Q4 2023 Funko Inc Earnings Call
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Later, we will conduct a question and answer session and instructions will follow at that time. Please.
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Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company.
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As a reminder, this call is being recorded I will now.
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I'll turn the call over to <unk> director of Investor Relations Brook Jaffe. Please proceed.
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Hello, everyone and thank you for joining us today to discuss <unk> 2023 fourth quarter financial results.
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On the call today are Mike <unk>, our interim Chief Executive Officer, Steve, Dave The Companys, Chief Financial Officer, and Chief operating officer, and even dependent than our deputy CFO.
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This call is being broadcast live at Investor Dot <unk> Dot com, a playback will be available for at least one year on the company's website.
Speaker Change: Good afternoon, and welcome to <unk> 2023, fourth quarter and full year financial results Conference call.
I want to remind everyone that during the course of this call management's discussion will include forward looking information. These statements represent our best judgment as of today about the company's future results and performance.
Speaker Change: This time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please.
Speaker Change: Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company as.
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.
As a reminder, this call is being recorded.
Speaker Change: I'll now turn the call over to <unk> director of Investor Relations Robert Jaffe. Please proceed.
Rob Jeffrey: Hello, everyone and thank you for joining us today to discuss <unk> 2023 fourth quarter financial results.
Additional information concerning factors that could cause actual results to differ materially is contained in our most recent SEC reports.
Rob Jeffrey: On the call today are Mike <unk>, our interim Chief Executive Officer, Steve, Dave The Companys, Chief Financial Officer, and Chief operating Officer.
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.
Rob Jeffrey: And <unk>, our deputy CFO.
Rob Jeffrey: This call is being broadcast live at Investor Funko Dot com.
Rob Jeffrey: <unk> will be available for at least one year on the Companys website.
Investors are encouraged to review <unk> press release announcing its 2023 fourth quarter and full year financial results for the company's reasons for presenting non-GAAP financial measures.
Rob Jeffrey: I want to remind everyone that during the course of this call management's discussion will include forward looking information. These statements represent our best judgment as of today about the company's future results and performance.
A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the earnings press release issued earlier today.
Rob Jeffrey: 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.
We have also posted supplemental financial information on the Investor Relations section of the Companys website I.
Rob Jeffrey: Additional information concerning factors that could cause actual results to differ materially is contained in our most recent SEC reports.
I will now turn the call over to Michael Landsberg, Mike.
Thanks, Rob and good afternoon, everyone.
I'll begin with a few overarching comments on the past year.
Rob Jeffrey: 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.
My first comment is on the general business front 2023 was transformative for funko.
We addressed significant existing operational issues and executed a comprehensive cost reduction plan.
Rob Jeffrey: Investors are encouraged to review <unk> press release announcing its 2023 fourth quarter and full year financial results for the company's reasons for presenting non-GAAP financial measures.
Plan included eliminating unprofitable product lines and Skus, two rounds of workforce reductions and aggressive reductions in our inventory levels, which I will return to in a moment.
Rob Jeffrey: A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the earnings press release issued earlier today.
The major element of this transformation are now complete.
My second comment is on the strategy front over the course of 2023, we grew our D to C business, which in turn helped us achieve consecutive quarterly increases in our gross margin.
Rob Jeffrey: We have also posted supplemental financial information on the Investor Relations section of the company's website.
Rob Jeffrey: I will now turn the call over to Mike Landsberg Mike.
Growing our DTC business remains a key goal for us we have more control over our D to C business and believe we can grow it profitably.
Mike Landsberg: Thanks, Rob and good afternoon, everyone I'll begin with a few overarching comments on the past year.
Mike Landsberg: My first comment is on the general business front 2023 was transformative for funko.
So we were pleased to see <unk> sales in Q4 comprised 26% of our mix and increased nearly 30% over the same quarter last year.
Mike Landsberg: We addressed significant existing operational issues and executed a comprehensive cost reduction plan.
My third comment is on the product front we.
Mike Landsberg: Plan included eliminating unprofitable product lines and Skus, two rounds of workforce reductions and aggressive reductions in our inventory levels, which I will return to in a moment.
We expanded our offering with two important product launches.
In early 2023, we entered the miniature collectibles market with the introduction of bidding pop and around the middle of the year, we launched pop yourself online.
Mike Landsberg: The major elements of this transformation are now complete.
Both products have been very well received by customers and were key contributors to our business in 2023.
My second comment is on the strategy front over the course of 2023, we grew our D to C business, which in turn helped us achieve consecutive quarterly increases in our gross margin.
My fourth comment is on the operational front, we achieved another important goal lowering the companys owned inventory levels at.
Mike Landsberg: Growing our DTC business remains a key goal for us we have more control over our D to C business and believe we can grow it profitably.
At year end inventory was $119 million, which was down more than 50% from $246 million at the end of 2022.
