Q2 2020 Funko Inc Earnings Call
[music].
Good afternoon, and welcome to Funko This conference call to discuss financial results for the second quarter 2020 at this time all participants on a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
Please be advised that reproduction of this call in whole or in part is not permit it without written authorization from the company.
As a reminder, does coal is being recorded.
We'll now turn the call over.
Hi, Andrew Harleys manager of Investor Relations to get started.
Please proceed.
Thank you good afternoon with us on the call today for management to broaden their Yardi, Chief Executive Officer, Andrew promoter, President and Jennifer for Young Chief Financial Officer, a press release covering the company second quarter 2020 financial results was issued this afternoon, that's available on our investor.
Relations website investors dropped bunker dot com before we begin I need to remind you that management's remarks on this call may contain forward looking statements with the meeting of the private Securities Litigation Reform Act or fight to 95 actual results may differ materially from as indicated by these forward looking statements as result of various important factors, including those discussed in the risk factor section or form 10-Q.
The three months ended June Thirtyth 2020, <unk> other filings with the FTC any forward looking statements made on this call represent our views only as of today, we undertake no obligation to update them, we'll be referring to certain non-GAAP financial measures on today's call surgeons, EBITDA and adjusted EBITDA, which we believe maybe important to investors to assess our operating performance, but I just.
One of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release. We've also prepared a visual presentation investor consult for along with this discussion and can be accessed and Bessert stuff Funko Dotcom I'll now turn the call over to Brian.
Good afternoon, everyone and thank you for being on the call today, we hope that everyone is staying safe and healthy in the quarter. Our team did a tremendous job of pulling together to navigate the current environment and finding a new and innovative ways to connect funko with our fans. Although we were challenged by the dynamic retail landscape and broad based store.
Closures, we delivered net sales of 98 million maintain strong gross margins and drove significant savings and that's DNA, allowing us to achieve breakeven adjusted EBITDA up.
When the quarter began not essential businesses were closed across the globe and many of the retailers that remain open we're prioritizing the restocking of essential goods.
These factors April was our most challenging month in the quarter as government started to relax stay at home mandate and retailers began to reopen we saw order trends improve in may and accelerate into June.
As expected our international business was more impacted in the quarter due to broad government closures, especially within Europe in the U.S.. We continued to see strong consumer demand with into mass market and third party E Commerce site.
While our specialty retailers performed better than we initially expected there were far more impacted by government shutdown than the other channels.
Importantly, we're also seeing more and more consumers tuned to bunko dot com and lounge by Dot com website to purchase our products, which drove E commerce sales growth of more than three yet in Q2 compared to last year.
The traction we are seeing online tells us that our products are continuing to resonate with consumers and our fans are engaging with funko, even in time of disruption.
We are staying nimble maintaining financial flexibility and making progress against our four key strategies, we outlined at the beginning of this year.
These include building on our core pop culture business.
Diversifying our product mix.
Further penetrating international market and expanding our direct to consumer business.
To that end during the second quarter, we successfully re bought funko dot com with an expanded product offering allowing bands to purchase from a wider array of funko products. We introduced several new products within the games category and unveiled a new high quality fashion line under the routes by umbrella as you can see we're not.
Staying Ida.
Over the past several months, our entire organization acted quickly and decisively to mitigate the effect of covert 19.
I had to make some tough decisions along the way all of which were necessary to navigate the current environment and build a stronger organization for the future.
Most recently, we implemented a workforce reduction that affected approximately 25% of our employees.
This is the only company wide workforce reduction in pump was 20 plus year history. It was an extremely difficult decision going for this will enable us to streamline the organization and redirect resources toward key strategic priority, such as direct to consumer and product diversification.
We believe these actions we take into increased financial flexibility, coupled with the underlying strength as a business will enable us to and navigate the impact of koeppen 19, and deliver long term shareholder value.
Well get the second half of the year, we're continuing to plan conservatively and expect a gradual recovery due to ongoing cobot 19 resurgence is in general uncertainty in both our U.S. and international market for the third quarter. We currently anticipate a net sales decline of approximately 25% compared to last year in the U.S.
We expect to see continued strength within both mass market and third party ecommerce channels as durable consumer demand remains.
Additionally, we expect to see ongoing momentum in our DTC channel.
However, we expect these factors to be offset by a slower recovery among or specialty retailers in Europe, given our retailer basis more specialty in nature. We expect this region to have a more gradual recovery than our domestic business.
