Q1 2022 Funko Inc Earnings Call
In this call management will discuss forecasts targets and other forward looking statements regarding the company and its financial results. While these statements represent 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 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. In addition, we will refer to non-GAAP financial measures during the discussion reconciliations their most directly comparable U S. GAAP financial measures and supplemental financial information can be found in the earnings press release and <unk>.
K that we released earlier today all of these items plus a visual presentation that investors can consult to follow along with the discussion are available on our Investor 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 Q1 was an excellent start to the year building on the strength and momentum of 2021.
We significantly outperformed our topline revenue expectations effectively navigating ongoing headwinds throughout the global supply chain Revo.
Revenue was $308 million, an increase of 63% over the prior year and well above our target range or.
Our results were broad based with strength across brand categories geographies and channels, particularly within the domestic mass market an online retailer channels.
Q1 highlights include a number of positive indicators across the business to demonstrate the strength of the funko pop culture platform underpinned by our ability to connect with our fad basis across the world.
We continue innovating in our core collectible brands category generating 53% revenue growth over the prior year launch.
<unk> grew 104% year over year, and now represent 16% of the total business we.
We delivered strong sales growth in our direct to consumer channels led by increased traffic on our web site enhancements across our E. Commerce site drove year over year improvements in important efficiency metrics, including conversion and bounce rates.
Our channel wide price increases were effective in helping to offset ongoing supply chain cost pressure, while we maintained strong unit demand.
And together with our newest and Ft partner Warner Brothers, We released Scooby Doo, which was our largest digital pop and FTE dropped to date surpassed only this morning by our second Warner Brothers collection DC Comics.
These strong results can be attributed to three primary factors exceptional consumer demand.
Portfolio comprised of compelling industry, leading brands and focused execution by the entire team.
Our excellent first quarter performance gives us even greater confidence in the business going forward.
As a result, we are raising our full year revenue and earning targets now.
Now I'll review some of the highlights from the quarter for each of our brand categories.
Pop the largest of our core collectible brands continues to sit at the pinnacle of F&I.
The brand delivered strong double digit growth robust consumer demand extended across our product assortments with multiple sellouts across our product lines, including some of our higher price point collections like pop by cast and pop jumbo.
Another pop vinyl collection to call out was our collaboration with the make a wish organization as part of our Pops with purpose program and.
Celebration of World wished a funko donated $150000 to make a wish and released the extremely popular make a wish addition, metallic pop collection.
Our two newest emerging brands pop CS and vinyl gold are also seeing strong momentum Pops. He has continued to generate very positive feedback from our retail partner and sales on <unk> dot com have exceeded our expectations.
The limited initial launch of vinyl gold generated similar enthusiasm with select gold figures in our top 10 products sold throughout most of the year.
We have new waves of NBA and NFL Goldfinger same stores now and we built a dedicated gold section within our flagship Hollywood store.
Turning to our toy and game brands, we continue to disrupt and both of these spaces with thoughtful and compelling product development.
Our collectible gaming business represented over a third of our Q1 gaming revenue highlighting our ability to maintain growth outside of the traditionally seasonal game business.
We recently launched paddle World series III with more collectible gaming platforms on the way designed to introduce new fans to this exciting intersection of collecting in gaming. While Q1 is typically a quieter quarter for new game launches, we launched new iterations of our most popular titles, including Houghton mentioned Magic Kingdom edition.
And multiple additions of art something wildcard games.
We also developed a FERC legacy gain further cementing our leadership position in the world's top game designers.
On the toys R. Five nights a trade lineup continues to be extremely successful Q1 marked yet another quarter of strong demand with sales exceeding triple digits.
We're actively working on an expansion of this lineup. So stay tuned as we continue to demonstrate huge upside potential with a different demographic from our core collectible brands.
Now slide which includes our soft lines category delivered one of its best quarters to date strong momentum came from multiple sources led by continued normalization of theme Park operations.
