Funko, Inc. (FNKO) Earnings Call Transcript

That's great. Thank you, Yves. Now Josh, what can investors expect in the second half of the year from Funko?

Well, I mean, look, I think the results that you just talked about this quarter really highlight the model that we're building. Sensing demand earlier, creating more repeatable ways to sort of take that demand and create products that can scale selectively through the right retail channels around the world. Look, I think in the second half, our consolidated sales will reflect more of a normalized year-over-year shipment comparison. And I think we'll continue to be prudent just sort of given some of the broader consumer environment that's out there. And also just to kind of double back on one of the things Yves mentioned earlier about Loungefly and the SKU reductions that we've discussed. Now we've made some meaningful progress in that area. I definitely would not declare the work they're finished. We have an exciting plans, but still a ways to go. But the encouraging signal in Q2 was that as Yves said, sales were down 2% with approximately 50% fewer SKUs. So really seeing that increased productivity. For the remainder of the year, importantly, I think the headlines that we definitely expect a core collectibles to continue growing in the second half. So when you step back from it, the core is growing Loungefly is becoming healthier. Our underlying earnings power is improving. And Q2 is really a strong and early proof point that everything we've talked about in the Culture POP strategy is underway, and our focus is now just about consistent execution.

Nice. And what are you excited for, for the rest of the year, particularly in terms of how the way the company is evolving?

Well, I mean, there's a lot to choose from that I'm super excited about. I guess a couple of things that I would highlight. First, overall is just speed. I've talked about this a lot. How do we make sure that we're part of these really great cultural or entertainment moments while they're happening. And really, the key to speed is being able to sort of sense demand earlier and respond quickly. And hopefully, in some cases, with even less inventory exposure. So 1 thing I've mentioned a couple of times, but excited to kind of more formally announce now we formalized a partnership with HK on the additive manufacturing front. This is part of our hyper strike strategy, which means we're able to create products in a matter of weeks instead of months or sometimes years that go into the traditional manufacturing process. We've already sort of launched our first product with this partnership at Fanatics test a couple of weeks ago. We did a really awesome mash up between WWE and the garbage pale kids. The products sold it out at Fanatics test. They're selling for multiples more than what we originally sold them for on eBay. So we're really excited to work with HP on that front. By the way, our normal quick-strike offerings from a speed standpoint has also continued to be off and running. We had preorders for heated rivalry, off-campus and obsession. So a lot of like surprise entertainment hits out there that we've been able to get after pretty quickly, including preorder when the NICS won the NBA championship, the night that they won, we went live with a championship 5 pack. And so we're really kind of building that repeatable speed capability. The second thing I'll mention is, we actually are announcing today that we're hiring a new Chief Commercial Officer. It's a role that we've had open for a little bit now. Kristin Hamilton, she joins us most recently from Crunchy role, where she was Senior Vice President and Head of Global e-commerce and direct-to-consumer. Obviously excited about her commercial experience there and her experience in the anime world, which is obviously a huge fandom for us. Before crunchy role, she spent about 15 years at Hasbro across a ton of different leadership roles, global e-commerce, consumer product strategy, transformation, brand management marketing. She's done a ton there. She officially starts on August 24. And so I guess that's another big exciting thing for me in the second half of the year.

All right. Well, the second half is looking promising. Nice. So we're going to take some questions from some analysts right now. First one is from Eric Wold at Texas Capital. How would you characterize the level of wholesale order demand in the third quarter of 2026 into the upcoming holiday season?

Sure. So I'll take that one. I think what we're seeing this year, we continue to have about 3 or 4 months visibility with our wholesale customers placing orders. I would say compared to last year, we're a return of a little bit more normalized seasonality, like Josh mentioned. Last year, Q2 was pretty disrupted post liberation Day announcement. And then we -- there was an element of kind of catching up with people's orders in Q3 and into Q4. This year, obviously, we're kind of shipping orders as our customers want them. We're seeing great POS trends in our wholesale channel globally. Our POS sales were up 6% year-over-year. So again, always looking for that balance between sell-in and sell-through, which we saw in Q2. So by all the metrics that we gauge, the business is healthy, inventory and the channel is healthy, and we see that there's a good demand from our wholesale partners and from our end customers as well.

