Q3 2020 Funko Inc Earnings Call
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Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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Good afternoon, and welcome to Banco <unk> conference call to discuss financial results for the third quarter of Twentytwenty. At this time all participants are in 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 permitted without written authorization from the company.
As reminder, this call is being recorded I will now turn the call over to Andrew Harless manager of Investor Relations to get started please proceed.
Thank you good afternoon.
That's on the call today are management or Bryan Merryman, Chief Executive Officer, Andrew perimeter pregnant, Jennifer for young Chief Financial Officer, a press release covering the Companys third quarter 2020 financial results was issued this afternoon and is available on our Investor Relations website Bester Dot dot com.
To begin I need to remind you that management's remarks on this call maybe forward looking statements within the meaning of the private Securities Litigation Reform Act that can cause.
Actual results may differ materially the indicated by these forward looking statements.
Various important factors, including those.
As discussed in the risk factor section of our form 10-Q, three months ended September Thirtyth 2020.
Our other filings with the FCC.
Any forward looking statements made on this call represent our views only as of today, we undertake no obligation to update them.
I'll be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA and adjusted EBITDA margin, which we believe maybe important to investors to assess our operating performance reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, including our earnings release. We've also premiered paid visual presentation investors to consult to follow along with that Scott.
It can be accessed at Investor day, It goes dot com I'll now turn the call over to Brian.
Thank you for joining the call today, and I hope that everyone is staying safe and healthy.
Many of our new lawn schemes for instance, this week Bunco games had over 10 titles on Amazon's top 100 Hot new releases for the games and accessories category.
And lastly, Danny.
And engagement with Bunko remains strong highlighted by the tremendous participation we saw and our last virtual call I'm during October more on the shortly.
<unk> turned the third quarter performance and our expectations for the balance of the year.
Region and channel mix continue to be primary drivers for our topline performance and the Covid environment.
R U S business declined 4% mcwhorter, reflecting a slower recovery within our specialty channel, which was partially offset by strengthened our third party E commerce mass-market and direct to consumer channels.
As I mentioned previously strong consumer demand drove over performance within our domestic third party E Commerce and mass retailers road and these channels is attributed to strength within our core collect little products as well as our expanded game and allows by offerings.
As the third quarter progressed, we began to see modest improvements and trends within the specialty channel driven by story openings and retailers shipping their inventory to their E. Commerce sites. Additionally, we are seeing ongoing momentum and our direct to consumer channel watched nearly doubled in Q3, driven by an increase in our own E Congress sites.
She had another quarter of triple digit growth are <unk> business represented 8% of our sales can Q3 up from 4% a year ago.
Laurence within our domestic mass market third party E Commerce, and DTC channels offset by continued softness within the European region and U.S specialty channels.
Importantly, we feel good about bunkers positioning heading into the holiday season, and we will have our most diverse product offering in the market. Yet this is enabling us to expand our relationships with key retail customers as we partner with them to deliver an expanded product offering which includes funko games and you'd collectibles at the same time.
We expect to drive consumers to our own ecommerce sites through creative marketing programs supported by a broad product offering.
The investments, we have been making in our own digital capabilities and DTC fulfillment leave us well prepared to meet anticipated demand.
The United States highly dynamic environment, we are continuing to see fans actively engaged and seek out bunko products in store and online.
As I previously mentioned just a few weeks ago, we wrapped up our bunko virtual Cohen in conjunction with New York City comic Con and could not be more enthusiastic about the level of engagement and passion. We received from the funko family not only we see our engagement levels tripled compared to last years in Pursing comic Con. So we were also able to do.
Drive higher sell through of Comecon items at our retail partners.
The broad base level of pop culture, we have been witnessing for many years now has not diminished due to the pandemic consumers and Mega fans alike are continue to view engage and create communities around their favorite properties content and teams.
Over the long term, we are confident that bunkers physician to drive growth as we continue to diversify our business across new product categories geographies and channels.
We are continuously working to bring new fans into the funko ecosystem by harnessing our innovative culture to create new products and leverage new licenses. This.
