Funko Inc (FNKO) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to Funko's conference call to discuss financial results for the first quarter 2018.

(Operator Instructions) As a reminder, this call is being recorded.

On the call today from management, are Brian Mariotti, Chief Executive Officer; and Russell Nickel, Chief Financial Officer.

I will turn the call over to Mr. Nickel to get started.

Please go ahead, sir.

Thank you, and good afternoon.

A press release covering the company's first quarter 2018 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website.

Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These may include statements regarding our business goals, plans, abilities and opportunities, industry and customer trends, growth, momentum and investment initiatives, consumer engagement and brand awareness, acquisitions and related expenses and anticipated financial performance.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factor section of our Form 10-K for the fiscal year 2017 and our other filings with the SEC.

Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligations to update them.

Please also note, that we will be referring to certain non-GAAP financial measures on today's call, such as EBITDA, adjusted EBITDA, adjusted pro forma net income, adjusted pro forma earnings per diluted share and net debt, which we believe may be important to investors to assess our operating performance.

Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and in the Investor Relations section on our website at funko.com.

I will now turn the call over to Brian.

Thanks, and good afternoon, everyone.

We had a great first quarter and continue to deliver strong growth and consistent results across the business.

Sales in the quarter increased 39% to $137 million.

Gross margin increased 210 basis points to 37.4%, and adjusted EBITDA increased 29% to $17 million.

At a time when traditional toy companies and retailers are struggling, we believe our continued strong and consistent results are a testament to our differentiated business and operating model.

Funko is not like any other company in the marketplace.

We sell a broad array of licensed consumer products and collectibles that appeal to women and men, girls and boys.

Our products are fun, whimsical and carry a stylized look that is distinct to Funko.

We have over 1,000 licensed properties from which developed products against, and we drive demand through a steady stream of new products.

We can develop and begin preselling new products in a matter of hours and can ship from our factories in as little as 70 days.

Our products are channel-agnostic and sell across a wide variety of retailers and channels around the world.

Our business is not hit-driven but a balance of mixed, evergreen back catalog content and newly released content.

Our fan base is large, highly engaged and follow us closely across our social media platforms, and our Pop!

brand carries strong global recognition, and we believe it has become synonymous with the pop culture industry.

As we said, consumers love our stylized designs, unique products and affordable prices.

Licensors trust us to connect their brands with fans around the world.

And retailers look to us to offer a growing assortment of curated products that resonate with consumers.

This has given us the opportunity to grow the business with consumers, licensors and retailers, and we are leveraging our success into an expanding assortment of products and distribution.

This is our growth strategy, and it is how we are becoming the go-to partner for consumers, retailers and licensors for pop culture products.

We believe our first quarter results demonstrate the power of our model and that we are executing against our strategy.

On the content side, we are leveraging our success in the new licenses, properties and business opportunities.

In the first quarter, we increased the active properties sold by nearly 9%, and our sales per active property increased by 28%.

We are growing the breadth and the depth of our product offering by leveraging our portfolio of licenses and properties across an expanding base of products, categories and distribution.

In the first quarter of 2018, no single property accounted for more than 10% of our quarterly sales, and sales were strong against key geographies, categories and channels and balanced between evergreen back catalog content and newly released content across movies, television, video games, music and sports.

Some of the top-performing properties in the first quarter of 2018 included: Avengers: Infinity War, Rick and Morty, Star Wars: Classic, Game of Thrones, Harry Potter, Stranger Things, Five Nights at Freddy's and Overwatch.

With the integration of Funko Animation Studios and the continued development of our digital platform, we are combining digital and physical assets to drive interactive experiences for consumers and are working with our retail partners to help them do the same.

Both of our retail and licensing partners recognize the benefit of showcasing our products through video content, and we expect to do more of this going forward, especially as our preorders often increase when we link video with a new product offering.

In 2017, our video shorts generated over 40 million views worldwide.

By comparison, our video shorts have already generated over 50 million views around the world in 2018.

We have focused on embedding content and a Funko-themed environment into our websites of our key retail partners.