Mike Landsberg: So we were pleased to see DSC sales in Q4 comprised 26% of our mix and increased nearly 30% over the same quarter last year.
And for our larger retail partners, who provide us with Pos data inventory in the channel at the end of 2023 was 32% lower than at the end of 2022 and at healthy levels relative to Pos sales.
Mike Landsberg: My third comment is on the product front we.
Mike Landsberg: We expanded our offering with two important product launches.
In early 2023, we entered the miniature collectibles market with the introduction of <unk> pop and around the middle of the year, we launched pop yourself online.
Our growth in sales improved gross margins and the right sizing of our cost structure culminated in a successful Q4.
Mike Landsberg: Both products have been very well received by customers and were key contributors to our business in 2023.
Specifically Q4 net sales were $291 million.
Mike Landsberg: My fourth comment is on the operational front, we achieved another important goal lowering the companys owned inventory levels at.
Gross margin was 38% and adjusted EBITDA was $23 million all of which were at the upper end of our guidance range.
Mike Landsberg: At year end inventory was $119 million, which was down more than 50% from $246 million at the end of 2022.
Turning now to 2024.
We expect 2020 for full year net sales to be comparable to down slightly from 2023.
Mike Landsberg: And for our larger retail partners, who provide us with Pos data inventory in the channel at the end of 2023 was 32% lower than at the end of 2022 and at healthy levels relative to Pos sales.
Regarding phasing of the quarters, we expect to achieve positive comps later in the year, but Q1 net sales to be lower than net sales in Q1 of last year.
Our expectation is in part based on the following.
Mike Landsberg: Our growth in sales improved gross margins and the right sizing of our cost structure culminated in a successful Q4.
First we took deliberate action to manage down our inventory levels and we eliminated a significant number of unprofitable product lines and skus.
Mike Landsberg: Specifically Q4 net sales were $291 million.
Second we are experiencing a software content schedule, primarily due to the recent Hollywood strikes.
Mike Landsberg: Gross margin was 38% and adjusted EBITDA was $23 million all of which were at the upper end of our guidance range.
And third we faced uncertainty around shipping costs, primarily due to current hostilities in the Red Sea.
Importantly, we expect 2020 for full year, adjusted EBITDA to be considerably higher than our 2023 full year adjusted EBITDA.
Speaker Change: Turning now to 2024.
Speaker Change: We expect 2020 for full year net sales to be comparable to down slightly from 2023.
The higher profitability, we expect in 2024 compared with 2023 is based on the actions we are taking to among other things further expand our D to C business and increased sales of pop yourself and limited edition products.
Speaker Change: Regarding phasing of the quarters, we expect to achieve positive comps later in the year, but Q1 net sales to be lower than net sales in Q1 of last year.
Speaker Change: Our expectation is in part based on the following.
Areas of our business, where we have more control and that we believe we can grow profitably.
Speaker Change: First we took deliberate action to manage down our inventory levels and we eliminated a significant number of unprofitable product lines and skus.
We believe that by focusing on these areas, we will gain operating leverage and a greater percentage of our sales will flow to the bottom line.
Speaker Change: Second we are experiencing a software content schedule, primarily due to the recent Hollywood strikes.
In 2024 and beyond our plan is to achieve long term profitable growth.
Speaker Change: And third we faced uncertainty around shipping costs, primarily due to current hostilities in the Red Sea.
We will pursue our previously communicated plan, which centers around focusing on our fans and unmatched brand.
Speaker Change: Importantly, we expect 2020 for full year, adjusted EBITDA to be considerably higher than our 2023 full year adjusted EBITDA.
Running the business with financial discipline, and focusing on fewer products done extremely well.
Investing in areas, we can control measure and grow profitably.
Speaker Change: The higher profitability, we expect in 2024 compared with 2023 is based on the actions we are taking to among other things further expand our D to C business and increased sales of pop yourself and limited edition products.
And keeping the flywheel, turning where each action we take builds on the previous one propelling positive momentum.
We believe this strategy is paying dividends. One. Recent example is the substantial reduction we made in both inventory and product Skus, which shows how we are removing complexity from our business by focusing on fewer products.
Speaker Change: Areas of our business, where we have more control and that we believe we can grow profitably.
Speaker Change: We believe that by focusing on these areas, we will gain operating leverage and a greater percentage of our sales will flow to the bottom line.
And another example is last month's sales event for our adjacent Kelsey pop figure.
Speaker Change: In 2024 and beyond our plan is to achieve long term profitable growth.
After our recent NFL playoff game, Jason Calyces Shortlists celebration in the stands went viral we.
We will pursue our previously communicated plan, which centers around focusing on our fans and unmatched brand.
We saw this is just the kind of event, we could memorialized for our fans.
Speaker Change: Running the business with financial discipline, and focusing on fewer products done extremely well.
Multiple internal teams collaborated to launch adjacent Kelsey pop figure demonstrating how we are focused on our fans as well as our nimbleness and quickness to market.