Okay. Another question. What are you seeing from your major retail partners around shelf space allocation in recent quarters and into the holiday season, and what categories are likely to see the most benefit from those gains?

Let's see. Well, look, I think I'll start off just kind of by the fact that I'm here in Europe and have been spending some time with our European retailers. We've secured extra drama displays in about 350 stores across Smith's, which is one of the most like preeminent toy retailers in Europe and certainly, even I would say, in the world. HMV gift universe, a bunch of independent retailers. And look, those are sort of like fully designed kind of built out displays that are really showcase our product out of the packaging on shelves. We're also seeing increase some endcap displays at Smith's for Bitty Pop!. If you walk around the city right now, we have pretty high profile windows at Hamleys another iconic toy retailer that sort of is a Disney and Funko collaboration that's really giving us a lot of high visibility and like prime tourist destinations. And actually, right now, even we have another partnership across Sony, Disney, with HMV on a big Spider-Man activation at HMV Oxford Street. So look, we -- things like Bitty Pop! have continued to lead to incremental shelf space for us. Things like Spiderman have led to incremental placement with like pallet trains at Walmart. So I think alongside these big entertainment releases and alongside our new and growing product lines. We're seeing it generate incremental shelf space for us at retail.

nice. I look forward to seeing people post some photos -- photo ops with all those displays there. All right. Well, now we have some questions from Megan tox at D.A. Davidson. In regards to the strong entertainment slate we have had this year, which franchises or categories are generating the strongest demand? Any highlights this quarter and what properties are you most excited for in the second half of the year?

SP1678207847 Well, thank you, for the question. Look, I mean, for us, obviously, a strong content slate always helps. And we knew going into this year, at least suspected that there would be some big hits. And I think you're really seeing that in box office attendance and box office records overall. But we have been pretty -- first, I'll just say, like broad-based across fandoms. We have seen momentum for us across anime, gaming, obviously, theatrical sports and some of our own programs. I'll remind everyone in this quarter, I think our top 10 franchises and programs represented about 32% of Q2 sales. So our business is not necessarily dependent on like any one property, but they obviously help. So Mando, Gogo was great for us. Toy Story 5, which was a massive hit for Disney also doing really well for us. You saw our Spider-Man brand-new day activation at Comic-Con, that has recently proven to be huge for us, and we're really glad that we made a bet on that film early on. And then could it be more excited for Avengers, Doomsday and what the Russo Brothers and Marvel and Disney are going to kind of bring to screens at the end of the year. But look beyond that, one piece in Pokemon in sort of the Anima gaming space continue to be huge. Sports delivered. I mentioned -- I mean, the excitement around the was somewhat unprecedented for us in the sort of -- certainly in the world of NBA championships compared to past seasons. The excitement around the World Cup, I think, was palpable and reflected in some strong sales for us. And then, look, I have to just sort of mention again on the quick-strike front, but you have movies like Obsession, which kind of came from out of no areas of surprise and was a major record-setting box office. And so we were able to very quickly go on presale for that film, along with things like heated rivalry and off-campus. And I'll even say a personal favorite of mine in this past quarter, a great line of products celebrating the spice girls. And I'm not just saying that because I'm over in the U.K. right now. I would have said that if I were at America as well. But across Loungefly and Funko, a dream come true, honestly, to be able to collaborate with those folks. So a pretty broad representation of franchises Keegan.

All right. So they'll be -- So -- all right, input intakes on the guidance, what are the assumptions that you get to the high and low ends of your guidance. Have you seen any impact from higher input costs like freight?

Sure. So I would start by -- to the upside, especially on sales. I mentioned our order book visibility in Q3. So we feel good about that. Obviously, then the holiday period in Q4. We have a bit less visibility too, but we're excited about the content slate. I think, obviously, any upside would depend on continued sell-through performance. We're hoping the consumer stays resilient through the holiday period. To the downside, we've -- I would call out tariffs. Obviously, we factored in the latest announced tariffs that are in effect of 10% to 12%. But for everyone who's following the news that there can continue to be surprises on that front. So again, chose to be prudent within our gross margin guidance in particular. And then as far as freight costs or raw materials costs, we're cautiously optimistic, but obviously, any kind of higher oil prices and things like that could negatively impact us as well.

