Q2 2024 Funko Inc Earnings Call

Thank you for your patience everyone. The Funko 2024 second quarter financial results conference call will begin shortly. During the presentation, you will have the opportunity to ask questions for Preston Star one-by-one on your telephone keypad.

Operator: Financial Results. The conference call will begin shortly. During the presentation, you will have the opportunity to ask questions about Price and Star, one by one, on your telephone keypad. [music] Good afternoon and welcome to Funko's 2024 second quarter financial results conference call. At this time, all participants are in listen-only mode.

Operator: Later, we will conduct a question and answer session, and introductions will follow at that time. Please be advised that reproductions of this call in whole or in part are not permitted without written authorization from the company. As a reminder, this call is being recorded. I will now turn the call over to Funko's Director of Sales and Investor Relations, Rob Jaffe, to begin. Rob, please go ahead. Hello.

Speaker Change: Good afternoon and welcome to the Funko's 2024 second quarter financial results conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and introduction will follow at the time.

Speaker Change: Please be advised that reproduction of this call in whole or in parts is not permitted without written authorization from the company.

Rob Jaffe: As a reminder, this call is being recorded. I will now turn you over the call to Funko's Director and Investor Relations, Rob Jaffe, to begin. Rob, please go ahead. Hello, everyone, and thank you for joining us today to discuss Funko's 2024 second quarter financial results.

Rob Jaffe: Hello everyone, and thank you for joining us today to discuss Funko's 2024 second quarter financial results. On the call are Cynthia Williams, our recently appointed Chief Executive Officer, and Yves LePendeven, our Chief Financial Officer. This call is being broadcast live at Investor.funko.com.

Speaker Change: On the call are Cynthia Williams, our recently appointed Chief Executive Officer, and Yves LePendeven, our Chief Financial Officer.

Rob Jaffe: A replay will be available for at least one year on the company's website. 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. Our actual results are subject to many risks, uncertainties that may differ materially from those stated or implied, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC report.

Speaker Change: This call is being broadcast live at Investor.Funko.com. A playback will be available for at least one year on the company's website.

Speaker Change: I want to remind everyone that during the course of this call, management's discussion will include forward-looking information.

Speaker Change: These statements represent our best judgment as of today about the company's future results and performance.

Speaker Change: 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 Change: Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC reports.

Rob Jaffe: 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. Investors are encouraged to review Funko's press release announcing its 2024 second quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today.

Speaker Change: 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 Change: Investors are encouraged to review Funko's press release announcing its 2024 second quarter financial results for the company's reasons for presenting non-GAAP financial measures.

Speaker Change: A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today.

Rob Jaffe: With that, I will now turn the call over to Cynthia Williams. Cynthia. Thanks.

Cynthia Williams: Thanks, Rob, and good afternoon, everyone. Welcome to Funko's second quarter financial results conference call. My first conference call is with the company's new CEO. I am delighted to be here.

Speaker Change: With that, I will now turn the call over to Cynthia Williams. Cynthia?

Cynthia Williams: Thanks Rob, and good afternoon everyone. Welcome to FUNCO's second quarter financial results conference call. My first conference call is the company's new CEO. I am delighted to be here.

Cynthia Williams: For the second quarter, our financial results were better than expected. Moreover, the second quarter was our first quarter of year-over-year net sales growth and our first profitable quarter since the third quarter of 2022. Net sales were $248 million, up 3% over the same quarter last year. The growth margin was 42%, and adjusted EBITDA was $28 million. Both were higher than our guidance and, in the case of Adjusted Evidence, substantially better than expected. Our strong overall performance includes a number of positives, but I'll call out just one here.

Speaker Change: For the second quarter, our financial results were better than expected.

Cynthia Williams: Moreover, the second quarter was our first quarter of year-over-year net sales growth and our first profitable quarter since the third quarter of 2022.

Operator: quarter financial results, conference call will begin shortly. During the presentation, you will have the opportunity to ask questions for person's power. Otherwise, one on the telephone keypad.

Cynthia Williams: Net sales were $248 million, up 3% over the same quarter last year.

Cynthia Williams: Growth Margin was 42% and Adjusted EBITDA was $28 million. Both were higher than our guidance range.

Cynthia Williams: And in the case of Adjusted Evidence, substantially better than expected.

Cynthia Williams: Our strong overall performance includes a number of positives.

Cynthia Williams: Sales of Biddy Pop, a recent entry into the miniature collectible space, more than doubled in Q2 compared with the same quarter last year, and we continue to build on that momentum. Last week, we announced the introduction of Bidiverse, an extension of Bidipop that allows fans to mix and match with new IP-driven rides, towns, and displays. For the full year 2024, we are reiterating our guidance range for net sales of between $1.047 billion and $1.103 billion and adjusted EBITDA of between $65 million and $85 million.

Speaker Change: I'll call out just one here.

Cynthia Williams: Sales of Bidipop, a recent entry into the miniature collectible space, more than doubled in Q2, compared with the same quarter last year. And we continue to build on that momentum.

Rob Jaffe: Good afternoon and welcome to the phone code, 2024 second quarter financial results, conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and a session and introduce. Introduction will follow at the time. Please be advised that reproductions of this call in whole or in parts is not permitted without written authorization from the company. As a reminder, this call is being recorded. I will now turn you over to Funko director and investor relations.

Cynthia Williams: Last week, we announced the introduction of Bidiverse, an extension of Bidipop that allows fans to mix and match with new IP-driven rides, towns, and displays.

Cynthia Williams: For the full year 2024, we are reiterating our guidance range for net sales of between $1.047 billion

Cynthia Williams: to $1.103 billion and adjusted EBITDA of between $65 million to $85 million.

Cynthia Williams: We'll discuss the second quarter financial results and our guidance in more detail in just a moment, but before we do, I'll share some of my initial thoughts since joining the company a little more than two months ago. Once officially on board, my first priority was to immerse myself in many aspects of the company. I've met with key constituents, including customers, licensing partners, and those in the investment community, some of whom I've known from prior roles at previous companies. Most importantly, and where I've spent most of my time, has been meeting and connecting with as many employees as possible, with the objective of thoroughly understanding the company, what's working, and what might be improved.

Speaker Change: We'll discuss the second quarter financial results and our guidance in more detail in just a moment, but before we do, I'll share some of my initial thoughts since joining the company a little more than two months ago.

Speaker Change: Once officially on board, my first priority was to immerse myself in many aspects of the company.

Speaker Change: I've met with key constituents, including customers, licensing partners, and those in the investment community, some of whom I've known from prior roles at previous companies.

Speaker Change: Most importantly, and where I spent most of my time, has been meeting and connecting with as many employees as possible, with the objective of thoroughly understanding the company, what's working, and what might be improved.

Cynthia Williams: I'm pleased to say I have learned we have a passionate team of dedicated professionals brimming with creativity and commercial savvy. I want to acknowledge the great work of my predecessor, Mike Lunsford, and the senior team for getting the company back on firm footing. Perhaps the highlight of my immersion was attending San Diego Comic-Con and our Funko Fundays event. The passion of our fans was on full display. They loved the opportunity to pop themselves in Deadpool or Wolverine gear, etc.

Speaker Change: I'm pleased to say I learned we have a passionate team of dedicated professionals brimming with creativity and commercial savvy.

Speaker Change: I want to acknowledge the great work of my predecessor, Mike Lunsford, and the senior team for getting the company back on firm footing.

Rob Jaffe: Rob Jaffe to begin.

Speaker Change: Perhaps the highlight of my immersion was attending San Diego Comic-Con and our Funko Fun Days event.

Rob Jaffe: Rob, please go ahead.