Speaker Change: Investing in areas, we can control measure and grow profitably.
Our limited edition product went from moment to market in 11 days and our fans responded by making Jason Kelsey one of our top selling funko dotcom items of all time.
Speaker Change: And keeping the flywheel, turning where each action we take builds on the previous one propelling positive momentum.
Speaker Change: We believe this strategy is paying dividends. One. Recent example is the substantial reduction we made in both inventory and product Skus, which shows how we are removing complexity from our.
Finally, a comment on our leadership team and search for a new CEO.
Earlier today, we announced that Steve nave, <unk> CFO and COO will resign effective March 15th 2024.
Steve joined US a year ago to help with our cost reduction and operational improvement plan.
He led our efforts to address our excess inventory and improve our Buckeye distribution center.
Negotiate lower shipping costs.
Right size our cost structure.
And manage our liquidity and improve our free cash flow.
On behalf of the company I want to extend our best wishes to Steve and thank him for his contributions.
Steve will depend upon our deputy CFO and senior finance executive at Funko for the last four years will serve as acting CFO beginning March 15th.
I have worked with <unk> for several years now as both a board member and as the interim CEO.
I have complete faith in <unk> to lead our finance and accounting functions and to be our primary face to you our analysts and investors.
I believe you will find him to be diligent and extremely knowledgeable not just about our financials, but also our business.
Turning to the CEO search as many of you know I took the role of interim CEO last summer with a mandate from the board to set funko on a solid foundation, so that a new CEO will be able to focus on growing the company.
We believe we now have in place a strong lean aligned senior leadership team to support the arrival of a new CEO and the growth of funko.
We expect to announce our permanent CEO in Q2 of this year.
I will now I will turn it over to Ive to take you through the financials. Thanks.
Thanks, Mike Hey, everyone. Thanks for joining us today for.
For the fourth quarter total net sales were $291 2 million.
Which included wholesale channel sales of $216 7 million.
And direct to consumer sales of $74 5 million.
Direct to consumer sales in Q4 represented 26% of net sales up from 17% in last year's Q4.
Sales of pop yourself were a key contributor to our Q4 direct to consumer results.
Gross profit was $109 4 million and gross margin was 37, 6%, which is well above our Q3 gross margin of 33, 2%.
The increase in gross margin was driven in part by growth in our higher margin direct to consumer sales and lower freight costs.
SG&A expenses of $97 $4 million included nonrecurring charges of $8 million.
Primarily related to fair market value adjustments for assets held for sale.
As a percentage of net sales SG&A expenses were significantly lower in the second half of 2023 compared with the first half due to the cost reductions we implemented during the year SGA.
SG&A expenses in the second half of 2023 declined to 32% of net sales from 38% first half.
Adjusted net income was half a million dollars.
<unk> <unk> per diluted share, which was within our guidance range for the quarter.
And finally, adjusted EBITDA was $23 $5 million, which was at the upper end of our guidance range.
Turning to our balance sheet.
At December 31, we had cash and cash equivalents of $36 5 million, which is after we paid down $26 $2 million of debt in the fourth quarter.
Our total debt was approximately $273 6 million.
Which includes the amount outstanding under the company's term loan facility net of unamortized discounts the balance on our revolving line of credit and our equipment finance loan.
In the first quarter of this year, we also announced a transaction related to our games business from which we used the proceeds to further reduce our debt.
And inventory was $119 $5 million, which is less than half of the inventory. We had at the end of last year and more than $40 million lower than our balance at the end of Q3.
Turning now to our outlook for the 2020 for full year, we expect net sales of between 1.0, $4 $7 million and one $1 3 billion.
As Mike mentioned, while we expect net sales in Q1 of 2024 to be lower than net sales in Q1 of last year, we expect to achieve positive comps later in the year.
Adjusted EBITDA of between $65 million and $85 million.
The increase over last year's adjusted EBITDA is expected to be driven by growth in our higher margin product lines and our direct to consumer business as well as the annual invasion of cost reduction measures implemented last year for the 2024 first quarter our guidance is as follows.
Net sales of between $214 million and $227 million.
Gross margin down slightly from Q4, primarily due to higher freight costs.
SG&A expense in dollars decreasing from Q4.
Adjusted net loss between $17 million or <unk>, 32 per share and $13 million or 24 per share and.
And finally, we expect adjusted EBITDA of between zero and $5 million.
We expect our financial results to improve in the second half of 2024 due to the natural seasonality of our business as well as an expected easing of the impact of the Hollywood strikes and the recent shipping disruptions in the Red Sea and the actions we are taking to grow our direct to consumer channel comp yourself and <unk>.
Other areas of our business.
Mike that's it for our financial results back over to you.
Thanks, Steve.
In summary.
We reported a solid overall financial performance in Q4.