Understood. I hear some questions from Stephen Lacik at Goldman Sachs. So Funko noted that point-of-sale tailwinds first quarter entertainment slate carried into early second quarter. But this positive trend continued through the remainder of the quarter and what gives management confidence that these trends are sustainable through 2026?

Sure. I mean I'll start with the trends that we saw in Q2. So again, I mentioned in the wholesale channel, 6% growth in units year-over-year in POS sales. For the year-to-date, it's 9% growth. And again, for the year-to-date in the U.S., up mid-single digit, in Europe, slightly over 20% POS growth. So it's a really strong trend. We're loving to see that momentum. I believe, based on the content slate and some of the products that we have coming up in the lineup that we should see that trend continue, and that's kind of what we factored into our guidance.

Okay. Now to what extent does management expect new formats like Bitty Pop! Pop Mystery and the sports-related launches to be revenue contributors in 2026? And what does management view as the key growth levers for Funko in 2026 and beyond outside of the core POP products?

Well, I'll jump in. I mean I think first on Pop Mystery, it's a little bit too early to sort of size that one responsibly. But -- what I think is most important about it, and I think kind of signals a lot of what we've been talking about as part of our strategy is that it's just sort of the platform potential of it. So if you think about Pop Mystery, just as another dimension and extension of the core POP product, it can really extend across like any entertainment franchise sports. We're doing it with our own IP that you saw sort of down at Comic-Con with the fluoro line. It can go in multiple channels, markets around the world, I would say sort of that blind box. Craze is showing no signs of slowing down. And for us, I think it's a unique way to kind of encourages what our fans have always loved that like thrill of the Chase discovery and then that sort of motivation for repeat participation, like they want to try and seek out that one specific item that they love. So we'll keep a close eye on sort of the initial launch and judge sell-through and reorders and consumer behavior and scale based on that. But I'd say, from a licensure standpoint, we have like a pretty exciting and awesome lineup of Pop Mystery products going all the way through next year. So I am feeling encouraged about that one. And then you mentioned sort of, your question sort of Bitty is just sort of another example that I mentioned we're seeing incremental placement now at Smith's around Europe, another extension of what people love about POP and what makes it iconic, but it's sort of it's becoming its own platform appealing to a slightly different consumer, getting us incremental placement. We'll continue to look at new ways to dimensionalize Pop. We have a few different ideas that are in development that we'll roll out end of this year and early next year. And then look, honestly, there's about, I would say, half a dozen totally brand-new formats that we have in development that will start to roll out early next year and beyond. And the idea with all of those is trying to establish new platforms for our fans to engage sort of capitalizing on what we know best around sort of culture and our licensor relationships and being part of these iconic entertainment and cultural moment events. But in new and exciting ways that I think hopefully will set the stage for hopefully the next POP franchise to come.

All right. Well, we'll look forward to all of that. I definitely forward to seeing who gets one of one worldwide case out there with these mystery pops. All right. Well, that's all the time we have for questions for today, even Josh, thank you so much for all your information about the success as well as how you handle certain challenges. So Josh, are there any thoughts before we let everyone go today?

Yes. Well, first of all, thank you for being with us down at Comic-Con and in the office there in Burbank. And look, for me, I would just say the financial highlights that this quarter shows us is really early evidence that the make culture pop strategy is beginning to take hold, and it's really becoming a more deliberate and disciplined growth engine for us. Ultimately, I think we're getting better at sensing where fan demand is coming from. Moving faster to turn those signals into distinctive products and -- in repeatable ways in building platforms like I was just talking about and then scaling them through channels all over the world. So look, this quarter, I think, was an early proof point, not the end of the work. But I think the growth in SKU productivity and certainly that record underlying gross margin gives us confidence that we're on the right track. And so -- and look, other than that, I just want to say thank you to our shareholders for your continued confidence. Most importantly, thank you to our fans for showing up in the way that you always do. I love sort of the energy and everyone who made their way down the Comic-Con this year. I love talking with everyone and hearing their ideas. It's just an awesome reminder of why we do this. And we're certainly excited for the rest of the year. So I'll just say again, Andre, thanks, everyone, for joining us, and we will see you all next quarter.