As a result, in the first quarter, we saw a 95% increase in sales to third-party e-commerce retailers, and the e-commerce channel remains a significant opportunity going forward.

On the product side, we are expanding our product offering across different categories and leveraging the Pop!

brand and the Loungefly acquisition.

The Loungefly products extend our addressable market into bags and fashion accessories category and allow us to offer a broader assortment of licensed pop culture merchandise.

At the same time, we are also leveraging the strength of the Pop!

brand to extend our products into new departments and gain additional shelf space in areas such as apparel, accessories and homeware.

For instance, in the first quarter, we launched an apparel program that combines a Pop!

T-shirt with a Pop!

figure.

The program was successful, and it is leading to other opportunities to extend the Pop!

brand into other products and categories.

We also plan to extend Pop!

into the bags and the fashion accessories category later this fall.

In the first quarter, figures, apparel and accessories all experienced very strong growth, and our Pop!

Vinyl figures alone increased by 59%.

We launched Pop!

8 years ago.

It is now a strong global brand, and we believe it has become synonymous with the pop culture industry.

This, in turn, continues to open up new opportunities for licensors and retailers around the globe.

On the distribution side, we continue to expand our geographic footprint, grow our shelf space with existing retailers and increase our presence online.

In the first quarter, global sales were very strong, with U.S. up 16% and the rest of the world up 114%.

Retailers are looking for ways to connect with the growing base of pop culture consumers and pick up market share from the Toys "R" Us closings.

We are working closer than ever with our retail partners to continue growing and executing the business.

Over the next several months, we will be expanding our presence within our remaining mass-channel retailers.

These new programs will be a bigger and better assortment of Funko products to create a more compelling and complete pop culture statement.

As a result, we expect to increase our shelf space with select retail partners later this year and remain excited about the continued growth opportunities in our U.S. business.

As we have discussed, our business is very diverse, our products are channel-agnostic, as we do not expect the Toys "R" Us store closings to change our sales outlook in 2018.

With the globalization of content and the worldwide recognition of our brand and products, we are seeing significant demand for our products around the world.

Through the launch of our direct distribution model in Europe, we have unlocked demand and have significantly grown our business across EMEA.

We believe further investments this year in key areas such as sales, operations, systems, logistics will provide the infrastructure to continue growing Europe and other international markets in the years ahead.

As we discussed on the last earnings call, in the second quarter, we are investing in a new ERP system and starting up a new 3PL operation in Europe that will -- that, we believe, will improve our visibility and scale this business going forward.

In summary, we are very pleased with our first quarter results, the underlining trends in our business and the significant growth opportunities that lie ahead.

We are executing our strategic initiatives in line with our plans and delivering against our financial and operating targets.

Finally, and most importantly, I'd like to thank all of our team members, licensors and retail partners around the world for their continued support, and a special thanks to our amazing, passionate and engaging fan base.

It is you that drive our business every day, and we are fortunate to have such a passionate group of supporters.

I will now turn the call over to Russell to take you through the first quarter financial highlights in more detail.

Thanks, Brian, and good afternoon, everyone.

Our first results were strong across the board.

Net sales in the quarter increased 38.5% to $137.2 million and were driven primarily by the continued expansion of products and properties in our portfolio.

In the quarter, the number of active properties increased 8.6% to 454, and net sales per active property increased 27.5% to $302,000.

On a geographical basis, net sales in the United States increased 16.3% to $88.9 million, and net sales to all foreign countries increased 113.6% to $48.4 million.

On a product category basis, net sales of figures increased 39.2% to $115.6 million, and net sales of other products such as bags, accessories, apparel and homewares increased 35% to $21.6 million.

As Brian discussed, the Pop!

brand continues to gain momentum across the globe, and sales of Pop!

Vinyl figures were very strong in the first quarter, increasing 59% on a worldwide basis.

As we expected, our first quarter results benefited from pull forward of European business related to the shipping restraints we are expecting in the second quarter as a result of the scheduled ERP and 3PL implementations.

It should also be noted that we did ship products to Toys "R" Us in the quarter prior to the bankruptcy filing, but ultimately, did not end up recognizing any revenue on those shipments, given the timing of the filing before the quarter ended.