As we enter the fall retail season, we have never had such a diverse product offering in the market, which is enabling us to expand our relationships with our retail partners as we've discussed in our last call. We expect to increase our shelf space at one of our mouse partners by over 20%. This fall within our core collectible category incremental to that.
We expect to see increase facings of our board games at all our major math in online retailers as well as new product placements within the toy.
Additionally, we are continuing to build unique programs that revitalize Miss deltic evergreen property and create excitement for our fans by utilizing our insights about bunkers consumers and their phantoms by way of example, we have delivered successful retail programs such as the Golden Girls, Bob Ross and Masters of the universe, we will be leverage.
During this unique ability as we launch amazing new products later this year, including.
Alliance celebrating Disneyland, 65th anniversary, which highlight a few of its iconic amusement park right.
Pop vinyl program of retro toys, which will showcase favorite pastime toys and games, such as operation, Mr and Mrs Potato head clue, furby and others and a new collection focused on this damaging Mcdonald's characters.
Given the current environment, we're continuing to see movie release dates get pushed out even with a limited new theatrical content, we've been able to create products across other category such as television sports music animate in this deltic evergreen properties that resonate with our consumers looking for we're refining our merchandising strategy.
We do include new lighthouse programs, which are broader and more holistic product set at retail that will cover multiple categories for figures apparel bag accessories in more.
We're continuing to enhance our go to market strategy to ensure we're maximizing each program to offer bands multiple ways to connect with their phantoms.
We continue to see passion amongst fan bases around the globe Vanda viewership and the desire to engage with content properties and teams that consumers love is not diminishing because of the pandemic.
Two weeks ago, we wrapped up funko virtual con reengage with hundreds of thousands of people around the world through our social media channel held a charity auction on E Bay that support the end double HCP legal defense fun on build new products and offered exclusive convention items through funko Dot com and other retail partners.
The biggest takeaway from our virtual Connie is funko its ability to create communities the spreads to all corners of the world from the U.S. to the Philippines, UK to Brazil, Thailand in India. It would truly amazing to see how large that bunko family has become at the joint incense a community we bring to our fans in such a disruptive time.
In todays highly dynamic environment is rewarding to see bunkers brands and products resonate strongly with consumers. We believe we have the platform in place to continue to diversify our revenue mix across product categories geographies and distribution channel, our culture of innovation and ability to create products across multiple.
Ladies and licenses has allowed us to reach consumers around the globe and continually bring new fans into the funko ecosystem.
Before I turn the call over to Andrew to provide an update on our progress I want to first take a moment to express my thanks and appreciation the entire funko team the past several months not been easy, but everyone pulled together as an organization adapted quickly and achieve successes during a challenging period and lastly, they get through all of our fans are part.
Earth and our shareholders for your continued support as we navigate these dynamic times.
I'll now turn the call over to Andrew.
Thanks, Brian in the second quarter, we made good progress against our key strategies for 2020 that I'm excited to discuss with everyone today.
Strategy number one is continuing to build upon our core pop culture business. This includes creating fun and the styles or programs with a heightened focus on evergreen properties as well as expanding our consumer base by growing under penetrated content genres.
In the second quarter, our evergreen properties made up 66% of our business compared to 46% last year higher concentration is in part due to limited products related to new content in the quarter as well as solid execution against some of our mainstay evergreen properties such as Harry Potter program on Star Wars DC Comics.
And Disney.
Some additional properties to highlight our demand lorient, our largest license property in the quarter driven primarily by products related to the child, which continue to see strong demand.
Global Comics, our sixth largest license property in part due to the Marvel Black Light series, which saw great demand at retail and celebrates Marvel's characters through incorporating a unique black light paint. This series incorporated a broad assortment of products across pop vinyl apparel and posters as well as backpacks from lounge fly.
Lastly, I wanted to highlight that we saw non licensed funko programs jump into the top 10 properties this quarter for the first time ever.
This is primarily due to fund coes pop Miss and pop around the world programs that were primarily sold through our DTC channels. This heightens the opportunity to leverage non license characters across our beloved form factors that resonate and connect with our fans and communities. Our second strategy is continuing to drive category diversification.
And by harnessing, our innovative culture to launch new products and reach new consumers during the second quarter, we introduced new product lines in the games in apparel categories within games, we launch Marvel Battle World Mystery in the fan stone, which targets a younger demographic and combines micro collectibles cards and gaming in short.
This represents an extremely well executed game development with a must have collectable line of figures under a popular license.
The company in the game our video shorts that were create in collaboration with Marvel and now available on Disney XD, Marvel HQ and you too.
Battlefield hit shelves in the us in late June and will launch in the UK. This month.
