Funko Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to Funko's 2023 Third Quarter Financial Results Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at the time. Please be advised that reproduction None of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded.

Operator

I'll now turn the call over to Funko's Director of Investor Relations, Rob Jaffe. Please proceed.

Speaker 1

Hello, everyone, and thank you for joining us today to discuss Funko's 2023 Third Quarter Financial Results. On the call are Mike Lundsberg, our Interim Chief Executive Officer and Steve Nave, the company's Chief Financial Officer and Chief Operating Officer. This call is being broadcast live at investor. Funko.com. A playback will be available for at least 1 year on the company's website.

Speaker 1

I want to remind everyone that during this call, management's discussion will include forward looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks And uncertainties that may differ materially from those stated or implied, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recent SEC reports. In addition, during this call, we refer to non GAAP financial measures that are not prepared in accordance with U.

Speaker 1

S. Generally Accepted Accounting Principles and may be different from non GAAP financial measures used by other companies. Investors are encouraged to review Funko's press release announcing its 2023 Third Quarter Financial Results for the company's reasons for presenting non GAAP financial measures. A reconciliation of the non GAAP financial measures The most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today. I will now turn the call over to Mike Lunsford.

Speaker 1

Mike?

Speaker 2

Thanks, Rob, and good afternoon, everyone. We're pleased to report better than expected financial results for the Q3. Net sales were 313,000,000 Adjusted net income was $2,000,000 and adjusted EBITDA was $25,000,000 all of which were above the high end of our guidance range. These results were primarily driven by strong direct to consumer sales, improved sales to several of our larger wholesale customers, both in the U. S.

Speaker 2

And in Europe, and the cost reductions and operational improvements we've implemented over the course of this year. On the last call, we outlined a path to achieve long term profitable growth. We said that this strategy and approach We'll inform everything we do going forward. By focusing on the fans and our unmatched brand, by running the business with financial discipline, Projecting complexity and focusing on fewer products done extremely well by investing in areas we can control, measure and grow profitably And by keeping the flywheel turning, where each action we take builds on the previous one, propelling positive momentum. I'd like to call out a couple of highlights from the quarter to demonstrate the progress we've made executing that plan.

Speaker 2

I'll start with the first element of the plan, though some of the highlights relate to multiple elements of the plan. We believe our fans and customers are excited and engaged, And our brand is strong. So how do we quantify this? First, we grew direct to consumer sales 32% year over year With B2C sales in Q3 representing 17% of our sales mix versus 11% in the Q3 of last year. 2nd, across our website, the average order value grew 8% year over year to $60 3rd, the successful online launch of Pop Yourself in August contributed to the strong D2C sales in Q3, And we expect sales to continue to ramp for the upcoming holidays.

Speaker 2

Pop Yourself is attracting new customers to our brand and to our D2C channel, With over 50% of customers purchasing Pop Yourself being new to our website. 4, Mondo sold more than 3,500 units at a $500 price point of a Masters of the Universe Battle Cat figure in an exclusive timed edition sale, our largest revenue drop ever. And finally, our fans reward loyalty program, Which we just launched in May, has already surpassed 100,000 new members. In the 3rd quarter, We also made progress focusing on fewer products done extremely well. On the fewer product side, we have stopped development of lower value product lines and SKUs.

Speaker 2

We believe this will ultimately help us expand gross margin and improve inventory management. On the done extremely well side, Loungefly won the Innovation Award at the Licensing Awards in September for its McDonald's French Fry Crossbody Bag At Loungefly's Disney Nightmare Before Christmas Toy, undead duck cross body bag,

Speaker 3

one

Speaker 2

of the fastest selling lines of Q3, Saw 100% sell through within the 1st week of sales. Biddy Pop! Our line of miniature collectibles launched earlier this year Was a key contributor to wholesale sales in both the U. S. And Europe, making up nearly 5% of total sales.

