Funko Inc (FNKO) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to Funko's conference call to discuss financial results for the fourth quarter of 2020. (Operator Instructions) 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 will now turn the call over to Andrew Harless, Manager, Investor Relations, to get started.

Thank you, and good afternoon. With us on the call today from management are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Jennifer Fall Jung, Chief Financial Officer. A press release covering the company's fourth quarter 2020 financial results was issued this afternoon and is available on our Investor Relations website, investor.funko.com.

Before we begin, I need to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 Factors section of our Form 10-K for the year ended December 31, 2020, 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 obligation to update them.

We'll be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted EBITDA margin, which we believe may be important to investors to assess our operating performance. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release. We've also prepared a visual presentation that investors can consult and follow along with this discussion and can be accessed at investor.funko.com.

I'll now turn the call over to Brian.

Thank you for joining the call today, and I hope that everyone is staying safe and healthy. Before we begin, I want to commend our Funko teams around the world that demonstrated tremendous resiliency and came together to execute in 2020. It's because of them that we were able to continue to bring joy to our fans in a highly disruptive year.

Some major highlights of 2020. First, we delivered innovation, which is the heart of Funko. We successfully launched new products ranging from Snapsies and Funko Vinyl Soda! to Pop! albums, Stitch Shoppe and a dozen of new board games. All of which expanded our presence among key retail partners, extended our reach to new consumers and further diversified our revenue stream.

To that end, our diversification strategy continues to bear fruit in 2020 as our non-figure products represented almost 23% of our sales, supported by our Loungefly-branded products up 17% and our expanded game portfolio growing over 50%.

Second, we continue to successfully leverage evergreen content, which allowed us to keep our products fresh and relevant during a time when many new releases were paused. For the year, sales related to evergreen content represented 66% of our business, up from 51% in 2019. Additionally, there is only a single property in our top 20 that is related to a theatrical release. This unique ability to leverage evergreen properties across a wide variety of genres, products, brands and retailers enables us to drive revenue while continually reaching new fan bases.

Third, we strengthened our direct-to-consumer platform in 2020 through several initiatives. We added important digital capabilities to enhance usability and functionality. We increased the number of SKUs on the site, up from only a few hundred to over 2,000. We launched funkoeurope.com in October, almost 2 years ahead of our original plan. These actions allowed us to grow our total direct-to-consumer sales by 80% to over $50 million.

As a percentage of sales, D2C represented 8% of the business in 2020, up from less than 4% in 2019. This was a nascent business in 2017 and in just a few years' time has become a rapidly growing channel for us. We are continuing to invest behind D2C to accelerate our capabilities, drive growth and build scale.

Our fourth accomplishment, in addition to expanding our D2C businesses, we have successfully pivoted and focused on supporting our global mass market and third-party e-commerce channels, driving growth compared to 2019. Exiting the year, these channels accounted for 35% of sales, up from 28% in 2019.

Fifth, in December, we launched Pop! People at our 2 flagship retail locations. This gives our fans the ability to create their own custom Pop! figure and box for themselves, their friends or family. We have seen tremendous initial response from our fans over the last 3 months, and Pop! People has quickly become the top-selling item at both of our Funko stores. Given the strong consumer demand, we are working to rapidly bring Pop! People to our websites in 2022 to allow our fans all over the world to build their own Pop! and connect with our iconic brand. We think this is a powerful way to enhance the experience while also attracting new fans to our site.

Last and more importantly, we found new ways to engage with our fans around the world. At a time when in-person events were not possible, we pivoted and innovated to ensure that we stay connected to our fans, whether it was through social media or hosting Virtual Con in connections with Comic Cons in San Diego, New York and Emerald City. We saw such strong fan engagement that in multiple instances, we sold more through our Virtual Con than through our in-person events last year. And our social media engagement was greater than that of the Comic Con themselves.

We are particularly pleased to wrap up the year with a solid fourth quarter, which was highlighted by a return to revenue growth, improved profitability and continued progress against our key growth initiatives. Q4 net sales grew 6% to $227 million, coming in significantly above our expectations. Our strong revenue performance, coupled with solid cost controls, drove adjusted EBITDA margins of 14.7%, up 270 basis points compared to last year.

