Party City Holdco (PRTY) Q2 2021 Earnings Call Transcript

Party City Holdco (PRTY -60.00%)
Q2 2021 Earnings Call
Aug 05, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Party City Q2 2021 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] I'd now like to turn the conference over to Eric Warren the VP, treasurer, and investor relations. Please go ahead.

[Technical difficulty] Pardon me, ladies and gentlemen. It appears we have lost connection to our speaker line. Please stand by while we connect. Thank you for your patience.

Pardon me, ladies and gentlemen, this is the conference operator. We've reconnected the speakers and we'll go ahead and continue. Thank you for your patience.

Eric Warren -- Vice President, Treasurer, and Investor Relations

Thank you, operator. Good morning, everyone, and thanks for joining us. This morning, we released our second quarter 2021 financial results. You'll find a copy of the press release on our website at investor.partycity.com.

Now, I'd like to introduce you to our executive team who are here on today's call. We have 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 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 our earnings release. And with that, I'll turn the call over to Brad Weston.

Brad Weston -- Chief Executive Officer

Thank you, Eric. Good morning, everyone, and thank you for joining us today. I'll begin our call with a review of the highlights of our second-quarter performance. Then, I'll discuss the operational progress we're making against the strategic priorities that support our purpose to inspire joy and make it easy to create unforgettable memories.

Todd will provide more detail on our financial performance, as well as some outlook commentary before we open up the call to your questions. Our second quarter was better than expected. With consolidated total sales up 110% to $536 million. Retail sales were $444 million, with brand comparable sales increasing 118%, or 19% relative to 2019, and our wholesale business was up 30% year over year for the quarter.

During the quarter, we anniversaried the bulk of the pandemic store closures in April and May, with April being the most impacted in Q2 2020. The momentum we saw in March continued into Q2 as the economy opened up and restrictions subsided, driving an improvement in the ability to celebrate. Overall, relative to Q1, we're very pleased with the acceleration we saw in the business, the consistency we saw each month of the quarter in Q2, and the continued strength in our core categories. Compared to 2019, which we view as the most recent normalized year, given the pandemic impact on 2020, trends across the business were very consistent.

And this trend continued into July, with results for the month very solid compared to both 2019 and 2020. It feels very encouraging to highlight the quarter to mention our performance was broad-based. We, again, saw a strong performance from our core everyday categories, which continues to bode well for us, given consumers rely on Party City most for everyday core celebratory products. Or seasonal business performed better than during the pandemic and continues to improve as people return to celebrating seasonal holidays they didn't celebrate last year.

In Q2, we were particularly pleased with the performance of graduation. Our teams consistently executed, providing the consumer with the assortments both in-store and online in a way that continues to better meet their shopping needs. We continue to see strong momentum. Within our digital business.

Digital continues to be a bright spot. The digitally enabled sales of strong double digits versus 2019, primarily reflective of digital strength in our core categories. Our wholesale business has begun to rebound, albeit not as strong of a rebound as retail. Canada has continued to lag, given the more restrictive environment in pandemic-related measures.

However, the recent easing of restrictions served well with the gradual recovery in that market. Instagram continues to perform extremely well, and we're increasing production capacity to keep pace. From a profitability perspective, we are pleased with the EBITDA increases year on year and versus 2019 as we leverage gross margin and operating expenses on our sales increase. And finally, we ended the quarter with net debt of approximately $500 million versus last year as we continue to remain committed to reducing debt over time.

I'll discuss the progress we made in Q2 on advancing the fundamental building blocks of our transformation strategy, which are product innovation and quality, in-store experience, being celebration-occasion obsessed, and focus on our North American vertical model. Starting with product innovation. As we focus on bringing product freshness and innovation to market, we continue to leverage consumer insights and data to drive our decision. In 2021, we've reset five categories: party favors, girl's birthday, boy's birthday, candy, and solid tableware.

These resets created the opportunity to introduce customer-driven innovation that is having a meaningful impact on the performance of these businesses. We introduced over a thousand new products across these core categories. A great example of the innovation I noted is our 20-person tableware kits now available in stores for $20. Our team identified a customer pain point of putting together table settings for larger events.

