Funko, Inc. (FNKO) Q2 2025 Earnings Call Transcript

Funko reported a challenging Q2 2025, with net sales down 22% to $193.5 million and a negative adjusted EBITDA of $16.5 million, primarily attributed to U.S. tariff policy disruptions that paused direct import orders. The company responded with a 20% workforce reduction, production shifts from China, and price increases, projecting an improved second half with sales down high single digits and mid-to-high single-digit adjusted EBITDA margins. To bolster liquidity and address debt maturing in September 2026, Funko secured credit covenant waivers, engaged Moelis & Company for refinancing and strategic options, and filed for an At-The-Market (ATM) equity offering of up to $40 million, alongside a 'going concern' disclosure.

Analysis

Funko's second quarter 2025 performance was severely impacted by external trade policy, resulting in a 22% year-over-year revenue decline to $193.5 million and a negative adjusted EBITDA of $16.5 million, a stark reversal from a $27.9 million positive EBITDA in the prior year. The primary driver was a disruption in sales from a pause in direct import customer orders due to U.S. tariff uncertainty. This top-line pressure cascaded to gross margins, which contracted significantly to 32.1% from 42.0%, driven by shortfalls in minimum guaranteed royalties, tripled tariff costs, and inventory reserves, which more than offset a 350 basis point benefit from reduced discounting. In response, management has initiated a multi-faceted mitigation plan including a 20% workforce reduction, accelerating the shift of production out of China, and implementing price increases. Despite these measures, the company's financial position is stressed, evidenced by a 'going concern' disclosure in its 10-Q, total debt of $256.6 million against total liquidity of just $54.2 million, and the recent amendment to waive debt covenants for Q2 and Q3. To address this, Funko has engaged Moelis & Co. to advise on refinancing and strategic options and has filed for a $40 million At-The-Market (ATM) equity offering to bolster liquidity. The outlook for the second half of 2025 shows sequential improvement, with guidance for a high-single-digit sales decline and a return to positive mid-to-high single-digit adjusted EBITDA margins, supported by resilient point-of-sale (POS) data and strong international growth of 28% in Q2. However, this recovery narrative is unfolding amidst a search for a permanent CEO, adding a layer of execution uncertainty.

Key Decisions for Investors

• Investors must prioritize monitoring the company's progress in refinancing its $256.6 million debt maturing in September 2026, as the 'going concern' warning and engagement of strategic advisors underscore this as a critical near-term risk.
• The viability of Funko's recovery hinges on its operational execution; track Q3 and Q4 results for evidence that price increases are not harming resilient POS volumes and that adjusted EBITDA margins are recovering toward the guided mid-to-high single-digit range.
• Factor in the potential for near-term shareholder dilution and stock price pressure from the newly filed $40 million ATM equity offering, a necessary measure to improve the company's precarious liquidity position.
• The appointment of a new permanent CEO, expected by the end of Q3, represents a significant catalyst or risk, and their strategic plan will be crucial for navigating the company's turnaround.