Funko Inc (FNKO) 2022 Q1 法說會逐字稿

Good afternoon, and welcome to Funko's Conference Call to Discuss Financial Results for the First Quarter of 2022. (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 Ben Avenia-Tapper, Director of Investor Relations, to get started. Please proceed.

Thank you, and good afternoon. With us on the call today are Andrew Perlmutter, Chief Executive Officer; and Jennifer Fall Jung, Chief Financial Officer.

Before we begin, I'd like to remind everyone that during the course of this conference call, management will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable U.S. GAAP financial measures and supplemental financial information can be found in the earnings release and 8-K that we released earlier today. All of these items plus a visual presentation that investors can consult to follow along with the discussion are available on our Investor Relations website, investor.funko.com.

I will now turn the call over to Andrew.

Good afternoon, everyone, and thank you for joining us today. Q1 was an excellent start to the year. Building on the strength of momentum of 2021, we significantly outperformed our top line revenue expectations, effectively navigating ongoing headwinds throughout the global supply chain.

Revenue was $308 million, an increase of 63% over the prior year and well above our target range. Our results were broad-based with strength across brand categories, geographies and channels, particularly within the domestic mass market and online retailer channels.

Q1 highlights include a number of positive indicators across the business that demonstrate the strength of the Funko pop culture platform underpinned by our ability to connect with our fan bases across the world.

We continue innovating in our Core Collectible Brands category, generating 53% revenue growth over the prior year. Loungefly grew 104% year-over-year and now represents 16% of the total business. We delivered strong sales growth in our direct-to-consumer channels, led by increased traffic on our websites, enhancements across our e-commerce site saw year-over-year improvements in important efficiency metrics, including conversion and bounce rates.

Our channel-wide price increases were effective in helping to offset ongoing supply chain cost pressure while we maintained strong unit demand. And together with our newest NFT partner, Warner Bros, we released Scooby-Doo, which was our largest Digital Pop! NFT Droppp to date, surpassed only this morning by our second Warner Bros collection, DC Comics.

These strong results can be attributed to 3 primary factors: exceptional consumer demand, a portfolio comprised of compelling industry-leading brands and focused execution by the entire team. Our excellent first quarter performance gives us even greater confidence in the business going forward. As a result, we are raising our full year revenue and earning targets.

Now I'll review some of the highlights from the quarter for each of our brand categories. Pop!, the largest of our Core Collectible Brands, continues to sit at the pinnacle of fandom. The brand delivered strong double-digit growth. Robust consumer demand extended across our product assortments with multiple sellouts across our product lines, including some of our higher price point collections like Pop! Die-Cast and Pop! Jumbo.

Another Pop! Vinyl Collection to call out was our collaboration with the Make-A-Wish organization as part of our Pops! With Purpose program. In celebration of World Wish Day, Funko donated $150,000 to Make-A-Wish and released the extremely popular Make-A-Wish edition, Metallic Pop! Collection.

Our 2 newest emerging brands Popsies and Vinyl Gold are also seeing strong momentum. Popsies continue to generate very positive feedback from our retail partner. And sales on funko.com have exceeded our expectations. The limited initial launch of Vinyl Gold generated similar enthusiasm with select Gold figures in our top 10 products sold throughout most of the year. We have new waves of NBA and NFL Gold figures in stores now. And we've built a dedicated Gold section within our flagship Hollywood store.

Turning to our Toy & Game brands. We continue to disrupt in both of these spaces with thoughtful and compelling product development. Our collectible gaming business represented over 1/3 of our Q1 gaming revenue, highlighting our ability to maintain growth outside of the traditionally seasonal game business. We recently launched Battleworld Series 3 with more collectible gaming platforms on the way, designed to introduce new fans in this exciting intersection of collecting and gaming.

While Q1 is typically a quieter quarter for new game launches, we released new iterations of our most popular titles, including Haunted Mansion Magic Kingdom edition and multiple editions of our Something Wild card games. We also developed our first legacy game, further cementing our leadership position among the world top game designers.

