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Party City Holdco Inc (NYSE:PRTY)
Q1 2020 Earnings Call
Jun 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 First Quarter 2020 Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Ian Heller, Vice President and Deputy General Counsel. Please go ahead sir.

Ian Heller -- Associate General Counsel

Thank you, operator. Good morning, everyone, and thanks for joining us. This morning we released our first quarter 2020 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 Brad Weston, our Chief Executive Officer and Todd Vogensen, our Chief Financial Officer. We'll start the call with some prepared remarks by Brad and Todd 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 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 toward forward-looking statements whether as a result of new information, new 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 Brad Weston.

Bradley M. Weston -- Director and Chief Executive Officer

Thanks, Ian. Good morning, everyone, and thanks for joining us today. To say these are challenging times for our country and indeed the world is an understatement. The COVID-19 pandemic has swept across the globe, exacting a heavy human toll, but also showcasing the bravery, dedication and compassion of the people on the front lines of this battle, including our first responders, healthcare workers and medical providers. We are deeply grateful to them.

More recently, the appalling event of the last few weeks served as a tragic reminder of the deep-rooted and long-standing issues around racism in our country. We need change. At Party City that starts by listening to our associates and customers as we work to develop a meaningful and sustainable approach to helping bridge these painful divides. Against this challenging backdrop, our team members have demonstrated great resilience and flexibility. And I want every one of them to know how grateful we are for their efforts. As we navigated the last several weeks and continued to respond the changing conditions, we do so with our amazing team as well as our customers at the center of our decision making.

I will now provide an overview of the company's response to the COVID-19 outbreak, followed by an update on our key strategic initiatives. Then, Todd will review our first quarter financial results and share some go forward thoughts. Our response to COVID-19 in navigating the current environment has been centered on three key areas. One, supporting the safety and well-being of our employees and customers. Two, preserving our financial health and liquidity. And three, adapting our strategic initiatives within the context of the current environment.

Beginning with the safety of our employees, which has been and remains our top priority. With this in mind, we acted swiftly and closed our stores on March 18, while our headquarter associates were asked to work from home. During this time, our partycity.com website remained fully operational and we quickly opened for curbside pickup in 300 stores where state and local regulations allowed. In addition, contactless delivery was made available to customers by associates who followed strict health and sanitation protocols for their safety and the safety of our customers. Increased health and safety protocols were also followed at our distribution and manufacturing facilities that were operational.

Second, preserving our financial health and liquidity was and remains the top priority. And accordingly, we took swift and aggressive action on cost, capital deployment and working capital management, which Todd will review next.

Moving to our initiatives. We remain focused on the five critical strategic initiatives to stabilize the retail business that I discussed on our year end call in March. They represent our biggest opportunities to drive increased relevancy with consumers because they focus on how we engage with our customers to make it easy for them to create unforgettable memories. While the reality of the backdrop has shifted the timing of some of our priorities, the strategy remains the same. We have adapted quickly to changing operating conditions, modifying our initiatives to increase our relevancy in an environment where social distancing could remain a priority.

Heading into Q2, piloting our new store format was a key priority, but the pandemic necessitated a quick pivot. Given the importance of expanded customer fulfillment options that allow for contactless purchases, we accelerated crucial elements of our omnichannel initiatives, including curbside pickup and same-day delivery with balloon pickup and delivery key to our efforts. I'm proud of the way our teams have responded and the speed and agility with which these initiatives were launched and expanded in a closed store environment.

Let me give you an update on each of our key initiatives. Number one, developing a more relevant in-store experience. We plan to open our first three next generation prototype stores at the end of March, which had to be postponed. We are addressing the fact that our stores can be overwhelming and time-consuming to navigate. In these first prototypes we're piloting changes to the in-store experience, including a new shop-in-shop store layout with improved product adjacencies, added a new more curated product assortments, reduced inventory as well as new services and experiences. By deep cluttering the stores and providing a more edited assortment, the customer will have a store environment that is easier to shop.

The most focused shop would be balloons, including a separate check-out to provide balloon customers with more personalized service, while speeding up transactions for non-balloon customers in the existing queue. The first three pilot stores are now opening this month and we plan to pilot 10 to 15 next generation prototype stores this year. I look forward to providing our customers the new brand experience and these critical next-gen store pilots will provide new customer insights that will inform how we shape the in-store experience into the future as we make strategic decisions on how our stores best serve consumers' needs. I am confident we will optimize our learning as we plan for a broader rollout in 2021.

Number two, winning in balloons. Balloons are a key differentiator for Party City with our unparalleled assortment and innovation in large part due to our unique manufacturing capability. We have the opportunity to better leverage this advantage with the improved in-store experience as well as an improved digital experience and home delivery.

