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Party City’s (PRTY) CEO Jim Harrison on Q4 2016 Results – Earnings Call Transcript

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Party City Holdco, Inc. (NYSE:PRTY)

Q4 2016 Earnings Conference Call

March 9, 2017 08:00 ET

Executives

Deborah Belevan – Vice President, Investor Relations

Jim Harrison – Chief Executive Officer

Dan Sullivan – Chief Financial Officer

Ryan Vero – President, Retail

Gregg Melnick – President

Mike Correale – Chief Accounting Officer

Analysts

Simeon Gutman – Morgan Stanley

Chris Horvers – JPMorgan

William Reuter – Bank of America

Stephen Tanal – Goldman Sachs

Adam Sindler – Deutsche Bank

Rick Nelson – Stephens

Curtis Nagle – Bank of America/Merrill Lynch

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Party City Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Deborah Belevan, VP of Investor Relations, you may begin your conference.

Deborah Belevan

Thank you, operator. Good morning, everyone and thanks for joining us. This morning, we released our fourth quarter and full year 2016 financial results. You can find a copy of our press release on our website at investor.partycity.com.

Now, I would like to introduce the executive team who are here on today’s call. We have Jim Harrison, our Chief Executive Officer; Dan Sullivan, Chief Financial Officer; Ryan Vero, President of our Retail division; Gregg Melnick, President and Mike Correale, Chief Accounting Officer. We will start the call with some prepared remarks by Jim and Dan 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 to the company’s future business prospects and results. These statements are subject to the 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 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 information regarding our non-GAAP financial measures and reconciliations to the most directly the comparable GAAP measures, please refer to the earnings release.

And with that, I will turn the call over to Jim Harrison.

Jim Harrison

Thank you, Debbie. Good morning, everyone and thank you for joining us this morning for our year end 2016 earnings call. In 2016, our business weathered the challenges associated with the 2-day shift from the Saturday to a Monday Halloween. Despite this headwind, I am pleased to report that we delivered solid financial performance this year. And most importantly, we have made tremendous progress against many of our strategic growth initiatives and organizational initiatives that will provide a path for continued success. These efforts have continued as we enter 2017 and I am excited to also discuss these actions already completed in the first quarter that will serve to further strengthen our business model and market position.

Let me begin with a high level review of our performance for the year end and recent business developments. And then Dan will provide further detail on our financial results for the quarter and year end as well as our 2017 outlook. 2016 marks our seventh straight year of record revenues on a constant currency basis and our 16th straight year and 24th out of the past 25 years of record EBITDA. 2016 saw adjusted EBITDA grow by 3% to over $390 million, while adjusted EPS grew 14% on a year-on-year basis. This performance reflects the strength of our business model and our ability to continuously grow our business profitably without relying solely on comp store sales growth delivered by our retail business. As most of you are already aware, it is this vertically integrated business model which differentiates us from other retailers and our 2016 financial results demonstrate its value.

In 2016, we grew revenues in constant currency by 50 basis points. This fell short of our original outlook for the year as our store comp sales came in slightly below expectations due to the dramatic impact of the calendar shift around our Halloween business. And while our total brand comp was clearly impacted by seasonal factors, we are very encouraged by the consistent strong growth in our everyday product categories such as birthday, baby shower, and general entertaining, which grew 3% in 2016. The growth on our bottom line was driven by gross margin expansion, disciplined cost control and increased efficiencies across our value chain, while our strong free cash flow generation enabled us to further reduce our leverage. Dan will provide more specifics on these metrics shortly.

In 2016, we made good progress against our strategic growth plan, positioning us well for sustainable growth across our business. We continue to expand our vertical model, increasing the percent of product that we both manufacture and sell at our own retail locations to over 20% for the full year, while also laying the groundwork for future expansion as we progress towards our goal of ultimately manufacturing at least half of what we sell at retail. 2016 was an important year in this journey, as we scaled up recent acquisitions, most notably our injection molding operation in New Mexico and our costume operation in Madagascar. We have expanded our manufacturing capabilities in a way that unlocks growth for our business outside of the traditional party good space.