These new kits provide all her tableware needs to host a party of up to 20 people with color options that allow her to put her own personal stamp on the event at a great value. We also brought exciting innovation and graduation assortment with new yard signs that can be personalized, which helped the category grows 16 % over 2019. We're investing in product quality. Our work to improve product quality complements our work on innovation.

These improvements are resonating with consumers as a new product is delivered. We're capitalizing on the consumer's desire to purchase better quality across products. That can carry higher price points at similar or expanded gross margins. As an example, we have made improvements to both the product and the packaging for our tableware utensil.

The structural rigidity of the product has improved 26 % to combat breakage, which is a major frustration point for customers. Additionally, packaging was upgraded to allow for more convenient storage of any unused product, and it's recyclable. Moving to in-store experience. In Q2, we opened and remodeled 16 next-gen stores, bringing our total to 57 to date.

We plan to have 41 additional next-gen stores by the end of 2021, including 23 new store openings in Q3, bringing our expected year in total to 98. We are pleased with the results our next-gen stores are producing. As we continue to innovate and refine the prototype. In fact, our remodeled stores are averaging a sales percentage increase of mid-single digits compared to their control stores.

Our current performance capital spend is approximately $250,000 for a remodeled store, and it is only $150,000 after tenant improvement allowances. In addition, the more curated assortment, lower shelf heights, and more shopping formats allow us to carry roughly $100,000 less in inventory while still generating the higher sales. Even when assumptions vary from the norm, we generally get a payback period for each store of less than three years. Based on the continued strength we see in our next-gen store performance lift, we remain committed to an aggressive rollout plan in 2022 and beyond.

Next, being celebration-occasion obsessed. We are on plan to update all major categories this year and believe customers will be delighted with the changes we are making. We remain committed to our plan of introducing an unprecedented level of innovation across all major categories this year as we strengthen our relevancy. Each of the resets this year has produced meaningful lists in the performance of the category ranging from mid-single to strong double-digit increases.

As we continue to grow our relevancy with consumers, we're building trust and increasingly becoming their destination for all things celebrations. Our improved understanding of consumer needs and stronger integration of data into our processes is accelerating our critical learnings and ability to execute. To that end, we're focused on growth across key metrics that demonstrate our increased relevancy. Our seasonal categories are now achieving significantly improved sell-through resulting in improved inventory turns and gross margin returns on inventory while exceeding the sales plan.

These improvements are driven by a greater focus on key items and a more curated assortment, which improves not only shop ability for the customer but also improved efficiency per store associates. The teams are staying disciplined and lean on the inventory of 2021 as we invest in our merchandise planning and inventory management functions. Finally, focusing on our North America vertical model. We continue to leverage our streamlined North American vertical model, making ongoing improvements to our integrated supply chain, including increased capacity in our manufacturing plants and improved throughput in our distribution centers.

As you are aware, there are broadly discussed supply chain headwinds across the industry. We have seen some, albeit minimal disruption receipt delays, we are finding alternatives and working through the challenges. Most importantly, we are ready for the important Halloween season, including new innovation and quality improvements in this important category. We currently expect a substantial increase in Halloween City stores relative to last year with current expectations of between 80 and 100 stores, leveraging the insights from last year.

In terms of our outlook, the operating environment remains dynamic, so we are not providing a formal outlook for full-year 2021. Inflationary headwinds are now part of the broader economic landscape and we're managing them at every level of our business. Rising freight and raw material costs, along with increasing labor wages, are incorporated in our forecasts. Our pricing power in both the retail and wholesale markets allows us to meaningfully mitigate rising costs with appropriate price adjustments.

Our detailed pricing analytics in broad and marketplace vantage point, including price elasticity at each point of distribution, along with our knowledge of the role of each SKU in the category in the basket, and our test and learn protocols allow us to make highly informed pricing decisions. These capabilities are increasingly important,  given the intensifying inflationary pressures as Todd will discuss. So, in summary, we're very pleased with our strong second-quarter results in sequential acceleration in the business. The quarter was highlighted by encouraging trends at retail and online, and the recovery well underway at wholesale.

