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spk06: Good afternoon and welcome to Funco's conference call to discuss financial results for the fourth quarter of 2022. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypads. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. And as a reminder, this call is being recorded. I would now turn the call over to Ben Avenia-Tapper, Director of Investor Relations, to get started. Please proceed.
spk02: Thank you, and good afternoon.
spk10: With us on the call today are Brian Mariotti, Chief Executive Officer, and Steve Nave, newly appointed Chief Operating Officer and Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, management will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. reconciliations to their most directly comparable U.S. GAAP financial measures and supplemental financial information can be found in the earnings press release in 8K that we released earlier today. All these items, plus a visual presentation that investors can consult to follow along with this discussion, are available on our investor relations website, investor.funco.com. I will now turn the call over to Brian.
spk11: Good afternoon, and thank you, everyone, for joining us today. As most of you know, this is my first earnings call since I stepped back into the role of CEO in December. I'd like to use this call to provide an update to the important work that is underway at Funko. I want to first emphasize that I stepped back into the role of CEO because I fully believe in the power of the Funko brand and its potential, but I also recognize that significant operational issues can prime us. My first priority is a reset of our operations, which we are addressing with urgency, but won't happen overnight. Recognizing our current situation, I think it's important to understand how we got here. Since we IPO'd approximately five years ago, we've more than doubled our revenue. We have taken a nationwide direct-to-consumer business and grown it to 15% of total revenue this past quarter. We've expanded into multiple new geographies, and we've added amazing new brands for our pop culture platform. This rapid growth brought challenges that we are now addressing. Our history proves that we can deliver reliable, profitable growth, but to do so, we will need to reset our operational foundation. With that context, let's turn to the results for the quarter. The demand for our brand is stronger than ever, but we're still early in our operational reset. Looking at our financial results for the fourth quarter, net sales were $333 million, down 1% year over year, wrapping up the year in which we grew 29% year over year. In our direct-to-consumer business, the channel we have most control over, we grew 37% year-over-year. And on the wholesale side, while we don't typically comment on point-of-sale trends, wholesale sell-through has been very encouraging. In Q4, we posted double-digit TOS growth, well ahead of NPD estimates of flat growth for the broader industry over the same period. While demand remained strong, our fourth quarter profitability was heavily impacted by our operational challenges. Adjusted EBITDA was a loss of $6 million, and adjusted EPS was a negative $0.35. It was clear on our last earnings call that the business and our operations hit an inflection point. A combination of macro factors and Funko-specific issues have disrupted our financial and operating performance to an unacceptable degree. We'll share more details on our financial results shortly, but I want to spend this time discussing the important work that's underway and how we're going to get our operations back on track. Our board and our management team are deeply focused on execution and unlocking the potential of Funko GE's value proposition. To begin, we have strengthened our leadership team. Steve Knave, who is with me on today's call, joined us in early December in an interim operations consulting capacity. We announced that today Steve will serve as both the new Chief Financial Officer and Chief Operating Officer. Steve brings a wealth of expertise spanning retail, consumer, and e-commerce industries. He served as CFO, COO, and CEO of Walmart.com, where he is responsible for all aspects of a multi-billion dollar e-commerce business. More recently, Steve was the CEO of Blue Stem Brand, a multi-channel retailer. We're thrilled to have Steve on board. We've made good progress in aligning the finance and operations sides of the business, and that's exactly why Steve will be serving in both capacities as CFO and COO. Allowing Steve to oversee both functions, we believe will be the better position for him to drive that alignment as we work across the organization to improve efficiencies and ultimately our financial results. Our efficiency improvements fall in three categories, gross margin initiatives, fulfillment cost reductions, and other SG&A savings. These actions are well underway, but 2023 is still very much a year to operationally reset. Once completed, we believe these actions will save us between $150 million and $180 million annually. Our first category of focus to improve execution is on the gross margin line. Here we have two primary levers, price and product cost, which together we expect