This year has certainly come with unique set of challenges for everyone I want to again give my thanks and appreciation to the entire funko team for helping us bring joy to our fans also.
Also thank you partners bands and shareholders for your continued support I hope everyone has a wonderful and safe holiday season, and new years now I turn the call over to Andrew to discuss our strategic initiatives.
Thanks, Brian in the third quarter, we made good progress against our key strategies to drive growth and diversification as.
As a reminder, these include building upon our core business further diversifying our product portfolio, expanding our international reach and increasing the share of our business through our own direct to consumer channels.
First maximizing the core pop culture business. This includes creating fun and the solvent programs with a heightened focus on evergreen properties as well as expanding our consumer based by growing under penetrated content John Ross.
Evergreen properties in the quarter made up 70% of the business compared to 58% last year and on a dollar basis grew 3% compared to last Q3.
Additionally, nine out of our top 10 properties, where evergreen in the quarter. We continue to see strong demand with mainstay properties such as Harry Potter Marvel Comics, Pokemon, DC Comics Disney and Star Wars. Some other notable programs in the quarter were the Nightmare before Christmas, which was our fourth largest property once and was driven by strong lease.
Sale programs included pop vinyl advent calendars and games more.
Marvel Action then the.
The 10th largest property was primarily driven by our retail program commemorating X men and films over the past 20 years as well as the inclusion of excellent characters and our marbles Amish program that included pop vinyl.
On a collector retail box.
Back to the future, which was just outside our top 10 top access to a broad selection of products, including pop vinyl four games apparel bags pins and accessories we.
We will continue to focus on having a strong mix of evergreen content going forward and creating fun and established programs at retail. Additionally, we intend to place emphasis on expanding the animate music and sports genre by broadening our license base and product offering so.
Strategy number two driving category diversification by harnessing our innovative culture to launch new products and reach new consumers. During the third quarter. We saw strong performance of our non figure products, primarily due to the performance of our expanded game offerings as well as our allowance line items.
Within games, we launched Marvel Battle World Midstream, the fan or stone late in Q2, which targets a younger demographic and combines micro collectibles cards and gaming.
No we saw stronger than anticipated consumer demand for these products, which resulted in a low in stock position that had us chasing replenishment throughout Q3, we.
We believe we are now in a good inventory position at retail for the holidays, while we initially launched Marvel Battle World at target in the US we have now expanded to other key mass ecommerce specialty and drug partners around the world.
We could not be more excited about the positive reaction we are seeing from the market on this line and look forward to expanding it in 2021.
We're seeing good traction with the additional game offerings. We lost this year many of our key titles, appearing on top new release lists and generating positive response from both consumers and retailers.
While our board game category is currently a small piece of the overall pie we plan to expand our offerings in the coming years and believe it will become a meaningful contributor to our business over the long term.
Also in the quarter, we saw exceptionally strong momentum with our lounge fly products, which grew 25% compared to last year. This.
This strength was driven by demand unwound flies website and at wholesale where retailers chased orders have pushed out from Q2 the.
The resiliency and performance of allowance lybrand demonstrates the importance of having a diverse product statement at retail and online to continue bringing advanced into the funko ecosystem.
For Q4, we are very excited about the launch of snap pace, our new non licensed.
You'd collectable line that utilizes fund coast patent pending snap and match technology to allow kids to create a custom character with each snap.
This line is a great example of how funko can utilize its creativity and innovation within the collectible category to target a new consumer.
Going forward, we will continue to invest and expand within games Softlines and use collectibles category to ensure we are offering fans across the world and increasingly diverse portfolio of items.
Now moving onto our third area of focus international expansion as you heard from Brian. The pandemic has been a headwind to our international business that said, we believe there is a significant amount of growth potential in overseas markets and feel confident that funko is well positioned to capture this win.
When macro conditions begin to improve.
Particularly across EMEA, Latin America and Canada.
We expect the recent launch of Funko, Europe dotcom to provide us with an additional growth lever.