Speaker Change: The passion of our fans was on full display. They loved the opportunity to pop themselves in Deadpool or Wolverine gear and accessories.

Cynthia Williams: Lounge Flies showcased amazing exclusives and had their best ever sales at Comic-Con. And the Mondo team came to the convention with an awesome assortment of collectibles and posters with some sneak peeks that stopped the crowds in their tracks. And the Funko Fusion panel was a huge hit. Developed in collaboration with Tenpen Games and NBCUniversal, Funko Fusion is slated to launch on next-generation consoles and PC on September 13th. Funko Fusion is an action platformer that brings together 20 beloved franchises into one adventure, including Five Nights at Freddy's, Invincible, Jurassic World, and many more.

Speaker Change: Lounge Flies showcased amazing exclusives and had their best ever sales at Comic-Con. And the Mondo team came to the convention with an awesome assortment of collectibles and posters, with some sneak peeks that stopped the crowds in their tracks.

Speaker Change: and FunkoFusion panel was a huge hit. Developed in collaboration with 10, 10 games and NBC Universal, FunkoFusion is slated to launch a next generation console and PC on September 13th.

Speaker Change: Funko Fusion is an action platformer that brings together 20 beloved franchises into one adventure, including Five Nights at Freddy's, Invincible, Jurassic World, and many more.

Cynthia Williams: Our team displayed never-before-seen gameplay and trailers, as well as previews of the next collection that pops out of the game, all of which include a chance to unlock an exclusive character or special skin for a character within the game. My immersion within the company, my experience at Comic-Con, and being surrounded by Funko fans crystallized my vision for the future of this company. Going forward, we believe Funko will grow by taking a fan-centric approach, which revolves around four fundamental principles. The LiDARCORE fam!

Speaker Change: Our team displayed never-before-seen gameplay and trailers, as well as previews of the next collection that pops from the game, all of which include a chance to unlock an exclusive character or special skin for a character within the game.

Speaker Change: My immersion within the company, my experience at Comic-Con and being surrounded by Funko fans crystallized my vision for the future of this company.

Speaker Change: Going forward, we believe Sonka will grow by taking a stand-centric approach, which revolves around four fundamental principles.

Speaker Change: The LiDARCORE fans.

Speaker Change: Attract and serve new fans, sell where the fans are, and improve the fan experience.

Cynthia Williams: Tracton sort of new family, sell where the fans are, and improve the fan experience. Let's start with Delight Our Core Fans. Note that I am referring to our consumers, who are true fans in every sense of the word. Everyone is a fan of something, and our brands empower them to express their fandom with what they display, wear, and carry. We will continue to amaze and serve our fans with an assortment of unique and imaginative products from our beloved Funko Pop figures, including exclusives and limited edition collectibles, our lounge fly bags and accessories, and our high-end Mondo collectibles.

Rob Jaffe: Hello, everyone. And thank you for joining us today to discuss Funko's 2024 second quarter financial results. On the call are Cynthia Williams, a recently appointed chief executive officer and Yves LePendeven, our chief financial officer. This call is being broadcast live at investor dot Funko dot com. A playback will be available for at least one year on the company's website. I want to remind everyone that during the course of this call, management's discussion will include forward looking information.

Speaker Change: Let's start with Delight our core famed.

Speaker Change: Note that I am referring to our consumers who are true fans in every sense of the word.

Rob Jaffe: These statements represent our best judgment as of today about the company's future results and performance. 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. Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC Records. In addition, during this call, we refer to non-GAP financial measures that are not prepared in accordance with U.S, generally accepted accounting principles and may be different from non-GAP financial measures used by other companies.

Speaker Change: Everyone is a fan of something, and our brands empower them to express their fandom with what they display, wear, and carry.

Speaker Change: We will continue to amaze and serve our fans within the sortment of unique and imaginative product.

Speaker Change: from our beloved Funko Pop figures.

Speaker Change: including exclusives and limited edition collectibles, our lounge fly bags and accessories, and our high-end Mondo collectibles.

Cynthia Williams: Second, attract and serve new fans. I believe we can unlock tremendous growth by expanding the fandoms that we serve. In the past few years, we've begun tapping into additional fandoms, including anime, video games, music, and sports. We believe these fandoms present opportunities for further growth. Let me tell you about a recent proof point.

Speaker Change: Second.

Speaker Change: Attract and serve new fans.

Speaker Change: I believe we can unlock tremendous growth by expanding the fandoms that we serve. In the past few years, we've begun tapping into additional fandoms, including anime, video games, music, and sports.

Cynthia Williams: Within 30 minutes of the final whistle, we went live with a one-of-a-kind, limited-edition Pops Boston Celtics 2024 NBA Champions 5-Pack on our direct-to-consumer website, Funko.com. This product significantly outperformed last year's offering. This kind of fan-driven moment excites both casual fans and collectors and keeps them coming back. Another excellent example is Pop Yourself, a recently launched product that allows fans to celebrate the moments in their lives by creating custom pop figures to commemorate special events such as Valentine's Day, Mother's and Father's Day, graduations, birthdays, weddings, and many other occasions. Since launch in August of last year, over 80% of Pop Yourself customers are new to Funko, which is a proof point that there are large, untapped fandoms we have yet to serve. Third, Delaware the Fancy.

Speaker Change: We believe these fandoms present opportunities for further growth. Let me tell you about a recent proof point.

Speaker Change: Within 30 minutes of the final whistle, we went live with a one-of-a-kind, limited-edition collectible, POPS Boston Celtics 2024 NBA Champions 5-Pack, on our direct-to-consumer website, Funko.com.

Speaker Change: The product significantly outperformed last year's offering. This kind of fan-driven moment excites both casual fans and collectors and keeps them coming back.

Speaker Change: Another excellent example is Pop Yourself, a recently launched product that allows fans to celebrate the moments in their lives by creating custom pop figures to commemorate special events.

Speaker Change: which is Valentine's Day, Mother's and Father's Day, graduation, birthdays, wedding, and many other occasions.

Speaker Change: fifth launch in August of last year over 80% of pop yourself customers are new to Funko. Which is a proof point that there are large untapped fandoms we have yet to serve.

Cynthia Williams: Although our distribution network of retail partners is incredibly diversified, with no single retail partner representing more than 10% of our total sales, we still have the opportunity to reach many more new customers. To do this, we plan to continue to grow our direct-to-consumer channel. Our direct-to-consumer business has doubled from 12% of our business in 2022 to approximately 25% today, and it generates a significantly higher gross margin than our wholesale business. Second, we anticipate expanding our test and learn license store model. We have three of these stores operating in Dubai and Abu Dhabi today.

Speaker Change: Third, tell where the fans are.

Speaker Change: Although our distribution network of retail partners is incredibly diversified, with no single retail partner representing more than 10% of our total sales, we still have the opportunity to reach many more new customers.

Speaker Change: Today this, we plan to continue to grow our direct to consumer channel.

Speaker Change: Our direct-to-consumer business has doubled from 12% of our business in 2022 to approximately 25% today, and it generates a significantly higher gross margin than our wholesale business.

Speaker Change: Second, we anticipate expanding our test and learn license store model. We have three today operating in Dubai and Abu Dhabi.

Speaker Change: And third, within our wholesale channel, we plan to establish new points of sale with new partners, both domestically and abroad.

Cynthia Williams: And third, within our wholesale channel, we plan to establish new points of sale with new partners, both domestically and abroad, to give you one example. I believe we can make great strides in growing our sports business by selling our products where the sports fans are, in stadiums and arenas, on college campuses, and in sporting goods stores, both brick and mortar and online. Finally, and underpinning everything, is to improve the fan experience.

Speaker Change: To give you one example.