to contribute approximately $60 to $70 million in annualized adjusted EBITDA. Last quarter, we discussed extending our price increases to include our exclusive product line. The recession has been encouraging, and we believe our products remain firmly in an affordable price range for our customers. We are also driving down our product costs with the introduction of a more competitive bidding process from our vendors and a more comprehensive assessment of costs throughout the product development life cycle. The second and third categories include addressing our fulfillment obstacles and reducing other SG&A spending. Since the pandemic, we've added approximately $85 million in annual fulfillment expenses, despite similar overall throughput in our distribution center. The mix of the business has changed since 2021, but by focusing on the execution, we can reclaim a significant portion of that spending increase. Combined, we expect fulfillment savings and other SG&A reductions to add $90 million to $110 million in analyzed adjusted EBITDA. The first action addresses the efficiency of our distribution center. We're implementing a warehouse management system that we believe will dramatically improve our cost to fulfill. This system is expected to be up and running this summer. The second fulfillment improvement action is addressing our elevated inventory level. We are beyond the intended capacity of our Arizona-based distribution center. The volume is restricting our distribution center's throughput and incurring incremental container rental charges. By eliminating this inventory, which we expect to do in the first half of this year, we expect to both reduce SG&A spending and improve our gross margin by saving on incremental container rental charges. Finally, we are taking steps to reduce operating expenses across the board, including a workforce reduction of approximately 10%, tighter marketing spends, and other cost reduction actions to ensure our spending is aligned with our top line results. These changes are ongoing, and we are focused on executing on all these initiatives with a high degree of urgency. We expect the margins in the first half of the year to remain under significant pressure. However, by the second half of the year, we expect the combination of gross margin initiatives, improved fulfillment, and reduced SG&A spending to return for our adjusted EBITDA margins to double digits. 2023 is a year for us to focus on operations. Most of that work is already underway and will continue throughout the first half of the year. Many of our retail partners have been very tentative in their post-holiday restocking, and we expect that to weigh in on first half selling. However, as already noted, demand and sell-through remain strong. We expect a robust second half rebound in the content calendar. These factors give us confidence in top-line performance in the second half. That sales trend Coupled with the bulk of our operational improvements coming in the first half, we expect our results to improve in the second half of the year. I look forward to updating you on the progress along the way. While we are heavily focused on execution, we have not lost sight of opportunities to grow our core business through new collaborations, adjacent product categories, new direct-to-consumer experiences, and new geographies. These opportunities are exciting and expected to help grow our business. Today, however, operational improvements are the most important. Our execution here will help us to ensure we're well positioned to win these new growth opportunities in the future. We know 2023 will be a year to reset, but I'm confident we will come out of this a stronger Funko from top to bottom. These steps will allow us to regain our operating leverage as we accelerate growth in the near future and deliver long-term value creation for the company and our shareholders. Now let's turn it over to Steve to provide more details on the financial results of the court.
spk09: Thanks, Brian. Hey, everyone. Nice to meet you. I look forward to future conversations with each of you. I'm super excited about this business and helping to unlock Funko's potential. I look forward to getting to know you all over the coming quarters as we continue on the operational and financial initiatives we have underway. Now jumping into the results. In the fourth quarter, we delivered net sales of $333 million, down 1% over the prior year. Our direct-to-consumer channel grew 37% to $49 million, driven by very well-received events including Black Friday and Cyber Monday. The strong performance in our direct-to-consumer business was offset by slower sell-in on the wholesale side. Wholesale declined 6% to $284 million as we managed through a period of muted stocking across most of our retail partners. In the U.S., net sales declined 5% to $241 million, while net sales in Europe were relatively flat at $64 million. Other international net sales increased 45% to $28 million, with double-digit growth in all of our emerging geographies. On a brand category basis, net sales in our core collectible brands declined 7% to $244 million on lower evergreen content as we prioritized more time-sensitive current content in light of our constrained logistics. The