The wholesale consumer products business performed well in 2016 and we continue to be excited about the growth opportunities we see in the alternative markets here in the U.S., as well as the continued growth of party goods in international markets. The domestic wholesale business operates from a position of strength across a fairly mature and predictable market. And as the clear leader of this category, we are well positioned. Our domestic wholesale reach is broad, spanning not only the 934 Party City stores, but also into major discount retailers and mass merchants. We also started growing the number of businesses that operate in the entertainment and non-traditional retail space. These newest channels grew in double-digits year-over-year.

We are also seeing additional market penetration in our international business driven in large part by the increased number of store-in-store concepts we have at major retailers in countries like Australia, the UK and Germany. Internationally, the consumer is still discovering the category and our unmatched product offering and integrated supply chain positioned us well to capture the growing demand expected across many of these markets. We look to continually enhance the customer experience through an integrated omni-channel strategy in meeting the customer’s desire to shop both online as well as in store. Our e-commerce business in 2016 grew at double the pace of 2015 fueled by double-digit transaction growth. While the topic of e-commerce encroachment is a major focus in many industries, the majority of retail shopping in our categories still happens within the four walls of our stores, where our customers enjoy the experience of interacting with our full product assortment before buying.

So looking ahead, there are lots of opportunities, initiatives which excite us about the future of Party City. We are a multi-faceted business with a large number of opportunities to generate sustainable growth both domestically and internationally. Now more than ever, we have numerous initiatives to pursue across various customer channels and geographies and we have yet to fully realize the benefits that we can gain in improved store operations and through greater customer engagement.

Next, we have successfully set ourselves apart from the industry with our business model that provides a diversified stream of revenue in wholesale as well as retail and multiple levers we can control to expand our bottom line and continue to fuel profitable growth. We have significant competitive advantages both in-store and online, both unaided brand awareness in excess of 70% and we are clearly established as the number one trusted resource for party goods as consumers plan their celebrations. The category-defining breadth and depth of our product offering means that most retail competitors will turn to the various elements of our wholesale manufacturing businesses for their own needs. As the demand for party goods grows, we will share the growth across our full vertical, irrespective of where the products are purchased or by the consumer.

And finally, one of the key differentiators from many other U.S. retailers is the fact that nearly half of what we sell at retail is made in the United States. The same cannot be said for a majority of retailers that source a large portion of their product offering from overseas. In fact, in looking at the wholesale side of our business, over 30% of our sales are products that we manufacture ourselves here in the U.S., while many of our competitors are importing these products from places like Mexico and Asia. In a category like metallic balloons, for example, our domestic manufacturing base and nearly 60% worldwide market share, will make it increasingly difficult for our competitors who import their products into the United States and would be potentially subject to a border tax. Additionally, many of the items that we do import are generally low-cost, low price point items, which are not available domestically. And as such, these items will likely have a high price in [indiscernible]. We therefore believe that the potential financial impact of a border tax would be relatively minor and could actually serve as a catalytic opportunity in certain product categories.

2016 was also a year whereby we took the steps to structure and realign our organization, adding management talent to our strong core. These changes will build out the leadership team of the company ensure that we are well positioned to lead the hardworking and dedicated associates who make up our business and help us thrive each and everyday.

Before I turn it over to Dan, I would like to mention that 2017 marks our 70th year since inception, when the Founder of our predecessor company, Amscan, started importing and distributing honeycomb decorations from her garage in Bronxville, New York. As we kick off our 70th year, I am excited to share a couple of early successes in 2017 that will support our growth objectives both in 2017 and beyond. We remain committed to a robust growth strategy. And as many retailers continue to reduce their footprint in 2017, we actually anticipate adding about 6% of retail space and doing this through a healthy combination of franchise acquisitions and white space new store development. And I am happy to report that we are off to a fast start in Q1.

First, in January we announced the acquisition of 18 franchise stores in the south at an effective earnings multiple below 4 times. And today, we are announcing that we expect to shortly close on the acquisition of an additional 18 franchise stores in North and South Carolina at similarly attractive economics. These 36 newly acquired stores almost double the franchise acquisitions made for the full year of 2016 and point to the growing opportunity for franchisee acquisitions for us based upon market conditions and owner sentiment. This is clearly one lever of our growth strategy to opportunistically acquire franchisees as a means to strengthen our brand and grow our business at attractive multiples. We also are able to grow our brand through continued footprint expansion for new stores and we are well on our way in terms of identifying new store footprints for 2017, having already completed 12 new sites with fully executed leases. So, our retail expansion efforts remain robust in 2017.

