Q3 2023 Funko Inc Earnings Call
Speaker 1: Hello all and thank you for your patience. Today's call will begin in approximately one minute's time.
Hello, and thank you for your patience today call, we will begin in approximately one minute time.
[music].
Speaker 1: Good afternoon and welcome to Funclos 2023 Third Quarter Financial Results Conference
Good afternoon, and welcome to <unk> 2023 third quarter financial results Conference call.
Speaker 1: At this time, all participants are in listener who made. Later, we will conduct a Q&A question and answer session and instructions will follow at the time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded.
At this time, all participants are in listen only mode.
We will conduct a question and answer session and instructions will follow at that time. Please.
Please be advised that reproduction of this call in whole or in part is not permitted without working authorization from the company. As a reminder, this call is being recorded.
Speaker 1: I'll now turn the call over to Bonco's Director of Investor Relations, Rob Duffy. Please proceed.
I'll now turn the call over to phone close director of Investor Relations wealth Jaffe. Please proceed.
Speaker 2: Hello everyone and thank you for joining us today to discuss Funko's 2023 third quarter financial.
Hello, everyone and thank you for joining us today to discuss <unk> 2023.
On the financing.
Speaker 2: On the call, our Mike Lundspurt, our interim chief executive officer, and Steve Naive, the company's chief financial officer and chief operating.
On the call are Mike <unk>, our interim Chief Executive Officer, and Steve <unk>, The company's Chief Financial Officer, and Chief operating.
Speaker 2: This call is being broadcast live at investor.bunco.com. A playback will be available for at least one year and the company's web.
This call is being broadcast live at <unk> Dot <unk> Dot com, a playback will be available for at least one year on the company's website.
Speaker 2: I want to remind everyone that during this call, management discussion will include forward looking into that.
I want to remind everyone that during this call management's discussion will include forward looking information.
Speaker 2: These statements represent our best judgment as of today about the company's future results The
These statements represent our best judgment as of today about the company's future results and performance.
Speaker 2: Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied, including those discussed in our own issues.
Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied including those discussed in our earnings release.
Speaker 2: additional information concerning factors that could cause actual results to differ materially to contain the number of recent SEC reports.
Additional information concerning factors that could cause actual results to differ materially contained in our most recent SEC reports.
In addition, during this call we refer to non-GAAP financial measures that are not prepared in accordance with U S. Generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.
Speaker 2: In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with US-General A.C.S. Attorney General.
Speaker 2: and maybe different from non- GAAP financial measures used by other companies.
Speaker 2: Investors are encouraged to review punkers press release announcing its 2023 third quarter financial result. For the company's reasons for presenting non- GAAP financial .
Investors are encouraged to review <unk> press release announcing its 2023 third quarter financial results.
The company's reasons for presenting non-GAAP financial measures.
Speaker 2: reconciliation of the non-GAAP financial measures, the most directly comparable GAAP financial measures is also attached to the company's only-presueling issue earlier today. I will now turn to Paul Ligress.
A reconciliation of the non-GAAP financial measures.
The directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today.
I will now turn the call over to Mike Mike.
Thanks, Rob and good afternoon, everyone.
Speaker 3: But please to report better than expected financial results for the third quarter.
We're pleased to report better than expected financial results for the third quarter.
Speaker 3: Net sales were 313 million, adjusted net income, with 2 million, and adjusted EBITDAI was 25 million. All of which were above the high end of our guidance.
Net sales were $313 million adjusted net income was $2 million and adjusted EBITDA was $25 million all of which were above the high end of our guidance range.
These results were primarily driven by strong direct to consumer sales improve.
Speaker 3: These results were primarily driven by strong direct to consumer sales.
Speaker 3: improved sales to several of our larger wholesale customers, both in the US and in Europe .
The improved sales to several of our larger wholesale customers both in the U S and in Europe.
Speaker 3: and the cost reductions in operational improvements we've implemented over the course of this year.
