Q2 2021 Funko Inc Earnings Call
And our best current judgment about future results and performance as of today. Our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect and.
In addition to any risks that we highlight during the call important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release and.
In addition, we will refer to non-GAAP financial measures during the discussion reconciliations to their most directly comparable U S. GAAP financial measures and supplemental financial information can be found in the earnings press release, and 8-K that we released earlier today.
All of these items plus a visual presentation that investors can consult to follow along with this discussion are available on our Investor Relations website, Investor Funko Dot Com I will now turn the call over to Brian.
Good afternoon, everyone and thank you for joining US today, we're pleased to deliver an exceptional second quarter highlighted by our largest top line performance in company history net.
Net sales came in at $236 million up 141% compared to last year, reflecting broad based strength across our brands product categories channels and regions.
We are now above pre pandemic sale levels and all our major geographies.
Our ability to drive this level of performance, while navigating the fluid macro environment.
Tremendous execution by our teams I am extremely proud of what we've accomplished during the last 18 months we have been.
Become a more resilient and dynamic organization and found new and exciting ways to delight and engage our fans. The evolution of our virtual convention is a great example of this.
The earlier part of the week at our first annual fund Con event, a hybrid virtual and physical events that we think represents the future of banding data we.
And we added virtual conventions and the path and in fact, our seventh virtual event, but we've managed to elevate the scope and the success of these online and hybrid events and a massive way hosted out of our Hollywood store, we developed a mix of live and prerecorded content for both life and in the store and tens of thousands of additional fans online.
This week, we featured price giveaway opportunities to go behind the scenes and be funko artists and celebrity features among a whole host of other fan engagement events and what we've unlocked with virtual and hybrid convention as a format that provides a more tailored fan experience with greater brand control and similar.
Revenue potential when compared with our traditional convention calendar.
The event is only halfway done with the initial stats have been extremely positive.
And on pace to beat our 2019 in person and sales numbers by more than 40%.
That does not mean that we're abandoning and person conventions and the future, but what it does mean and you can expect more virtual elements and we continue to elevate our fan experience.
On the direct to consumer front and accelerating the expansion of our e-commerce platform with a key growth pillar, even before the pandemic, but it became that much more important and physical retail was closed and or disrupted last year.
Today, we are generating sustained traffic growth and we've integrated tools and analytics to increase conversion rates and average purchase value on our sites driving steady performance improvement.
We are also leveraging our strong social media presence and broadening the skus available.
Our funko shop exclusives like Alice in Wonderland, Blacklight series continue to sell out minutes, but by expanding our catalog of Pops and other categories available on our sites, we're able to seamlessly provide additional item recommendations.
And just the first 2 quarters and this year alone average units per transaction.
<unk> orders per customer both increased by more than 35% and.
A quarter that saw consumers returned to brick and mortar retail we maintained strong traffic and sales growth across all our sites.
Turning to our Evergreen collection for the past 18 months have served as an important proof point of our ability to deliver compelling products irrespective of the current slate of new content and.
And cinema closed last spring Sports League canceled seasons, and TV shows stopped filming we refocused even more on our evergreen properties. Our content catalog is a treasure trove of fan favorites and it is no surprise that evergreen titles dominated throughout 2020 sales today, we're maintaining that the ability to.
Create products that thrill and resonate from our entire catalog and fact evergreen property revenue more than doubled in Q2 versus the prior but now were beginning to layer on new content, including excellent theatrical release calendar and the results speak for themselves.
This past quarter, our list of top 10 properties include new titles like space Jam, and new legacy as well as classics like legal and Fitch and Seinfeld.
And the last item and I want to call out it's a tremendously successful launch for earlier this week of our first digital pop NSP collection with the teenage mutant Ninja turtles for.
The first drop of $20 and standard packs and 10000 and premium packs sold out and less than 15 minutes with more than 45000 and fans and the Q when a drop went live.