While still early days, we have seen very strong demand above our initial expectations.
Equally exciting we launched multiple board games in the quarter, including Pan Am Godzilla, Tokyo clash and back to the future back in time.
Panam and Godzilla were initially launched a target in June and have performed exceedingly well above our initial expectations.
Back to the future was launched at specialty stores and online and quickly sold out.
These early reads are encouraging and will allow retailers to react and capture additional demand for holiday.
The board game category continues to perform well across the sector as people look for stay at home activities.
While our board game portfolio is relatively small today, we plan to continue to expand our offering and believe it will become more meaningful piece of our business over the long term.
Also in the quarter Lounge fly launched it shop, a high quality licensed apparel line that includes dresses skirts tops and other accessories. Each piece is a limited edition and comes with an exclusive pin, adding an extra layer of collectability.
The initial line includes products for Disney Coca Cola and Barbie fans. This is another example of our ability to innovate and create new ways for our fans to connect with their favorite properties and demonstrate their fandom.
Looking at the balance of the year, we remain on track with diverse array of product launches. We have slated for 2020, which include multiple new games toys and figure lines. Our third area of focus is expanding internationally. Our international business was hit hard by Kobin 19 in Q2, and while we're seeing real.
Agents begin to improve we expect to see greater impact in our international regions than our domestic markets in the third quarter. We continue to believe there's significant opportunity to expand internationally, especially within Europe, Latin America, and Canada as those markets normalize.
We are in the process of realigning our sales team and implementing a heightened focus on international penetration as global economies begin to recover.
Our fourth area of strategic focus is expanding our direct to consumer business. The investments we've been making in our digital capabilities preparedness to meet the heightened demand that we saw in the first half of this year.
While our DTC business represents less than 10% of our sales.
We view this as a significant growth opportunity going forward and an important vehicle for expanding our reach and broadening our relationship with our fans in the second quarter. Our total DTC business, which includes our two flagship retail stores and E commerce sites grew by over 80%.
As Brian mentioned, our ecommerce sites alone grew over 350% in the quarter, notably landslide drove more sales through its ecommerce site in Q2 2020 than it did in all of 2019, reflecting our ability to bring new consumers engine lounge flies ecosystem through product expansion and innovation.
We reopened our two flagship stores in mid June and reduced capacity and while they were close we initiated a buy online pickup curbside option to continue to support our fans as Brian mentioned, we relaunched funko dotcom in June the refresh site includes an expanded product offering enhanced.
Usability and interface additional payment options and speedier checkout. Among other features and its initial weeks. The relaunch site has resulted in a lift in our key operating metrics.
Also during the quarter, we opened a new ecommerce fulfillment area within one of our existing warehouse facilities.
This has allowed for more streamlined pick and pack process and is expected to strengthen our operational infrastructure and allow us to drive scale.
While we made great progress Theres still more work to be done as we continue to build out our ecommerce platform.
Over the remainder of the year, we plan to enhance the site and improve upon our customer journey and experience importantly, we will be piloting and launching new marketing programs aimed at driving traffic and consumer acquisition across specific products and properties.
Additionally, in the second half of 2020, we will be deploying resources towards building out our ecommerce capabilities in Europe as we continue to grow our DTC footprint. We are excited about the opportunity to reach new consumers as well as utilized trends and data to inform our overall business strategy.
While the second quarter was challenging due to covert 19, we remain excited about our future opportunities and committed to driving progress against key strategies, which we believe are critical to the long term health and success of our business I will now turn the call over to Gen to take you through the financials.
Thanks, Andrew Good afternoon, everyone.
Although we faced significant headwinds and acquire sales came in better than anticipated margins held and we reduced as kenai spending.
Our action allowed us to maintain strong liquidity position in acquire with 87 million at 115% from year end.
Thank you to net sales totaled 98 million down 49% versus a year ago, reflecting the impact of carbon 19.
The other performance compared to our expectations, primarily reflect the strongly opening cadence across the U.S. and international markets during the latter half of the quarter.
A number of active property in Q2 was 644, which declined 5% from Q1 2020 and increased 9% from Q2 2018.
Net sales per active property were 152000 in the quarter down substantially compared to last year, reflecting a broad based retail store closures in the quarter.
Our top 10 performing properties in the second quarter, where.
And then delorean.
Harry Potter.
Okay mine.
Our what classic.
See comics.
Uhhuh.
Kidney classic.
Dragonball Super.
Sionko IP and the office.
We continue to see durability and the evergreen category as a percentage of our total next evergreen property accounted for 66% of net sales in Q2 up from 46% a year ago.
