Q2 2022 Funko Inc Earnings Call
Culminating in San Diego comic Con two weeks ago, where we recorded our largest day of direct to consumer sales ever.
Of course these events are more than just about direct sales, we have been able to expand the fan engagement, we've become known for to a level that eclipses anything we've done before <unk>.
Demand is through the roof enthusiasm for our brand is the highest we've ever seen and fans are thrilled to get back to celebrating with us.
We continue to monitor many factors impacting the global supply chain and macroeconomic climate, but we remain cautiously optimistic about the second half of the year.
On the strength of our first half we are raising our net sales outlook for the full year by $25 million at the midpoint reaffirming our implied second half guidance.
I'll now review some of the highlights from the quarter for each of our brand categories.
Within the core collectible brands category continue innovation across the category is what drives the amazing loyalty from our fans.
Our flagship pop brand generated double digit growth as exciting evergreen activations like pop Dicast pop deluxe supplemented a robust content slate across multi media formats.
Complementing pop and contributing to the category is 21% year over year net sales increase.
Emerging brands, including soda and pop sees all delivered strong incremental growth each with additional expansion opportunities on the horizon.
While still in its early integration Mondo will sit within the collectible brands category.
We expect Mondo is high and limited release business model and diverse range of high quality collectibles to be an excellent addition to our current portfolio of brands tapping into a new segment of attractive market opportunity for funko.
Turning to our toys and games brands one of our key areas of revenue diversification Funko games continues to drive category growth with our growing catalog of legacy titles as well as multiple exciting launches chief among these new releases during the quarter was the Ted Lasso Party game are best.
Launch to date Ted.
<unk> provides an exciting blueprint to leverage universally loved content to reach a broad target audience.
On the collectible gaming side will soon expand our collectible gaming portfolio with the recently announced Disney Kingdom Mania designed for ages, six and up Kingdom Mania introduces a collectible gaming platform built on some of the most popular Disney and Pixar characters.
Further this gave targets at slightly different audience from Battle World, which remains a top five game for funko within our toy brands.
Five nights at Freddy's again made our top 10, best selling products across all of Funko.
Fly had another amazing quarter as the brand continues to resonate with a large and growing community of devoted fans, while serving as the flagship of our revenue diversification strategy.
We've leaned into our deep connections within the collector community as the brand continues to expand its loyal fan base.
This is particularly visible on <unk> dot com, where we've seen a significant uptick in traffic as fans go directly to the source for their favorite brand.
The brand's net sales have grown tenfold in five years since we acquired it and we continue to see tremendous upside.
Finally, turning to our digital pop NFC business participation and enthusiasm continues to grow as we increase drop size and frequency. Our recent DC comics and FTE dropped saw nearly half a million fans in Q well, the Scooby Doo and my little Pony drops both sold out in under 30 minutes.
We're excited to continue exploring this new world of digital collectibles with our fans and many opportunities it presents.
As I mentioned earlier, our international business delivered record net sales in the second quarter with particularly strong results from Europe .
Strength was broad based across the region driven by improvements in operating efficiency and continued strategic targeting of Pan European retailers.
Importantly, we generated double digit growth in net sales across our brand categories in the region and we continue to expand our brand portfolio internationally to match the breadth domestically.
And frankly, we like to say, we are one largest customer reflecting the growth we've seen in our direct to consumer business. Despite ongoing supply chain headwinds and the relocation of our distribution center from ever at the Buckeye, Arizona during the quarter, we maintained strong double digit growth in net sales we continue to drive high.
Average order value and conversion rates through additional payment options improved site operations and new merchandising tools.
In summary, we maintained the first quarter momentum and delivered strong results in Q2, while reinforcing fund goes foundation for growth.
While we are thrilled with the first half we are mindful of the uncertainties that remain in the macroeconomic climate broadly.
Some of these factors, including inflation could impact consumer spending or further disrupt supply chains. We are monitoring the environment closely while we are confident in our ability to deliver sustainable long term growth and manage through disruption significant deterioration in the macroeconomic climate wood.
Impact our operations acknowledging these factors and on the strength of the first half. We now expect fiscal 2022 revenue between one three and 135 billion and adjusted earnings per share of $1 88 to $1 99.
Moving into the second half, we will continue to execute against our key strategic growth initiatives.
Within the core diversify our revenue base grow our direct to consumer business and expand international operations, we look forward to providing updates as the year unfolds.
