Funko, Inc. Price & Performance (FNKO)

Hello, everyone, and thank you for joining us today to discuss Funko's twenty twenty five first quarter financial results. On the call are Cynthia Williams, our chief executive officer and Yves Le Pen de Ven, the company's chief financial officer. This call is being broadcast live at investor.funko.com. A playback will be available for at least one year on the company's website. I want to remind everyone that during the course of this call, management's discussion will include forward looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied. Including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC reports. During this call, we refer to non GAAP financial measures that are not prepared in accordance with US generally accepted accounting principles and may be different from non GAAP financial measures used by other companies. Investors are encouraged to review Funko's press release announcing its twenty twenty five first quarter financial results for the company's reasons for presenting non GAAP financial measures.

A reconciliation of the non GAAP financial measures to the most directly comparable GAAP financial measures, is also attached to the company's earnings press release issued earlier today. I will now turn the call over to Cynthia Williams. Cynthia? Thanks, Rob.

Good afternoon, everyone. Thank you for joining us. Let me start with some context. We came into 2025 with a clear eyed view The first half of the year would be about setting a stronger foundation for Funko attracting new fans with intentional diversification, into sports gaming, and music, and selling where the fan is through improved retail opportunities and experiential engagements. All of which are designed to delight new and core collectors. But the pace and intensity of change in the macro environment has accelerated. It's amplified existing challenges and compressed the timeline for making tough, necessary decisions. Even so, our strategy is sound. And more importantly, we're executing it We're staying disciplined moving with speed, and adjusting in real time to protect the business while continuing to invest what's working. That resilience showed up in Q1 We delivered net sales of a hundred and $91,000,000 in line with guidance. Gross margin was 40% and adjusted EBITDA came in at a negative $5,000,000 both ahead of expectations. Before I outline our tariff mitigation efforts, it's important to note that international performance continues to be a strength. According to Surcana Market Research, Funko is gaining share among consumers internationally and outpacing the broader toy market.

In Europe's g five combined markets, where overall toy POS growth was just 1%, Funko grew by 8%, We are also expanding our global footprint with licensed and partner stores now operating in The United Arab Emirates and China and with a newly announced location in The Philippines, marking our first physical presence in Southeast Asia. The Philippines has been one of our strongest performing markets in Asia, and this licensed store represented a commitment to selling where a passionate fan base lives. These are indicators that in more stable economies outside of The US, the road map we've built is gaining traction. We're gaining share expanding reach, and taking disciplined action to strengthen the foundation of the business and that is giving us confidence. However, in The US, the pressure we faced in Q1 from tariffs to more selective consumer behavior have intensified in q two.

Given these complexities, and the uncertainty related to the implementation of global tariffs, we are withdrawing our 2025 outlook. We believe this is the most responsible course of action given how quickly these variables are shifting. That said, we continue to focus on the outcomes we can control. So let me tell you about what we're doing to mitigate the impact of tariffs. When the tariff announcement was made on April 2, we immediately consulted our retail customers and subsequently paused most US bound orders out of China for direct import partners as we worked collaboratively on tariff mitigation activities. While this will clearly impact our second quarter, we believe our quick tariff mitigation efforts position us to enter Q3 with strong partners and agile logistics. Fortunately, we began diversifying our supply chain footprint as early as 2017. Building relationships with a network of strategic partners across Vietnam, Cambodia, Indonesia, and beyond. Over time, we've established a more agile operating model. One that we believe enables us to respond to volatility without compromising long term strategy. In April, we launched a cross functional tariff task force led by our new SVP of operations, Cliff Ingle, bringing together leaders across sourcing, finance, legal, and commercial with a mission to protect margins, preserve liquidity, and optimize every lever within our control.

Here's what we've done what we're doing now. We've accelerated sourcing diversification to countries like Vietnam and Cambodia Due to strategic and long standing manufacturing partnerships, we quickly secured enough capacity that enable us to reduce the manufacturing, of US bound products from China from a third to approximately 5%. By the end of the year. This is far faster than originally planned. We have also taken a holistic approach to cost discipline throughout the business achieving annualized reductions across product cost, supply chain and fixed expenses. This includes reducing operating cost including reducing our global workforce by more than 20% over the course of 2025 with the majority already implemented to date. Renegotiating pricing with ocean freight partners with a % of our volume locked in at contracted rates, and a focused SKU rationalization effort to eliminate low margin, lower velocity items. All of this sharpens our cost structure and gives us greater agility to respond to shifting demand without compromising execution. Beginning in July, we will implement pricing changes originally planned as part of our 2025 product repositioning. As tariffs and the subsequent rising cost escalated, we carefully considered whether a further price increase would be necessary but ultimately, we chose to hold the line.

