone. I wanted to ask first on your plans for debt pay down. Can you talk about what is slated for 2020 compared to 2019?
Todd Vogensen -- Chief Financial Officer
Sure. And I think going back to the comment that it's a very fluid situation out there, and as I've been here, frankly less than six weeks, we have a great deal of availability under our ABL. And I'd like to have more of a chance to go through and study overall cash position, overall working capital position before I get too far down the path of throwing out numbers. Mostly we wanted to reiterate that managing our debt -- managing our debt level was still a priority in terms of what that means in specific numbers, I want to come back to you a little bit later in the year on that.
Simeon Gutman -- Morgan Stanley -- Analyst
Fair enough. I don't know if you can speak at this high level but whatever the business generates in excess free cash beyond the capex, which we heard about and within some of the plans that Brad laid out, is that a fair assumption to assume the excess free cash is going to be used for debt pay down, or that's too simplistic.
Todd Vogensen -- Chief Financial Officer
I think it's a little bit early in my tenure for me to get too far into that. Clearly, we are looking at debt pay down as our number one priority. For excess cash, how much that looks like, again at this point having a little bit of extra cash on the balance sheet given the environment, doesn't scare me, and it's going to be more a matter of degree. And yeah, we have to come back to you with more detail as I get more of a chance to study it.
Simeon Gutman -- Morgan Stanley -- Analyst
Got it. Fair enough. And then I want to ask Brad, given the nature of the business and how it performed in 2019. I guess what you can always want to go faster, do you feel that in this test and learn mode, you could go faster or you're moving at the appropriate pace just given that you're doing a lot of things at once and you don't want to move any quicker, and you're not at the stage yet to deploy even faster at this stage.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So based on learnings over the last seven months, I have a level of confidence in the five initiatives that we've laid out and have data insights that see that those are -- can have a positive impact on our results. Related to rate and pace, all of those are very fluid, we're getting new learnings on a daily basis and a weekly basis. And I would say relative to how much we sort of push on the gas or the brakes relative to each of them is sort of a week-to-week, month-to-month thought process. I'm not -- I don't -- as I said to Seth, I don't think there's any risk at the rate and pace that we are anticipating. I would like nothing more than the ability to find some excellent results in those that exceed expectations and have the ability to go faster and if there are elements of it where we can go faster, we certainly will.
Simeon Gutman -- Morgan Stanley -- Analyst
Great. Okay. Well, good luck. Thanks, and all the best, Jim.
James M. Harrison -- Director and Chief Executive Officer
Thanks so much.
Operator
Our next question comes from Rick Nelson with Stephens. Please go ahead.
Richard Nelson -- Stephens Inc. -- Analyst
Thanks, good morning. My congrats to Jim, Brad as well. So I'm curious how you plan for Halloween at this point? A lot of uncertainties around COVID-19, do you do anything different at this point?
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So at this point, we're not focused on doing anything different than the plans that we have been in works because we're not, we're obviously have a strong eye on our supply chain and keep a constant view of that. I would say the changes that we're focused on primarily around the sales opportunities that exist in Halloween. We are clearly understanding of the consumer insights that tell us that consumers want more of a do-it-yourself sort of opportunity to shop. We know we can do a better job there. The opportunities for more of a mix, match, make it your own, given those do-it-yourself trends are opportunistic for us, we have the opportunity and are focused on making our assortments more relevant.
In some instances, I think we've been too reliant on license product and we have the opportunity to introduce more do-it-yourself type costumes and more trend right costumes. We have an offering that is clearly different than what others could execute in the marketplace and the learnings that we've had that will be reinforced in the way that we execute in-store merchandising to reinforce that mix and match opportunity that exists in costumes and the accessories that really make them customizable and so we have very distinct plans to make that exciting and more shoppable and more experiential for the customer.