Just like with our physical product. The first launch is always a learning opportunity. We will continue to refine the size of our drops the cadence of which our drops occur and the overall our user experience, but the early response has been extremely encouraging and well above our expectations on.
Generally pleased with the team's ability to quickly execute against this initiative and deliver a product and buying experience that excited and delighted our fans.
Q2 was a companywide success, reflecting the effectiveness of our entire pop culture platform and our ability to connect with our fan bases around the world.
Our pop and allowance by brands each grew in excess of 130% over the prior year as the reopening of specialty retail provided a huge lift for both brands.
Pop benefited from the stronger content calendar as well as our continued success with evergreen property revenue.
Meanwhile, allowance by its unique and innovative approach to collectible fashion has made it particularly attractive to specialty as these retail partners look for opportunities to differentiate their experience and product and it.
Like our exclusive program.
Provide additional tiers of differentiation and continue to be a driver for new demand for the brand from a product category perspective, our diversification efforts were headlined by <unk>, which grew 136% over 2020 led by bags wallets and accessories.
Also generated strong growth and non last buy items, including games plush and action figures on a regional basis, both the U S and Europe generated triple digit growth over Q2, 2020, and both regions exceeded 2019 performance.
The reopening of specialty drove significant growth in both geographies within Europe, we saw recovery across the region.
The areas that lagged and Q1 of this year largely coming back in line as lockdown restrictions eased.
And our other international markets results approached or exceeded pre pandemic 2019 levels as growth returned to nearly all regions.
We delivered an excellent first half of the year and we remain focused on executing against our key initiatives to increase our broad consumer appeal and expand our total addressable market.
Against the backdrop of a record quarter and a really excellent first half we are mindful of the macro uncertainties, we are facing and the second half most notably for <unk>.
Headwinds are accelerating sharply, causing product delays and substantial cost increases. Additionally, the rising concern around the Delta variant is beginning to weigh on our consumer sentiment.
Despite these macro challenges, we now expect to achieve net sales of $900 million to $930 million Approx.
Approximately $30 million at the midpoint from our previous guidance range, reflecting our second quarter outperformance and the exceptional demand for our products, which remains at an all time high churn will share more details on our outlook when she reviews our financial results.
And before I hand, things over to Andrew and I want to express my enthusiasm for the management transition and we announced this afternoon, Andrew and I have enjoyed a strong and highly productive partnership since she joined Funko in 2013, we will continue to collaborate closely through this transition process and we are looking for maintaining our partnership and our new roles beginning next.
Year.
The business has never been stronger.
And we just reported our best sales quarter ever and have had the product and talent to ensure we are well positioned to deliver long term growth and sustained shareholder value.
We greatly appreciate the support of our partners fans and shareholders and look forward to keeping you updated on our progress throughout the year.
Now I'll turn the call over to Andrew to discuss our strategic initiatives.
Thanks, Brian let me start by saying how honored I am to assume the role of CEO next year, Brian and I have been working together for more than 10 years and I look forward to working with them for another 10.
This is a very special time for funko, and we have amazing opportunities in front of us and I know that was Brian is our chief Creative officer, our future will be as bright as ever on.
On a record quarter was driven by success in each of our for strategic growth initiatives Q2 was an exceptional quarter and for the pop brand, which generated triple digit growth and exceeded 2019.
And highlighted our successful evergreen properties, which are now being complemented with a robust movie slate.
Within our evergreen properties sports music and anime and continued to gain momentum.
<unk> anime properties made it into our top 20 for the quarter, our new vinyl figure platform targeting sports and music fans coal.
Set to hit shelves. This fall and we have more programs targeting new customers and fans on the way.
Our product diversification initiatives saw similar success on non figure business also generated triple digit growth and success across all categories landslide continued on with their exceptional growth trajectory.
And this was driven by strong recovery and specialty P&C performance and growth in Europe a.
A combination of exclusive programs higher average price points and a more focused product mix for all factors and our success international.
<unk> continues to be a growth area for wildfire.
When we originally acquired and the launch fiber and it was mostly a domestic business over the last few quarters, we've seen accelerated growth in Europe as we've expanded our footprint.