We significantly reduced our inventory levels and used a portion of our cash to pay down debt.
We have completed the major elements of our 2023 cost reduction and operational improvement plan.
And our outlook for 2024 reflects a renewed focus on our core business, especially those areas, where we have greater control and believe we can grow profitably.
Yeah.
Before we open up the call for questions. Steve has a couple of comments he'd like to share about his resignation.
Steve.
Thanks, Mike Hey, everyone.
I'll cut to the chase.
My decision to resign was influenced by a few factors.
First we largely completed and accomplish the job I was brought in for which included fixing operational issues, improving our financial profile right sizing inventory managing liquidity and improving our free cash flow.
I believe <unk> has a strong financial executive and is highly qualified to take over the CFO role as a matter of fact, when we began succession planning last fall, we promoted eve to deputy CFO as you know.
With the operational improvement plan now complete my role would focus more on the CFO side, a role that I believe ive is eminently qualified to assume.
Third as some of you know I live in Minnesota, and the weekly commute to the Seattle area has really begun to wear on me my family and the company.
Taken together this is a good time for me to exit and I take great comfort in knowing that the company is in significantly better financial shape today than this time last year.
<unk> was the primary architect of our 2024 plan. So I am confident the baton being passed to him will be seamless to you.
Look I've thoroughly enjoyed my time at <unk>, especially the people I've met and worked with there are very talented and dedicated bunch of capable people doing amazing things.
I have enjoyed interacting with many of you in the investment community and keeping you apprised of our progress.
It's been an interesting and fun ride.
Proud of what we've accomplished this past year and I look forward to watching <unk> continued success.
I will continue to believe funko blue until the day I die.
I'll leave it there for now with that I'll turn the call back over to the operator, So we can take your questions operator.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two one.
One for Brian and ask your question. Please enjoy devices on mute locally.
First question comes from Stephen <unk> with Goldman Sachs. Your line is open. Please go ahead.
Hey, great. Thank you for the questions maybe Michael first on the 24 guide could you, perhaps expand a little bit on some of the assumptions that are underlying guidance I think you called out some specific factors like.
The deliberate actions you've taken on the inventory side, the Hollywood strikes easing from shipping issues abating could you just dive in a little bit deeper on each of those and perhaps how that reconciles with your outlook for the broader industry in 'twenty four and just how you arrived at the 'twenty guidance.
Let me.
So let me start with sort of separating Q1 from the rest of the year Q1, when I came in.
Last July we put our plan together for a turnaround in that plan extended all the way through the end of Q1, and we knew we would be making choices then with things that were already being post post shipping from factory et cetera that we were going to limit some of our financial upside all the way through the end of Q1.
Just to get.
Everything cleared out as it were so we will see that impact in Q1, that's one of the comments that I made the other comments are more general for the rest of the year I think it is a light content year from Hollywood. So we're fighting a declining.
A declining trend there with growth in a lot of other areas, particularly pop yourself the new limited edition drops that we're doing.
Growth in our DTC channel, our new evergreen strategy thats going to be a large percentage of our sales going forward et cetera. So that we'll see some single digit percentage growth in the last three quarters of the year first part of the year will be down versus last year.
Got it thanks for that and maybe just a follow up on <unk>, you called out any DTC sales increasing by nearly 30%. It sounds like you expect that to continue to some degree into 24 could you maybe just talk a little bit more about the drivers of that growth level.
But I made the other comments are more general for the rest of the year I think it is a light content year from Hollywood. So we're fighting a declining.
A level of momentum you expect to continue.
And into this calendar year. Thank you.
A declining trend there with growth in a lot of other areas, particularly pop yourself the new limited edition drops that we're doing.
So pop yourself as the biggest one that is through our direct to consumer channels, both in the stores and online.
We will continue to see good growth there that is a big part of our strategy. In addition to <unk>.
Growth in our D to C channel, our new evergreen strategy thats going to be a large percentage of our sales going forward et cetera. So that we'll see some single digit percentage growth in the in the last three quarters of the year first part of the year will be down versus last year.
As a matter of fact, we started we project Fred launched Youll see limited edition drop that we did today youre going to see a number of those over the course of the year the adjacent Kelsey pop was another one.
We've added some other elements in like that that will be actually very high revenue drops because.
Got it thanks for that and maybe just a follow up on <unk>, you called out any DTC sales increasing by nearly 30%. It sounds like you expect that to continue to some degree into 24 could you maybe just talk a little bit more about the drivers of that growth and the level of momentum you expect to continue.
Just a much higher price point than you're used to seeing from us as a matter of fact, the one today, which is above the big boy.
Drop is a $295 price point so.
So youll see a lot of that from us this year and that will drive the D to C revenue on top of what we normally would be doing which includes expansion to other territories and other things in that part of our business.
And into this calendar year. Thank you.
Absolutely so pop yourself as the biggest one that is through our direct to consumer channels, both in the stores and online.
