Q3 2021 Funko Inc Earnings Call
We can figure.
We're not only expanding our shelf space with these means we're also continuing to broaden our fan base.
<unk> is a great example of this consistent growth mindset.
We acquired <unk> in late 2017, when it was generating less than $20 million in annual revenue a figure we nearly doubled in Q3 of 2021 alone to date, we have successfully executed against our geographic expansion initiatives soft lines is now our fastest growing category internationally.
Domestically, we continue to see strong performance aided by the reopening of theme parks as well as new channel partnerships and best in class product design.
Our direct to consumer channel is another Great example, and is driving growth across product categories and geographies delivering another quarter of exceptional growth and reaching 11% of total net sales do you see continues to be a critical driver of our success, both domestically and through Funko Europe Dot com.
Our digital and logistical improvements in conversion fulfillment and user experience yielded excellent results.
On <unk> Dot Com for instance session transactions per user and conversion rates were all up more than 40% year over year.
And frontal Europe Dot com, which we launched last year has nearly tripled the number of sessions with similar operational improvements to our domestic site and it's worth noting that we achieved this success in the same quarter that our wholesale business generated strong double digit growth exceeding expectations and demonstrating the viability and sustainability of our <unk>.
<unk> channel approach.
In our core pop platform, we continue to extend the brand with excellent results, whether it's the rapid sellout of our pop die cast line.
Deluxe albums or are extremely popular ultimate partnership with Hallmark. These examples illustrate the tremendous potential of our platform built around fandom and pop culture.
Our efforts go beyond the pop brand, including the launch of our gold action figure line targeting of sports and music fan base that was rolled out to the mass market in September and has been met with similar enthusiasm in.
In fact, our target growth areas for content sports music and anime each increased more than 50% in the third quarter.
Also want to call out the streaming show squid game, which launched on September 17th and soon became a global sensation in typical <unk> fashion. We were we believed the first to sign a licensing agreement and using our world class speed to market. The first to launch a figure lineup for pre sale with a full set of pop vinyl figures mere weeks could shows.
East.
It should come as no surprise that our post announcing these figures were the highest performing social media posts across all of our channels and funko history.
Through the pop vinyl platform and our other form factors Funko is once again proving to be the authority in our industry connecting fans to their favorite properties at the speed of pop culture.
Within our games business. The titles, we launched at the end of Q2 are gaining significant traction. We again grew games by strong double digits led by mass market channel and particularly strong results in third party online retailers. This traction and mass market reflects our successful efforts to move into additional aisles with <unk>.
Handed shelf space at some of our largest retail partners.
The collectible games front, we launched Battle World series, two which generated excellent early results with this success, we look forward to expanding our collectible gains portfolio in the future finally in our youth collectibles business, we had an excellent quarter and accurate figures with five nights at Friday as well as the very popular Turbo man, which was one of our top selling items for this fall.
<unk>.
Additionally, we launched snap six series to at all our mass market partners as we continue to extend our fan base.
We delivered these achievements, while we also proactively manage supply chain disruptions throughout the quarter and as a result exceeded expectations let.
Let me touch on some of the factors that drove the outperformance.
The majority of our products are not seasonal in nature. The best examples of this are evergreen products, which were again, 65% of net sales in Q3 2021.
With that said in those product categories, where we do have higher seasonal exposure, we've made sure to prioritize items as appropriate.
Items like our advent calendars, but also products that are more likely to be gifted, including our gains.
In fact throughout the quarter, we were in a position to take additional shelf space left open by competitors, who found themselves without product due to supply chain disruptions.
Given the challenges of the container shortage and higher freight costs, we managed to partially offset these headwinds by balancing our traditional trade arrangements with additional container space.
Been proactive in addressing Covid related factory stoppages in southeast Asia in Vietnam in particular, our products are produced across multiple factories spread throughout the country. This allowed us to shift production to less affected areas when disruptions did occur in our region.
Today, we are expanding that regional diversity, even further to stay ahead of possible disruptions in the future.
