Funko, Inc. (Nasdaq: FNKO), a leading pop culture consumer
products company, today reported preliminary financial results for
the fourth quarter ended December 31, 2019. Net sales are expected
to be approximately $214 million, a decrease of 8% compared to $233
million in the fourth quarter of 2018. Net sales were below
expectations in mature markets, including the U.S., due to the
challenging retail environment, which resulted in lower than
expected purchases among Funko’s top customers throughout the
holiday season as well as softness in sales related to certain
tentpole movie releases. These factors more than offset strong
growth both in Europe and the Loungefly brand during the
quarter.
For the fourth quarter of fiscal 2019, Funko estimates:
- Net sales in the U.S. will decrease approximately 9%, while net
sales internationally will decrease approximately 8%, reflecting
declines in mature international markets, including Australia and
Canada, partially offset by continued double digit growth in
Europe.
- On a product category basis, net sales of figures will decrease
approximately 10% and net sales of other products will decrease
approximately 3% versus the year ago period, respectively. Net
sales of Loungefly items, included in other products, are expected
to show continued double digit growth in the fourth quarter offset
by declines in other branded products.
- The Company will incur a one-time $16.8 million charge related
to the write-down of inventory as a result of the Company’s
decision to dispose of slower moving inventory to increase
operational capacity. This charge is incremental to normal course
reserves and will have an unfavorable impact to gross profit1,
gross margin1, net loss and net loss per diluted share in the
fourth quarter.
- Gross profit1 will be in the range of $62.3 million to $62.8
million, while gross margin1 will be 29.2% to 29.4%. Gross margin
excluding the one-time inventory write-down2 will be 37.0% to
37.3%.
- The Company will have a net loss in the range of $6.7 million
to $6.0 million and net loss per diluted share of $0.12 to
$0.11.
- Adjusted EBITDA3 will be in the range of $24.7 million to $25.7
million.
- Adjusted Net Income3 will be in the range of $8.1 million to
$8.9 million and Adjusted Earnings per Diluted Share3 will be in
the range of $0.16 to $0.18.
“While we are disappointed in our fourth quarter results, we are
confident that our strong track record of innovation through new
product categories and properties, as well as continued
international expansion, will continue to propel the Company in
2020 and beyond. The underlying strength of our Pop! and Loungefly
brands, combined with Funko’s unique ability to leverage evergreen
properties will enable the Company to achieve high-single-digit to
low-double-digit sales growth in 2020,” stated Brian Mariotti,
Chief Executive Officer. “Since 2017, we have grown sales at a
compound annual rate of more than 20%. The key drivers that have
fueled our growth and brought Funko to where it is today remain
intact. Looking forward, we plan to continue investing in existing
and new products, people and global operations to ensure the
Company is positioned for long-term success.”
Initial 2020 Outlook
In 2020, Funko plans to focus on integrating scalable processes
and procedures to position the Company for long-term success. These
plans will include building scale through infrastructure
investments in talent, IT and global operations. At the same time,
the Company expects to utilize its design and development
expertise, extensive licensing partnerships, broad distribution and
new product initiatives to drive top line growth. Strategic
initiatives include:
- Developing and building upon new growth platforms, including
additional product categories and proprietary IP through new
introductions in toys and games;
- Leveraging Funko’s strong global presence to increase the
Company’s international sales mix;
- Growing direct-to-consumer sales and increasing fan engagement
through Funko’s e-commerce channel; and
- Driving supply chain improvement through initiatives across
planning, logistics and inventory management.
The Company expects its 2020 net sales growth rate to be in the
high-single-digits to low-double-digits. Additionally, the Company
anticipates that top line trends will improve gradually throughout
2020 and will be largely weighted toward the second half of the
year, with net sales in the first half expected to be down
low-single-digits to flat compared to the first half of 2019. Funko
plans to provide expanded guidance for 2020 in connection with the
release of fourth quarter and full year 2019 financial results on
March 5, 2020.
