Q4 2021 Funko Inc Earnings Call
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.
Esther Relations website, Investor Funko Dot Com I will now turn the call over to Andrew.
Good afternoon, everyone and thank you for joining US today today is my first earnings call as the CEO and it is my pleasure to announce <unk> best quarterly and annual results ever.
We surpassed $1 billion in annual net sales and reported the highest full year adjusted EBITDA and EPS in company history.
The strength was broad based with growth in all channels geographies and brand categories.
Afflicting the power of the fund co brands to generate sustainable demand throughout the volatility of the past two years, our employees fans and partners all deserve a tremendous amount of credit for helping make this past year possible.
I'll begin with some highlights from the year before turning to the fourth quarter.
In 2021, wheat room figure revenue by 59% sustaining excellent momentum in our core business with strength across geographies and channels.
We expanded into an entirely new market with the launch of digital pop NFC lineups.
We launched new physical products like vinyl goal and policies extending our footprint with key retailers and introducing new fan bases to funko and we more than doubled our sales in the direct to consumer channel.
These achievements contributed to more diverse revenue mix and topline growth of 58% for the year with adjusted EBIT margin expansion of more than 200 basis points.
Our ability to deliver product, while managing through supply chain disruptions has been critical to our performance.
We took important steps this past year to onboard new factories, providing additional capacity and further diversifying our manufacturing footprint to partially mitigate these disruptions while strengthening our foundation for the future.
The guidance, we provide today assumes that the current level of supply chain disruption and specifically freight inflation will persist at least for the first half with only modest relief possible in the second half.
However, as I just described our business is Brazil as is the demand from our great fans we.
We are prepared for the challenges, we anticipate and we believe that we are well positioned should the operating environment improves faster than expected.
Before I share some of the fourth quarter highlights I want to call out how we'll be talking about the business going forward.
One of my first actions since becoming CEO in January was to provide additional structured to the great collection of brands that make up funko.
This new brand structure will allow us to seamlessly execute against our growth targets and maximize strength of our brands.
To that end today, we have four main brand categories.
Our collectible brands includes our iconic pop vinyl as well as newer additions like soda and the newly launched vinyl Goldman policies lounge slide focused primarily on soft lines represents our next largest brand.
Our emerging toys and games brands, including some of our newest and highest growth opportunities and finally, our digital brands, which today includes our digital pop in Ftes.
With this new brand structure will better align to execute against our four growth pillars are first growth pillar is continued innovation within our core collectible brands category, while our second growth pillar is sustained revenue diversification through products and brands adjacent to our core portfolio. Our third growth pillar is continued.
<unk> of our D to C E Commerce platform and finally, our fourth pillar is international expansion here, we will continue to leverage the breadth of our brands and selectively add resources and capabilities to open up key international markets.
I'll now share some of the highlights from the quarter.
Under our first strategic growth pillar, we delivered another excellent quarter with strength across our collectible brands and in all channels.
The pop brand grew 41% year over year in the fourth quarter, our sustained success with Pops stems not only from our industry, leading breadth of properties, but also our strong fan engagement and innovation, we bring to the product line.
We've introduced innovative new figures and designs and highly successful seasonal product lines, our participation in the Macy's Thanksgiving day parade with our balloon featuring <unk> from the hit series demand alone is a great example of the strong fan engagement and innovation, we continue to bring to the brand.
Our balloon generated one of the top social media events ever for Funko, serving as an introduction to the funko brand for millions of new fans as with other fan engagement events. We hosted this past year the products tied directly to these events continue to be among some of our most popular releases.
Anime sports and music are also exciting opportunities for growth for our collectibles brands.
We recently launched a new figure line vinyl goals targeting sports and music sneaker head demographic.
Early results have been very positive with a new sleek artists and athletes set to launch this spring.
We also introduced policies are collectible Greenville launch at the end of Q4 and here too the responses have been excellent.
We've had repeated sellouts in our DTC channel and the feedback from our exclusive launch partner has been very encouraging turning to our second growth pillar revenue diversification, we continue to meaningfully expand the breadth of our portfolio through the successful incorporation of new pop culture centric brands, most notably among these as <unk>.
