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Operator
Good afternoon and welcome to Funko's 2024 First Quarter Financial Results Conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of the company. As a reminder, this call is being recorded. I would now send the call over to Funko's Director of Investor Relations, Rob Jaffe. Please proceed.
Funko
Hello, everyone, and thank you for joining us today to discuss Funko's 2024 first quarter financial results. On the call are Mike Lunsford, our interim chief executive officer, Yves Lapendaven, our acting CFO, and Cynthia Williams, our newly appointed CEO. 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 recent SEC reports. In addition, during this call, we referred to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Funco's press release announcing its 2024 first quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures for 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 Mike Lunsford.
Mike Lunsford
Mike? Thanks, Rob, and good afternoon, everyone. I'll begin with the announcement made earlier today that our Board of Directors has appointed Cynthia Williams as Funko's next CEO. Cynthia's experience across the consumer products, gaming, and e-commerce industries, combined with the growth she spearheaded while at Hasbro, Microsoft, and Amazon, made her the clear choice to be our next CEO. We welcome Cynthia to the Funko family. I can tell you Cynthia is eager to get started, and I'm pretty eager for her to get started. She is here with us today and will make a few introductory comments a little later in our presentation. Turning to our financial performance, we reported a solid overall first quarter. Net sales of almost $216 million were within our guidance range, albeit at the lower end. Sales of some lower margin products shifted to Q2 from Q1. Otherwise, our net sales for the quarter would have been close to the midpoint of our expectations. Gross margin of 40% and adjusted EBITDA of $10 million were both well above our expectations. One key driver for the increased gross margin was higher than expected margins on sales in the value channel, which is the result of the processes we put in place to improve inventory management. Another key driver was lower than anticipated freight costs. Operationally, we continued to make progress reducing our inventory levels and paying down debt. At the end of Q1, inventory was $112 million, down from $119 million at December 31st, 2023, and total debt was down $27 million. This is on top of the progress we made last year, reducing inventory levels by more than half. What a difference a year makes. Since Q1 of 2023, we've made tremendous progress reducing inventory levels lowering fulfillment costs, and improving service levels. And just last month, almost two years to the day of opening our new warehouse in Arizona, we hit the milestone of over 100 million units shipped. Turning now to our outlook. We are reiterating our full year 2024 guidance. As expected, a lack of new entertainment content, primarily due to the recent Hollywood strikes, impacted our Q1 top line. We expect the content schedule remaining soft in the Q2 and then strengthening in the second half of the year. With regard to freight, our original forecast assumed a substantial increase in shipping costs due to conflicts in the Red Sea. Freight costs in Q1 were lower than we anticipated and have stabilized. Nonetheless, our logistics team continues to look for ways to manage and mitigate fluctuations in these costs. Turning briefly to a couple of recent product highlights and how they relate to our growth plan. With regard to focusing on our fans and unmatched brand, on our last call, we spotlighted our presale capabilities with the limited edition Jason Kelsey pop figure. Building on that success, we recently launched several exciting collaborations, including the Dunkings and Project Fred, Big Boy, Coke, and Sprite campaigns. And earlier today, we launched our first edition of the Jumbo Chon line. This new collectible line initially features our nostalgic and iconic Freddy Funko in a new anime stylization. All of these exclusive drops of premium priced, limited edition collectible items have all sold out and have been creating brand heat with our core customers. To focus on fewer products done extremely well, we are emphasizing evergreen and replenishment sales of Bidipop to drive SKU efficiencies and produce characters that consistently resonate with customers. And Pop Yourself is a great example of investing in areas we have better control over and expect to be able to measure and grow profitably. We continue to add options and accessories to our Pop Yourself line. In Q1, Pop Yourself sold especially well as a Valentine's Day gift, and the team is gearing up for the upcoming Mother's Day and Father's Day holidays. In April, we launched a Pop Yourself two-pack, strategically in time for the upcoming wedding season. Since launch, two-packs have generated more revenue than the singles. What we thought was going to be a nice addition to the line has performed well above our expectations. And as a sign of the product's growing consumer awareness, Pop Yourself was featured in a New York Times roundup of best wedding gifts. In combination, these highlights demonstrate how we keep the flywheel turning, where each action we take builds on the previous one, propelling positive momentum. With that, I'll now turn it over to Eve to take you through the financials. Eve?