Before I turn the call over to Brian I'll reiterate that the demand for the Funko brand has never been stronger.
And our third quarter results and our increased guidance at.
At the same time, we've been proactively managing the supply chain challenges that are facing many across a wide array of sectors and industries, our employees our partners and our fans all deserve a tremendous thank you for making this possible now I will turn the call over to Brian to discuss some of the ways. We have and will continue to drive these outstanding results.
Thanks, Andrew I'll start by echoing Andrew Florida Bank, the global supply chain has seen unprecedented disruption this year and the fact that we are able to report the kind of third quarter results. We did despite those challenges.
Estimates of our employees and our loyal fans.
We have an amazing community of funko, and I couldnt be more craft.
I look to transition into my new role as Chief Creative Officer in January.
Highly focused on continuing to elevate our level of band interaction and bringing innovative new products to market and a business that is a hallmark of our success.
Central to this effort is our focus on developing events that are monetize level and consistent with Banco trademark one of a kind been engaged.
Throughout the pandemic, we've proven our ability to develop these event at any point on the calendar and in any form factor, including virtual and hybrid formats.
This capability was an important factor in our ability to deliver such a strong third quarter.
Precedented supply chain headwinds I'll share a few events that highlight.
I'll start with our celebration of back a while perhaps not a traditional holiday on every calendar our ability to generate genuine excitement fan engagement drove this could be our single largest non convention sales day on record at Banco Dot Com in fact between our Alice in Wonderland event in July Hong Kong.
August and our Batman takeover at September we created rebrand new events this quarter, representing the top three largest sales base for our direct to consumer and E Commerce channel.
We also recently announced our first festival a virtual event taking place in early December with highly successful virtual events are highlighting new product driving awareness for our retail partners and our own DTC channels and engaging our fans with exciting new content, our gross utility allows us to operate.
By seasonality, so we can truly engaged with and delight, our fans with fresh content and amazingly pop cultured products year round.
Also excited to participate in this year Macy's Thanksgiving day parade with a gigantic balloons featuring the encore prop interpretations of the character grow group effectually known as baby Yoda.
This beloved characters from the Star Wars series demand Delorean streaming only on Disney bought 441 billion year on Thanksgiving day is massive brand moment will allow us to reach millions of families and new pop culture fan.
Simultaneously released a limited edition collectible line based on the balloon that'll be available only on Concord Dot com.
Finally, I want to share some of the milestones we've achieved in our digital pop NFC business to date, we've had four major drop as well as several small events.
The response, so far has been truly outstanding each of our drops buildout minute and all of them have been massively oversubscribed with tens of thousands of band in the Q. We have also demonstrated our ability to generate.
Across a range of license tiers, as we said when we first announced our entry into the NFC market.
Long term that said today I can confidently say, we are well on our way the rest of the calendar both up for the year and the licensing landscape continues to gain traction.
Also recently announced in partnership with poking away the opening of our new digital marketplace drop Dot Io dropped Io greatly more accessible user friendly interface and we build our digital product business.
I'll reiterate that this is still a very early stage market, but we're incredibly encouraged by what we've seen so far let me.
We conclude by reminding everyone that when you hear from US again next year for our Q4 call you'll be hearing from Andrew.
As he takes over in January we are thrilled to have Andrew or taking the range. We've done an excellent job guiding our strategy in his time with Banco at absolute confidence and visibility to continue that in this new world.
In conjunction with Andrew assuming the role as CEO I will be moving to the role of Chief Creative Officer, I will be primarily focused on product creation and innovation and engagement and our digital core business, while continuing to investigate other potential organic and acquisitive needs to accelerate our growth in <unk>.
Our addressable markets.
With our continued partnership and the amazing work of the bump I am confident in our ability to unlock.
So as we look forward for our next phase of growth. We've had an excellent year to date and we're excited to close out the year with some of the great products and programs. We have in store I will now turn the call over to Jen to take you through the financials and 2020 expectations.