And the cost reductions and operational improvements we've implemented over the course of this year.
Speaker 3: On the last call, we outlined a path to achieve long-term profitable growth.
On the last call, we outlined a path to achieve long term profitable growth.
Speaker 3: We said that this strategy and approach will inform everything we do going forward.
You said that this strategy and approach will inform everything we do going forward.
Speaker 3: By focusing on the fan and our unmatched brand, by running the business with financial discipline, rejecting complexity, and focusing on fewer products done extremely well.
By focusing on the pad and our unmatched brand by running the business with financial discipline, rejecting complexity and focusing on your products done extremely well.
Speaker 3: by investing in areas we can control, measuring, grow profitably.
By investing in areas, we can control measure and grow profitably.
Speaker 3: And by keeping the flywheel turning, where each action we take builds on the previous one, propelling positive momentum.
And by keeping the flywheel, turning where each action we take builds on the previous one propelling positive momentum.
Speaker 3: I'd like to call out a couple of highlights from the quarter that demonstrate the progress we've made executing that.
I like to call out a couple of highlights from the quarter that demonstrate the progress we've made executing that plan.
Speaker 3: I'll start with the first element of the plan, so some of the highlights relate to multiple elements of the plan.
I'll start with the first element of the plan. So some of the highlights relate to multiple elements of the plant.
Speaker 3: We believe our fans and customers are excited and engaged and our brand is strong. So how do we quantify?
We believe our fans and customers are excited and engaged and our brand is strong.
How do we quantify that.
Speaker 3: First, we grew direct consumer sales 32% year over year, with D to C sales in Q3 representing 17% of our sales net, versus 11% in the third-
First we grew direct to consumer sales, 32% year over year with DTC sales in Q3, representing 17% of our sales today.
Versus 11% in the third quarter of last year.
Speaker 3: Second, across our website, the average order value grew 8% year-over-year to
Second across our website the average order value grew 8% year over year.
$60.
Speaker 3: Third, the successful online launch of Pop Yourself in August contributed to the strong D to D sales in Q3. And we expect sales to continue to ramp with the upcoming holiday.
Third the successful online launch of pop yourself in August contributed to the strong <unk> sales in Q3, and we expect sales to continue to ramp for the upcoming holidays.
Speaker 3: Pop Yourself is attracting new customers to our brand and to our D2C channel, with over 50% of customers purchasing Pop Yourself being new to our website.
Pop yourself is attracting new customers to our brand and to our D to C channel with over 50% of customers purchasing pop yourself being new to our website.
Speaker 3: Before, Mondo sold more than 3,500 units at a $500 price point of a Masters of the Universe Battle Cat figure in an exclusive timed edition sale, our largest revenue drop ever.
Port Mondo sold more than 3500 units at a $500 price point.
Masters of the universe title Cat figure and an exclusive timed addition, sale our largest revenue dropped a bit.
Speaker 3: And finally, our Fans Reward Loyalty Program, which we just launched in May, has already surpassed 100,000 new members.
And finally, our fans reward loyalty program, which we just launched in May has already surpassed 100000 new members.
Speaker 3: In the third quarter, we also made progress focusing on fewer products done extremely well.
In the third quarter, we also made progress focusing on fewer products done extremely well.
Speaker 3: On the fewer products side, we have stopped development of lower value product lines.
Fewer products side, we have stopped development of lower value product lines and Skus. We believe this will ultimately help us expand gross margin and improved inventory management.
Speaker 3: We believe this will ultimately help us expand gross margin and improve inventory management.
Speaker 3: On the done-extremely-well side, Loungefly won the Innovation Award at the Licensing Awards in September for its McDonald's French Fry Crossbody Bag. And Loungefly's Disney Nightmare Before Christmas toy, Undead Duck Crossbody Bag, one of the fastest-selling lines of Q3, saw 100% sell-through within the first week of sale.