Second quarter net sales in the U.S. decreased 36%, reflecting ongoing business closures in April and a partial reopening in may followed by improved performance in June.
International sales decreased 71%, reflecting the ongoing effects of Kevin 19 on overseas markets within the quarter, particularly in Europe.
On a product category basis, Q2, net sales figures were down 52% to 77 million well other sales decreased 34% to 21 million.
Sales of a pop branded products were down 51% linked quarter.
Without resiliency in a lounge high brand in the quarter, which performed better than the overall company as it declined 25%. Despite many of the recasting credits.
Second quarter gross margin was 36.6% down 60 basis points versus a year.
The decline primarily reflects higher shipping freight and packaging cost as a percentage of sales due to decreased volume and a lower percentage and fob shipments in the quarter, which were partially offset by improved parts margin.
Although we saw an increase in margin due to the growth and DTC sales. This is offset by geographical mix in the corner.
Assuming the quarter came in at 39 million.
As we anticipated this was down both sequentially and compared to the prior year.
Cost cutting initiatives, we implemented in Q1 enabled us to capture over 15 million of savings against our plan during the second quarter, primarily within personnel and marketing.
As a result of our continued cost saving action, including the workforce reductions announced in June coupled with the refocusing resources to our key priorities, we anticipate that estimate dollars in the second half of 2020, well continue to be below 2018 levels.
On the earnings perspective, adjusted EBITDA came in slightly positive at 224000.
Turning now to the balance sheet as a reminder, we ended the second quarter with total liquidity of 87 million, which consisted of 41 million of cash and cash equivalents and 46 million of availability under our revolver.
Total debt net of unamortized discount was 249.
Inventory totaled 50, 910, 20% versus a year ago and 3% from year end.
During the first half of 2020, we took actions to cut cost preserve cash increased flexibility.
We have lowered expenses across the organization reduced planned capital expenditures by one third and proactively managed our working capital requirements through inventory reduction.
These actions coupled with successfully amending our credit facilities provided us with greater near term flexibility.
I think considered the balance of the year, we're planning conservatively given the dynamic environment.
Taking into account the current landscape and trends Brian discussed by Channel region. We expect Q3 net sales declined by approximately 25% compared to last year.
Additionally, we anticipate at Q3 gross margin lift strengthened from Q2 levels that will be down year over year, primarily due to geographical mix.
Also due to continued cost saving actions, we anticipate a CNH in Q3 will decline on a dollar basis on the mid single digit compared to the prior year.
Given the macro uncertainties and the fluid impacts at corporate 19, these expectations could be affected by heightened effects from the pandemic as the quarter progressive.
We are closely managing cash and liquidity aligning inventory to anticipated demand and carefully controlling costs.
We believe the actions we're taking in the current environment combined with the underlying strength of our business model will enable us to continue navigating the anticipated affects of cobot 19.
Thank you and we appreciate your time this afternoon now, Brian Andrew and I would be glad to take your questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.
Your first question comes from Steph Wissink.
Jefferies.
Thanks, Good afternoon, everyone.
All of questions. The first then is on your comments on SDMA. When you mentioned decline in dollars and the mid single digits are you talking about.
$5 million or you're talking about a mid single digit rate of dollar decline.
Absolute dollars.
Got it okay. Thank you and then the second question. It is more thematic based on your E. Com trend can you just give us an update on the percentage of sales.
Total that worked through funko dot com or loans by Dot com in partnership with Funko Dotcom.
And you know as.
In general we did see a threefold keep in mind that our DTC business is still relatively small compared to our total business that we felt really good about the success of the business, but it's still small compared to end the total portfolio.
Okay, and just as a follow up to that what are you learning about your merchandise assortment on your dot com that might lead into some of your merchandising strategies in the back half or even into 2021 in terms of where you're seeing your fan both enthusiast, our casual gravitating towards new merchandise. Thank you, yes, yes, yes pay it Brian.
A lot of lessons learned one is as we added more products onto the website. Obviously, we started to see a mentality change from just impulse buying on glass sales or exclusives to going there for an exclusive and adding to the basket. So whether a mandatory dropped to you might they might pick up a couple of college.
Hi, mandatory in on it they would buy another retailer because we had the full lineup. So I think that's number one number two is it is just evolving the entire site experience by putting out the new website.
As recommendations as better search capabilities, it's a better overall shopping experience minus.
A close to 200000 people visiting the website in the first minute during the study will call on virtual comecon when it came to selling our product it's been pretty good.
Well, we striving to get better there but.