We'll continue to see good growth there that is a big part of our strategy. In addition today as a matter of fact, we started.
Got it thanks for that.
We now turn to Linda Bolton Weiser with D. A Davidson. Your line is open. Please go ahead.
Project, Fred launched Youll see limited edition drop that we did today youre going to see a number of those over the course of the year the adjacent Kelsey pop was another one.
Yes, hi.
So.
I don't mean to farm.
We've added some other elements like that that will be actually very high revenue drops because they're just a much higher price point than you're used to seeing from us as a matter of fact, the one today, which is above the big boy.
Wanted to.
Kiki, what im asking that but.
All right.
Running the business.
Who will be leaving in about a week on a day to day basis.
Drop is a $295 price point.
Because Andrew Perlmutter has left the company and.
So youll see a lot of that from us this year and that will drive the D to C revenue on top of what we normally would be doing which includes expansion to other territories and other things in that part of our business.
Yes.
Not quite onboard so how shall we gain comfort that well.
But we also aren't going to fall off.
And we'll be operating sort of until the new CEO Tom Thanks.
Hi, Linda this is Steve I'll share some thoughts and then I am sure Mike wants to add we'll probably want to add something.
Got it thanks for that.
Okay.
Speaker Change: We now turn to Linda Bolton Weiser with D. A Davidson. Your line is open. Please go ahead.
It's a fair question, except what I would what I would point to as you know.
When Brian was here I was much more active in kind of the way you say it the running of the company Mike K.
Speaker Change: Yes, hi.
Speaker Change: So.
I don't mean to Tom.
Speaker Change: Sort of.
I'm in August into July has been very very active running the company doing all the things that you would expect a CEO to be doing.
Speaker Change: <unk>, what I am asking that but.
Speaker Change:
Speaker Change: Running the business.
Speaker Change: Well, ladies and about a week.
Linda <unk>.
Speaker Change: Day to day basis.
And I think most of the investment community knows Eve.
Speaker Change: Because Andrew Perlmutter has left the company and <unk>.
There is there is not a ball here to be dropped on the finance side Ive is incredibly capable and I'm sure over time. He will prove to you that he has a better CFO than I could ever be on the operation side I brought in a very senior executive that I earlier in 'twenty three that I've worked within the past.
Speaker Change: <unk> CEO is still not quite onboard so how shall we gain comfort that.
Speaker Change: But we also aren't going to fall off.
Speaker Change: And we'll be operating sort of until the new CEO Tom Thanks.
Speaker Change: Hi, Linda this is Steve I'll share some thoughts and then I am sure Mike wants to add we'll probably want to add something.
He is obviously incredibly capable I think these results speak for themselves.
Rob Jeffrey: It's a fair question, except what I would what I would point to as you know.
I don't see there really being much of a void if at all with my departure. So the company is going to continue to be run by Mike <unk> is going to be slide right into the CFO role and let's be honest. He's gone most of all the heavy lifting for me anyway operations is going to be in good shape. So I really.
Rob Jeffrey: When Brian was here I was much more active in kind of the way you say it the running of the company Mike came.
Mike: Came in August into July.
Mike: Has been very very active running the company doing all the things that you would expect the CEO to be doing.
Don't think it's.
I understand your question I don't think it's something to be concerned about but Mike do you want to.
Rob Jeffrey: Linda <unk>.
Rob Jeffrey: And I think most of the investment community knows Eve.
There is there is not a ball here to be dropped on the finance side Ive is incredibly capable and I'm sure over time, you will prove to you that he has a better CFO than I could ever be on the operation side I brought in a very senior executive that I earlier in 'twenty three that I've worked within the past.
Linda and anyone else I guess time is not a proxy for attention, but I come up to average every Sunday night at eight o'clock and I leave Everett Friday night at 5% or six o'clock.
I am here 24 hours a day in between and I'm in the office, except for when I'm sleeping and getting a little bit of time in the gym I pay an enormous amount of attention to every detail in this company I can even tell you where people parked in the parking garage.
Rob Jeffrey: He is obviously incredibly capable I think these results speak for themselves.
Speaker Change: I don't see there really being much of a void if at all with my departure. So the company is going to continue to be run by Mike <unk> is going to be slide right into the CFO role and let's be honest. He's done most of all the heavy lifting for me anyway operations is going to be in good shape. So I really.
No.
I understand your question I don't think its a cheeky one I hope my responses in <unk>, but I am paying attention to the details.
Rob Jeffrey: Don't think it's.
Okay that sounds good.
Rob Jeffrey: I understand your question I don't think it's something to be concerned about but Mike do you want to.
On the CFO naming your new CEO front, it sounds like Youre getting close would it be fair to say it would be the earlier part of second quarter and not the later part of second quarter.
Speaker Change: Linda and anyone else I guess time is not a proxy for attention, but I come up to average every Sunday night at eight o'clock and I leave Everett Friday night at five or six o'clock.