We have demonstrated consistent strength in our core everyday categories for the last four quarters, which is a testament to our continued focus and disciplined execution of our transformation strategy and the resulting relevancy strides that position as well to capitalize on continued growth in demand over the near and long term. As we look to the back half of the year, while the environment remains dynamic, we are well-positioned for the upcoming Halloween season and are prepared for a variety of demand scenarios from an assortment and inventory perspective. Our teams are focused. And we are excited about our refined marketing, improved go-to-market position, and elevated omnichannel capabilities.

And now, I'd like to turn the call over to Todd to discuss the second-quarter results and our 2021 outlook in greater detail. 

Todd Vogensen -- Chief Financial Officer

Thanks, Brad, and good morning, everyone. Today, I'll focus on the key highlights of our second-quarter performance, and then I'll discuss how we're approaching the rest of fiscal 2021. For full details regarding our 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 discussed, we are very pleased with the acceleration we've saw in the business and the broad-based strength in the second quarter.

Consolidated revenues were up approximately 110% versus the prior-year period. Brands comparable sales increased to approximately 180%, driven primarily by a strong performance in our core categories. Versus 2019 brand comparable sales increased 19%, including a 28% increase in our core categories. Additionally, e-commerce delivered strong growth in the second quarter and the percent of our sales that originated online represents approximately 13.6% of our mix, an increase of 310 basis points versus 2019.

Also, revenue for the second quarter increased 33% versus 2020, primarily due to the COVID-19 pandemic impact in the prior-year period. This increase was partially offset by the divestiture of a significant portion of our international operations in the first quarter of 2021. Excluding the impact of the divestiture, wholesale revenues increased 97% versus the prior-year period or 1% versus 2019. Importantly, we were pleased by the improving sales trends we delivered to our franchise and independent customers in the second quarter as COVID-related restrictions continue to subside.

Although it's still early in the recovery, we have strategies in place that are focused on driving growth in our wholesale business overall and we're encouraged by the resulting revenue growth. Adjusted gross margin rate in the second quarter expand to 2,100 basis points from the prior-year period, and 270 basis points versus 2019, driven primarily by sales leverage on fixed costs and favorable product mix, partially offset by increased costs of delivery services. Adjusted operating expenses were approximately $151 million, an increase of $35 million from the prior-year period and a 1,700-basis-point improvement, primarily driven by more normalized sales and expense levels. As a result, adjusted income from operations was $69 million, compared to an adjusted loss from operation of $65 million last year, and adjusted income from operations of $59 million in Q2 2019.

Adjusted EBITDA was $86 million in the second quarter, compared to a loss of $43 million in 2020, and adjusted EBITDA $81 million in 2019, and second-quarter adjusted earnings per share was $0.29, compared to an adjusted loss per share of $0.66 in the prior-year period, and adjusted earnings per share of $0.22 in 2019. Turning to our balance sheet and cash flow. Inventory was down 33% year over year, driven primarily by two strategic items that we've previously discussed. Namely, the disposal of seasonal inventory in the fourth quarter of 2020 in order to drive higher in-season sell-through and less annual inventory carryover, as well as the international inventory that was sold as part of the international business divestiture.

Together, these items accounted for approximately $154 million of reduced inventory, resulting in a year-over-year decline of approximately 9% excluding these two items. We continue to prudently manage our working capital, and we expect ongoing opportunities to improve inventory levels. Year to date through the second quarter, operating cash flow improved approximately $63 million versus the prior-year period, and there are really higher net sales and improved operating income. We were also pleased with liquidity, which ended the quarter at approximately $269 million, comprising 84 million in cash and 185 million revolver availability.

In addition, our principal balancing debt net of cash was approximately $500 million lower than the prior-year period at $1.6 billion. Now, let me turn my comments to our outlook. We remain optimistic about the trends throughout our business and the prospects for continued economic growth. We also recognize that the macro environment still has a high level of uncertainty, given current inflation and COVID-19 trends.

