Yahoo Finance Funko, Inc. (NASDAQ:FNKO) Q4 2023 Earnings Call Transcript
Funko, Inc. (NASDAQ:FNKO) Q4 2023 Earnings Call Transcript March 7, 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 2023 Fourth 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'll now turn the call over to Funko's Director of Investor Relations, Rob Cassidy. Please proceed.
Robert Cassidy: Hello, everyone. And thank you for joining us today to discuss Funko's 2023 fourth quarter financial results. On the call are Mike Lunsford, our Interim Chief Executive Officer; Steve Nave, the Company's Chief Financial Officer and Chief Operating Officer; and Yves LePendeven, our Deputy CFO. 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 2023 fourth quarter and full-year 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.
We have also posted supplemental financial information on the Investor Relations section of the company's website. I will now turn the call over to Mike Lunsford. Mike?
Michael Lunsford: Thanks, Rob. And good afternoon, everyone. I'll begin with a few overarching comments on the past year. My first comment is on the general business front. 2023 was transformative for Funko. We addressed significant existing operational issues and executed a comprehensive cost reduction plan. The plan included eliminating unprofitable product lines and SKUs, two rounds of workforce reductions, and aggressive reductions in our inventory levels, which I'll return to in a moment. The major elements of this transformation are now complete. My second comment is on the strategy front. Over the course of 2023, we grew our D2C business, which in turn helped us achieve consecutive quarterly increases in our gross margin.
Growing our D2C business remains a key goal for us. We have more control over our D2C business and believe we can grow it profitably. So we were pleased to see D2C sales in Q4 comprise 26% of our mix and increased nearly 30% over the same quarter last year. My third comment is on the product front. We expanded our offering with two important product launches. In early 2023, we entered the miniature collectibles market with the introduction of Bitty Pop!. And around the middle of the year, we launched Pop! Yourself online. Both products have been very well received by customers and were key contributors to our business in 2023. My fourth comment is on the operational front. We achieved another important goal, lowering the company's owned inventory levels.
At year-end, inventory was $119 million, which was down more than 50% from $246 million at the end of 2022. And for our larger retail partners who provide us with POS data, in in the channel at the end of 2023 was 32% lower than at the end of 2022 and at healthy levels relative to POS sales. Our growth in sales, improved gross margins, and the rightsizing of our cost structure culminated in a successful Q4. Specifically, Q4 net sales were $291 million, gross margin was 38%, and adjusted EBITDA was $23 million, all of which were at the upper end of our guidance range. Turning now to 2024, we expect 2024 full-year net sales to be comparable to down slightly from 2023. Regarding phasing of the quarters, we expect to achieve positive comps later in the year.
but for Q1 net sales to be lower than net sales in Q1 of last year. Our expectation is in part based on the following. First, we took deliberate action to manage down our inventory levels and we eliminated a significant number of unprofitable product lines and SKUs. Second, we are experiencing a softer content schedule primarily due to the recent Hollywood strikes. And third, we face uncertainty around shipping costs primarily due to current hostilities in the Red Sea. Importantly, we expect 2024 full-year adjusted EBITDA to be considerably higher than our 2023 full-year adjusted EBITDA. The higher profitability we expect in 2024 compared with 2023 is based on the actions we are taking to, among other things, further expand our D2C business and increase sales of Pop! Yourself and limited edition products, areas of our business where we have more control and that we believe we can grow profitably.
We believe that by focusing on these areas, we will gain operating leverage and a greater percentage of our sales will flow to the bottom line. In 2024 and beyond, our plan is to achieve long term profitable growth. We will pursue our previously communicated plan which centers around, focusing on our fans and unmatched brand; running the business with financial discipline and focusing on fewer products done extremely well; investing in areas we can control, measure and grow profitably; and keeping the flywheel turning where each action we take builds on the previous one, propelling positive momentum. We believe this strategy is paying dividends. One recent example is the substantial reduction we made in both inventory and product SKUs, which shows how we are removing complexity from our business by focusing on fewer products.
And another example is last month's sales event for our Jason Kelce Pop! figure. After a recent NFL playoff game, Jason Kelce's shirtless celebration in the stands went viral. We saw this as just the kind of event we could memorialize for our fans. Multiple internal teams collaborated to launch a Jason Kelce Pop! figure, demonstrating how we are focused on our fans, as well as our nimbleness and quickness to market. The limited edition product went from moment to market in 11 days, and our fans responded by making Jason Kelce one of our top-selling Funko.com items of all time. Finally, a comment on our leadership team and search for a new CEO. Earlier today, we announced that Steve Nave, Funko's CFO and COO, will resign effective March 15th, 2024.
Steve joined us a year ago to help with our cost reduction and operational improvement plan. He led our efforts to address our excess inventory and improve our Buckeye distribution center, negotiate lower shipping costs, rightsize our cost structure, and manage our liquidity and improve our free cash flow. On behalf of the company, I want to extend our best wishes to Steve and thank him for his contributions. Yves LePendeven, our Deputy CFO and Senior Finance Executive at Funko for the last four years, will serve as acting CFO beginning March 15th. I have worked with Yves for several years now as both a board member and as the interim CEO. I have complete faith in Yves to lead our finance and accounting functions and to be our primary face to you, our analysts and investors.
