Funko, Inc. (FNKO) Earnings Call Transcript

Okay.

But obviously, sort of a version of our kiosk experience where you can pick your body type, your skin tone, your hair, your clothes. And like I said, some very specific Spidey outfits that you can only get here at Comic-Con. All right. Do you want to give it a try?

I have to pop myself here. Okay. Let me start building. So you said this is an exclusive Spider-Man: Brand New Day, Pop! Yourself.

Exclusive only here to Comic-Con.

All right. Let me pick my body here. Nice. Okay. Let's go with some skin tone. Love that.

Yes. Get to really customize it here. Your lashes.

Yes.

Your hair.

Lots of different styles. Oh, there we go. This looks like me. I like that. I like that. Very nice. Got to do the glasses. Glad you have some glasses options.

Of course. It's your trademark.

Yes, there we go...

Yes. And then some exclusive accessories as well.

So we got a VIP badge, perfect, for Spider-Man going to Comic-Con. All right. He can hold the mask in his hand.

Like that. Yes.

And then we also got some shooting here. All right. Let me go with that mask. And then I can pick another one, right?

Yes. There you go.

Yes, let's do the webs. very nice.

You name it.

What's really cool I see, you have a little Hulk here. Is that also exclusive here?

It's come with a Bitty Pop! Hulk.

Oh, that's awesome. All right. So I get a Bitty Pop! Hulk with my Spider-Man outfit. All right. Got to package that Pop!. What?

There you go...

Wow. It's me. In the Spider-Man outfit. There's the web shooting. There's the mask. There is a exclusive Hulk Bitty Pop! in there. Oh, that is great. And that's a really cool experience to come here. If you're excited for Spider-Man: Brand New Day. If you're excited for Pop! Yourself. And you get to have this experience right here in San Diego Comic-Con.

And obviously, the ability to create these sort of geo-specific experiences is something that we'll start to roll out and test later this year with some retail partners. So you can imagine something like this starting to kind of pop up in other parts of the world and really create something unique and specific to a location.

That's interesting. because, obviously you could do this at the Funko Stores. But now you're saying there might be other stores...

Some other places as well.

Around the world to do this, too.

Yes.

All right. Stay tuned for that.

All right. Let's go. Let's check out the next part of the booth.

All right.

All right. Let's go by the Mondo booth.

Oh, yes.

I don't know -- as you know, like Mondo is sort of our premium collector toy line.

Yes.

These guys are amazing artists.

I've got some figures in my home right now.

Okay. Great. And we're going to kind of cut through the crowds here.

Hey, how it's going man?

Good to see you.

Yes, yes.

Okay. I am a huge Ninja Turtles fan. So I'm very excited about what's going on here.

This is the TMNT Mondoverse, where our partnership with Paramount has given us permission and access to create our own what-if scenario sequel story to the '90s film. So we're bringing in all the characters and whimsy and wildness of the comics, video games and cartoons into this real-world, gritty, like man in a suit vibe, that's the movies have.

Yes.

Paramount has given us the blessing to reimagine all of the character history.

Okay.

So for example, we're introducing new versions of the Punk Frogs as kid brothers that Mikey finds in sewers. And that's the kind of story expansion that we're able to do with the Mondoverse. It's our sandbox.

And I was curious about that because you have Funko and Mondo under the same roof. But obviously, you're doing like different types of products. Have you seen this interesting transition in any kind of way of from Funko to Mondo as far as like getting figures more detailed or upgrade?

It's like we have the artist in-house to do all the technique, right? What we get from Funko is the support, the credibility and the doors being blasted open for us to get licenses and access and relationships that we otherwise might not be able to get. So it's really an amazing pairing that creates another like collectible through line. So you might have been collecting Funko Pops for a long time and you have a beautiful collection of them. And you're just like, I'm a turtles guy. I got all the Turtles Pops. But I also want a realistic one 6th scale. So you can stay in-house at Funko through Mondo and have a really diverse collection. Thank you for stopping by man. We're proud of it. I can't wait to show you guys more.

This is awesome. Oh my gosh, that's so much nostalgia here too, man. Real Ghostbusters, Masters of the Universe. Street Sharks.

Yes.

All right. One more. One more stop on this....

All right. We've seen the booths. We've seen the fans having a wonderful time buying the Pops enjoying the experiences. This feels like a good out to go on in San Diego.