Thanks, Brian and good afternoon, everyone. We're pleased to report record third quarter results highlighted by net sales growth of 40% over the prior year, reflecting very strong third quarter demand.
Broad based strength across our product categories geographies and channels.
The over performance versus our expectations was primarily driven by domestic wholesale outperformance in part due to a shift to <unk> for some of our larger accounts.
All comparisons are to third quarter of 2020, unless otherwise stated net sales in the U S increased 36% to $191 million, while net sales in Europe grew 66% to $59 million and our other international markets increased 19% to $18 million with growth in all regions.
The number of active properties in Q3 increased 13% to eight 6%.
Net sales per active property were 332000 in the quarter an increase of 24%.
For a list of our top performing properties in the quarter. Please see our accompanying earnings presentation.
On a product category basis, Q3, net sales figures, including action figures grew 42% to $206 million with pop branded products increasing 41%.
Figure product sales increased 34% to $62 million, primarily driven by our <unk> brand, which grew 36% with strong contributions from games and flush.
Third quarter gross margin was 36% a decrease of 260 basis points versus Q3 2020.
Freight expense.
Managed to partially offset the freight inflation through improved global product margins in the quarter as well as careful expense management throughout the organization. We currently forecast a supply chain disruption to result in a 2021 gross margin slightly below our 2020 level. We expect this headwind to remain through at least the first half of next year.
SG&A for the quarter was $60 million or 22, 4% sales, representing a 90 basis point sequential improvement over Q2 exceeding expectations.
Going down the P&L adjusted EBITDA increased to $40 million with an adjusted EBITDA margin of 15% also above expectations.
Our outperformance was due to our proactive efforts to delay some marketing spend to align with product availability.
Finally, adjusted diluted earnings per share were <unk> 39.
Turning to the balance sheet and cash flow, we ended the quarter with $93 million of cash and cash equivalents and $100 million of availability under our revolver, representing total liquidity of $193 million we.
We ended the quarter with total debt of $178 million down 7% compared to Q3 of last year inventory.
Inventory at quarter end totaled $141 million at 94% relative to sales growth of 40% roughly 60% of our inventory and transit as total transit times have increased significantly compared to pre pandemic levels.
The business generated operating cash flow of $79 million year to date.
As we've previously discussed we expect supply chain disruptions to continue throughout the rest of the year and at least into the first half of 2022.
While this will continue to put pressure on gross margin. We are actively managing our operations to ensure we can meet as much demand as possible without jeopardizing profitability.
With that context for full year 2021, we are raising our top line outlook at the midpoint of the range by approximately $45 million with anticipated net sales now expected to be in the range of 958970 $5 million. We expect gross margin for the year to be slightly below 2020 level. This includes a sequential decline.
Of approximately 300 basis points for the fourth quarter due to the elevated freight expense due to the supply chain disruptions.
We expect fourth quarter SG&A on a dollar basis to increase mid to high single digits sequentially, reflecting higher sales volume as well as catch up on some of the marketing spend that shifted from Q3.
For the full year adjusted EBITDA margin is expected to be in the range of 14% to 14, 5%, representing an increase of 200 basis points at the midpoint compared to 2020.
We expect adjusted net income of 64, 4% to $70 4 million based on a blended tax rate of 25% and adjusted earnings per diluted share of $1 20 to $1 31 based on weighted average diluted share count of $53 9 million we.
We appreciate your time this afternoon now, Brian Andrew and I'll be glad to take your questions.
Thanks.
Next question that will be stopped by one on your telephone keypad Scott fully by Q. If you change your minds will be taking our first question today from Erinn Murphy from Piper Sandler Erinn EBITDA.
Great. Thank you good morning, or good afternoon, everyone.
Couple of questions for me just echo person that third quarter can you just talk about the key drivers of your outperformance 80 by channel and then secondly, just a little bit more color on the supply chain Jen I think you referenced a lot of your inventory. It's still in transit I don't know if you can give us kind of a point in time now of inventory balance.
What do you have kind of floating off takers of the whack.
Were mitigating factor that you've taken.