On the heels of our successful balloon delivery pilot expedited by the current environment, we now offer balloon and total party delivery capabilities at over 500 store locations. We're very encouraged by the customer uptake of our curbside and delivery services, which are driving increased balloon transactions and average order value. A key component of winning in balloons is successfully integrating the category in seasonal celebrations. A great example of this is the graduation season where we are seeing strength, both online and in our stores. Our partycity.com graduation theme balloon sale have almost tripled versus last year. Drivers of this growth are a combination of innovative new products, such as our new 50-inch heirlooms item as well as compelling value on bundles of traditional best sellers.

Number three, addressing price value perception in key categories. Last fall, we embarked on this initiative with the implementation of price reductions in our solid color tableware products and the results have been very strong, with margin dollars turning positive within months of the price actions. We're leveraging those learnings as we execute go forward action plans to capitalize on the opportunity to sharpen our value perception in the highest impact categories. We're prioritizing categories and SKUs that the key value indicators, a strong price elasticity and are highly competitive.

Building on the success we've experienced, we will rollout additional price reductions over the next few months. We will mitigate their margin impact by simultaneously reducing our promotional spend. As an occasion-based retailer, we need to drive trust with consumers through the right price value every day rather than attempting to drive transactions through short duration promotions that are only relevant to select customers.

Number four, improving our customer engagement selling culture. Improving customer engagement and our selling culture is critical. But in a closed store environment, we had focused on initiatives and actions to improve engagement through our marketing messages, our merchandising approach as well as our digital initiatives, including expansion of fulfillment options for customer orders.

To date, while our overall marketing budget has been drastically reduced given the environment, we have increased our performance spend year-over-year and our returning seven times returns on our dollar in conversion to sales. Even as we pulled back on overall marketing spend, we've been working to ensure that our marketing messages in digital and social channels are particularly relevant to the current environment and align with our enhanced digital and omnichannel focus.

During the time when our stores were closed and stay at home orders were in place we adjusted rapidly to meet customer needs in the moment. While people were social distancing and birthday parties showers in other group celebrations were being canceled, we quickly pivoted, adapting our offering and go-to-market approach to meet our customers' evolving needs and enable them to still celebrate live's important milestones in a safe manner

We offered an Adventure in a Box to help parents with bored kids at home and Birthday in a Box as well as drive-by birthday products that included value add how-to instructions with video support to aid customers in adapting to these new celebration methods We also saw a spike in customer interest in personalized products such as lawn signs and banners used to celebrate loved ones. As we moved into graduation season, we've continued to augment our online assortment to adapt to new ways in which these celebrations are taking place.

As part of our effort to focus messaging on the occasion rather than a single SKU. We created several web and marketing execution, featuring graduation focus been yet, which allows us to be increasingly inspirational an aspirational instead of just transactional on our site. These interactive vignettes were featured in our marketing communication across email, banner ads and our homepage, showcasing 10 plus SKUs arranged an inspirational setting, a room with tableware balloons personalized signage in a series of papers that once it's scroll over to see the details and click to add to cart.

Customers responded well as they could both relate to and shop this approach with greater ease. In May, we experienced parts of approximately 50% in graduation in conversions in the low-teens versus low-single-digits last year. Improving engagement with our customers through digital communication methods in an increasingly personal way will drive loyalty and increase transactions over time.

Number five, build on our omnichannel platform. Our focus has been on ensuring we offer our customer multiple options for their purchases in addition to our online stores. As I discussed earlier, an area where we need rapid progress in a short amount of time was the enabling and expanding of customer fulfillment options despite a closed store environment. Our partycity.com website remained fully operational while our stores were closed. Within a few weeks of closing, we piloted curbside pickup in a handful of stores and quickly expanded the service where we were allowed to under local regulations. We saw strong buy online pickup in store growth in 2019 with sales from this channel up approximately 90%. After quickly expanding our curbside pickup capabilities, we saw buy online pickup in store growth of over 500% in May, as customer stop convenient and touchless ways to secure product.

With the addition of curbside pickup, we have seen buy online pickup in store penetration remains significantly higher than prior year in our reopened stores, and we believe this trend will continue as customers seek more convenient options. Curbside pickup is also helping drive our balloon business, which represents almost 50% of demand through this channel. We now have curbside pickup available in all stores and offering delivery including balloons in the majority of them.

Additionally, we continue to make improvements to our website, including SKU level delivery detail options and expanded delivery window options by time and day of the week. While curbside pickup and delivery were in our plans were being piloted, we reacted swiftly to pivot to the customers' needs and accelerate their launch and expansion. We will continue to enhance our capabilities with further evolution of the physical and digital shopping experience that will drive increasing share of wallet.