And our youth collectibles category, we continue to make strides and new areas of the store, reaching new customers snaps.
Snaps each wave 2 and hitting source soon and we continue to see strong success without plush and action figures, mainly driven by a 5 minutes on Friday business and last but certainly not least is our continued expansion into the game aisle. We saw strong positive reaction to several of our new titles, including ESPN tree and night Disney is a small world.
<unk> never say die and our new Seinfeld game the game about nothing within our collectible gaming systems. We are seeing success out of the gate on Battle World too and there is a lot more fun and games on the way.
Moving to our direct to consumer business the.
For channel accounted for 11% and net sales and the quarter and we continue to generate strong revenue and traffic growth.
Operating and increased selection of mainline items as well as limited edition exclusives for both driving traffic and increasing cost guidance. We've also increased the conversion rates on our growing traffic volume.
We will continue to expand product lines and enhanced customer experience.
And we will remain an important driver for incremental growth for funko.
Turning to international expansion, we saw growth across our geographies, particularly in Europe.
Which maintained its strong momentum from Q1 for Q2 and exceeded 2019 results.
The major contributors to this growth were specialty recovery continued launch for growth and our DTC channel Funko Europe Dot com.
And our other international geographies also showed growth, especially oceana and Latam. Finally, this week at <unk>, We announced a brand new initiative as part of Funko cares program help hospital purpose.
And funko community engagements has always been at the center of our efforts with Pos with farmers, we are elevating our commitment to our community with a distinctly funko approach. We began identify and causes that are important to our fans employees and communities. Today, we are partnering with leading organizations to create pop collection celebrating the individuals affected by.
Are contributing to those causes stay tuned for our first pop collection and partnership with Mako and.
We've had an excellent first half of the year and we're excited to execute on the opportunities in front of US. We look forward to keeping you updated as we progress through the year I will now turn the call over to Jenn take you through the financials and 2021 expectations.
Thanks, Andrew and good afternoon, everyone. We're pleased to report record second quarter results highlighted by net sales growth and 141% over the prior year, reflecting the very strong second quarter demand and broad based strength across our product categories geographies and channels.
Do you ever performance relative to our expectations was primarily driven by our lifestyle brand in Europe as well as strong mass macro results.
All comparisons are to the second quarter of 2020, unless otherwise stated.
Net sales and the U S increased 110% to $163 million, while Europe growth, 393% to $52 million and our other international markets increased 117% with growth and all of our larger region.
And then we have active properties in Q2 was 795 and increase of 23% from prior year net sales per active property for 297000 and acquire and increase of 95%.
For a list of our top performing property in the quarter. Please see the accompanying earnings presentation.
On a product category basis, Q2, net sales of figures, 142% to $187 million with top branded products increasing 137%.
And on figure product sales increased 136% to $49 million, primarily driven by our <unk> brand, which grew 132%, but with strong contributions from accessories and gained plush and action figures.
Second quarter gross margin was 39, 1% and increase of 250 basis points versus Q2 of 2020 net.
And present, primarily reflects our healthy inventory position and lower clearance activity in the quarter, while we were able to largely offset the writing shipping and freight costs and the first and second quarters, we've seen a sharp acceleration in July and expect shipping and freight to remain a significant headwind throughout the second half.
SG&A came in at $55.9 slightly lower than anticipated due to timing of on boarding new talent and a shift and marketing spend for the second half of 2021.
Moving down the P&L adjusted EBITDA increased substantially to 41 million with adjusted EBIT margin at 17, 4% and adjusted diluted earnings per share of <unk> 40.
Turning to the balance sheet and cash flow, we ended the quarter with $95 million of cash and cash equivalents, our highest bounce ever and $75 million and availability under our revolver, representing total liquidity of $170 million.
We ended the quarter with total debt of $177 million and 26% compared to Q2 of last year.
Inventory at quarter and totaled $86 million up 43% on sales growth of 141%.