Pop Yourself
Thanks, Mike. Hey, everyone. Thanks for joining us today. For the first quarter, total net sales were $215.7 million. Direct-to-consumer sales index in Q1 was 23% of our gross sales, up from 19% in last year's Q1. This represents 5% direct-to-consumer sales growth, which we achieved despite a lack of new entertainment releases due primarily to the Hollywood strikes. As we said previously, a key element of our strategy is to continue to grow our direct-to-consumer business, which in turn helps our gross margin. Gross profit was $86.3 million and gross margin was 40%, which was well above our guidance and significantly higher than our gross margin in any quarter in 2023. SG&A expenses of $85.6 million included non-recurring charges of $5.1 million. primarily related to severance and non-cash charges associated with exiting certain business lines. Adjusted net loss was $9.2 million, or 17 cents per share, which was better than our guidance range for the quarter. And finally, adjusted EBITDA was $9.6 million, which was well above our guidance range. Turning to our balance sheet. At March 31st, we had cash and cash equivalents of 26.1 million dollars, which is after we paid down 27.4 million dollars of debt in the first quarter. Our total debt was approximately 246.4 million dollars, which includes the amount outstanding under the company's term loan facility, net of unamortized discounts, the balance on our revolving line of credit, and our equipment finance loan. Total company liquidity was 69.1 million dollars and inventory was 112.3 million dollars, which was down from 119.2 million dollars at December 31st, 2023. Turning to our outlook, we are reiterating our 2024 full year expectations, which are net sales of between 1.047 billion dollars and 1.103 billion dollars and adjusted EBITDA of between $65 million and $85 million. For the 2024 second quarter, our guidance is as follows. Net sales of between $225 million and $240 million, gross margin of approximately 38 to 40%, SG&A expense of $80 million to $85 million, adjusted net loss between $8 million or 15 cents per share, and $4 million or $0.08 per share. Finally, we expect adjusted EBITDA of between $9 million and $15 million. We expect our financial results to be stronger in the second half of 2024 than in the first half due to the natural seasonality of our business as well as an expected easing of the impact of the Hollywood strikes. Mike, that's it for our financial results. Back over to you.
Mike Lunsford
Thanks, Steve. In summary, We reported a solid overall financial performance in Q1. We continued to make progress reducing our inventory levels and paying down debt. Our outlook for 2024 reflects a renewed focus on our core business, especially those areas we have greater control over and believe we can grow profitably. And we announced our new CEO, Cynthia Williams, who is expected to start on May 20th. With that, and before we open up the call for questions, I'll turn the call over to Cynthia, who has comments she'd like to share. Cynthia?
Cynthia
Thanks, Mike. And hi, everyone. I'm Cynthia Williams. And as you know, I'll be taking over as Funko's permanent CEO later this month. I thought it would be helpful to introduce myself before I began immersing myself in the company and my new role. I'd like to start by saying I am incredibly excited about joining Funko. From my perspective, the company has lots of potential. Funko has a long history and is a leader in the collectible space. It has several global brands, innovative and unique products, and a passionate and loyal customer base. What's the most exciting to me are the multiple opportunities for substantial growth, especially in the areas Mike discussed, anime, music and sports, as well as the company's direct-to-consumer channel and international growth. I believe Mike and the team have done an excellent job of refocusing the company on its core assets, reducing costs, improving profitability, and creating a solid foundation upon which we can scale the company in a profitable way. As you probably saw in the press release, I have a deep background with consumer products gaming and e-commerce as well as extensive experience growing brands to a global consumer base having worked in adjacent industries and having had previous dealings with some of funko's key customers and strategic licensing partners i am ready to hit the ground running my first priority will be to get to know the management team and the employees at our various locations and do a deep dive to learn more about Sunco's capabilities. In short order, I also intend to meet with our strategic partners and key customers. With that brief introduction, we'll open the call for questions. Operator?
Operator
Thank you. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind, please dial star followed by two to exit the queue. And finally, when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question today is from the line of Eric Wald of B. Reilly. Please go ahead. Your line is open.