Before I close I would like to announce our investor event, which we are holding on September 13th in New York, We will be sharing some additional depth on our businesses and providing details around our three year roadmap to sustained double digit growth and margin expansion. We look forward to seeing many of you there I'd like to thank our incredible fans.
<unk> and employees for their continued support and belief in the funko brand with that I'll turn the call over to Jen to take you through the financials.
Thanks, Andrew and good afternoon, everyone. We are pleased to report a record second quarter for net sales with growth of 34% over the prior year. Our results were broad based with strength across our brand categories geographies and channels. The outperformance was primarily driven by continued strength within our lounge side brand domestic mass market wholesale.
And our own direct to consumer channel.
Net sales in the U S increased 42% to $231 million, while net sales in Europe grew 22% to $63 million and other international net sales increased 1% to $21 million.
On a brand category basis core collectible brands net sales grew 21% to $233 million driven by continued innovation in the category with new form factors like our pop dicast lineup and new figures, including our pop season <unk> lines, the landslide brand more than doubled its net sales for the second consecutive quarter.
<unk> to $70 million, reflecting our successful efforts to increase revenue per SKU, while shifting product mix to our more iconic and high value items.
We've broadened our partner brands and we continue to open new retail relationships importantly, we have established ourselves as a category leader and bank communication and engagement.
Among our other brands, which includes toys and games as well as digital net sales grew 12% to $13 million.
Our landslide in other brands now constitute 26% of net sales up from 19% in the second quarter of 2021, and a strong proof point and the effectiveness of our investments to diversify our revenue base.
Moving down the P&L first quarter gross margin was 33% a decrease of 640 basis points versus Q2, 2021, primarily due to supply chain cost inflation.
As a reminder, we rely on the spot market for Trans Ocean freight.
Last year. This resulted in higher freight rates hitting our P&L somewhat later than some of our peers.
Conversely, as we described last quarter, although rates are beginning to improve we saw a little benefit in Q2 2022.
Relative to the first quarter of 2022 margins declined 260 basis points, partially due to product mix as emerging brands, where a large share of total revenue in Q2 versus Q1.
SG&A for the quarter was $83 million or 26% of net sales.
In Q2, we saw elevated expenses related to the relocation of our distribution center from Everett to Buckeye, Arizona as well as our ERP project.
Regarding our ERP, we recently made the difficult decision to delay the remaining steps until 2023.
There were a number of factors that contributed to this decision, but ultimately we did not want to impair the momentum that we have today by shifting to a platform that we felt wasn't yet fully ready to support our business.
We plan to have more details for you around our 2023 implementation plans on our Q3 call in November .
Adjusted EBITDA was $32 million with an adjusted EBITDA margin of 10%, reflecting the elevated freight rates product mix and infrastructure spending.
We remain on track to deliver full year adjusted EBITDA margins consistent with 2021 results, but acknowledged that a significant deterioration in the macroeconomic environment or less than anticipated stability and freight rate contemporary margin expansion in the second half of the year.
Wrapping up the P&L adjusted diluted earnings per share were 26.
Turning to the balance sheet, we ended the quarter was $56 million of cash and cash equivalents and $30 million of remaining availability under our revolver, representing total liquidity of $86 million.
We ended the quarter with total debt of $235 million up 32% compared to Q2 of last year as we leverage our revolver for near term infrastructure investments.
Inventory at quarter end totaled $234 million as shipping delays begin to subside.
While our inventory levels are up year over year, we believe the inventory is generally high quality and leaves us well positioned to meet our consumer demand and support our strong second half growth forecast now to the guidance for 2022, which assumes we don't experience further congestion due to supply chain or a significant deterioration in consumer demand due to <unk>.
Macroeconomic factors.
We are raising our full year net sales target to between one three and $1 35 billion, reflecting our $25 million outperformance in the second quarter.
For full year adjusted EBITDA margins, we continue to target a margin consistent with 2021.
We expect adjusted net income of 101, eight to $107 3 million based on a blended tax rate of 25% and adjusted earnings per diluted share of $1 88 to $1 99 based on a weighted average diluted share count of $54 1 million.
We appreciate your time this afternoon, now Andrew and I will be glad to take your questions.
If you would like to ask a question. Please do so now by pressing star followed by one on your telephone keypad and preparing to ask your question. Please ensure that your device Andrew microphone on mute you'd likely.