Speaker Change: I believe we can make great strides in growing our sports business by selling our products where the sports fans are, in stadiums and arenas, on college campuses, and in sporting goods stores, both brick-and-mortar and online.

Speaker Change: Finally, and underpinning everything, is to improve the fan experience.

Cynthia Williams: These four principles are core to our future growth because, number one, great products keep fans coming back. Number two, new audiences grow the business, and there are lots of them we haven't tapped into yet. Number three, new distribution is available to us to improve our margins and reach new fans. And number 4, keeping fans at the center of all we do. 3. Love, loyalty, and long-term value. Before we discuss our financial results... I am pleased to announce that we have removed the "acting" from his title and appointed Yves LePendeven as our Chief Financial Officer.

Speaker Change: This encompasses everything from improving our e-commerce experience to providing excellent customer service.

Speaker Change: These four principles are core to our future growth because, number one, great products keep fans coming back. Number two, new audiences grow the business, and there are lots of them we haven't tapped.

Speaker Change: Number three, new distribution is available to us to improve our margins and to reach new fans. And number four, keeping fans at the center of all we do breeds love, loyalty, and long-term value.

Cynthia Williams: He joined Funko five years ago and, during that time, has held several senior finance roles. He is extremely knowledgeable about the company and highly regarded by the entire team, as well as our investors, bankers, and investment analyst community. He has been my right-hand since I joined Funko, for which I am personally grateful. He is deserving of this new role, and I look forward to working closely with him as we work to scale Funko and take it to the next level. And with that...

Speaker Change: Before we discuss our financial results, I'm pleased to announce that we have removed acting from his title and appointed Yves LePendeven as our Chief Financial Officer.

Speaker Change: He joined Funko five years ago and during that time has held several senior finance roles. He is extremely knowledgeable about the company and highly regarded by the entire team, as well as our investors, bankers, and investment analyst community.

Speaker Change: He has been my right hand since I joined Funko, for which I am personally grateful.

E: He is deserving of this new role, and I look forward to working closely with him as we work to scale funcos and take it to the next level, and with that, I'll turn it over to E to take you through the swimming and shoulders. E.

Yves LePendeven: Thanks, Cynthia. Hey, everyone. Thanks for joining us today.

Yves LePendeven: For the second quarter, total net sales were $247.7 million. Direct-to-consumer sales in Q2 were 23% of our growth sales, up from 18% in last year's Q2. This represents 33% direct-to-consumer sales growth, which we achieved despite a lack of new entertainment releases due primarily to the Hollywood strike.

E: Thanks, Cynthia. Hey everyone. Thanks for joining us today.

Speaker Change: For the second quarter, total net sales were $247.7 million.

E: Direct-to-consumer sales mix in Q2 was 23% of our growth sales, up from 18% in last year's Q2. This represents 33% direct-to-consumer sales growth, which we achieved despite a lack of new entertainment releases due primarily to the Hollywood strikes.

Yves LePendeven: Our Q2 sales included a pull forward of approximately $9 million as certain customers placed orders earlier than usual in part to secure vessel space due to rising freight costs and container availability issues. The bottom line impact was approximately two and a half million dollars. Gross profit was $104 million, and gross margin was 42%. The higher-than-expected gross margin was driven by higher-than-expected margins on value channel sales and a corresponding relief in inventory reserves. SG&A expenses were $77.9 million, which was better than expected, due in part to a non-recurring net benefit of $1.5 million.

Speaker Change: Our Q2 sales included a pull-forward of approximately $9 million as certain customers placed orders earlier than usual in part to secure vessel space due to rising freight costs and container availability issues.

Speaker Change: The bottom line impact was approximately $2.5 million.

Speaker Change: Gross profit was $104 million, and gross margin was 42%. The higher-than-expected gross margin was driven by better-than-expected margins on value channel sales and a corresponding relief in inventory reserves.

Speaker Change: SGNA expenses were $77.9 million, which was better than expected, due in part to a non-recurring net benefit of $1.5 million. We've also shifted some marketing spend into the second half of the year.

Yves LePendeven: We've also shifted some marketing spend into the second half of the year. Adjusted net income was $5.6 million, or $0.10 per diluted share, which was above our guidance range for the quarter. And finally, adjusted EBITDA was $27.9 million, which was well above our guidance range and the result of the combined effect of higher sales and gross margin and lower SG&A. Turning to our balance, at June 30th, we had cash and cash equivalents of $41.6 million, which is after we paid down $22.5 million of debt in the second quarter.

Speaker Change: Adjusted net income was $5.6 million for 10 cents per diluted share, which was above our guidance range for the court.

Speaker Change: And finally, adjusted EBITDA was $27.9 million, which was well above our guidance range and the result of the combined effect of higher sales and gross margin and lower SG&A.

Speaker Change: Turning to our balance sheet.

Speaker Change: At June 30, we had cash and cash equivalents of $41.6 million, which is after we paid down $22.5 million of debt in the second quarter. Our total debt was approximately $223.9 million,

Yves LePendeven: Our total debt was approximately $223.9 million, down from $246.4 million at the end of the first quarter. Total debt 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.

Rob Jaffe: Investors are encouraged to review Funko's press release announcing its 2024 second-quarter financial results for the company's reasons for presenting non-GAP financial measures. A reconciliation of the non-GAP financial measures to the most directly comparable GAP financial measures is also attached to the company's earnings press release issued earlier today.

Speaker Change: down from $246.4 million at the end of the first quarter. Total debt 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.

Yves LePendeven: Total company liquidity increased to $101.6 million from $69.1 million at the end of last quarter and up from $36.8 million at the end of Q2 last year, and Net Inventory was $109 million, down from $112.3 million at March 31st, 2024. Turning to our outlook, we are reiterating our 2024 full-year guidance of net sales of between $1.047 billion and $1.103 billion and delivering adjusted EBITDA of between $65 million and $85 million.

Speaker Change: Total company liquidity increased to $101.6 million from $69.1 million at the end of last quarter and up from $36.8 million at the end of Q2 last year.

Speaker Change: and that inventory was $109 million down from $112.3 million at March 31, 2024.

Speaker Change: Turning to our outlook, we are reiterating our 2024 full year guidance of net sales of between $1.047 billion and $1.103 billion and delivering adjusted EBITDA of between $65 million to $85 million.

Cynthia Williams: With that, I will now turn the call over to Cynthia Williams. Thanks, Rob, and good afternoon, everyone. Welcome to Funko's second-quarter financial results conference call. My first conference call is the company's new CEO. I am delighted to be here. For the second quarter, our financial results were better than expected. However, the second quarter was our first quarter of year-ever-year net sales growth and our first profitable quarter since the third quarter of 2022.

Cynthia Williams: Net sales were $248 million, up 3% over the second quarter last year. For its margin was 42%, and adjusted EBITDA was $28 million, both were higher than our guidance range. And in the case of adjusted EBITDA, it's substantially better than expected. Our strong overall performance includes a number of positives. I'll call more than doubled in Q2 compared with the same quarter last year. And we continue to build on that momentum. Last week, we announced the introduction of Biddyburs, an extension of Biddyboss to allow fans to mix and match with new IP driven, rived towns and displays.

Yves LePendeven: Before I provide our third-quarter guidance, I'd like to note a couple of things. First, as I mentioned earlier, we estimate that about $9 million in net sales were pulled forward from Q3 into Q2. Second, unlike in years past, we expect net sales to be higher in our fourth quarter than in the third quarter due to our higher mix of direct-to-consumer sales and the giftable nature of product lines like Pop Yourself and Biddy Pop.

Speaker Change: Before I provide our third quarter guidance, I'd like to note a couple of things.

Speaker Change: First, as I mentioned earlier, we estimate about $9 million in net sales were pulled forward from Q3 into Q2.