Eric Wald
Thanks. Good afternoon. I'm glad to be on the call for the first time here. And welcome, Cynthia. I guess a couple questions for me. You spoke to the main drivers behind the stronger gross margin in Q1, and they got in for Q2 of 38% to 40%. I guess, what are the main variables that would take you either to the 38% or the 40% within that range? And given what you see in Q1, expect in Q2, should we think of this gross margin, the high 30% to 40% as kind of a new baseline going forward?
Pop Yourself
Hey Eric, this is Eve. Thanks for the question and good to have you on the call. Yeah, I guess I could speak to that, you know, first again reiterating why our margin was 40%, our gross margin was 40% in Q1. So we did benefit from a few things. Freight costs were, you know, lower than we initially expected. Direct-to-consumer mix was 23% of sales. And we did benefit from having a much cleaner inventory position than we've had in the past year. So all of those were kind of the drivers. And then when you think about Q2, we feel good about maintaining direct-to-consumer at around that 20% to 25% of our sales mix, which will help our gross margin. The freight costs we anticipate will remain pretty stable. I think that the main difference between a 38% and a 40% gross margin would be Timing of shipments to our wholesale customers. As you know, we have a wide variety of products and customers. And so sales mix can have a little bit of an impact on gross margin. But we feel pretty good about that range right now.
Eric Wald
Perfect. And second question, if I may. Obviously...
Mike Lunsford
Sorry, Eric. I think the second part of your question was, this is Mike, is this the new normal? Is 38% to 40% the new normal? I don't know that we're willing to commit to that yet, but it certainly seems that we've gotten to a point where that is something you could perhaps build your models around.
Eric Wald
Perfect. And then last question. You're expanding the pop yourself and kind of promoting around a variety of different um events and holidays any early reads that you want to share on um you know the percentage of customers coming to your website to order a pop yourself that have never ordered on your site before and if you're seeing any trends of them them returning at later dates for you know purchases outside the pop yourself realm
Mike Lunsford
Without getting into specific numbers, and Eve will know more what we've shared and what we can share, I would say that the percentage of people who are coming in to buy Pop Yourself are a very high percentage are first-time customers. And that is great news for us and something that we're trying to leverage every chance we get. We're not far enough along yet to tell you what the follow-up purchase is from that group. It is not as high as our main core customers, our main product customers coming in now, but we see a pathway for it to get there. I think in the next six months, that's something that we'll have more insight into and can share.
Pop Yourself
Yeah, the only color I would add to that would be that, you know, keep in mind, we really just launched Pop Yourself Online last August, and we had a, you know, we're really pleased with how it did over the holiday period. And we're trying to now make it a year-round business, right? So we're capitalizing on other holidays such as Valentine's Day and Mother's Day and Father's Day. And as we're going through that process, we're learning a lot about these new customers that are coming to our site. And in some cases, it's a different shopper coming in for a Father's Day gift than the person coming in for the Mother's Day gift. So we're still learning, but it's early days with this product line, and we see a lot of upside potential.
Eric Wald
Perfect. Thank you both. Thanks, Eric. Thanks, Eric.
Operator
Our next question today is from the line of Steven Laschick of Goldman Sachs. Please go ahead. Your line is open.
Steven Laschick
Hey, great. Thanks for the questions and welcome, Cynthia. Maybe first on U.S. versus international growth, I think there's about 10 percentage points of delta. in the first quarter with U.S. underperforming Europe. I'm just curious if you could talk a little bit more about the dynamics at play there and how you expect U.S. versus European growth to trend throughout the year. And then secondly, on product innovation, I was wondering if you could talk a little bit more about the product and innovation slate as you look into the back half of the year. I know the film slate's ramping up, and it sounds like there might be some opportunity there. Just curious if you could expand on that. Thank you.
Pop Yourself
Sure. Hey, Steven, I'll take the first part to that question, and I think probably Mike will want to speak to the product innovation. But you're right, a pretty big delta between the growth rates in the United States and Europe. But just keep in mind, I think in the European market, we've had a much more stable business over the past couple of years, and we have had a lot of success with really building an evergreen program there. So I would say that the main difference there in Q1 was that In the U.S., we were a little bit more impacted by the Hollywood strikes and the content slate, whereas in Europe, they have a much more, you know, a higher portion of their business is related to evergreen sales, which weren't quite as impacted. Mike, do you want to take the product innovation?