Staying true to our fan first approach we continue to believe that collecting should still be fun and accessible even when the world gets more expensive. By holding the line on pricing while continuing to invest in value we know we're protecting what matters most. The fan experience. Investments in sculpt quality packaging, and authentication continue. Because we believe better value doesn't have to mean higher cost. As we continue to navigate this complex trade environment, we also want to acknowledge the broader impact this moment has on our industry. Funko is proud to be part of the American creative economy. Our products are developed by teams across The United States, from design to licensing to digital. And we work with hundreds of domestic partners who depend on the stability of this economy to drive jobs, innovation, and fan engagement. We support the toy association's advocacy for zero tariffs on toys and collectibles. And we stand with our peers in urging for free and fair trade policies that preserve creativity, accessibility, and the millions of emotional connections that fans make with our products every day. Toys and collectibles aren't just goods. They're cultural touchstones. They inspire self expression. Innovation, and community.

As one of the most culturally relevant players in our category, we take seriously our role, not just as a licensee, but as a trusted brand partner. We're working closely with partners to find shared solutions that reduce the impact of tariffs from logistics and manufacturing to product design and the end consumer experience. The silver lining we believe these collaborations have strengthened key relationships that will help propel our business forward. Combined, these actions across our global network and business make each dollar work harder positioning us to deliver for the fan while maintaining the quality they expect from our products. Even in a disrupted environment, we're seeing clear evidence that our strategy is working. POS data fan response, and partner feedback all point to continued traction. Especially around new formats, differentiated IP, and more targeted storytelling. Let me share a few examples of where that momentum is showing up across our ecosystem. Our direct to consumer business remains a critical pillar of our long term strategy. Particularly as a source of fan engagement, margin strength, and first party data. Our fan rewards loyalty program continues to grow, engaging our most valuable fans who spend more return more often, and have a stronger connection with our brand proposition.

As we continue to scale pop yourself and refine personalization through our newly launched customer data platform, we see this segment playing an outsized role in driving both profitability and brand advocacy. And perhaps, one of the clearest green shoots is in sports. In the first four months of 2025, we launched Pop Yourself at NBA All Star weekend with 100% sell through. Expanded into new team stores across Major League Baseball the National Football League, and the National Basketball Association. We launched a limited edition pop of Alex Avechkin within hours of his record breaking goal and yesterday, we announced our first ever WNBA pop figures launching with Aja Wilson, Angel Reese, Brianna Stewart, and Caitlin Clark. And while this wasn't by our design, we were delighted to see Juju Watkins pop sitting courtside during March Madness standing in for the athlete herself while she recovered at home. It was a viral reminder of how deeply our fans connect with the stories behind our figures. The intersection of fandom and sports continues to grow. And Funko is well positioned to participate as a leader in the sports collectible space. We're still in early innings but signals for continued growth are promising.

At Funko, we built a business that moves fast, adapts smartly, and thinks long term. In q one, we proved that again. Even amid uncertainty, our team delivered better than expected results stayed disciplined, and continued investing in the future. This is what execution looks like. Measured, creative, and fan first. Eve will now walk you through our financials.

Thanks, Cynthia. Hey, everyone. Thanks for joining us today. For the first quarter, total net sales were $190,700,000 which was within our guidance range. Direct to consumer sales comprised 22% of our gross sales, which is comparable to last year's first quarter. It's worth noting that shipping delays on products crossing the Mexico border hampered sales of Pop Yourself in Q1. Gross profit was $76,900,000 equal to gross margin of 40.3%. SG and A expenses were $84,800,000 which was well below our guidance range. Adjusted net loss of $17,800,000 or $0.33 per share was better than expected. And finally, negative adjusted EBITDA was $4,700,000 also better than expected. Turning to our balance sheet. At March 31, we had cash and cash equivalents of $25,900,000 Total debt was approximately $202,200,000 up $19,400,000 from the end of the previous quarter.

Net inventory was $87,700,000 down from $92,600,000 at the end of Q4. And total company liquidity was $90,900,000 a decrease from $124,700,000 at the end of Q4. Turning to our outlook, As Cynthia mentioned, we have decided to withdraw our formal 2025 full year outlook. The ongoing changes to global tariff policies as well as uncertainty about the macroeconomic environment make it difficult to provide reliable projections. However, I will provide a couple of high level thoughts on our future performance. For the second quarter, we expect our results to be negatively by the effect of the tariff policies. Both in terms of the tariffs themselves on our cost of goods sold as well as the disruption to sales related to direct import orders out of China. Because of this, today's 10 Q filing includes disclosures about the company's ability to continue as a going concern. At this time, we are in compliance with our debt covenants, and we have ample liquidity to operate the business. We have begun discussions with our lenders to obtain covenant relief in Q2 and we are evaluating strategies to refinance our debt. We are highly confident we will resolve this issue. Turning to the second half of twenty twenty five, we expect our performance to improve compared with the first half based on the following: Most importantly, we expect to fully offset the impact of incremental tariffs within the year.

At current rates, we estimate the incremental tariff costs to represent approximately $45,000,000 The offsets are driven by actions within our control. Including accelerating our sourcing diversification initiatives, implementing price increases, and reducing costs. Additionally, in The US market, we're working closely with our largest customers to resume shipping direct import orders out of China. Finally, we also believe our international business which represents more than one third of our sales, will continue to gain momentum. Cynthia, that's it for me. Back over to you.