Also, we continue to strengthen our balance sheet as we increased our liquidity position over 70% versus prior year to $127 million. Q4 was highlighted by a number of strong trends that make us even more bullish about the Funko brand, the underlying strength of our pop culture platform and our ability to connect with our fan base around the world. We saw exceptional demand in the U.S., where sales increased 18% to $171 million and represented our largest domestic quarter ever. This was driven by strong growth across the mass market, third-party e-commerce and direct-to-consumer channels. We also saw better-than-expected performance among our specialty retail partners, but recovery in that channel still remains gradual.

From a brand perspective, domestically, we achieved strong growth of 12% in Pop! and 55% in Loungefly during Q4, demonstrating the strength and resiliency of our brands. A second trend that is particularly notable is the enduring strength of evergreen content, which represented 68% of sales in the quarter. This demonstrates our ability to drive growth without relying on new releases as we increasingly connect fans to their favorite evergreen content.

Additionally, our diversification strategy is continuing to gain solid traction. In Q4, our figures category was flat compared to last year, and virtually all of our growth was driven by our other products, fueled by strong performance within our Loungefly brand and our expanded game offerings. Also, we are continuing to see more and more fans turn to our Funko and Loungefly website for their pop culture purchases. Sales from our own e-commerce sites grew over 170% in the quarter. In fact, our e-commerce sites would have ranked in the top 3 of our largest customers globally.

Lastly, from an international lens, we performed better than expected as pandemic disruptions in Europe were partially offset by sustained demand from both our retail partners and consumers. We are continuing to see strong demand signals from the European region for 2021 and believe we are well positioned to further expand our international footprint.

Funko's brands are what licensors, retailers, and most importantly, our fans trust when it comes to pop culture. Our diversity across product categories, licenses, genres and distribution allows us to reach a broad consumer base. Just in 2015, over 90% of our sales were attributed to figures. Since that time, we've expanded into growth adjacencies and diversified our product mix to include bags, wallets, board games, apparel, toys, accessories and more. We have grown our non-figure category from about $25 million in 2015 to nearly $150 million in 2020, and that category now represents 23% of our sales.

However, during this time, we have remained focused on strengthening our figure business, which we have doubled since 2015 and represents over $500 million in 2020. We are continuing to drive growth and build on our diversification by extending our reach across product, category, channel and geography. We have done this by expanding our product offering through strategic acquisitions and entering new categories; increasing our penetration in genres, such as sports, anime and music; continuing to build internationally into Europe, Latin America and Canada; broadening our distribution to new and existing retailers as well as directly to consumers through our own website; continually finding new and innovative ways to engage with our growing family.

By way of example, just a few weeks ago, in lieu of New York Toy Fair, we hosted our first ever virtual Funko Fair, in which we partnered with our licensors and retailers to engage our fans and launch new offerings. We couldn't be more thrilled with the response we received and the tremendous success of the event, in which fan engagement far exceeded any in-person toy fair we have attended over the years. The event led to nearly 1.5 million units being presold to fans through our retail partners. And many of these products are still 6 to 9 months away from being released.

In addition, this resulted in over 90 million impressions across social media. We plan to continue to leverage virtual events throughout 2021 to drive community, awareness and engagement amongst fan bases across the world.

We exited 2020 strongly positioned from a strategic, operational and financial standpoint, and we are incredibly excited about the journey ahead. We have well-defined strategies for growth, and we are executing against substantial TAMs. The global licensed merchandise market is over $290 billion, and the global toy and game market is more than $90 billion. Our runway is significant, and our strategies to lever our core pop culture platform, diversify the business and drive profitability are continuing to gain traction. We expect 2021 to be our strongest sales year yet, which gives us the confidence to continue to invest in the business to drive long-term growth.

For the year, we expect to deliver sales growth of 25% to 30%, reflecting broad-based strength across our brands, products, channels and geographies. This also reflects growth from 2019 pre-pandemic levels. Importantly, we are continuing to manage the business with discipline and expect to deliver strong growth on top and bottom line in 2021. We greatly appreciate the support of our partners, fans and shareholders and look forward to keeping you updated on the progress throughout the year.

Now I turn the call over to Andrew to discuss our strategic initiatives.

Thanks, Brian. We are pleased with the tremendous progress we made in 2020 against our key strategies to drive growth and diversification. As a reminder, these include building upon our core pop culture business, further diversifying our product portfolio, expanding our international reach and increasing the share of our business through our own direct-to-consumer channels.