On the done extremely well side lounge, why I want the innovation award at the licensing awards in September for Mcdonald's French Fry cross body bags.
And lounge Wise Disney Nightmare before Christmas toy on Dead Duck Cross body bags, one of the fastest selling lines of Q3, well, 100% sell through within the first week of sales.
Speaker 3: Bidipop, a line of miniature collectibles launched earlier this year, was a key contributor to wholesale sales in both the U.S. and Europe , making up nearly 5% of total sales.
Betty pop a lot of miniature collectible lost earlier this year was a key contributor to wholesale sales in both the U S and Europe, making up nearly 5% of total sales.
Speaker 3: Aside from the tremendous growth potential, we are excited about this product line for a couple of reasons.
Aside from the tremendous growth potential we are excited about this product line for a couple of reasons.
Speaker 3: First, we're not reliant on new content and we're able to leverage the strength of evergreen property.
We're not reliant on new content, we're able to leverage the strength of evergreen properties.
Speaker 3: These top-selling bitty pops in Q3 were the original Star Wars and Harry Potter characters.
The top selling 30 Pops in Q3, where the original Star Wars, and Harry Potter characters.
Speaker 3: And second, we're able to secure incremental shelf space and reach new customers in different aisles of specialty, mass, and value retailers.
And second we're able to secure incremental shelf space and reach new customers and different aisles in specialty mass and value retailers.
Turning to the company's leadership.
I'll share a brief update on the CEO search.
Speaker 3: The search process is underway and we're delighted with the quality and caliber of the candidates expressing interest in the position.
The search process is underway and we're delighted with the quality and caliber of the candidates expressing interest in the position.
Speaker 3: I remain very excited about the opportunity ahead, and the candidates I have spoken with share my enthusiasm.
I remain very excited about the opportunity ahead and the candidates I have spoken with share my enthusiasm.
We also announced today a change to our board of directors.
Speaker 3: We also announced today a change to our board of directors. Mike Kearns has been named to the board, replacing Rich Paul. Mike is a co-founder and managing partner at The Turning Group and has deep experience starting, managing, and investing in digital media and consumer technology companies. We welcome Mike.
<unk> has been named to the board, replacing Rich Paul Mike as a cofounder and managing partner of the Chernin group and has deep experience, starting managing and investing in digital media and consumer technology companies.
We welcomed Mike I look forward to his counsel and advice.
Speaker 4: At the same time, we thank Rich for his contributions as a director.
At the same time, we thank rich for his contributions as a director.
Speaker 4: While he has resigned from the board, we are pleased that he will continue to serve in a new role as a strategic advisor to the board.
While he has resigned from the board. We are pleased that you will continue to serve in a new role as a strategic advisor to the company.
Speaker 4: And finally, as we previously announced, Brian Mariotti, who resigned from the board in September , also continues to serve as a strategic advisor to the company.
And finally, as we previously announced Brian Mariotti, who resigned from the board in September also continues to serve as a strategic advisor to the company.
Speaker 3: With that, I'll turn the call over to Steve to cover our detailed financial results and guidance.
With that I'll turn the call over to Steve to cover our detailed financial results and guidance.
Speaker 5: Thanks, Mike. Hey, everybody. Thanks for joining us today. I'm going to dive right in on the financial results. For the third quarter, net sales were $312.9 million, which included wholesale channel sales of $258.3 million and direct-to-consumer sales of $54.7 million.
Thanks, Mike Hey, everybody. Thanks for joining us today I'm going to dive right in on the financial results for the third quarter net sales were $312 9 million, which included wholesale channel sales of $258 3 million and direct to consumer sales of $54 7 million.
Speaker 5: Q3 wholesale and D to C sales increased 29% and 38% respectively compared with the second quarter.
Q3, wholesale and DTC sales increased 29, and 38% respectively compared with the second quarter.
Speaker 5: Gross profit for the quarter was $104 million, and gross margin was 33.2%, which, as expected, was well above our Q2 gross margin of 29.2%.