Mr. Mariotti continued, “In 2020, we expect growth to be driven
by strength in our Pop! and Loungefly brands, continued expansion
in under-penetrated international markets and new product
introductions in toys and games. Our teams will be focused on
broadening Funko’s offerings and global reach, positioning us to
continue delivering strong top line growth over the long-term. At
the same time, we are enhancing our operations to drive efficiency
and gain leverage in our model.”
1 Gross profit is calculated as net sales
less cost of sales (exclusive of depreciation and amortization).
Gross margin is calculated as net sales less cost of sales
(exclusive of depreciation and amortization) as a percentage of net
sales.
2 Please see the “Non-GAAP Financial
Measures” section for a reconciliation to the most directly
comparable U.S. GAAP measure.
3 Adjusted Net Income, Adjusted Earnings
per Diluted Share and Adjusted EBITDA are non-GAAP financial
measures. For a reconciliation of Adjusted Net Income, Adjusted
Earnings per Diluted Share and Adjusted EBITDA to the most directly
comparable U.S. GAAP financial measures, please refer to the
“Non-GAAP Financial Measures” section of this press release.
Fourth Quarter and Full Year 2019 Conference Call and
Webcast
Funko will report fourth quarter and full year financial results
after the market closes on Thursday, March 5, 2020. The Company
will host a conference call to discuss the results and Funko’s 2020
strategies and outlook, followed by Q&A, at 4:30 p.m. Eastern
Time. The call can be accessed by dialing (833) 227-5847 or (647)
689-4074 and referencing passcode 6565388, or visiting the Investor
Relations section of the Company’s website at
https://investor.funko.com/. A replay of the webcast will be
available for one year.
About Funko
Headquartered in Everett, Washington, Funko is a leading pop
culture consumer products company. Funko designs, sources and
distributes licensed pop culture products across multiple
categories, including vinyl figures, action toys, plush, apparel,
housewares and accessories for consumers who seek tangible ways to
connect with their favorite pop culture brands and characters.
Learn more at https://funko.com/, and follow us on Twitter
(@OriginalFunko) and Instagram (@OriginalFunko).
Financial Disclosure Advisory
The Company reports its financial results in accordance with
U.S. generally accepted accounting principles. All financial data
in this press release is preliminary and represents the most
current information available to the Company’s management, as
financial closing procedures for the fourth quarter ended December
31, 2019 are not yet complete. These estimates are not a
comprehensive statement of the Company’s financial results for the
quarter ended December 31, 2019 and actual results may differ
materially from these estimates as a result of the completion of
normal year-end accounting procedures and adjustments, including
the execution of the Company’s internal control over financial
reporting, the completion of the audit of the Company’s financial
statements for the year ended December 31, 2019 and the subsequent
occurrence or identification of events prior to the formal issuance
of the fourth quarter and annual financial results.
Forward-Looking Statements
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. All statements contained in this press release that do not
relate to matters of historical fact should be considered
forward-looking statements, including statements regarding our
preliminary financial results for the fourth quarter of 2019, our
financial outlook for 2020, the underlying trends in our business,
growing demand for our products, our potential for growth,
strategic initiatives, plans for investments in our business and
future opportunities, including expanding into new product
categories, broadening our retailer network and increasing
international sales. These forward-looking statements are based on
management’s current expectations. These statements are neither
promises nor guarantees, but involve known and unknown risks,
uncertainties and other important factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by the forward-looking statements, including, but not
limited to, the following: our actual results for the fourth
quarter of 2019 may differ, perhaps materially, from the
preliminary results disclosed in this press release; our ability to
maintain and realize the full value of our license agreements; the
ongoing level of popularity of our products with consumers; changes
in the retail industry and markets for our consumer products; our
ability to maintain our relationships with retail customers and
distributors; our ability to compete effectively; fluctuations in
our gross margin; our dependence on content development and
creation by third parties; our ability to develop and introduce
products in a timely and cost-effective manner; our ability to
obtain, maintain and protect our intellectual property rights or
those of our licensors; potential violations of the intellectual