Which continues to experience high demand leading to record results. Despite the supply chain disruptions of the past several quarters.
The <unk> brand, which has come to define collectible fashion with its unique design and high product quality generated strong growth in our DTC channels and across our retail partners with excellent results in both the U S and European markets.
<unk> excellent year was driven by multiple factors all of which point to even more exciting opportunities to come the average selling price increased double digits, driven by a deliberate emphasis on premium higher value value products, which allow us to more fully capture lounge lives quality and design advantages, while continuing to dip.
<unk>, our wholesale channel as demand from independent specialty and online retailers has accelerated and.
And finally <unk> fly continues to be our fastest growing brand in our international markets nearly doubling sales in Europe over the past year.
We've grown the lounge slide brand from approximately $20 million in business. When we acquired it in 2017 to over $140 million in sales. This past year and we believe we have only just begun to unlock <unk> full growth potential domestically the opportunity is broad based with a particularly strong outlook for both.
Independent specialty retailers and our DTC channels.
Internationally based on the strong demand that we're seeing across Europe and early indications from our other international markets. We believe a similar growth trajectory as possible. Our second area of revenue diversification is within our toys and games brand.
While our collectible and lounge why brands are category leaders, our toy and game brands are playing the role of disruptor in their respective markets with strong growth and share gains you would expect from a compelling new entrant into the market.
We've made great strides in leveraging these brands to expand our footprint with key retail partners into the toys and game aisle.
<unk> games launched more than 40 titles in 2021, a significant achievement that gives us great runway and opportunity in the category. We also had great success with our collectible gaming platforms and will be introducing new titles in this space in the coming months in November we noted that our games business was able to be opportunistic when retailers were looking for <unk>.
At the height of the supply chain disruption last fall today, we've held onto those gains in shelf space contributing to our fourth quarter growth rate for games more than double that of the overall games market.
Within toys R products designed for a younger audience continues to do exceptionally well with an expanded five nights at Freddy's line already in the works at some of our key retail partners. Finally, the last area of diversification is our digital business, which today encompasses our digital pop entities Q4 was our second quarter of digital pop sales.
And also mark the launch of drop that I O and NFC marketplace developed by our affiliate token wave.
To date, we've completed eight major drops and we've been thrilled with the enthusiasm for these programs while still in the early stages. We are encouraged by the exceptional demand we continue to see for digital tops across a wide range of licenses.
Our third growth pillar DTC growth continues to be one of the best performing channels for funko.
In Q4, <unk> grew 74% and now represents 11% of our total business. We believe there is substantial opportunity for future growth driven by expanded product offerings greater use of exclusives and technology enhancements designed to improve conversion. This past year, we increased the number of unique customers.
More than 50%, while increasing our annual customer value by double digits.
Customer value is benefiting from growth in both orders per customer and average order value, reflecting strength of our D to C sites across multiple factors.
These enhancements will provide improved integration across <unk> and lounge lifestyle and allow for more streamlined process to expand our E. Commerce platform internationally. We're excited about the future of the DTC channel, which importantly continues to be incremental to the growth of our wholesale business the fourth growth pillar international expansion.
Is another area, where we've just begun to scratch the surface.
In Europe the region with the most established international presence fourth quarter revenue increased 58% to $64 million, one of the largest quarters ever in Europe , and representing 19% of total sales.
We're seeing a strong rebound across the entire region and some of the hardest hit countries during the pandemic, where some of the best performers in Q4 demand is strong across all brands led as I mentioned by some of our newer additions like wildfire.
Outside of Europe , the opportunities potentially even more exciting as we are still in the early innings of.
Globally, some of our largest retail partners report that bundle is one of the most search terms on many of their international ecommerce sites. This is truly an encouraging sign of the strength of the funko brand and the opportunity we see globally.
Our progress in specific approach will vary by geography, but we have an exciting roadmap to extend our footprint globally.
We will be focusing on near term opportunities in Latin America, Canada, and oceana each with a tailored go to market plan that is already underway. We're in a great position to deliver against all four growth pillars.
As always we will balance focused internal execution with prudent M&A, where appropriate to extend our product portfolio and expand our geographic footprint for.
