• Net Sales: $292.8 million, down compared to Q3 of last year.
• Gross Margin: 40.9%, driven by lower than anticipated inventory reserves.
• Adjusted EBITDA: $31 million, above guidance range.
• Adjusted Net Income: $8 million or 14 per diluted share, above guidance range.
• SG&A Expenses: $92.7 million, within guidance range.
• Cash and Cash Equivalents: $28.5 million as of September 30th.
• Net Inventory: $118.6 million, up from $109 million at June 30th.
• Total Debt: $223.4 million, slightly down from the previous quarter.
• Total Company Liquidity: $83.5 million, decreased from $101.6 million last quarter.
• Full Year Net Sales Outlook: Lowered to $1.037 billion to $1.05 billion.
• Full Year Adjusted EBITDA Outlook: Raised to $85 million to $90 million.
• Q4 Net Sales Guidance: Between $280 million and $294 million.
• Q4 Gross Margin Guidance: Between 38% and 40%.
• Q4 SG&A Expense Guidance: $93 million to $99 million.
• Q4 Adjusted Net Income Guidance: Between a loss of $3 million and income of $1 million.
• Q4 Adjusted EBITDA Guidance: Between $17 million and $22 million.

• Warning! GuruFocus has detected 6 Warning Sign with FNKO.

Release Date: November 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Funko Inc (NASDAQ:FNKO) reported a solid overall financial performance for the quarter, with net sales of $293 million, which was at the high end of their guidance range.
• The company achieved a gross margin of 41% and adjusted EBITA of $31 million, both exceeding the top end of their guidance range.
• Funko Inc (NASDAQ:FNKO) raised the range for adjusted EBITA to $85 million to $90 million for the full year, indicating improved profitability.
• The company expanded its collaboration with the NFL, allowing fans to customize 'Pop Yourself' with NFL team logos, which exceeded launch expectations.
• Funko Inc (NASDAQ:FNKO) has diversified its supply base, with only about a third of its products manufactured in China, reducing potential tariff impacts.

Negative Points

• Net sales guidance for the full year was lowered to $1.037 billion to $1.05 billion due to cautious consumer spending and wholesale customer caution.
• Direct to consumer sales were down 7% year over year, indicating challenges in this sales channel.
• The company anticipates a higher percentage of sales to occur during promotional periods, which may impact gross margins.
• Funko Inc (NASDAQ:FNKO) experienced a decrease in total company liquidity, dropping from $101.6 million to $83.5 million.
• There is concern about potential capacity challenges if tariffs are enacted, which could lead to a rush to ship products into the U.S.

Q & A Highlights

Q: Are you seeing any trends in point-of-sale (POS) data that justify the cautiousness of wholesalers, and how is direct-to-consumer (DTC) responding to promotional activities? A: Yves Lependeven, CFO: Globally, POS sales were down single digits, with the US down low double digits, while EMEA showed double-digit growth. Consumers seem to be waiting for promotional periods, similar to what we observed in DTC. We expect a significant portion of Q4 sales during Black Friday and Cyber Monday, which will likely result in lower gross margins due to increased promotions.

Q: How are potential tariffs under the new administration expected to impact Funko, and what is the current manufacturing mix? A: Cynthia Williams, CEO: About a third of our products are manufactured in China, with less than 10% of our Loungefly business already tariffed. We are diversifying our supply base to mitigate risks. If tariffs are enacted, there might be a rush to ship products to the US, which could strain capacity, although 70% of our freight rates are under contract.

Q: Can you elaborate on the drivers of higher margins in Q3 and the outlook for Q4? A: Yves Lependeven, CFO: Q3 margins benefited from lower inventory reserves and freight costs. In Q4, we expect more discounting during promotional periods, which will slightly erode gross margins. Increased marketing spend will also impact SG&A, but overall, we anticipate a solid Q4 performance.

Q: How is Funko positioned relative to Fanatics, and do you see them as a competitor or partner? A: Cynthia Williams, CEO: We view Fanatics as a partner. While there are some product overlaps, we collaborate on items like NFL Santas and Loungefly bags. Our products complement their offerings, especially with items like clear stadium bags popular among NFL fans.

Q: What are the expected cost savings from headcount reductions, and are there plans for further cost improvements or investments? A: Yves Lependeven, CFO: We've annualized most cost savings from last year's reductions. We are reallocating savings to marketing and continue to find operational efficiencies. Cynthia Williams, CEO: We are backfilling key roles and investing in capabilities for growth, such as a customer data platform for DTC business and brand marketing expertise.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.