In addition, we were able to service a portion of unmet demand that shifted from Q4 of last year as product availability headwinds began to modestly used in the quarter.
Turning to our digital brands, we continue to hit critical milestones with our digital pop NFC business, we're leveraging the enthusiasm of these drops to bring new users into our proprietary NFC platform dropped out Io, which has grown its user base.
Since its launch.
This year, we began accelerating the frequency of our FTE drops and increasing the size depending on the specific collection.
The sponsor has been phenomenal and we're thrilled to have some excellent properties on the way including of course this morning's DC comics launch.
Featuring some of Warner brothers, most popular characters.
We also completed our first physical product redemption cycle and the enthusiasm we have seen from our fans.
For the physical products that come with the rarest ftes have been tremendous physical product redemptions have served as a perfect opportunity to build the bridge between collecting in the physical and digital world.
With the first wave of physical redemption.
So a significant increase in new accounts on dropped at Idaho from our longtime fans, suggesting a growing interest in participating in both physical and digital collecting.
We're thrilled with the response that we've received from our fans for digital pop, but we're only in the early stages.
We're actively exploring a number of interesting ways to apply this technology to create additional value for our fans as we bring our most popular brands into the world of digital collectibles.
Turning to our goals and outlook for the future last quarter, we shared our three year objective of delivering sustained double digit revenue growth.
Pat to achieving that sustained level of growth lies in our four growth pillars, which we also outlined for you in greater detail last quarter.
I've already covered a number of examples of the strong results. We delivered in Q1 from our first growth pillar continued innovation within the core.
The 53% growth we generated in our collectible brands in Q1 stems from our ability to continually deliver products that excite our fans across a variety of genres from blockbuster movie releases to nostalgic classics global sports icons and more.
We continue to expand the pop brand with new additions like pop die cast.
Pump albums, and newly launched collaborations with Slam magazine and Panini trading cards.
Innovation also means routinely introducing new opportunities to our collection of emerging brands.
Our vinyl soda collection for example grew 150% year over year in Q1, initially limited to more collectors centric specialty channel. We now have the opportunity to extend that brand in the mass market capitalizing on our ability to create products that appeal to collector and casual enthusiasts alike.
The very promising early results from our gold and Popsy lines are another indication of how effectively our product and design teams have been able to capture an aesthetic that connects to our fans even as we target new fan communities last year, we delivered strong Q1 results against our second growth pillar revenue diversification.
Last year of approximately 17% of our revenue came from brands outside of our core collectible brands in Q1 of this year that share increased to approximately 22% as both lounge fly and our emerging toys and games and digital brands recorded triple digit growth.
Internationally all of our brands outside of the core are significantly underpenetrated.
<unk> is already the fastest growing brand in Europe , and we're only getting started with toys and games domestic.
Domestically, we are beginning to expand into a number of previously Unserved channels. One example is our early success with games in the drugstore channel for our ability to provide title that generate high sell through an appeal to this channel specific shopper has led to shelf gains and expanded order size.
And some examples of new channel coincides with the expansion of our product catalog for example, <unk> always been known for its premium high quality product offerings and as a result has primarily been sold at theme parks and through specialty retail both channels that server less price sensitive customer.
The <unk> team started at the development stage to create unique product features differentiated designs construction and branding elements, which allow us to begin to unlock the broader mass market opportunity without compromising the <unk> brand and doing so we've expanded our addressable market, while introducing new audience to the <unk> portfolio.
Hands.
Our third growth pillar growing our direct to consumer business also continues to contribute to the overall growth with sales up 36% in the quarter.
On our e-commerce sites, our user base continues to grow and we're consistently making enhancements to improve our site efficiency as we prepare to rollout an entirely new ecommerce platform later this year.
Internationally, we've now lapped the launch of <unk> Europe Dot Com and continue to post triple digit growth in Q1, we launched three new countries, Denmark, Sweden, and Switzerland, and have an ambitious list of new countries to bring onboard over the remainder of the year.