Gross margin, which excludes depreciation and amortization, increased 210 basis points to 37.4%.

Included in cost of sales and gross margin was $1.8 million of costs related to Toys "R" Us shipments in the first quarter, for which no revenue was recognized.

Apart from the impact of those Toys "R" Us costs, our first quarter gross margin was in line with our internal expectations.

Also, impacting the year-over-year gross margin comparison was $1.5 million of inventory step-up costs in the first quarter of 2017 that were related to the Underground Toys acquisition.

In the quarter, selling, general and administrative expenses increased 38.7% to $34.8 million.

The majority of the increase was driven by growth in the business as well as incremental investments associated with strategic initiatives, including our direct distribution model in Europe and other international markets, our Loungefly operations and Funko Animation Studios.

Looking at the company as a whole, the biggest areas of increase were personnel expenses, which increased $7.9 million and were driven by the build-out of our sales, operating and administrative teams worldwide and facilities and rent, which increased $1.6 million, primarily from new facilities in Europe at Loungefly and the overall growth in the business.

Depreciation and amortization expense increased 38.1% to $9.3 million.

The majority of the $2.6 million increase was from higher depreciation on mold and tooling costs as we continue to expand our product offerings.

Net interest expense decreased 15.6% to $5.9 million from $7 million in the first quarter of 2017 due to our lower debt levels.

As a result of these factors, adjusted pro forma net income was $1.7 million, adjusted pro forma earnings per diluted share was $0.03, and adjusted EBITDA was $17.5 million in the first quarter.

Touching on a few balance sheet highlights.

We ended the first quarter with net debt of $235.2 million.

Inventory was $74 million versus $79 million at year-end 2017 and $52.8 million on March 31, 2017.

As we discussed on our last call, the fast fashion nature of our business and the shift to a more just-in-time inventory model by some of our larger retailers has shifted some inventory burden onto our balance sheet.

We are working with our larger retail partners to improve in-stock and inventory productivity at levels at retail and investing in systems and tools that we believe will help us to improve our inventory turns over time.

Turning to our 2018 outlook.

We are reiterating our guidance as follows: net sales of $595 million to $615 million; adjusted EBITDA of $100 million to $110 million; and adjusted pro forma earnings per diluted share of $0.60 to $0.71, which assumes a blended corporate tax rate of 25% and a weighted average diluted share count of $51.1 million.

As Brian indicated, at a time when other traditional toy companies are struggling, we are reiterating our full year outlook and feel very good about the underlying trends in our business.

Looking at the quarterly sales progression, we would expect our year-over-year sales growth to decelerate on a sequential basis as the year progresses.

The biggest factors influencing this and potentially creating some modest sales shifts between quarters are: the planned ERP and 3PL implementations in Europe; reallocation of the Toys "R" Us business; the transition and expansion of shelf space at our remaining mass retailers; and difficult comparisons in the back half of the year with the ramp of Underground Toys and Loungefly in 2017.

As Brian mentioned, we see significant long-term growth opportunities for the business and will continue investing in key areas to drive long-term growth.

We would expect the rate of investments to decelerate as the year progresses and be in a position to begin leveraging operating expenses late this year and into next year.

With that said, I would now like to turn the call back over to the operator to start the Q&A sessions.

(Operator Instructions) Our first question is coming from the line of Stephanie Wissink with Jefferies.

I have a 2-part question.

The first is just on the inventory.

I think, roughly, you gave us some detail on the shift of carriage from the retailer to you, the vendor.

So can you talk about that 40-ish percent increase?

Maybe break it down by type of inventory or where it's located around the world, just to get a bit more comfort with that level?

And then secondly, I'm intrigued by this idea of getting to a point of leverage in the P&L.

I'm wondering if you can walk us through where you expect to lever first, if it's in some of the gross profit areas, or if it's in more of the fixed G&A areas?

Yes, absolutely.

So on the inventory levels, as we said, we are seeing some of the shift from the retailers to -- onto our balance sheet.

