Party City Holdco's (PRTY) CEO James Harrison on Q2 2016 Results - Earnings Call Transcript

| About: Party City (PRTY)

Party City Holdco, Inc. (NYSE:PRTY)

Q2 2016 Earnings Conference Call

August 04, 2016 08:00 AM ET

Executives

Deborah Belevan - Vice President, Investor Relations

James Harrison - Chief Executive Officer

Gregg Melnick - President

Michael Correale - Chief Financial Officer

Analysts

Stephen Grambling - Goldman Sachs

Michael Baker - Deutsche Bank

Karru Martinson - Jefferies

Simeon Gutman - Morgan Stanley

Operator

Good morning. My name is Candice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Party City Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be quarter-and-answer session. [Operator Instructions] Thank you.

Ms. Jim Harrison, CEO, you may begin your conference.

Deborah Belevan

Thank you, operator. Good morning, everyone, and thanks for joining us. This morning we released our second quarter financial results. You can find a copy of our press release on our website, at investor.partycity.com. On today's call we have Jim Harrison, our Chief Executive Officer; Gregg Melnick, our President; and Mike Correale, our Chief Financial Officer. We'll start the call with some prepared remarks by Jim and Mike, 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 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 comparable GAAP measures, please refer to the earnings release.

With that, I'll turn the call over to Jim Harrison.

James Harrison

Thank you very much, Debbie. Good morning, everyone, and thanks for joining us for our quarterly call. Overall, we are very pleased with our strong second quarter results, reflecting adjusted EPS of $0.25 per share, a 100% increase from the prior year’s quarter.

These results were driven by a 5% increase in total revenues, 200 basis points of gross margin expansion and reduced interest expenses resulting from our 2015 IPO and recapitalization. We believe that these results are a clear reflection of the strength of our unique vertical model as the global leader in the category, which sets us apart from most others in the retail space.

This quarter’s margin growth was driven in part by the ongoing strategy of vertical integration, which enables us to increase the number of margin layers we capture, as well as improved sourcing costs reflecting our global investments. 77% of this quarter’s retail sales were products, which were supplied by our wholesale business, which we refer to as share of shelf and slightly more than 20% of that was manufactured by our manufacturing units.

Our goal over the next several years is to ultimately increase the 20% manufactured share of shelf to 50% as we simultaneously increase our overall share of shelf to at least 80%. This quarter growth in our wholesale business on a pro forma basis increased approximately 3%, after adding back the elimination of sales through recently acquired franchise stores and the impact of FX. In our retail segment, we saw strong brand comp sales of 3.8% as well.

These comp store sales increases were driven by the Easter shift this year to Q1, about 70 basis points; a stronger summer and graduation season, and a positive response to our new advertising campaign, which carries the basic message, it is not a party unless it is a Party City party. As positive as our Q2 financial results are it is what is happening behind the scenes that will set the stage for sustained future growth, which is even more exciting.

In our newly acquired costume manufacturing operation called Festival, we are well underway in integrating the business unit and expanding production capacity. Through June 30th this year this facility has produced over 580,000 units of which 350,000 units are for our own requirements. With some minor investments over the balance of this year, for 2017 we expect capacity to exceed 2 million units of which approximately 1.2 million will fulfill our own internal needs.

At our Custom Injection Molding plastics manufacturing operation, ACIM, we are also making good progress integrating this operation into our vertical model. We have transitioned approximately 1.5 million of product purchases away from third party foreign and domestic vendors, and putting our own product now through this facility, including plastic tumblers, [buckets] and containers. As I have mentioned in the past, this business unit has a healthy third-party business, which has a tremendous amount of potential.

These opportunities will be an important element in our strategy of growing alternative market channels outside of our historical party goods retail market. We will continue to pursue additional lower cost bolt-on acquisitions similar to ACIM and Festival, to further help us reach our goal of 50% self-manufactured. I look forward to updating you on these efforts in the not too distant future.

We have also [Indiscernible] our retail operations, expanding our store base to achieve our plan of 4% growth per year. Regarding new stores and remodels we continue to be on track to open about 30 new stores this year. There are currently 25 in the pipeline to open before year-end and with those we signed 21 leases. Year-to-date we have also remodeled or relocated 26 stores and plan to complete about 60 in total by year’s end.