Equally exciting on the consumer product side of our business, earlier this week we announced the acquisition of Granmark, a manufacturer and distributor of licensed party goods in Mexico, which is very exciting, as it will strengthen our presence in Latin America and support our planned 80 store location rollout over the next several years. Additionally, we have acquired Balloon Agencies, a smaller party goods distributor in Australia, which will provide us access to the specially retail channel there. In summary, we have come a long way over the past 7 decades, reshaping our organization and building out our vertical model. And I am even more excited about the opportunities that lie ahead.

And with that, I would now like Dan to provide us a more in-depth review of our 2016 results, while also sharing with you our guidance for 2017.

Dan Sullivan

Thanks, Jim and good morning everyone. I will provide some further insight on our financial and operating performance for the quarter and the full year before discussing our outlook for 2017 and then we will open up the call for questions.

2016 proved to be a challenging year. And despite the pressure felt on our top line results, the inherent strength of our business model was evident in our overall financial performance. We expanded gross margin rates by 70 basis points, delivered $300 million in free cash flow, grew our adjusted net income by 21% and delivered adjusted EPS of $1.15 per share, or 14% above last year.

Our fourth quarter results were obviously largely impacted by our Halloween performance, which we discussed previously in our Q3 call. That said I am encouraged by the resilient underlying performance of our business in the quarter, highlighted by our improved comp sale results in November and December and our solid financial performance which I will discuss. During the fourth quarter, consolidated revenues were $749 million, down 4.1% to last year’s Q4. The strengthening of the U.S. dollar continued to negatively impact our international sales, accounting for 80 basis points of the sales decline.

In our retail segment, sales decreased 3.3% on a reported basis, largely a result of the shift from a Saturday to a Monday Halloween. This is seen clearly in our Halloween City results, where we operated 65 fewer temporary stores than a year ago, in anticipation of the impact of the holiday shift and realized $22 million in lower sales. At quarter’s end, our company store network totaled 934 stores, 750 of which were corporate stores, as we opened 15 new stores and closed 2 during the quarter.

Our brand comparable sales, which include our U.S. and Canadian permanent stores and North American e-commerce business, decreased 3.5% for the quarter. This was driven by a decline in transactions of about 4%, offset partially by a slight increase in basket dollars. However, when we look beyond the effects of Halloween, as I mentioned earlier, there was underlying evidence of solid performance. First, our everyday business grew 3% in the quarter, which is in line with our expectations and represented the continuation of strong everyday performance, which we saw across most of last year. Our Thanksgiving and New Year’s businesses were solid, each posting growth of approximately 4%, while our Christmas business was down. Our North American e-commerce comp sales increased just over 6% in the quarter, driven by an almost 16% growth in transactions, as customer conversion rates continued to improve and our free freight offer around the holidays resonated well with our customers. And lastly, traffic levels in our brick-and-mortar business improved post-Halloween.

Turning to our non-vertical wholesale segment, total revenues decreased 1% after adjusting for foreign currency and the elimination of $5 million in sales due to the acquisition of 23 franchise stores since December of 2015. International wholesale sales rose approximately 2% on a constant currency basis as we were cycling 17% growth in Q4 last year, which was largely driven by the Big W Halloween program rollout and our Travis acquisition. In addition, there was the impact of a softer Halloween business. We did see healthy growth in the UK in the quarter of 11% in constant currency driven by our growing national accounts business and our store-in-store concept as we rolled out to 13 additional Morrison stores.

Our consolidated gross profit margin was 46.4%, or 40 basis points below the same quarter last year and in line with our expectations. Our wholesale business continued to deliver higher gross margin rates, fueled by realized sourcing savings and commodity cost tailwinds, while the retail business benefited from further share-of-shelf gains. However, such effects were more than offset by the negative effect of currency, de-leveraging of our occupancy costs and higher promotional levels in support of our seasonal business.

Operating expenses decreased $7 million from last year and increased 20 basis points in rate of revenue, totaling $192 million and 25.6% of revenues respectively. In the quarter, we realized the benefit of our gift sales reorganization, while also reducing our G&A expenses largely a result of lower incentive compensation. We were again able to reduce our store labor costs versus last year, despite the effect of adding new permanent stores, reflecting both continued labor efficiency and productivity gains in our stores as well as the benefit of operating 65 fewer temporary Halloween City stores.