Therefore, we're not providing specific annual sales and earnings guidance. However, in today's earnings release, we did provide our sales and earnings outlook for the third quarter. In the third quarter, we expect our consolidated sales to be approximately $490 million to $515 million with a brand comp sales increase in the high single-digit percent range versus the comparable 13-week period in 2020, or in mid-teens percent increase versus the comparable period in 2019. Lastly, we expect Q3 adjusted EBITDA to be in the range of $35 million to $45 million.

There are a few elements to note relative to our expectations for the third quarter. First, as a reminder, with the sale of our international operations in January of 2021, there is an impact on our revenue and other financial metrics. As we shared previously, in 2019, the international business generated approximately $250 million in revenue with an immaterial amount of profit. However, for the third quarter modeling purposes, it is important to note that the divested international business generated approximately $80 million in revenue and $6 million of EBITDA during the third quarter of 2019.

Second, like many in the industry, we are experiencing heightened inflationary impacts on our business, including freight and labor cost headwinds. With the continued challenges facing all global supply chains, our logistics team is taking prudent actions to ensure high-end stock rates for our Halloween season. We feel confident that we are well-positioned to fully support our holiday strategies, but we also expect to incur higher freight costs over the nearer term. We are taking additional pricing actions, as mentioned earlier by Brad, as well as other cost mitigation actions to limit the overall impact on our profitability.

It is also important to note that we expect our pricing actions to offset some third-quarter headwinds to have a more significant benefit to fourth-quarter results while the nature of inflation is still quite dynamic. Based on our current plans, our guidance includes the estimated third-quarter impact of the overall inflation net of our mitigation efforts to be $7 million to $12 million. Taken together, the inflation headwinds and divestiture of our international business are expected to impact our Q3 EBITDA by $13 million to $18 million. In terms of capex for the full year 2021, we now expect capex spend in the range of $80 million to $90 million, up from the previous expectations of $70 million to $80 million, with the increase primarily related to capacity investments in support of Anagram's growth.

So in summary, we are really pleased with our second quarter financial and operational performance and remain encouraged by the underlying momentum of the business. Our team's disciplined execution of our key growth priorities has positioned us to capitalize on the opportunities received for the business in the back half of the year. And with that, I'll turn the call over to the operator to start the Q&A session.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] The first question comes from Rick Nelson from Stephens.

Rick Nelson -- Stephens Inc. -- Analyst

Hello, good morning. So I'd like to follow-up on the commentary about July sales, you know, how they're tracking versus the high single-digit, you know, compared to a year ago, mid-teens compared to pre-pandemic 2019.

Brad Weston -- Chief Executive Officer

Yeah. And if you'll remember the last in 2020 or July and Q3 -- or our Q3 comps, I should say, we're in the high single-digits and our trend in Q2 was in the, you know, 19% versus 2019. As I said in my remarks, you know, July continues to be very strong, both on top of 2019 as our trend continues, as well as on top of our strong 2020. And we really attribute that to, you know, the underpinnings of the transformation strategy that we've put into place in addition to the strong overall consumer demand that we've seen broadly at retail.

And that's really across all three segments of our business: retail, digital, and now seeing our wholesale business coming back as we would have -- as we said, we anticipated as wholesale sales intuitively follow strong retail sales.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks for that, Brad. You also discussed some of the financials around the next-gen stores. It sounds like they're performing well. The plan for rollout, now I think you had mentioned an acceleration in rollout next year.

I guess what is keeping you from accelerating that rollout, and you could discuss the plan for the remainder of this year and what you're thinking about for next?

Brad Weston -- Chief Executive Officer

Yeah. And we've been building momentum as we continue to see the positive results. Whether it's a remodeled store, a relocated store, or a new store opening. And so, we've been building -- we built our -- after our piloting in 2020, you know, we built some momentum going into 2021.