We've learned that diversity of licenses just like anywhere else is absolutely key but they want to loyalty program. They want bass shipping they want great customer service and we're getting better and all those areas in are extremely excited about the progress. We've made in addition to this again.
We've moved up by three years, the EMEA due to seed operation when it comes to ecommerce and we'll have that hopefully up by sometime in September.
Thank you very much.
Your next question comes from Erinn Murphy from Piper Sandler.
Great. Thanks, Good afternoon, and a couple of questions for me as well maybe first on the improvement that you spoke to through June can you speak to what you're seeing in July we saw that continue and then how are you seeing it within that channel had fallen versus <unk> point of sale or sell three dynamic at that point.
Generally take the first part and Andrew the second.
Yeah, we as we noted on the call in line.
<unk>.
I perceive a it's pretty consistent across most.
And again, we don't see significant increase in terms of as economy, starting to open up and doors started the open at June was our best month as the quarter I don't want to comment yet on July given that it that is part of the Q3, but we were pleased with the progression at the quarter made and that's what with key to us actually exceeding our initial expectations.
Yeah in regards to the inventory question [noise].
You know out of the customers that we get data for.
I would say that the on what we're seeing is the inventory is down pretty significantly.
Ended the quarter. So we feel like we're in a pretty good position.
Heading into Q3 in Q4.
As far as the channel inventory goes.
So, yes, we're feeling optimistic about that.
Okay. Thank you and then just on your approach it internationally, they probably it sounds like John from your perspective, there's still a little bit of pressure I'm. We're still in those markets in the back half is that just tied to the distribution model beers eating Richard specialty or is there something different how the consumer is behaving just there, but just curious on how we should.
Think about the decline path from here and Alan for the year Yeah Eric.
I guess I can take that one yeah, you know air and it will we're still a majority of our business EMEA is still specialty.
Not is you know mature.
As we have the United States with Big partners like Amazon and target in Walmart. So a lot of that it gets smaller retailers are slow to hope and and it's just taking a little bit longer for that that to open compare to the you asked it really a lot of the big Big players never really close so we had some areas of our time.
And where it was just essential goods, but.
Definitely I, we think of Europe's about three years behind you asked in terms of the development of pop culture retail compared to the United States and I think you know other parts of the country or maybe closer to five years behind but definitely heavy specially focused but we are seeing some positive trends there in Europe, it's starting to rebound.
And then just last question it just on that trend, you're seeing in or gains and to stay at home activities broadly how big do you see that isn't it being at the end of this year and maybe even longer term you didn't really get traction within that your new launches.
Yeah Andrew.
Yes, I can take that one so you know the board game business for Funko, we're still new we're.
Just in our second year, we're not even to the point, where we're comping year over year numbers. Since we launched in October with that said you know, it's still a pretty small portion of our business. We are extremely optimistic about.
Its future growth potential to become more meaningful part of our business as we go forward and you know we're very enthusiastic about some of the wins that we're seeing in the market this year.
Thank you.
Thank you thank Dan.
Your next question comes from drew Crum from Stifel.
Okay. Thanks, guys good afternoon.
Can you share with us the percentage of stores or doors that were close.
Exiting Q2 versus where you were exiting one Q.
Yeah, I can tell you that through his Brian in Europe alone I would say that through the majority of Q2, I would say that between 90% to 95% of our store.
Stores were closed that we service in EMEA and I would say that you know probably closer to 70, 75% in Asia, and then obviously Latin Americas had a little bit of Oh was slower development. When it comes to co bid and then now there are there obviously getting the brunt of it and so we've seen a lot of store closures there so internationally.
He is been significant.
Domestically, obviously, there's been some wins it for Wal marts and targets in Amazon's because they were the ones that were consistently open.
But we are obviously starting to see some traction with specialty, but I would say that that specialty is always going to play a larger role in funko success and we.
We obviously been hurt more than the traditional toy companies that have a more higher concentration in mass.
So yeah, I think you know domestically, probably more like 40% to 50% of the store count, but definitely hired actually.
Okay, and then Brian on the Nanda Lorianne.
Can you talk about what your plans are in terms of expanding that line and.
Are you expecting the tailwind you saw in Twoq to continue into the second half.
Yeah, Andrew you know with funny, you look at the top 10 and that's the only.
I would talk call it got tent pole or current license or in the top 10, which just shows bunko strength that.
When people that are concerned about us in shifting.
Tent poles and shifting content slate.
Here, we are with a great quarter, our first quarter ever having funko IP in the top 10 and nine at the top 10 or evergreen and so yes mandatory and continued to perform for US much you know better than we ever had hoped.