My hope would be that on the next earnings call you will hear our new Ceos voice.
Rob Jeffrey: I am here 24 hours a day in between and I'm in the office, except for when I'm sleeping and getting a little bit of time in the gym I pay an enormous amount of attention to every detail in this company I can even tell you where people parked in the parking garage.
Okay sounds good and then.
Just turning to.
Performance.
In the channel I mean, I know you may not have pls.
Pos numbers to share but.
Yes, I'm, assuming it's pls is kind of down trending down year over year.
Rob Jeffrey: No.
I understand your question I don't think its a cheeky one I hope my responses in <unk>, but I am paying attention to the details.
Why would that be when demand on your own DTC website itself.
Why would there be a difference in demand trends in store versus on your DTC website. Thanks.
Speaker Change: Okay that sounds good.
Speaker Change: On the CFO naming your new CEO front, it sounds like Youre getting close would it be fair.
Hi, Linda <unk> here.
Kind of begin the answer to this question I think what Youre seeing is yes, Pos sales are still down.
Mike Landsberg: Or to say it would be the earlier part of second quarter and not the later part of second quarter.
Mike Landsberg: My hope would be that on the next earnings call you will hear our new Ceos voice.
I'd say high single digit percentage.
Trend did improve throughout the year last year.
But really what youre, saying is the mix shift into our own direct to consumer channel. So we've shared that over the past few years a lot of our topline growth was driven.
Speaker Change: Okay. It sounds good and then.
Mike Landsberg: Turning to <unk>.
Mike Landsberg: Performance.
Mike Landsberg: In the channel I mean, I know you may not have.
Some of our retail partners.
And obviously, we are now favoring.
Mike Landsberg: Pos numbers to share, but I guess I'm, assuming it's pls is kind of down trending down year over year.
The higher margin direct to consumer channel.
Direct connection with our fans.
Mike Landsberg: Why would that be when demand on your own DTC website is so strong why would.
So I wouldn't read too much into the Pos trend itself.
Mike Landsberg: There will be a difference in demand trends in store versus on your DTC website. Thanks.
Yes, it's down I think it is.
It's resulting in a healthier mix of business for us.
Linda: Linda <unk> here.
And the last thing I'll point to you and Mike commented in the call is that we.
Speaker Change: Kind of begin the answer to this question I think what Youre seeing is yes sales are still down I would say high single digit percentage.
We've really seen tremendous progress in inventory in the channel.
So both our owned inventories come down, 50% and we kind of quoted inventory in the channel for those customers that report that information to us was down 30% throughout the year so relative to sales.
Linda: That trend did improve throughout the year last year.
Linda: But really what you are saying is the mix shift into our own direct to consumer channel. So.
We look at weeks of supply and we're right in that sweet spot in the range that we like to see it. So I think thats a good indicator of a healthy business out there.
Linda: We've shared that over the past few years, a lot of our topline growth was driven.
Mike Landsberg: Some of our retail partners.
Mike Landsberg: And obviously, we are now favoring.
Only thing I would add is we have.
Mike Landsberg: The higher margin direct to consumer channel.
Not calling out names, but we do have one particular wholesaler, who is significantly down year over year, and if you take those numbers out.
Mike Landsberg: Direct connection with our fans so I wouldn't read too much into the Pos trend itself, yes.
Our wholesale channel does not is not significantly off of where it would have been at this point.
Speaker Change: Yes, it's down I think it is.
Speaker Change: It's resulting in a healthier mix of business for us.
Speaker Change: And the last thing I would point to in my commented in the call is that we.
Okay. That's good to know.
And then.
Mike Landsberg: We've really seen tremendous progress in inventory in the channel.
On the cost side on the margin side, I mean, congratulations Stephen everybody, but gross margin.
Mike Landsberg: So both our owned inventories come down, 50% and we kind of quoted inventory in the channel for those customers that report that information to us was down 30% throughout the year so relative to sales.
Improvement is really impressive.
You are back to normal historical levels, I would say, even maybe higher I'd have to look at it but.
So the gross margin is great.
Mike Landsberg: We look at weeks of supply and we're right in that sweet spot in the range that we like to see it. So I think that's a good indicator of a healthy business out there.
Going forward, how do we continue to improve EBITDA margin and remind us when you anniversaried the head count reductions because that will happen in the Anniversarying I think we'll be in the second half of the year, so that SG&A ratio.
Speaker Change: Only thing I would add is we have.
Mike Landsberg: Not calling out names, but we do have one particular wholesaler, who is significantly down year over year, and if you take those numbers out.
How is it going to improve because that has to be the driver of more EBITDA margin expansion. So maybe you can comment on that.
Mike Landsberg: Our wholesale channel is not does not significantly off of where it would have been at this point.
Let me, let me start with an overall comment and then these guys can give you more detail but.