Gross profit for the quarter was $104 million and gross margin was 33, 2%, which as expected was well above our Q2 gross margin of 29, 2%.
Speaker 5: The increase in gross margin was primarily driven by price increases fully in effect for the quarter, lower inbound freight costs, partially offset by increased levels of discount sales and inventory revenue.
The increase in gross margin was primarily driven by price increases fully in effect for the quarter lower inbound freight costs, partially offset by increased levels of discount sales and inventory reserves.
Speaker 5: Included in the Q3 gross margin was $6.4 million of non-recurring charges related to factory purchase order cancellation. If not for the one-time charges, gross margin would have been higher at approximately $35,000.
Included in the Q3 gross margin was $6 4 million of nonrecurring charges related to factory purchase order cancellations.
Not for the one time charges gross margin would have been higher at approximately 35%.
Speaker 5: FESG and A expenses were 94 million and as a percentage of net sales improved considerably to 30% in the third quarter versus 36% in the second quarter.
SG&A expenses were $94 million and as a percentage of net sales improved considerably to 30% in the third quarter versus 36% in the second quarter.
Speaker 5: Some additional color on SG&A. First, SG&A in Q3 included $9.9 million of one-time expenses, which included $6.2 million related primarily to the termination of a lease agreement, and $3.7 million for severance and related charges.
Some additional color on SG&A.
SG&A in Q3 included $9 9 million of one time expenses, which included $6 2 million related primarily to the termination of a lease agreement and $3 7 million for severance and related charges.
Speaker 5: Second, excluding the one-time expenses, SG&A and dollars remained essentially flat in Q3 from Q2, which is quite an achievement considering net sales in Q3 were $73 million higher than Q2. It also gives you a sense of the progress we've made carrying out our cost reduction.
Second excluding the one time expenses SG&A in dollars remained essentially flat in Q3 from Q2, which is quite an achievement considering net sales in Q3 were $73 million higher than Q2.
It also gives you a sense of the progress we've made carrying out our cost reduction plan.
Speaker 5: And then third, the workforce reduction announced in August generated a partial cost savings benefit in the third quarter. We expect to see the full benefit beginning in our current fourth quarter.
And then third the workforce reduction announced in August generated a partial cost savings benefit in the third quarter, we expect to see the full benefit beginning in our current fourth quarter.
Speaker 5: Adjusted net income was $1.7 million, equal to $0.3 per gluteed share, which exceeded our guidance range for the quarters. And finally, adjusted EBITDA was $25.4 million, which as Mike mentioned earlier was much better than we against us.
Adjusted net income was $1 $7 million equal to <unk> <unk> per diluted share, which exceeded our guidance range for the quarter.
And finally, adjusted EBITDA was $25 4 million, which as Mike mentioned earlier was much better than we anticipated.
Speaker 5: Turning to our balance sheet at the end of the third quarter, we had cash and cash equivalent of $31.9 million. Our total debt was approximately $299.5 million, which includes the amount outstanding under the company's term loan facility, net event, and advertised discounts, the balance on our revolving line of credit and our equipment finance.
Turning to our balance sheet at the end of the third quarter, we had cash and cash equivalents of $31 $9 million. Our total debt was approximately $299 5 million, which includes the amount outstanding under the Companys term loan facility net of unamortized discount.
The balance on our revolving line of credit and our equipment finance loan.
Speaker 5: Inventory with 162.1 million, which was $84 million lower than the December 31, 2022 balance, and 25 million lower than our Q2 ending.
Inventory was $162 1 million, which was $84 million lower than the December 31, 2022, balanced and $25 million lower than our Q2 ending balance.
Speaker 5: To be clear, a portion of the letter inventory was due to a higher than average opalescence reserve recorded during the third quarter. This was expected and included in the guidance we provided last quarter.
To be clear a portion of the lower inventory was due to a higher than average obsolescence reserve recorded during the third quarter.