Heading into 2021, we are excited to build upon the progress to date, which we believe will position the company for sustained long-term growth. First, maximizing the core pop culture business. In 2021, we will continue to create unique programs that resonate with our fans with a heightened focus on evergreen properties as well as expanding our consumer base by growing underpenetrated content genres and launching new products. We saw strong success with our evergreen programs in 2020 and expect to continue to build upon those by leveraging new properties such as Seinfeld, recreating new ways to celebrate fan favorite properties such as Marvel: Deadpool and focusing on building holistic statements at retail.

We are planning to drive expansion in our core business with sports, music and anime genres. The licensed sports and music merchandise market represents over $30 billion in annual sales. We are only just starting to focus on this growing business and capturing market share through license expansion, utilizing existing brands such as Pop! and Loungefly and creating new lines geared towards their specific fan bases.

In 2020, we saw positive consumer response to the launch of Pop! Album, which recreates iconic records and offers fans a new way to enjoy the Pop! brand. For example, our Pop! Album of AC/DC's classic Back in Black record was our top collectible item at one of our key mass market retailers. Given the strong initial fan reaction, we plan to expand this concept across new genres, including sports, trading cards and comic book covers.

Additionally, later this year, we will be launching a new premium Vinyl figure line that captures the essence of culture through icons in music and sports. This product is aimed to cater to new collector bases as well as sports and music fans across the world.

Another large opportunity is within the anime category, which we estimate to be over $8 billion in annual global licensed merchandise sales. As fandom for anime properties continues to grow around the world, we are focused on making sure that there's a consistent flow of products and properties that fans can connect with. Just last month, one of our key mass market retailers held an endcap devoted to fan favorite anime properties. We will continue to look for opportunities to highlight and grow this genre moving forward.

Strategy number two, driving category diversification by harnessing our innovative culture to launch new products and reach new consumers. In 2020, we achieved significant accomplishments as we grew our Loungefly brand, expanded our games portfolio and launched new youth-inspired collectibles, all of which helped drive our non-figure products to generate nearly $150 million in net sales.

Heading into 2021, we are focused on continuing to expand the Loungefly brand through broader distribution both domestically and internationally. In the U.S., we are thrilled to be expanding our Loungefly relationship with Amazon later this year. In overseas markets, we are seeing strong demand for the brand across EMEA and other regions and are focused on further penetrating new markets.

Within our board game category, we launched dozens of new titles throughout 2020 that included Marvel Battleworld, Pan Am, Godzilla: Tokyo Clash and Back to the Future: Back in Time. Many of our titles made top-seller lists on Amazon and continue to be outstanding performers at our key retailers.

Heading into 2021, we believe we have another solid board game slate plan that includes dozens of new titles, including a second wave of Marvel Battleworld. We are seeing strong traction in this category among our key partners at mass, e-commerce and specialty, which is resulting in increased shelf space and visibility for the Funko brand.

Within the youth collectible category, we launched Snapsies in late Q4 and plan to build upon this line in 2021 through expanded distribution to Walmart and Amazon as well as new product launches to keep the line fresh and appealing. Going forward, we will continue to invest and expand within our games, softlines and youth collectible categories to ensure we are offering fans of all ages around the world an increasingly diverse assortment of Funko products.

Moving now to our third area of focus, international expansion. 2020 was especially difficult in our international regions given the pandemic disruptions. From a high-level perspective, the total addressable market for licensed merchandise outside the U.S. is more than $125 billion, so the opportunity is significant. Within Europe, we are focused on expanding our footprint in Central and Eastern Europe and driving product diversification with particular emphasis on softlines. Additionally, we plan to continue to expand our direct-to-consumer reach in the region, which I'll expand on shortly.

Our next area of focus will be setting ourselves up for growth in Latin America and Canada by executing on initiatives to expand key direct retail relationships within the region, improving fulfillment capabilities and building our in-region sales force. In Australia and New Zealand, which is one of the more mature international regions, we will focus on diversifying our revenue by growing Loungefly-branded products and games category.

In APAC, we will remain focused on executing against regional distribution strategies and building upon our existing relationships. We plan to continue investing across these markets to ensure Funko is positioned for growth as pandemic headwinds begin to abate.

