Q4 2022 Funko Inc Earnings Call
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Okay.
Good afternoon, I'm well can you just some case conference call to discuss financial results for the fourth quarter of 2022.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypads. Please.
Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company and as a reminder, this call is being recorded I.
I would now turn call over to Ben vignettes Hopper director of Investor Relations to get started please proceed.
Thank you and good afternoon with us on the call today are Brian Mariotti, Chief Executive Officer, and Steve made newly appointed Chief operating Officer, and Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of this conference 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.
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 to their most directly comparable U S. GAAP financial measures and supplemental financial information can be found in the earnings press release, an 8-K that we released earlier today.
All of these items plus a visual presentation that investors can consult to follow along with this discussion are available on our Investor Relations website, Investor Funko Dot Com I will now turn the call over to Brian .
Good afternoon, and thank you everyone for joining us today as most of you know this is my first earnings call as I step back into the role of CEO in December .
I can use this call to provide an update on the important work that is underway.
I wanted to first emphasize I stepped back into the role of CEO , because I fully believe in the power of the funko brand and its potential but I also recognize the significant operational issues to progress.
My first priority the reset of our operations, which we are addressing with urgency, but it won't happen overnight.
Recognizing our current situation I think it's important to understand how do we got here.
The IPO of approximately five years ago, we've more than doubled our revenue we had taken at <unk> direct to consumer business.
18% of total revenue this past quarter.
We've expanded into multiple new geographies.
And we've had an amazing new brands for our pop culture platform. This rapid growth brought challenges that we are now addressing our history of prudent and we can deliver reliable profitable growth, but to do so we will need to reset our operational foundation.
With that context, let's turn to the results for the quarter.
<unk> for our brand is stronger than ever.
Still early in our operational reset looking at our financial results for the fourth quarter net sales were $333 million down 1% year over year wrapping up the year in which we grew 29% year over year.
In our direct consumer business. The channel we have most control over we grew 37% year over year and on the wholesale side, while we don't typically comment on point of sales trends wholesale sell through has been very encouraging.
Q4, we posted double digit Pos growth well ahead, NPV estimate of flat growth for the broader industry over the same period.
While demand remained strong our fourth quarter profitability was heavily impacted by our operational challenges adjusted.
Adjusted EBITDA was a loss of $6 million and adjusted EPS was a negative 35.
It was clear on our last earnings call that the business and our operations hit an inflection point.
A combination of macro factors and focused specific issues that disrupted our financial and operating performance.
Acceptable degree.
I'll share more details on our financial results shortly but I want to spend this time discussing important work underway.
To get our operations back on track <unk>.
Our board and our management team are deeply focused on execution and unlocking the potential of bump with unique value proposition.
To begin we have strengthened our leadership team Steve made who is with me on today's call joined US in early December and an interim operations consulting capacity, we announced it today, Steve will service, both the new Chief Financial Officer, and Chief operating Officer.
He brings a wealth of expertise spanning retail consumer e-commerce industry.
<unk> CFO COO and CEO of Wal Mart Dot com, where use responsible for all aspects of a multibillion dollar e-commerce.
More recently speed was the CEO of the new stem brand a multichannel retailer we're thrilled to have Steve on board. We've made good progress in aligning the finance and operations side of the business and Thats exactly why Steve will be serving in both capacity as CFO and COO.
Allowing seem to oversee both functions, we believe will be better positioned for him to drive that alignment as we work across the organization to improve efficiencies and ultimately our financial results.
Our efficiency improvements on free categories gross margin initiatives.
Government cost reduction and other SG&A savings.
These actions are well underway, but 2023 is still very much a year to operationally reset.
Once completed we believe these actions will save us between $150 million and $180 million annually.
Our first category of focus to improve execution is on the gross margin line.
Here, we have two primary levers price and product costs, which together, we expect to contribute approximately 60% to $70 million in annualized adjusted EBITDA.