This was expected and included in the guidance, we provided last quarter.
Speaker 5: A comment about our inventory. Right sizing our inventory remains a key objective. We have completed the bulk of our product purchases for the year and as a result, we are on track to end 2023 with the lowest inventory levels of...
A comment about our inventory right sizing our inventory remains a key objective we have completed the bulk of our product purchases for the year and as a result, we are on track to end 2023, with the lowest inventory levels of the year.
Speaker 5: As a result, we expect working capital to be a tailwind in the fourth quarter. And we should see a meaningful rise in our liquidity in the quarter.
As a result, we expect working capital to be a tailwind in the fourth quarter and we should see a meaningful rise in our liquidity in the quarter.
Speaker 5: Now, turning to our outlet. For the four year, we have narrowed our range for net sales and maintained the midpoint. Our range for adjusted EBITDA is unchanged.
Now turning to our outlook for.
For the full year, we have narrowed our range for net sales and maintained the midpoint of our range for adjusted EBITDA is unchanged.
Speaker 5: We now expect net sales of between 1.065 billion and 1.105 billion and adjusted either of the between 20 and 30 million. So the fourth quarter are.
We now expect net sales of between 1.065 billion and $1 105 billion and adjusted EBITDA of between 20 and $30 million for the <unk>.
Fourth quarter, our guidance is as follows.
Speaker 5: net sales of between 260 and 300 million. Gross margin increasing sequentially from the third quarter.
Net sales of between 260 and $300 million.
Gross margin increasing sequentially from the third quarter.
Speaker 5: S-GNA expenses in dollars decreasing from the third quarter.
SG&A expenses in dollars decreasing from the third quarter.
Speaker 5: Adjusted net loss of 4.2 million or 8 cents a share to adjusted net income of 2.8 million or 5 cents per polluted share
Adjusted net loss of $4 2 million or eight a share to adjusted net income of $2 8 million or five cents per diluted share.
Speaker 5: Finally, we expect the justity of a DAW of between 16 million and 26
Finally, we expect adjusted EBITDA of between 16 million and $26 million.
Speaker 5: Mike, that's it for the financial results. So I'm going to kick it back to you the closing.
Mike Thats it for the financial results, so I'm going to kick it back to you to close this out.
Speaker 3: Thanks, Steve. A close with some high-level thoughts about 2024.
Thanks, Steve I'll close with some high level thoughts about 2024.
Speaker 3: We're currently developing our outlook for next year, which we expect to provide in our next earnings group.
We're currently developing our outlook for next year, which we expect to provide in our next earnings report.
Speaker 3: This involves weaving together the elements of our plan, focusing on our brands and fans.
This involves weaving together the elements of our plan focusing on our brands and fan.
Speaker 3: running the business with financial discipline, and selectively investing in areas we can grow profitably, given our opportunities and challenges. Our Q3.
Running the business with financial discipline and selectively investing in areas, we can grow profitably given our opportunities and challenges.
Our Q3 performance is a good starting place that reflects.
Speaker 3: It reflects the strength and resilience of our brand, the cost reductions and operational improvements we implemented this past year, as well as a re-energized attitude within the company to build a solid foundation for a more profitable future. I will now turn it over.
The strength and resilience of our brands the cost reductions and operational improvements we implemented this past year as.
As well as a reenergized attitude within the company to build a solid foundation for a more profitable future.
I will now turn it over to the operator for Q&A.
Thank you. Please press star followed by the number one if you'd like to ask a question and enjoy video devices that need to likely minus your attention.
Speaker 1: Thank you. Peace by Scarf, I'll be by the number one, if you'd like to ask the question, and ensure that your device is unmuted locally when it's your turn.
Speaker 1: If you change your mind or your question has already been answered, use them with a draw by pressing staff followed by the number two.
You change your mind on your question has already been answered.
Sure My question first off on it by the numbers.