Loungefly brand grew 31% to $71 million, bringing the full-year growth to 68% year-over-year as the brand saw strong demand. Among our other brands, which include toys and games and our digital products, net sales declined 13% to $18 million, as the ongoing strength of our digital collectibles was offset by fulfillment challenges in our games business. Turning to margin and expenses, fourth quarter gross margin was 28%, well below our expectations due to multiple factors, including container rental charges and, to a lesser extent, chargebacks. These two factors reduce gross profit by approximately $15 million. While freight rates do continue to improve, this was offset by container rental charges incurred when capacity constraints within our distribution center prevented us from unloading containers. As Brian discussed, we believe that our ongoing inventory management practices combined with our lower product costs and increased pricing will allow us to get back to our historical margin range in the second half of this year. Moving on to operating expenses, we experienced significant headwinds due to constrained logistics. SG&A was $139 million, which includes a one-time $33 million non-cash charge for the write-down of capitalized costs related to a pivot in our ERP deployment strategy. In addition, there was approximately $3 million in incremental labor and third-party fulfillment expenses. For the fourth quarter, adjusted EBITDA was negative 6 million due to container rental charges, chargebacks, and additional fulfillment expenses, all of which we are addressing in the first half of this year. Finally, adjusted diluted loss per share was 35 cents. Turn to the balance sheet. We ended the quarter with $19 million of cash on hand. We ended the quarter with total debt of $246 million. Today, we announced an amended credit agreement which provides us with additional room under our financial covenants as we implement this year's cost savings initiatives. Please refer to our 10-K filing for additional details. Inventory at quarter end totaled $246 million, up 48% year over year. As Brian previously mentioned, we've conducted an exhaustive analysis of our fulfillment network and have decided to reduce our inventory levels to improve our overall cost to fulfill by managing our inventory to the proper efficient operating capacity of our U.S. distribution center. We expect this action to result in an inventory write-down in the first half of between $30 and $36 million. Before I move on to our guidance, I'll note that we've all been incredibly focused on identifying and addressing opportunities for improvement. We believe that executing on our initiatives will position us to drive sustained long-term shareholder value. However, these initiatives will take time, and in some cases, several quarters. As a result, we don't expect adjusted EBITDA to be positive until the second half of 2023, but to improve sequentially throughout the year as these initiatives take hold. For the first quarter, we expect revenue between $225 and $255 million, excluding our anticipated inventory write-down. We expect gross margin to be slightly below this past quarter and improve sequentially throughout the year as our inventory actions, pricing, and product costing efforts take hold. We expect SG&A to be sequentially lower by approximately $25 million. Adjusted EBITDA for the quarter is expected to be between negative 50 million and negative 45 million, returning to positive territory in the second half of 2023. We expect adjusted net loss of negative 53 million to negative 48 million based on a blended tax rate of 25%. And adjusted loss per diluted share of negative $1 to negative 90 cents based on a weighted average diluted share count of $52.3 million. For the full year, as gross and operating margins improve, we expect year-over-year revenue growth between 0% and 5%. We expect adjusted EBITDA for the year to be between $50 and $75 million, with effectively all of that coming in the second half of the year. We've made steady progress, and there's still much more to do. We've identified initiatives to capture between $150 and $180 million in annualized adjusted EBITDA. The next two quarters will see us rebuild a stronger foundation for Funco, and we are confident it will produce meaningful benefit in the second half and into 2024 and beyond. We appreciate your time this afternoon. Now I'll turn it back over to Brian.
spk11: Thank you, Steve. In closing, we remain very encouraged by the strong support and demand we continue to see from our devoted fans. As I said, we recognize our results are not where we want them to be, and we are working with urgency to take operational steps we need to deliver margin improvement and drive a long-term shareholder value. We are confident in our ability to execute. Thank you for the time today, and I will now turn it over to the operator for Q&A.
spk06: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypads now. If you change your mind, please press star followed by two. And when preparing to ask your question, please ensure that your line is unmuted locally. The first question on the line comes from Alexander T. Perry from Bank of America Merrill Lynch. Please go ahead, your line is open.