As well as another method to expand our reach and broaden our relationship with fans across the region.
That leads me to our fourth area of strategic focus the expansion of our direct to consumer business. We've made significant strides growing this channel in 2020 by investing in our digital and fulfillment capabilities as Brian mentioned, our DTC channel almost doubled in the quarter.
Led by ongoing momentum on our E commerce sites, which grew more than 150%.
The investments we made earlier in the year to expand our product offerings and improve the customer experience are bearing fruit on funko dotcom.
We are continuing to strategically invest within the business to reach new consumers.
As I just mentioned, we strategically launched Funko Europe Dotcom last month, approximately 18 to 24 months ahead of schedule. We made the strategic benefit decision to fast track this opportunity in light of the current environment and the team did a tremendous job getting this across the finish line ahead of schedule.
Currently we are shipping to the UK, Ireland, and Spain, and expect to expand to Germany, France, and Italy by the end of the year with additional countries coming online in 2021.
While we are pleased with the substantial progress we made on the digital front theres still more work to be done as we continue to build out our E commerce platform.
We plan to continue to enhance our site to further strengthen the customer journey and experience as well as invest in our digital platform to ensure we can scale the business alongside demand.
Despite the dynamic environment. We've seen this year, we've stayed focused on executing against the strategy that we believe will best position the business for 2021 and beyond.
I will now turn the call over to Jeff to take you through the financials.
Thanks, Dan Good afternoon, everyone.
In Q3 came in better than anticipated across the TNL net sales declined 14% ahead of our initial expectations gross margin improved a little tools strong cost controls.
Our action allowed us to improve profitability increased cash flow and maintain a strong liquidity position throughout the quarter.
Net sales of 1.1 million largely reflect the ongoing impact of element tool.
Lincoln.
The outperformance relative to our expectations is primarily to the hill keen strength in us within third party E Commerce mass market and DTC channel.
The number of active properties in Q3 was 715, which increased 14% from prior year.
For ACA property for 267000 in the quarter and 25% compared to last year, reflecting the pressure on net sales from the pandemic in the quarter.
The top 10 performing properties water.
And then to Ryan.
Harry Potter.
Marvel Comics.
And I never looked at that.
Looking line.
DC comic.
Disney Classic.
Star Wars classic guidance.
Adam Levine and Marvel excellent.
Third quarter net sales in the U.S. decreased 4%, reflecting the continued softness in specialty channel, which was partially offset by strength in third party E commerce mass market and our own DTC channel.
International sales decreased 34%, reflecting the ongoing effect that cause a 19 on overseas markets within the quarter, particularly in Europe.
On a product category basis Q3, net sales figures were down 18% to 140 Fivenine.
Okay are strong gross margin performance embedded unexpected SG&A enabled us to deliver improve profitability in the corner.
Adjusted EBITDA came in at 36 million, which represents an adjusted EBITDA margin of 18.9% of 70 basic points from last year.
Looking at the balance sheet, we ended the third quarter with total liquidity of $107 million, which consisted of $32 million of cash and cash equivalents and 75 million availability under a revolver as we'd be paid all out and borrowings under our line of credit during the quarter.
Total debt net unallocate discount with 208 million down 12% compared to last year inventory totaled $73 million down 23% versus a year ago.
A lot amongst several countries there have been not only restrictions on openings, but also in terms of what can be sold so it's it's a pretty big hit to the quarter just based on what we're seeing currently within the business model.
Yeah also they add a little color area no no. One obviously is a counseling using for spring of next year and we are still working with the assumption with some of the retailers that we will be able to start shipping again as early as December 2nd on some of the countries are shut down for the 30 day shutdown. So we're doing everything we possibly can submitted.
Again, the possible shut down for 30 days. In addition to obviously, having our own E commerce direct consumer platform up and running so.
I got away from that mix. It came back to bite us which was <unk> two four of of 19, when we were too heavy and Star Wars have nine and too heavy and frozen too. So you know I I think.