For 2022, we anticipate revenue growth of between 20% and 25% and adjusted EPS of $1 75 to $1 91, with adjusted EBITDA margin relatively in line with fiscal 2021, reflecting onetime project spend the gen will describe in detail as well as.
Great headwinds that we're now expecting to remain in place for most of the year.
Despite external factors that are largely out of our control we've proven our ability to deliver in difficult environments and I'm very confident we are well positioned to meet our objectives for the full year.
Looking beyond 2022 based on the strength of our portfolio the sustained demand, we cultivate with our fans and our proven ability to execute we believe that <unk> can deliver double digit revenue growth over the next three years, while consistently expanding margin.
In closing the fourth quarter capped off a truly remarkable year for funko, we surpassed $1 billion in annual net sales launch multiple new products, both physical and digital generated exceptional growth across our brands and delivered more than 200 basis points of adjusted EBITDA margin expansion.
And one of the most disruptive supply chain environment in memory.
It's a testament to the iconic nature of our brands incredible faithful fan base and importantly, the dedication of our amazing employees and partners. We entered 2022 with strong momentum and I couldnt be more excited about the opportunity ahead.
And with that I'll turn the call over to Jim to take you through the financials.
Thanks, Andrew and good afternoon, everyone. We're pleased to report record fourth quarter results highlighted by net sales growth of four 8% over the prior year and 57% of our pre pandemic 2019 results. This strong performance reflects continued demand and broad based strength across our categories geographies and channels.
Over performance relative to our expectations, but primarily driven by wholesale both domestically and internationally all comparisons are to the fourth quarter of 2020, unless otherwise stated.
Net sales in the U S increased 47% to $253 million, while net sales in Europe grew 69% to $64 million and other international markets increased 32% to $19 million with growth in all primary regions on a product category basis, Q4, net sales of figures including accident figures.
2% to $255 million driven by strong growth in our core pop brand.
Non figure product sales increased 44% to $81 million, primarily driven by bags and wallets and our <unk> brand as mix shift drove higher launch by AFC.
Let's now on a dollar basis, we also had strong growth from games plush and accessories.
Our existing branch structure, the pop brand grew 41% to $238 7 million, while the allowance by brand grew 57% to $49 7 million and other brands grew 88% to $47 9 million.
As part of our continued focus on building a leading pop culture branded company beginning in the first quarter of 2022, we will begin providing revenue under our new branch structure as uncle collectible brands the allowance by brand and.
In other brands, which will include funko toy and game brands and digital.
The number of properties in Q4 increased 26% to 915 net sales per active property were 360 out in the fourth quarter, an increase of 17% for a list of our top performing property in the quarter. Please see our accompanying earnings presentation.
Fourth quarter gross margin was 33, 9% a decrease of 330 basis points versus Q4, 2020, due primarily to supply chain inflation as freight expense in the fourth quarter created a headwind of roughly 500 basis points.
SG&A for the quarter was $78 million or 23, 3% of sales leveraging 40 basis points year over year due to revenue outperformance.
Moving down the P&L adjusted EBITDA was $39 million with an adjusted EBITDA margin of 11, 6% above expectations due to top line outperformance.
Adjusted diluted earnings per share were <unk> 38.
Turning to the balance sheet and cash flow, we ended the quarter with $84 million of cash and cash equivalents and $100 million of availability under our revolver, representing total liquidity of $184 million.
We ended the quarter with total debt of $173 million down 9% compared to Q4 of last year.
Inventory at quarter end totaled $166 million up 178% relative to sales growth of 48%.
The year over year increase in inventory was primarily due to an increase in our inventory in transit, which represented over 60% of the balance as well as a uniquely tight inventory position in the prior year as we were still adjusting to pandemic disruption.
The business generated operating cash flow of $87 million year to date.
Before I provide guidance for the year I'll briefly describe what we expect from freight rates in 2022, our guidance now assumes that the cost of freight remain at near record highs for the year with a potential for only modest relief in the second half of the year.
Rates do begin to normalize in the second half, we expect new rates will remain well above pre pandemic levels.
While we believe we have been prudent in our assumptions regarding the new normal in terms of freight expense.
<unk> or escalation at the current level of supply chain disruption throughout the second half will put additional pressure on gross margin beyond what our guidance currently contemplates.