Our first quarter concluded at the end of March, which certainly feels like a lifetime ago. Todd will discuss our first quarter results in a moment, but before I turn the call over to him, I want to give you an update on our store reopening and what we are currently seeing. We have taken a measured and phased approach to reopening our stores, rounded in the health and safety of our associates and customers.

As of today, we have over 85% of our stores open. Productivity at these stores for the reopen period and including buy online pickup in-store is approximately 80% of last year's corresponding period volume on average with performance building to the reopen period in the most recent ways of openings outperforming the earlier ways. Hard to predict performance trends for the coming weeks and months, but we remain very disciplined in our approach to running the business, incurring expenses and spending capital.

On the wholesale side of our business, given the essential nature of some of the products we manufacture and supply to certain retailers like grocery stores, mass and dollar stores, all who were deemed essential with stores open throughout this period. The majority of our manufacturing and distribution facilities remained open throughout this crisis. We quickly implemented strict health and safety protocols at the outset of the crisis across our facilities and they remain in place. As franchise and independent retail customers reopen their stores and as customer demand increases for party supplies, sales from our wholesale business are recovering.

In summary, as I look at what we've already accomplished through the first months of the year on our customer-facing initiatives that underpin our five-pronged strategy to stabilize our retail business, I am pleased with the early results. Along with everything that is to come, I look forward to the growing impact of our initiatives, which will drive the success of Party City. The environment remains highly uncertain and we are managing liquidity and expenses with continued discipline even as we push forward on our key strategic priorities to drive business improvement.

And now, I'd like to turn the call over to Todd to discuss the first quarter results in greater detail.

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Thanks, Brad, and good morning, everyone. Today, I'll focus on the key highlights of our first quarter and recent performance and then I'll provide an update on our financial position. Full details regarding our first quarter 2020 financial results, please refer to our earnings press release and the accompanying slides, which are available on the Investor Relations section of our website.

As Brad just discussed, our number one priority throughout the pandemic has been the health and safety of our associates, customers and communities. As a result, we temporarily closed our retail stores on March 18. Through the end of February, our Party City brand comparable sales were down 1%, reflecting solid sequential improvement in year-over-year sales trends relative to the fourth quarter comp decline of down 5%.

Our results for the full quarter showed significant headwinds in March from COVID-19, including the closure of all stores from March 18 through the end of the quarter as well as the significant pullback in franchise and independent orders for our wholesale segment. Consolidated revenues for the quarter were down 19.3% or 19% on a constant currency basis. And brand comparable sales for the quarter were down 17.1%.

Our retail segment's first quarter net sales declined 20.3% and 20.2% on a constant currency basis with strong New Year's Eve and Super Bowl performance more than offset by the impact of COVID-19. Our wholesale segment was also negatively impacted in the last two weeks of the quarter as many of our third-party retail customers temporarily close their stores. Overall, net wholesale revenue decreased 16.5% in the first quarter or 15.6% on a constant currency basis.

From a profitability standpoint, adjusted gross margin declined by 320 basis points, primarily driven by a deleverage of occupancy and other semi-fixed costs in addition to increased healing costs, which was partially offset by reduced promotional discounts. Adjusted operating expenses declined by $13 million and was driven largely by the temporary store closures during the quarter. Adjusted EBITDA was $11.9 million compared to $51.5 million in Q1 of 2019. Adjusted net loss for the quarter was $26.4 million compared to adjusted net income of $1.1 million last year. And adjusted loss per share was $0.28 compared to adjusted EPS of $0.01 in the prior year.

Turning to our balance sheet. Ending inventory was down 17.5% year-over-year, primarily driven by a reduction in store count and ongoing inventory management. Importantly, the composition of this inventory is largely everyday in nature with most of the remaining seasonal component relevant to our consistent beyond the current year. As a result, we do not expect significant inventory exposure related to the COVID-19 disruption.

As we announced in our release on March 27, we made the decision to proactively drawdown $150 million on our $640 million asset-based revolving credit facility. As a result of the drawdown, at the end of the first quarter, we had $382 million outstanding under our revolving credit facility and total ending net debt was $1.76 billion. We had $194 million in cash and cash equivalents, which when combined with $71 million of borrowing availability, resulted in total liquidity at quarter end of $265 million.

In our announcement on April 8, we outlined several actions that we have taken to aggressively manage expenses, inventory and capital expenditures to help preserve our financial health and flexibility. From a cost perspective, we pulled levers across spending categories. These include, payroll expense. During the store closures, we made the difficult decision to furlough the majority of our team members. This included 90% of our store employees and 70% of our wholesale, manufacturing and corporate employees.