Our first question today comes from Stephanie Wissink with Jefferies. Stephanie. Please go ahead.
Thank you good day, everyone. We have two questions for you John the first is on inventory just to give you a chance to talk a little bit more about where the inventory resides how much of it is related to the DC relocation how much might be in transit. If you could just dimensionalize inventory for us that would be appreciated.
Great Hey, Seth how are you.
Inventory, so what we actually ended up.
Four and had a lot of delays that rolled into Q1, just due to the congestion within the supply chain and youre seeing a little bit of that Q2 as well, although as we're now looking into the back half of the year, we feel the inventories in a really good and healthy position and.
Poised to deliver on our back half results. It was really about just managing through the congestion that we saw are knowing that we're seeing this transit times come down and delivery date to be more on time than they had.
Earlier in the year so.
There is.
A large portion of the in transit, but we're working to get that into the DC in and get that out to our customers.
Alright, that's great and then Angela one for you is just on your big growth driver is the innovation diversification direct to consumer International if you have it.
Think about where you would force rank.
Of those more than the other or is it something that is outperforming your expectation within those four drivers if you look at them almost equal laterally.
The drivers of the business.
Hey, Steph, yes, thanks for the question we actually.
Sort of on an individual.
Each silo.
One initiatives that we're focused on driving.
So it's kind of hard to stack rank. The four broad drivers I will say that we have a lot of resources pointed towards our direct to consumer business. We're excited about growing that.
We're putting in some a lot of effort to expand in that we just came off of San Diego comic Con our biggest one ever.
Days of sales.
Direct to consumer history, which was thrilling so that's really exciting obviously product diversification acquired mondo.
You're seeing tremendous growth from lounge, why so we're very focused on.
Yes.
The graphics.
That one we're going to focus on.
Versus build continue to look at the Murphy.
World, That's an area that we're constantly focused on so it's kind of hard.
To really pick one stack right because we're we sort of have a stacked rig of initiatives.
Level up to each individual pillar if that helps answer your question.
It does thank you very helpful. Thanks.
Thank you.
Our next question comes from Linda Bolton Weiser with D. A Davidson Linda Please go ahead.
Yes Hello.
So the toy companies, which I know you are not exactly the same thing, but they reported quite high shipment growth in the first half because they were sort of refilling inventory levels in the channel. So the Pos was actually lower than their shipment growth do you think that's what.
Is that what was going on with you in the first half is like in the U S where you can sort of reselling channels or is your high growth just purely a reflection of the high consumption growth.
Yes.
How are you.
And as you recall that was an extremely high growth that was more.
The mechanism of the Q4 sales slipping into Q1, so that's where that growth really came from we feel good about our Q2 growth as well keeping in mind that there is a little bit of price increase in there as we did start to see those come to fruition, but we feel good about managing our inventory with our retail partners and <unk>.
Where they sit.
And also on.
On the plus side.
You talked about pushing out this ERP initiatives into 2023 does that mean, there's going to be less associated SG&A costs associated with that in 2022.
No and Thats actually a great question there'll be puts and takes of that 2022.
We will still continue to work on many initiatives throughout the year. So the run rate will continue but there's other offsetting factors to that so we don't see it as a major headwind in 2022, so far but we feel good we made the right decision for the business to not have business interruption as we go into the holiday season.
Okay and then.
I'm just curious about your cash flow I mean, you had a really really high level of free cash flow during the pandemic in 2020, and then 2021 was still strong but down I'm just kind of wondering in 2022 do you have any sense for whether like your cash flow can be up or down year.
I'm just concerned that you develop this trend of declining cash flow and how that might look.
Yeah, that's a great question, what you're seeing underneath the covers there.
A couple.
Hi of cash whether it be the distribution center that was a major feat to get that up and running we had a lot of cash associated with moving the inventory between.
Our distribution centers and Everett down to Buckeye as well as continuing to focus on the key.
This year as well so with a lot of uses of cash and then we had the inventory that came in.
All at once as you got in Q4 inventory Q1 inventory and so.
The inventory and some of those uses of <unk>.
But what we have done because we do anticipate it coming back up in the back half of the year, just maybe a point in time, we have worked with them.
With our banks and we have we did have an accordion within our debt agreement. So we've managed to leverage that and that's that's in our Q and so youll see that and so you see additional cash come onto the balance sheet.
Okay. That's it for me. Thank you so much.
