Q1 2023 Funko Inc Earnings Call
Okay.
We can't make up for all the loss retail opportunity we.
We are continuing to see extraordinary growth and the channels, we do control.
Beyond the strength of D to C. There are several other indications of the enduring enthusiasm of our fans in Q1, we launched a new line of miniature collectible is called <unk> and it's been one of the most successful product launches in our history.
This product not only resonates with our core collector, but perhaps the broader miniature collectibles trend to bring new fans into the brand the convenience side product quality and diversity and license partners gives us the confidence in the future for this promising new form factor.
The positive reception to <unk> reinforces our confidence in upcoming programs. This year with one of the most exciting being the online launch of pop yourself.
This product, which allows you to create your very own fully customized pop is already the number one product in both of our brick and mortar stores and is easily our most anticipated launch to date.
<unk> not only resonates with our core fans, but also introduces a new customer to go through the lens of gift giving.
In addition to our funko dot com launch, we will be introducing a new broadened assortment of personalization elements and accessories, including seasonal elements to personalize your pop throughout the year and limited edition opportunities tied to the relevant pop culture trends and events.
We expect to bring pop yourself to a much larger audience later this year and we're only getting started on maximizing this opportunity.
Finally, I am thrilled to be able to share our newest strategic partnership in Q1, we went live on a key partnership with fanatics.
As a major step for funko, as we prioritize and activate against the sports side of pop culture. We've already seen success with the launch of our limited edition, Kansas City Chiefs Super Bowl <unk> four pack and currently have bunko, an allowance byproducts on <unk> Dot com, we look forward to the expansion of our partnership with upcoming.
NFL and NBA seasons.
As the undisputed leader in the critical sports category and we're excited to continue to deepen this relationship as they expand their collectibles footprint.
As we detailed 2023 is a year for us to focus on operations. We have made great progress on all fronts. While we have made the deliberate decision to scale back and push out some longer term opportunities. We have continued to deliver uniquely funko products and experiences that have been so fundamental to our long history.
Three a success.
While funko success built on <unk> has shown a remarkable resilience through the volatility in the broader market. We are not immune to external factors in the short term based on what we're hearing from our retail partners. We are taking a more cautious approach to the second half of this year, which is reflected in our updated full year.
Topline guidance.
While we manage through the macro uncertainty we believe we are off to a great start for the year.
We're making excellent progress on the operations front and have multiple launches in a partnership we believe will be instrumental in driving growth well into the future.
As always we remain deeply focused on delivering long term value creation for the company.
And our shareholders.
Now I'll turn it over to Steve to provide more details on the financial and operating results of the quarter.
Thanks, Brian .
Ryan said, we're well on the way to delivering the operational improvements necessary to support <unk> future growth to provide greater transparency on our performance I'll share additional context around the operating initiatives, we discussed last quarter as I walk you through our first quarter results.
I'll also provide an update on our outlook for the second quarter and the full year.
In March we described multiple steps, we are taking to drive between 150 and $180 million in annualized improvements to our financial profile.
Pleased to report that we've made great progress across the board.
Start with our efforts to improve our gross margin.
Last quarter, we described the container rental charges, we were paying which peaked at just over $100000 per day.
This was our most immediate action items and I am pleased to report that as of the end of the quarter. We've eliminated all excess containers, we were able to accomplish this work much more quickly than we originally anticipated.
The introduction of a price increase on our exclusive products as the second gross margin letter we've been focused on in Q1, we successfully wrapped up negotiations on this action with our retail partners and we are on track to receive the full benefit of this pricing action by the third quarter of this year.
Finally, we've made strides in our efforts to drive efficiency in our product costs, we've instituted a competitive bidding process with our manufacturers and are currently implementing design cost tracking and reduction initiatives.
Turning to our operating expenses, we have been similarly successful in reducing the rate of SG&A increase, particularly with the U S fulfillment costs in our Arizona distribution Center.
Within our U S distribution center, we've rebalanced, our staffing levels introduced more efficient shift scheduling improved process clause and added other fundamental improvements that have driven a substantial bottomline beat in the first quarter. Importantly. These steps are also designed to ensure a more stable foundation for our.
As we rollout our new warehouse management system. This summer.
Finally, we completed a 10% workforce reduction that we announced last quarter. This action was done thoughtfully to enable us to remain well positioned to execute on current and future growth initiatives.
I will now provide the financial results for the first quarter.
In the first quarter, we delivered net sales of $252 million at the top end of our guidance range as Brian mentioned, our direct to consumer channel grew 61% to $42 million.
Our wholesale business was lower by 26% year over year at $210 million due to broad based cautiousness from retailers around restocking and inventory levels.