Our adjusted net income was $91.2 million, which was flat to last year in dollars and improved 60 basis points in rate. And our adjusted EBITDA decreased $5 million to $192.4 million, but increased 40 basis points versus last year in rate.

In assessing our full year results, while our top line growth was limited, based largely on the effects of the Halloween shift already discussed, our financial results were solid and demonstrated the strength of our vertical model. In 2016, we significantly expanded gross margins, generated over $300 million of free cash flow, paid down our debt, reduced our interest expense. And in so doing, we grew adjusted net income 21% and adjusted EPS 14% year over year.

Consolidated revenue for the year was $2.3 billion, which represented growth of 0.5% on a constant currency basis. Retail sales grew 1.2% on a reported basis and 1.6% in constant currency. Despite the slightly negative comp sales for the year, we were encouraged by many of the underlying drivers of our retail sales performance. Our everyday business grew 3% in 2016, with accelerating growth in the second half of the year, despite some retail headwinds and overall consumer malaise. New store and franchise acquisitions bolstered our results, with 19 franchises acquired in the calendar year and 29 new stores opened in 2016. Our web business with almost 10% comp growth continues to be a strong complement to our brick-and-mortar business offering our consumers increased ease of shopping.

Our non-vertical wholesale business was down 4.3% on a reported basis. However, net revenues grew 1% when we adjust for the effects of both foreign exchange and franchise acquisitions. Our domestic wholesale business revenues decreased 3.3% on an adjusted basis largely reflective of lower Halloween sales and lower gift sales as a result of our de-emphasis of this product line and subsequent restructuring. Our international wholesale business grew 9% after adjusting for the negative effect of currency and we saw strong growth for the year across our core markets, including Germany at 13% and the UK at 9%.

Gross margin rates improved 70 basis points in 2016, despite approximately 30 basis points of currency headwind and was driven by three core factors, each of which impacted our gross margin rate fairly equally for the year. First, we continued to expand our vertical model, which drove our share-of-shelf metric to 76.6% or 160 basis points better than last year, driven by our mylar balloon, costume accessories, and serveware categories, just to name a few. Additionally, our refined and simplified sourcing model lowered our costs and helped us to realize margin growth as we further optimized our sourcing base and expanded our direct-to-factory model. And finally, we benefited from the easing of commodity costs, most notably resin. These factors helped mitigate the negative impact of higher occupancy costs as well as the strengthening of the U.S. dollar.

Operating expenses for the year were $658.9 million, which were about $7 million and 50 basis points higher as a percentage of revenue than 2015. Our increased costs largely reflected the impact of our new stores and franchise acquisitions, higher cost associated with our web business where orders grew almost 14%, and overall general inflation. In 2016, operating expenses were also aided by the previous reorganization of our gift business, 65 fewer Halloween City stores, lower incentive compensation costs and our continued efforts to simplify the way we operate our stores, allowing us to efficiently manage payroll costs and focus more on improving the customer experience.

Interest expense was $89.4 million or $34 million lower than last year, reflecting the refinancing that took place in August of 2015. Adjusted net income for the year was $138.3 million or 21% better than last year, which helped us to deliver adjusted EPS growth of over 14% to $1.15 per share. Adjusted EBITDA rose to $390 million, up 3% versus last year.

Finally, for the year we delivered free cash flow, defined as adjusted EBITDA less CapEx, of $308 million, an increase of $7 million versus 2015. CapEx totaled $82 million, while we allocated $121 million towards debt pay-down and $32 million towards acquisitions. We ended the year with net debt of $1.6 billion, resulting in a debt leverage ratio of 4.1 times. And at the end of the year, we had approximately $369 million available in our existing asset-based revolver.

Looking forward to 2017, our strategic priorities and growth objectives remain unchanged. As Jim mentioned, we continue to believe in the multiple levers of growth that our business offers and have already made meaningful acquisitions in Q1 to augment our core business. As such, we expect revenue for 2017 to be in the range of $2.35 billion to $2.45 billion, with comp sales growth in the range of 1% to 1.5%. For the first quarter, we expect comp sales to be broadly in line with our full year outlook.