Now turning to our fourth area of focus, expanding our direct-to-consumer business. We made huge strides in 2020 as we improved the functionality and usability of our website, increased product availability and expanded our reach globally. This led to our direct e-commerce business growing 170% compared to 2019 and would have represented our third largest customer for the year.

This year, we will be focused on accelerating our digital capabilities by implementing a new global e-commerce platform, investing in marketing to drive awareness and increasing the functionality of our Funko mobile app. Internationally, we are continuing to expand our direct-to-consumer reach by expanding our fulfillment capabilities in EMEA region. We launched funkoeurope.com just 5 months ago with the ability to fulfill 3 countries and have since expanded to 8 countries. We are in the early stages of our European D2C effort, and we'll be implementing marketing programs and other initiatives throughout the year to build awareness and drive fan engagement in the region.

Those of you who know us well understand that we have a deep underlying passion for this business and all things pop culture. When we look at the TAMs Brian and I just talked about, our position as a trusted pop culture brand and the strategies we're executing against, we see tremendous runway for growth and are excited to continue our journey in 2021.

I will now turn the call over to Jen to take you through the financials and 2021 expectations.

Thanks, Andrew, and good afternoon, everyone. The fourth quarter came in better than anticipated across the P&L, marking a strong finish to the year. Our net sales increase of 6% significantly outpaced our expectations. Gross margin remained strong, and we continue to manage costs while supporting our key initiatives. As a result, we delivered improved profitability and cash flow, proactively paid down debt and increased our liquidity position.

Our top line performance in Q4 largely reflects the strength of our brands and product diversification. Our overall performance compared to our expectations was partially driven by better-than-anticipated results across Europe as there was sustained consumer and retailer demand despite the Q4 lockdown. Additionally, we saw continued strong demand within the domestic third-party e-commerce, mass market and D2C channels.

The number of active properties in Q4 were 724, an increase of 9% from prior year. Net sales per active property were $313,000 in the quarter, down 2% compared to last year. The top 10 performing properties in the quarter were: The Mandalorian, Harry Potter, Marvel Comics, Dragon Ball Z, DC Comics, Disney Classics, Pokémon, The Nightmare Before Christmas, Star Wars Classics and Mickey Mouse.

As Brian mentioned, fourth quarter net sales in the U.S. increased 18% to $171 million, our strongest quarter ever domestically. Although our European performance came in better than we expected, sales decreased 24% versus a year ago, reflecting the ongoing effects of the pandemic. Additionally, sales in other international regions decreased 7%.

On a product category basis, Q4 net sales of figures were flat at $170 million. Other sales increased 30% to $56 million, primarily reflecting strength of our Loungefly-branded products, which grew 51% in the quarter. Additionally, we saw growth within our game, plush and accessory categories. Sales of our Pop!-branded products grew 1% in the quarter, reflecting the continued headwinds internationally while Pop! delivered strong growth of 12% domestically. Fourth quarter gross margin remained strong at 37.2%. That's up 800 basis points versus last year, which includes 790 basis points of impact from a onetime inventory write-down in 2019. The gross margin expansion reflects improved inventory management and increased product margins due to higher percentage of D2C sales in the quarter. This was partially offset by an increase in shipping-related expenses due to higher mix of orders being fulfilled out of our distribution center versus direct shipments from our factories.

SG&A in the quarter came in at $54 million or 23.7% of sales. That's down $4 million from last year and reflects 310 basis points of leverage. SG&A on a dollar basis came in slightly higher than anticipated due to revenue overperformance in the quarter.

Turning now to profitability. Our strong gross margin performance and ability to leverage SG&A enabled us to deliver improved profitability in the quarter. Adjusted EBITDA increased by 29% to $33 million. This represents an adjusted EBITDA margin of 14.7%, up 270 basis points from last year.

Looking at the balance sheet and cash flow. Our teams exercised discipline and have managed with rigor throughout the pandemic, allowing us to drive strong cash flow and strengthen our liquidity position. In 2020, liquidity increased by 71% to $127 million, comprised of $52 million of cash and cash equivalents and $75 million of availability under our revolver.