Our stores support the party customer’s inherent desire to shop in person, while providing a fun destination experience, which is also complemented by our e-commerce capability. A survey of our online shoppers revealed that nearly half of the respondents indicated that they visited partycity.com to plan what to buy in the store. Our first two franchise stores in Mexico are now open and we expect to have three more open by year-end.

Our initiative to expand our international presence is progressing in line with our plans as well. Year-to-date international wholesale revenues outside of the US have increased 7% on a constant currency basis. I am excited and enthusiastic about our future. We are pursuing numerous initiatives to grow our sales and profitability, whether it is accretive acquisitions to strengthen our vertical model, expanding our customer base to new markets and geographies, expanding our global sourcing capabilities or continuing to offer consumers an unparalleled shopping experience to help them celebrate life’s most important moments and events. We are fortunate to have a team of associates, who refuse to be satisfied with the status quo and strive for continuous improvement.

With that I'd like to turn the call over to Michael Correale, who will review our financial results in more detail.

Michael Correale

Thanks, Jim. Good morning, everyone. Looking at our second quarter consolidated revenues totaled $519 million and were $24 million or 4.8% higher than in the second quarter of 2015. The strengthening of the US dollar continued to negatively affect our international sales, lowering reported sales by $3 million in the quarter. However, this FX drag was substantially offset by our retail stores gain of an additional days sales as Easter Sunday, a day on which our stores are closed, shifted into the first quarter of 2016 versus falling in the second quarter of 2015.

After adjusting for currency and the Easter Sunday shift, our retail or vertical sales increased 7% or $25 million. During the second quarter of 2016, our brick-and-mortar sales increased 6.5% as reported, or 6.1% on an adjusted basis. The brick-and-mortar sales growth principally reflects additional store count as well as our strong second-quarter comp sales growth.

Our global e-commerce sales increased 16.4% as reported or 17.1% on an adjusted basis, and reflect expanded digital marketing as well as online product assortment. On the Party City brand basis, our same-store sales increased 3.8% as reported or 3.1% after adjusting for the shift in Easter and reflect the positive response to our new advertising campaign and strong summer grad sales.

The reported Party City brand comp sales reflect a 3.1% increase in average transaction dollar, and 0.7% increase in transaction count. The reported e-commerce same-store sales included in the Party City brand comp increased 17.3%, reflecting a 15.9% increase in transaction count, and a 1.4% increase in average transaction dollar.

At the quarter's end, our company store network totaled 730 stores as we opened four new stores and closed five stores during the second quarter of 2016. Compared to June 30, 2015 we had a net increase of 33 stores, as we acquired 23 stores from franchisees, opened 23 new stores and closed 13 stores during the [LTM] period ending June 30, 2016.

Our non-vertical wholesale sales as reported were $1.4 million or 1% lower than in the second quarter of 2015. After adjusting for constant currency, wholesale sales were slightly positive and increased by $4.2 million or 3% compared to the second quarter of 2015 after further adjusting for – to consider the elimination of $4 million in sales to the 23 former franchisee stores acquired in December of 2015 and January of 2016.

Our overall gross profit margin for the quarter was just north of 40% or 200 basis points higher than in the second quarter of 2015, despite a nearly 30 basis point negative impact from unfavorable foreign currency movement. The growth in margin was principally driven by the expected flow through of lower product cost, as well as an increase in our share of shelf within our vertical operation from 75.6% in the second quarter of 2015 to 77% in the second quarter of 2016. The increase in share of shelf occurred principally in the bakeware, serveware and latex balloon categories.

Operating expenses for the second quarter of 2016 totaled $153 million, increasing by 6.5 million, but remaining flat as a percentage of revenue when compared to the second quarter of 2015. The impact of acquired stores and the timing of additional broadcast and digital advertising spend were offset by the leverage from our strong retail comps, core savings associated with the reorganization of our gift sales group and a $1 million nonrecurring contract termination charge in the second quarter of 2015.

For the quarter, net interest expense totaled $23 million or nearly $11 million less than in the second quarter of 2015, reflecting the application of our April 2015 IPO proceeds to pay down debt and the subsequent refinancing of our debt portfolio during the third quarter of 2015.