We are projecting full year adjusted net income of $148 million to $158 million, or $1.23 to $1.30 per share. We expect adjusted EBITDA to be in the range of $400 million to $417 million. Underlying these results are further gross margin gains, although at a more modest rate than in 2016, as further share-of-shelf gains and sourcing savings are offset by anticipated commodity cost headwinds and further negative FX impact. Additionally, while we will remain focused on structurally addressing our cost base, in 2017 we will also further invest in our stores and our overall customer experience to ensure that we are providing the best shopping experience for our customers, with unsurpassed service and engagement. Finally, we expect our debt leverage at the end of 2017 to be approximately 3.5 times.

With that, I would like to turn the call back over to the operator and open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.

Simeon Gutman

Thanks. Good morning, everyone. I want to ask first, Jim, just one more postmortem on Halloween, can you talk about the customer lead time in that business, is it – I mean, I am assuming customers still shopping close to need? And then can you talk about any changes that you are seeing on Party City in-store versus Party City online regarding Halloween in terms of timing and then percent of business mix?

Jim Harrison

Well, firstly, the consumer continues to shop later and later for every season, Halloween obviously being our biggest, but the consumer still shops late. We do have little bit of visibility on the tempo for Halloween, probably a week to two weeks ahead as the consumer who is online will give us some indication for trend sampling as to how they are thinking about the season. The biggest change this year as you know was the move from the weekend to the Monday and the impact on the adult side of the business, but I think that was what we had anticipated, was real strongly anticipated. But as we look at this year, we think this year will be comparable to last year. We don’t expect to see a significant change on a year-over-year basis with respect to the Halloween purchases this year as we move from a Monday to a Tuesday.

Simeon Gutman

Got it, okay. That’s helpful. My second question relates to operating leverage for, I guess, incremental margins for 2017. I guess, we are trying to sort through all the noise with FX, but I guess underlying is the flow-through of the business improving next year or staying the same? And I just heard Dan’s comments on the gross margin being a little less good relative to this year, but curious about overall, I guess flow-through, because it struck us, the top line guide looks a little better. I would say net-net, we would have expected maybe a little better flow-through, but maybe it’s just noise that we can’t see?

Dan Sullivan

Yes, I think that’s right. We are guiding at an EBITDA margin essentially flat to slightly better than this year, right around 17% plus. And the components of that are continued gains in gross margins, although at a less aggressive rate than we have seen. What we are expecting in gross margin is two types of headwind. One is as you mentioned is FX, we continue to see the strong dollar providing a challenge for us in gross margin. The second is, is in the commodity markets where we expect to continue to see the rising cost of resin, as well as other materials, board, tissue and the like. So, that’s going to put a bit of a headwind into the gross margin picture. In terms of OpEx, we will continue to focus structurally on our cost base. We have got some programs obviously in our plans to address costs, but we also believe 2017 is an important year for us to invest in the stores, to invest in the customer to really drive a selling organization and a service model. That could be in incremental hours, it will be in incremental training and development. Because as you have heard Jim say now for a while, we think that’s a real opportunity for us, is in-store engagement and creating a more selling focused organization.

Jim Harrison

Yes, I think – this is Jim again. I think over the long-term as we continue to build out our customer engagement, we will develop an even stronger bond with our core consumer, and help build that basket.

Simeon Gutman

Okay. Thanks, guys. Good luck.

Dan Sullivan

Thank you.

Operator

Your next question comes from the line of Chris Horvers from JPMorgan. Your line is open.

Chris Horvers

Thanks. Good morning, guys. Wanted to follow-up on comp and the EPS forecast, so you talked about the everyday business being up about 3% for the year and I believe that’s what you expected in November and December. Is that how you actually played out in those months or did you see any volatility that some of the retailers have talked about? And then just thinking long-term, that 1% to 1.5% versus that 3% everyday, how should we reconcile that? And I know you are not guiding beyond 2017, but is 1% to 1.5% the right baseline in this business as we think about more medium-term growth algorithm?