I believe you will find him to be diligent and extremely knowledgeable, not just about our financials, but also our business. Turning to the CEO search, as many of you know, I took the role of interim CEO last summer with a mandate from the board to set Funko on a solid foundation, so that a new CEO will be able to focus on growing the company. We believe we now have in place a strong, lean, aligned senior leadership team to support the arrival of a new CEO and the growth of Funko. We expect to announce our permanent CEO in Q2 of this year. I will now 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 fourth quarter, total net sales were $291.2 million, which included wholesale channel sales of $216.7 million and direct-to-consumer sales of $74.5 million. Direct-to-consumer sales in Q4 represented 26% of net sales, up from 17% in last year's Q4. Sales of Pop! Yourself were a key contributor to our Q4 direct-to-consumer results. Gross profit was $109.4 million and gross margin was 37.6%, which was well above our Q3 gross margin of 33.2%. The increase in gross margin was driven in part by growth in our higher margin direct-to-consumer sales and lower freight costs. SG&A expenses of $97.4 million included non-recurring charges of $8 million, primarily related to fair market value adjustments for assets held for sale.
As a percentage of net sales, SG&A expenses were significantly lower in the second half of 2023 compared with the first half due to the cost reductions we implemented during the year. SG&A expenses in the second half of 2023 declined to 32% of net sales from 38% first half. Adjusted net income was $0.5 million or $0.01 per diluted share, which was within our guidance range for the quarter. And finally, adjusted EBITDA was $23.5 million, which was at the upper end of our guidance range. Turning to our balance sheet. At December 31st, we had cash and cash equivalents of $36.5 million, which is after we paid down $26.2 million of debt in the fourth quarter. Our total debt was approximately $273.6 million, which includes the amount outstanding under the company's term loan facility, net of unamortized discounts, the balance on our revolving line of credit, and our equipment finance loan.
In the first quarter of this year, we also announced a transaction related to our games business, from which we used the proceeds to further reduce our debt. And inventory was $119.5 million, which is less than half of the inventory we had at the end of last year and more than $40 million lower than our balance at the end of Q3. Turning now to our outlook. For the 2024 full year, we expect net sales of between $1.047 billion and $1.103 billion. As Mike mentioned, while we expect net sales in Q1 of 2024 to be lower than net sales in Q1 of last year, we expect to achieve positive comps later in the year. Adjusted EBITDA of between $65 million and $85 million. The increase over last year's adjusted EBITDA is expected to be driven by growth in our higher margin product lines and our direct-to-consumer business, as well as the annualization of cost reduction measures implemented last year.
For the 2024 first quarter, our guidance is as follows. Net sales of between $214 million and $227 million. Gross margin down slightly from Q4, primarily due to higher freight costs. SG&A expense in dollars decreasing from Q4. Adjusted net loss between $17 million or $0.32 per share and $13 million or $0.24 per share. And finally, we expect adjusted EBITDA of between $0 and $5 million. We expect our financial results to improve in the second half of 2024 due to the natural seasonality of our business, as well as an expected easing of the impact of the Hollywood strikes and the recent shipping disruptions in the Red Sea, and the actions we are taking to grow our direct-to-consumer channel, Pop! Yourself, and other areas of our business. Mike, that's it for our financial results.
Back over to you.
Yves LePendeven : Thanks, Yves. In summary, we reported a solid overall financial performance in Q4. We significantly reduced our inventory levels and used a portion of our cash to pay down debt. We have completed the major elements of our 2023 cost reduction and operational improvement plan, and our outlook for 2024 reflects a renewed focus on our core business, especially those areas where we have greater control and believe we can grow profitably. Before we open up the call for questions, Steve has a couple of comments he'd like to share about his resignation. Steve?
Steve Nave : Thanks, Mike. Hey, everyone. I'll cut to the chase. My decision to resign was influenced by a few factors. First, we largely completed and accomplished the job I was brought in for, which included fixing operational issues, improving our financial profile, rightsizing inventory, managing liquidity, and improving our free cash flow. Second, I believe Yves is a strong financial executive and is highly qualified to take over the CFO role. As a matter of fact, when we began succession planning last fall, we promoted Yves to Deputy CFO, as you know. With the operational improvement plan now complete, my role would focus more on the CFO side, a role that I believe Yves is eminently qualified to assume. And third, as some of you know, I live in Minnesota.
And the weekly commute to the Seattle area has really begun to wear on me, my family, and the company. Taken together, this is a good time for me to exit and I take great comfort in knowing that the company is in significantly better financial shape today than this time last year. Yves was the primary architect of our 2024 plan, so I'm confident the baton being passed to him will be seamless to you. Look, I've thoroughly enjoyed my time at Funko, especially the people I've met and worked with. There are very talented and dedicated bunch of capable people doing amazing things. I've enjoyed interacting with many of you in the investment community and keeping you apprised of our progress. It's been an interesting and fun ride. I'm proud of what we've accomplished this past year and I look forward to watching Funko's continued success.
I will continue to bleed Funko blue until the day I die. I'll leave it there for now. With that, I'll turn the call back over to the operator so we can take your questions. Operator?
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