On the toys front, our Five Nights at Freddy's lineup continues to be extremely successful. Q1 marked yet another quarter of strong demand with sales exceeding triple digits. We're actively working on an expansion of this lineup. So stay tuned as we continue to demonstrate huge upside potential with a different demographic from our Core Collectible Brands.

Loungefly, which includes our softlines category, delivered one of its best quarters to date. Strong momentum came from multiple sources, led by continued normalization of theme park operations. In addition, we were able to service a portion of unmet demand that shifted from Q4 of last year as product availability headwinds began to modestly ease in the quarter.

Turning to our digital brands. We continue to hit critical milestones with our Digital Pop! NFT business. We're leveraging the enthusiasm of these Droppps to bring new users into our proprietary NFT platform, Droppp.io, which has grown its user base [exponentially] since its launch.

This year, we began accelerating the frequency of our NFT Droppps and increasing the size depending on the specific collection. The response has been phenomenal. And we're thrilled to have some excellent properties on the way, including, of course, this morning's DC Comics launch featuring some of Warner Bros' most popular characters.

We also completed our first physical product redemption cycle. And the enthusiasm we've seen from our fans for the physical products to come with the rarest NFT has been tremendous. These physical product redemptions have served as a perfect opportunity to build the bridge between collecting in the physical and digital world.

With the first wave of physical redemption, we saw a significant increase in new accounts on Droppp.io from our long-time fans suggesting a growing interest in participating in both physical and digital collecting. We're thrilled with the response that we've received from our fans for Digital Pop!, but we're only in the early stages.

We're actively exploring a number of interesting ways to apply this technology to create additional value for our fans as we bring our most popular brands into the world of digital collectibles.

Turning to our goals and outlook for the future. Last quarter, we shared our 3-year objective of delivering sustained double-digit revenue growth. The path to achieving that sustained level of growth lies in our 4 growth pillars, which we also outlined for you in greater detail last quarter. I've already covered a number of examples of the strong results we delivered in Q1 from our first growth pillar, continued innovation within the core. The 53% growth we generated in our Collectible Brands in Q1 stems from our ability to continually deliver products that excite our fans across a variety of genres from blockbuster movie releases to nostalgic cult classics, global sports icons and more.

We continue to expand the Pop! brand with new additions like Pop Die-Cast, Pop! Albums and newly launched collaborations with Slam Magazine and Panini Trading Cards. Innovation also means routinely introducing new opportunities to our collection of emerging brands. Our Vinyl Soda! collection, for example, grew 150% year-over-year in Q1. Initially limited to more collector-centric specialty channel, we now have the opportunity to extend that brand to the mass market, capitalizing on our ability to create products that appeal to collector and casual enthusiasts alike.

The very promising early results from our Gold and Popsies lines are another indication of how effectively our product and design teams have been able to capture an aesthetic that connects to our fans even as we target new fan communities.

Last year, we delivered strong Q1 results against our second growth pillar, revenue diversification. Last year, approximately 17% of our revenue came from brands outside of our Core Collectible Brands. In Q1 of this year, that share increased to approximately 22% as both Loungefly and our emerging Toys & Games and digital brands recorded triple-digit growth.

Internationally, all of our brands outside of the core are significantly underpenetrated. Loungefly is already the fastest-growing brand in Europe. And we're only getting started with Toys & Games. Domestically, we're beginning to expand into a number of previously unserved channels. One example is our early success with games in the drugstore channel where our ability to provide titles that generate high sell-through and appeal to this channel-specific shopper has led to shelf games and expanded order size.

In some examples, a new channel coincides with the expansion of our product catalog. For example, Loungefly has always been known for its premium, high-quality product offering, and as a result, has primarily been sold in theme parks and through specialty retail, both channels have served a less price-sensitive customer.

The Loungefly team started the development stage to create unique product features, differentiated designs, construction and branding elements, which allow us to begin to unlock the broader mass-market opportunity without compromising the Loungefly brand. In doing so, we've expanded our addressable market while introducing new audience to the Funko portfolio of brands.