Last quarter, we discussed extending our price increases to include our exclusive product lines. The reception has been encouraging and we believe our products remains firmly at an affordable price range.
Our customers.
We're also driving down our product costs with the introduction of a more competitive bidding process from our vendors and a more comprehensive assessment of costs throughout the product development lifecycle.
The second and third categories include addressing our fulfillment obstacles and reducing other SG&A spending since the pandemic, we've added approximately $85 million in annual fulfillment expenses. Despite similar overall throughput in our distribution center.
Mix of the business has changed since 2021, but by focusing on the execution, we can reclaim a significant portion of that spend increase.
Combined we expect fulfillment savings and other SG&A reductions to add 90 million to $110 million in annualized adjusted EBITDA.
The first action addresses the efficiency of our distribution center.
Implementing a warehouse management system that we believe will dramatically improve our cost to fulfill this system is expected to be up and running this summer.
The second fulfillment improvement action is addressing our elevated inventory levels. We are beyond the capacity of our Arizona based distribution center volume as restricting our distribution centers throughput and incurring incremental container rental charges by eliminating inventory, which we expect to do in the first half of this year, we expect the result.
SG&A spending.
And improve our gross margin by saving on incremental container rental charges. Finally, we are taking steps to reduce operating expenses across the board, including a workforce reduction of approximately 10%.
Tighter marketing spend and.
And other cost reduction actions to ensure our spending is aligned with our topline results.
These changes are ongoing and we are focused on executing on all of these initiatives a high degree of urgency.
We expect the margins in the first half of the year remain under significant pressure.
However by the second half of the year, we expect the combination of gross margin initiatives improved fulfillment and reduced SG&A spending to return for our adjusted EBITDA margins to double digits.
2023 of the year for us to focus on operations. Most of that work is already underway and will continue throughout the first half of the year.
Any of our retail partners have been very tentative in their post holiday restocking and we expect that to weigh in on first half seven however, as already noted demand and sell through remains strong.
A robust second half rebound in the content counter these factors give us confidence in topline performance in the second half.
Net sales trend coupled with the bulk of our operational improvements coming in the first half we expect our result.
<unk> in the second half of the year.
I look forward to updating you on the progress along the way.
While we are heavily focused on execution, we have not lost sight of opportunities to grow our core business through new collaborations adjacent product categories, new direct to consumer experiences and new geographies.
These opportunities are exciting expected to help grow our business today. However, operational improvements are the most important.
Our execution here will help us to ensure we are well positioned to win in these new growth opportunities in the future.
We know that 2023 will be at year to reset, but I'm confident we will come out of this.
A stronger funko from top to bottom.
These steps will allow us to regain our operating leverage as we accelerate growth in the near future and deliver long term value creation for the company and our shareholders.
Now, let's turn it over to Steve to provide more details on the financial results of the quarter.
Thanks, Brian Hey, everyone nice to meet you and look forward to future conversations with each of you I'm Super excited about this business and helping to unlock <unk> potential.
Look forward to getting to know you all over the coming quarters as we continue on the operational and financial initiatives, we have underway.
Now jumping into the results in the fourth quarter, we delivered net sales of $333 million down.
Down 1% over the prior year.
Our direct to consumer channel grew 37% to $49 million driven by very well received events, including Black Friday and cyber Monday.
The strong performance in our direct to consumer business was offset by slower sell in on the wholesale side.
Wholesales declined 6% to $284 million as we manage through a period of muted restocking across most of our retail partners.
In the U S. Net sales declined 5% to $241 million, while net sales in Europe were relatively flat at $64 million other.
Other international net sales increased 45% to $28 million with double digit growth in all of our emerging geographies.
On a brand category basis net sales in our core collectible brands declined 7% to $244 million on lower evergreen content as we prioritize more time sensitive current content in light of our constrained logistics.
The last slide brand grew 31% to $71 million, bringing the full year growth to 68% year over year as the brand saw a strong demand.