Speaker Change: Second, unlike in years past, we expect net sales to be higher in our fourth quarter than in the third quarter due to our higher mix of direct-to-consumer sales and the giftable nature of product lines like Pop Yourself and Biddy Pop.

Yves LePendeven: This, of course, is dependent on a strong holiday season, which we'll have a better sense of on our next conference call. With that in mind, for the 2024 third quarter, our guidance is as follows: net sales between $282 million and $297 million. Gross margin between 38% and 39%. SG&A expense of $90 million to $95 million. Adjusted net income between half a million dollars, or one cent per diluted chair, and three million dollars, or six cents per diluted chair. Finally, we expect adjusted EBITDA between $21 million and $25 million. Cynthia, that's it for our financial results. Back over to you.

Speaker Change: This, of course, is dependent on a strong holiday season, which we'll have a better sense of on our next conference call.

Speaker Change: With that background, for the 2024 third quarter, our guidance is as follows, net sales between $282 million and $297 million.

Speaker Change: Gross margin between 38 percent and 39 percent.

Speaker Change: SG&A expense of $90 million to $95 million.

Speaker Change: Adjusted net income between half a million dollars or one cent per diluted share and three million dollars or six cents per diluted share.

Speaker Change: Finally, we expect adjusted EBITDA between $21 million and $25 million.

Speaker Change: Cynthia, that's it for our financial results. Back over to you.

Cynthia Williams: Thanks, Steve. In summary, we reported a strong overall financial performance in Q2. Our outlook for 2024 reflects the stabilization of our business despite a weaker content slate and some uncertainty around freight costs and consumer spending going into the holidays. We've made solid progress on developing our strategic plan to grow the company with a focus on our fans. As you would expect, some of these plans will take time to develop and implement.

Cynthia Williams: Thanks, Steve, in summary, we reported a strong overall financial performance in Q2.

Cynthia Williams: Our outlook for 2024 reflects the stabilization of our business despite a weaker content plate and some uncertainty around break calls and consumer spending going into the holidays.

Speaker Change: We've made solid progress on developing our strategic plans to grow the company with a focus on our fans.

Cynthia Williams: As you would expect, some of these plans will take time to develop and implement.

Cynthia Williams: We'll give you further updates and upcoming calls. Finally, and on a personal note, I want to thank all of my new colleagues at Funko for the warm welcome. And with that, we'll open the call for questions. Operator. We will now begin the question and answer session.

Speaker Change: We'll give you further updates and upcoming calls. Finally, and on a personal note, I want to thank all of my new colleagues at Funko for the warm welcome. And with that, we'll open the call for questions. Operator?

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2.

Operator: When preparing to ask your question, please ensure your device is unmuted locally. We will make a quick pause here for the questions to be registered. Our first question comes from Eric Wold from B-Riley.

Speaker Change: Who will now begin the question and answer session? If you would like to ask a question, let's press star for the white one on your telephone keypad now. If you change your mind, let's press star for the white two.

Speaker Change: When preparing to ask your question, please ensure your device is unmuted locally. We will make a quick pause here for the questions to be registered.

Speaker Change: Yves LePendeven, Steven Nave, Rob Jeffrey, Rob

Speaker Change: www.freebiblecommentary.org

Cynthia Williams: For the full year 2024, we are at $4.7 billion to $1.103 billion, and adjusted EBITDA at between $65 million to $85 million. We'll discuss the second quarter financial results and our guidance in more detail in just a moment. But before we do, I'll share some of my initial thoughts on joining the company a little more than two months ago. Once officially on board, my first priority was to immerse myself in the many aspects of the company.

Speaker Change: [inaudible]

Speaker Change: Our first question comes from Eric Lutz from Burelli.

Eric Wold: Thank you. Good afternoon, guys. Great quarter.

Eric Lutz: Thank you. Good afternoon, guys. Great quarter.

Eric Wold: A few questions from my end. I guess, I guess, first of all, I'm not sure who wants to take the question, but Yeah, obviously, huge upside on Evita for the quarter. Maybe just walk us through the biggest surprises on your end or biggest deltas on your end to take you to, you know, $27 million versus the $9 to $15 million range. And what in that, besides the one-time thing you call that around SG&A, may not be repeatable with a performance like that?

Eric Lutz: A few questions from my end. I guess first off, I'll start off, not sure who wants to take the question, but obviously a huge upside on EBITDA for the quarter. Maybe just walk us through the biggest surprises on your end or biggest deltas on your end to take you to $27 million versus the $9 to $15 million range. And what in that, besides the one-time thing you called out around SG&A, what may not be repeatable with a performance like that?

Yves LePendeven: Sure, Eric. Hey, thanks for the question. I'll take that one.

Eric Lutz: Sure, Eric. Hey, thanks for the question. I'll take that one and I'll call out a couple of the main ones, right? So we beat our net sales guidance.

Eric: We came in above the top end of the range, and as I mentioned, about $9 million of that was pulled forward from Q3.

Speaker Change: So that was primarily from our direct import customers, and as you're aware, the rising freight costs...

Yves LePendeven: And I'll call out a couple of the main ones, right. So we beat our net sales guidance. We came in above the top end of the range. And as I mentioned, about $9 million of that was pulled forward from Q3. So that was primarily from our direct import customers. And as you're aware, with the rising freight costs and also the uncertainty about being able to secure vessel space, we had some customers' orders that basically shipped in June versus July. So that was one part of it.

Eric: and also the uncertainty about being able to secure vessel space, we had

Eric: Some customers orders that basically shipped in June versus July . So that was one part of it.

Eric: The other part is the inventory reserve relief. So approximately two and a half points of our margin favorability, gross margin favorability, came from that. We continue to see a really great environment in the value channel, and as we continue to...

Yves LePendeven: The other part is the inventory reserve relief. So approximately two and a half points of our margin favorability, gross margin favorability, came from that. We continue to see a really great environment in the value channel, and as we continue to sell aged inventory into that channel at good margins, we are able to relieve some of our reserves. And so that's one item that we wouldn't see in Q3 and Q4. So between those two, I think those drove a lot of the adjusted EBITDA favorability. But we also came in under SG&A, not just because of the non-recurring benefit that's normalized out of adjusted EBITDA anyway, but we just continue to stay focused on managing expenses.

Eric: So, aged inventory into that channel at good margins, we were able to release some of our reserves. And so, that's...

Eric Wold: Got it. That's helpful.

Eric: One item that we wouldn't see in T3 and T4.

Eric: So between those two, I think those drove a lot of the adjusted EBITDA.

Eric: Saverability, but we also came in under SGNA, not just because of the non-returing benefits, that's normalized out of adjusted EBITDA anyways, but we just continue to stay focused on managing expenses.

Cynthia Williams: I've met with Keaton's constituents, including customers, licensing partners, and those in the investment community, some of whom have known some prior roles at previous companies. Most importantly, and most of my time, has been meeting and connecting with as many employees as possible with the objective of thoroughly understanding the company, what's working, and what might be improved. I'm pleased to say, I learned we have a passionate team dedicated professional, brimming with creativity and commercial satisfaction.

Yves LePendeven: And then Thinking about the guidance, if I look at the $37 million of adjusted EBITDA in the first half and take the low end of the guidance for Q3 of $21 million to get to $58 through three-quarters, what would need to happen in Q4 from this point to only generate $7 million to get to the low end of the 65? Obviously, you kept it out there because it's possible. So, from your standpoint now, what would really need to happen to only get to $7 million at the low end, maybe even in the fourth quarter?

Speaker Change: Gallon and Pethro IV, and then...