We continued to provide health benefits to furloughed employees. And we established the PCHI Employee Assistance Fund for both active and furloughed employees who were temporarily experiencing economic hardship due to the pandemic. Additionally, Brad and I along with the remainder of the executive team took temporary base salary reductions and the board of directors elected to forgo their respective second quarter cash retainers. We've also significantly reduced non-payroll expenses, including advertising and other store expenses.

In terms of occupancy, we're working closely with our landlords on rent relief. Important to note that while we've successfully negotiated payment deferrals, this won't materially affect our P&L in Q1 or Q2 as deferrals don't change the total cash payments over the life of the lease. To manage working capital and inventory, we canceled orders and negotiated receipt delays. We are grateful for the collaboration and partnership of our long-standing vendor partners, which has enabled the success of these efforts, and we made significant reductions on capital expenditures. Our 2020 capex forecast is now $35 million to $45 million, down from $62 million last year. Our capex in 2020 is focused on selected next generation stores that Brad discussed as well as high priority investments in equipment and technology. For our outlook, given the uncertainty around the duration and trajectory of the COVID-19-related disruption, please note that we're not providing additional outlook for 2020 today.

However, we thought it would be helpful to provide some data points recorded to-date. As Brad mentioned, we are reopening stores through a phased and measured approach with increased sanitation protocols. Our reopenings has been heavily concentrated in the last weeks of May and we're encouraged by the initial reopening results we've seen. Sales at reopened stores including buy online pickup in store are at approximately 80% of corresponding prior year volumes on average. Our e-commerce business, including BOPIS, generated record performance for the duration of our store closures and continues to deliver strong performance in this early phase of reopening.

Given the loss of store operating days for all of April and most of May, overall retail comparable sales trends through June 7 are down approximately 70% with wholesale third-party sales declining directionally consistent with this number. As of Sunday, June 7, our liquidity position was approximately $230 million, split roughly equally between cash and ABL availability. This coupled with the actions to conserve cash and bolster our financial position will help preserve financial health and flexibility as we continue to reopen stores and resume our operations.

Finally, on May 28, we are pleased to announce the execution of the transaction support agreement with holders of over 52% and principal amount of our $850 million in senior notes. The contemplated transactions would have the effect of reducing our total debt by $450 million as well as raising $100 million in new capital to support our operations and transformation initiatives. We expect to commence the exchange offered by the end of June. In summary, while these are challenging times and the environment remains highly uncertain, we'll continue to manage liquidity and expenses with discipline even as we push forward on our key strategic priorities to drive long-term business growth.

And with that, I'll turn the call over to the operator to start the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And today's first question ladies and gentlemen comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, good morning. I wanted to first ask about the bondholder agreement to the extent you can comment. I think we read that 98% of bondholders need to agree, just want to make sure that that statement is correct? And I see there was 52% in the first release, 54% as of today. So how -- I guess, what's the progression or how do you get to that full amount? And again, correct me if I'm wrong on any of those statistics.

Bradley M. Weston -- Director and Chief Executive Officer

You got to say those specifics, exactly right. So the way the process should work or that it was planned out was that we would get the initial buy-in of a significant portion of the bondholders, which we did at over 50%. And now we go through the process of the more nitty-gritty agreements that will go along with that and then have a launch of the transaction where that's the point at which you would hope to see a lot more of the bondholders sign up to get to closer to that 100%, and that's a fairly normal process. So at this point, we're really in the process of drafting those agreements. And then from there, the transaction if it goes forward would progress toward getting more and more of the bondholders signed up.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. Okay. And I guess, shifting to the business, I wanted to ask two -- just two parts and that will be my last question. First, the stores are at the run rate of running at about 80% of productivity. Can you talk about the range? I'm sure there's a lot of different stores at different stages of opening. If you can speak to the ones that let's say have been opened along in states that have been opened, I'm curious where those are normalizing?

And then I think Brad mentioned in the pricing strategy, lowering price offsetting with promotions. I guess, Brad, how well do you understand the elasticity of demand? I'm sure, well at this point. But are these are these categories where you think you're losing share or does not gaining as much as you should? And what are the categories in which you're going to be doing this?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. Thanks, Simeon. So related to the 80% in the run rate, the ones that open -- we started opening stores on May 1. The ones that opened on May 1, if you think about where we were at the time in that period, they opened at a lower base. As we've moved progressively opening stores every week, it continue to open at a higher base. And so the stores that have opened more recently, opened much stronger and are returning closer to normal levels. And so we see the progress. Geographically, it's been very interesting because there isn't really a geographical impact per se. But we do see that in areas that were most impacted by COVID-19, the stores opened a little bit slower. Where there was less impact to COVID-19, they opened at much higher levels.