Jim Harrison

I will answer the second part of your question first and Dan can address the first part. I think one of the things to bear in mind is that in 2017, we have the shift of New Year’s into 2018. So as crazy as it sounds in our business, there is no New Year’s Eve business, the significant New Year’s Eve business in 2017. So, if we were to look at the – our guidance of 1% to 1.5%, that’s more in line with probably 1.5% to 2% in that range, which is consistent with our long-term expectations for the business of about a 2% comp. I will now ask Dan to address the first part of your question.

Dan Sullivan

Yes, I think – Chris, I think what you are asking is the everyday business. I am not going to get into monthly everyday performance. You said it right, the quarter played out as we expected, with 3% everyday growth and it was reasonably consistent over the course of the quarter. We didn’t see any major volatility.

Chris Horvers

Okay. And so jumping back to Jim’s response, so as we think about that, does that create a – not sure how you are going to report comps. So when you report comps in the fourth quarter, do we have to take that New Year’s day out and so that will be something like a whatever, 1.90%, is there something like that sort of headwind and then the other quarters are a little better and that’s how you get to that 1% to 1.5%?

Jim Harrison

Correct. I think, when you look at – like I said, when you look at the fourth quarter, then that 30 to 50 basis points associated with New Year’s on an annualized basis is about 100 basis points for Q4.

Chris Horvers

Okay. And then on the EPS front, does the guide include debt pay down? Maybe I missed that, how much debt would you anticipate paying down this year? And then more broadly, you are guiding to 10% EPS growth. I know there is another some headwinds from FX and commodity costs. But again, as you think about the medium-term growth algorithm there, is that 10% the number that we should center on or something unique to 2017 as you referred to on the comp side?

Jim Harrison

There is nothing unique in terms of the comp side, but probably in terms of the 10% EPS growth, I think that’s where we are guiding to. In terms of where we see debt at the end of the year, I believe Dan has that in the guidance.

Dan Sullivan

Yes, we talk about 3.5 times as a debt leverage ratio goal for 2017 and that’s based on really the continuation of what we have seen previously, healthy free cash flow generation and a good balance of debt pay down capital invested back in the business, and acquisition.

Chris Horvers

Understood. Thanks very much, guys.

Jim Harrison

Thank you, Chris.

Operator

Your next question comes from the line of William Reuter from Bank of America. Your line is open.

William Reuter

Good morning, guys. I was just wondering when you guys look at performance by category, I was wondering if there was anything that was notably weak? And I guess, I am wondering if there are certain products that you believe you could be losing share to e-commerce competitors or where you are seeing the most e-commerce competition?

Jim Harrison

In terms of categories being weak, obviously the headwind we had in 2016 was Halloween, with it moving from the weekend to the weekday. That was really the weak category that one would say was weak. And as we look to break that down, it’s really on the adult side of the business was weak. Do we think that we have lost share to anyone in Halloween? We don’t believe that on the macro level we have lost share. Anecdotally, the research we have done and talking to others in the marketplace, it was generally a soft Halloween predicated upon move to the weekend. And in terms of our core categories, most of the product that you will find on the web, not just at Party City, you will find is actually comes from our consumer products business wholesale – Amscan. So, I don’t think we have lost any share to anybody on the web, in any major category.

Dan Sullivan

Yes. And the only thing I would add to that, as Jim mentioned in his opening, our web business for the year was quite strong. We had a 10% comp based on almost 14% transaction growth.

William Reuter

Okay. And then I don’t think I saw a CapEx number for 2017, do you know or you think or expect that to shake out?

Dan Sullivan

Yes, we expect it to be generally in line with where we were in ‘16 at around $80 million or so, about 3% of revenue.

William Reuter

Okay. And then just lastly, you talked about 3.5 times leverage at the end of the year, I guess where do you believe that the long-term target is here and I guess when you hope to achieve that number?

Jim Harrison

Yes, our long-term target is in the range of 3 times. And obviously, if we are going from 4.1 to 3.5 this year, I would expect by the end of ‘18, we should be at or probably below 3 times.

William Reuter

Great. I will pass it to others. Thank you.

Jim Harrison

Thank you.

Dan Sullivan

Thank you.

Operator

Your next question comes from the line of Stephen Tanal from Goldman Sachs. Your line is open.

Stephen Tanal

Hi, thanks guys. Good morning.

Jim Harrison

Good morning, Steve.