Among our other brands, which include toys and games and our digital products net sales declined 13% to $18 million as the ongoing strength of our digital collectibles was offset by fulfillment challenges in our games business.
Turning to margin and expenses fourth quarter gross margin was 28% well below our expectations due to multiple factors, including container rental charges and to a lesser extent charge backs.
These two factors reduced gross profit by approximately $15 million.
While freight rates do continue to improve this was offset by container rental charges incurred when capacity constraints within our distribution center prevented us from unloading containers.
As Brian discussed, we believe that our ongoing inventory management practices combined with our lower product costs and increased pricing will allow us to get back to our historical margin range in the second half of this year.
Moving on to operating expenses, we experienced significant headwinds due to constrained logistics SG.
SG&A was $139 million, which includes a onetime $33 million noncash charge for the write down of capitalized costs related to a pivot in our ERP deployment strategy.
In addition, there was approximately $3 million in incremental labor and third party fulfillment expenses.
For the fourth quarter, adjusted EBITDA was negative $6 million due to container rental charges charge backs and additional fulfillment expenses all of which we are addressing in the first half of this year.
Finally, adjusted diluted loss per share was <unk> 35.
Turning to the balance sheet, we ended the quarter with $19 million of cash on hand, we ended the quarter with total debt of $246 million today, we announced an amended credit agreement, which provides us with additional room under our financial covenants as we implement this year's cost savings initiatives.
These refer to our 10-K filing for additional details.
Inventory at quarter end totaled $246 million up.
Up 48% year over year.
As Brian previously mentioned, we have conducted an exhaustive analysis of our fulfillment network and have decided to reduce our inventory levels to improve our overall cost to fulfill by managing our inventory to the proper efficient operating capacity of our U S distribution Center. We expect this action to result in an inventory.
Right down in the first half of between 30 and $36 million.
Before I move on to our guidance I'll note that we've all been incredibly focused on identifying and addressing opportunities for improvement.
We believe that executing on our initiatives will position us to drive sustained long term shareholder value.
However, these initiatives will take time and in some cases several quarters as a result, we don't expect adjusted EBITDA to be positive until the second half of 2023.
But to improve sequentially throughout the year as these initiatives take hold.
For the first quarter, we expect revenue of between 225 and $255 million, excluding our anticipated inventory write down we expect gross margin to be slightly below this past quarter and improved sequentially throughout the year as our inventory actions pricing and product costing efforts take hold.
We expect SG&A to be sequentially lower by approximately $25 million.
Adjusted EBITDA for the quarter is expected to be between negative $50 million and negative $45 million returning to positive territory in the second half of 2023.
We expect adjusted net loss of negative $53 million to negative $48 million based on a blended tax rate of 25%.
And adjusted loss per diluted share of negative $1 to negative 90.
Based on a weighted average diluted share count of $52 3 million.
For the full year as gross and operating margins improve we expect year over year revenue growth between zero and 5%, we expect adjusted EBITDA for the year to be between 50% and $75 million.
With effectively all of that coming in the second half of the year.
We've made steady progress and there is still much more to do we've identified initiatives to capture between 150 and $180 million in annualized adjusted EBITDA.
The next two quarters, we will see us rebuild a stronger foundation for funko and we are confident it will produce meaningful benefit in the second half and into 2024 and beyond we appreciate your time. This afternoon now I will turn it back over to Brian .
Thank you Steve in closing, we remain very encouraged by the strong support and demand we continue to see from our devoted there as I've said, we recognize our results are not where we want them to be and we are working with urgency to take operational steps need to deliver margin improvement and drive a long term shareholder value.
And our ability to execute thank you for the time today and I will now turn it over to the operator for Q&A.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now.
And your mind, Please press star.
I wanted to ask your questions. Please ensure that your line is Amit it lately.
The first question on the line comes from Alexander <unk> from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi, Thanks for taking my question I guess just first.
Sort of is there any indication on when the operational headwinds from the lack of a warehouse management software at the new DC will be behind US and then I guess the obvious question is how much of a drag on sales gross margin SG&A is that this year. So like if we sort of exclude the operational headwinds what would the guidance have been.