Related to your pricing question, we have a very firm handle on elasticity at the SKU level and at the category level. As I mentioned, last time we invested in analytics team that really has supported this decision making. And we firmly believe that this investment had positioned us really to be more competitive and to gain share. It's hard to say in the past, whether our pricing has cost us or helped us, but where we have implemented this, as I mentioned in my remarks, we've seen very good results.

Related to the other categories, I'm not going to go into all the specifics of those categories. But I can tell you that they are the ones that demonstrate on multiple levels. One is, demonstrate opportunity on multiple levels, I should say. One is, high elasticity. Two is, they are highly competitive. And three, they demonstrate that they are either trip drivers or significant to the average basket, which really makes some key value indicators.

We started with our solid color tableware, as I mentioned before, back in September. While this -- while tableware is only about 17% of our total business, it's in more than 40% of the consumers' basket. And so it's a category that is a key value indicator because they do know on a relative value based on the competitive level.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay, thanks. Good luck.

Operator

Our next question comes from Seth Sigman with Credit Suisse. Please go ahead.

Seth Sigman -- Credit Suisse -- Analyst

Hey guys, good morning. Thanks for taking the question. I want to follow-up on those last points. So with the recent stores opening up a little bit stronger, maybe closer to normal levels, I think was the comment. Now, I believe that store sales and BOPIS as well, but not the rest of online, I just want to clarify that. So when you add it all up, should total comps be closer to flat or even positive in those markets just as you've seen them reopen?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. I don't want to go too deep into our overall second quarter results. But what I will tell you, you got it right. In this instance, we are talking -- we did include the number of BOPIS and/or buy online pickup at curbside along with store sales, so you got a real sense of what's happening at stores. Typically, going forward, we will think about this more as part of our digital number. When you add all the components of how consumers are shopping us, we're pleased with how demand is rebounding.

Seth Sigman -- Credit Suisse -- Analyst

Okay. Just in that context, when you look at the performance and maybe break it down between transactions and basket, obviously we're not in a normal demand scenario right now and maybe activities don't fully go back to normal, you don't have big gatherings necessarily, but you obviously still have events. Can you talk a little bit more about are there encouraging signs that maybe transactions are picking up, but you're not seeing the bigger baskets yet or how do we think about some of the components within that?

Bradley M. Weston -- Director and Chief Executive Officer

Great question, Seth. And let me -- it's mixed. And so let me break that down a little bit. When we see sales rebounding, it's transaction-driven. So if I say that sales to -- our stores start a little bit slower and then have picked up speed as we've moved through the past four weeks, five weeks, those are transaction-driven. I can tell you that we are seeing positive average order value. In addition, there is -- our thought process, there is that consumers for the sake of ease are looking for more one-stop shop. They want to make a condensed number of trips when they leave their house. And it's an opportunity for us to continue to message to consumers how much of their Party basket we can supply.

Seth Sigman -- Credit Suisse -- Analyst

Okay, great. All right. Thanks, and best of luck.

Operator

Our next question today comes from William Reuter with Bank of America. Please go ahead.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good morning. You mentioned in the current quarter you're seeing a 70% decline in wholesale revenues. Do you have a sense for how much of this is due to the store closures of those customers versus lower demand?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. I -- go ahead, Todd.

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Yeah. So I would say we said it's directionally consistent with retail comparable sales. And so there is different dynamics on the wholesale side. The independent and franchise retailers certainly are starting to open, just like we are. Probably didn't have the, as a general statement, benefit of some of the capabilities we had. So maybe off to a little bit slower start than our retailer -- our retail stores would be. But then we do have also on the wholesale side an amount we consider essential retailers, mass, Dollar store, grocery that have provided a nice base for us as we've gone through this. I think it's fair to say most people's purchases and those essential retailers have shifted a bit away from Party during the pandemic, but there was still a solid base there.

And so as we go forward that solid base continues or starts to expand and we are starting to see encouraging signs on the more franchise and independent customers. So similar in that, seeing the recovery happen, seeing that there is that base of our underlying customer that is returning and starting to show up in the sales trends.

William Reuter -- Bank of America Merrill Lynch -- Analyst

That's helpful. And then...

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. Just to add related to Party specialty and franchise, it makes sense as both our retail business and wholesale businesses are focused on the same end Party consumer for the most part. And based on this consumer discretionary spending environment, the two parts of our business are highly correlated in that way.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Yeah. That makes sense. And then just as a follow-up, you gave some helpful color on both the two channels. I don't think I heard, and I apologize if I missed it, but May e-commerce. Could you give us what that growth rate was or decline was?

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Yeah. We didn't get into that level of specificity, but certainly, stores being closed, there was demand online. Online, as for most people, works best when stores are open and it's treated more like an omnichannel effect. But the combination of buy online pickup in store, which obviously is buy online. And our e-commerce volume, we had a significant amount of volume going through our web. And that really provided a nice baseline for us as we went through the month.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. I'll pass to others. Thank you.

