Dive Brief:
- Party City once again lowered its 2022 earnings guidance as supply chain costs continued to affect the retailer’s margins in Q3.
- The retailer’s initial 2022 outlook was $275 million to $300 million in February, but it has been lowered each quarter and now sits at $130 million to $150 million.
- The lower guidance assumes $90 million in cost headwinds from incremental supply chain costs, and $20 million higher expenses for helium, compared to 2019, EVP and CFO Todd Vogensen said in a Nov. 8 earnings call.
Party City's earnings outlook fell by more than $100M
Dive Insight:
Party City's move to ship Halloween inventory in advance and the effects of limited global helium supply led to an expensive quarter — and year — for the retailer.
Ongoing supply chain challenges led Party City to bring in early inventory to ensure that the company had the inventory it needed ahead of Halloween. Of Party City’s higher inventory costs, $40 million were due to inflation and $67 million were driven by Halloween receipts, Vogensen said.
“As expected, we saw continued elevated freight costs in the quarter, especially as we brought in Halloween products earlier than last year,” CEO Brad Weston added. “In terms of the broader freight market, freight spot prices are moderating and well off their recent highs. However, given how our inventory turns, we would not expect to see the associated benefit until later in 2023.”
Regardless of Party City’s positive Halloween sales, it still fell short of initial Q3 expectations with results on the lower end, leading the company to reassess its 2022 guidance.
With the updated 2022 outlook for earnings, Party City aims to “focus on reducing structural costs and increased operating efficiencies,” Weston said.
The retailer is one of the many companies looking to optimize its supply chain operations amid cost-cuts. This quarter, Party City named Peter Smith its new chief operations officer to increase efficiency throughout its value chain, including “manufacturing, sourcing, inventory optimization and supply chain efficiency,” Weston said.
The retailer’s helium business also took a hit earlier this year as spot rates increased due to logistics challenges.
In turn, the retailer has been diversifying its supplier base and entering into long-term agreements to improve its helium supply as market recovery takes longer than expected.
“Overall supply of our individual contracts and the things that we’ve done to ensure our Party City retail stores are in good helium supply have all benefited us,” according to Weston. “Anagram customers rely on a similar network, but acquire helium in a different fashion, different contracts [and] different arrangements. So, those customers have been more impacted by the challenging supply conditions across the industry and globally.”
Party City currently accounts for roughly 35% to 40% of its balloon manufacturing division Anagram’s total sales, according to Weston.
Looking forward, helium conditions paired with rising expenses are expected to further impact the retailer’s Q4 revenue and profits, Weston said.
Global helium supply has been disrupted partly due to the brief closure of the U.S. Bureau of Land Management’s Crude Helium Enrichment Unit’s plant, which resumed production in April, boosting the retailer’s supply. Meanwhile, the Gazprom facility in Russia, which was expected to increase global supply by a third, experienced an explosion in September 2021 that knocked the facility out of commission.
“We do not have a view of when [the Gazprom] facility will be back up and running,” Weston said. “While that is not a facility that would supply Party City or necessarily the broader U.S. industry, it does have a significant impact on the global supply because there are countries that would supply from that factory.”