The ability to just continually find interesting retail stories products with evergreen content is gonna continue to to go a very strong for us for the next couple of years I think the the lesson learned in queue for we'll we'll keep us always hungry to make sure. We're developing is great evergreen properties and and building a really cool retail programs.
Around that and then you layer in what do you think a really strong content you're next year and I think you know I think there's still some there's some liquidity in that and and fluidity in that in the first half of the year, but it's still much stronger than what we have in 2020 2020 with his bare and it's got it considering a global pandemic and almost no you can't.
Besides the man Delorean I think we've done exceptionally well.
Alright, thank you for that.
Your next question comes from the line of stuff I think much cafes, that's july or something.
Good afternoon. This is actually hasn't gone for staff. Thanks for taking a question to start we were wondering if you could update us or give them a little bit more color on the games initiatives given to strengthen the category here today, and then any faint allocation change anything in your destination wishing out without thanks.
I could jumping on that I wonder if you guys want to talk a little bit about the the games business. So.
Our games claim is going according to plan, we are increasing our shelf space with our retail partners as I mentioned on the call. It's still a pretty small piece of the overall pie, but that being said we are seeing growth, but we are seeing additional shelf space at our retailers, we're seeing a tremendous.
Reaction from our online E Commerce partners.
One of the one of the fun fun ways to track that is by looking at all the lists.
Lists, but they have Amazon I referenced that on my on my talking points and so yeah. We're really excited about we're excited about both at retail and add.
E com as well.
And so we continue to grow I think that it's a fresh take on a category. The category is doing very well as you as you pointed out it's.
It's perfect for when people are spending more time at home.
Better better for some categories and others part of games, obviously is [laughter].
Take it a little bit of it because of the people getting together around the table, but.
The strategy category in a lot of the other categories are doing really well. So we're excited about it.
She has a lot of success this year and we look forward to building on that in the years to come.
Great. Thanks, and then just that yeah. My next question any state allocation changes, we should know about your knee interesting you shouldn't listen to you.
My model Yeah.
Yeah, I don't think that there's anything of note I can tell you that we are.
We are seeing.
Continuing to see additional space allocated to us redo.
Retail of our retailer.
We had mentioned that before we're growing our space both in by diversifying our categories every now.
But then also just taking over more incremental space within our department. So.
That's continuing to happen.
And we mentioned larger snap cease which is obviously incremental space in a completely different department for us.
Coming out in queue for very excited about that just launched in.
In Europe at Tesco.
Last I think Monday of this week so.
We're excited to see how that goes and.
We're getting more and more interest.
As the as the weeks go on so we're very bullish on that but yeah. I mean, that's an incremental space for us as well and the new department in the store.
Okay, great. Thanks, so much.
Mhm. Thank you.
Your next question comes from the line, Alex carrying with Bank of America, Alex Your nineties open.
So thanks for taking my question some other retailers in the space of called out sort of a different cadence the holiday this year sort of.
Extended promotional timeline. It just can you give me your outlook on any hospital promotional environment to the extent you see one.
That's my first question.
You know as we enter into the holiday season right.
Alright and are are feeling very optimistic.
Under the practices that we are seeing in the European business.
And if you look across the core business with them and you asked me are seeing some positive signs and as we noted in our guidance or a R. R and.
Okay, 8%.
<unk> from Ah the working both myself.
And very bosses are moving to keep for at least.
<unk> and that we anticipate things and very strong business within the corner for promotional effective and into their pick a time, but we haven't seen necessarily anything different and from our perspective, it's been and the success of R. E. Commerce sites are only com site as well as math.
Angel strong.
That's really helpful best of luck going forward.
Thank you.
Thanks.
Your next question comes from the line it can be used to carry out the JP Morgan.
Daniel Your line is open.
Okay expense. So does that include D N a or just as janie dollars.
That was an SG&A dollar.
Guidance question and really what we're talking about it you know as we're coming off the Q3 and we get into queue for you will see an increase in our SG&A coming off the Q3 quarter.
Got it so and junior excluding DNA, that's the guide.
Correct.
Got it okay. Thank you so much.
Thank you.
They just.