Operator

Our next question comes from Rick Nelson with Stephens. Please go ahead.

Rick Nelson -- Stephens -- Analyst

Thanks. Good morning. Brad, how do you plan Halloween now in the current environment? What are your thoughts about the upcoming Halloween season?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. Thanks, Rick. Obviously, we're not providing any forward-looking guidance. So we're not going to get -- I'm not going to get too specific with the numbers. Obviously, as people think about holiday seasons, whether it's Christmas or Halloween for us in the back half of the year, the situation is certainly fluid. Therefore, we're approaching Halloween really building in flexibility to meet different levels of potential demand. We bought conservatively as we went into this year and have appropriate carryover from last year into this year, 2019 and 2020. We plan to go into the Halloween season conservatively knowing we have the ability to refill in-demand product if demand comes in stronger than expected.

We certainly believe Halloween is going to happen in some form, and it is likely to be different regionally across the country based on what local community mandates and how different communities feel about their safety in relation to Halloween. We believe the kids costume business will continue even if it's celebrated in home. We anticipate Halloween decorating to continue. Probably the more unknown piece is, is what the environment will be for adult parties. And as we talked about following our last Halloween, we're definitely going to continue to expand our omnichannel offering and really be prepared to meet the consumer where the customer wants to engage whether in-store, curbside, online and through delivery.

Rick Nelson -- Stephens -- Analyst

Great. Thanks for that color. Curious, what you're seeing in the wholesale channel for Halloween. Would those orders be coming in at this time? Would that give you some color as to what you're seeing from competitors for the Halloween season?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. I would just say on our manufacturing and intercompany wholesale basis, obviously, a lot of our Halloween product we manufacture ourselves. And so we've continued to flow that product and we've continued to flow the product for our other wholesale customers and have a positive outlook regarding that.

Rick Nelson -- Stephens -- Analyst

Okay. And I also like to ask you about balloon category. It sounds like it's quite strong. If you could speak to the profitability there? I know you've got those new helium supply agreement, have a year-over-year margins compare in balloons?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. So the balloon category, as we've talked about before, is approximately 20% of our business, it's a high margin category. So it gets close to a third of our retail margin. Obviously, people are using balloons as a key component of their celebration, and we're seeing that pickup in that category in our retail business as well as our Anagram and wholesale businesses, which is encouraging. It wouldn't be a Party City call without talking of helium. And I can tell you that we are able to meet a 100% of our helium needs. As you said, we have multiple contracts with many vendors. They're in the one to five years depending on the helium vendor. And as we've discussed, we have two wells generating an increasing amount of helium. So we are very well positioned for the higher demand we're seeing in balloons that we anticipate will be ongoing.

Rick Nelson -- Stephens -- Analyst

Great. Thanks, and good luck.

Operator

Our next question today comes from Joe Feldman with Telsey Advisory. Please go ahead.

Joe Feldman -- Telsey -- Analyst

Yeah, thanks. Good morning, guys. So can you share a little more color on kind of what is selling? It sounds like balloons are starting to pick up and sort of makes sense to me, I guess, as graduation season and it's sort of an easy way to decorate. But like, are you seeing other of the traditional party categories. I mean, I would think it's a lot of little kids are not gathering for parties these days. Like, what are you seeing -- you're selling maybe through the product categories, if you could take us through that?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. And obviously, we've pivoted really as we've moved along and understanding exactly what it is that consumers want. Balloons and personalization are seeing a big boost in sales. Balloon's share of the business is up, as I just mentioned. Personalized products continue to perform well, up double-digits for the year. Demand is driven both by graduation and new opportunities such as drive by celebrations and increase in outdoor parties, and now as we've seen even virtual parties.

We've certainly learned that regardless of pandemic, people are still celebrating the special events in their lives. They're just doing it differently. And there is clearly, it looks like a pent-up demand around kids' birthdays as well now. As people are starting to gather more, we're prepared for -- we're prepared to react to consumer demand. And I think we've demonstrated that we can make marketing online and assortment shifts that consumers respond to really quickly.

Joe Feldman -- Telsey -- Analyst

Got it. Thanks for that. And then I guess, the other follow-up I had on the price investments that you're making, I guess how should we think about that impact on profitability going forward? I mean will it be a significant number? Is there a way to think about the gross margin? And what kind of headwind that might be on the gross margin going forward?

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

So we'll see ultimately how margin plays out and how consumers react to the product that we take price reaction or price reductions to. Typically, and when we do the testing for these or when we pilot these and do the analysis, we're addressing categories where we anticipate that there will be a unit increase and that unit increase can help mitigate any loss to sales or margin at retail. And then if you think about the broader vertical pipeline, our ability to realize increased margin with increased unit is much faster than the non-vertical retailer.