Our second quarter 2016 income tax provision is based on an estimated annual effective tax rate of approximately 37% for the year, compared to the actual annual effective tax rate of 42% for 2015. The higher tax rate in 2015 principally reflects the impact of additional foreign income taxes on our consolidated tax provision.

Before I discuss net income and net income per share, I want to point out that for the quarter, I will be referring to adjusted net income. The adjustments to arrive at adjusted net income and adjusted net income per share are provided in the financial tables in today's press release, and include among other things non-cash purchase accounting adjustments, the amortization of intangible assets, deferred finance costs and original issued discounts, equity-based compensation and the gain or loss on sale of assets.

As a result of the adjustments I just described, net income for the second quarter of 2016 was $28.3 million or $0.24 per share, compared to adjusted net income of $14.2 million or $0.12 per share in the second quarter of 2015.

In comparison to the second quarter of 2015, the impact of foreign currency on our second quarter 2016 operation was to decrease net income by approximately $1 million, or just under $0.01 per share. However, due to movements in currency rates from March 31 to June 30, we experienced a net foreign currency transaction gain on international receivables denominated in US dollars, which we report in other income.

Thus the net effect of the currency on our bottom line for the second quarter of 2016 when compared to 2015 was an increase in adjusted net income of $1.2 million or $0.01 per share.

Adjusted net income for the second quarter, which is also provided in the financial tables to our press release, totaled $85.1 million or $10 million higher than in the second quarter of 2015 and was in line with our expectation. On a constant currency basis, adjusted EBITDA increased to $87 million.

Looking at our cash flow, cash flow from operations for the second quarter of 2016 was a source of $75 million for a $44 million increase over the second quarter 2016, principally the result of IPO related costs flowing through 2015 net loss. Working capital was a source of cash of $27 million and $23 million in the second quarters of 2016 and 2015 respectively.

On a day’s basis, the components of working capital were generally comparable year-over-year. During the quarter, our CapEx and net cash investment activity of $19.3 million was comparable to the second quarter of 2015. Retail CapEx totaled $11 million and an additional $5 million was spent on wholesale.

The company ended the second quarter of 2016 with net debt of $1.75 billion, and a net leverage ratio of 4.5x, and we continue to expect our leverage ratio to improve to just under 4x by year-end. Availability under our existing asset based revolving credit facility at June 30, 2016 totaled $374 million.

With that, I'd like to turn the call back over to Jim.

James Harrison

Thanks very much, Mike. In the immediate term we are very busy getting ready for the Halloween season and are already putting product into our stores. We have a fantastic mix of new proprietary costume designs, a key differentiator in our product offering, and are applying lessons learnt from last season to further increase efficiencies in our stores to handle the surge of customers we see in the days leading up to Halloween.

Despite our better than anticipated performance for the first half of the year and the positive trends, we are only slightly modifying full year guidance as we continue to take a prudently conservative outlook in light of the shift in Halloween this year from Saturday to Monday. We are adjusting brand comp outlook to slightly positive. Revenues are anticipated to range between $2.35 billion and $2.42 billion.

Adjusted EBITDA is expected to total between $390 million and $405 million, and adjusted net income is expected to fall between $140 million and $150 million or $1.17 or $1.25 per share.

Before closing I would also like to touch upon an organizational change we recently announced. Mike, who has served as our CFO since 2002, has been with the company for approximately 18 years has elected to step down from this role as global CFO, and will assume the newly created position of Executive Vice President, Chief Accounting Officer, and Treasurer. As a growing public company we have the need to create this position, which will focus on treasury, public reporting, banking and credit relationships and the ever-growing requirements of Sarbanes-Oxley.

To succeed Mike in the role of EVP and the global CFO, [Indiscernible] to our senior leadership team Daniel Sullivan. Dan will have overall responsibility for finance including FP&A, business development and investor relations. Dan’s broad and extensive experience at Ahold Delhaize and Heineken USA will make him a key addition to our senior leadership team and we look forward to him joining us.

With that I'd like to open the lines up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Stephen Grambling from Goldman Sachs. Your line is now open.

Stephen Grambling

Good morning. Thanks for taking the questions. I guess first on the wholesale business, you provided some good detail about how that is trending ex-the franchise impact in international, I guess as we look further out or farther out how do you think about the base domestic growth in that business going forward?