Mike Lunsford
I will. Hey, Steven, nice talking to you. I would say second half innovation, there aren't any surprises there. It's stuff that we've been working on for the last year and have talked about pretty constantly at this point. I think as Cynthia comes in and we look at a longer term plan, there are opportunities to innovate in new areas. But for now, what you'll see from us is more pop yourself, more biddy. We're making good progress with Mondo. We've started launching the limited editions, which I talked about in the call. And we have a whole slate of those for the second half of the year. And then, you know, Lounge, Fly, and Core will continue to innovate on form factors and on content. But there won't be anything that, you know, is going to really just, oh, my God, they've come up with something new in the next six months, not a new form factor, et cetera. We are very excited for a few movies this summer, including Deadpool, which we think will have some interesting stuff around.
Steven Laschick
Great. Thank you, guys. Thank you.
Operator
And our next question today is from the line of Linda Bolton-Weiser of DA Davidson and Company. Please go ahead. Your line is open.
Linda Bolton - Weiser
Yes. Hello. Thank you, and welcome to Cynthia. So I had a question about the SG&A. level of guidance for second quarter, that figure of 80 to 85 million, I think it's still things elevated versus the run rate kind of SG&A level prior to when you had the operational difficulties. So I'm wondering, you know, you've made headcount reductions, you've done streamlining, et cetera. What is still elevating that level of SG&A?
Pop Yourself
Well, I'd say, Linda, thanks for the question. So first on SG&A, one of the big differences you have to keep in mind compared to the past few years is that we're really growing that direct-to-consumer business, which has the benefit of having a higher gross margin, but it also has more variable SG&A, including marketing costs, especially as we're trying to grow and build brand new product lines like Pop Yourself and attracting those new customers to our website. So that's one key difference. The other thing I'd say is that, of course, SG&A as a percent of sales, you know, in a quarter like Q1 where we had, you know, a lower content slate and so forth, you know, that's obviously not where we want to be in the long run as you kind of look at our guidance for Q2 and then think about the back half of the year as sales are going to ramp up sequentially. will absolutely bring that SG&A as a percentage of sales down quite a bit.
Linda Bolton - Weiser
Okay, thank you. And then I'm just curious about how things stand with the big mass retailers. Are you kind of just the status quo, you know, in terms of where you're at now, or are there going to be some initiatives to try to gain shelf space or kind of what are you thinking right now about that kind of whole channel?
Mike Lunsford
Well, I think Bidipop is the place right now where we're making more inroads with mass and value than with any of our other products. We're seeing significant pickup by the two large brick and mortar mass retailers there, and we'll continue to see that. And the good news there is that that's not in our usual shelf space. That's front of store, that's impulse, that'll eventually be in toy, we think. So that's a big pickup for us in the long term.
Linda Bolton - Weiser
Okay. And then, I guess, in terms of i don't know if cynthia is she answering questions if so i'd be curious to know what her just initial first impressions are kind of about the company the culture um you know and and personnel like is she feeling that there needs to be a chief operating officer or is there anything she can say about those those topics hi linda nice to meet you this is cynthia um
Cynthia
I have had most of my interaction at this point has been with the board of directors. I've had an initial social conversation with my executive leadership team. So I'll be spending the first 30 days going really deep, getting to know the people and the business, and then over the next 60 days focused on sort of any impacts we need to do to the strategy and the plan. But my first impressions are incredibly positive.
Linda Bolton - Weiser
And are you relocating to the Pacific Northwest?
Cynthia
Actually, I've been in the Pacific Northwest for about 17 years since I started at Amazon in 2007. And so fortunately, I don't even need to relocate and I'll be in the Everett headquarters. Oh, wow. Great.
Linda Bolton - Weiser
Sounds good. Thank you.
Operator
Thank you. And we have no further questions in the queue at this time, so I'd like to hand back to the management team for any closing remarks.
Mike Lunsford
Thank you, operator. Thank you, everyone, for joining us on the call today. As always, thanks to our fans, employees, and partners for their support. This will be my last earnings call. Cynthia will be taking over and sharing our progress on our next call. I've enjoyed working with you, our analysts and investors, and assure you I am leaving you in better hands than my own. Goodbye, everybody.
Operator
This concludes today's call. Thank you all for joining. You may now disconnect your lines. today's call thank you all for joining you may now disconnect your lines
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