Our financial flexibility enabled us to further pay down debt in Q4. In addition to our required debt payment of approximately $6 million, we proactively paid down an incremental $12 million on our term loan. As a result, total debt net of unamortized discount, was $191 million at year-end, down over $50 million or 20% compared to last year.

Inventory at year-end totaled $60 million, down 4% versus 2019. We believe we exited 2020 in a solid inventory position as we carefully manage inventory to align with demand throughout the year. The business generated strong cash flow from operations of $47 million in Q4, representing an increase of 69% from a year ago. For the full year, cash flow from operations totaled $107 million, an increase of 18%.

Now turning to our 2021 outlook. As Brian and Andrew highlighted, we are poised for a strong 2021 and feel confident in the trajectory of the business and our opportunities to drive growth. To that end, we plan to continue investing in the business in 2021 as we execute against our 4 key growth initiatives.

We expect strong top line growth of 25% to 30% for the full year driven by broad-based growth across the business. We anticipate revenue will return to a more normalized seasonal pattern between the first and second half of the year. However, the pandemic impacts of last year create much easier comparisons in the first half, and as such, we are providing the following framework for 2021. We expect sales growth on a percentage basis in the first half in the range of low to high 50s. We expect sales growth in the second half in the low to mid-double digit. And for the first quarter of 2021, we expect sales growth of approximately 30%.

Now turning to margin. We expect gross margin to strengthen in 2021 driven by an increase in our direct-to-consumer business as well as regional and distribution mix. For the same reason, we expect Q1 gross margin to increase slightly from Q4 2019 levels. The strong revenue growth we expect for 2021 and the large market opportunity in front of us provide us with added confidence to invest behind our key growth strategies.

Looking at SG&A, the main areas of planned investment in 2021 include the following: talent, to support our international and direct-to-consumer expansion as well as our product diversification strategy; marketing, to support new and recent product launches as well as D2C efforts; and technology, as we enhance and implement new systems that are designed to allow us to scale our business as we execute our key initiatives. This includes a new ERP, warehouse management system and global e-commerce platform.

Specifically in Q1, we expect SG&A on a dollar basis to increase in the low to mid-single digits compared to the first quarter of 2020. For the balance of the year, we anticipate SG&A on a dollar basis to increase sequentially each quarter into the low to mid-single digit. From an earnings perspective, we expect full year adjusted EBITDA margin to be in the range of 13.5% to 14%, representing an increase of 120 to 170 basis points compared to 2020. Additionally, we expect adjusted net income of $44 million to $51 million based on a blended tax rate of 25%, which translates to adjusted earnings per diluted share of $0.84 to $0.96 based on a weighted average diluted share count of 52.5 million.

We appreciate your time this afternoon. Now Brian, Andrew and I would be glad to take your questions.

(Operator Instructions) And your first question comes from the line of Erinn Murphy with Piper Sandler.

Nice to see a lot of your hard work come together. I guess my first question is on the guidance for the first quarter in particular, can you just share a little bit more about what you're seeing in Europe versus the U.S.? Is the strength that you saw in the fourth quarter in the U.S., has that continued? And then maybe if you can frame the full year sales guidance for us between what you're expecting between Pop! and some of the figure business versus that diversification piece that you spoke to in the non-figure side.

Great. Erinn, so yes, basically, what we're seeing underneath the covers, I'm going to answer your first question -- or your last question first, is that we do expect to have growth across all of our product categories. Some of our product categories are quite at the absolute dollar value as obviously our core businesses. So we'll see a little bit more in those, for example, the size of Loungefly and softlines and games. So we'll see probably more pressure for growth coming from those, but we do expect to see growth across the board.

And as we move into -- kind of getting back to your first question, as we look at EMEA and what we're seeing underneath the covers there, they still were down 24% in Q4. So they still did have headwinds absolutely just as much as we had anticipated. And as they continue to be on the lockdown, they'll still see headwinds until we kind of make it through at least the first half of the year. But we are pleased with the performance of that business and what we're seeing given how strict the lockdowns has been over there.

Got it. Okay. And then just 2 quick ones, maybe one for Brian and Andrew. First for Brian, on virtual events. It seems like you've had some good success there. Can you talk about your thoughts about, as we go back into, hopefully, a post-vaccine world, revisiting in-person events versus if there's some stickiness around what you're seeing in virtual?