What's most important is how we're really delivering price value to the consumer. And that is, as I said, really shifting to building trust with consumers that we're priced right every day. I think in the past we've been over-reliant on promotions. And the challenge with promotions in our category, I think for example, at 20% off coupon. If you're not -- we're an occasion-based retailer. And if you're not having a party then that 20% coupon at a party store is not going to get you off the couch. We also don't believe it's necessarily giving us a day in day out, competitive advantage. It's really just spending margin dollars with the consumer that was going to shop you. So our strategy is really to invest in price where we believe the consumer sees the value in those products and really sets the tone for the entire assortment.

Joe Feldman -- Telsey -- Analyst

Got it. That makes sense. Thanks guys. Good luck with this quarter. Thank you.

Operator

And our next question today comes from Jenna Giannelli with Goldman Sachs. Please go ahead.

Jenna Giannelli -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for taking my question. I just had a few follow-ups. First on Halloween. I'm curious about how -- I know you said you're planning conservatively for the holiday and trying to build in some flexibility. But how are you changing your merchandising mix versus last year? I know that there were some headwinds around mix and not necessarily having the right product. So are there any products or categories you're reemphasizing or key sizing as we think about planning for this year's season? Thanks.

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Thanks, Jenna. I talked a little bit about this before and I'll reiterate some of it related to our key learnings coming out of last Halloween. And that's that when it relates to sort of costume in a bag, we did see a shift to online, both to within our own business as well as the competition. And what we're trying to do and how we merchandise the store and merchandise ourselves online this year is more of a emphasis on how you really personalize and customize a costume. We're seeing that as a broad trend, not only across sort of the DIY aspects in societies, but then also related to how people are addressing up and less reliant on costume in a bag.

So we're bringing our mixing, our costumes and our assortments in new and interesting way with vignettes around key categories in our stores and we're bringing all those accessories. And when you think about accessories, whether it's wigs or make up or masks and those kind of things. Closer to the costumes and mixing them in ways that help a customer put together a costume.

And so there will be greater emphasis on kind of mixing it, matching it, making it your own. In our marketing efforts in our merchandising and in our online experience we're going to lean into social media from a marketing perspective and influencers as well as how we prevail that message to consumers, supported by how to videos and the like. And those were some learnings we took out last year and believe we'll really resonate with the consumer as we thought about how we merchandise the assortment.

Jenna Giannelli -- Goldman Sachs -- Analyst

Hey, great. Thanks We hope everyone will be trick or treating this year. I wanted to also ask on just the health and the mix of the inventory right now. As we think about the balance of the year and the potential impact to margin, can you update us or give us a sense of how much do you feel like you have to clear through or that you would categorize as seasonal? And is there any opportunity to carry some of that more seasonal products over again, maybe into 2021?

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Yeah. Our inventory is largely evergreen in nature. And outside of Halloween, our non-Halloween seasonal business is a much smaller piece of our business than Halloween. And so almost all of it can really be carried, and we do not expect COVID-related writedowns or markdowns.

Jenna Giannelli -- Goldman Sachs -- Analyst

Okay. That's great. And then just finally, I know you talked about plans for closures. Can you update us at this point or maybe where you price to beat the end of the second quarter on the number of doors that are generating -- or present a fleet that's positive EBITDA at this point? And just remind us how many leases you have coming up for renewal in 2020 and 2021? And that's it for me. Thank you.

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. We have all of our stores reopened. And related to closures, we have -- we did announce earlier that we have 21 stores that we are closing this year. Those stores are currently opened for business and in their closure process. Related to overall real estate and how we think about closures, we're constantly examining the store fleet from a sales and profitability optimization perspective and we're regularly engaged in rigorous analysis at store level and at market levels as we look at market shifts co-tenancy, viability of centers and the opportunity to reposition stores. And we look thoroughly at what opportunities we have to recapture share if we do close stores and gain share where we can. It's really this process that has resulted in the store opening, store relocations and store closures in the past and that will continue. As we see it, stores are really required for curbside pickup, they facilitate delivery and they're certainly convenient for balloons. Related to leases, for the balance of this year and into next year, we have close to 100 releases that will be up for renewal and we will be aggressively negotiating those as we go along.

Jenna Giannelli -- Goldman Sachs -- Analyst

Great. Thanks so much.

Operator

And our next question today comes from Carla Casella with J.P. Morgan. Please go ahead.