Speaker Change: Thinking about the guidance, if I look at the $37 million, I would just leave it up in the first half and take the low end of the guidance for Q3 of $21 million to get to 58 through three quarters.

Cynthia Williams: I want to acknowledge the great work of my predecessor, Michael Lunsford, and the senior team for getting the company back on firm footing. Perhaps the highlight of my immersion was attending San Diego Comic-Con and our Funko Fundays event. The passion of our fans was on full display. They loved the opportunity to pop themselves in Deadpool or Wolverine Gear and accessories. They faced amazing exclusions and had their best ever sales at Comic-Con, and the mundane came to the convention with an awesome assortment of collectibles and posters with some sneak peeks that stopped the crowds in their tracks.

Cynthia Williams: The Funko Fusion panel was a huge hit. Developed in collaboration with 1010 Games and NBC Universal, Funko Fusion is slated to launch a next generation console and PC on September 13th. Funko Fusion is an action platformer that brings together 20 loved franchises into one adventure, including Five Nights at Freddy, Invincible, Jurassic World, and many more. Our team displayed never-before-seen gameplay and trailers, as well as previews of the next collection that popped from the game, all of which include a chance to unlock an exclusive character or special skin for a character within the game. My immersion within the company, my experience at Comic-Con and being surrounded by Funko fans, crystallized my vision for the future of this company.

Cynthia Williams: Going forward, we believe Funko will grow by taking a fan-centric approach which revolves around four fundamental principles. Delight our core fans, attracted in sort of new fans, sell where the fans are, and improve the fan experience. Let's start with Delight our core fans. Note that I am referring to our consumers who are true fans in every sense of the word. Everyone is a fan of something, and our brands empower them to express their fandom with what they display where and carry.

Speaker Change: What would need to happen in Q4 from this point to only generate $7 million to get to the low end of the 65? Obviously, you kept it out there because it's...

Speaker Change: Make it possible. So, kind of, you know, from your standpoint now, you know, what would you really need to happen to only get to seven million at the low end, maybe for even on the fourth quarter?

Yves LePendeven: Yeah, I'll take that one as well. Obviously, we're pleased with the progress we made in the first half on adjusted EBITDA and getting to our full year target. You know, I'll answer your question, I guess, by going to the top line first. And, and, as we said in the call, a little bit more of our sales are going to be weighted in the second half than they have previously.

Speaker Change: Yeah, I'll take that one as well. I mean, obviously we're pleased with the progress we've made in the first half on adjusting EBITDA and getting to our four-year target. You know, I'll answer your question, I guess, by going to the top line first. And, you know, as we said in the call,

Cynthia Williams: We will continue to amaze and serve our fans with an assortment of unique and imaginative products from our beloved Funko pop figures, including exclusive and limited edition collectibles, our lounge flybags and accessories, and our high-end Mondo collectibles. Second, attract and serve new fans. I believe we can unlock tremendous growth by expanding the fandoms that we serve. In the past few years, we've begun tapping into additional fandoms, including anime, video games, music, and sports.

Cynthia Williams: We believe these fandoms present opportunities for further growth. Let me tell you about a recent proof point. Within 30 minutes of the final whistle, we went live with a one-of-a-kind limited edition collectibles, the top Falcons Celtics 2024 NBA Champions Five Pack on our direct to consumer website, Funko.com. The product significantly outperformed last year's offering. This kind of fan-driven moment excites both casual fans and collectors and keeps them coming back. Another excellent example is pop yourself a recently launched product that allows fans to celebrate the moments in their lives by creating custom pop figures to commemorate special events such as Valentine's Day, Mother's and Father's Day, graduation, birthday wedding and many other occasions.

Cynthia Williams: Since launch in August of last year, over 80 percent of popular self-customers are new to Funko, which is a proof point that there are large, untapped fandoms we have yet to serve. Third, sell where the fans are. Although our distribution network of retail partners is incredibly diversified with no single retail partner representing more than 10 percent of our total sales, we still have the opportunity to reach many more new customers. To do this, we plan to continue to grow our Direct to Consumer Channel.

Cynthia Williams: Our Direct to Consumer Business has doubled from 12 percent of our business in 2022 to approximately 25 percent today, and it generates a significantly higher growth margin that our wholesale business. Second, we anticipate expanding our test and learn license store model. We have three today operating in Dubai and Abu Dhabi. And third, within our wholesale channel, we plan to establish new points of sale with new partners both domestically and abroad. To give you one example, I believe we can make great strides in growing our sports business by selling our products where the sports fans are in stadiums and arena on college campuses and sporting good stores but brick and mortar and online.

Cynthia Williams: Finally, an underpinning everything is to improve the fan experience. This encompasses everything from improving our e-commerce experience to providing excellent customer service. These four principles are core to our future growth recalls. Number one, great products keep fans coming back. Number two, new audiences grow the business and there are lots of them we haven't tapped. Number three, new distribution is available to us to improve our margins and to reach new fans. And number four, keeping fans at the center of all we do, brief love, loyalty, and long-term value.

Yves LePendeven: Part of that was due to the pull forward from Q3 and Q2. The other part was the higher mix of direct-to-consumer sales and additional weighting into the fourth quarter. So, with that being said, we've made more progress on the bottom line than on the top line, and we feel confident in achieving our initial guidance that we put out there, but it's just an uncertain environment right now. We're watching a lot of indicators, as I'm sure you are, too, between interest rates, the labor market, and consumer spending. It's just, you know, a lot of our sales are still ahead of us, and the environment's uncertain, and so that's why we just reiterated our initial guidance.

Speaker Change: A little bit more of our sales are going to be weighted in the second half than they have previously. Part of that was due to the pull forward from Q3 and Q2. The other part is the higher mix of direct-to-consumer sales.

Speaker Change: and additional waiting into the fourth quarter.

Speaker Change: So, with that being said, we've made, you know, more progress on the bottom line than on the top line, and we feel confident in achieving our initial guidance that we put out there, but it's just an uncertain environment right now. We're watching a lot of indicators, as I'm sure you are too.

Cynthia Williams: Before we discuss our financial results, I'm pleased to announce that we have removed acting from his title and appointed Eve LePinivan as our chief financial officer. Eve joined Funko five years ago and during that time, he held several senior finance roles. He is extremely knowledgeable about the company and highly regarded by the entire as well as our investors, thinkers, and investment analyst community.

Cynthia Williams: He has been my right hand since I joined Funko, for which I am personally grateful. He's deserving of this new role, and I look forward to working closely with him as we work to scale Funko and take it to the next level.

Cynthia Williams: And with that, I'll turn it over to Yves to take you through the financials.

Yves LePendeven: Yves? Thanks, Cynthia.

Speaker Change: between interest rates, the labor market, consumer spending, it's just, you know.

Yves LePendeven: Hey, everyone. Thanks for joining us today. For the second quarter, total net sales were $247.7 million. Direct to consumer sales mix in Q2 was 23% of our growth sales, up from 18% in last year's Q2. This represents 33% direct to consumer sales growth, which we achieved despite a lack of new entertainment releases due primarily to the Hollywood Stripes. Our Q2 sales included a toll forward of approximately $9 million as certain customers placed orders earlier than usual in part to secure vessel space due to rising freight costs and container availability issues.

Speaker Change: It's a lot, a lot of our sales are still ahead of us, and the environment is uncertain, and so that's why we just reiterated our initial guidance.

Yves LePendeven: The bottom line impact was approximately $2.5 million. Gross profit was $104 million and Gross margin was 42%. The higher than expected Gross margin was driven by better than expected margins on value channel sales and a corresponding release in inventory reserves. SGNA expenses were $77.9 million, which was better than expected, due in part to a non-recurring net benefit of $1.5 million. We've also shifted some marketing spend into the second half of the year.