property rights of others; risks associated with counterfeit
versions of our products; our ability to attract and retain
qualified employees and maintain our corporate culture; risks
associated with our international operations; changes in U.S. tax
law; foreign currency exchange rate exposure; the possibility or
existence of global and regional economic downturns; our dependence
on vendors and outsourcers; risks relating to government
regulation; risks relating to litigation, including products
liability claims and securities class action litigation; any
failure to successfully integrate or realize the anticipated
benefits of acquisitions or investments; reputational risk
resulting from our e-commerce business and social media presence;
risks relating to our indebtedness and our ability to secure
additional financing; the potential for our electronic data to be
compromised; the influence of our significant stockholder, ACON,
and the possibility that ACON’s interests may conflict with the
interests of our other stockholders; risks relating to our
organizational structure; volatility in the price of our Class A
common stock; and the potential that we will fail to establish and
maintain effective internal control over financial reporting. These
and other important factors discussed under the caption “Risk
Factors” in our quarterly report on Form 10-Q for the quarter ended
September 30, 2019 and our other filings with the Securities and
Exchange Commission could cause actual results to differ materially
from those indicated by the forward-looking statements made in this
press release. Any such forward-looking statements represent
management’s estimates as of the date of this press release. While
we may elect to update such forward-looking statements at some
point in the future, we disclaim any obligation to do so, even if
subsequent events cause our views to change. These forward-looking
statements should not be relied upon as representing our views as
of any date subsequent to the date of this press release.
Non-GAAP Financial Measures
Adjusted Net Income, Adjusted Earnings per Diluted Share, EBITDA
and Adjusted EBITDA are supplemental measures of our performance
that are not required by, or presented in accordance with, U.S.
GAAP. Adjusted Net Income, Adjusted Earnings per Diluted Share,
EBITDA and Adjusted EBITDA are not measurements of our financial
performance under U.S. GAAP and should not be considered as an
alternative to net income (loss), earnings per share or any other
performance measure derived in accordance with U.S. GAAP. We define
Adjusted Net Income as net income attributable to Funko, Inc.
adjusted for the reallocation of income attributable to
non-controlling interests from the assumed exchange of all
outstanding common units and options in FAH, LLC for newly
issued-shares of Class A common stock of Funko, Inc. and further
adjusted for the impact of certain non-cash charges and other items
that we do not consider in our evaluation of ongoing operating
performance. These items include, among other things, reallocation
of net income attributable to non-controlling interests, non-cash
charges related to equity-based compensation programs, acquisition
transaction costs and other expenses, foreign currency transaction
gains and losses, the Loungefly customs investigation and related
costs, certain severance, relocation and related costs, and other
unusual or one-time items, and the income tax expense (benefit)
effect of these adjustments. We define Adjusted Earnings per
Diluted Share as Adjusted Net Income divided by the
weighted-average shares of Class A common stock outstanding,
assuming (1) the full exchange of all outstanding common units and
options in FAH, LLC for newly issued-shares of Class A common stock
of Funko, Inc. and (2) the dilutive effect of stock options and
unvested common units, if any. We define EBITDA as net income
(loss) before interest expense, net, income tax expense (benefit),
depreciation and amortization. We define Adjusted EBITDA as EBITDA
further adjusted for non-cash charges related to equity-based
compensation programs, acquisition transaction costs and other
expenses, the Loungefly customs investigation and related costs,
certain severance, relocation and related costs, foreign currency
transaction gains and losses and other unusual or one-time items.
We caution investors that amounts presented in accordance with our
definitions of Adjusted Net Income, Adjusted Earnings per Diluted
Share, EBITDA and Adjusted EBITDA may not be comparable to similar
measures disclosed by our competitors, because not all companies
and analysts calculate these measures in the same manner. We
present Adjusted Net Income, Adjusted Earnings per Diluted Share,
EBITDA and Adjusted EBITDA because we consider them to be important
supplemental measures of our performance and believe they are
frequently used by securities analysts, investors, and other
interested parties in the evaluation of companies in our industry.