We'll continue to build momentum on our ability to execute every refinement that we make in the prototype because those are ongoing. We continue to find ways to make it even better for both our consumers, as well as our associates from an operating capacity, and continue to tweak the assortments in the categories to ensure that we're maximizing those. So we're extremely bullish. We haven't pegged an exact number for 2022.

Obviously, we're looking at all of the remodel opportunities, as well as new store opportunities, as we look ahead to 2022 and beyond. Our continued desire is to upgrade the majority of the chain over the next several years. So we'll be as aggressive as we can.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks for that. Finally, if I could ask you, the outlook for Halloween, how you're planning for that, can you give any insights through the wholesale operation as to what your customers are thinking about Halloween?

Brad Weston -- Chief Executive Officer

Yeah, you know, we're not going to talk directly to how we're thinking about Halloween as it falls in -- into the fourth quarter. There's a lot of factors, obviously, that influence Halloween. We have a lot more learnings in customer insights and data relative to prior years. We have a new merchandising and store teams that had built over the last 18 months that are ready to -- that are executing well, leading up to Halloween and excited to get going with this really fun and important season.

We continue to improve our product assortment, our merchandising techniques in the store, our marketing, and our digital content, all of which I believe have made real progress over our past go-to-market strategies, and our investment improving on all fronts will certainly increase our relevancy in the Halloween. You know, we're ready for any level of demand as we are sort of in a -- still in a volatile and dynamic time. You know, our wholesale outlook relative to Halloween is stable, consistent, and it looks like everybody is sort of feeling the same as we'll have to see what consumer participation is in Halloween, but we are ready.

Rick Nelson -- Stephens Inc. -- Analyst

Great. Thanks and good luck.

Operator

Thank you. The next question comes from William Reuter from Bank of America. Please go ahead, William

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

Good morning. The first question was on the $7 million to $12 million, the third quarter inflation impact. Did that include the impact of higher freight costs, or was that just on product itself?

Todd Vogensen -- Chief Financial Officer

I'll go. Yeah. That was just -- that did include all the freight costs as well as any inflation pressures on raw materials or base products. And the biggest impact for us really is that supply chain pressure that we're seeing, really everybody's seeing.

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

Yes. And then given lead times, I would imagine you guys have pretty good perspective on what that number might look like for the fourth quarter. Can you share what that number might look like? And I guess are you contracted with regard to your freight at this point for the second half of the year, or are you generally purchasing the spot market?

Todd Vogensen -- Chief Financial Officer

So at this point, we're not giving Q4 guidance, but I think it's fair to say the pressures that we're seeing on the supply chain front have been building during the year. So, we would expect to continue to see that through the rest of the year. And the way everything works, we match up our costs with our inventory flow. So, given the timing of Halloween, you are going to see a little bit more flow-through from those costs in Q4.

We also said we should have a better opportunity to mitigate some of those costs with pricing action in Q4. So, both of those two things kind of coming together to net out as we get into the fourth quarter. In terms of managing versus contracts, the shortage is really acute from a container perspective, from a ship perspective. So, what we're hearing from most retailers is that whether you have a contract or not, you're going to be facing the same pressures, and that's fairly well what we are seeing.

We have contracts in place but we are still in a position where we need to look for alternative ways to bring goods in, and fortunately for us, we have a strong supply chain team that's been able to get ahead of that and put us in a really good position for Halloween where even though there's cost structure, we feel good about our in-stocks and feel good that we're positioned well from a product perspective for the season.

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

OK. And then just lastly for me. Given strong demand during the second quarter, I guess you mentioned that July continues to go well, would -- is there an impact on third-quarter sales from out of stocks currently? Meaning, would your revenue guidance be higher by X percent if you had as much inventory as you would like right now?

Brad Weston -- Chief Executive Officer

Listen, our -- there are certainly supply chain constraints and volatility across categories. It's interesting because, you know, we've experienced those even in Q1 and Q2 relative to supply constraints and shortages that have been in the market as we came out of the, you know, height of the pandemic, and our business has sustained itself very well through those. They're spotty. And one category recovers well and another one may be challenged a little bit, but we do not see any negative impact relative to that in our July results or in Q3.