Eric Wold: Got it. I guess the biggest, the biggest part is given the significant strength and importance now of DTC, you have a little less visibility into that than you would into a wholesale order that's already come in for the holiday. So you kind of want to see how that plays out. Is that fair?

Yves LePendeven: Adjusted net income was $5.6 million or 10 cents per diluted share, which was above our guidance range for the quarter. And finally, adjusted Yves was $27.9 million, which was well above our guidance range and the results of the combined effect of higher sales, and Gross margin, and lower SGNA.

Speaker Change: Got it. I think it's the biggest, the biggest...

Speaker Change: If I'm hearing you correctly, I think the biggest part is, given the significant strength and importance now of DTC, you have a little less visibility into that than you would into a wholesale order that's already come in for the holiday, and so you kind of want to see how that plays out. Is that fair?

Yves LePendeven: Turning to our balance sheet. At June 30th, we had cash and cash equivalents of $41.6 million, which is after we paid down $22.5 million of debt in the second quarter. Our total debt was approximately $223.9 million dollars, down from $246.4 million at the end of the first quarter. Total debt 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.

Yves LePendeven: Total company liquidity increased to $101.6 million from $69.1 million at the end of last quarter, and up from $36.8 million at the end of Q2 last year. And net inventory was $109 million down from $112.3 million at March 31st, 2024.

Yves LePendeven: That's exactly right.

Eric Wold: Okay, and then his last question: if I may, update us on where wholesale channel inventories are right now relative to where you'd want them to be heading into, you know, the holiday. And what are you kind of hearing from your retail partners or already seeing from orders about their comfort taking product into the holiday versus, you know, prior years?

Speaker Change: That's exactly right.

Speaker Change: Okay, and then this last question, if I may, update us on where wholesale channel inventories are right now relative to where you'd want them to be heading into, you know, the holiday, and what are you kind of hearing from your retail partners or already seeing from orders?

Speaker Change: about their comfort taking product into the holiday versus, you know, prior years.

Yves LePendeven: Yeah, I mean, for the same reasons I just mentioned, we're staying very close to our retail partners and watching inventory levels very closely. We're being prudent about the buys that we're making. And the good news is that the inventory that they have, you know, for those customers that report POS sales and POS inventory to us, they're in a healthy place right now. We typically want to see 15 to 20 weeks of supply out there in the marketplace.

Speaker Change: Yeah, I mean, for the same reasons I just mentioned, we're staying very close to our retail partners and watching inventory levels very closely.

Speaker Change: We're being prudent about the vise that we're making and the good news is that the inventory that they have for those customers that report.

Speaker Change: P.O.S. sales and P.O.S. inventory to us.

Speaker Change: They're in a healthy place right now. We typically want to see 15 to 20 weeks of supply out there in the marketplace.

Yves LePendeven: And they're right around that range. And so the quality of the inventory, the levels of inventory are good right now. But as I said before, I think a lot is, you know, going to depend on how the consumer shows up during the holidays, and we'll have a lot more visibility on that in our next call.

Speaker Change: and their right around that range and so that the quality of the inventory, the levels of inventory are good right now. But as I said before, I think a lot is going to depend on how the consumer shows up in the holidays and we'll have a lot more visibility to that in our next call.

Eric Wold: Perfect. Thank you both. I appreciate it.

Speaker Change: Perfect. Thank you both, appreciate it.

Operator: As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad. And our next question comes from Steven Lezinski from Goldman Sachs.

Eric Lutz: All right. Thanks Eric.

Speaker Change: As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.

Speaker Change: And our next question comes from Stephen Leszczynski from Goldman Sachs.

Steven Lezinski: Hey, great. Thanks for taking the questions. Maybe first for Cynthia, now that you've been in the seat for a few months and maybe going off of some of your prepared remarks, I'd be curious if you could reflect on some of what you have learned since taking over as CEO. What have you learned that maybe reaffirms some of the thoughts coming into the position? And then, are there any areas of the business that you think might have more opportunity for improvement?

Stephen Leszczynski: Hey, great. Thanks for taking the questions. Maybe first for Cynthia, now that you've been in the seat for a few months and maybe going off of some of your prepared remarks, I'd be curious if you could reflect on some of what you learned since taking over as CEO. What have you learned that this maybe reaffirms some of the thoughts coming in to the position? And then, are there any areas of the business that you think might have more opportunity for improvement?

Yves LePendeven: Turning to our outlook, we are reiterating our 2024 full-year guidance of net sales of between $1.047 billion and $1.103 billion and delivering a subsidy betot of between $65 million to $85. First, as I mentioned earlier, we estimate about $9 million and net sales were pulled forward from Q3 into Q2. Second, unlike in years past, we expect net sales to be higher in our fourth quarter than in the third quarter due to our higher mix of direct to consumer sales and the giftable nature of product lines like pop yourself and baby pop.

Yves LePendeven: This, of course, is the most important thing. It's dependent on a strong holiday season, which will have a better sense of on our next conference call. With that background for the 2024 third quarter, our guidance is as follows, net sales between $282 million and $297 million. $39, gross margin between 38% and 39%, SGNA expense of $90 million and $95 million, adjusted net income between half a million dollars or $1 per diluted share and $3 million or $6 per diluted share. Finally, we expect adjusted EBITDA between $21 million and $25 million.

Yves LePendeven: Cynthia, that's it for our financial results, back over to you.

Cynthia Williams: Yeah, thanks, Stephen. First, I'd say I've been really pleasantly surprised. I'm pleased to see two things. First, the employee base is incredibly passionate, engaged, and creative. That just reinforces for me that we can stay focused on our fans and deliver products that they're going to love. I'd say the second has been our engagement with the fans. I don't know if you've ever had a chance to go to San Diego Comic-Con and attend Funko Fun Days, but that is an experience unlike any other fan event I have ever seen, and I thought I had been to some crazy fan events.

Cynthia Williams: Thanks, Steve.

Cynthia Williams: Yeah, thanks, Stephen.

Speaker Change: or let's say what I've been.

Cynthia Williams: Really pleasantly surprised and pleased to see is to think first the employee base is incredibly passionate and engaged and creative.

Cynthia Williams: In summary, we reported a strong overall financial performance in Q2. Our outlook for 2024 reflects the stabilization of our business despite a weaker content slate and some uncertainty around break calls and consumer spending going into the holidays. We've made solid progress on developing our strategic plans to grow the company with a focus on our fans. As you would expect, some of these plans will take time to develop and implement. We'll give you further updates and upcoming calls.

Operator: Finally, and on a personal note, I want to thank all of my new colleagues at Funko for the warm welcome. And with that, we'll open the call for questions operator. We will now begin the question and answer session. If you would like to ask a question, please press star follow by one on your telephone keypad now. If you change your mind, please press star followed by two. When you're asked your question, please ensure your device is emitted locally. We'll make a quick pause here for the questions to be registered.

Stephen Leszczynski: That just reinforces for me that we can stay focused on our fans and deliver products that they're going to love. I'd say the second has been the engagement with the fans.

Eric Wold: Our first question comes from Eric Wolfe from BeReilly. Thank you.

Yves LePendeven: Good afternoon, guys. Great quarter. A few questions from my I guess. I guess for several sort of much of who wants to take the question. But, obviously, huge upslide on the quarter. Maybe walking through the biggest surprises on your end or biggest delta in your end to take you to 27 million versus you, the 9 to 15 million range. And what in the size of the one time that you call that around us, you know, what may not be repeatable with a performance, you know, like that.

