While a double-digit decline in sales would usually be cause for alarm, Funko‘s third quarter earnings reflect the challenges of the overall toy industry this year paired with a welcome overhaul in the company’s operations.
Funko’s net sales slid 14.4% to $312.9 million in Q3 versus $365.6 million in the same period last year. Gross margin took a slight hit at 33.2% versus 35% last year, due in part to charges related to factory purchase order cancellations. The company’s ongoing operational improvements resulted in one-time charges relating to a lease cancellation and severance packages following two rounds of workforce reductions earlier this year.
For the 2023 third quarter, net sales, adjusted net income and adjusted EBITDA exceeded our expectations. Our solid overall performance was driven by strong direct-to-consumer sales, which were bolstered by the successful online launch of Pop! Yourself; improved sales to several of our larger U.S. and European wholesale customers, due in part to growing sales of Bitty Pop!; and ongoing efforts to significantly reduce costs and enhance efficiencies."
In a presentation accompanying its Q3 earnings, Funko highlighted the success of its direct-to-consumer (DTC) business which amounts to 11% of its total sales. Funko remains its own biggest retailer with no other partner accounting for more than 7% of net sales. Growth in the DTC channel also includes the company’s Pop! Yourself offerings — a $30 proprietary product with no licensing fees.
“We also made progress on our plan to focus on Funko’s core products and reduce the number of product lines and complexity in our business,” Lunsford adds. “In addition, we realigned our senior management team to streamline decision making, to better collaborate, and to improve cross-functional communication throughout the organization.”
Looking ahead, Funko says it will continue focusing on running its business like a “lean startup” with a focus on core products following a 30% reduction in SKUs this year. Additionally, the company plans to offer an “always fresh” evergreen product assortment of approximately 200 items that are always available to retail partners.
Revised guidance for the full year sees the company retaining its status as a billion-dollar business with anticipated net sales of $1.065 billion to 1.105 billion amid improvements in margin and income.