You mentioned, some pretty positive color about wholesale Pos being up double digit percent in the quarter is that the type of growth rate that 2023 sort of would be FX.
For the operational issues you guys there.
Thanks.
Yeah sure Hey, this is Steve.
Take the first cut at this.
On your first set of questions around the operational efficiency initiatives that we have underway, that's going to kind of come in.
Kind of phased throughout the year for example, we're already taking action on the inventory and we're already seeing some efficiency gains from that.
Although we're not we're not done with that work.
We're going to see some.
We're starting to see some benefit there.
We've already started to see these container rental charges that we've been incurring thats, we basically cut those in half.
As of a couple of days ago. So we're seeing that benefit already in that that benefit is going to continue to get bigger and bigger as we worked through the inventory on the system side, which is really the biggest hamstring in our U S distribution.
We expect to have a warehouse management system in place this summer.
And normally in a systems implementation like that it takes 45 60 days to fully burn in and work out the Kinks, but we're confident that after that burn in period, we will see some really nice efficiency, especially on the variable labor side of fulfillment.
Great. That's really helpful. And then I guess just on the sort of.
Two follow up questions can you give us a little more color on the anticipated inventory write down was due to sort of lower wholesale reorders or is it primarily just the logistics issue, which didn't allow you to on the containers and then.
My last question is what sort of led to the decision to not go through with the ERP implementation.
Take the charge in the quarter. Thanks.
Sure.
On the inventory this is purely an operational thing.
The products are good but the facility was running at over 100% capacity when it needs to run around.
Around 80% capacity to be as efficient as.
As we'd like it to be and we were incurring all of these kind of storage costs. Both in terms of the container rentals as well as some off site storage that we had to procure in the fall of last year and then another temporary one that we've had to put in place a few weeks ago. So the inventory reduction is purely in order.
To be able to operate more efficiently and save a lot of money on storage costs.
We've worked that tradeoff through pretty tightly to understand that.
I hate to get rid of that inventory, but we're very confident of the payback that we're going to get as a result of being just being more efficient and saving on storage costs on.
On the ERP question, so, it's a little bit of an oven involved to answer.
We figured out in early part of this year call. It call. It January that we were not going to be on time with the launch of the ERP that was scheduled to happen. This summer.
Unfortunately, the warehouse management system for the Buckeye facility would have been tied to the launch of the ERP. So we took a look at the landscape. Other systems solutions that were out there that maybe we could implement much more quickly, including the ERP that we run very successfully in our EMEA business.
And basically made the decision that we could move forward.
Invest less money and a pivot in the strategy one of cost to complete the original strategy.
The side benefit is it gives us the ability to actually launch a warehouse management system in advance.
Summer so full blown ERP phase one will not be completed until sometime in 2024, but we're able to separate warehouse management from that now and go down that path separately.
Perfect. That's really helpful best of luck going forward.
Thank you I appreciate the questions.
The next question on the line comes from Linda Bolton Weiser of D. A Davidson. Please go ahead.
Yes, hi.
Im sorry, if you answered this because I missed the very beginning of your commentary but.
Like my understanding was that this distribution center was like almost inaccessible like it was just so many problem, but therefore, you have to have duplicative storage and inventory on third party locations. So are you, saying now that you are accessing the DC or like I'm just I'm trying.
Figure out like what has happened the last time, you spoke about all of that.
Yes sure.
So we've been operating that distribution center since I believe June or July of last summer when it went live.
The problem with the inventory as it just became too cumbersome to operate in any sort of efficient manner. So the notion that we that we've not been able to access it I would say is not quite accurate we've been using it and it's been incredibly inefficient.
Both because of the system issue as well as the inventory is starting to starting.
So pileup and.
So, yes, I mean.
Like I like I like I answered from the last call and we're already seeing some of the benefits of the changes that were taking place.