The business generated strong operating cash flow of 71 million during the quarter.
And as Brian mentioned, we expect container cost and availability to prevent a much greater headwind and the second half and we saw on Q2. Meanwhile, that's a very concerns continue adding additional uncertainty for the second half outlook on.
Offsetting these external headwinds is the record demand for our products across all our channels and our focused execution.
Based on our current view, we are raising our full year revenue guidance to reflect our strong second quarter, while adjusted EBITDA margin guidance remains unchanged.
With that context for the full year 2021, we are raising our top line outlook at the midpoint by about $30 million with anticipated net sales of $900000.930 million.
We now expect gross margin for the year to be approximately at or just below 2020 level, which implied a sequential decline from Q2, reflecting the sharply increasing shipping and freight costs expected in the second half.
We expect third quarter SG&A on a dollar basis to increase sequentially for the mid to high single digit millions, reflecting a catch up and some of the marketing spend that shifted from Q2 with a more modest sequential increase and the fourth quarter.
Full year adjusted EBITDA margin is expected to be and the range of 14% to 14, 5% representing an increase of 170 for 220 basis points compared to 2020.
We expect adjusted net income of $57.4 to $64.2 million based on a blended tax rate of 25% and adjusted earnings per diluted share of $1.6 to $1.19 based on a weighted average diluted share count of $54 million.
We appreciate your time this afternoon, Brian and Andrew and I will be glad to take your questions.
And if youre less losses.
<unk> study you can do some pressure for the 1 on your telephone and keep that now.
And our first question comes from Tony Chicago.
And <unk> from J P Morgan channel Yolanda and now.
And if you'd like to proceed and your question.
Hi, Thank you so much for taking my questions.
So my first question and you got and your comments.
And that the delta on that and is beginning to weigh on consumer sentiment and.
Could you elaborate on that and a little bit is that based on what you're seeing from retailer order trends on or the end consumer and holding off on purchases.
Because of the virus.
Hey, Jamie how are you and this is Jen and thanks for the question, we're really and what we're really describing there is what we're hearing externally on demand has never been stronger and we feel really good about our Q2 sales and about our outlook. It was more just to acknowledge that this pandemic continues to weigh on consumer sentiment. So we'd be remiss not to mention that day.
Got it got it and it's not and nothing specific to fund growth quarter to date trends, rather alright, mura for macro sentiment. Okay got it got it that's super helpful.
And then.
I think your previous for full year guidance contemplated and like a low to mid and mid double digit sales growth and the back half and now I think everything into like mid teens to high teens sort of range. So can you help us understand what that means for and a third quarter versus fourth quarter.
And then whether this increase implies any contribution from the ft that debt deal and launched recently.
Yeah and so.
The way I would think about our quarters, we have a fairly stable and normal quarterly basis, and and I think looking at just some of the history. If you remove 2020 and of course would be helpful.
And we talked about on our last call and we feel really good about the NFC and <unk>. We just launched our first 1 officially on Tuesday, which was exciting and at this point, it's an evolving industry and and were new to us. So we have not baked that into our numbers at this time.
Got it okay perfect. Thank you so much.
Thank you.
Okay.
Our next question comes from Erinn Murphy from Piper Sandler and Yolanda appear for now if you'd like to proceed.
Great. Thanks, good afternoon, and congratulations Andrew and Brian to the announcements this afternoon.
I guess my first question is on supply chain and 70% I believe you produce out of Vietnam could you share a little bit more about what youre seeing in terms of factory downtime. How flexible you can be in terms of moving product out of Vietnam or into China, or just elsewhere, and then you talked a little bit about freight expense and the back half really.
Starting to pick back up and what's embedded in the outlook right now and are you having to tap into airfreight.
Darrin and I'll take the permit.
The first part of that.
As far as bandwidth in terms of capacity for our factories and we're in great shape.
Please go ahead.
You said, 70% to 75% is still and Vietnam, but our ability to keep up with demand is not a problem and factory capacity, it's more about container space.
