• Net Sales: $247.7 million, up 3% year-over-year.
• Gross Margin: 42%.
• Adjusted EBITDA: $27.9 million.
• Adjusted Net Income: $5.6 million or $0.10 per diluted share.
• Direct-to-Consumer Sales Mix: 23% of gross sales, up from 18% in the previous year's Q2.
• SG&A Expenses: $77.9 million.
• Cash and Cash Equivalents: $41.6 million.
• Total Debt: $223.9 million, down from $246.4 million at the end of the first quarter.
• Total Company Liquidity: $101.6 million, up from $69.1 million last quarter.
• Net Inventory: $109 million, down from $112.3 million at March 31, 2024.
• Full Year 2024 Guidance: Net sales between $1.047 billion and $1.103 billion; Adjusted EBITDA between $65 million and $85 million.
• Q3 2024 Guidance: 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 $0.5 million and $3 million; Adjusted EBITDA between $21 million and $25 million.

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

Release Date: August 08, 2024

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

Positive Points

• Funko Inc (NASDAQ:FNKO) reported better-than-expected financial results for the second quarter, with net sales of $248 million, marking a 3% increase over the same quarter last year.
• The company achieved its first profitable quarter since Q3 2022, with a gross margin of 42% and adjusted EBITDA of $28 million, both exceeding guidance ranges.
• Sales of Bitty Pop, a new entry in the miniature collectible space, more than doubled compared to the same quarter last year, showcasing strong product momentum.
• The direct-to-consumer sales mix increased to 23% of gross sales in Q2, up from 18% in the previous year, representing a 33% growth in this channel.
• Funko Inc (NASDAQ:FNKO) successfully reduced its total debt from $246.4 million at the end of Q1 to $223.9 million by the end of Q2, improving its liquidity position to $101.6 million.

Negative Points

• The company faced challenges due to a weaker content slate, partly attributed to Hollywood strikes, impacting new entertainment releases.
• Approximately $9 million in net sales were pulled forward from Q3 into Q2 due to rising freight costs and container availability issues, which may affect future quarters.
• Despite strong performance, the company remains cautious about the uncertain economic environment, including interest rates, labor market, and consumer spending.
• Funko Inc (NASDAQ:FNKO) anticipates lower gross margins in Q3 due to higher freight costs, which could impact profitability.
• The company is still in the process of strategically pulling back from the mass channel in the US, which may affect sales growth in the short term.

Q & A Highlights

Q: Can you explain the significant upside on EBITDA for the quarter and what factors contributed to the $27 million result versus the $9 million to $15 million range? A: Yves Lependeven, Acting CFO, explained that the upside was due to higher net sales, with about $9 million pulled forward from Q3 due to rising freight costs and vessel space issues. Additionally, inventory reserve relief contributed approximately 2.5 points to gross margin favorability. These factors, along with controlled SG&A expenses, drove the EBITDA performance, though some elements like inventory reserve relief may not repeat in future quarters.

Q: Given the strong first half EBITDA, what would need to happen in Q4 to only generate $7 million to reach the low end of the $65 million guidance? A: Yves Lependeven noted that while they are confident in achieving their full-year guidance, the environment remains uncertain. The higher mix of direct-to-consumer sales and the weighting of sales into Q4, along with economic factors like interest rates and consumer spending, contribute to the cautious outlook.

Q: How are wholesale channel inventories positioned for the holiday season, and what feedback are you getting from retail partners? A: Yves Lependeven stated that retail partners' inventory levels are healthy, with 15 to 20 weeks of supply, which is ideal. The quality and levels of inventory are good, but the holiday season's success will depend on consumer behavior, which will be clearer in the next call.

Q: Cynthia, what have you learned since taking over as CEO, and are there areas with more opportunity for improvement? A: Cynthia Williams highlighted the passion and creativity of Funko's employees and the strong engagement from fans, particularly at events like San Diego Comic-Con. She believes that focusing on delivering high-quality, creative products will ensure the company's success.

Q: Can you discuss the drivers of strong growth in Europe and international markets compared to the US? A: Yves Lependeven explained that Europe saw 20% sales growth, driven by regions like Eastern Europe and the Middle East. The US market faced challenges due to strategic pullbacks in the mass channel and SKU reductions. Europe has been more successful in expanding evergreen content and distribution, lessons that are being applied to the US market.

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