Ill cover everything you asked.
Yeah, Yeah that's.
And previously I know you were.
And just giving very rough guidance.
Before because they didn't quite know probably but I know you were talking about in SG&A adjusted SG&A level of $100 million per quarter or thereabout is that still the case or I know you said it like it is going to be that high.
In first quarter than it is going to come down or what's the color on that.
Yes.
Our SG&A expenses. This year, we've got some headwinds there the annualized <unk> of some expenses and payroll that we knew payroll that we incurred last year, we are working very aggressively to bring that down.
Inside SG&A is the variable labor well, it's more than just a variable labor, but mostly the variable labor of the of our distribution centers. So youre going to see improvements there again back to my previous answer is probably not until I mean, we're seeing some benefit now but real benefit not until later this year.
And then we've got a number of cost takeout initiatives that Brian alluded to that are underway that are going to bring it down even more.
So I did glance at your SG&A in the fourth quarter, yet, but what was that number and then how much of that in the fourth quarter. SG&A is unusual type expenses that will eventually go away.
Okay.
I might need to follow up with you on that question just to make sure we're not capturing it correctly, our fourth quarter SG&A was about was $139 million.
That included that includes the $32 million charge for the ERP write down that I just discussed.
And then small single digit millions of other.
Nonrecurring onetime expenses.
Right. So even excluding the cards, that's like whatever $100 million. That's a very large number for a company of your size. So I'm trying to figure out like what's the normal if you've got all these things going on because that's a few quarters ago Youre at CNA was like.
I don't know.
$70 million or something so.
How much of it is like.
Oh Wow like that's non recurring Florida, one size fits all your problems.
Well I mean, the things that I, just mentioned and that's about that's going to total about $40 million.
Nonrecurring expense that we got hit within the fourth quarter that were not going to see going forward into 2024.
Or some other headwinds in the number for this year the annualized <unk>.
Any new hires that took place last year is the best example of that.
But again the key.
Cost takeout initiatives that Brian mentioned, and I've mentioned as well are going to youre going to see a pretty dramatic reduction in our SG&A expenses overtime.
And will that be noticeable in third quarter, 2023, or not till fourth quarter.
It will be it will be noticeable in third quarter.
Okay.
Got you. Thank you and then one more thing on that.
The retail situation.
I have a lot of my other companies talk about how specialty retailer didnt stock up as much inventory, so theyre not reducing inventory because they never had it but it's the bigger big box retailers that are more problematic.
You talked about that however, Walmart said their inventory was flat year over year in the last quarter. It seems like the problem is like fixed almost pretty much. So.
No.
Is that the case.
Like why wouldn't your sales growth been kind of snap back a little bit more quickly.
Yes, Linda this is Brian Yes, I would say that you are accurate on the first part definitely specialty has not had the dip that some of our bigger partners David may add some over inventory positions and began basically canceling orders.
Late third quarter and also fourth quarter, we're seeing some rebound, but we're also still seeing a little bit of conservative nature in terms of ordering with some of the bigger the bigger accounts I mean, the one thing that is in our favor and it always has been is our lack of concentration right. I mean, no one retailer is more than 8% of our overall business.
And then obviously our number one customers are south of close to <unk> 15 for the quarter a percent, which is our direct to consumer channels, but yes. There is.
It's been a slow but starting to thaw.
Take on our bigger retailers in terms of increasing their orders with exclusive content in the everyday items.
Okay, Alright, thank you very much I really appreciate it.
I appreciate it thank you Wendell.
The next question on the line comes from Meghan Alexander of Jpmorgan. Please go ahead. Your line is open.
Sure.
Hi, Thanks for taking my question I guess, maybe to follow up on that is there any way within the guide of the first quarter at the midpoint, maybe down 25%, but you could unpack the impact from maybe said normalizing seasonality the impact of Destocking, just help us understand what the actual core underlying demand.
That you're projecting there is and maybe what youre, what youre expecting for Pls and are you seeing more destocking in Europe , Pos Suntrust given your billing the fulfill product.
