Yahoo Finance Funko, Inc. (NASDAQ:FNKO) Q1 2024 Earnings Call Transcript
Funko, Inc. (NASDAQ:FNKO) Q1 2024 Earnings Call Transcript May 9, 2024
Funko, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Funko's 2024 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at the time. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization from the company. As a reminder, this call is being recorded. I would now turn the call over to Funko's, Director of Investor Relations, Rob Jaffe. Please proceed.
Rob Jaffe: Hello everyone, and thank you for joining us today to discuss Funko's 2024 first quarter financial results. On the call are Michael Lunsford, our Interim Chief Executive Officer; Yves LePendeven, our acting CFO; and Cynthia Williams, our Newly Appointed CEO. 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. 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 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 recent SEC reports. In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with US 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 first 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. I will now turn the call over to Mike Lunsford.
Mike?
Michael Lunsford: Thanks, Rob and good afternoon, everyone. I'll begin with the announcement made earlier today that our Board of Directors has appointed Cynthia Williams, as Funko's next CEO. Cynthia's experience across the consumer products, gaming and e-commerce industries, combined with the growth she spearheaded while at Hasbro, Microsoft and Amazon made her the clear choice to be our next CEO. We welcome Cynthia to the Funko family. I can tell you Cynthia is eager to get started and I'm pretty eager for it to get started. She is here with us today and will make a few introductory comments a little later in our presentation. Turning to our financial performance, we reported a solid overall first quarter. Net sales of almost $216 million were within our guidance range albeit at the lower end.
Sales of some lower-margin products shifted to Q2 from Q1. Otherwise, our net sales for the quarter would have been close to the midpoint of our expectations. Gross margin of 40% and adjusted EBITDA of $10 million were both well above our expectations. One key driver for the increased gross margin was higher than expected margins on sales in the value channel, which is the result of the processes we put in place to improve inventory management. Another key driver was lower than anticipated freight costs. Operationally, we continued to make progress reducing our inventory levels and paying down debt. At the end of Q1, inventory was $112 million, down from $119 million at December 31, 2023 and total debt was down $27 million. This is on top of the progress we made last year reducing inventory levels by more than half.
What a difference a year makes. Since Q1 of 2023, we've made tremendous progress reducing inventory levels, lowering fulfillment costs and improving service levels. And just last month, almost two years to the day of opening our new warehouse in Arizona, we hit the milestone of over $100 million units shipped. Turning now to our outlook. We are reiterating our full year 2024 guidance. As expected, a lack of new entertainment content, primarily due to the recent Hollywood strikes impacted our Q1 top line. We expect the content schedule remaining soft into Q2 and then strengthening in the second half of the year. With regard to freight, our original forecast assumed a substantial increase in shipping costs due to conflicts in the Red Sea. Freight costs in Q1 were lower than we anticipated and have stabilized.
Nonetheless, our logistics team continues to look for ways to manage and mitigate fluctuations in these costs. Turning briefly to a couple of recent product highlights and how they relate to our growth plan. With regard to focusing on our fans and unmatched brand, on our last call, we spotlighted our pre-sale capabilities with the limited edition Jason Kelce Pop! figure. Building on that success, we recently launched several exciting collaborations, including the DunKings and Project Fred, Big Boy, Coke and Sprite campaigns. And earlier today, we launched our first edition of the Jumbo Chan line. This new collectible line initially features our nostalgic and iconic Freddy Funko in a new anime stylization. All of these exclusive drops of premium priced limited edition collectible items have all sold out and have been creating brand heat with our core customers.
To focus on fewer products done extremely well, we are emphasizing evergreen and replenishment sales of Bitty Pop! to drive SKU efficiencies and produce characters that consistently resonate with customers. And Pop! Yourself as a great example of investing in areas we have better control over and expect to be able to measure and grow profitably. We continue to add options and accessories to our Pop! Yourself line. In Q1 Pop! Yourself sold especially well as a Valentine's Day gift and the team is gearing up for the upcoming Mother's Day and Father's Day holidays. In April we launched a Pop! Yourself two pack, strategically in time for the upcoming wedding season. Since launch two-packs have generated more revenue than the singles. What we thought was going to be a nice addition to the line has performed well above our expectations.