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

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

Operator

Thank you. The next question comes from Joe Feldman from Telsey Advisory Group. Please go ahead, Joe. 

Joe Feldman -- Telsey Advisory Group -- Analyst

Great. Thanks, guys, for taking the questions. I wanted to ask about product innovation, and are there other things you can share with us there, you know, like you mentioned that 20-pack tableware, which makes a lot of sense, and you managed to get the price down to $20, so like a buck a person, basically. But can you -- are there other areas where there are some big opportunities like that that you are targeting right now?

Brad Weston -- Chief Executive Officer

So these -- the -- thanks, Joe. The introductions that we made, that I talked about were primarily in girl's and boy's birthday favors and candy. We eliminated some nonproductive SKUs, curated some new items that really allowed us to gain relevancy with our consumers, and we replaced, like I said, the old product with a new product in many instances. You know, those were really gleaned from just consumer feedback, focus groups, putting product in front of consumers, and really understanding the sales data, as well as the consumer insights and what they're looking for, where some of the friction points may be in the product thereby, or some of the gaps in the assortments that we have.

As we look at every single category, I can tell you that we are finding opportunities for new innovation, we're finding opportunities to improve our quality. And the good news is when we improve our quality, it's either doing it without impacting cost or if we do have any cost adjustments. And therefore, price adjustments, these are margin neutral or margin enhancements. And they're in places that we know based on our price elasticity, data, and modeling that the consumer is willing to accept a higher price to pay for the value they're getting and the innovation and the quality.

So, they've been extraordinarily well received. We have some in the pipeline. And this is just a mindset in how we operate our assortments, and how our merchants and product development teams, you know, really think about their opportunities to build relevancy.

Joe Feldman -- Telsey Advisory Group -- Analyst

That's helpful. Thank you.  And then, I wanted to ask, can you share a little more color on the pricing actions you mentioned that you're planning to take in the third quarter. Was that meant to say that you're taking prices up or down, or I guess I was a little confused by that statement and what areas you're planning to do that in?

Brad Weston -- Chief Executive Officer

Joe, let me start that answer by stating as I often do that, you know, we've instilled practices to be extremely price aware. And our data and analytics around price elasticity and basket analysis at the category level and down to the SKU level allow us to make really smart decisions. When we talked in 2020 about our initiatives to stabilize our retail performance, we outlined poor pricing perception as a barrier to being relevant with consumers. That work included lowering our prices to be more competitive in most cases.

But it did also include taking price increases where the analytics really showed it was appropriate. So based on that, as we address changing prices related to cost headwinds, you know, just like we do constantly, we'll use a test-and-learn approach to adjust prices to mitigate those headwinds in a way that makes sense to our customers and our long-term growth goals. And as I said in our remarks, we have a broad view of the market. So, we have the ability to really understand price elasticity throughout the supply chain.

You know, and as the category-defining brand, we have pricing power that will allow us to find the right pricing equilibrium.

Joe Feldman -- Telsey Advisory Group -- Analyst

Got it. OK. So, continue to just optimize on that front. That makes sense.

And then, you know, with regard to those supply chain pressures that others have asked about, are there any particular categories that you're seeing than the pressures on or where you can maybe -- and what the alternatives are in those areas?

Brad Weston -- Chief Executive Officer

You know, I would -- the best way to think about them is, you know, they're very supply and demand base. And, you know, where our demand has shifted, we've shifted our ability to get products through our own manufacturing capacity or our sourcing capacity to meet those needs. So we're ramping up capacity where we have high demand. And so, the pressure is really coming through demand changes.

So, you can tell in the categories that we're talking about having the highest level of performance. Therefore, driven by the highest level of demand are the places where we're really working on the capacity to continue to maintain that demand.

Joe Feldman -- Telsey Advisory Group -- Analyst

That's helpful, thanks, and good luck in the third quarter. Thank you.

Operator

Thank you. The next question comes from Jenna Giannelli from Goldman Sachs. Please go ahead, Jenna.