Carla Casella -- J.P. Morgan -- Analyst

Hi. One follow-up on Jenna's question. Did you pay April and May rent? And if not, when we have to take that?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. So as a general statement, since our stores were not open and not generating revenue across April and much of May, we did not pay rent and had talked to our landlords about that. And same thing, as a general statement, for June. Now we've been in a lot of conversations with our landlords. We actually have agreements with them for about two-thirds, we're still papering some of that. But about two-thirds of our landlords we do have agreements to defer rents on several months worth of rent with most of that being paid back and deferred into 2021.

So it's an ongoing process, as you can imagine. But from a cash flow perspective, I think there has been good participation, good meetings of the mind on how we do manage cash flow for real estate in the short-term versus long-term. And so that's a ongoing process for us.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. Just on another deferral item. Are you changing or deferring any of your payables? I know they were relatively low this quarter, but I'm wondering if that changes next -- will be changing terms with any of your vendors coming out of COVID?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. I think for this quarter in particular, you noticed that they were down versus last year. I think that is purely timing. And so as we look forward, yes, we've been working with vendors, very proactively on either delaying shipments, delaying payment terms or negotiating different payment terms. And we've had a lot of our vendors for a lot of years and they understand the environment, have been very cooperative as we go through that process. So some combination of either delaying receipts to be closer to when the selling seasons are or extending out payments and a lot of cases. So I would expect that payables balance to increase as we go through the Halloween season just as a matter of course. And again, everybody that we're working with understands that cash flows out of premium at this point.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. And then I had a follow-up on the helium. You talked about how you've got ample supply and long-term relationships, but can you just talk about the overall helium pricing in the markets for thinking about how your customers on the wholesale side are seeing helium? And maybe how your rates may differ from the overall market rate?

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. It's hard to speak to what the overall market rates specifically look like. I believe we mentioned before that as we went into 2020, we were going to see in aggregate about a 14% increase in helium prices 2020 over 2019. obviously with fluctuations in demand, we continue to negotiate, renegotiate those and anticipate that not only ourselves will have 100% helium, but the helium market has largely recovered and available to really just about all of our wholesale customers as well.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. And that pricing still holds? We look for a 14% increase. And do you think your customers are seeing a similar? And is it playing even through the next few quarters?

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Our pricing is pretty even through the next several quarters. We will continue as our contracts expire to renegotiate those. It would be difficult for me to project what the market is paying.

Jenna Giannelli -- Goldman Sachs -- Analyst

Okay. And how much of your supply is kind of from your own captive supply that you talked about?

Bradley M. Weston -- Director and Chief Executive Officer

That fluctuates geographically and fluctuates overall. So hard to pin an exact number on that. It moves as we helium has to be moved around geographically. And so we optimize contracts and wells sort of intermittently.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. And then on the balloons.

Bradley M. Weston -- Director and Chief Executive Officer

Just to clarify, the two combined give us more than 100% of our anticipated needs.

Carla Casella -- J.P. Morgan -- Analyst

That's great. Okay, great. And then just on the balloon front, do you have a sense for how much of the balloon business for the spring events is with overall canceled because of the event cancellation versus what we picked up in just later, maybe in second quarter was any of that demand shifted from 1Q to 2Q? I know our graduation business is on back, it's just

Bradley M. Weston -- Director and Chief Executive Officer

Yeah. Since we really -- COVID-19 store shutdowns happened just two weeks prior to the end of our first quarter. I don't think that -- so events moving from one quarter to the other isn't necessarily as relevant as the fact that people buy balloon pretty close to need if you think about how long balloons filled with air lasts, they don't last as long. Helium balloons in foil lasts longer. People buy very close to need.

So we believe what we're seeing is balloon purchases for parties and for celebrations and events happening in the next two days relative to when they're purchased. Certainly graduation is a usually more of early June event. Our numbers would say that customers have pushed some graduations out, I think we all see that in the news as well and are experiencing that ourselves. The graduation is -- it has been extended event, but as we've reported graduation has been a very healthy part of our current business.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. Thank you so much for all the detail.

Operator

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn it back over to Brad Weston for any final remarks.

Bradley M. Weston -- Director and Chief Executive Officer

Thank you everybody for joining us today. In closing, in what has been an unprecedented operating environment, our team has really stepped up to the challenges, responding swiftly and aggressively, taking the necessary actions to effectively navigate this crisis period. We did this while simultaneously executing against key elements of our strategic plan to transform the business and position it for longer term growth and market share gains. I personally want to thank each and every one of them for their resiliency and commitment during this incredibly challenging time and again thank you all for joining us today. Stay safe and well, and we look forward to updating you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Ian Heller -- Associate General Counsel

Bradley M. Weston -- Director and Chief Executive Officer

Todd E. Vogensen -- Executive Vice President and Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Seth Sigman -- Credit Suisse -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

Rick Nelson -- Stephens -- Analyst

Joe Feldman -- Telsey -- Analyst

Jenna Giannelli -- Goldman Sachs -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

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