Stephen Tanal

Just wanted to follow-up on sort of share-of-shelf, so at 77.9% right now kind of tracking toward that long-term target that had been set of 80%, how do you think about that long-term? Do you feel like there is upside beyond that kind of the number?

Dan Sullivan

There is always upside, based on what categories we want to get into. I mean, if you look at the – at 80% if you look at the categories we are not in, we are not in greeting cards, we are not in helium, we are not in commodity, floral pans and Styrofoam and we are not in candy, candy being the largest one. As we look at those categories, we will evaluate whether it makes sense for us economically to become just a pure distributor on those categories. And if it does, then obviously, our share-of-shelf will grow. It’s simply going to be a question of where the economics lie and if it’s profitable for us to do it.

Stephen Tanal

Got it, okay. And just thinking about the comp outlook, can you talk to the online kind of growth rate embedded in that versus our other stores?

Dan Sullivan

Yes. So we continue to think the online business is a big part of our comp growth. As I just mentioned, we see double-digit – we saw double digit-growth in 2016. And I think that’s a pretty good proxy for our overall outlook in 2017.

Stephen Tanal

Great. And then just lastly for me, on the Granmark acquisition, which I think is clearly probably a bigger deal than the Balloon Agencies deal that you just recently announced. But the thing about Granmark is there some number that you can share in terms of what’s maybe an EBITDA and/or EPS in ‘17 kind of included in the guidance?

Jim Harrison

I will just talk about Granmark globally, since we don’t really want to lock into an EBITDA number, because we are in the process of really bringing that on board synergizing the opportunities both to import from Granmark and to export to Granmark and to build the product portfolio at Granmark and rationalize our infrastructure in Mexico on the consumer product side of our business. So, there is a lot of moving parts there. But Granmark is a very important acquisition, certainly much bigger than Balloon Agencies. It really does position us in Mexico as a supplier to the marketplace, as a supplier to the growth of own franchise stores. As a basically springboard for us to bring to Latin American marketplace, a broader breadth of products, that’s consistent with our Amscan and our Party City portfolios. And it also gives us an opportunity to broaden our own supply base and our own sourcing base out of Asia and into the North American continent, which obviously does a lot of things for us, including giving us a good option to Asia as a source for lot of hand labor products. So, with the Granmark acquisition, I think as we look back in several years from now, will definitely be an important part of our overall growth strategy.

Stephen Tanal

Got it. Okay, thank you.

Operator

Your next question comes from the line of Adam Sindler from Deutsche Bank. Your line is open.

Adam Sindler

Yes, good morning everyone. Thanks for taking my question on for Mike Baker this morning. First question on the top line 1Q comps, slightly below the adjusted full year. Is that because more of what you are seeing now sort of just trend to-date or is it maybe because March will be hurt by the Easter shift?

Jim Harrison

I apologize for any confusion. We expect the first quarter to be consistent with our full year outlook. So, we talk about the full year in the range of 1% to 1.5%. We also think the first quarter will be in the range of 1% to 1.5%. There is no anomaly in the first quarter that we see at this point in time.

Adam Sindler

Okay. And then just staying on the top line, the better – sort of the commentary around better trends in November and December versus October, can you maybe quantify how much November and December were up versus the quarter?

Dan Sullivan

Yes, I am not going to get into the specifics of the months of the quarter. I think what’s safe to say, coming out of Halloween, which is obviously the dominant story in the quarter, we felt very good about a couple of things. One is the consistent everyday performance that we saw across the quarter and two is strong seasonal performance, mainly in Thanksgiving and New Year’s.

Adam Sindler

Perfect. Alright, thank you so much.

Operator

Your next question comes from the line of Rick Nelson from Stephens. Your line is open.

Rick Nelson

Thanks. Good morning. Manufacturing your share-of-shelf, can you tell us where that was in 2016 and your expectation for 2017 and longer term?

Dan Sullivan

Yes. So, manufacturing share-of-shelf was just over 20% in ‘16. So, it was up about 300 basis points from 2015 and there we saw the continued benefit of recent acquisitions in ACIM and in Festival. And so I am not going to give any guidance or any specifics on 2017. But as we have said, we still believe there is a lot of upside room in manufactured share-of-shelf getting to our long-term goal of 50% manufacturing.