And when would you expect that dynamic to reverse.
Yes, I think.
So I think there is there is a lot to unpack there and it is kind of take a little bit of time Tom.
Back to that for you.
Questions.
Also you've got to you've got to keep in mind that we are trying to comp.
Artificially high quarter in the first quarter of last year.
So when we look at our our sales guide for the first quarter, it's taking into consideration that especially January and February of last year had really high sales as lot of supply chain challenges cause orders.
And replenishment orders specifically to move into from like a November December timeline into January and February So a big part of the basically flat to 5%.
Growth, which is pretty muted obviously for the first quarter of this year as a result of that.
Yes, we're still definitely seeing great trends on the sell through on POS. So we're definitely the brand continues to do extremely well, it's just a slower amount of orders coming in some of the bigger customers, but that again I said on the last question by Linda starting to thaw, a little bit and it's looking at.
A lot better for us, but we're very encouraged by the strong U S.
Okay, and then maybe a separate question are there more investments and capacity needed. After this I think you mentioned you were running additional three PL than last I heard you hadn't node launch why under the new DC. So for that warehouse is kind of already at <unk>.
On capacity, how should we be thinking about additional investments beyond that.
<unk> needed to achieve the growth you expect and related to that how much of the.
$180 million of savings.
For us the bottom line.
Sure. So the first thing that I'll say is we're leaving no stone unturned on the supply chain side. So we're looking at every possible option.
To enhance the network.
In a way that's more financially efficient in what were what were delivering today.
Specifically on things like lounge fly.
We moved the lounge slide direct to consumer business into Buckeye, if that Hasnt happened already it's like happening this week or next.
So we're going to start fulfilling that product out.
Buckeye, Arizona facility here very soon.
We are looking at all of the third party logistics partners that we have not just the lounge fly partners, but all of them to understand if there are if there are some synergies we can get by collapsing those into one or two larger facilities et cetera.
As it relates to Buckeye, specifically the inventory reduction initiative is going to allow that building to handle the capacity that we needed to handle for the next couple of years for sure.
But we are also still looking at potential long term <unk> solutions as we grow into more and more volume.
Yeah, I'll add just one more thing to onto what Steve said, which is a real hyper focus on F O b.
From some of our bigger customers that we finally had a chance to set up a direct ship. So they'll look we're also pushing a lot more volume out of Asia and 'twenty three than we ever have before so another encouraging trend for us.
Put into WNS for mid summer and didn't really think that the efficiencies in the warehouse in terms of just getting product out the door and cost to fulfill will be on their way down starting as soon as third quarter.
Okay. That's helpful and maybe if I could sneak in one more just as a follow up to the previous question.
There any way you can share what DTC looks like through the first two months of the year relative to the 37% you talked about in the fourth quarter.
Yes, I mean look.
It's just continues to grow for us I mean, it is it is our strongest.
Growth category back.
That we have control of the narrative on that it makes it a little bit easier with some of the difficulties in the last quarter quarter to half of some of the bigger retail partners.
We continue to just broaden the ability to fulfill quicker out of those were out of those direct to consumer orders and we have great content coming out of the D to C channel. So we do expect.
Again significant growth for.
For direct consumer throughout the entire year, obviously, the contents they gets a little bit better towards the middle and ended the year.
As compared to the content slate in 2022, which was about as core as ive seen it in years. So.
Again large buy and funko continues to do really great things in.
In direct to consumer and Mondo business, which is going to grow significantly. This year. Since we acquired it is pretty much all direct to consumer. So we will continue to see a lot of heat on that channel for us and we're really happy about that.
Okay. Thank you very much.
Thanks, David.
The next question on the line comes from Gerrick Johnson of BMO. Please go ahead. Your line is open.
Alright, good afternoon, and thank you very much.
Steve can you talk about the inventory that you're liquidating what type of product that is.
It is important given that a lot of your customers are collectors.