And then secondly, for Andrew, on the Snapsies performance. Can you just talk about how you see kind of capitalizing on that outperformance as we move into 2021? Any opportunities between girl's or boy's toys after what you've seen thus far?

Yes. Erinn, thanks for the questions. Yes, a virtual -- I mean, obviously, the Funko Fair in -- virtually, it replaced New York Toy Fair. The results were staggeringly good considering, and we obviously just got the news recently that San Diego Comic Con will not be held this year as well. So obviously, we've learned a lot from basically 9 months ago when we did our first virtual event at San Diego Comic Con, where our share of voice was actually better and bigger than San Diego Comic Con's own share of voice. We repeated that success and made some improvements in New York Comic Con. And obviously, Funko Fair did really well.

So it certainly -- I think it adds to what we can do as a company. And look, eventually, the world will go back to normal, and we're going to have a big event. It might even be New York Comic Con where we're physically at the show. But I think we're going to use the learnings that we get -- we gather from these virtual events to continue to find ways to drive retail in different and unique ways.

And I think the one thing I'm so excited about is just seeing the year-over-year improvement in preorder on stuff that's 6, 7, 8, 9 months out. You see our retailers going out and getting those secured orders, giving us better reads on indication of interest, what licenses are outperforming than what we thought they were and sometimes not performing as well. All this, I guess, adaptability we've had to learn to do and learn from when we didn't do quite what we thought we would do is certainly going to pay off in the future.

So I would see us as a blend going forward once we get a macro environment that returns to normal. I think you'll see virtual events alongside of physical events and then virtual events on their own driving unique ways of pop culture that only Funko can do. So it's exciting and lots of learnings, and we just seem to get better at it as we go.

I'll jump in on the Snapsies part. So yes, we launched Snapsies in December as a first to market in Target. It was launched on time. We were excited about it. We got good results. It was launched on a promotional sidekick and which sold out -- is out. You can't find that in stores anymore obviously.

We just set in line, which we're really excited about. We just set in line about a week ago at Target. So if you go into your local Target, it may be there unless it's sold out, which hopefully it is. And we are excited about it, not only because it's our first-ever girl-specific youth collectible line, but we are also approaching it from a slightly more aggressive marketing angle than we have with some of our more traditional grassroots marketing efforts for the Funko brand in general.

So we're excited to see some early results on that. We're excited to see that the digital efforts are working. We're excited to see that the store lift that we're seeing early is working. So we're seeing some very positive signs. We've got future plans to refresh the line with a lot of great product this year. And as I mentioned in the script, we're expanding our distribution. So we are getting some additional retail doors. As I mentioned, it was a first to market for Target. We've got other retailers coming on board, which we're very excited about. We think there's a lot of opportunities amongst specialty nontraditional toy retailers on this line.

So we're very excited. It's still early days, but we're excited about the brand.

And your next question comes from the line of Steph Wissink with Jefferies.

This is Anna on for Steph. First, it looks like the growth in the quarter is increasingly being driven by noncore. Could you help us with how we should think about the margin contribution relative to the figures business?

As we look across the business, we did see success across all the product categories. As we mentioned on the call, domestically, we had a very strong quarter, our strongest quarter yet.

As we look at -- if I'm hearing your question correctly, from a margin perspective, as some of these other categories come into play, whether it be the success of Loungefly, they do have different margin makeup. So it will impact the channel distribution, will impact the total margin, depending on the growth of each of those categories. But overall, we felt really good about where it landed, also keeping in mind that DSD has a very strong margin profile. So there's some puts and takes underneath the covers, but we feel good about the growth across the board.

Okay. Helpful. And turning to 2021. As we think about the 25% to 30% growth target, could you walk us through how much you're embedding in terms of inventory reload, distribution gains and internationally?

Yes. We -- as we look across all of our categories, some of the smaller ones, I think, as I mentioned earlier, game has -- we expect a lot of growth out of games coming into 2021 as well as our D2C business and our softlines.

What you'll also see from a regional perspective is EMEA will have a stronger growth simply because they had a more challenging year in 2020. So we're expecting more of a pickup with them coming into the year as we move forward.

Next question comes from line of Alex Perry with Bank of America.