That is primarily happening in the U.S. But we're also seeing a build in inventory, given the 3PL, the move to the 3PL, as well as the strong demand in Europe.

So you're seeing a larger increase in that inventory levels over time -- inventory levels in Europe.

Again, to fulfill that, the pent-up demand that we're unlocking with that acquisition in our operations over there.

We are, as with the shift here domestically, as retailers, are shifting some of that burden onto our balance sheet.

We are continually reevaluating our processes as well as tools and systems to basically work to improve our inventory turns over time.

So we do think we'll see some improvement in turns over time.

But we're working through that, and we feel comfortable with our inventory levels at this time.

On the leveraging of the SG&A, we will largely begin to see that in the -- on the SG&A front -- or the leveraging of operating expenses, we'll see that on the SG&A front more so than on the gross margin.

As we've said in the past, we really expect to see a gross margin of overall of about 39%.

The gross margin in the first quarter was impacted, obviously, by the expenses or the cost of goods sold to recognize on the shipments to Toys "R" Us where we recognized -- where we didn't recognize any revenue.

Absent that, our gross margins would have been more in line with the -- with our internal targets.

The next question is coming from the line of Erinn Murphy with Piper Jaffray.

A couple of questions for me.

I guess, last quarter, we had talked a little bit about some of the destocking we've seen at Walmart, been in stores recently.

It seems like some of the product is coming back.

But the space is still not ideal relative to what we're seeing from some of your other accounts.

So just curious on, kind of, the transition or the progress there, and what the opportunity is with this account longer term?

Thanks, Erinn.

Hey, it's Brian.

So with Walmart, we're definitely in a transition period.

We feel that there is a very large opportunity, as we segue from toys into the DVD entertainment section.

That's going to happen in Q3, late Q3 and early Q4.

So we're basically migrating from one area of the store to the other.

We think, ultimately, this is going to lead for a strong late part of the year in '18 and a very, very strong part of '19.

And this really goes to what we built at Target very similarly, where the additional space allows us to broaden the products mix, to really curate the space more like a pop culture, basically stores within a store.

And we're excited about that.

But yes, that's what -- I think that's what you're seeing right now at Walmart.

Okay.

So just to clarify with that.

So if I look at some of the Walmart, we've been in recently, it's kind of a 4-foot space.

So as you move to more of the positioning you have at Target in the DVD section, that, effectively, permits you to be a much long -- bigger brand, whether it's 8 feet over time or even greater.

Is that how we should think about it as incremental space and just better potential for just footfall?

I would agree with all that.

I mean, obviously, we're still working through the logistics and everything.

But I do see upside.

We'll leave it at upside.

So...

Okay.

And then, I guess, my -- second question I have is just on the ERP implementation in Europe, I guess, first, for Russell, what was the dollar amount, or how do we think about the timing shift of revenue that benefited in Q1 that you pulled forward and out of Q2?

And then the second question, more strategically, where are we at in the rollout currently?

When is -- when should we be on with the new ERP?

Is there a testing phase?

Are we already there?

Just curious on what's happening thus far in the second quarter.

Yes, absolutely, Erinn.

So obviously, with the strong demand that we're seeing in Europe, throughout, it's exactly - it's a little hard to quantify exactly how much of that revenue we did pull forward.

Our estimates are, it's somewhere between $3 million to $5 million.

But again, we're seeing really strong demand overall, and we're anticipating, again, just that's a little bit of a slowdown in the second quarter of shipments out there, given both the 3PL and the ERP.

And as it relates to timing, we're really upgrading their ERP.

When we acquired them, they were on a very rudimentary system.

We're bringing them online to a system more akin to what we have.

We're in the process right now of testing it, and we are scheduled to go live later this quarter, which is, again, is why we're really trying to work with those retailers to pull that revenue from Q2 into Q1.

Okay.

And then just last clarification, I guess, Russell, for you as well.

On the gross margin, I know Q1's rate is not sustainable, given some of the things you talked about lapping last year, Toys "R" Us.

But we should still think about this year as being around 39%?

I know that's your long term, but just curious if that's the still, kind of, the way we should think about this year.