And in addition, we're focused on the marketing around Halloween as well. We can build the online experience and we can build content that again reinforces the strength we have in the marketplace. So relative to Halloween, we continue to plan, we continue to plan against the opportunities that we identified from last year and look forward to, it's going to be interesting. The IP lined up for 2020 is not as positive. The Presidential Election timing will be interesting as Halloween is just three days, prior to Halloween. But we also know that traditionally Saturday Halloween provides a tailwind. So we will be clearly focused on this trend, newness, innovation and in looking to improve on our Halloween performance last year.
Richard Nelson -- Stephens Inc. -- Analyst
Thanks for that color, Brad. Also curious how last couple of weeks in these markets have seen front and center Seattle and San Francisco with regard to store traffic sales, if you could provide any color around that that would be helpful.
Todd Vogensen -- Chief Financial Officer
Yeah, this is Todd. And again I think we are early on, it's tough to give you a day or two of measurements at this point, because I think it can be very misleading. So we just decided to not give specifics around the demand side of the equation at this point. And that's probably the best I can tell you right now.
Richard Nelson -- Stephens Inc. -- Analyst
Okay, fair enough. Also, I mean if you could speak to the covenants, where you stand with those?
Todd Vogensen -- Chief Financial Officer
In studying our debt, as I have before, I have to tell you I've been really impressed with the way the company set up the debt agreements, the ABL agreements. The covenants are, I would call them covenant very light, really the one that's most applicable and there is the fixed charge coverage ratio, which we are very well within the bounds of right now. So covenants, not really something at this point that's a concern.
Richard Nelson -- Stephens Inc. -- Analyst
Okay, thanks and good luck.
Todd Vogensen -- Chief Financial Officer
All right, thank you.
Operator
Our next question comes from Karru Martinson with Jefferies. Please go ahead.
Karru Martinson -- Jefferies -- Analyst
Good morning. Just looking at the guidance here, the $250 million to $270 million, when we last spoke, we talked about having a roughly $45 million tailwind for the helium, for the capital costs. So obviously a big swing here. Can you kind of bridge us to what has changed in your thinking from just a few months ago to today?
Todd Vogensen -- Chief Financial Officer
Having that I've been here a few months ago, I'm a little bit handicapped but what I can tell you, we are seeing positive impact in balloons. What we're also seeing is the effects of the things Brad has been talking about today that in the core underlying businesses, we have some opportunity as retail has quickly changed and those things probably were not as evidence as helium was so front and center as we went through last year.
So what we've really baked in is more of what we would consider to be the core run rate of the business that then we can build off of and so you're seeing that low-single digit negative comp rate as part of the core and then as these initiatives start building in, you would expect to see a change in that trajectory.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
I would add to that a bit, it's been fantastic to have the last seven months to really learn be a student of the business, understand it and further digest sort of how we got here where we are, and how we create the right path forward. I would summarize it by saying, I think we've struggled having a bit of a relevancy opportunity with consumers and as we've said before and I'll reiterate, we have not kept pace with consumer expectations to the level that consumers expect. And I think core in the five strategic initiatives that I laid out, our key components of how you established relevancy, regain relevancy and create momentum.
Karru Martinson -- Jefferies -- Analyst
Okay. And then when we look at the third-party balloon sales, what is the state of the helium market out for those guys?
James M. Harrison -- Director and Chief Executive Officer
Sure, this is Jim. When we look at the -- when we look right now at the third-party balloon business, it has definitely stabilized off of last year. The situation is improving, not just the Party City where we are back in stock on helium but also globally, the helium situation is improving and stabilizing, and we continue to believe that by the beginning of 2021, there should be ample supplies of helium available in the broader market to satisfy the needs of the consumers.
Karru Martinson -- Jefferies -- Analyst
Okay. And then when you look at your portfolio, be it manufacturing, any owned facilities or even geographies that you're looking at potentially for asset sales, or ways to bolster your liquidity?