James Harrison

There is two different elements to that Stephen. There is the rest of the party channel that we have the privilege of servicing and we look at that as low-single digits, and then there is our alternative markets, which we look to grow at a much higher rate, more than 10% range. Now as we look at the first half of this past year our sales into the [Indiscernible] markets and into the mass market obviously had Frozen effect involved in it, and if we were to pull that out we would see that the alternative markets are growing roughly in that 10% range.

Stephen Grambling

That is helpful, and then on e-commerce, I think that you mentioned the assortment was expanded, can you quantify the increase in SKUs online, maybe you can talk to what categories those would be in and where you have additional opportunities?

James Harrison

Sure. I will ask Greg to address that.

Gregg Melnick

So, one of the things that we are doing online is actually creating kit SKUs and so we are actually taking packaging SKUs whether it be 5 SKUs, 10 SKUs, and we are putting together for the consumer almost on a one-click basis for them to be able to buy different aspects of their party together, and so that a piece of the business, while it appears to be a different SKU in a different assortment it is actually driving sales especially on our mobile business because, it is very hard to sift through 40,000 products on our phone. That is one piece of it. We continue to expand our costume business. We continue to expand the assortments on our seasonal products as well as our candy business.

Stephen Grambling

Then one last one if I can just sneak it in just on margins, any additional color you can provide on the gross margin split between input cost on the share of shelf and how we should be thinking about potential benefits from some of the lower input costs as we look forward? Thanks.

James Harrison

Sure Steve. Essentially it is 50:50. I think the share of shelf is like 90 basis points and the cost and other savings is roughly about 1.1%. I think as we look at it on a go forward basis, last year at this time we had just begun to get some of the benefits of that – of those costs savings and additionally as you track our share of shelf and look at it historically quarter-by-quarter, you will see that we had a strong share of shelf in Q3 and Q4 of last year. So I think that sends the cycle through which is why we are projecting a relatively flat gross margin expectations for the balance of the year.

Stephen Grambling

Great, thanks so much. I will jump back in the queue.

James Harrison

Thank you, Stephen.

Operator

Your next question comes from Mike Baker from Deutsche Bank. Your line is now open.

Michael Baker

Hi, can you talk about the same-store sales trend throughout the quarter, and then we have you guidance obviously for the full year, so going back to the back half guidance, but just curious if you could talk about some of the things that happened last year in the third quarter that caused your comp to be negative and what the plans are to cycle that and how the Halloween shift may impact the back half? Thanks.

James Harrison

That was a whole bunch of questions…

Michael Baker

Particularly comps.

James Harrison

So in terms of the tempo of comps over the course of the second quarter, obviously in April we had the benefit of Easter, which was about 70 bps, and then as we saw the graduation summer seasons evolve, particularly in the latter part of May and June we had a very, very strong graduation and a strong, although not as strong as graduation, summer season. As we look into the third quarter, the third quarter really doesn't have the benefit of [I will call it], catalyst, whether that is Halloween, whether that is graduation, whether that is Christmas or New Year, the third quarter really is for all intents and purposes the dog days of summer, where we really rely upon the everyday programs, our everyday celebrations to drive business.

And we look at that business as good right now, but we wouldn't expect it to have the same sort of strong 3.1% [Easter] that we had in Q2, and so therefore we look at that being a positive period, particularly since we are up against last year when we had some impact from the remodels to help us drive a positive comp in Q3, albeit not as strong as Q2. And then as we look at the fourth quarter, as I said in my earlier comments, I think we are being prudently cautious and conservative as we look out to the fourth quarter in the context of Halloween, as Halloween moves from a Saturday to a Monday we are taking a cautious outlook on that because obviously there is a difference between a Saturday and a Monday Halloween, albeit very, very difficult to quantify.

Michael Baker

Okay, perfect, understood. If I could just ask one more quick one, the $0.24 adjusted number this quarter, how does that compare to your internal plans, it is clearly better than the consensus number but how does it compare to your internal plan, and I guess the implication there that it was better than expected, why wouldn't you raise the full year guidance except I guess being conservative?