Finally back in 2020, we launched pop yourself and our Hollywood and average stores. This product, which allows you to build a completely customized pop of yourself friend or anyone you know has been a bestseller in our stores since its launch late.
Late last year, we introduced automated kiosks, what's accelerate throughput in this past quarter, we brought in additional kiosks.
De pop yourself represent 17% of the total physical store revenue and we're still well short of demand.
The in store experience is an exciting capability in its own right, but the introduction of pop yourself to our ecommerce platform later this year significantly elevate the opportunity.
Our last pillar international growth with similarly, encouraging both in Q1 and looking forward over the next three years, both Europe and our combined other international markets grew in excess of 40%.
In Europe, we're seeing significant growth in brick and mortar as COVID-19 restrictions ease complementing the growth in our D to C E Commerce platform.
Because of the disparate nature of this region relative to the domestic market were actively targeting retail partners that can offer a foothold in multiple markets by leveraging these pan European retailers, we've been able to effectively drive growth across the region.
Adding to our channel efforts in the region, our brand and product assortment further enhances our growth potential in.
In Europe for example, we introduced <unk> with excellent results. Similarly, we've localized our collectible catalog where appropriate tailoring, our product and fandom focus for the audience that doesn't just mean more European footballers in the U. K has also allowed us to target the massive European anime fan base.
Other region specific communities.
Finally, I want to briefly touch base on our announcement today with the new partnership the Chernin group or TCG under this agreement a TCG led consortium, including ebay enrich Paul has agreed to acquire 80% of the shares previously held by a con investments.
Want to extend a thank you to Ken Robin and Adam Craig two of our board members from a card for their support over the last seven years, we've had a great relationship with <unk> getting to $1 billion in revenue and are excited to continue that success with TCG.
As a part of this transaction Jesse Jacobs co founder of <unk> will be joining our board taking over one of the seats previously held by Ken and Adam.
Jesse brings expertise in media entertainment and sports and we look forward to leveraging his background as we do with all of our independent Board members.
In summary, Q1 was an excellent start to the year, we delivered strong financial results and are raising our outlook for 2022 across the portfolio. Our brands are exciting and engaging our fans in a uniquely fund co way.
That has never been stronger and while we continue to operate in a constrained environment through multiple global factors, we are effectively managing through these disruptions and exceeding our expectations.
We are confident in our ability to achieve our new fiscal 2022 artists of revenue between $1 $2 75, and 132 5 billion and adjusted earnings per share of $1 80 to $1 90.
We believe these same factors plus our focus on sustainable long term growth will enable us to deliver on our three year growth objective of double digit revenue growth over the next three years with consistent margin expansion.
I want to thank our amazing fans partners and employees for making this possible 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 a record first quarter with net sales growth of 63% over the prior year.
Notes were broad based with strength across our brand category geography and channel.
The outperformance was primarily driven by domestic wholesale.
A lesser extent to demand that shifted from Q4 of 2021 due to supply chain disruption.
Sales in the U S increased 70% to $232 million, while net sales in Europe grew 43% to $57 million and other international net sales increased 48% to $19 million.
Can you provide better insight into our entire brand portfolio. We began reporting net sales on our brand category basis, this quarter, including the prior year period for comparison purposes.
With Evercore collectible brand net sales grew 53% to $240 million driven by strong growth in our core pop brand and supplemented by our emerging collectible brands in.
In addition, our last night brand more than doubled to $50 million, primarily driven by <unk> sales, a rebound and send the landslide most important wholesale partners, including theme parks and improving product availability relative to Q4 2021.
Among our other brands, which includes toys and games as well as digital net sales grew 140% to $19 million.
A product category basis figures, which includes action figures increased net sales by 59% to $240 million driven by strong growth in our core pop brand five nights at Friday's toy collection, and our newer bigger lines.
Non figure product sales increased 77% to 68 million, primarily driven by strong demand in banking laws under our <unk> brand.