Congrats on a really strong finish to the year here. Just first, on the quarter, so sales came in about 14 points higher than the high end of your guidance range. I guess just first, where was the delta here? Was it mostly Europe? And then I guess going into the quarter, what was the thought on Europe? Just maybe help us think about where the delta was. Or was there a certain channel or property that sort of came in way ahead of your expectations?

Alex, yes, so what we basically saw -- so as we mentioned, Europe came in at a negative 24% growth rate on the quarter that we had anticipated a much lower growth rate, given they were going into full lockdown and given what we had seen in Q2 when they were also in full lockdown.

So they -- what you saw happening in Europe is they took key learnings that we've learned from Q2, and they quickly pivoted to make sure that they were looking at their orders, pivoting their orders to other retailers to make sure that they could deliver the best possible quarter. And they really did a nice job. We were pleasantly surprised with their performance given what they were up against.

And now as we look across the board, though, we did see our D2C business did extremely well over the quarter. It was really across the board. Not only did we see success in our third-party e-commerce or mass market in D2C, but we are starting to see the specialty players aren't quite back to where they used to be, but they're really leveraging their D2C channel as well. And so it was really great to see all tides rise, so to speak.

That's great to hear. And then just on the guidance, I think of that high end of the range would imply sort of 7% revenue growth versus 2019. I guess what gives you confidence on returning the revenue base to pre-pandemic levels? And are you seeing an improvement in the content schedule versus maybe the update you gave us when you reported 3Q? And what is the assumption on the recovery in specialty in the guidance?

Yes. I'll take the first part, and I'll let Brian speak to content. But as we look forward -- and yes, this is above our -- the high end of the guidance is above our 2019 levels by about that 7%. And we have confidence in these numbers because of our ability -- what we've been able to achieve over the course of the past year, how we've pivoted to our D2C business, how we've worked directly with our specialty retailers to make sure that -- especially during the Q2, looking at our orders, making sure that we moved orders to other channels, our international expansion. We feel everything we've put into place over the course of the pandemic really showed up in Q4, and we feel confident that as we look forward that our guidance of 25% to 30%, it fits right in line with our strategic initiatives and how we've invested in the business. So we feel good about our guidance.

And I'll let Brian speak to the content piece.

Yes. Alex, I'm sorry, you broke up just a bit. You said content for '21?

Yes. Just have you seen any sort of improvement in the content slate? And then, I guess, the second part of that was any -- what's the assumption on the recovery in specialty sort of in the guidance?

Yes. So look, I'll tell you that the content in '20 was a barren desert, right? There was none. I mean it was Mandalorian, and that was really it. And then we had some initiatives like Wonder Woman 1984 where we released product, and it was 6 months before the movie came out. So the product just didn't do well. So we basically had 0 content in '20.

So if you look at '21 and based on just solidifying the content slate, 5 new Marvel TV shows and 5 Marvel movies alone in '21. We're really excited about that. We're obviously seeing a lot of the movies that were pushed from '20 into '21. They've got stakes in the ground for the second half of the year.

Some great video game content that we're excited about, television with Seinfeld, which could be as big or if not bigger than The Office, which has been great for us for the last 2 years. So we are insanely excited about the content slate, not only for '21 but '22 and beyond. It's really shaping up well. And I think Disney+ -- I like to call that out because it's a big part of this analysis. Back-to-back huge wins for us with not only 2 seasons of Mandalorian but then WandaVision that's been -- outperformed anything we ever expected.

So going into specialty. Look, we -- our specialty partners have been phenomenal about adapting the business during a very difficult time. They pushed most of their business to online, so their own e-commerce channels. And I think you're going to see an omnichannel approach for the next year; buy online, pick up in store; online, and then I think when the world gets back a little bit normal, visiting their stores. So I think they're going to rebound. We definitely see them in great inventory positions. And the demand for the products have never been better. So we're obviously very optimistic when the macro environment clears that we're in good shape there.

Perfect. And then actually, if I could squeeze one more in. So inventory at the end of the quarter was down 4% versus 6% sales growth. I guess, how do you feel about the current inventory position? And then are you seeing any inventory constraints given port congestion issues on the West Coast? If so, have you seen any sort of gradual improvement there? I know a lot of other brands and retailers have been calling that out.

Yes. From an inventory perspective, we feel really good about our inventory position. We continue to make progress in terms of the efficiency of our inventory. So we feel like we're in a really good place.