So that is exactly where we should be thinking or how we should be thinking about 2018.

The next question is coming from the line of Michael Ng with Goldman Sachs.

It sounds like Pop!

momentum is accelerating with sales up 59% year-over-year worldwide.

I was wondering if you could just parse it out a little bit.

How much was the U.S. up versus international?

And also, are you able to talk about what you think -- how much of that momentum came from new doors and customers versus just existing retailers expanding shelf space?

Great question, Mike.

I mean, I can talk more toward the momentum of Pop!

for -- in the 59% growth.

I mean, first of all, Pop!

is, for a lack of a better word, we continue to say, our iPhone.

And what it's been able to do for us is open doors.

And if you look at Europe as a whole, Europe is about 2 to 3 years behind the progress we have made in bringing our sale vision to North American and the idea of pop culture store within a stores.

So what -- how it usually see happens is, Pop!

is the key, the first building block, the first part of the foundation that gets us into a new retailer, whether it be a Fnac or a Carrefour in Europe, we set that with Pop!.

Then the retailer looks at the velocity and the sales generated within that new product category for them.

And that usually leads to incremental sales and incremental space.

We take that space, and we leverage it around the Mystery Minis and the Dorbz and the rock candy and the additional categories, accessories, apparel and bags.

So that's, kind of, why you're still seeing a significant growth in Pop!.

As we continue to grow rest of the world, I think, we're at, what, 114% for ROW.

In Q1, Pop!

is paving the way.

So we're super excited about that.

And as far as the breakdown is concerned, I think we were right around about 20...

So -- no.

So as it relates to the momentum of Pop!

again, we launched Pop!

10 years -- 8 years ago in 2010.

In the U.S. it's our most matured market.

But we're seeing growth of upwards of almost 20% year-over-year in the first quarter.

And then we're seeing really strong growth, as Brian said, as we continue to leverage Pop!

to penetrate those new markets in the international.

Great.

That's very helpful.

And just one other question.

Rick and Morty just received a 70-episode renewal.

Since you have the Master Toys license, can you talk about whether or not your rights extend through the end of this renewal?

And then lastly, can you comment on any opportunities that you might see in securing a collectibles license for Fortnite or any other properties that you may be excited about?

Boy, I've never heard of Fornite at all.

Is that a newer game?

I'm kidding.

I'm going to be as vague as I possibly can.

We -- I think we have some exciting licensing opportunities that we will announce in the very short future.

I'll just leave it at that.

Rick and Morty, 70 episodes, how quick we get them out?

That's all I'm talking about.

We do have a plan in place to certainly continue growing the Rick and Morty footprint, and we're going to take that all the way into '19 when we believe there's a good chance that the new content starting and going to come out.

So super excited to hear that was done.

Obviously, we've had some inside information on that, and we're very excited about that as well.

We believe that we're going to be able to continue to extend our licenses with them.

We -- again, we've never lost a material license in the 13 years we've run the company.

We are -- we think in great standing with Cartoon Network, with Rick and Morty.

So -- and we just add them out to our headquarters.

So I think all of us are aligned on what the future means for that great show.

And I think as we continue to expand, I think you're going to see accessories, bags and more apparel with Rick and Morty as well further cementing our position as a one-stop solution for everything that is Rick and Morty.

Our next question is coming from the line of Rafe Jadrosich with Bank of America Merrill Lynch.

Russell, I was wondering, can you break out the organic growth -- revenue growth in the quarter?

If you exclude Underground Toys and Loungefly, what was the organic growth?

Absolutely.

I mean, Loungefly contributed about just over $6 million in revenue, and that's really the only aspect of the revenue that we really acquired in terms of year-over-year comparison.

Again, Underground Toys or Funko U.K. is really only disturbing our product.

So that demand that we're unlocking, that is demand for our product.

So if you take the $6 million that Loungefly contributed and you back that out, then really you're looking at about a 34% organic growth rate for our core business and our product lines.

Perfect.

And then the sales per active property, I think, were down a little bit last year, and then really accelerated in the first quarter of this year.