spk00: Hi, thanks for taking my question. I guess just first, Sort of, is there any indication on when the operational headwinds from the lack of the warehouse management software at the new DC will be behind us? And then I guess the obvious question is how much of a drag on sales, you know, gross margin SG&A is that this year? So like if we sort of exclude the operational headwinds, what would the guidance have been? You know, you mentioned some pretty positive color about wholesale POS being up double digit percent in the quarter. Is that the type of growth rate that 2023 sort of would be if it weren't for the operational issues you guys are facing? Thanks.
spk09: Yeah, sure. Hey, this is Steve. I'll take the first cut at this. On your first set of questions around the operational efficiency initiatives that we have underway, it's going to kind of come in kind of phased throughout the year, for example, We're already taking action on the inventory and we're already seeing some efficiency gains from that. Although we're not done with that work yet, but we're starting to see some benefit there. We've already started to see these container rental charges that we've been incurring. We've basically cut those in half as of a couple of days ago. So we're seeing that benefit already, and that benefit is going to continue to get bigger and bigger as we work through the inventory. On the system side, which is really the biggest hamstring in our U.S. distribution, we expect to have a warehouse management system in place this summer. And, you know, normally in a systems implementation like that, it takes, you know, 45, 60 days to fully burn in and work out the kinks. But we're confident that after that burn-in period, we'll see some really nice efficiency, especially on the variable labor side of fulfillment.
spk02: Great. That's really helpful.
spk00: And then I guess just on the sort of two follow-up questions, can you give us a little more color on the anticipated inventory write-down? Was this due to sort of lower wholesale reorders or is it primarily just the logistics issue which didn't allow you to unload the containers? And then, you know, my last question is what sort of led to the decision to not go through with the ERP implementation and take the charge in the quarter? Thanks.
spk09: Sure. On the inventory, it's purely an operational thing. The products are good. but the facility was running at over 100% capacity when it needs to run around 80% capacity to be as efficient as we'd like it to be. And we were incurring all these kind of storage costs, both in terms of the container rentals, as well as some offsite storage that we had to procure in the fall of last year. And then another temporary one that we've had to put in place a few weeks ago, So the inventory reduction is purely in order to be able to operate more efficiently and save a lot of money on storage costs. We worked that trade-off through pretty tightly to understand that it takes a hit to get rid of that inventory, but we're very confident of the payback that we're going to get as a result of just being more efficient and saving on storage costs. On the ERP question, So it's a little bit of an involved answer. We figured out in early part of this year, let's call it January, that we were not going to be on time with the launch of the ERP that was scheduled to happen this summer. And unfortunately, the warehouse management system for the Buckeye facility would have been tied to the launch of the ERP. So we took a look at the landscape, other system solutions that were out there that may be we could implement much more quickly, including the ERP that we run very successfully in our EMEA business, and basically made the decision that we could move forward, invest less money in a pivot in the strategy than it would have cost to complete the original strategy. And the side benefit is it gives us the ability to actually launch a warehouse management system in advance this summer. Full-blown ERP phase one will not be completed until sometime in 2024, but we're able to separate warehouse management from that now and go down that path separately.
spk00: Perfect. That's really helpful.
spk02: Best of luck going forward. Thank you. Appreciate the questions.
spk06: The next question on the line comes from Linda Bolton-Weiser of DA Davidson & Co. Please go ahead.
spk03: yes hi um i'm sorry if you um answered this because i missed the very beginning of your commentary but um like my understanding was that this distribution center was like almost inaccessible like it was just so many problems and that therefore you had to have duplicative storage and inventory in third-party locations so are you saying now that you are accessing the dc or like i'm just not i'm trying to Dena Roche- figure out, like what has happened since the last time you spoke about all this.
spk09: David Miller- yeah sure um so I mean we've been operating that distribution Center since I believe June or July of last summer, when it went live. David Miller- The problem with the inventory is it just became too cumbersome to operate in any sort of efficient manner so. The notion that we've not been able to access it, I would say, is not quite accurate. We've been using it. It's been incredibly inefficient, both because of the system issue as well as the inventory starting to pile up. And so, yeah, I mean, like I answered for the last caller, we're already seeing some of the benefits of the changes that were taking place. Did that cover everything you asked?