Speaker 2

Aside from the tremendous growth potential, we are excited about this product line for a couple of reasons. First, we're not reliant on new content. We're able to leverage the strength of Evergreen Properties. The top selling Biddy Pops in Q3 were the original Star Wars and Harry Potter characters. And second, we're able to secure incremental shelf space and reach new customers in different aisles in specialty, mass and value retailers.

Speaker 2

Turning to the company's leadership. I'll share a brief update on the CEO search. The search process is underway, and we're delighted with the quality and caliber of the candidates expressing interest in the position. I remain very excited about the opportunity ahead, And the candidates I have spoken with share my enthusiasm. We also announced today a change to our Board of Directors.

Speaker 2

Mike Kearns has been named to the Board, replacing Rich Paul. Mike is a co founder and managing partner of the Kearns Group and has deep experience Starting, Managing and Investing in Digital Media and Consumer Technology Companies. We welcome Mike and look forward to his counsel and insight. At the same time, we thank Rich for his contributions as a Director. While he has resigned from the Board, we are pleased that he will continue to serve in a new role as a And finally, as we previously announced, Brian Mariotti, who resigned from the Board in September, Also continues to serve as a strategic advisor to the company.

Speaker 2

With that, I'll turn the call over to Steve to cover our detailed financial results and guidance.

Speaker 4

Thanks, Mike. Hey, everybody. Thanks for joining us today. I'm going to dive right in on the financial results. For the Q3, net sales were $312,900,000 which included wholesale channel sales of $258,300,000 And direct to consumer sales of $54,700,000 Q3 wholesale and D2C sales increased 29% 38%, respectively, compared with the 2nd quarter.

Speaker 4

Gross profit for the quarter was 104,000,000 And gross margin was 33.2%, which as expected was well above our Q2 gross margin of 29.2%. The increase in gross margin was primarily driven by price increases fully in effect for the quarter, lower inbound freight costs, partially offset by increased levels of discount sales and inventory reserves. Included in the Q3 gross margin With $6,400,000 of non recurring charges related to factory purchase order cancellation. If not for the one time charges, Gross margin would have been higher at approximately 35%. SG and A expenses were $94,000,000 and as a percentage of net sales Improved considerably to 30% in the 3rd quarter versus 36% in the 2nd quarter.

Speaker 4

Some additional color on SG and A. First, SG and A in Q3 included $9,900,000 of onetime expenses, which included $6,200,000 related primarily to the termination of a lease agreement and $3,700,000 for severance and related charges. 2nd, excluding the one time expenses, SG and A and dollars remained essentially flat in Q3 from Q2, Which is quite an achievement considering net sales in Q3 were $73,000,000 higher than Q2. It also gives you a sense of the progress we've made Carrying out our cost reduction plan. And then 3rd, the workforce reduction announced in August generated a partial cost savings benefit In the Q3, we expect to see the full benefit beginning in our current Q4.

Speaker 4

Adjusted net income was $1,700,000 Equal to $0.03 per diluted share, which exceeded our guidance range for the quarter. And finally, adjusted EBITDA was $25,400,000 Which as Mike mentioned earlier was much better than we anticipated. Turning to our balance sheet. At the end of the 3rd quarter, We had cash and cash equivalents of $31,900,000 Our total debt was approximately 299,500,000 which includes the amount outstanding under the company's term loan facility, net of unamortized discounts, The balance on our revolving line of credit and our equipment financing. Inventory was 162,100,000 Which was $84,000,000 lower than the December 31, 2022 balance and $25,000,000 lower than our Q2 ending balance.

Speaker 4

To be clear, a portion of the lower inventory was due to a higher than average obsolescence reserve recorded during the Q3. This was expected and included in the guidance we provided last quarter. A comment about our inventory. Rightsizing our inventory remains a key objective. We have completed the bulk of our product purchases for the year, and as a result, we are on track to end 2023 With the lowest inventory levels of the year.

