Story updated following earnings call and industry reaction…
Funko continues to wow the toy industry, but growing pains are beginning to emerge amid a contradictory balance between sales spikes and declining profit.
The Washington-based maker of pop culture-inspired toys and lifestyle products reported third quarter earnings reflecting net sales of $365.6 million, a 36.6% gain over the same period last year. Year-to-date sales for the first nine months of 2022 hit $989.7 million versus $693 million during the same period last year — a 42.8% gain.
“We delivered another quarter of record net sales growth, with robust demand across our brand portfolio. Our sustained success is a testament to our employees, our partners, and our loyal and highly engaged fan base,” says Funko CEO Andrew Perlmutter. “As we continue to support our rapid growth, we are making needed short-term investments to upgrade our infrastructure to help provide the capability and capacity to support our future growth.”
While net sales (36.6%) and gross profit (32.6%) increased in Q3, net income and EBITDA fell as gross margin dropped 100 basis points to 35%. The short-term outlook and updated guidance for the year headed into Q4 are spooking investors (more below) as growth may slow as the year winds down.
The Big Hits:
Funko says that it experienced double-digit sales growth across all brand categories as its direct-to-consumer sales increased 36.5% versus Q3 2021. Funko’s Digital NFT sales have more than doubled due to more frequent drops and additional partnerships.
On a call with investors and analysts, Perlmutter noted that:
- Popsies have been successful at Walmart and the company will increase shelf space to emerging brands in 2023.
- Five Nights at Freddy’s SNAPS! have been well-received right out of the gate and set the stage for a “full ecosystem” that Funko has planned for the brand.
- Mondo, the high-end collectibles company that Funko acquired this year, has started to be integrated into Funko’s “core collectibles” business. Funko expects Mondo to open new opportunities in music, with more details to be revealed.
- Funko is still its biggest customer. D2C web traffic is up and sales are up.
- The Funko Countdown Calendar business — which started four years ago with collectible advent calendars — has been reimagined as a “Countdown to Anything” category with more than 8x growth since its launch.
- The company is in the midst of infrastructure improvements for distribution and logistics.
- In-person sales at Comic-Con International San Diego (SDCC) were up double digits.
- In-person sales at New York Comic Con (NYCC) were up triple digits.
Future Outlook:
Looking ahead, Funko says that it expects full-year net sales for 2022 to reach $1.29 billion to $1.33 billion.
Due to the current economic conditions, the company expects a decline in gross margin and says that excess inventory is slowing — or leading to cancelations — of retail orders in Q4.
Funko’s balance sheet reflects a whopping 73% reduction in cash/cash equivalents on hand, a 40.9% increase in debt, and an 88% spike in inventory on hand versus last year despite strong consumer demand and sales increases across all categories.
The contradictory results between sales growth and financials led to an immediate sell of Funko stock as the share price dropped more than 41% overnight.