James Harrison

Once again internally we have obviously therefore we look a point that we look to achieve too, but we also look at a range as we develop our guidance and we develop a range. With respect to our quarters in the context of looking towards the full year guidance it was at the higher end of our range for guidance for Q2. So it may have been higher at that point in time but was at the high end of our internal guidance as a range.

Michael Baker

Understood, thank you. I appreciate that.

Operator

Your next question comes from Karru Martinson from Jefferies. Your line is now open.

Karru Martinson

First and foremost want to stay congrats Mike on the move, 18 years, very impressive. And then when you look at kind of the shift here in summer and grad sales, I mean is it really as simple as you guys were just more focused on the category, more focused with the advertising and that drove that, or is there a broader change out there in the market?

James Harrison

There is a couple of things going on Karru. I think first off I think our in-stock position on summer was a little better this year in terms of timing. Additionally, as we look at graduation over the last several years graduation has been trending slightly down, and there clearly is a shift in I think the mindset of young parents these days to celebrate every step of the educational process from starting school at two years of age, which when my kids were going, we called it day-care. Now it is called school. Now that has been celebrated as we go from 2 to 3 and 3 to 4 and 4 to 5 et cetera. So I think there is more celebration of graduation at the younger end of the cycle and not as much as it was years ago at the further end of the cycle as young people graduated from college, telling mom and dad, we would rather go with our friends to Cancun, than have a graduation party. But there is a backfilling going in terms of the different ages.

Michael Correale

Yes, and I think Jim said it right, and to evidence that we included a range this year, that was a lot more juvenile and we actually marketed it to not only graduation but to the concept of Moving Up Day, and that was something that we saw in our digital marketing and proved to be pretty successful.

Karru Martinson

And when you look at the remodel effort here, 60 stores targeted for the year, I mean what is the sales lift that you get from those, are they – kind of these are just your older stores, or your better performing markets, or were you giving them a facelift?

Michael Correale

So I think it is a combination of what you said. Overall, where we model or relocate 55 to 60 stores for the year, on the relocation strategy it is probably two thirds of that number and we do that in concert with leases coming up for renewal, and so it is not necessarily heavier markets. It is just when the store is timed up; we can take advantage of the real estate market and be able to remodel our store at the same time.

And on the remodel standpoint that is just stores that we are investing in for the future that haven't been remodeled in a while. All told, it ranges somewhere between 5% to 10% depending on the overall store, where it is reload or remodel.

James Harrison

That is the left over base.

Michael Correale

Yes, the left.

Karru Martinson

And just lastly, on Halloween, given the acquisitions that you guys have made on costumes and the licenses, how much of the costume assortment this year do you feel is going to be produced and manufactured by you versus the prior year, what is the gain there?

James Harrison

So in terms of manufactured by us it is very de minimis. It is the 350,000 units coming pit of Madagascar because this Madagascar is our initial manufacturing entry into the category. We do design and we do source obviously as we have since we acquired Christy's in 2010 and that has been a growing number. In terms of exact numbers, north of 95% of our costume will come through our vertical model this year.

Michael Correale

Yes, and if you include all of our accessories and all of that stuff, we are in the high 80s, and this year we have the opportunity to first from a new perspective, some of the new properties from Warner Brothers.

James Harrison

Right.

Michael Correale

[Indiscernible] next year.

Karru Martinson

Thank you very much guys. I appreciate it.

Operator

And your next question comes from Simeon Gutman with Morgan Stanley. Your line is now open.

Simeon Gutman

Okay. Simeon, how are you? Nice quarter guys. Jim, first does the success around graduation just that there was an event and you marketed around it successfully and the consumer was receptive, does that give you some more confidence around the back half especially Halloween time?

James Harrison

If the question Simeon, which I believe it is, how do I feel about our advertising, I think our advertising has been pretty much how I expected. It has been effective. It is very difficult to quantify the true impact of the advertising in terms of putting a number on it unless you do it on a product basis. And we did do it on a product basis for our multi-[water balloon] product and we saw tremendous response there. Today, the impact on our mobile digital advertising which is really a new adventure for us this year in terms of spending real money on it. We're seeing, I think that's where we're seeing the impact and that's probably part of why we see the lift we see in our ecommerce.