Obviously, they're on track to launch the second season in October in a tail. So we believe there is a tailwind going into season, two and we will have some product in the market that is season, two centric, but more of this season launches and then we are already to go with them Supersecret stuff.
The episodes or release, so we anticipate a nice tailwind on this and obviously very thankful. This is one of the two properties. It is.
Kind of cemented in stone with their release date. So it's been it's good it's been a nice surprise for us.
Okay, and then one one maybe for John you mentioned, a b to C. Part of your business was additive margin can you comment on the margin for total E commerce relative to your bricks and mortar retail business.
Hey, Joe and Yeah, we actually don't break that out, but you know a good thing to think about it that you know we are selling you know at retail prices on our DTC business person in the wholesale prices. So you do have that added benefit in it and it does help improves the overall margin you keep in mind, though that we did that also have the headwinds.
And with the international piece the business that has you know typically higher margin being depressed kinda offset some of that gain as well.
Okay. Thanks, guys.
Yeah. So.
Your next question comes from Alex Parry from Bank of America.
Hi, Thanks for taking my question just first could you just to elaborate more on sort of what came in above your plan 90 days ago was it better than expected demand from one of the wholesale channels or you know what what exactly came in better than expected.
Yeah, I can start in Gen and Andrew Please feel free to chime in I I would just say obviously before the last three or four weeks, where there was a resurgence in encoded obviously it was more than anything else just stores opening stores opening gradually.
In Europe as they got control of the pandemic quicker than the United States and then obviously before we had the re spike in Koby case is starting to see the specialty stores opened for us so.
It's just about doors being open and but what we like the fact that there's still just a tremendous amount enthusiasts them and demand for our products that has not Wayne.
But yeah, I, just think more anything else just doors opening.
Perfect. That's really helpful. And then I'm just my second one.
Can you talk through sort of longer term, how you're thinking about the specialty channel you know given the sort of traffic declines in store closure headwinds they may be facing and then maybe some color in terms of additional channel distribution that you think could potentially being offset there. Thanks, Yeah, you know I I always tell you.
That.
We could there are self channel agnostic. We proved this during the Toysrus bankruptcy when the hasbro's the mattel's the spin Master has had a concentration of anywhere between 70 17 and.
22% of their business was that TR, you and then obviously they have a lot of business with the with the big guys at Amazon Walmart target.
We didnt have any effect at all with with the T or you business. It was supposed to be about 6% of our business that year, we just spread it around amongst a bunch of different retailers, we kind of speak about that the same way channel agnostic. If specialty is impacted youre going to see obviously, we're off to a great start this year with with the mass channels that ability to.
Take our products and we are fan base to anywhere in any retailer around the globe is something being that flexible and that liquid. He is a real strength of the company. We're very proud of it now with that being said, we're going to be more affected with so many specialty accounts being close versus the big guys.
Who were habit, obviously, a higher concentration with mass then with the Toysrus situation and so obviously is a bit of an opposite effect with the pandemic versus tier you bankruptcy. So I do think we had that unique ability to see one sector or maybe struggling with mall foot traffic can be able to shift some of that.
Content and that demand over to different retailer, so, we're where we like that position to be.
Perfect. That's very helpful. Thank you.
Thank you.
Your next question comes from the line of Mike <unk> from Goldman Sachs.
Hey, good afternoon. Thanks to the question I just have to first for Andrew I was just wondering if you could talk a little bit about the increased shelf space that you're getting at a one of your mass partners that a function of.
You know more dedicated space to the toy ill or to collectibles and then second for Brian I was just wondering if you could talk a little bit about.
The lounge fly performance in the quarter why did that outperformed the rest of the portfolio. So much. Thank you very much.
Sure sure I could jump in.
I would say that a it's a great question. Thank you were asking it because it's a good it's a good luck for me to answer one I would say the 20% referenced at the mass partner of is within the collectibles area. So that actually doesn't include all the incremental space that we're getting in new cash.
Glories as we diversify our product line.
You know an example of that is the number of facings within the game Department that we're growing toys to some degree as well those are included in that 20% increase those are over and above.
And so we're very pleased with the incremental space that we're getting holding and obviously the goal is to grow that space and the games Department. The toy idle you know the soft lines areas of the stores.
Yeah and after the second question, obviously lounge buys a much smaller business. So it's a little bit easier to a two affected in a positive way Big guard most of that we did see the ability to kind of flip that switch and build those items with you know we were talking about margin share and.
What you bake off of a product obviously when it gets to direct to consumer there even more profitable.