Hey, Erinn.
Nice to hear from you.
From a growth perspective, it was really across the board.
U S grew substantially lounge by continues to grow every one of our international challenge channels grew as well what you saw in EMEA was Dave actually this is the first quarter, they've now lapped 2019 levels.
We're under just slightly in Q2, so we're just seeing growth really across the board and feeling really positive about where the business is heading our demand for our products has never been stronger and our DTC business continues to be on fire as well so.
We've.
Already outpaced our penetration of our DC. Since then we thought we would for the year. So.
Very consistent.
And you had a second part I apologize yes.
Yes, no that's fine just on that supply chain, if you could give us a little bit more color on some of your mitigating factor.
The West Coast right now and just maybe a case in point in time for what your inventory it looks like right now, yes. So our inventory is up year over year obviously.
As we go into a quarter, where sales will be up year over year. Our inventory turns in Q3 were the fastest they have been in for.
Overall perspective, as well as in on hand perspective.
Third in the past three quarters Q3 quarters. So as we're looking forward. This inventory a couple of things that we're doing we want to make sure. We don't only protect Q4, but also as we get into Q1 as supply chain time have extended we've been managing both our Q4 as well as our Q1 inventory to make sure. We are set up for to end the year on a high note.
As well as to start 2022 with enough inventory.
Our sales.
What we are seeing I think as everyone seeing container is a lot of container sitting out.
In long Beach, which obviously.
That's a big part for us as well so we're just continuing to work with different.
Line haul is across our television different containers to make sure that we can get our inventory here and get it to our distribution center and back out. We've also moved some of our customers to <unk> and.
To help kind of alleviate some of that congestion within our own supply chain.
Got it and then if I could just add one more question pricing, we've noticed you've taken pricing for.
For some of your retailers can you just talk about.
How deep are your pricing increases now I know youre facing come out maybe internationally as well as we look into next year and then one for Andrew on snap fees, we're noticing that product back in our store checks.
Can you talk a little bit more about how the reception has been.
Thanks.
Yes, great.
Yes on the pricing frankly hadn't raised their prices in quite some time as we started to look at.
At into the future and seeing some of the pressures you're seeing within the supply chain. We thought now was the right time to work across our retail channels in and work with them to raise prices.
Fairly systematically across the board and we are also this is consistent with EMEA, just a little bit less.
From an increased perspective.
Increased a little bit less over there, but we don't expect to see that.
And.
This until really later in Q1 of next year in Q2, we wanted to make sure that we partnered with our retailers and gave them time and really focused on go forward order. So.
It was the right time for us to do it and so far it's been.
I think fairly well received as much as it can be.
Yes, I can jump in Erinn on the snaps. This thing. Thank you for noticing series two hitting shelves.
We're excited to see that hit shelves.
We're just thrilled with the traction that we're getting.
In the new areas of the store that we're working with whether it be snap sees or battle world or the game aisle.
We're just we're just we're just happy with the results and so yes, you're right snaps wave two is hit we've also launched an additional product.
Which was an offshoot of snaps called Gems, we're excited about that we've got really good retailer support on that.
We've always said right.
The girls toy aisles, a tough competitive landscape and so we have sort of modest expectations, but you are seeing with you on the on the shelf. We're excited about it and we're continuing to support it and Youll continue to see us support this holiday.
Thank you so much.
Thank you Erinn thanks, Eric.
As a reminder, before we move on to our next question. If you would like to ask a question on today's call that will be staff for that by one staff fully by Q. If you change your mind.
We will now review the key Garrick Johnson of BMO Gerrick Apta.
Hey, good afternoon. Thank you I have.
Two questions one.
Vietnam is an area.
Sure.
Quite a bit from <unk> that was the worst.
There has to be sourced and how will you able to.
Right.
Mitigate the problems there into your product to market Thats, one and then the shift to <unk> you talked about for some of your larger accounts.
How does that impact the flow of goods did you pull some stuff forward recognize some stuff earlier than you would have last year.
The F O b.