As our portfolio of brand developed the number of active properties is no longer a relevant metric to analyze the health of the business beginning this quarter. We will report this metric and the accompanying earnings materials only.
Moving down the P&L the first quarter gross margin was 35% a decrease of 610 basis points versus Q1, 2021, due primarily to supply chain cost inflation.
SG&A for the quarter was $78 million or 25% of net sales leveraging 167 basis points year over year due to strong net sales growth.
Adjusted EBITDA was $36 million with an adjusted EBITDA margin of 11, 8% representing sequential improvement of 20 basis points over last quarter. Despite ongoing inflation in the cost of freight.
While the increased burden from higher supply chain costs continues to be a headwind we remain on track to reach our full year adjusted EBITDA target as a margin consistent with 2021 results.
The factors contributing to our confidence include the full benefit of our recently implemented price increases and the anticipation of a modest improvement in supply chain disruption into the second half of the year.
Adjusted diluted earnings per share was <unk> 34.
Turning to the balance sheet and cash flow, we ended the quarter with $33 million of cash and cash equivalents and $100 million of availability under our revolver, representing total liquidity of $133 million. We ended the quarter with total debt of $169 million down 8% compared to Q1 of last year.
Inventory at quarter end totaled $162 million down sequentially from last quarter, but still reflecting an elevated rate of inventory in transit at 40% as transition freight times remain well above pre pandemic durations.
As we shared on our last earnings call our guidance assumes that the cost of freight will remain at near record highs for most of the year with the potential for only modest relief in the second half of the year remaining well above pre pandemic levels.
With that context, we are raising our full year net sales target to $1 75 to $1 32 5 billion.
We remain on track to deliver full year adjusted EBITDA margins consistent with 2021.
This target reflects the ongoing freight inflation headwinds as well as approximately 80 basis points of pressure due to onetime project spend and the consolidation and relocation of our distribution centers and the implementation of our ERP system. We.
We expect adjusted net income of $98 six to $103 8 million based on a blended tax rate of 25% and adjusted earnings per diluted share of $1 80 to $1 90 based on weighted average diluted share count of $54 6 million.
For the second quarter, we expect gross margin to be lower sequentially from Q1, as we continue to face an inflationary freight environment, we expect SG&A as a percent of net sales to increase sequentially in the second quarter, reflecting onetime project spend from both our distribution center relocation and our ERP implementation.
<unk>.
We expect the result of these two factors to be a decline in adjusted EBITDA margin sequentially with some recovery expected in the second half as previously discussed.
Appreciate your time this afternoon, now Andrew and I will be glad to take your questions.
Thank you if anyone would like to register a question. Please press star followed by one on the telephone keypad. If you would like to withdraw your question. Please press star followed by T. When preparing to ask a question. Please ensure you Amit lately. So Thats star followed by one on your telephone keypad to register a question.
Jim.
We have a question from Stephanie Wissink from Jefferies. Stephanie Your line is open. Please go ahead.
Okay.
Thank you everyone. We have two questions. If we could first Andrew if you could just talk a little bit more about loan slide. It's just been so powerful is the driver outside of the core business I'd like to give you a chance to share with us what's similar about the ramp in loan supply relative to your fan base business and then what's unique that you find that.
Augmenting the rate of that growth being so much stronger so much faster.
Hey, Thanks for the question. So I think that what we're experiencing with lounge fly is.
Youre seeing a.
A company like <unk> get a hold of companies like lounge, and really put our resources behind it and it's a relatively small company. So as we as we put it into our distribution channels and we take advantage of our licensing relationships retailer relationship.
<unk>, our global distribution, obviously, especially I mean, it's really growing very quickly and EMEA for us I think thats why youre seeing sort of this explosive growth with that brand.
We were thrilled with the.
The consumer base, because it's such a huge overlap with pop culture and a love for.
At the same IP as our core fans.
Obviously, it's a more female demographic than our core.