spk03: yeah yeah that's that's fine and previously um i know you were just giving very rough guidance um before because you didn't quite know probably but i know you were talking about an sdna adjusted sdna level of 100 million dollars per quarter thereabouts is that still the the case or i know you said it's like it's going to be that high in first quarter then it's going to come down or well what's what's the color on that
spk09: Yeah, so our SG&A expenses this year, we've got some headwinds. There's the annualization of some expenses and payroll that we new payroll that we incurred last year. We are working very aggressively to bring that down. Inside SG&A is the variable labor. Well, it's more than just the variable labor, but mostly the variable labor of the of our distribution center. So you're going to see improvements there again. Back to my previous answers, probably not until, I mean, we're seeing some benefit now, but real benefit not until later this year. And then we've got a number of cost takeout initiatives that Brian alluded to that are underway that are going to bring it down even more.
spk03: So, sorry, I didn't glance at your SG&A in the fourth quarter yet, but what was that number? And then how much of that in the fourth quarter SG&A is unusual type expenses that will eventually go away?
spk09: I might need to follow up with you on that question just to make sure that I'm capturing it correctly. Our fourth quarter SG&A was about, was $139 million. That included, that includes a $32 million charge for the ERP write down that I just discussed. And then small single digit millions of other non-recurring one-time expenses.
spk03: right so even excluding the charge that's like whatever 100 million dollars that's a very large number for a company of your size so i'm trying to figure out like what's normal if you've got all these things going on because just a few quarters ago your sdna was like i don't know it was like below 70 million or something so how much of it is like unusual like that's non-recurring sort of once you fix all your problems
spk09: Well, I mean, the things that I just mentioned, that's going to total about $40 million of non-recurring expense that we got hit with in the fourth quarter that we're not going to see going forward into 2024. There are some other headwinds in the number for this year. The annualization of any new hires that took place last year is the best example of that. But again, the cost takeout initiatives that Brian mentioned and that I've mentioned as well,
spk03: are going to you're going to see a pretty dramatic reduction in rsgna's expenses over time and will that be noticeable in third quarter 2023 or not till fourth quarter uh it will be it will be noticeable in third quarter okay gotcha thank you and then one more thing on um just the retail situation um I've had a lot of my other companies talk about how specialty retailers didn't stock up as much inventory. So they're not reducing inventory because they never had it. But it's the bigger big box retailers that are more problematic. And I think you talked about that. However, Walmart said their inventory was flat year over year in the last quarter. It seems like the problem is like fixed almost pretty much so. Is that the case, and why wouldn't your sales growth then kind of snap back a little bit more quickly?
spk11: Yeah, Linda, this is Brian. Yeah, I would say that you're accurate on the first part. Definitely specialty has not had the dip that some of our bigger partners did when they had some over-inventory positions and began basically canceling orders. in in late third quarter and also fourth quarter we are seeing some rebound but we're also still seeing a little bit of conservative nature in terms of ordering with some of the bigger the bigger accounts i mean the one thing that is in our our favor and always has been is our lack of concentration right i mean no one retailer is more than eight percent of our overall business and then obviously our number one customers are south but close to 15 for the quarter percent which is our direct consumer channels But, yeah, I mean, it's been a slow but starting to thaw, you know, take on our bigger retailers in terms of increasing their orders with exclusive content and the everyday items.
spk03: Okay. All right. Thank you very much. I really appreciate it.
spk02: Appreciate it, Linda. Thank you, Linda.
spk06: The next question on the line comes from Megan Alexander of J.P. Morgan. Please go ahead. Your line is open.
spk04: Hi, thanks for taking my question. I guess maybe to follow up on that, is there any way, you know, within the guide of the first quarter, you know, at the midpoint, maybe down 25%, that you could unpack the impact from, you know, maybe some normalizing seasonality, the impact of destocking, you know, just help us understand what the actual core underlying demand that you're projecting there is, and maybe what you're expecting for POS? And, you know, are you seeing more destocking than your POS might suggest, given your inability to fulfill product? And when would you expect that, you know, dynamic to reverse?