Our third growth pillar, growing our direct-to-consumer business, also continues to contribute to the overall growth with sales up 36% in the quarter. On our e-commerce sites, our user base continues to grow. And we're consistently making enhancements to improve our site efficiency as we prepare to roll out an entirely new e-commerce platform later this year.

Internationally, we've now lapped the launch of funkoeurope.com and continue to post triple-digit growth. In Q1, we launched 3 new countries, Denmark, Sweden and Switzerland and have an ambitious list of new countries to bring onboard over the remainder of the year.

Finally, back in 2020, we launched Pop! Yourself in our Hollywood and Everett stores. This product which allows you to build a completely customized Pop! of yourself, friend or anyone you know has been the best seller in our stores since its launch.

Late last year, we introduced automated kiosks, which accelerate throughput and this last quarter, we brought in additional kiosks. Today, Pop! Yourself represents 17% of the total physical store revenue, and we're still well short of demand. The in-store experience is an exciting capability in its own right, but the introduction of Pop! Yourself to our e-commerce platform later this year significantly elevates the opportunity.

Our last pillar, international growth, was similarly encouraging both in Q1 and looking forward over the next 3 years. Both Europe and our combined other international markets grew in excess of 40%. In Europe, we're seeing significant growth in brick-and-mortar as COVID restrictions ease, complementing the growth in our D2C e-commerce platform. Because of the desperate nature of this region relative to the domestic market, we're actively targeting retail partners that can offer a foothold in multiple markets. By leveraging these pan-European retailers, we've been able to effectively drive growth across the region.

Adding to our channel efforts in the region, our brand and product assortment further enhances our growth potential. In Europe, for example, we introduced Loungefly with excellent results. Similarly, we've localized our collectible catalog where appropriate, tailoring our product and fandom focus for the audience. That doesn't just mean more European footballers in the U.K., it has allowed us to target the massive European anime fan base among other region-specific communities.

Finally, I want to briefly touch base on our announcement today with the new partnership of The Chernin Group, or TCG. Under this agreement, a TCG-led consortium, including eBay and Rich Paul, has agreed to acquire 80% of the shares previously held by ACON Investments. I want to extend a thank you to Ken Brotman and Adam Kriger, two of our Board members from ACON, for their support for the last 7 years. We've had a great relationship with ACON getting it to $1 billion in revenue and are excited to continue that success with TCG.

As a part of this transaction, Jesse Jacobs, Co-Founder of TCG, will be joining our Board, taking over one of the seats previously held by Ken and Adam. Jesse brings expertise in media, entertainment and sports, and we look forward to leveraging his background as we do with all of our independent Board members.

In summary, Q1 was an excellent start to the year. We delivered strong financial results and are raising our outlook for 2022. Across the portfolio, our brands are exciting and engaging our fans in a uniquely Funko way. Demand has never been stronger. And while we continue to operate in a constrained environment through multiple global factors, we are effectively managing through these disruptions and exceeding our expectations.

We are confident in our ability to achieve our new fiscal 2022 target of revenue between $1.275 billion and $1.325 billion and adjusted earnings per share of $1.80 to $1.90. We believe these same factors plus our focus on sustainable, long-term growth will enable us to deliver a 3-year growth objective, up double-digit revenue growth over the next 3 years with consistent margin expansion.

I want to thank our amazing fans, partners and employees for making this possible. And with that, I'll turn the call over to Jen to take you through the financials.

Thanks, Andrew, and good afternoon, everyone. We're pleased to report a record first quarter with net sales growth of 63% over the prior year. Our results were broad-based with strength across our brand category to geographies and channels.

The outperformance was primarily driven by domestic wholesale, aided by a lesser extent to demand that shifted from Q4 of 2021 due to supply chain disruptions. Net sales in the U.S. increased 70% to $232 million, while net sales in Europe grew 43% to $57 million, and other international net sales increased 48% to $19 million.