Speaker Change: Okay. That's good to know.
Speaker Change: And then.
On the cost side on the margin side I mean, congratulations Stephen everybody by gross margin.
You've hit the nail on the head Linda on something that I would like everyone to be looking more closely at which is the EBITDA margin versus gross margin as we shift from wholesale to DTC and specifically inside of the D to C on pop yourself.
Speaker Change: Improvement is really impressive and you are back to normal historical levels I would say, even maybe higher I'd have to look at it but.
Speaker Change: So the gross margin is great, but going forward, how do we continue to improve EBITDA margin and remind us when you anniversary the head count reductions because that'll happen in the anniversary I think we'll be in the second half of the year, so that SG&A ratio.
The line items that make up our cost shift dramatically from the gross margin side of the business to the SG&A side. So we've actually made a ton more progress than you can even see it at the summary level on gross margin because we're selling more things that require.
Speaker Change: How is it going to improve because that has to be the driver of more EBITDA margin expansion. So maybe you could comment on that.
<unk>.
More hands to touch them.
So over time Youre going to see our gross margin probably get cap to some extent, but the net.
Speaker Change: Let me, let me start with an overall comment and then these guys can give you more detail, but you've you've hit the nail on the head Linda on something that I would like everyone to be looking more closely at which is the EBITDA margin versus gross margin as we shift from wholesale to <unk>.
Net the net margin is going to get a lot higher with that I'll turn it over to them.
I would just add to that.
I would think about the guidance you could look at our Q4 results and see that that's a good indicator that we're already kind of performing.
Speaker Change: And specifically inside of D to C on pop yourself.
Where we expect to see our financials throughout 2024. So like you said, we achieved the gross margin and we are in the back in the high <unk>. We think we can sustain that margin throughout 2024.
Speaker Change: The line items that make up our cost shift dramatically from the gross margin side of the business to the SG&A side. So we've actually made a ton more progress than you can even see it at the summary level on gross margin because we're selling more things.
A lot of that improvement was driven by the price increases that we put through about a year ago and then the mix shift towards DTC and then obviously freight continues to be a nice tailwind for us.
Speaker Change: That require.
Speaker Change: More hands to touch them.
But now with a continued kind of higher mix of direct to consumer that we have planned for 2024 will kind of maintain that margin in the high Thirty's and as Mike said, we're annualizing a lot of cost savings from the risk that.
Speaker Change: So over time Youre going to see our gross margin probably get cap to some extent, but.
Speaker Change: The net the net margin is going to get a lot higher with that I'll turn it over to them.
Speaker Change: Yes, I would just add to that.
That we did in earlier in Q1 of 2023 and then in July of 2023.
Speaker Change: I would think about the guidance you could look at our Q4 results and see that that's a good indicator that we're already kind of performing.
But there are some offsets to that part of growing that direct to consumer channel requires us to spend more marketing dollars to attract the fans to our site. So that's that's what you see going on in SG&A.
Speaker Change: Where we expect to see our financials throughout 2024 so.
Speaker Change: You said, we achieved the gross margin.
But overall when you look at the bottom line margin. It is it is improving and I think that as we kind of round. The corner past Q1, we start comping up later in the year and then we're not providing guidance just yet for the years to come but I think as we are able to grow that topline again youll see really good flow through to the bottom line.
Speaker Change: In the back in the high <unk>, we think we can sustain that margin throughout 2024.
Speaker Change: A lot of that improvement was driven by the price increases that we put through about a year ago and then the mix shift towards DTC and then obviously freight continues to be a nice tailwind for us.
Speaker Change: But now with the continued kind of a higher mix of direct to consumer that we have planned for 2024 will kind of maintain that margin in the high Thirty's and as Mike said, we're annualizing a lot of cost savings from the risk that we did in earlier in Q1 of 2023 and then in July of 2023.
Okay and then.
Thank you.
The comment you made about the last three quarters of the year.
Did you say low single digit I think.
Can you just clarify do you mean in the last three quarters altogether up low single digits or it starts being up low single digit in the second quarter.
Speaker Change: But there are some offsets to that part of growing in that direct to consumer channel requires us to spend more marketing dollars to attract the fans to our site. So that's what you see going on in SG&A.
Let me answer that I think we said specifically, we expect to comp up later in the year.
Speaker Change: But overall when you look at the bottom line margin. It is it is improving and I think that as we kind of round. The corner past Q1, we start comping up later in the year and then we're not providing guidance just yet for the years to come but I think as we are able to grow that topline again youll see really good flow through to the bottom line.
We are hopeful that we can comp up in each of those three quarters right now, though we're watching that red sea situation very closely because it is impacting our transit times and some of the our ability to kind of recognize revenue in each quarter. So.
Didn't specifically say, we comped up in every quarter, but we do think that throughout the year.
Speaker Change: Yes.
Speaker Change: Okay and then.