James M. Harrison -- Director and Chief Executive Officer
As I've mentioned before, Karru, I think understanding our portfolio, reviewing our portfolio, reviewing our portfolio in the context of what is the long-term strategy for the business, and how do we leverage and plan those investments and those assets to maximize the value to shareholders and to bondholders. It is an active process that continues. I mean last year, as you know, we -- the two financial engineering transactions. One, the Canadian Tire transaction, the other being the sale leaseback. And with Brad, and with Todd, part of my role going forward is to try and work with them and provide my thoughts around the very subject you're raising. But in terms of saying, is there something specific that we're doing, we're thinking about it would be far, far too early to talk about that.
Karru Martinson -- Jefferies -- Analyst
Thank you very much guys.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Thank you.
Operator
Our next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead.
Joseph Feldman -- Telsey Advisory Group LLC -- Analyst
Hey guys, good morning. And wanted to ask, I know that obviously the capital expenditures are stepping up, it looks like a fair amount to the $925 million to $975 million that's in your guidance. I mean, is that what we should think about this level for the next couple of years or will it even step up further given as you do these tests and then start to expand and roll them out further, should we see even a step-up there, and then how does that impact debt repayment, if that's been jumping up a bit higher?
Todd Vogensen -- Chief Financial Officer
Sure. And just to clarify, we are looking at $65 million for our targeted capital expenditures next year. Is that what you were referring to just to make sure?
Joseph Feldman -- Telsey Advisory Group LLC -- Analyst
Yeah, yeah. Your capex. Yeah, yeah.
Todd Vogensen -- Chief Financial Officer
Yeah. So $65 million next year, which shouldn't be a significant step up, it really does reflect the things we've been talking about. So about half of our investment is in stores and you're seeing benefit or cost of new stores where we think there is good payback as well as relocations and the types of things that we're building into the test we're doing. So it should not be a significant step up and that's -- a number of things I've been high really impressed with here, one of which is that fiscal discipline around making sure that we're not going out and getting ahead of ourselves on our cash investments. So you should really continue to see that.
Joseph Feldman -- Telsey Advisory Group LLC -- Analyst
So just how much does it cost to do one of these remodels done, like this full-on remodels? I'm just surprised that you're not going to have to step up the capex.
Todd Vogensen -- Chief Financial Officer
So the remodels are fairly light relative to capital from the standpoint that there is not a lot of incremental fixtures that are being put into them and we are, where there are incremental fixtures, it's really around balloons and enhancing the balloon experience. Otherwise, it's more of a store relay than it is anything else and a refresh. So they are not capital intensive. It's also fair to think about the commercial real estate market and the desire for landlords to have additional traffic in their stores and their willingness to invest in addition to us.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
I'll throw in one last thing, as I think the team has been very disciplined about trying to take advantage of any new store opportunities that are coming up or relocations or already slated remodels, so that we can piggyback on top of investments that we are already going to make, and we're already a part of the plan to build in any investments that we are planning to do on next-gen. I wouldn't put a single number on an individual store, they obviously are very depending on the types of agreements that you can reach an investment level, others, landlords may want to make as well. I would also say that part of testing and learning is not only what is the positive customer experience in sales list in generation, but also the ability to manage the costs and reduce the cost based on the learnings you get as you go along. So we'll have a much as we roll these out over the next several months, we will gain a greater insight as to what the long-term investment might look like.
Joseph Feldman -- Telsey Advisory Group LLC -- Analyst
Got it. And then another kind of question that your third quarter, you guys were pretty well baked after Halloween. You gave some guidance, I think at the low end, we're going to be like $0.84 in EPS. I mean we're at ICR and spoke like what happened that was so different from where we in the street were at, in your guidance like it just seems like a lot of stuff had to happen that you probably knew about that didn't come out earlier. I guess I'm kind of confused as to what was the big change.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So I would say from everything I've looked at gross profit margin was the big area that I moved toward the downward side more than we would have normally predicted. We went through a lot of promotional activities, we went through the course of December after we got through Halloween, we would have expected to see a little bit more improvement in areas like the solids, like the Christmas programs. And so when we didn't and when there was incremental promotions, those really flowed through to the bottom line very, very quickly.