Yves LePendeven: Sure, Eric. Hey, thanks for the question. I'll take that one and I'll call out a couple of the main ones, right? So we beat our net sales guidance. We came in above the top another range. And as I mentioned, about $9 million of that was pulled forward from Q3. So that was primarily from our direct import customers. And as you're aware, the rising freight costs and also then certainty about being able to secure vessel space.

Stephen Leszczynski: I don't know if you've ever had a chance to go to San Diego Comic-Con and attend a Funko Fun Days, but that is an experience unlike any other fan event I have ever seen, and I thought I had been to some crazy fan events.

Cynthia Williams: These folks are so... https://www.youtube.com.au, It shows to me that they are very much with us, their core and real fans, and they want to see us succeed. And so I think those things together have left me with real optimism that as long as we're putting out high-quality, creative products... This business has an exceptional future.

Stephen Leszczynski: These folks are so...

Yves LePendeven: We had some customers orders that basically shipped in June versus July. So that was one part of it. The other part is the inventory reserve relief. So approximately two and a half points of our margin, favorability, gross margin, favorability came from that. We continue to see a really great environment and the value channel. And as we continue to sell aged inventory into that channel at good margins, we were able to release some of our reserves.

Stephen Leszczynski: passionate, they're so engaged, they are a real community. What I saw with their engagement with us at the booth where we were selling product

Stephen Leszczynski: demonstrates to me that they are very much with us, their core and real fans, and they want to see us succeed.

Yves LePendeven: And so that's one item that we wouldn't wouldn't see in Q3 and Q4. So between those two, I think those drove a lot of the justice EBITDA. But we also came in under SGNA, not just because of the non-recuring benefit that's normalized out of the justice EBITDA anyways, but we just continue to stay focused on managing expenses. Got it. It's hopeful. And then, you know, thinking about the guidance, you know, if I look at the, you know, the 37 million of just the first half and take the low end of the guidance for two, three, 21 million to get to 58, three, three quarters, what would need to happen in Q4 from this point, to only generate 7 million to get to the low end of the 65.

Stephen Leszczynski: And so, I think those together have left me with real optimism that as long as we're putting out high quality creative product, this business has an exceptional future.

Yves LePendeven: Obviously, you kept it out there because it's possible. So, you know, from your standpoint, now, you know, what would really need to happen to only get to 7 million at the low end, maybe for even on the fourth quarter. Yeah, I'll take that one as well. I mean, obviously, we're pleased with the progress we've made in the first half on just the data and getting to our full year target. I'll answer your question, I guess, by going to the top line first.

Yves LePendeven: Thanks for that. I have two financial questions for Yves. Looking at Europe versus, international versus, the U.S., could you maybe talk a little bit more about the drivers of the strong growth you're seeing in Europe and international and perhaps how those trends differ from what you're seeing in the U.S. at the moment? And then, just lastly, on logistics, I think you called out some of the volatility in the freight market. I'm curious if you could expand on this a little bit more and how you see and quantify the risk of vessel procurement as you head into the latter part of the year. Thank you.

Yves LePendeven: And, you know, as we said in the call, a little bit more of our sales are going to be weighted in the second half and they have previously part of that was due to the pull forward from Q3 and Q2. The other part is the higher mix of direct to consumer sales and additional weighting into the fourth quarter. So, with that being said, we've made, you know, more progress on the bottom line than on the top line.

Stephen Leszczynski: [inaudible]

Speaker Change: Thanks for that. Maybe two financial questions for Yves. Looking at Europe versus, international versus the U.S., could you maybe talk a little bit more about the drivers of the strong growth you're seeing in Europe and international and perhaps how those trends differ from what you're seeing in the U.S. at the moment?

Yves LePendeven: And we feel confident in achieving our initial guidance that we put out there, but it's just an uncertain environment right now. We're watching a lot of indicators as I'm sure you are to between interest rates, the labor market, consumer spending. It's just, you know, it's a lot, a lot of our sales are still ahead of us and the environment's uncertain. And so that's why we just reiterated our initial guidance. Got it.

Yves LePendeven: I guess the biggest part is given the significant strength and importance now of DTC, you know, a little less visibility to that than you would into a wholesale order that's already come in for the for the holiday. And so you kind of want to get that place out of that fair. That's that's exactly right. Okay. And then his last question, if I may, I'll see that somewhere wholesale channel inventories are right now relative to where you want them to be heading into, you know, the holiday.

Yves LePendeven: And what are you kind of hearing from your retail partners or or or are you seeing from from orders about their comfort taking product into the holiday versus, you know, prior years. Yeah, I mean, for the for the same reasons I just mentioned, we're staying very close to our retail partners and and watching inventory levels very closely. We're being prudent about the buys that we're making. And the good news is that the inventory that they have, you know, for those customers that report POS sales and POS inventory to us.

Yves LePendeven: They're in a healthy place right now. We typically want to see 15 to 20 weeks of supply out there in the marketplace and they're right around that range. And so the quality of the inventory, the levels of inventory are good right now. But as I said before, I think a lot, a lot is, you know, going to depend on how the consumer shows up in the holidays and we'll have a lot more visibility to that in our next call. Perfect. Thank you both appreciate. All right. Thanks, Eric. As a reminder, if you would like to ask a question, please press star for the bite one on your telephone key, VAD.

Stephen Leszczynski: And then just lastly on logistics, I think you called out some of the volatility in the freight market. I'm curious if you could expand on this a little bit more and how you see and handicap the risk of vessel procurement as you head into the tail part of the year. Thank you.

Yves LePendeven: Sure, no problem. So I'll speak first to your question about the sales, the sales difference, I guess, between the U.S. and the European markets. You know, we've focused a lot on the U.S. market in the past few quarters on these calls. You know, one of the things you're seeing in Q2 is twofold, right? In the U.S. market, we expanded very quickly into the mass channel, and about 18 months ago, we started the process of strategically pulling back and making sure that we had the right products in the right channels. And so that's one part of it.

Yves LePendeven: We also did a 30% SKU reduction last year, which was the long tail of SKUs and not a material impact on sales, but still more of a factor in the U.S. than in Europe. And then the third thing I'll call out, again, the weaker content slate, I think that had a little bit more impact on the U.S. market, although we've shifted our mix of product to more evergreen products. We've made more headway in Europe than in the U.S., and so that had a little bit more of an impact in the U.S.

Speaker Change: Sure, no problem.

Speaker Change: And...

Speaker Change: So I'll speak first to your question about the sales difference, I guess, between the U.S. and the European markets. You know, we've focused a lot on the U.S. market in the past few quarters on these calls. You know, one of the things you're seeing in Q2 is twofold, right? In the U.S. market, we had, you know, expanded very quickly into the mass channel, and about 18 months ago, we started the process of...

Cynthia Williams: And our next question comes from Stephen Laszczyk, from Goldman Sachs. A great, thanks for taking the questions. Maybe first for Cynthia. Not even in the seat for a few months and maybe going off of some of your prepared remarks. I'd be curious if you could reflect on some of what you've learned since they can ever see you. I would have you learned that this may be reaffirmed from this thought coming in to the position and then of any areas of the business that you think might have more opportunity for improvement.

Speaker Change: strategically pulling back and making sure that we had the right products in the right channels and so

Speaker Change: That's one part of it. We also did 30% skew reduction last year, which was the long tail of skews and not a material impact of sales, but still more of a factor in the U.S. than in Europe.

Cynthia Williams: Yeah, thanks, Stephen. First, I'd say what I've been really pleasantly surprised and pleased to see is two things. First, the employee base is incredibly passionate, engaged, and creative. That just reinforces for me and that we can stay focused on our fans and deliver products that they're going to love. I'd say the second, it has been the engagement with the fans. I don't know if you've ever had a chance to go to San Diego Comic Con and attend a fun, good fun days, but that is an experience.