With that for full year 2022, we expect net sales growth of 20% to 25% with our first quarter revenue growth rate expected to be in the mid 40% range. We expect our adjusted EBITDA margin to be relatively in line with 2021, reflecting a significant freight inflation headwinds as well.
As approximately 80 basis points of pressure due to a onetime project spend from the consolidation and relocation of our distribution centers and our new ERP system.
We expect adjusted net income of 95, eight to $104 8 million based on a blended tax rate of 25% and adjusted earnings per diluted share of $1 75 to $1 91 based on weighted average diluted share count of $54 8 million.
Because of the dynamics I just referenced I'll provide some additional commentary on our gross margin and SG&A expectations throughout the year.
Our gross margin is heavily influenced by the current inflationary freight environment.
As a result, we expect first half gross margins to be consistent with the second half of 2021 with some limited improvement in the back half of 2022 as our 2021 price increases go into full effect and in line with our expectations for modest relief and freight rates in the second half of the year.
SG&A as a percent of sales is also expected to be slightly higher in the first half of the year due to the timing of project costs associated with the consolidation and relocation of our distribution center as well as our ERP implementation.
We appreciate your time this afternoon, now Andrew and I will be glad to take your questions.
Okay.
We will now begin the Q&A session.
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We will pause briefly to allow questions to generate in Q.
The first question is from the line of Anthony.
Jefferies You May proceed.
Thank you good afternoon, everyone. We have two questions. The first is just on the diversification by property really impressive to see the top 10 at that 30% level. So Andrew maybe talk a little bit about the diversification you mentioned some new categories.
Art since sneaker world that Youre entering but how do you think about that concentration effect continuing to mitigate over time.
Hey, Thanks for the question, Yes, we've put forth an effort to continue to diversify our revenue streams and we're starting to see.
The fruits of that labor as you can see so what you what.
What you would reference was the gold program that we did that really focus on sports and music. We've talked about the diversification that we're that we're seeing with the allowance ly brand the toys and games, which are smaller but also create a lot more diversification. So so I would say that what youre seeing as a result of a conscious effort.
To continue to diversify across all avenues of fandom and that goes anything from sports music video games TB.
<unk> et cetera, and you're starting to see us continue to grow our universe of properties.
That's helpful and then Jim just one quick one for you. Thank you for all the information on freight rates. That's really helpful to hear anything we should be thinking about on your rock cost of goods in terms of resins.
Youre seeing within the cost of goods basket beyond shipping that we should be thinking about within gross margin. Thank you.
Yeah, and good to hear from you.
Yes really the main.
Headwind for US is the uncertainty in the supply chain and that's what we've really reflected in our in our guidance.
Why wouldn't really stay focused in terms of as you are looking at each of the quarters.
Yes.
Okay I'm just throw one more in you gave 80 basis points of pressure from it seems like more of a transitory DC and ERP implementation and transition.
Any context on when that 80 basis points as concentrated as it first half second half anything we should be mindful of it yes.
First half for sure.
We.
We will probably launch at the beginning early.
Q3 for the ERP, but the distribution center move will happen in the first half.
Okay helpful. As always thank you everyone.
Thanks Beth.
Thank you.
The next question comes from the line of Linda Bolton Weiser.
D. A Davidson you May proceed.
Yes, Hello, and congratulations on a strong quarter and year.
So.
Our growth outlook for the top line for the next year with quite a bit above what the street had.
And maybe you could just give a little more color is it that there's going to be just so many more entertainment properties as we come out of the pandemic or is it new distribution.
Geographic expansion just can you kind of give us a little more flavor on why you have confidence in that very high growth rate continuing.
Hey, Linda it's Andrew Thanks for the question good talking to you.
So I would say that.
As we take a look at the at.
At the business and where we're coming off of 2021.
We are it's not necessarily about content or.
Or theatrical Youre seeing the reflection of us diversifying our business and that goes across channels of distribution that goes across geographies.
Trying to see the company really action some of the initiatives that we've been working on over the past couple of years and I think that is being reflected in what youre seeing in that I'll hand, it over to agenda, Adam Yes, Hey, Linda Thanks, so much.