To provide better insight into our entire brand portfolio, we began reporting net sales on a brand category basis this quarter, including the prior year period for comparison purposes. Within our Core Collectible Brands, net sales grew 53% to $240 million, driven by strong growth in our core Pop! brand and supplemented by our emerging collectible brands.

In addition, our Loungefly brand more than doubled to $50 million, primarily driven by bag and wallet sales, a rebound in some of the Loungefly's most important wholesale partners, including theme parks, and improving product availability relative to Q4 2021.

Among our other brands, which includes Toys & Games as well as digital, net sales grew 140% to $19 million. On a product category basis, figures, which includes action figures, increased net sales by 59% to $240 million, driven by strong growth in our core Pop! brand, Five Nights at Freddy's Toy Collection and our newer figure lines.

Non-figure product sales increased 77% to $68 million, primarily driven by strong demand in bags and wallets under our Loungefly brand. As our portfolio of brand developed, the number of active properties is no longer a relevant metric to analyze the health of the business. Beginning this quarter, we will report this metric in the accompanying earnings materials only.

Moving down the P&L. The first quarter gross margin was 35%, a decrease of 610 basis points versus Q1 2021 due primarily to supply chain cost inflation. SG&A for the quarter was $78 million or 25% of net sales, leveraging 167 basis points year-over-year due to strong net sales growth. Adjusted EBITDA was $36 million with an adjusted EBITDA margin of 11.8%, representing a sequential improvement of 20 basis points over last quarter despite ongoing inflation in the cost of freight.

While the increased burden from higher supply chain cost continues to be a headwind, we remain on track to reach our full year adjusted EBITDA target of a margin consistent with 2021 results. The factors contributing to our confidence include the full benefit of our recently implemented price increases and the anticipation of a modest improvement in supply chain disruption into the second half of the year. Adjusted diluted earnings per share were $0.34.

Turning to the balance sheet and cash flow. We ended the quarter with $33 million of cash and cash equivalents and $100 million of availability under our revolver, representing total liquidity of $133 million. We ended the quarter with total debt of $169 million, down 8% compared to Q1 of last year.

Inventory at quarter end totaled $162 million, down sequentially from last quarter, but still reflecting an elevated rate of inventory in transit at 40% as transaction freight times remains well above pre-pandemic durations. As we shared on our last earning call, our guidance assumes that the cost of freight will remain at near-record highs for most of the year with the potential for only modest relief in the second half of the year remaining well above pre-pandemic levels.

With that context, we are raising our full year net sales target to $1.275 billion to $1.325 billion. we remain on track to deliver full year adjusted EBITDA margins consistent with 2021. This target reflects the ongoing freight inflation headwinds as well as approximately 80 basis points of pressure due to onetime project spend from the consolidation and relocation of our distribution centers and the implementation of our ERP system. We expect adjusted net income of $98.6 million to $103.8 million based on a blended tax rate of 25% and adjusted earnings per diluted share of $1.80 to $1.90 based on weighted average diluted share count of 54.6 million.

For the second quarter, we expect gross margin to be lower sequentially from Q1 as we continue to face an inflationary freight environment. we expect SG&A as a percent of net sales to increase sequentially in the second quarter, reflecting onetime project spend from both our distribution center relocation and our ERP implementation.

We expect the result of these 2 factors to be a decline in adjusted EBITDA margin sequentially with some recovery expected in the second half, as previously discussed. We appreciate your time this afternoon.

Now Andrew and I would be glad to take your questions.

(Operator Instructions) We have a question from Stephanie Wissink from Jefferies.

We have 2 questions, if we could. The first, Andrew, if you could just talk a little bit more about Loungefly. It's just been so powerful as a driver outside of the core business. I'd like to give you a chance just to share with us what's similar about the ramp in Loungefly relative to your fan-based business? And then what's unique that you find that is augmenting the rate of that growth being so much stronger, so much faster?