Speaker Change: And then the third thing I'll call out, again, the weaker content slate, I think that had a little bit more impact.

Speaker Change: on the US market, although we've shifted our mix of product to more evergreen product, we've made more headway in Europe than in the US, and so that had a little bit more of an impact in the US.

Yves LePendeven: So in contrast to that, in Europe, we saw a really nice 20% sales growth in the quarter. I'll just kind of call out that within that region, Eastern Europe, Greece, and the Middle East were really drivers of that growth. So that's... That's something that, you know, we're taking those lessons, bringing them over to the U.S., and continuing to expand our distribution and then expanding our mix of evergreen content in what we sell.

Speaker Change: So in contrast to that, in Europe, we saw a really nice 20% sales growth in the quarter. I'll just kind of call out that within that region, Eastern Europe, Greece and the Middle East.

Speaker Change: were

Cynthia Williams: I'm like any other fan event I have ever seen and I thought I had been to some crazy fan events. These folks are so passionate, they're so engaged, they are a real community. What I saw with their engagement with us at the booth, where we were selling product, demonstrates to me that they are very much with us, they're core and real fans, and they want to see us succeed.

Speaker Change: were really drivers of that growth. So that's...

Speaker Change: That's something that, you know, we're taking those lessons, bringing them over to the U.S. and continuing to expand our distribution and then expand our mix of evergreen content in what we sell.

Cynthia Williams: I'll just share one additional highlight since you covered the evergreen, which I do think that Europe got far out ahead of the U.S. on, and it's been a real wonderful lesson for us to bring into the U.S. The second, though, is the licensed store model that we were talking about a bit earlier. We have three in the Middle East, and in that model, we partner with a retailer who has experience in that market, understands those customers, and will deliver based on our brand requirements.

Speaker Change: I'll just share one additional highlight since you covered the evergreen, which I do think that Europe got far out ahead of the U.S. on. It's been a real wonderful lesson for us to bring into the U.S.

Yves LePendeven: I think those together have left me with real optimism that as long as we're putting out high quality creative product, this business has an exceptional future. Thanks for that. Maybe two financial questions for Yves. Look at Europe versus International versus the US. Could you maybe talk a little bit more about the drivers of the strong growth you're seeing in Europe and international and perhaps how those trends differ from what you're seeing in the US at the moment.

Speaker Change: The second, though, is the licensed store model that we were talking about a bit earlier. We have three in the Middle East.

Speaker Change: And in that model, we partner with a retailer who has experience in that market, understands those customers, will deliver based on our brand requirements.

Cynthia Williams: And in addition to a bit of a licensing fee, then, of course, they're buying products from us. And that, for us, is a no to very low capital way for us to expand our markets. And you're starting to see that take hold in the AMENA region as well.

Speaker Change: And in addition to a bit of a licensing fee, then of course they're buying product from us. And that for us is a no to very low capital way for us to expand our markets. And you're starting to see that take hold in the AMENA region as well.

Yves LePendeven: And then just lastly on logistics, I think you called out some of the volatility in the freight market. I'm curious to expand on this a little bit more and how you see and handicap the risk of vessel procurement as you head into the tail part of the year. Thank you. Sure, no problem. So I'll speak first to your question about the sales, the sales difference between the US and the European market.

Yves LePendeven: And then, Stephen, I'll answer the second part of your question on freight. So, you know, a couple of months ago, we were watching that market very closely. I think the good news is that rates seem to kind of have stabilized, and so they weren't a material impact on our Q2 results. We do capitalize freight costs on the balance sheet. And then, you know, you'll see some of those higher costs impact us more in Q3 and Q4.

Speaker Change: And then Stephen, I'll answer a second part of your question on freight. So, you know, a couple months ago we were watching that market very closely. I think the good news is that

Stephen Leszczynski: Rates seem to kind of have stabilized, and so

Speaker Change: They weren't a material impact in our Q2 results. We do capitalize rate costs to the balance sheet, and then, you know, you'll see some of those higher costs.

Yves LePendeven: We've focused a lot on the US market and past few quarters on these calls. One of the things you're seeing in Q2 is twofold. In the US market, we had expanded very quickly into the mass channel. And about 18 months ago, we started the process of strategically pulling back and making sure that we had the right products and the right channels. And so that's one part of it. We also did 30% skew reduction last year, which was the long tail of skews and not a material impact of sales, but still more of a factor in the US than in Europe.

Yves LePendeven: I'd say right now that it's not very material, but it is something that we factored into our guidance, you know, for a gross margin of 38 to 39 percent, which is slightly lower than Q1 and Q2. That was one of the factors that caused that.

Steven Lezinski: Got it. Thank you for all that.

Speaker Change: impact us more in Q3 and Q4. I'd say right now it's not very material, but it is something that we factored into our guidance, you know, for a gross margin of 38 to 39%, which is slightly lower than Q1 and Q2. That was one of the factors that caused that.

Speaker Change: Got it, thank you for all that.

Operator: As a final reminder, if you would like to ask a question, please press star 411 on your telephone keypad. As we currently have no further questions in queue, I will hand over to Cynthia Williams for any final remarks.

Speaker Change: And the final reminder if you would like to ask a question, please buy star for a while and on your telephone keypad.

Yves LePendeven: And then the third thing I'll call out, again, the weaker content slate, I think that had a little bit more impact on the US market, although we've shifted our mix of product to more evergreen product. We've made more headway in Europe than in the US. And so that had a little bit more of an impact in the US. So in contrast to that in Europe, we saw a really nice 20% sales growth in the quarter.

Speaker Change: [inaudible]

Speaker Change: As we currently have no further questions on the queue, I will hand back over to Cynthia Williams for any final remarks.

Cynthia Williams: Thank you everyone for joining us on the call today. We look forward to sharing our progress with you on our very next call.

Operator: Thank you everyone for joining. You might now disconnect from the call.

Yves LePendeven: I'll just kind of call out that within that region, Eastern Europe, Greece, and the Middle East, we're really drivers of that growth. So that's something that, you know, we're taking those lessons, bringing them over to the U.S, and continuing to expand our distribution and then expand our mix of evergreen content in what we sell. I'll just share one additional highlight since you covered the evergreen, which I do think that Europe got far out of head of the U.S, on and it's been a real wonderful lesson for us to bring into the U.S.

Speaker Change: Yves LePendeven, Steven Nave, Rob

Yves LePendeven: The second, though, is the licensed store model that we were talking about a bit earlier. We have three in the Middle East, and in that model, we partner with a retailer who has experience in that market, understands those customers, will deliver based on our brand requirements and in addition to a bit of a licensing fees, and of course, they're buying product from us. And that, for us, is a no-to-very-low capital way for us to expand our markets, and you're starting to see that take hold in the Indian region as well.

Yves LePendeven: And then Steven, I'll answer a second part of your question on freight. So, you know, a couple of months ago, we were watching that market very closely. I think the good news is that rates seem to kind of have stabilized. And so, they weren't a material impact in our Q2 results. We do capitalize freight costs to the balance sheet, and then, you know, you'll see some of those higher costs impact us more in Q3 and Q4.

Yves LePendeven: I'd say right now it's not very material, but it is something that we factored into our guidance. You know, Frogrose margin of 38 to 39%, which is slightly lower than Q1 and Q2, that was one of the factors that caused that. Got it. Thank you for all that. As a final reminder, if you would like to ask a question, please find out for a by-one on your telephone case. As we currently have no further questions on the queue, I will hand back over to Cynthia Williams for any final remarks.

Cynthia Williams: Thank you, everyone, for joining us on the call today. We look forward to sharing our progress with you on our very next call. Thank you, everyone, for joining.

Operator: You might now disconnect from the call.