In the U S. Net sales declined 23% to $178 million, while net sales in Europe grew 4% to 59 million.
In our other international regions.
Which faced many of the same retail headwinds net sales declined 23% to $15 million.
On a category basis, our core collectible brands net sales decreased 23% to $183 million.
The lounge fly brand grew 4% to $52 million, while other brands, which includes toys games and Mondo declined 13% to $16 million.
First quarter gross margin was 20%, which included the write down of approximately $30 million in inventory in the quarter. Excluding the inventory write down adjusted gross margin would have been approximately 32% or 400 basis points ahead of expectations.
This outperformance was a combination of savings and product margin and container rental fees as well as favorable freight and shipping rates.
Moving onto operating expenses SG&A was $100 million, a sequential improvement and approximately $15 million ahead of our expectations due to the progress we've made on driving fulfillment efficiencies.
While macro retail caution has had an impact across our brands and geographies. The progress on our operating improvement initiatives have allowed us to significantly outperform our previous Q1 adjusted EBITDA guidance for the first quarter adjusted EBITDA was negative $14 million more than 30 million.
Ahead of expectations.
Finally, adjusted dilutive loss per share was <unk> 49.
Turning to the balance sheet, we ended the quarter with $35 million of cash on hand, and total debt of about 310 million.
We remain confident in our cash forecast and believe we have ample liquidity to navigate the year.
Inventory at quarter end totaled $192 million, a decrease of 22% sequentially, but still an increase of 19% year over year, we expect to continue to make progress on improving our inventory levels throughout this year.
Now onto guidance for the second quarter and the full year for.
For the second quarter, we expect net sales of between 240 and $260 million.
We expect sequential gross margin improvement relative to the first quarter adjusted gross margin.
We expect SG&A to come in roughly in line with that of the first quarter and we expect adjusted EBITDA for the quarter to be a loss of $10 million so breakeven.
Finally, we expect adjusted net loss of $24 million. So we loss of $16 million based on a blended tax rate of 25%.
On a per share basis, we expect a loss of <unk> 45 to a loss of 37.
Based on a weighted average diluted share count of 52 2 million shares.
For the full year 2023, reflecting the uncertainty around multiple macro factors, including retail confidence, we now expect year over year net sales to decline by between 5% and 10%, which is a reduction to the previous guidance, we provided last quarter.
Despite the expected decline in our net sales outlook, we are raising the midpoint of our adjusted EBITDA outlook and now expect adjusted EBITDA of between 65 and $75 million.
Q1 represented a great first step in our operational reset we remain confident in our ability to rightsize our business for the current climate as we continue to build a solid financial foundation for the long term.
Before I turn things over to the operator for Q&A.
I'd like to take a minute to recognize the incredible hard work and dedication of our people the.
The improvements we've driven into the business. So far this year are a testament to the scrapping is on the willpower all of our employees. We still have a lot of work to do but my confidence in our ability to deliver against the improvements we've yet to tackle goes up every day as I see how our teams are coming together with the singular mission of improving our financial.
<unk> profile.
So with that said thank you so much for your time today, and we'll 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 telephone keypad.
Thank you Keith Hello, a question. Please press star followed by <unk>.
And then the time to ask a question. Please ensure your phone is on mute.
Our first question today go to Andrew <unk>.
Jefferies. Andrew. Please go ahead your line is open.
Hey, Thanks, guys for letting me ask a couple of questions I guess the first one just kind of on the Q1 results you talked about the.
Storage cost effectively going away faster than you anticipated is that because youre able to move inventory quicker.
ERP system warehouse system got rolled out faster just kind of curious where allows you to clear that out more quickly.
Yes.
Steve Good question.
We were able to get out of it more quickly than we anticipated because.
I don't remember if we brought this up on the last call. We did acquire some short term expansion space in Arizona, not too far from our Buckeye facility, where we're able to start staging inventory to get the containers emptied and return and without getting into too much of the puts and takes of that process. We also were able to find.
Third party agent willing to access the trailers on behalf of the carriers because the carriers would only take so much back at a time.
Which is kind of ridiculous because theyre charging us rent, but thats the way. It works. So we found a third party Asia.
Can receive containers back on behalf of the carriers in that that immediately stops the per diem charges that you were seeing.
I think you also you mentioned the ERP and WNS those projects are not done so ERP just as a reminder to everybody.
Not really investing much in ERP. This year were singularly focused on the warehouse management system that is definitely on track looking to launch that in the first week of July .
So we should see some further efficiencies after that and then honestly Andrew I forgot the other part of your question so feel free.
No.
That answered it I appreciate the additional color and then just kind of switching to.
Just a little bit more color on.