Can you talk about what drove that acceleration?

Yes.

I mean a lot...

How you -- like, how do you expect that to play out through the rest of 2018?

I mean, again a lot of the, what I would say, deceleration with the -- of the sales per active property that we saw in 2017, that's because we're comparing or comping off of such a difficult year.

Not a difficult year, but such a huge anomaly that we had with Five Nights at Freddy's in 2016, which was really a great proof point for our opportunity to execute as a Master Toy license.

What you're seeing now, as we continue to develop and launch and sell again new properties, fits with the confines but there's additional just this proliferation of content that's recognized globally.

And then this acceleration of the sales per active property is much more in line with really how Funko typically operates.

Again, as Brian said, we are not hit-driven.

So we're seeing growth in sales per active property in large part, because as we've added new product categories, and as we've expanded our distribution, in particular internationally, we're able to leverage those individual properties on a much broader scale.

So I would expect to see, again, absent a substantial Master Toy license that has a impact like Five Nights at Freddy's, you're going to continue to see incremental growth in both the number of properties as well as the sales per active property.

Okay.

And then the last question is just, in terms of the Europe pull-forward, was it in line with your expectations?

Or was there more of a pull-forward from 2Q to 1Q than you were initially expecting?

There was a little bit more of a pull-forward than we were initially expecting.

So we -- again, we had a great first quarter.

We saw strong results, but we did pull more revenue forward, in part, because of that increased demand that we're seeing in Europe and with the anticipated, just, rollout of the 3PL and the ERP.

We saw a great quarter.

But it was a little in line -- it was a little higher than that what we were expecting internally, given that our ability to pull forward some of that revenue.

When you look at the full year revenue, is that why you're keeping the full year revenue guidance the same, even though 1Q was probably -- it was at least a lot higher than what consensus was modeling?

Yes, there's a -- yes, I mean, obviously, we had a great first quarter.

But there are a number of factors not only the ERP and the 3PL, that revenue pull-forward from the first quarter -- or from the second quarter, but also the loss of Toys "R" Us and the timing of some of that.

At the end of the day, when we look at the full year, we feel very confident about our year.

We feel very confident about our business and how the model is working.

But it's also very early in the year.

(Operator Instructions) Our next question is coming from the line of Drew Crum with Stifel.

Brian, you alluded to The Avengers being a contributor in the quarter.

Can you talk about expectations for the Marvel license through the balance of the year?

Looks like they've got quite a few feature films on the slate this year.

And also didn't hear you mention Blank Panther.

That was one of the bigger box offices year-to-date.

So any commentary there?

Yes, Drew, thanks.

Great question.

Yes, obviously, Avengers: Infinity War has performed extremely well.

We do believe there will be a tailwind behind it.

We also think there was a halo effect from the Black Panther movie, and that also had a lot to do with, maybe, even exceeding the expectations of what we had for Avengers: Infinity War.

Black Panther, keep in mind, we did -- a significant amount of our business was in Q4 and in Q1.

So if you would tally those 2 quarters together, exceeded expectations, still has a strong tailwind with Black Panther as well.

The rest of the year, we're excited.

I mean, you, obviously, have Ant-Man versus Wasp (sic)[Ant-Man and the Wasp] . But there is a Spiderman new video game and an animated series we'll be leveraging against as well.

And then we're also going to activate against a very strong program on Marvel, 10 years cinematic -- the anniversary, the 10 years of the Marvel Cinematic Universe.

So all those are really, really exciting.

And then, obviously, as far as the halo around Marvel, you have a Venom movie and a Deadpool movie.

So all that speaks to a very, very strong year with Marvel.

So we're excited about what that means for '18 and beyond.

Okay, that's great.

And then just shifting gears, Russell, you found confidence that the high 30s is still a good gross margin for the year.

With that being said, any change in the input -- or the change in the input cost environment, which we've heard from others, is that in any way playing into the expectations for gross margin, maybe have something to offset that?

No, I mean, we're -- I think there's a couple of different things.

We are seeing a little bit of product margin lift in -- and product margin lift as it relates to in Europe.