Speaker 4

As a result, we expect working capital to be a tailwind in the 4th quarter, and we should see a meaningful rise in our liquidity in the quarter. Now turning to our outlook. For the full year, we have narrowed our range for net sales and maintain the midpoint. Our range for adjusted EBITDA is unchanged. We now expect net sales of between 1 $0.065 $1,105,000,000 and adjusted EBITDA of between $20,000,000 $30,000,000 For the Q4, our guidance is as follows: net sales of between $260,000,000 $300,000,000 Gross margin increasing sequentially from the 3rd quarter, SG and A expenses in dollars decreasing from the 3rd quarter, Adjusted net loss of $4,200,000 or $0.08 a share to adjusted net income of $2,800,000 or $0.05 Finally, we expect adjusted EBITDA of between $16,000,000 26,000,000 Mike, that's it for the financial results.

Speaker 4

So I'm going to kick it back to

Speaker 1

you to close this out.

Speaker 2

Thanks, Steve. I'll close with some high level thoughts about 2024. We're currently developing our outlook for next year, which we expect to provide in our next earnings report. This involves weaving together the elements of our plan, focusing on our brands and fans, running the business with financial discipline And selectively investing in areas we can grow profitably given our opportunities and challenges. Our Q3 performance is a good starting place.

Speaker 2

It reflects the strength and resilience of our brand, the cost reductions and operational improvements we implemented this past year, as well as a reenergized attitude within the company to build a solid foundation for a more profitable future. I will now turn it over to the operator for Q and A.

Operator

Thank you. And ensure that your device is unmuted locally when it's your turn to speak. If you change your mind or your question has already been answered, Our first question today comes from Linda Bolton Weiser of D. A. Davidson.

Operator

Your line is open.

Speaker 3

Hi. This is Christina Shu on for Linda. So I want to ask what are the factors that would result in the high end of the EBITDA guidance range for the Q4 versus the low end?

Speaker 5

Hey, there. It's Steve. I'm sorry,

Speaker 4

I didn't follow that question. Could you repeat that for me?

Speaker 3

Yes. So I was wondering what are the factors that would possibly result in the high end of the EBITDA guidance for That would possibly result in the high end of the EBITDA guidance range for the Q4 versus the low end?

Speaker 4

Oh, sure. So I mean, it's going

Speaker 5

to come down to sales, and probably most specifically to the D2C sales because A lot of the retailers for holiday, they've done their stocking up, etcetera. So, I think it's going to come down to how well we do with our e commerce Business right up until ground cutoff as well as our couple of retail stores.

Speaker 3

Okay. Thank you. Maybe a follow-up. So like, can you give us like a general idea to the trend of your retail POS growth?

Speaker 4

Our own internal our retail store POS? Yes.

Speaker 1

I don't know if I have that off the top of my head.

Speaker 3

External oh, okay.

Speaker 5

External POS growth.

Speaker 6

Yes. Sure. I'll jump in. Hi, this is Yigal Penevan, I'm Deputy CFO. Sure.

Speaker 6

Yes. We don't have specific stats on our retail POS, but for those retailers in the mass channel that report the data to us, We're still down year over year in POS sales, but we have seen an improving trend over the past 6 months. We've commented on this I think the most encouraging thing that we're seeing is that our sell in continues to be lower than our sell through, and we're just seeing improved levels of Inventory in the channel as we head into the holiday sales period. So I think the trend is encouraging from what we're seeing.

Speaker 3

Okay. Thank you. I'll pass it along.

Speaker 7

Tell Linda we miss her. Yes.

Operator

Thank you. There are no further questions in the queue. So I'll turn the call back over to management for any closing remarks.

Speaker 7

Okay. Thank you, everyone, for joining us on the call today. As always, thanks to our fans, employees and our partners for their support, And thank you to our investors and analysts for joining the call and listening in. We look forward to sharing our progress on our next call, and we'll talk to many of you in the next 48 hours as we do follow-up calls. Thank you.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your line.

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Earnings Conference Call
Funko Q3 2023
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