I guess the back half change in revenue guide is that just purely retailers wanting less.
Is that.
It sounded like you mentioned.
A couple of initiatives were pushed out so it was that a part of it.
And what kind of contribution do you think DTC will have.
By the end of the year.
If you can share that.
Thank you guys.
Andrew It's Brian I can start I think obviously <unk>.
<unk> is one of the levers we're able to pull when we have a very conservative retail buying environment right now everybody is afraid of having too much inventory and so we've been able to we can continue to shift goods to our need to seem to basically.
Move move revenue from one source to another obviously at a more profitable manner. So that part of it we feel pretty excited about it.
Yes, I would just add onto that the sales drop.
But we've just guided.
As a reaction to what we're seeing kind of at the macro level, it's not like a bunch of our customers have come back and said, we're not going to buy all those buckets just more looking at macro having conversations with our with our retail partners about the second quarter and just trying to get their mood on inventory levels and things like that so we feel like.
The sales down was the prudent thing to do.
Because of just the uncertainty going on kind of out there in the on the retail landscape.
Got it thanks for the color.
Good job on execution, so far it looks great.
Thanks, Ed.
Thank you. The next question go to Linda Bolton Weiser of D. A Davidson. Please go ahead. Your line is open.
Yes Hello.
I was wondering.
If you could comment on.
On the channel the regular brick and mortar channel inventory levels, and how things can kind of among the bigger box retailers versus the specialty retailers out there and what the current situation is.
Yes, sure Hey, Linda it's good to hear from you.
So what we're seeing with the larger retailers and I'm sure.
Other consumer products companies.
You're probably hearing the same thing is that a lot of the larger retailers are just taking a peanut butter approach right now for inventory management and reducing inventory across all categories and we are definitely not immune to that.
As you can imagine I've got.
Really good contacts in the retail industry I'm hearing the same thing from everybody that I talked to that we want more of your product, but we're facing.
<unk> down mandate to reduce inventory by X percent and that's hitting everybody.
Thats definitely part of it.
The good news is eventually they're going to run it and theyre going to run out of stock.
So sell through is obviously still better than sell in at some point the sell in both of those curves are going to have to cross and theyre going to have to start restocking.
We've got checked out with a number of customers and Theyre, all kind of anecdotally, saying, yes, we will definitely have to be upping, our replenishment gain here in the not too distant future.
Okay and then.
Okay.
<unk> was up 4% in the quarter.
Different from the other kind of categories of product, while I was allowed to fly so much better than just the other pop figures.
Yes, I think Linda it's Brian here.
Obviously, we've diversified.
Over the last couple of years since we've owned we've diversified the retail mix and some of the channel mix.
We need to excel in D C.
Some of their partners.
We don't have a ton of partners compared to <unk>, but the ones that do are doing very very well. The parks are doing very well, especially we've opened up some new doors by expenses that is performing extremely well for us. So I think we're just seeing.
More of an opening of new retail partners that want to participate in the last by brand and that's kind of offsetting some of that some of them, maybe just smaller customers, who are having credit issues or just.
Their products, regardless moving as fast as we had hoped.
The new doors, the additional doors are really helping large buy and this is ahead of a really exciting time for them with the new.
Doggy fashion Thats coming in.
Summertime and also our stationery line, that's launching in the fall and then following it up with a really big unisex offering for all of our bags apparel and accessories in Q1 of 'twenty four it's good to see that they still have momentum going in a really tough macro environment in terms of retail so we're pretty excited and again.
The DTC channel is just one of those great levers, we're able to pull as we can move product from one.
Channel to another.
Okay and then.
So remind me did you.
Have any.
Target for your own inventory by the end by the end of 2023 do you have a target for that.
Not that we've shared note.
Okay.
Alright, that's all for me thanks very much.
I think Linda Thanks, Linda.
Thank you as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
And our next question Gucci Gerrick Johnson of BMO. Please go ahead. Your line is open.
Hi, Thank you.
Steve I'd like to take Linda's question go a little bit more granular.
Can you share with us channel inventory.
Quarter to quarter and year over year.
And quantify that and then perhaps bifurcated between mass and specialty.
Doug.
That's probably not something that I can answer on this call we can follow up.
On that.
But yes going that granular on this call I'm not equipped to do that right.
Quality.
Okay, all right. Thanks, Larry.
Okay.
Thank you we have no further questions I'll now hand, the call back to Brian for any closing comments.
Alright. Thank you very much guys for joining us on this earnings call and we look forward to talk to you guys in the future.
Thanks, everyone.
Thank you. This now concludes today's call. Thank you so much for joining you may now disconnect your lines.
[music].
Welcome to today's call. Thank you so much for joining you may now disconnect.