Jenna Giannelli -- Goldman Sachs -- Analyst

Hi, thanks for taking my questions. The first one is just a follow-up on the inflation headwind for the third quarter. I'm assuming that includes helium. But if we could just talk about helium specifically, how much of a headwind that is for the balance of the year, remind us on hedging and any early, you know, outlook, how we should think about that for '22?

Todd Vogensen -- Chief Financial Officer

Sure. So, if you look at our helium, just our helium cost per cubic foot in Q1 and Q2 versus 2019, we were wrapping around on some headwinds there. But as we move into Q3, we're on a much more level playing field. We've got contracted rates for helium.

Any increases that are in there for helium put us right back in line with 2019. So we're not really seeing any inflationary pressures there, and really would not expect to see any as we go into 2022 either. So, we have gone out and put long-term contracts in place. We actually have even partnered with a couple of wells directly.

And based on that, we're feeling secure with the amount of supply we have and the price that we have it at.

Jenna Giannelli -- Goldman Sachs -- Analyst

OK. Great. Thank you. And then I just want to ask about balloons in the store just because, you know, it's such an important traffic driver.

If we can talk about that for a minute. Specifically, how you're working through that experience in the store, whether customer service, merchandising, location, checkout, etc. And I'm curious how just the retail balloon sales and customer trends that you're seeing compare now as we compare back relative to maybe 2019, basically, if there's still might be some upside and opportunity here in this category in the store?

Todd Vogensen -- Chief Financial Officer

Our balloon demand continues to be very strong. And as we've talked about, it is a driver of our sales this year, as well as our highlights of Q3 in 2020 -- we had strong balloon sales throughout 2020 and now into 2021, I like to see and love seeing the ongoing demand. Relative to your question around the experience in the stores, we continue to focus on the key items and the assortment that is driving those sales, and ensuring that we have adequate capacity and adequate quantities to drive those sales is a focus. The experience in the store has changed to some degree with the onset of buy online, pickup in-store and balloon delivery, which are both now available to consumers.

That was a different operating dynamic on the stores that we have adjusted for to make that experience seamless as consumers both preorder balloons for their parties to come and pick them up, as well as come in and build a bouquet of balloons with our sales associates to personalize them for their own parties. Many -- a lot of the innovations that we brought into the market around larger standup balloons, larger letters and numbers, as well as, you know, very topical and seasonal items are doing well. Also, our premade bouquet, which we make ahead of time for the consumers, for the walk-in consumer, relative to things that are happening in the marketplace at the time. Whether that's graduation, 4th of July, those types of occasions.

We're ready for the consumer and have products waiting for them.

Jenna Giannelli -- Goldman Sachs -- Analyst

Great. Thanks so much. That's helpful.

Operator

Thank you. The next question comes from Hale Holden from Barclays. Please go ahead, Hale.

Hale Holden -- Barclays Investment Bank -- Analyst

Good morning, thank you. I just had two questions. Can you remind us of the 80 or 100 Halloween stores that you're planning, how that compares to 2019 Halloween City?

Brad Weston -- Chief Executive Officer

In 2019, we had approximately 250. And in 2020, we had 25.

Hale Holden -- Barclays Investment Bank -- Analyst

And then, I was wondering if you had seen any changes since you talked about July regionally through the U.S. where perhaps there might be more COVID outbreaks or if there are -- it was pretty even performance across the country.

Brad Weston -- Chief Executive Officer

Yeah, you know, as cases have increased and restrictions have been put in place in certain areas, we've not seen an impact on our overall business. In geographies that are being watched closely like Florida, areas of California, the Deep South, you know, we've seen a bit of slowdown to the increase in these areas, but the increase in sales over 2019 in those areas is still very strong.

Hale Holden -- Barclays Investment Bank -- Analyst

Great to hear it. Thank you very much.

Operator

Thank you. [Operator instructions] The next question comes from Karru Martinson from Jefferies. Please go ahead, Karru.

Karru Martinson -- Jefferies -- Analyst

Good morning. I just wanted to circle back on the Halloween inventories. So, just as we're clear that you are fully in stock and you feel that you have the goods either in transit or in your warehouses or in your stores so that you're ready for the Halloween season, correct?