Collectibles.
Customers fans and so I would say that that's really what's adding to the success.
And then a quick fast growth.
Alright, that's great and then gentlemen for you is just on your remarks around the onetime project spend for ERP in D. C below can.
Can you just help us think through the total amount that you anticipate spending and then anything more by cadence.
By quarter would be really helpful.
Yeah. Thanks for the question nice to hear from Steph So yes.
We reported out and that was about 80 basis points on the year, all of which will happen in the first half of the year.
It's about two points of pressure just in Q2 on adjusted EBITDA.
We are launching or we did launch the new DC in April and the ERP is set to come out at the end of the corner.
Okay, so anything trickling into the back half or should we assume that its pretty much done. After Q2, yes. It really the pressures are all in the first half of the year specifically Q2.
Okay. Thank you.
Thank you before we take our next question I'd, just like to remind everyone. If they register a question.
<unk> one on the telephone keypad.
Our next question is from Megan Alexander from J P. Morgan Megan Your line is open. Please go ahead.
Hi, guys. Thanks for the question I wanted to spend a little bit more time on the <unk> announcement.
And their press release, they talked about.
The opportunity for <unk> to develop its own properties into entertainment franchise similar to what they've done with things like exploding kittens. So can you just talk about that opportunity a little bit more how you see this investment helping to accelerate that and in terms of the marketplace. What is the primary marketplace for.
Reselling of <unk> at this point and how exactly would that work in order and making EBIT the primary marketplace.
Hey, it's Andrew Thanks for the question.
Let me let me take the second part of your question first which is ebay has always been our.
<unk> official secondary marketplace on that.
Where our fans prefer to go for the secondary marketplace and so we've had a longstanding relationship with with ebay and we think this will just prove to strengthen that relationship over time, we're really excited about partnering up with them on multiple initiatives that were.
Quite frankly in the works for a while now so we're excited just to continue to grow those opportunities when we take a look at the TCG partnership.
Their portfolio of companies.
Is really an interesting it provides us with a lot of opportunity there.
There are some overlaps with what they do with the collector community. There's a lot of entertainment overlaps and as we talk about things like the funko generating our own IP and potentially going after.
The entertainment space. These are all things that we've been talking about for <unk>.
For a little while now and we think that there are going to be opportunities presented to us by way of this.
This new partnership that we're really excited about it's still early days and we're still exploring.
All of the different potential opportunities, but we are thrilled with the.
With the connections and the networking the doors this.
This partnership could open up for us.
Yes.
Great. That's really helpful. Maybe just a few.
Follow up it seems like you've raised the top line for a little bit more than where you beat the street on revenue in <unk> is that just what youre seeing quarter to date or can you talk a little bit more about that and then on the bottom line you talked about Q2 gross margin being lower sequentially on freight.
Any change in terms of in terms of the the expectations in the back half are those more or less unchanged.
Yes, great.
So we feel really good about our guidance.
Guiding to $1 75 to $1 <unk> 5 billion, 24% to 29% growth rate. So we feel really confident about our ability to deliver on that for.
For the full year.
And as you as you look at the margin rates yes.
We will see more pressure on gross margin in the second quarter, there was a little bit of a benefit from just some timing shifts in Q1. So that's why we do feel that margins will go down in the second quarter.
At <unk>.
Sequentially quarter over quarter, but then as we get into Q3 and Q4.
Haven't necessarily changed a ton of input on Q3 and Q4, we did have freight.
Remaining fairly high but we do think there'll be a little bit of relief in Q4. So unfortunately, it's a bit of a hockey stick on the margin front the way it looks but Q2 is where we're seeing the pressure from an SG&A perspective on the investments as well as on pressure from freight.
Awesome. Thank you.
Thank you.
Thank you as a final reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
Alright, Thank you everybody for the questions and thank you to all of our fans and employees for a fantastic Q1. Thank you very much.
Yes.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Okay.
Okay.