And where is that product being liquidated and how does that how is that being done.
Sure. So obviously, we went we went after the oldest inventory one.
Again inventory that we felt like we could sell over time, but due to the operational constraints, it's just better to get out of it. So we've looked at all the inventory that that's been the oldest as our as our first bucket.
And then we're looking at anything where we feel like.
Sure, we're selling quite a bit of it but we might have.
More weeks of supply than than than we need right to manage the business efficiently.
And I mean, there are about eight different lenses that we're using to look at all of our inventory to determine which units are going to get destroyed.
Speaking to how and where that's happening we're using a third party.
And theyre not far from our distribution center in Buckeye, Arizona, So we're not going to incur too much transportation expense to do that but we're using a facility that can certify the destruction for us. So that we can provide certificates of destruction to our license source.
Yeah.
Okay. So its so its being destroyed.
Clear and the <unk>.
Product I guess it would be.
Full range of product from pop onto other.
Other product that you sell.
No.
Yes, absolutely Eric.
Okay. Okay.
Steve can you talk about the inventory at hobby and specialty a little bit more and more importantly, I'm wondering now that you've stepped into this role and you had a look under the Hood do you have confidence in.
Systems and ability to attract that inventory.
Well that's it that's a two part question for sure.
My confidence level.
Yes.
We don't we don't have the best systems right now, which is why we talk about things like an ERP and warehouse management system.
So I have confidence that we're going to get to a place where our systems infrastructure supports the business the way it needs to in the meantime, a lot of this stuff is done semi annually and we've especially on on initiatives like this inventory effort. We've put in so many redundant controls and the and the generation of.
The products that we've flagged to get rid of as well as kind of the execution of getting the files pass back and forth between our planning group and the distribution center that I am confident that we will do this without messing it up.
Confident one thing that I wanted to go back and just.
Emphasize for you, though Garrett is yes. We are we are destroying this product, but we're doing it through us.
Very green third party firm, that's going to recycle everything.
So to the extent it can be recycled so I just wanted to make sure that everybody knew that we're trying to do this the most the most responsible way we possibly can.
Okay.
Thank you very much.
Thank you.
The next question on the line comes from Stephen <unk> of Goldman Sachs. Please go ahead.
Hi, Thanks for taking the question, maybe just one more on the new distribution system. I was wondering if you could talk a little bit more about what the biggest differences will be between the new system compared to the one proposed last year and do you anticipate that the new system. Once implemented will have as much opportunity for efficiency over the long term as the plan you laid out at Investor.
Last year.
Yes, Steve So thats, a good question and perhaps be able to clarify something for everybody. So the new warehouse management system that we're talking about deploying this summer is what I would call a warehouse management system light.
Not necessarily the permanent solution, but it's something that we know we can deploy very quickly.
Very little incremental cost relatively speaking.
It may be that as we complete our analysis around what the right permanent solution is that would be tied to a full ERP launch and maybe that we go in a different direction again, although I expect what we're going to find with the with both the lighter system that I. Just mentioned is we're going to end up with about <unk> <unk>.
70% to 80% of the feature and functionality that we would have gotten with a full blown top shelf warehouse management system.
As such a leap forward for our business to have the 70% to 80% that it is going to produce amazing benefits in terms of our ability to operate efficiently, but it may not be the full term solution.
Going forward now the one benefit that I will say I've taken this bifurcated approach to the to the deployments.
<unk>.
We won't be dependent on the actual ERP to get the systems implemented and that also means that when we implement a new ERP. We don't at the same time they have to implement a new top shelf warehouse management system. If we decided to go that down that path, we can still keep it bifurcated due to ERP.
Let that burn and figure out the tweaks in the issues that every systems implementation has and then go back and upgrade our warehouse management system. If we decide that that's the juice is worth the squeeze.
Thanks, that's helpful. And then maybe separately could you talk some more about the assumptions behind your 'twenty three outlook, maybe just in terms of your outlook for the economy, the health and pacing of the consumer and what you're hearing out of the retail channels.