Thanks, Mike This is Linda.
Before we take our next question as a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now.
Our next question comes from Meghan Alexander with Jpmorgan. Please go ahead.
Hi, Thanks, very much for taking my question I just wanted to start on the macro and others you clearly called out a lot of the factors weighing on consumer sentiment.
Hoping you could elaborate on that are you seeing any change in retail order trends or the end consumer holding off a bit or is it more just an acknowledgment that the consumer is under pressure and therefore, you're just being prudent it does seem like the latter I just wanted to clarify.
John you can chime in it's really the latter.
What I.
I would say that we don't really have a crystal ball. So if something turns in the back half of the year I think that's why we're pointing that out.
Obviously, there is pressure on the consumer we're aware of that our retail partners are aware of that so I think we're just being cautiously sort of just cautious about it as we really know what the back half of the year holds Jon you want to add anything to that.
I would just add similar to what we saw during the pandemic, we would see some positive signs and then the economy would shut down again, so we had to address.
At this point, we don't have a crystal ball, we want to make sure we're being prudent.
Got it that's helpful and then maybe.
A follow up quickly for you John on the gross margin you did mention that it makes sense or not seeing benefit add soon but can you talk a little bit about the gross margin outlook for the back half maybe any any commentary on cadence and.
Are we going to start to see some.
Relief from Ocean freight.
Yes.
Great question, but youll see in the back half as you'll see we will get them sequentially higher.
As you look at Q3, and then into Q4, which is not our normal cadence.
We know that but.
We think theres going to be some relief more in Q4 on the shipping then in Q3. So we've put some modest improvement in there as well as we're actually looking at painters, we are seeing the prices and we're actually seeing that come down.
Recall, we do have the inventory that we do have.
To sell in Q3 came in at those higher rates. So that's why Q3 will not see as much benefit as Q4.
Got it and can you just remind us did you use airfreight at all last year and if so would you what's your expectation for airfreight this year.
Minimally some.
We did not do airfreight, yes.
Yes.
Okay.
We don't have plans at this point.
Okay. Thank you very helpful.
Thank you.
We have no further questions. So I'll now hand back to Andrew.
I'd just like to say thank you everyone. I appreciate you jumping on the call today.
And.
Thank you very much.
Can you hear me.
Theres not one more question Arthur.
Apologies we have just had another question comes from Garrick Johnson with BMO capital market Garrick. Please go ahead.
Alright, Thank you Andrew good catch.
Hey, I wanted to ask you about.
You will be shipping from a holiday season.
If you pulled anything forward into third quarter into the second quarter from the third of the force.
No we have not.
Okay.
Alright, and then maybe.
You had mentioned this before but your agreement with Tencent games and a AAA game you guys Youre planning on developing can you just talk a little bit more about that what kind of deals. This is just a licensing deal or are you actively.
Building, a studio or what's going to happen with Tencent games.
Yes, it's a great question. Thank you and we probably should have mentioned that.
A lot going on here.
So yes that is a licensing deal we are not building out a studio we are partnering with games.
To work with them to release.
On brand.
Game that represents funko.
Our IP as well as the other IP that they're going to be working with so it's an outsourced licensing deal.
Very excited about it by the way for our fans.
Debuted at San Diego comic Con was.
Spots.
Okay, great and maybe one more.
The opportunities.
How about the physical games the board game business.
You'll see that as a growth category as we come out the other side of the pandemic.
Yes, we view that's been a really great sports we continue to grow we continue to work with our retail bond.
You are very familiar with.
Having that expanded white space on the games wall.
Three of the store talking to a different consumer with a different buying team has been really good for us.
Some of the relationships that we're building out through the success that we've had in the early days.
Really exciting the best is yet to come we mentioned Disney Kingdom, mainly very bullish on.
Pneumonia and bullish on a couple of the other new initiatives that we haven't announced yet we talked about things like the <unk> Party game. These are just things that we're cranking out and the fans our fans.
And more more so our retailers are really enjoying the relationship in this expansion for us into new area of the store.
Okay, great. Thanks, Andrew.
Thank you.
As a final reminder, for any further questions. Please press star followed by the number one on your telephone keypad now.
At this time, we have no further question to Andrew I will hand back to you.
Alright, thanks, everybody for joining us today appreciate it. Thank you to all of our fans employees and everybody who helped make this possible I appreciate it.
Okay.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Okay.