And that's where the bottleneck is for us and just about everybody else and we continue to work with even some of our biggest retailers in the world about moving applebee box for them, they're having the same constraints that we are but I'll, let John answer the second question yes.
As you I'm sure and reading as well, it's constantly evolving the situation with the containers and the freight costs we have.
And trying to look forward to see what we anticipate based on what we're seeing that and the marketplace and baked that into our guidance.
And that's why we feel really good about on adjusted EBIT margin guidance, but.
And if we were to actually exceed our sales it would put margin pressure on just based on what we're seeing out there, but we have contemplated those freight increases and our guidance.
Okay, and then Brian just to follow up just to make sure I understand so are you not being impacted by any of the factory downtime I know a lot of athletic.
Manufacturers right now, we're kind of moving on to week fiber downtime.
Downtime and factory and so I just wanted to add.
Got it and not an issue for us at all.
Okay, Great and then.
A couple of follow ups, maybe Andrew for you and love to hear how your view at the back to school, thus far and what Youre seeing in terms of your kind of core channel. It sounds like math with part of the outperformance in Q2 with that continuing into third quarter, and maybe what youre seeing and digital versus specialty as well.
Yeah.
Hey, Erin yes, so we are seeing.
We saw strong results and the mass market and.
And Q2 as you know we've been building pretty significant programs and that channel for quite some time.
And that channel fared the best over the last year.
And so and connect and it continues to so.
And I'll go back to school is and traditionally a very.
Big event for Funko.
We do obviously get.
A little bit of the foot traffic and thats going into the stores for back to school supplies and things like that that packs and as I've got that are more of a targeted back to school.
So yes, I mean, we're thrilled with where we are right now and and we think that the.
We are benefiting and maybe a little bit from the from the foot traffic, but I wouldn't say, it's anything over and above what see normally.
Okay and then last question just following up on NFC is very exciting to see that that came out earlier. This week can you share a bit more about the user experience you've created and how should we think about frequency of launches going forward. Thank you. So much yeah. A great question I would tell you that we certainly didn't create a user experience for you we definitely piggybacked on.
<unk>.
Marketplace.
And we certainly work with them hand in hand to try to enhance maybe previous releases on that platform and to try to make it more funko Pam would expect and I think they did a really good job with that being said.
It is and our plan and waxes aware that we are building our own marketplace and we will end up controlling the front and of that fairly quickly as far as cadence is concerned I think.
We're not going to be as aggressive as we originally thought with the once a week releases.
We talked earlier on.
And Andrew and Jeff.
And then did a roadshow about the difficulties and the licensing space with the legalities and the boiler plate contracts, because it's just new and Theres a lot of outside counsel on us on outside counsel on them trying to come up with that I also think that there was a lot of learnings and despite a.
<unk> initial launch there are things that we want to do to better. The overall express my guess is youre going to see things on on about every 3 week cadence with a couple 1 there'll be a little bit shorter than that throughout the end of the year I think as we continue to ramp up contracts are taking a little bit longer than than we anticipated I think youll see a more robust.
And with reschedule and 'twenty, 2 but so far.
And we're really really optimistic and thrilled with the initial release.
Great and congratulations.
Thanks Sharon.
Our next question comes from Steph Wissink from Jefferies. Your line aside for now if you'd like to proceed with your question.
Thank you good afternoon, everyone and all.
And Aaron sentiment and congrats for the team on the transition.
And my question is actually on loans fly if we could just unpack that a little bit up over 100% and the quarter has that been from incremental distribution. It sounds like Europe was part of that and what are you seeing about that customer relative to your core business is it bringing a new customer and to the funko family or are you seeing that and over.
Lapping customer that's already buying some of your figures as well.
Yes, Jeff I'll start and I'll, let the guys chime in too I mean, we're obviously seeing.
And I can say that the riding on the mom and pop for the specialty retailers are really driving a significant amount a significant amount of growth there being able to order more to be able to carry their own exclusive content.
And that married with.