The back half.
Orders picking up that'd be helpful.
Yes.
Yes look obviously, yes, absolutely. So look we have obviously visibility to our order book through all the way through Q3, and we also know there is a.
Lot of great content, and <unk> 23, compared to 22, we're seeing extent like I said earlier following are some of the bigger customers in terms of like getting back to their normal levels or bring on a week to week basis for us. So between the combination of all three I mean, we think we're in a really good position to start building momentum towards the second half of the year and then.
As we do that obviously the implementation of the parachuted in WNS.
Bob.
Fulfillment.
Creasing dramatically in Asia, and just better systems in places like Steve said every angle that we're looking at in terms of getting better and fulfilling getting faster fulfilling and reducing our cost of fulfill should all be taking place in old in the Q3 and Q4, so ultimately based on the Super positive.
Pos for the brand and specialty always been a big part of our overall business with the lack of concentration we have we see this thing we need to build back to what we think are really good levels in the second half of the year.
Great. Thank you.
Thank you Steve.
The final question on the line comes from Angie <unk> of Jefferies. Please go ahead. Your line is open.
Great. Thank you I appreciate the time just two quick ones. The first one is.
With all these moving pieces.
And kind of a stronger back half could you share with us kind of a little bit more color around.
What do you think like extra rate gross margins or exit rate operating margins would be as we exit this year and get a lot of these issues behind us.
I'm not I'm.
Im not sure if we're if we're sharing that.
Level of detail yet about about the exit rate on the year.
You'll certainly we'll certainly bring you along for the ride throughout the year and you can see those the sea for.
Ralph as those trends improve.
Got it.
Yes, yes.
Go ahead.
Yes, I think as we get towards the very end of Q3 and Q4, we're going to seeing our EBIT.
In the double digits and the positive. So we are getting back to historical numbers that <unk> operated for years and years.
Again, like Steve said, it's going to take us a little while to get there, but as we end the year, we're going to feel like we're in a really really good place.
Going into Q.
Q1 of 2024, so with numbers that are much more in line with how we've operated the business for the last couple of years.
Got it that's helpful. I appreciate it and then last question I guess.
How is this affecting now that you've kind of come back in the seat.
And you've always been a creative guy.
Dealing with all these issues is it holding back R&D projects or growth initiatives are.
Anything along those lines.
Look we've made some conscious decisions on some of our initiatives to push it at 24, so that the entire company was focused on one thing which is the operationally a heck of a lot better than we have been.
And to cut SG&A and so I think yes, we've made a couple sacrifices for the very short term it will not affect the.
The promising nature of some of those investments.
Before but we wanted the entire company pulling in the same direction in terms of fixing our <unk> as fast as we possibly can.
We had a.
Barely launched ERP.
Process and unfortunately, a really nice warehouse that was configured for an ERP in WNS that never arrived on time, but I think it would be.
Important for us to continue.
All of the company pulling in the same direction on fixing these problems. The mean Meanwhile, though we have three new product lines.
<unk> are all launching middle of this year or later that have had a phenomenal response from our retail partners on a global basis, one of which is that he pocket.
Same we excited about which is a micro pop collectible so we feel like.
Much better content slate.
<unk>, great new products dropping planned at two <unk>.
More than double Mondo since we've acquired it launch license to be on fire and we just have to fixed our fulfillment issues in some of our operational issues, while we reduced SG&A and so their focus has been on Napa I think youre still going to see some new disruptive products in the market and then we will pick up with some of the other new initiatives, we have in 'twenty four as we get there.
The business back in order and as fast as we possibly can.
Got it really appreciate the candor on that I appreciate it guys. Thank you.
Thank you Andrew.
Yes.
We currently have no further questions. So I'll hand back to the management team for any closing remarks.
Yes, I really appreciate everybody's questions and your time, so thank you very much.
This concludes today's conference call. Thank you for joining you may now disconnect with Nicole.
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