Joseph Feldman -- Telsey Advisory Group LLC -- Analyst
Okay. Thank you and good luck with this quarter.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Thank you.
Operator
We have time for one more question and that comes from William Reuter of Bank of America Securities. Please go ahead.
William Reuter -- Bank of America Merrill Lynch -- Analyst
Hi, just a follow-up on Karru's question. When you look at your expectations for helium this year versus last year, I assume that you'll have increased sales due to not being out of stock as much as well as I think some lower sourcing due to the higher spot prices that you are paying on a portion of it last year. When you think about those gross margin dollars that you're going to achieve this year. Can you give us a sense of what you're expecting and what's baked into the guidance?
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Yeah. Our balloons overall will be a plus should be a plus to our overall business in 2020 not a minus. Helium, with helium shortage behind us, cost getting better sequentially, they will be higher overall in 2020. But we see them largely in line with the Q4 '19 run rate that we had. Our balloon business has been healthy, continuing to get healthier. It's a growing piece of our business. And so if we drive good sales comps in balloons that will offset any helium costs that we see being higher. We continue to watch as we gain insights and data around price elasticity at the balloon category and SKU level. We now have a very informed way to think about our prices, our ability to take some of our prices up, some of our prices down depending on those reads and elasticity. And so those are the things that we've thought about it and put into our guidance.
William Reuter -- Bank of America Merrill Lynch -- Analyst
That's helpful. I understand that given Todd's relatively new there, making assumptions on working capital and debt repayment, might be a little bit challenging. I guess is it fair to say that you will allocate all of your free cash flow to debt or given the share price being a little depressed, would you consider that as well?
Todd Vogensen -- Chief Financial Officer
I think it is early. We're continuing to look at what that right amount of free cash flow and cash to go toward debt would be. Debt pay down is the number one priority, for what it's worth. This is a year where we do expect to continue to improve our productivity on inventory. So as we look across the year, we don't see our working capital needs spiking. We expect to continue to push on inventory turns, inventory gross margin return on investment and so that means we should not see massive needs out of working capital, in terms of again, how much of that exactly goes to debt pay down, it's just a little bit early for me to commit.
William Reuter -- Bank of America Merrill Lynch -- Analyst
Okay and then just lastly, given relatively soft retail traffic, have you found any opportunity to renegotiate leases or do you expect that that may be an opportunity this year to kind of reduce operating costs.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
So it has been an opportunity in the past as we thought about the store optimization that we've done, we did in 2019, we'll continue to do in 2020. Certainly negotiating lease terms and rent prices are all a part of our ongoing initiatives to reduce those expenses and we are actively participating in those discussions on a consistent basis.
William Reuter -- Bank of America Merrill Lynch -- Analyst
All right, thanks for taking the questions.
James M. Harrison -- Director and Chief Executive Officer
Thanks.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Brad Weston for any closing remarks.
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
I'd like to thank each and every one of you for joining us. Todd and I are available to speak with you. I am truly excited and passionate about the opportunities that lie in front of us, which are truly great. So thank you everybody.
Operator
[Operator Closing Remarks]
Duration: 60 minutes
Call participants:
Ian Heller -- Vice President And Associate General Counsel
James M. Harrison -- Director and Chief Executive Officer
Todd Vogensen -- Chief Financial Officer
Brad Weston -- President of Party City Holdco Inc. and Chief Executive Officer of Party City Retail Group
Seth Sigman -- Credit Suisse AG -- Analyst
Simeon Gutman -- Morgan Stanley -- Analyst
Richard Nelson -- Stephens Inc. -- Analyst
Karru Martinson -- Jefferies -- Analyst
Joseph Feldman -- Telsey Advisory Group LLC -- Analyst
William Reuter -- Bank of America Merrill Lynch -- Analyst