spk09: Yeah, I think, so I think there's a lot to unpack there. And it's going to take a little bit of time to unpack that for you. But, I mean, great questions. Also, you've got to keep in mind that we are trying to comp an artificially high quarter in the first quarter of last year. So when we look at our sales guide for the first quarter, it's taking into consideration that especially January and February of last year had really high sales as a lot of supply chain challenges caused orders and replenishment orders specifically to move into from like a November, December timeline into January and February. So a big part of the basically flat to 5% growth, which is pretty muted obviously for the first quarter of this year as a result of that.
spk11: Yeah, we're still definitely seeing great trends on the sell through on POS, so we're definitely The brand continues to do extremely well. It's just a slower amount of orders coming in from some of the bigger customers. But that, again, like I said on the last question by Linda, starting to thaw a little bit, and it's looking a lot better for us. But we're very encouraged by the strong POS.
spk04: Okay. And then, you know, maybe a separate question. Are there more investments in capacity needed after this? I think you mentioned you were running additional 3PLs and You know, last I heard, you hadn't moved Loungefly into the new DC. So if that warehouse is kind of already at 100% capacity, you know, how should we be thinking about additional investments beyond this needed to achieve the growth you expect? And, you know, related to that, how much of the $180 million of savings, you know, actually flows through to the bottom line?
spk09: Sure. So the first thing that I'll say is is we're leaving no stone unturned on the supply chain side. So we're looking at every possible option to enhance the network and in a way that's more financially efficient than what we're what we're delivering today, specifically on things like lounge fly. We've moved the lounge fly direct to consumer business into Buckeye. That hasn't happened already. It's like happening this week or next. Um, so we're going to start fulfilling that product out of, out of, out of the Buckeye Arizona facility here very soon. Um, we are looking at all of the third party logistics partners that we have, not just the lounge fly partners, but all of them to understand if there are, if there are some synergies we can get by collapsing those into, you know, one or two larger facilities, et cetera. Um, as it relates to Buckeye specifically the inventory reduction initiative is going to allow that building to handle the capacity that we need it to handle for the next couple of years for sure. But we are also still looking at potential long-term 3PL solutions as we grow into more and more volume.
spk11: Yeah, I'll add just one more thing onto what Steve said, which is a real hyper focus on FOB pickups. some of our bigger customers that we finally had a chance to set up um direct ship um so they're we're also pushing a lot more uh volume out of asia uh in 23 than we ever have before so another encouraging trend for us is we uh put in the wms for mid-summer and really think that the efficiencies in the warehouse in terms of just getting product out the door and cost of the bill will be on their way down starting as soon as third quarter
spk04: Okay, that's helpful. Maybe if I could sneak in one more just as a follow-up to the previous question. Is there any way you can share what DTC looks like through the first two months of the year relative to the 37% you talked about in the fourth quarter?
spk11: Yeah, I mean, look, it just continues to grow for us. I mean, it is our strongest product. growth category, the fact that we have control of the narrative on that, it makes it a little bit easier with some of the difficulties in the last quarter, quarter and a half with some of the bigger retail partners. We continue to just broaden the ability to fulfill quicker out of those direct consumer orders. And we have great content coming out of the D2C channel. So we do expect you know, again, significant growth for direct-to-consumer throughout the entire year. Obviously, the content slate gets a little bit better toward the middle and end of the year as compared to the content slate in 2022, which was about as poor as I've seen it in years. So, again, Loungefly and Funko continue to do really great things in direct-to-consumer. And Mondo's business, which is going to grow significantly this year since we acquired it, is, you know, pretty much all direct-to- So we will continue to see a lot of heat on that channel for us, and we're really happy about that.
spk04: Okay. Thank you very much.
spk09: Thanks, Megan.
spk06: The next question on the line comes from Garrick Johnson of BMO. Please go ahead. Your line is open.