Todd Vogensen -- Chief Financial Officer

Yes. So we have a view of every place we have products in the supply chain. We have products in our stores. We have products in our DCs, and we have products on the water.

And so, as we look at our in-stocks relative to prior years, we can look at 2019, 2020, you know, we're in a solid position.

Karru Martinson -- Jefferies -- Analyst

OK. And then in terms of the wholesale portion that you produce for all, how long do your customers need to order in terms of advanced times? Like when do you get a good read on that traffic?

Todd Vogensen -- Chief Financial Officer

So the majority of our wholesale orders for Halloween come in anywhere from November to approximately January and February of the prior year.

Karru Martinson -- Jefferies -- Analyst

OK. So, that is already done. And so, you have a good read on that, correct?

Todd Vogensen -- Chief Financial Officer

Absolutely.

Karru Martinson -- Jefferies -- Analyst

OK. And then when we look at the full year, you know, in our calculation you should be positive free cash flow this year. Can you talk to kind of the uses? You mentioned adding some capacity in Anagram, paying down debt. Where are you prioritizing uses of cash here?

Todd Vogensen -- Chief Financial Officer

Absolutely focused on making sure that we can be paying down debt. First and foremost, has to come funding internal operational growth initiatives. So, of course, we're doing that and making sure that we have the right levels of working capital for the business, but from a pure capital allocation perspective, debt paydown is top of the list and should continue to be.

Karru Martinson -- Jefferies -- Analyst

Thank you very much, guys. I appreciate it.

Todd Vogensen -- Chief Financial Officer

All right. Thank you.

Operator

Thank you. The next question comes from Michael Coppola from J.P. Morgan. Please go ahead, Michael.

Michael Coppola -- J.P. Morgan -- Analyst

Hey, good morning. Congrats on the quarter. Just one question regarding any sort of deferred rents during COVID. Has that all been repaid, or if not, is there any update done on how much is remaining?

Todd Vogensen -- Chief Financial Officer

Absolutely. So, we still haven't announced out there. We were really scheduled -- most of that is to be paid off over the course of 2021. So, we paid another $15 million in Q2.

And we have another $70 million left that will be really mostly over the course of the second half.

Michael Coppola -- J.P. Morgan -- Analyst

Great. Thank you. Understood. And just as a second question.

Have you guys seen any sort of changes as to the size of parties that are happening, or anything that kind of gives color to that?

Brad Weston -- Chief Executive Officer

Yeah, you know, we have places in our basket analysis that we can see that and certainly, we are seeing in some of the quantities being purchased that there is a return to larger quantities of sizes of the parties, which obviously bodes well for the breadth of product and the average order value in a basket, which we're pleased with.

Michael Coppola -- J.P. Morgan -- Analyst

Great. That's all for me. Thank you and good luck. 

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Brad Weston for closing remarks.

Brad Weston -- Chief Executive Officer

In closing, we're pleased with the ongoing momentum in our business. As we update and improve our product assortments and inventory position, our relevancy with celebration consumers continues to expand. Our relentless focus on consumer insights, as well as both forward-looking and performance-based data, are informing our decision-making and improving our ability to inspire joy and make it easy for our customers to create unforgettable memories. As we move into the back half of the year, we will continue to make progress on our strategic initiatives to further drive our performance.

I want to thank you for joining us this morning, and let you know we will be participating in the Goldman Sachs retail conference in September and look forward to seeing some of you there. Have an excellent day.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Eric Warren -- Vice President, Treasurer, and Investor Relations

Brad Weston -- Chief Executive Officer

Todd Vogensen -- Chief Financial Officer

Rick Nelson -- Stephens Inc. -- Analyst

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

Joe Feldman -- Telsey Advisory Group -- Analyst

Jenna Giannelli -- Goldman Sachs -- Analyst

Hale Holden -- Barclays Investment Bank -- Analyst

Karru Martinson -- Jefferies -- Analyst

Michael Coppola -- J.P. Morgan -- Analyst

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