Simeon Gutman

Okay. And then somewhat connected. It sounds like you started the quarter out fine, even ex-Easter and you gave us that commentary on the last call. May described as sort of steady and then what the big pick up end of May into June. And now you said July was fine even if it's dog days of summer. But can you say if July is consistent with sort of the May or April, just trying to gauge like the underlying tenor of the business X sort of the graduation meaning. Has something picked up excluding these holiday events, do you think it's your advertising that's starting to drive traffic and a little bit better, I guess, traffic in the store?

James Harrison

We don’t give quarterly counts. But as I look at July, I see July as a modified continuum of what we saw at the end of May and June and as to what I attribute to, I attribute to a couple of things. I attribute to as we talk the impact of the remodel list here and getting past that. And as well as I believe the advertising program is a long term investment and it's a long term strategy to really create the differentiation of our retail space from the other retail space out there in the category.

So, I think it's a combination of those two and I think in terms of looking at the full year as I said I think it would be in course of the prudent in our approach to how we give guidance with respect to comp sales. But as of now we continue to be very comfortable with our guidance.

Simeon Gutman

Okay, thanks.

James Harrison

All right.

Operator

Your next question comes from William Minor from Bank of America Merrill Lynch. Your line is now open.

William Minor

Hi. I was just going to ask about the 30 stores that you guys planned to open this year. And I guess can you talk to me about what the how the last year's vintage of stores has performed relative to maybe some of your historical vintages. And then also, have you updated this recently on what you believe the long-term store growth opportunity is?

James Harrison

Yes. So, your first question based on the stores that we opened last year, the 2015 vintage. They are performing on as expected on pro forma and doing nicely with respect to that. Has it relates the long-term new store opportunities, we continue to see about 30 new stores a year, we see that for this year with the bulk of them happening in the back half of the year as we done in previous years.

Gregg Melnick

But in terms of total stores, we're in the approximately 300 store range.

[Cross talk]

Gregg Melnick

Yes, the universe. Yes.

William Minor

Okay. And then just my second question. I'm not sure if you've updated this on your ecommerce penetration at this point, where we are at this juncture and what you believe your long term opportunity is for that number?

James Harrison

So, I think our overall our ecommerce business on a percent of sales is about 6% to 7%. It's relatively consistent with prior years. But if you take that back in and think about it on a transaction basis because the web average transaction is about 2 ½ times what is in the stores. From a transaction perspective, the web is about 2.5% of our store network transaction and that's been relatively consistent. The consumer definitely uses partycity.com and our digital assets to shop and to pre-clan parties to get ideas, to get perspectives, but the consumer tells us that she comes into our store and enjoys the shopping experience and we have not seen any changes in the overall penetration of the digital perspective in relationship to the brick and mortar perspective, except to say that we are improving our conversion on our mobile platform.

If we're doing a lot of work there, not only with the kit skews that I was talking about those party idea skews but also check out and eve of navigation on the sites. So, we're seeing an enhanced conversion of traffic on our web accelerate in recent months.

William Minor

Okay, great. Thank you, very much.

Operator

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

Rick Nelson

Thanks, good morning, great quarter. I like to ask you about the acquisition pipeline. Do you go slower now as you assimilate first of all full speed ahead?

James Harrison

That's a great, it's a great question, Rick. It really is full speed ahead and I don’t mean for that to sound like we'll be reckless to the concept of pursuing bolt-on acquisitions. But the nice part of that our strategy is that these acquisitions are on Day one, the only small acquisitions, they don’t require a tremendous amount of work from an integration standpoint and because we have the ability for us to add our own demand to these operations, we can get them up to speed fairly quickly. So, we can proceed with opportunities as we see them and we don’t really have to create a backlog for digestion. We can digest them pretty quickly.

So, as I said in my earlier comments, we continue to look for bolt-on acquisitions that will enhance our capability and improve our overall vertical model. Andi would expect that we would have some opportunities that we could hopefully bring to fruition and matriculate in the not too distant future.

Rick Nelson

Okay, great. And your manufacturing shelf goods outstand today and given the recent acquisitions where do you see that proportionate, is that 270 basis points of margin that opportunity growing to 50%. Is that still there?