Even surprised we are when it with our own need to see channel. So they often a lot of those store closures with with direct to consumer business. So I think that bodes very well if we continue to grow our whole philosophy on direct to consumer but is also a little bit easier to smoke smaller chunk of business overall.
And keep in mind, there less it there are a little less exposed to the international markets as well.
Our primarily based lessen the present, the U.S. and they didn't have that headwind.
Great. Thank you all.
Thanks.
Your next question comes from Christopher Horvers from JP EM.
Thanks, Chris Horvers.
So quitting my question is you know in a in the second quarter U.S. sales were down 37 International is down 70 in the context of the you know down 25 to for the third quarter does that does that gap close.
And how close to flat are you thinking about.
The U.S. business can be in third quarter.
Dan you want to take that one.
Yeah, no we've as we kind of look out into the Q3 over really approaching it as you know we do know there has been consistent and we certainly <unk>, there's an ankle cost will be around store opening and store closures. So you know as we look forward to Q3, we just we don't have quite the sharp return current.
<unk> and <unk> as we're looking at the business as I think you know some folks have but we feel very confident that we have a strong been going into Q3, and we do feel Q2 was our worst quarter or looking forward to you know rebounding throughout the year.
And so do you think the rebound in the in the U.S. is sharper does international rig down faster as those doors, perhaps open up.
We didn't see includes here that the rebound was much more quick into U.S. person in the international markets in my concluding that as we look forward as well.
Got it and then you know thinking about the holiday season can you just remind us what the typical sort of order cycle is for for the holiday season.
A lot of stories out there you know them the mass merchants want to be more just in time.
Typically are you receiving the orders for holiday for for Q holiday now or are they coming later this year, Andrew you want to take that one yeah I can take that one so and it's a little bit of a mixed depending on the channel of distribution.
Most of our retail partners have a pretty.
From plans at this stage for Q3 in Q4, there are some retailers that com you know a lot of our online partners have a lot of tools at our disposal to help us maximize their sales you know off of a baseline of businesses they're expecting.
And so we're taking full advantage of those but for most part I would say we've got from plans not necessarily firm orders across the board on there's a lot of replenishment that happens in Q3 Q4, So I would say it's a it's a good mix of both but you know the signs that we're seeing outside.
The potential setback of you know the resurgence of co bid out there, which is you know rearing. Its ugly had again, obviously are very positive.
Got it and then.
I guess as you think about of course any comment on how you're thinking about the fourth quarter, but maybe if you if you want but maybe the right where they ask it is.
What turns let's say to you it just focus on the U.S. like what turns the U.S. business positive again is it.
As a theatrical releases is it yeah, the specialty shops open.
And movie theaters opening as it is it you know specialty shops in the mall lets say opening I like how are you thinking about the biggest drivers of the U.S. business turning positive other than you should that the lap of getting too.
The first half of next year, Yeah, Chris I think it's all those right I think the sooner sooner, we see some sort of semblance of a better foot traffic or is there I mean did due to the resurgence of the Cobra cases go backwards viewed this content slate.
We stabilized stabilize again right and they the some of these anchors they put in like Black widow Wonder woman 1984 stay in their current position tenet.
All this is really going to help us and I think that obviously that provides an ability to maybe get some upside, but with that kind of uncertainty around all of that and a resurgence of covidien. Obviously, we're being very very conservative and we just have to kind of see how that plays out I think all those things.
You know are going to.
Play a part in what Q4, it looks like for us.
I guess, if I can just sneak one last one interest as you think about.
Just trying to way outside the content the theatrical content portion of that headwind of demand. If if you just think about if you were going to wait the lack of theatrical content versus you know people not engaging in going to two specialty stores and not shopping as much as you know the as they had.
Prior how how would you wait the two of those factors says that yeah, I review I would say in a way of looking at it Chris If you look at Q2 and nine to 10 properties were odd evergreen and not current content in the one that was was content that aired in October of last year, meaning man Delorean I would tell you that we are looking.
At the second half the year expecting not to see any tent pole movies B B, a part of it right, where we're being conservative. We're we're looking at our models thinking that you know this isn't going to bounce back and people are going to be theaters, and there isn't going to be a bunch of big theatrical.
The theatrical impact is going to be minimal at best anyways, and there's only a couple of movies there that are that managed to.
The meant themselves in the second half of the Euro bottomless, which to 21 and that is the wonder woman and at Black widow, Yeah are the two big ones that but everything else is pretty much moved there are some TV shows that are gonna be a part of the second half of this year as well in is that it's in TV shows that it moves so I think there's there's some upside.