Jim Harrison

And Rick, that’s with respect to the retail business. As we look at the total business, our consumer product business, we are north of 30% now in manufacturing and the consumer product business. And obviously with the continued expansion of our capabilities at the New Mexico in the injection molding business, continued investment in our manufacturing operation at Madagascar, as well as now the acquisition of Granmark, which has a number of competencies in manufacturing, I would expect our goal of 50% is clearly getting, coming in sight now for us.

Rick Nelson

Do you, Jim, I think I have talked in the past about 200 basis points margin lift driving to that 50%, is that still your thoughts as you have done more acquisitions?

Jim Harrison

Yes, for sure it is.

Rick Nelson

Okay. And e-comm, can you tell us what percent of revs that accounts for?

Jim Harrison

It’s 9% of revenue, but one of the things to recall is that includes the franchisee territories. So, if we were to adjust for the franchisees territories, it is actually closer to about 7% of our sales, but it’s 9% of what we report, but in terms of looking in the context of our sales, about 7%.

Rick Nelson

And the economics there for e-comm versus bricks-and-mortar?

Jim Harrison

I’m sorry, Rick, I missed your question.

Rick Nelson

The economics and the profitability of e-comm relative to bricks-and-mortar?

Jim Harrison

No, the basket in e-commerce is twice the basket in – it’s more than twice the basket at store level and obviously the mix includes a lot of higher-priced product.

Dan Sullivan

Higher-priced product and more promotional.

Jim Harrison

And it’s also more promotional, correct.

Dan Sullivan

Yes.

Rick Nelson

And the shipping policy, of course?

Jim Harrison

Yes.

Rick Nelson

Alright, thank you. Good luck.

Jim Harrison

Thank you, Rick.

Operator

Your next question comes from the line of Curtis Nagle from Bank of America/Merrill Lynch. Your line is open.

Curtis Nagle

Great. Thanks very much for taking the question. So just, I guess a quick one on the alternative channel, how big is it now? Which segments have you had the biggest successes in? And I guess where do you think you can grow the business as a percentage of revenue over the next few years?

Jim Harrison

Okay. So let’s talk about the alternative markets, I can describe what alternative markets are. Alternative markets are really are all those markets that we have not focused on historically as we have been primarily focused on the party specialty market, not just our owned stores, but the broader party specialty market as well. As we now look at our business, we look really in terms of our capabilities. So I think we have the ability now to make party goods, but a lot of what you make are really just products that have alternative uses, not just for parties, whether it’s cups for savings, souvenir cups, whether it’s chicken pot pie bowls as I have talked about in the past etcetera. Right now, it’s about $60 million piece of business. It grew at 11% last year. As we look at that market, in terms of potential, the potential is something we really have trouble sizing, because everywhere you look there is essentially opportunities for us either in terms of a consumable product, a promotional product, or some other utility for what we do. Whether it’s balloons in movie theaters and then in theme venues and zoos and parks, whether it’s like I said earlier, souvenir cups and stadium cups for the various sports franchises that we have relationships with, whether it’s getting in and across a multitude of different channels and opportunities using the functionality of the product as opposed to using it as a party good. It really is a clean piece of paper for us. Now lot of the market already exists. So we are not inventing market uses, we are just going to participate in those markets, utilizing and leveraging up our capabilities.

Curtis Nagle

Understood. And then just a quick follow-up, if you are using free cash – or using cash flow from operations instead of EBITDA, where was free cash flow for the year?

Dan Sullivan

Free cash flow for 2016, was that the question?

Curtis Nagle

Yes, but using free cash flow from operations, not EBITDA?

Dan Sullivan

Yes, so the number we report is $308 million, which is basically EBITDA less CapEx.

Jim Harrison

So you would have to go to the unadjusted EBITDA number and subtract the $8.2 million of CapEx.

Dan Sullivan

Yes.

Curtis Nagle

Okay, very good.

Operator

There are no further questions at this time. Mr. Harrison, I turn the call back over to you.

Jim Harrison

Thank you very much, operator. Once again, thank you very much for joining us this morning. We appreciate your continued interest in our business and continued support. And as I said earlier, we are excited about where our business is today and the opportunities for us to continue to grow our business. And I look forward to speaking with you all again shortly as we talk about the first quarter later this year. Have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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