But really I mean, all-in, we kind of anticipated, and we've modeled some of those -- the puts and takes, if you will.

So again, I do feel very confident about that 39%.

Okay.

And then just one housekeeping item.

The $9.3 million per D&A that you recorded in the quarter, is that a good quarterly run rate through the balance of the year?

Yes, I think so.

I mean, we have -- obviously, we saw a lot of the increase in amortization, just given the impacts of the purchase accounting from the acquisitions of Underground Toys and whatnot last year.

We will continue to leverage our mold and tooling costs.

So we will continue to, obviously, invest in mold and tooling as we continue to release and launch new product.

So you'll see a slight increase, kind of, in line -- a little bit in line with a ramp -- the ramp in sales.

But overall, you will see our ability to leverage, really, the mold and tooling cost, which is the primary driver of our D&A.

The next question is coming from the line of Gerrick Johnson with BMO Capital Market.

I have 3 questions.

The first one is actually a 2-part question, so maybe it's 4. Can you talk about POS retail takeaway in the quarter either U.S. or worldwide whichever is easier?

Yes, look, Gerrick, hey, it's Brian.

I can tell you that it will be -- talk about a little bit in third quarter and definitely in fourth quarter.

Sell-through is up, and our inventory position is still down.

So we feel -- both in double digits there.

So we feel again, we have fixed some of the blips that were on the radar in Q2 of 2017.

Really just each and every quarter getting better and better in monitoring our sell-through with our key retail partners and the inventory position therein.

So we feel like we're set up extremely well for the rest of '18 and beyond.

And -- but with that being said, we know there's room for growth and to get better, and we're investing in people, and we're investing in systems to make sure we're demand-planning better and just recognizing that real-time inventory position with all our retail partners.

The biggest thing, Gerrick, I would say is that what we've gained a lot over the last year or plus is just visibility into our key retail partners a lot about 50 in of our top retailers in the U.S. report to us on a weekly basis, both sell-through and most of them report inventory levels as well and so that gives us a lot of more opportunity to proactively manage, and therefore, balance our sell-in to sell-through, which allows us to maintain and keep our retailers in a much healthier inventory position than we were -- than they were in when they exited 2016.

Appreciate all that information, but I was just, kind of, curious what the POS was in the quarter.

So the point of sale in terms of sell-through, then we -- yes, we saw sell-through up high teens -- sorry, across-the-board of those retailers that point out -- that report to us.

Okay, great.

And my second question, Target is formatting their stores.

What does that mean for the Funko shop in those stores?

Gerrick, yes, we are -- it's business as usual.

We are being asked to look at some of their new store concepts and continue to have a say in what pop culture and entertainment looks like in those stores as well, and we're excited about those opportunities and some of the newly designed stores, so there is an active dialogue going on and how we can continue to increase or differentiate what our look and feel is for pop culture with Target.

So I think it's all great and with opportunity for further growth.

Okay.

And my last question pertains to GameStop.

They had a target of $650 million to $700 million in collectible sales for 2017.

They came an at $636 million.

So has that shortfall changed their commitment to the category in your products?

No.

I mean, look, we have a very great relationship with those guys.

Their -- the CEO was just here less than 2 weeks ago.

We are seeing strong growth in the Nordics.

We're seeing strong growth, a continued strong growth in France with Micromania.

And we are up, again, double digits in sell-through with GameStop.

So I could tell you, I think there are certain things that are performing better than others in their categories.

I would tell you that if you ask them, point-blank, Funko is probably outperforming a lot of the different other vendors and manufacturers, but they're committed to the category.

I think they've got a great partner in us with the leveraging of the over thousand licenses we have, a lot of it which we do cater for them is video game related and theatrical related and anime related.

So everything I'm hearing is that they are very bullish on the category, and I think we're going to be a significant partner for them for years to come.

Our next question is coming from the line of Michael Swartz with SunTrust Robinson Humphrey.

Russell, just a clarification question.

With your reiteration of guidance, does that include or adjust for the Toys "R" Us charge in the first quarter or just the, I guess, the $1.8 million in costs?