It does. And we're in the big POP! Mystery box. I think the mystery is going to be where we end up after this box closes.

But for now, should we go and take some investor questions?

I think we should. Thank you so much for all of this.

Yes. You have ruined the mystery.

Oh, I just remember it. They told me that one exclusive IP is coming up soon. It's going to be -- well, that was fast. One minute we're dodging crowds at Comic-Con, and next we're here in the Funko office. And sometimes, Josh, you made it all the way to London.

I am across the pond, spending some time with our EMEA team and partners, but it's a late night, but excited to be reunited with you here live.

Absolutely. The magic Mystery box can do multiple locations apparently. Well, multiple drop-offs.

So now we shared all the fun stuff at Comic-Con. Yves. Can you tell us a little bit more about the financials.

Sure. I'd be happy to. So like I mentioned earlier, sales were up 7% in Q2 and 6% in the first half. In addition to that, we reported a gross margin of 56.6% compared to 32.1% last year. And to be clear, our Q2 gross margin benefited from the recognition of a $25 million credit that was related to the expected tariff refunds and release of accrued tariffs. So just for sake of comparison, to our guidance range of 42% to 44%. Our gross margin normalized for that $25 million credit was 44.4%, which was still a record high for Funko. SG&A expenses improved as a percentage of sales by over 400 basis points compared to last year. And finally, adjusted EBITDA was $40.9 million compared to negative adjusted EBITDA of $16.5 million last year. Again, excluding that tariff-related benefit, we delivered adjusted EBITDA of $15 million, well above our guidance range. I'd also like to highlight that in the quarter, we executed a sale of our IEEPA tariff claims, a total of $22 million for proceeds of $19 million, and we used that to pay down debt by a total of $15 million making more progress on deleveraging our balance sheet.

It sounds like great results. And what about the outlook?

Yes. So for the outlook, we're reiterating our net sales guidance of flat to up 3%. And we're raising our adjusted EBITDA guidance to $100 million to $110 million, and that raise is driven by, again, that $25 million tariff credit from Q2 as well as $5 million from improved profitability.

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 Yves 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 there 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 is that we definitely expect the 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 Make 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 one thing I've mentioned a couple of times, but excited to kind of more formally announce now. We have formalized a partnership with HP 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 Fest, a couple of weeks ago. We did a really awesome mash up between WWE and the Garbage Pail Kids. The products sold it out at Fanatics Fest. 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 Knicks won the NBA Championships, 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 Crunchyroll, where she was Senior Vice President and Head of Global eCommerce and Direct to Consumer. I'm obviously, excited about her commercial experience there and her experience in the anime world, which is obviously a huge fandom for us. Before Crunchyroll, she spent about 15 years at Hasbro across a ton of different leadership roles, Global eCommerce, 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 seeing 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 in 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 diorama displays in about 350 stores across Smyths, 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 Smyths for Bitty Pop!. If you walk around the city right now, we have pretty high-profile windows at Hamleys, it's another iconic toy retailer that sort of is a Disney and Funko collaboration that's really giving us a lot of high visibility in 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, things like Bitty Pop! have continued to lead to incremental shelf space for us. Things like Spider-Man 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, with photo ops, with all those displays there. All right. Well, now we have some questions from McKeegan Cox (sic) [ Keegan Cox ] 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?

Well, thanks. Thank you, Keegan, for the question. Look -- I mean, look, for us, obviously, a strong content slate always helps. And we knew going into this year or 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 a 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, Grogu 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 and Pokémon in sort of the anime, gaming space continue to be huge. Sports delivered. I mentioned -- I mean, the excitement around the Knicks 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 nowhere as a 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. Save me a Mel B Funko POP!, any of that. All right, any puts and takes 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 to, 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, 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 Laszczyk at Goldman Sachs. So Funko noted that point-of-sale tailwinds from the first quarter entertainment slate carried into early second quarter. Did this positive trend continue 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 Flora 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 licensor 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, Stephen, your question sort of Bitty is just sort of another example that I mentioned we're seeing incremental placement now at Smyths 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 look forward to seeing who gets 1 of 1 Worldwide Chase out there with these Mystery POPs. All right. Well, that's all the time we have for questions for today, Yves and 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 and 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 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 loved sort of the energy and everyone who made their way down to 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.