James Harrison

And the answer the back the last questions, yes. And in terms of where we are today, we're in the low 20s. It takes a little bit of while to get prioritization is a great example here. It takes a little bit of what a time to get molds made and dyes made and robotic arms acquired to bring in and take on the capacity into demands, associated with our own products. We have a number of molds coming online hopefully this week, they will further enhance how much product we run through ACIM. But ACIM for instance should be about $45 million of our own purchases that currently go elsewhere and we'll get that, we should achieve that over the next three four years.

And in terms of Festival, as I said my other comments will do 800,000 pieces this year, 350 for our own demand and next year we're looking at roughly 2 million pieces and million two of our own demand and now we continue to grow as well. And we look further opportunities to add more capacities elsewhere.

Rick Nelson

Okay. Thanks a lot and good luck.

James Harrison

Thanks, Rick. I appreciate it.

Operator

Your next question comes from Seth Sigman with Credit Suisse. Your line is now open.

Seth Sigman

Great, thanks. And good morning guys, nice quarter. I wanted to just follow-up on the online topic. I think Jim, earlier you provided a really interesting statistic about half of the survey respondage you had, the browsing online first and then I think coming to the store, maybe you just clarify that statistic because I said was interesting. And then more importantly reminders of the differentiation of your offering versus the other online options out there where consumers can cross out. I don’t know if there is some measure of skew exclusivity that you can maybe point to that would help us frame why the consumer will still go to your side or go to your store versus somewhere else?

James Harrison

Right. So, think about the shopping experience, mums in our store for 45 minutes to an hour, planning it, planning the party, trying to figure it out. In a day that she's going to bring her child there, she's actually needs to expedite that shopping experiences as has as possible. It's really not enough time for browsing. And what we find in our consumers is that they utilize our website for ideas for the mix and match capability of the way our products work together to get color inspiration and then they come in to the store and they actually they make the purchase.

Trying to come through 30,000 skews in the store in a 45 minute period is difficult. And that’s kind of where that perspective from a consumer comes from.

Gregg Melnick

Yes. Also, as you know from partycity.com, we create a I will say a more logical but I would call it more logical and more interactive shopping experience of the consumer as we romance and show the product in unison in various situations. I think additionally in terms of your question, in terms of the product that swarm in. I think the big difference we have in addition to our kits and our ability to kit some of the broad spectral product we carry, we do have a much larger swarm of party goods and then virtually anybody else out there. And we have the ability to offer those products.

I don’t think we have any unique or specific product stats, then we'll be able to do and create in terms of kits. Because we do self in up from our marketplace.

Seth Sigman

Okay, perfect. That's helpful. And then the positive response to the advertising campaign, really is early but where do you think it's helping, the driving traffic, is it driving ticket, and at this stage of its bringing it new customers and then that customer profile is any different than your existing customer base?

James Harrison

I think it still wait to our think to be able to reach a lot of those conclusions at this point in time, I think we did to consider, I think we do see the impact in our ecommerce and what's done from standpoint of our mobile digital platform. And I think in terms of it being effective, we do have the anecdotally we have the time the advertising campaign that promoted the water Bloom program when we had a tremendous spike in that process at that time, for some of our pool parties.

Seth Sigman

Okay, got it. All right, thanks guys.

James Harrison

Thank you.

Operator

And there are no further questions at this time, I'll turn the call back to our presenters for closing remarks.

Deborah Belevan

Thanks, operator. And thanks everyone for joining us today.

James Harrison

I just wanted to add, there was a question, I did get a text on a question that I want to just touch upon quickly. Somebody has spoke about Pokémon. We are having some lift on Pokémon party goods which we manufacture and sell in our stores as well as Pokémon balloons. It will be nowhere near a frozen in terms of this impact. Right now, Pokémon is doing about who say good with a 150,000 a week in our stores in party goods.

Michael Correale

Yes.

James Harrison

Which places it as a good pattern, a good pattern but not a great pattern and but we did, we are in positive trend and we are taking advantage of Pokémon. So, with that I'll turn it back to Debby. Thank you, Debb.

Deborah Belevan

Thanks, Jim. And thanks everyone, have a great day. And a replay of this call will be available on our website later today. Have a great day.

Operator

And this concludes today's conference call. You may now disconnect.

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