Thanks, Eve. Before we open it up for questions, I want to reiterate that while we're navigating a challenging macro environment, we're also seeing the upside of our actions. We're strengthening partnerships sharpening our focus, and moving with greater speed and clarity about what matters most delivering for our fans. I want to thank our teams, our partners, and the fans who continue to show up for this brand. It is because of their support that we remain focused. We're moving fast and we're building for the long term. With our community alongside us every step of the way. With that, let's open the line for questions.

And finally, when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question today will be from the line of Antares Tobelum with Goldman Sachs. Please go ahead. Your line is open.

Hi. This is Antares on for Steven, and I appreciate you guys taking the questions. You guys talked through a lot of mitigation you're taking in response to the current tariff situation. Can you offer any extra color on what some of these actions look like in practice in particular when it comes to passing through price adjustments? And maybe to the extent that you're already having those conversations can you talk about what changes you're seeing in retailer sentiment or purchase patterns coming out of Easter? Thanks.

Venteres, thanks for the question. First, I'd say the pricing that we're doing was a decision that we've made back in January. So we've had the benefit of talking to our retail partners about this for several months now. Beginning back around the time of New York Toy Fair. Positive part of that was that we were able to talk about where we were positioned versus other collectibles. And the sentiment was generally that in pop culture collectibles, we're still a fantastic value and priced below comparable competitors. And so they have been aligned to this price point since early January. As the tariffs came in, we continued conversation with them as we discussed should we go higher. And we really received not only a lot of support for not going up, We entered into some healthy discussions about how to hold the line on that pricing. And so if anything, it's deepened some partnerships with those retail partners. So that that's the color there. The pops will be priced at $14.99. And that's the price point that our exclusive had been being sold at. That's our suggested retail price. So it's a a price increase versus the $12 price that nonexclusives had.

It's the same price of what we did with exclusives. And we're investing some of that in improving the quality of the sculpts and the packaging in the fan experience.

And maybe just as a quick follow-up, can you also talk maybe more about the POS trends that you're seeing so far in the quarter and maybe what you're looking for over the next few months in terms of trends there to maybe gain a bit more confidence in the rest of the year?

Sure.

I'll start with The US market. Obviously, that's the focus. You know, we've talked in our last couple of calls about, you know, consumers, looking for value being a little bit more more choosy. We've actually seen some encouraging trends in The US market for larger retailers, the year to date, POS has been down mid single digit, Part of that, I would say, was driven by certain, mass partners that we've had There were some softness in in footfall and some boycotts earlier in the year. We've actually seen an improvement to that trend. For the past four weeks, we've actually been up low single digit. POS in The US. So that's that's very encouraging trend. In Europe, which I'll point out again is over a third of our business, we continue to see good POS, high single digit comps year over year. And that business is is gaining momentum.

And I know we said it in the script, but it's worth pointing out that POS cells in Europe's g five markets. Actually outpaced the toy industry in q one. We were at 8% up in POS as reported by Sercana. And the toy industry was up 1%.

Great.

Thank you.

Thank you.

The next question will be from the line of Keegan Cox with D. A. Davidson and Co. Please go ahead. Your line is open.

Hi, this is Keegan. Thanks for taking my question. [indiscernible] kinda just wanted to get some clarity on the pricing. So those those prices were already planned for the year. They weren't in response to the original 20% tariff Right? That's correct.

Hi, Keegan. It's nice to meet you virtually, by the way. Welcome to the call.

Yeah. Nice to meet you as well. Perfect. And then, just to follow-up on margins. I I was wondering, if margins came in kind of above your expectations and if you guys could go through the drivers of that.

Sure. Yeah. Nice to meet you, Keegan. Yes. Our gross margin came in slightly above the high end of our guidance range. I would just point out that in Q1, we you know, there wasn't really much of a tariff impact in the quarter. [indiscernible] you know, saw across the board just slight slight, improvements over what we had forecasted both in terms of our product margins, our inventory reserves, our, and our discounts, and allowances. So just nothing No major driver to call out, but everything kinda came in line or slightly better than what we were expecting for q one.

Great. And then one more if I can. I I noticed the, 20% headcount reduction You said most of that is already taken place. That's really only a a one q benefit, I guess, but as we look forward, I how should I think about it?

The way I think about it, Keegan, is we we had an extra sorry. Yes. It it will show up in the cost savings. We had a action that took place in March and then another that took place yesterday, which I have to say was quite challenging for the management team and, of course, most importantly for the employees where we had friends and colleagues and fans who helped build Funko who aren't with us anymore. And so that that's very difficult decision That that is the majority of that 20% The remainder of it is about things that we won't be backfilling where we had some attrition. Or some hires that we had planned that we're not doing. It'll bring us down to finish out that 20%. So when you think about the benefit of it, a portion of it has already occurred in this order in q two. And you'll see more of it throughout the remainder of the year.

Thank you.

You're welcome.

With no further questions on the line at this time, I will now turn the call back over to management for any closing remarks.

Well, you everyone for joining us today on the call. We look forward to sharing our progress with you when we meet next time. Thanks so much.

This will conclude Funko's twenty twenty five first quarter financial results conference call. Thank you to everyone who joined us today. You may now disconnect your lines.