What percent of your shipments in the third quarter for B versus last year. Thank you.
So let me let me start with the <unk> question.
And then we can dive into.
So to answer by the way.
So sure.
We didn't.
Orders forward due to the F&B shipments it was more to help mitigate.
Supply chain disruptions and get product to retailers faster so.
Where we have historically gone through our domestic warehousing facility.
<unk>.
<unk> talked to some of our key partners and said Hey, listen we can cut.
No time off of the supply chain by going directly to you.
And where we might have done a little bit here and there whether it was a game shipments to some retailers or.
Big programs the retailers saw the benefit of opening up their ability to take more of a broad selection of products.
Bob B because they also knew that it would cut weeks off of the supply chain and they were experiencing the same things. We were that being said we are we also assume that some of the large retail partners that we deal with have better access to containers a little of funko. So.
That was one of the other.
Motivators and really trying to push it and use some of these big company, a retail supply chain to help us offset some of that.
And to answer your question about Vietnam, our factories in Vietnam are concentrated in one particular area of the country. So that helped us mitigate some of that risk that you were talking about with any factory stoppages stoppages that may have come up so we were able to move.
Production within Vietnam to areas that work.
And that was how we mitigated it and as I mentioned in the script, that's something we're continuing to look at how do we further diversify.
Geographically to avoid any sort of risk like this in the future.
Yes, we have eight main factories in Vietnam and they are over a couple of hundred mile radius. So we added only two and a half factories affected at all by Covid. It was only in the last by 45 days that they have been and we were able to mitigate some of that with moving molds and production from other factories and other factory groups.
<unk>.
Nike and some of the textile companies of factories have been more affected than us.
I need to grow rapidly or do you think you can maybe get some positive SG&A leverage as you continue to grow thanks.
[noise] ceiling doesn't I figured for me. This is Jen yeah actually that's a great question I I feel like I I T that went up for you you know, we don't Wanna comment too much on 20 twenty-two, but you know just to provide a little bit of flavor and we do have some infrastructure. We continue to grow demand for our product has never been stronger and we you know as we look forward to 2022.
To we're really excited.
We kind of about where we need to invest in a business, we talked a little bit about and previous calls we do have an E. R. P. Implementation that we are currently working on that is set to be implemented next year, so that will be of use of capital.
Is we do our extensive growth we do have to invest in our logistics capabilities and add some additional space there and so we've taken on some additional leases. So that we can fulfill the growth that we see in the future. So that will be capex that you'll see come through you know more towards 20.
22, but also some now but nothing.
We will definitely help but keep in mind that it's a little bit later in Q1 and more so in queue too.
Got it that's very helpful. If I could squeeze in one last one I think you're a D. T C get to customer business has been exceptionally strong in a really bright spot. So as you think more long term.
Where do you see the penetration of your D. T C business going because I I think if it keeps growing it's it's an inherent tell them into your gross margin structure. So how do you think about your D. T C penetration over the next two.
Two to three years.
So we see a ton of opportunity in front of us on our Datasheet business. You know we are really focused on the U S and EMEA.
Which has several countries cover.
But.
The truth is there is a tremendous opportunity G G.
Geographically.
For us to continue to expand.
And while we haven't disclosed what percentage of the business, we're trying to reach with that particular part of our business.
Your observation is correct. It is performing exceedingly well in the same quarter that we saw our overall wholesale business perform exceeding lapel. So we're excited that those two channels are growing in tandem with each other and we think that there is.
The world is at our doorstep when it comes to growing our DDC considering that we're only really in two geographic areas right now.
So we're excited about is a tremendous amount of potential yes, we are adding obviously investment to that and when we put in the new platform next year, we're going to be able to put in preorder, which is huge right now we're taking all of our announcements with virtual events and sending them to other retailers, which we love to support that we'll be able to take preorders next fall on that as well in addition to customer service.
Improvements and getting packages out of the warehouse quicker customer loyalty and better marketing tools will all basically come along with new platform that we're gonna get on and fall. So we are just continuing to be.