Thanks for the question. So I think that what we're experiencing with Loungefly is you're seeing a company like Funko get a hold of a company like Loungefly and really put our resources behind it. And it's a relatively small company. So as we put it into our distribution channels and we take advantage of our licensing relationships, retailer relationships, our global distribution, obviously, especially, I mean, it's really growing very quickly in EMEA for us. I think that's why you're seeing sort of this explosive growth with that brand. Obviously, we're thrilled with the consumer base because it's such a huge overlap with pop culture and the love for the same IP as our core fans. It's a more female demographic than our core collectibles customers fans. And so I would say that, that's really what's adding to the success of the -- and the quick and the fast growth. Yes.

All right. That's great. And then, Jen, one for you is just on your remarks around the onetime project spend for ERP and DC (inaudible) can you just help us think through the total amount that you anticipate spending? And then anything more by cadence by quarter would be really helpful.

Yes. Thanks for the question. So yes, we reported out that was about 80 basis points on the year, all of which will happen in the first half of the year. It's about 2 points of pressure just in Q2 on adjusted EBITDA. So we're launching -- or we did launch the new DC in April, and the ERP is set to come out at the end of the quarter.

Okay. So anything trickling into the back half? Or should we assume that it's pretty much done after Q2?

Yes. It's really the pressures all in the first half of the year, specifically Q2.

(Operator Instructions) Our next question is from Megan Alexander from JPMorgan.

I want to spend a little bit more time on the TCG announcement. In their press release, they talked about the opportunity for Funko to develop its own properties into entertainment franchise similar to what they've done with things like Exploding Kitten. So can you just talk about that opportunity a little bit more, how you see this investment helping to accelerate that? And in terms of the marketplace, what is the primary marketplace for reselling of Funko at this point? And how exactly will that work in order -- in making eBay the primary marketplace?

It's Andrew. Thanks for the question. So let me take the second part of your question first, which is eBay has always been our preferred official secondary marketplace. That's where our fans prefer to go for the secondary marketplace. And so we've had a long-standing relationship with eBay. And we think this will just prove to strengthen that relationship over time. We're really excited about partnering up with them on multiple initiatives that were, quite frankly, in the works for a while now. So we're excited just to continue to grow those opportunities.

When we take a look at the TCG partnership, we -- their portfolio of companies is really an interesting -- it provides us with a lot of opportunity. There are some overlaps with what they do with the collector community. There's a lot of entertainment overlaps. And as we talk about things like the Funko generating our own IP and potentially going after the entertainment space, these are all things that we've been talking about for a little while now.

And we think that there are going to be opportunities presented to us by way of this new partnership that we're really excited about. It's still early days, and we're still exploring all the different potential opportunities. But we are thrilled with the connections and the networking and the doors that this partnership could open up for us.

Great. That's really helpful. And maybe just a follow-up. It seems like you raised the top line for a little bit more than where you beat The Street on revenue in 1Q. Is that just what you're seeing quarter-to-date? Or can you talk a little bit more about that?

And then on the bottom line, you talked about 2Q gross margin being lower sequentially on freight. Did anything change in terms of the expectations in the back half? Or are those more or less unchanged?

Yes. Great. This is Jen. So we feel really good about our guidance, guiding to $1.275 billion to $1.325 billion, 24% to 29% growth rate. So we feel really confident about our ability to deliver on that for the full year. And as you look at the margin rate, yes, we will see more pressure on gross margin in the second quarter. There was a little bit of a benefit from just some timing shifts in Q1. So that's why we do feel that margins will go down in the second quarter sequentially quarter-over-quarter.

But then as we get into Q3 and Q4, there's -- we haven't necessarily changed a ton of input on Q3 and Q4. We did have freight remaining fairly high. But we do think there'll be a little bit of relief in Q4. So unfortunately, it's a bit of a hockey stick on the margin front, the way it looks. But Q2 is where we're seeing the pressure from the net SG&A perspective on the investments as well as on pressure from freight.

(Operator Instructions)

All right. Thank you, everybody, for the questions. And thank you to all of our fans and employees for a fantastic Q1. Thank you very much.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.