spk07: All right. Good afternoon. Thank you very much. Steve, can you talk about the inventory that you are liquidating, what type of product that is? I think it's important given that a lot of your customers are collectors. And where is that product being liquidated and how is that being done?
spk09: Sure. So, obviously, we went after the oldest inventory first. Again, inventory that we felt like we could sell over time, but due to the operational constraints, it's just better to get out of it. So we've looked at all the inventory that that's been the oldest as our as our first bucket. And then we're looking at anything where we feel like, sure, we're selling quite a bit of it, but we might have, you know, more weeks of supply than than than we need. Right. To manage the business efficiently. And I mean, there there are about eight different lenses that we're using to look at all of our inventory to determine which which units are going to get destroyed. Um, speaking to how and where that's happening, we're using a third party, um, and, uh, they're not far from our distribution center in Buckeye, Arizona. So we're not going to incur too much transportation expense to do that, but we're using a facility that can certify the destruction for us so that we can provide certificates of destruction to our license source.
spk07: Okay. So it's, so it's being destroyed. Um, clear. and uh the product i guess would be uh a whole range of product from pop on to uh other other product that you sell i don't know yeah absolutely here yep okay okay and um steve can you talk about the inventory at hobby and specialty a little bit more do you and more importantly i'm wondering now that you've stepped into this role and you've had a look under the hood do you have confidence in in funco's systems and ability to track that inventory
spk09: Um, well, that's a, there's a, that's a two part question for sure. Um, my confidence level, um, yes. You know, we don't, we don't have the best systems right now, which is why we talk about things like an ERP and a warehouse management system. So I have confidence that we're going to get to a place where our systems infrastructure supports the business the way it needs to in the meantime. A lot of this stuff is done semi-manually. And we've, especially on initiatives like this inventory effort, we've put in so many redundant controls in the generation of the products that we've flagged to get rid of, as well as kind of the execution of getting the files passed back and forth between our planning group and the distribution center, that I'm confident that we'll do this without messing it up. Very confident. One thing that I wanted to go back and just emphasize for you, though, Garrett, is, yes, we are we are destroying this product, but we're doing it through a very green third party firm that's going to recycle everything to the extent it can be recycled. So I just wanted to make sure that everybody knew that we're trying to do this the most the most responsible way we possibly can.
spk02: Okay, great to hear. Thank you very much. Yeah, thank you, Garrett.
spk06: The next question on the line comes from Steven Lazacek of Goldman Sachs. Please go ahead.
spk05: Hi, thanks for taking the question. Maybe just one more on the new distribution system. I was wondering if you could talk a little bit more about what the biggest differences will be between the new system compared to the one proposed last year. Do you anticipate that the new system once implemented will have as much opportunity for efficiency over the long term as the plan you laid out at Investor Day last year?
spk09: Yeah, Steve, so that's a good question and prompts me to clarify something for everybody. So the new warehouse management system that we're talking about deploying this summer is what I would call a warehouse management system light. It's not necessarily the permanent solution, but it's something that we know we can deploy very quickly. with very little incremental cost, relatively speaking. It may be that as we complete our analysis around what the right permanent solution is that would be tied to a full ERP launch, it may be that we go in a different direction again. Although I expect what we're gonna find with the lighter system that I just mentioned is we're gonna end up with about 70 to 80% of the feature and functionality that we would have gotten with a full blown top shelf warehouse management system. It's such a leap forward for our business to have the 70 to 80% that it's gonna produce amazing benefits in terms of our ability to operate efficiently, but it may not be the full term solution going forward. Now, the one benefit that I will say of taking this bifurcated approach to the deployments is we won't be dependent on the actual ERP to get the systems implemented. And that also means that when we implement the new ERP, we don't at the same time have to implement a new top shelf warehouse management system. If we decide to go down that path, we can still keep it bifurcated through the ERP let that burn in, figure out the tweaks and the issues that every systems implementation has, and then go back and upgrade our warehouse management system if we decide that the juice is worth the squeeze.