Speaker Change: Thank you.
We will be able to have easier comps compared to last year.
Speaker Change: The comment you made about the last three quarters of the year.
And part two just remember Q.
Speaker Change: Yes.
Did you say low single digit I think.
Q1 of this year is comping against.
Speaker Change: Can you just clarify do you mean in cumulative the last three quarters altogether up low single digits.
Effective Q1 of last year.
But not really right because that Q1 had some leftover sales from Q4 that came through because the inventory was delayed and then that led to the inventory overstocking for the rest of the year. So.
Speaker Change: It starts being up low single digit in the second quarter.
Speaker Change: Let me answer that I think we said specifically, we expect to comp up later in the year.
Q1 is just a tough comp.
Speaker Change: We are hopeful that we can comp up in each of those three quarters right now, though we're watching that red sea situation very closely because it is impacting our transit times and some of the our ability to kind of recognize revenue in each quarter. So.
Okay. Thanks.
And.
Okay.
Follow on your comment about the Red Sea.
So I think that's the only affecting sales for sure.
Speaker Change: Didn't specifically say, we comped up in every quarter, but we do think that throughout the year.
With us from Asia to Europe.
<unk> is not a huge part of your sales. So I guess I'm curious why that is such a.
Speaker Change: We will be able to have easier comps compared to last year.
Major effect impact and also it seems like there would just be a delay not that youre not getting the product from Asia to Europe. So can you give a little bit more color around that.
Speaker Change: And part two just remember.
Speaker Change: Q1 of this year is comping against.
Speaker Change: Pretty effective Q1 of last year.
And I think Thats exactly right Linda.
Speaker Change: But not really right because that Q1 had some leftover sales from Q4 that came through because inventory was delayed and then that led to the inventory overstocking for the rest of the year. So.
Saying that the Red Sea has more of an impact on Q1, specifically, we don't think it's going to be disruptive.
Our full year <unk>.
<unk> projections. So just just based on those longer transit times little bit higher cost that we've seen come through and there. It is youre right, primarily in EMEA impact, but there could be knock on effects.
Speaker Change: Q1 is just a tough comp.
Speaker Change: Okay. Thanks.
Speaker Change: And.
Speaker Change: Just to follow on your comment about the Red Sea.
For the rest of the world. So again, we're just watching it very closely.
Speaker Change: So I think that's the only affecting sales.
We know today is reflected in our guidance right now.
Speaker Change: Shipments from Asia to Europe.
Speaker Change: What's really is not a huge part of your sales. So I guess I'm curious why that is such a mess.
Okay, and sorry to keep going on but I think I missed what you said about how much actual debt reduction was there.
Speaker Change: Effect impact and also it seems like there would just be a delay not that youre not getting the product from Asia to Europe. So can you give a little bit more color around that.
In the first quarter related to that transaction.
So we haven't we haven't commented on the actual number youll see it in our Q1 results, but we paid down $26 million of debt in Q4, and we are continuing to pay down debt in Q1.
Speaker Change: And I think Thats exactly right, Linda we're saying that the Red Sea has more of an impact on Q1, specifically, we don't think its going to be disruptive to our full year sales projection. So just just based on those longer transit times little bit higher cost that we've seen come through in there.
Okay. Thank you I'll leave it there thanks a lot.
Thanks, Lauren welcome Thanks, Linda.
Speaker Change: It is.
Speaker Change: <unk>, primarily in EMEA impact, but there could be knock on effects.
This concludes our Q&A I'll now hand back to the management team's final remarks.
Speaker Change: To the rest of the world. So again, we're just watching it very closely.
Okay.
Speaker Change: What we know today is reflected in our guidance right now.
Yes.
Thank you to everyone for joining us on the call today as always thanks to our fans employees and partners for their support and thank you to our investors and analysts for joining the call and listening in.
Speaker Change: Okay, and sorry to keep going on but I just I missed what you said about how much actual debt reduction was there.
We look forward to sharing our progress on our next call in nine weeks.
Speaker Change: In the first quarter related to that that transaction.
Goodbye everyone.
Speaker Change: So we haven't we haven't commented on the actual number youll see it in our Q1 results, but we paid down $26 million of debt in Q4, and we are continuing to pay down debt in Q1.
Ladies and gentlemen, today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
Speaker Change: Okay. Thank you I'll leave it there thanks a lot.
Speaker Change: Thanks, Larry Thanks, Linda.
Speaker Change: This concludes our Q&A.
Speaker Change: Back to the management teams for final remarks.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Thank you to everyone for joining us on the call today as always thanks to our fans employees and partners for their support and thank you to our investors and analysts for joining the call and listening in.
Speaker Change: We look forward to sharing our progress on our next call in nine weeks.
Speaker Change: Goodbye everyone.
Speaker Change: Ladies and gentlemen, today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, today's call is now concluded.
Speaker Change: Yes.