And as a sign of the product's growing consumer awareness, Pop! Yourself was featured in a New York Times round up of best wedding guests. In combination, these highlights demonstrate how we keep the flywheel turning where each action we take builds on the previous one propelling positive momentum. With that, I'll now turn it over to Yves to take you through the financials. Yves?
Yves LePendeven: Thanks Mike. Hey, everyone. Thanks for joining us today. For the first quarter, total net sales were $215.7 million. Direct-to-consumer sales mix in Q1 was 23% of our gross sales, up from 19% in last year's Q1. This represents 5% direct-to-consumer sales growth, which we achieved despite a lack of new entertainment releases due primarily to the Hollywood strikes. As we said previously, a key element of our strategy is to continue to grow our direct-to-consumer business, which in turn helps our gross margin. Gross profit was $86.3 million and gross margin was 40%, which was well above our guidance and significantly higher than our gross margin in any quarter in 2023. SG&A expenses of 85.6 million included nonrecurring charges of $5.1 million, primarily related to severance and non-cash charges associated with exiting certain business lines.
Adjusted net loss was $9.2 million or $0.17 per share which was better than our guidance range for the quarter. And finally, adjusted EBITDA was 9.6 million, which was well above our guidance range. Turning to our balance sheet. At March 31, we had cash and cash equivalents of 26.1 million, which is after we paid down 27.4 million of debt in the first quarter. Our total debt was approximately $246.4 million, which includes the amount outstanding under the Company's term loan facility net of unamortized discounts balance on our revolving line of credit and our equipment finance loan. Total company liquidity was $69.1 million and inventory was $112.3 million, which was down from a $119.2 million at December 31, 2023. Turning to our outlook. We are reiterating our 2024 full year expectations, which are net sales of between 1.047 billion and $1.103 billion and adjusted EBITDA of between $65 million and $85 million.
For the 2024 second quarter, our guidance is as follows. Net sales of between $225 million and $240 million, gross margin of approximately 38% to 40%, SG&A expense of 80 million to 85 million, adjusted net loss between $8 million or $0.15 per share and $4 million or $0.08 per share. Finally, we expect adjusted EBITDA of between $9 million dollars and $15 million. We expect our financial results to be stronger in the second half of 2024 than in the first half due to the natural seasonality of our business, as well as an expected easing of the impact of the Hollywood strikes. Mike, that's it for our financial results. Back over to you.
Michael Lunsford: Thanks Steve. In summary, we reported a solid overall financial performance in Q1, we continued to make progress reducing our inventory levels and paying down debt. Our outlook for 2024 reflects a renewed focus on our core business especially those areas we have greater control over and believe we can grow profitably. And we announced our new CEO, Cynthia Williams who is expected to start on May 20th. With that and before we open up the call for questions, I'll turn the call over to Cynthia who has comments you'd like to share. Cynthia?
Cynthia Williams: Thanks Mike, and hi everyone. I'm Cynthia Williams. And as you know, I'll be taking over as Funko's permanent CEO later this month. I thought, it would be helpful to introduce myself before I began immersing myself in the company and my new role. I'd like to start by saying I am incredibly excited about joining Funko. From my perspective, the company has lots of potential. Funko has a long history and as a leader in the collectibles space has several global brands, innovative and unique products and a passionate and loyal customer base system. But most exciting to me as a multiple opportunities for substantial growth, especially in the areas Mike discussed on-demand music and sports as well as the company's direct-to-consumer channel and international growth.
I believe Mike and the team have done an excellent job of refocusing the company from its core assets, reducing cost, improving the profitability, and creating a solid foundation upon, which we can scale the company in a profitable way. As you probably saw in the press release, I have a deep background with consumer products, gaming and e-commerce, as well as extensive experience growing brands to a global consumer base. Having worked in adjacent industries and having had previous dealings with some of Funko's key customers and strategic licensing partners, I am ready to hit the ground running, my first priority will be to get to know the management team and the employees at our various locations and do a deep dive to learn more about Funko's capabilities.
In short order, I also intend to meet with our strategic partners and key customers. With that brief introduction, we'll open the call for questions. Operator?
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