spk05: Thanks. That's helpful. And then maybe separately, could you talk some more about the assumptions behind your 23 outlook, maybe just in terms of your outlook for the economy, the health and patient of the consumer, and what you're hearing out of the retail channels, and in terms of the back half orders picking up, that'd be helpful.
spk11: Yeah, I'll pick this one up. Yeah, look, obviously, yep, absolutely. So look, we have obviously visibility to our order book through all the way through Q3. And we also know there's a lot of great content in 23 compared to 22. We're seeing, like I said earlier, a thawing of some of the bigger customers in terms of like getting back to their normal levels ordering on a week-to-week basis for us. So Between the combination of all three, I mean, we think we're in a really good position to start building momentum for the second half of the year. And then as we do that, obviously, the implementation of the parachuted NWMS, the FOB fulfillment increasing dramatically in Asia and just better systems in places, like Steve said, every year. angle that we're looking at in terms of getting better in fulfilling, getting faster at fulfilling and reducing our cost to fulfill should all be taking place and hold in the Q3 and Q4. So ultimately based on the super positive POS for the brand and specialty always been a big part of our overall business with the lack of concentration we have. We see this thing continue to build back to what we think are really good levels in the second half of the year.
spk02: Great. Thank you. Thank you, Steve.
spk06: The final question on the line comes from Andrew Urquitz of Jefferies. Please go ahead. Your line is open.
spk08: Great. Thank you. I appreciate the time. Just two quick ones. The first one is, with all these moving pieces and kind of a stronger back half, could you share with us kind of a little bit more color around what you think like exit rate gross margins or exit rate operating margins would be? as we exit this year and get a lot of these issues behind us?
spk09: I'm not sure if we're sharing that level of detail yet about the exit rate on the year, but we'll certainly bring you along for the ride throughout the year, and you can see for yourself as those trends improve. Got it. Go ahead.
spk11: I was going to say, I think as we get towards the very end of Q3 and Q4, we're going to start seeing our EBITDA in the double digits, in the positive. So we are getting back to historical numbers that Funko has operated for years and years. Again, like Steve said, it's going to take us a little while to get there. But as we end the year, we're going to feel like we're in a really, really good place going into Q1 of 2024. So with numbers that are much more in line with how we've usually operated the business the last couple
spk08: Got it. That's helpful. I appreciate it. And then last question, I guess. How is this affecting now that you kind of come back in the seat and you've always been a creative guy dealing with all these issues? Is it holding back R&D projects or growth initiatives or anything along those lines?
spk11: No, look, we've made some conscious decisions on some of our initiatives to push into 24 so that the entire company was focused on one thing, which is to be operationally a heck of a lot better than we have been and to cut SG&A. And so I think, yeah, we've made a couple decisions. sacrifices for the very short term. It will not affect the promising nature of some of those investments in 24. But we wanted the entire company pulling in the same direction in terms of fixing our ills as fast as we possibly can. We had a fairly botched ERP process and unfortunately a really nice warehouse that was configured for ERP and WMS that never arrived on time. But I think It was important for us to continue all of the company pulling in the same direction on fixing these two problems. Meanwhile, though, we have three new product lines that are all launching middle of this year or later that have had a phenomenal response from our retail partners on a global basis, one of which is Bidipop that we're just insanely excited about, which is a micropop collectible. So we feel like a much better content slate, three great new products dropping, plan to more than double Mondo since we've acquired it. Lounge Life seems to be on fire. And we just have to fix our fulfillment issues and some of our operational issues while we reduce SG&A. So the focus has been on that, but I think you're still going to see some new disruptive products in the market. And then we'll pick up with some of the other new initiatives we have in 24 as we get the business back in order as fast as we possibly can.
spk08: Got it. I really appreciate the candor on that. Appreciate it, guys. Thank you.
spk09: Thank you, Andrew.
spk06: We currently have no further questions, so I'll hand back to the management team for any closing remarks.
spk02: Yeah, we appreciate everybody's questions and their time, so thank you very much. This concludes today's conference call. Thank you all for joining. You may now disconnect from the call.
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