Funko, Inc. Q2 2024 10-Q Summary
Business Context and Reporting Period
This summary covers Funko, Inc.'s (FNKO) quarterly report on Form 10-Q for the period ended June 30, 2024. Funko is a leading pop culture lifestyle brand that designs, manufactures, and sells licensed consumer products, including figures, plush, accessories, and apparel. The company operates globally with significant manufacturing in Vietnam, China, and Mexico, and sales concentrated in North America and Europe.
Key Financial Metrics
| Metric | Q2 2024 (3 Months) | Q2 2023 (3 Months) | YTD 2024 (6 Months) | YTD 2023 (6 Months) |
|---|---|---|---|---|
| Net Sales | $247.7 million | $240.0 million | $463.4 million | $491.9 million |
| Gross Margin | 42.0% | 29.2% | 41.1% | 24.3% |
| Operating Income (Loss) | $10.7 million | ($30.5 million) | ($4.2 million) | ($95.0 million) |
| Net Income (Loss) | $5.4 million | ($75.9 million) | ($18.2 million) | ($137.0 million) |
| Net Income Attributable to Funko | $5.1 million | ($73.0 million) | ($17.5 million) | ($128.3 million) |
| Diluted EPS | $0.10 | ($1.54) | ($0.34) | ($2.71) |
| Adjusted EBITDA | $27.9 million | ($7.6 million) | $37.5 million | ($21.6 million) |
| Cash and Equivalents | $41.6 million | $36.8 million | $41.6 million | $36.8 million |
| Total Debt Outstanding | $210.9 million | $240.0 million | $210.9 million | $240.0 million |
| Working Capital | ($26.3 million) | ($16.0 million) | ($26.3 million) | ($16.0 million) |
Material Changes vs. Prior Period
- Revenue Growth: Q2 2024 net sales increased 3.2% year-over-year, driven by growth in direct-to-consumer channels and mass-market retailers. However, YTD sales decreased 5.8% due to lower sales to e-commerce sites and specialty retailers.
- Margin Expansion: Gross margin improved significantly to 42.0% in Q2 (vs. 29.2% in Q2 2023) and 41.1% YTD (vs. 24.3% YTD 2023). This improvement is primarily attributed to the absence of a $30.1 million inventory write-down recorded in Q1 2023, lower shipping costs, and the recapture of inventory write-downs as aged inventory was sold at better margins.
- Profitability: The company returned to profitability in Q2 2024 with $5.1 million in net income attributable to Funko, compared to a loss of $73.0 million in Q2 2023. The prior year's loss was heavily impacted by a $99.6 million gain on tax receivable agreement liability adjustment and a $138.1 million tax expense related to a full valuation allowance on deferred tax assets.
- Cost Reduction: Selling, general, and administrative (SG&A) expenses decreased 9.0% in Q2 and 12.0% YTD, driven by reductions in personnel costs and professional fees.
- Debt Reduction: Total debt decreased by approximately $29 million compared to the prior year period, with the company paying down $30.5 million on its revolving credit facility and $19.6 million on term loans during the first half of 2024.
Guidance, Outlook, and Risks
- Management Commentary: Management notes a challenging retail environment where retailers are slowing restocking and prioritizing lower inventory levels. The company is strategically adjusting inventory buy-ins to focus on core products. International sales (Europe and Other International) showed growth, offsetting declines in the U.S. market.
- Liquidity and Covenants: As of June 30, 2024, the company had $60.0 million available under its Revolving Credit Facility. The company is in compliance with its financial covenants (Net Leverage Ratio of 2.50:1.00 and Fixed Charge Coverage Ratio of 1.25:1.00). On June 11, 2024, lenders granted a permanent waiver of the minimum Qualified Cash covenant.
- Internal Controls: The company disclosed that its disclosure controls and procedures were not effective as of June 30, 2024, due to material weaknesses in internal control over financial reporting. Remediation efforts are ongoing throughout 2024.
- Legal Contingencies: The company faces ongoing securities class action litigation and derivative lawsuits. A non-monetary settlement in principle was reached for certain derivative actions in March 2023, pending final court approval. A securities class action regarding the IPO remains in discovery.
- Risk Factors: Key risks include dependence on third-party licensors (top 10 licensors accounted for 68% of YTD sales), inventory management challenges, global economic downturns affecting discretionary spending, and potential disruptions in international supply chains.
Investor Verification Checklist
- Inventory Levels: Verify the current inventory balance ($109.0 million) against sales velocity to assess the risk of future write-downs, given the company's history of inventory adjustments.
- Covenant Compliance: Monitor the company's ability to maintain the Net Leverage Ratio and Fixed Charge Coverage Ratio, especially given the negative working capital position.
- Internal Control Remediation: Track the progress of remediation efforts for material weaknesses in internal controls, as failure to remediate could lead to restatements or regulatory sanctions.
- Licensor Concentration: Assess the impact of the top 10 licensors (68% of sales) and the Disney/LucasFilm/Marvel group (35% of sales) on future revenue stability.
- Legal Exposure: Review the status of the ongoing securities class action litigation and the potential financial impact of the settlement in the derivative actions.
- Tax Receivable Agreement (TRA): Understand the potential future cash outflows related to the TRA, which requires payments of 85% of realized tax benefits to Continuing Equity Owners, contingent on future taxable income.