Speaker 1: Our first question today comes from Linda Bolton, Wiser of D8 Davidson. Your line is open.
Our first question today comes from Linda Bolton Weiser of D. A Davidson your line is open.
Speaker 6: This is Christina Schu on Florida. So I want to ask what are the factors would result in the high end of the ebitus guidance range for the fourth quarter versus the low end?
Hi.
This is Christina on Portland also.
I wanted to ask what are the factors.
And then the high end of the EPS guidance range for the fourth quarter versus the low end.
Yeah.
Speaker 5: uh... hey hey there it's deep i'm sorry i didn't follow that question could you repeat that for me
Hey, Steve I'm, sorry, I didn't follow that question could you repeat that for me.
Speaker 6: Oh yeah, so I was wondering what are the factors that would possibly result in the high end of the EBITDA guidance range for the fourth quarter versus the low end?
Oh, yes. So I was wondering what are the factors Scott what possibly the bolt on the high end of the EBITDA guidance range for the fourth quarter versus the low end.
Oh sure. So I mean, it's going to come down to sales.
Speaker 5: Oh, sure. So I mean, it's going to come down to sales. And and probably most specifically to the D to C sales because, you know, a lot of the retailers for holiday, they've, they've done their stocking up, etc. So I think it's going to come down to how well we do with our e-commerce business right up until ground cut off as well as our, our couple of retail stores.
And probably most specifically to the D to C sales because a lot of the retailers for holiday they've they've done they're stocking up etcetera. So.
I think it's going to come down to how well, we do with our E Commerce business right up until ground cutoff as well as our a couple of retail stores.
Speaker 6: Okay, thank you. Maybe follow up. So like, can you give us like a general idea to the trend of your retail POS grow?
Okay. Thank you my follow up sounds like can you give us like a general idea that trend of your <unk>.
Speaker 5: Our own internal RR retail store of PLS.
Our own internal or our retail store pls.
Yeah.
Speaker 6: I don't know if I know that I have to talk about external, oh okay.
I don't know that off the top of mind.
Okay.
Good morning.
Speaker 7: external POS group. Yeah. Sure. I'll jump in. Hi. This is Eagle Penn event. I'm deputy chief. Well, sure. Yeah. We don't have specific stats on our retail TOS. But for those retailers in the mass channel that report the data to us, we're still down year over year in POS sales. But we have seen an improving trend over the past six months.
External Pos growth.
Sure I'll jump in on.
This is even with kind of event that you need to give.
Uh huh.
Sure, Yes, we don't have specific stats on our retail Pos but for those those retailers in the mass channel that report the data to US, we're still down year over year and <unk> sales, but we have seen an improving trend over the past six months.
We've commented on this before I think the most encouraging thing that we're seeing is that our sell in continues to be lower than our sell through and we're just seeing improved levels of inventory and the challenge.
Heading into the holiday sales period, So I think the trend is encouraging from what we're seeing.
Okay. Thank you I'll pass it along.
Telemundo, we miss her.
Yeah.
Speaker 1: Thank you. There are no further questions in the queue, so I'll turn the call back over to management for any closing remarks.
Thank you.
No other questions in the queue. So I'll turn the call back over to management for any closing remarks.
Speaker 3: Okay, thank you everyone for joining us on the call today. As always, thanks to our fans, employees, and our partners for their support. And thank you to our investors and analysts for joining the call and listening in.
Okay. Thank you everyone for joining us on the call today as always thanks to our fans employees and our partners for their support and thank you to our investors and analysts for joining the call and listening to it.
Speaker 3: We look forward to sharing our progress on our next call and we'll talk to many of you in the next 48 hours as we do follow-up calls. Thank you.
We look forward to sharing our progress on our next call and we'll talk to many of you in the next 48 hours as we do follow up calls thank you.
Speaker 8: This concludes today's call. Thank you for joining. You may now disconnect your line. First as we do follow up calls, thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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First as we do follow up calls thank you.