And keep in mind too that we did announce that we have we're putting into play a price increase last year that will go into effect in mid to late Q1, so that is contributing to that.
Top line as well and we are at this point, where we're not seeing pullback in unit. So it's a combination of units and price increases.
Okay great.
Also can you.
I have several brand companies that are pushing on your DTC strategy and trying to really drive that business, but it.
Sometimes there's cautionary tale about being able to balance that initiative with your relationship with your retail partners can you talk about how youre kind of balancing that and making sure that your DTC.
Does it doesn't threaten that that important.
Business with retailers.
Absolutely. So so that is one of the differentiators about our business and it always has been whether it's differentiating differentiation of retailers in the marketplace of which now <unk> is one.
We drive differentiation through products.
So exclusivity on different products that we drive different people to various retailers, we have retailers that over index in anime properties and retailers that over index in sports and music and so the variety of products that we make.
The ability to make specific products for specific specific retailers drive foot traffic to those retailers. That's our key differentiator very different than I think some of the competitors that you might be referring to our other branded businesses that you referred to where they don't have that breadth of skus that we.
Half, that's always been sort of a differentiator for <unk> and it will be continue to be in the future.
Gotcha. Thank you.
And then.
Finally.
Just in terms of your.
Your game and toy expansion.
<unk>.
You are small, but you are getting bigger and lets see I see that Franco birth, I think that was one of your first product is still out there on the market, but have you had any major lines and products inventory game area that did not <unk>, but you've discontinued since you entered the category.
You know for the most part there are different lifespans when it comes to various items and some items are not meant to be in the market for a long time I think.
James of Toys for example, Im sorry games for example.
Not that is not necessarily the goal is actual longevity, so to see funko verse still on the shelf is a great sign and we think that there is tremendous longevity in that category with titles that really resonate with consumers.
If you take a look at some of the great games out there that have been around forever that sort of tied.
Tied to that specific industry, not everything will be on the shelf forever.
But the longer the better we really liked that about the games business, it's very different than some of our other businesses.
Why does this.
It goes both ways. There are smaller initiatives that are more in and out programs that we've had a couple of and then there are bigger initiatives that we want to build on more of a branded approach in the toy aisle than an unbranded approach, which is more of a short term opportunity. So I'm not sure if that answers your question, but I would say longevity on the.
Gabriel is definitely a goal.
<unk>.
And then it comes down to the toy relief like for example, I'll use the turbo band that we had last year and Walmart.
You may see an iteration of that on the shelf, but you won't see most likely that exact same item next year, but it was a tremendously successful item.
It's part of the strategy around keeping things fresh and again, something thats slightly differentiates funko from some other people in the aisle.
Great. Thank you very much.
Thank you.
Thank you.
The next question is from the line of Megan Alexander with Jpmorgan you May proceed.
Alright, thanks, very much and congrats on the strong results.
And on the gross margin can you just remind us historically how much of your.
Your freight contracts are contracted versus spot and how are you thinking about planning out this year.
Are you going to try and maybe lean more on spot given it seems like hopefully people think freight rates the spot rate can come down later in the year.
Yes, so historically, we've been a little bit different in that we do operate in the spot market and we anticipate continuing that given all the uncertainties in the freight world right now.
Got it and then in terms of the price increases can you just talk about do you look to maintain gross margin rate and I guess, if if freight does pull back a little bit more than expected.
Could that be.
Good guide to gross margin in the back half relative to what you're expecting right now.
Yes, there is there's really a lot of uncertainties in that and so we tried to make sure. We're prudent in looking at the full year and trying to provide some guidance.
From a from a price perspective, I think the first part of your question eventually, yes that would be the margin accretive piece to it but we really do need to see.
Kind of where freight.
Settles and normalizes.
Got it that's helpful. Thank you.
Thank you.
Yes.
Yes.
Thank you.
Again to ask a question please press star one.
So there are no additional questions at this time I will now pass it back to the management team for any further remarks.
Thank you all for joining today appreciate it special thank you to our employees and our fans and our partners for a wonderful 2021 look forward to a great 2022. Thank you.
That concludes today's conference call. Thank you and have a great day.
Okay.
Alright.
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