And obviously, the parks going back and into play with Disneyland Disney World and the resorts.
Universal Studios as well the D to C channel continues to thrive and again more dedicated resources to creating more interesting online exclusive content for the DTC is also thriving.
And then part of what Andrew and I promise balance a lot of them and we acquired on which is more licenses and more help with distribution and I think all of that is really good.
Just it's been phenomenal growth story, there, but we just think we're just honestly scratching the surface with that brand. We think that we are capable of so much more and we've really been able to put some talent around that team and it keeps we keep investing in and lounge and why and it's obviously paying off but I'll, let Andrew and Jenny add anything to that yes, I will just China and quickly on the on.
Customer mix I would say that it's.
Seeing sales from both existing funko fans, but we're definitely bringing new people into the funko ecosystem.
It's part of B for.
Further and becoming pop culture, and lifestyle brand and that.
Just 1 more category, where we can talk to people that we werent talking to before.
So I would say Theres, obviously funko fans at our launch of Lifelock fans, but we are bringing new people into the funnel step for 2 new 1 just 1 key metric where we brought on a key person on over from Disney to run lounge by marketing, we've never had a dedicated resource before and she has nearly doubled the Instagram followers and think we're now well over 700000 Instagram followers.
The leading.
I guess, the leading competition and the space, which is a much larger company than we are has 24000 fans on Instagram so.
Theyre more commodity based and allowance for <unk> is more high end brand pop culture based and I think that as we continue to build out that brand. The appetite. We're seeing globally is just phenomenal for the brand and we're excited that we're actually starting to properly market the brand and new ways and we've never done before so again, just kind of leads us and just kind of a <unk>.
<unk> the surface com and we're really excited about what that future for them.
And that's great and then just 1 for you John really quickly I wanted to just reconcile the EBITDA being unchanged you mentioned gross margins coming and a little bit lower but then I think you also said something around shifting and marketing to the second half for there might have also been a timing factor can you just give us a little bit more color there. Please.
Yes, that's absolutely correct and we did have some of our marketing that we anticipated originally spending and this quarter and that will shift to the back back half of the year to align with when the product launches and then secondly for.
And from an SG&A perspective, we did have a slower ramp up on our talent than we anticipated, but we were still on track to continue to add the talent that we've been talking about on these calls so.
And EBITDA margin and.
Okay.
Reiterating our guidance there, but overall the adjusted EBIT, obviously with the increased sales will go up.
Okay. Thank you very much.
Just as a reminder, if you'd like to ask questions. Today, you can do simple crushing staff on it by 1 on your telephone and keeps us now.
Our next question comes from Linda Bolton Weiser from da Davidson and the Euro.
And as Nellix and if you'd like to go ahead to go quick.
Well thank you.
I was wondering if you could just talk about things a little bit longer term kind of beyond this year and and general way Andrew.
And does not control for grow rapidly and ramp up what is the net.
And that's F O B and do you think that that's gonna chefs and fails like into the third quarter for the fourth quarter.
Oh, sorry.
Hey, it's Andrew Uhm, so when where and when we're talking about that we are having conversations with our customers right now and about container availability right whether it's.
We're working our.
Resources to find more containers and our retailers are as well as you probably know right.
Even companies like Walmart and the walls large retailer having trouble finding container. So those are the conversations that were referencing and.
Around trying to find ways to move products.
Or might not have a home on a container yet.
And so we are and dialogues with our customers most of those were already doing.
Some some F O b with.
So we're utilizing net as much as we can to move as many products as we can as far as and what percentage of our business is F O b.
I think it's around the 25, 35% when you look at both the us and Europe, combined but I kind of have to go back and and really look at that to confirm.
That's so great and thank you very much.
Thanks for the.
Thanks for Linda.
We have no further questions. So I can handbags, and Brian Andrew and Jen to conclude.
Yeah, guys on a big everybody and our our investors or shareholders and the funko team for us.
Supporting another great quarter for Funko, and and we're looking obviously for the rest of the year.