As we think about -- and thanks for bringing up the port congestion. Yes, we are seeing a little bit of that, especially with our Loungefly business. At this point, it's not necessarily disrupting the total business model. But of course, we're experiencing it like everybody else is, for sure.

Our next question comes from the line of Gerrick Johnson with BMO Capital Markets.

I have 3 questions here. The first one is very similar to a prior question. You discussed your growth for 2021, a lot of it coming from evergreen. But how much of that 25% to 30% is based on new theatrical releases, not just new entertainment but specifically new theatrical releases?

Gerrick, I'll take that. Yes. Look, I think it's obviously a portion, but we've had ebbs and flows as a company over the last 5, 6 years. 6, 7 years ago, our #1 properties were TV with Game of Thrones and Walking Dead. So there's always an ebb and flow of how important theatrical is. I think the one lesson we learned from Q4 of '19, where we didn't do very well and underperformed, is a reliance on theatrical event to drive the majority of our business is not a sound business strategy. We learned from that. We prepared ourselves rather quickly. And that change paid off, obviously, in a pandemic that no one saw coming. And we drove amazing business with shift to evergreen and almost no TV, new content.

So now you add a bunch of new TV content plus a bunch of theatrical content, plus some great video game titles. We have a master toy announcement we're going to have that's pretty major. It's coming up fairly soon. We don't like to put a percentage on how much of that growth is. I think it will contribute. But like anything else, we've certainly learned from the one mistake we made in that one quarter. We're going to take an omni approach to just every kind of thing that we think is moving the needle on pop culture.

Okay. Great. I'm down one more question. You kind of answered both of my prior questions. So Loungefly seems to be the biggest surprise here in the quarter. So what distribution channel are you seeing the most success with Loungefly?

No. I think a tremendous amount of success, with the Disney parks closed, which is amazing because that's their #1 customer. It's still very specialty. We're seeing a lot of -- a tremendous amount of growth online through our own direct-to-consumer. And Amazon has really become a focus for them as well.

So -- and then we're also putting in plans using the Loungefly skill set with the Pop! brand, and we're starting to dip into the mass retailers. And so I think it truly is about that domestically, those 3 channels. And then obviously, just doing a better job of the amazing amount of content they're creating and having that resonate international. The appetite in EMEA for Loungefly is through the roof. And we think we can do a better job of focusing on sales of the stuff created at Loungefly and moving it all over the world. So we think international is going to play a lot in the near future with their growth in addition to Walmart, Target and Amazon.

So I think we're not surprised with the growth. We are -- have been very bullish. We've almost quintupled that business in a very short period of time. And we believe that the potential for Loungefly is unlimited. We think there'll be just many fans wanting to buy softlines and accessories as hard goods and Vinyl figures. So we're very bullish in the future of Loungefly.

And your next question comes from the line of Tami Zakaria with JPMorgan.

Congrats on the excellent results. I have 2 questions. My first question is, can you remind us what percent of sales in 2020 came from your own website -- D2C website? And do you expect that penetration to grow year-over-year in 2021? And what does that mean for your gross margin profile?

Yes. Tami, so we did see roughly about 8% penetration of the D2C business, which is up from less than 4% a year ago. So we did see tremendous growth. As we look forward to 2021, one thing to keep in mind is that, as I noted earlier, all tides are rising. So as our wholesale, our EMEA business, as everything else gets bigger, the shape of the pie changes a little bit. So we do expect some increased penetration, but we don't think it will be as significant, simply because there is growth in all the channels.

Got it. Got it. That's super helpful. And so my second question is, can you give us an update on what percent of the specialty channel still faces closure in the international markets? Or any numbers around that now versus what you saw in the fourth quarter?

Yes. And it's really hard to track that, as you know, because even domestically, there's different rules and regulations across the board. What I would say is that what we saw in the second quarter was probably the most challenging that we've seen throughout the course of the year. We are seeing it come back to business. As we noticed, it did exceed our expectations in Q4. And as they have pivoted to D2C, it's really helped them alleviate some of the challenges they had internally as well. So as we look forward, it won't be our -- it will be a slower back to normal than our other channels, and we've anticipated that. But we do see, eventually, it will get back to where it used to get to.

And that concludes our questions for this time, and that concludes today's conference call. Thank you for your participation. You may now disconnect.