There are some stuff that stabilizes, but we're certainly not counting.
Thanks, Brian Best of luck.
Yeah I appreciate it.
Thanks.
Your last question comes from the line of Gerrick Johnson from BMO capital markets.
Hey, good afternoon. Thank you have three questions one for each of you Gen on the layoffs that were announced in June of 250 people.
When does that charge it hasn't hit already how big will that be and then what's the what's the annual run rate savings from that action.
Hey, Gary a nice to talk to yeah. So from our last perspective that happened in Q2. The majority of that is behind US. There are some additional payments that really making for cobra within for the rest of year, but it's not significant in terms of you know the overall picture and.
I'm sorry, little second part of the question what do you have done right now so definitely yes, yeah. I mean, what do you have to think about it as you know that was does a pretty significant savings that we saw in Q2 as we look forward into Q3 in Q4 and this is another reason why you will see the S. You may go up sequentially from Q3 at two key things kind of.
You too is that is of the fertility folks that we.
Had for led some have come back into the business.
In addition to that as we continue to focus on our priorities you know our R&D to see expansion as well you will see some we'll have to backfill some of the roles are and promotion that we continued to focus on our priorities. So yeah. We don't really have a run rate that that we're looking at per se. It's more about how do we look at the organization on a go forward basis to make sure that we.
You're putting resources against the prior priorities that we have.
Okay fair enough Andrew.
Look covance still here doesn't look like it's going anywhere soon so can we talk about your your and consumer for second how how is their demand been affected during a pandemic or they are these collectors finding comfort and their collections or are they perhaps gravitating towards more activities are experiences. So what's your research Tanya.
At your core customer yeah. That's a really good question I will say that not only our Reis research, but you know the conversations that we're having with some of our partners who have remained open during this time.
Have been.
Really surprising.
In a positive way right the though the walmarts the targets the Amazon Geo these ones that haven't really.
I had to shut down you know the demand that we've continued to see at those retailers tells us that collectors are still out there there are still looking for products, they're still interested in getting products as soon as they drop that's still the pandemic hasn't really affected that.
You know, there's still shopping in stores, which I think was something that we were really worried about you know was everyone I'm going to just go to you know the dot com portions of the websites or Amazon to go find a go find our products and we haven't seen that'd be the case, we are obviously seeing I believe the benefits of.
Some of the stay at home activities that we talked about that talked about on the call you know within the emerging game business and we have but you know guarantee even the impulse purchases that we're seeing at mass are very positive. So I would say yeah.
Yeah I'll take your guide I'll add we had almost 200000 people in the first minute trying to buy a the comecon items, we had about Brazil on bunker Dot compress DCC.
And we had a waste of share.
That anywhere comecon greater than any other company, including that able comic con and more than that Hasbro and Mattel put together. So there's still palatable excitement for how we connect bands to the things. They love I don't think that dissipated at all and I think it gives us great hope that you know.
Hey, as things is a macro trend stabilizes I, we're going to be back to where we're at in flying.
Okay. Okay perfect segue to the question was going to ask you I'm getting broader and broader as I go up the food chain here.
How do you feel you your business will performed in an economic downturns should we have you know we get through government stimulus in the election, we have yeah, you know a garden variety recession that my last a little while what or how does how does your business. How about you know with great question, Eric I would I would tell you it took a global pandemic for us not to.
Grow we've grown every single year says you know I acquired the company back in 2005, and I would tell you that the number one thing that gives us a.
Confident no matter what the economic situation is going forward is it a couple of things one our product for the most part or sub $10 most of them ravage around eight bucks into.
Diversity diversity diversity that means that.
The the license portfolio was spread so diversity across sports and music in animated video games and television and theatrical temples that were going up connect you to something you love a very very affordable price and I think that look three top economic time companies like Nigel collectibles or hot waste.
Alan 200 or action figures could be impacted they make wonderful products I think both those companies or utterly amazing, but that's where the high end collected the collector or the Super banner, the or the product that the enthusiasm for property might say, hey, look I cant afford that but a pop it it eight bucks I I think they Canada.
That gives us hope and we have a very big track record that says for you know essentially 16th straight years before the pandemic, we've grown even during tough economic times in 2008 2009 2010.
Okay, great. Thank you for that Brian I appreciate it yeah, you bet you're talking to him.
And I have no further questions at this time or are there any closing remarks.
Thanks, everyone for joining the call today, and we'll talk to you next quarter. Thank you.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation and I've said you. Please disconnect at this time.
[music].