Party City lowers 2022 profit outlook amid rising supply chain costs

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diving letter:

  • Party City again lowered its 2022 earnings guidance as supply chain costs continued to hurt the retailer’s margins in the third quarter.
  • The retailer’s original guidance for 2022 was $275 million to $300 million in February, but has been lowered each quarter and is now $130 million to $150 million.
  • The lower guidance assumes cost headwinds of $90 million from additional supply chain costs and $20 million higher spend on helium compared to 2019, EVP and CFO Todd Vogensen said on a Nov. 8 earnings call.

Party City’s earnings outlook plummeted by more than $100 million

Minimum and maximum outlook for FY2022 Adjusted EBITDA earnings as disclosed in quarterly earnings releases.

Dive insight:

Party City’s move to ship Halloween inventory in advance and the impact of limited global helium supplies made for an expensive quarter — and year — for the retailer.

Ongoing supply chain challenges led to Party City introducing early stock to ensure the company had the stock it needed before Halloween. Of Party City’s higher inventory costs, $40 million was due to inflation and $67 million to Halloween revenue, Vogensen said.

“As expected, we continued to see increased freight costs during the quarter, particularly as we launched Halloween products earlier than last year,” added CEO Brad Weston. “Regarding the broader freight market, spot freight prices are moderating and are well below their recent highs. However, given the turnover rate of our inventory, we do not anticipate the associated benefit until later in 2023.”

Notwithstanding Party City’s upbeat Halloween sales, it still fell short of original third-quarter expectations with results on the low end, prompting the company to reevaluate its 2022 guidance.

With the updated 2022 earnings outlook, Party City “plans to focus on reducing structural costs and increasing operational efficiencies,” Weston said.

The retailer is one of many companies trying to streamline their supply chain operations amid cost cuts. This quarter, Party City named Peter Smith as its new chief operations officer to drive efficiencies across the value chain, including “manufacturing, sourcing, inventory optimization and supply chain efficiencies,” Weston said.

The retailer’s helium business was also hit earlier this year as spot prices rose on logistical challenges.

In turn, the retailer has diversified its supplier base and entered into long-term agreements to improve its helium supply as the market recovery is taking longer than expected.

“The overall supply of our individual contracts and the things we have done to ensure our retail stores in Party City are well supplied with helium have all helped us,” said Weston. “Anagram customers rely on a similar network, but purchase helium in a different way and under different contracts [and] different arrangements. So these customers have been more affected by the difficult delivery conditions across the industry and globally.”

According to Weston, Party City currently accounts for about 35% to 40% of total sales for its Anagram balloon-making division.

Looking ahead, helium conditions coupled with rising spending are expected to continue to impact the retailer’s fourth-quarter revenue and profits, Weston said.

Global helium supplies were disrupted in part due to the brief closure of the US Bureau of Land Management’s Crude Helium Enrichment Unit facility, which resumed production in April and increased supplies to the retailer. Meanwhile, the Gazprom plant in Russia, which is expected to increase global supply by a third, experienced an explosion in September 2021 that shut down the plant.

“We have no idea when [the Gazprom] The plant will be operational again,” Weston said. “While this is not a facility that would supply Party City or necessarily the broader US industry, it does have a significant impact on global supply as there are countries that would supply from this factory.”

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