No, we are not including that in our adjustments.

So effectively, I'm not -- in fact, that's rolling through and impacting my adjusted EBITDA that I recognized in the first quarter, and I'm not adjusting anything for that.

So that incorporates that incremental charge that was -- originally was not anticipated when we first laid out the 2018 guidance.

Okay.

And then, Brian, maybe just give us a little color on the Target Funko Friday program that you had during the first quarter, maybe how that performed.

And then based on that, is that a program you'll look to repeat with that retailer?

And does that maybe give you, if successful, an opportunity with other retailers to do some similar programs?

Yes, I think that, obviously, we had a ton of success.

I think that most of everything we put up there for the Fridays sold out in mere minutes.

A lot of that launched at like 2:00 in the morning of that Friday.

The dot-com business with Target is through the roof.

If could see me now, I've got my finger to my mouth like Dr. Evil in Austin Powers.

It's a huge number that we're super excited about.

And I think what Target is seeing is a halo effect with our products, an upside in their REDcard members.

I think that the 10-inch Thanos, which is one of our special editions for them for the Funko Fridays, outsold every other Marvel product by 58% in Week 1 and Week 2, with that includes the other manufacturers that licensed Marvel products.

So they love it.

They love what we're doing.

I think you're going to see a consistent appetite from them to continue to do more special event online Funko days and possibly extended program.

So it's been nothing but huge success for us, and I think that -- we just met with everybody at Target, they were at our headquarters as well in the last week and nothing but glorious feedback from that program of what we can do further on in the future.

So it was really good stuff.

We do have a follow-up question coming from the line of Stephanie Wissink with Jefferies.

Just a couple of follow-ups.

One, you made a comment in your prepared remarks about the Pop!

brand extending beyond Vinyl figures into other product categories.

I'm curious if you can talk a little bit about the success you've had with that iconic piece of your business from a branding perspective stretching into some of the other categories, particularly some of those that you might have inquired in with the Loungefly acquisition?

And then secondly, we've been learning a lot about the power and potential of eSports, and I'm curious if you can talk a little bit about how you see that as an opportunity for your business over the next few years?

Great questions, Stephanie.

Yes, so Pop!.

I think it started with just the idea that Pop!

could be levered a bunch of different ways.

Accessories, we're doing keychains and Pop Pen Poppers, Pop Rides, Pop Movie Moments, which is a new category for us in the last year.

And then now we're doing 10-inch, we call them, Life-Size Pops, obviously, that only makes sense when it's like baby group, but it's working.

All those different categories.

In addition to that, yes, we are working with Loungefly on our first line of Pop Handbags, Pop Purses and Pop!

Wallets.

The Pop apparel is really exciting for us, because we think that T-shirts and apparel is typically brand-agnostic, and yet our fans recognize our look, our feel, our design and are asking for it by name.

And unlike some apparel partner -- or manufacturers, we're able to get a premium on that look and on that feel, because we know there is brand affiliation with that.

So I think more than anything else to the idea that, that is the ground floor for new channels and new retail doors.

The Pop!

is the paving way.

It's allowing us to get people into the pop culture business who have never been in it before to see the success, to see the diversity of licenses, to see the unique demographic coming in through the doors, and then leveraging that into more space, which now becomes our pop culture statements, which has all categories that we've managed to cross-collateralize.

So we're excited about that growth in that -- more than anything else, that global recognition of our aesthetic.

I think just one of the other things I'll point out is just, if you just look at the Pop!

videos, the content from Evil Corp, now Funko Animation Studios, 40 million views in '17, 50 million views in the first quarter alone.

So even the aesthetic in content is resonating on a global basis.

So we're super excited about that.

Thank you.

It appears there are no further questions at this time.

So I'd like to pass the floor back over to Mr. Mariotti for any additional concluding comments.

Yes.

Thank you.

Again, thank you for your interest and support of Funko, and we look forward to speaking with you guys again in the second quarter earnings call in August.

Thank you, and have a great day.

Lady and gentlemen, this does conclude today's teleconference.

Again, we thank you for your participation, and you may disconnect your lines at this time.