Management believes that investors’ understanding of our
performance is enhanced by including these non-GAAP financial
measures as a reasonable basis for comparing our ongoing results of
operations. Management uses Adjusted Net Income, Adjusted Earnings
per Diluted Share, EBITDA and Adjusted EBITDA as a measurement of
operating performance because they assist us in comparing the
operating performance of our business on a consistent basis, as
they remove the impact of items not directly resulting from our
core operations; for planning purposes, including the preparation
of our internal annual operating budget and financial projections;
as a consideration to assess incentive compensation for our
employees; to evaluate the performance and effectiveness of our
operational strategies; and to evaluate our capacity to expand our
business.
By providing these non-GAAP financial measures, together with
reconciliations, we believe we are enhancing investors’
understanding of our business and our results of operations, as
well as assisting investors in evaluating how well we are executing
our strategic initiatives. In addition, our senior secured credit
facilities use Adjusted EBITDA to measure our compliance with
covenants such as senior leverage ratio. Adjusted Net Income,
Adjusted Earnings per Diluted Share, EBITDA and Adjusted EBITDA
have limitations as analytical tools, and should not be considered
in isolation, or as an alternative to, or a substitute for net
income (loss) or other financial statement data presented in this
press release as indicators of financial performance. Some of the
limitations are:
- Such measures do not reflect our cash expenditures, or future
requirements for capital expenditures or contractual
commitments;
- Such measures do not reflect changes in, or cash requirements
for, our working capital needs;
- Such measures do not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments on
our debt;
- Although depreciation and amortization are non-cash charges,
the assets being depreciated and amortized will often have to be
replaced in the future and such measures do not reflect any cash
requirements for such replacements; and
- Other companies in our industry may calculate such measures
differently than we do, limiting their usefulness as comparative
measures.
Due to these limitations, Adjusted Net Income, Adjusted Earnings
per Diluted Share, EBITDA and Adjusted EBITDA should not be
considered as measures of discretionary cash available to us to
invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using
these non-GAAP measures only supplementally. As noted in the table
below, Adjusted Net Income, Adjusted Earnings per Diluted Share and
Adjusted EBITDA include adjustments for non-cash charges related to
equity-based compensation programs, acquisition transaction costs
and other expenses, foreign currency transaction gains and losses,
and other unusual or one-time items. It is reasonable to expect
that these items will occur in future periods. However, we believe
these adjustments are appropriate because the amounts recognized
can vary significantly from period to period, do not directly
relate to the ongoing operations of our business and complicate
comparisons of our internal operating results and operating results
of other companies over time. Each of the normal recurring
adjustments and other adjustments described herein and in the
reconciliation table below help management with a measure of our
core operating performance over time by removing items that are not
related to day-to-day operations.
In addition, this press release refers to the non-GAAP financial
measures gross profit excluding the one-time inventory write-down
and gross margin excluding the one-time inventory write-down. Gross
profit excluding the one-time inventory write-down is calculated as
net sales less cost of goods sold (exclusive of depreciation and
amortization) less the $16.8 million charge related to the one-time
inventory write-down. Gross margin excluding the one-time inventory
write-down is calculated as net sales less cost of goods sold
(exclusive of depreciation and amortization) less the $16.8 million
charge related to the one-time inventory write-down as a percentage
of net sales. Management believes that gross profit excluding the
one-time inventory write-down and gross margin excluding the
one-time inventory write-down provides useful information to
investors because it assists investors in comparing our ongoing
operating performance between periods.
The following table reconciles gross profit excluding the
one-time inventory write-down and gross margin excluding the
one-time inventory write-down to the most directly comparable U.S.
GAAP financial performance measure:
Estimated Range for the Three Months Ended December 31, 2019
(In millions, except per share amounts) Net sales
$
213.6
$
213.6
Cost of sales (exclusive of depreciation and amortization)
151.2
150.7
Gross profit (1)
$
62.3
$
62.8
Gross margin (1)
29.2
%
29.4
%
Adjustment: One-time inventory write-down (2)
16.8
16.8
Gross profit excluding the one-time inventory write-down
$
79.1
$
79.6
Gross margin excluding the one-time inventory write-down
37.0
%
37.3
%
(1) Gross profit is calculated as net sales less cost of sales
(exclusive of depreciation and amortization). Gross margin is
calculated as net sales less cost of sales (exclusive of
depreciation and amortization) as a percentage of net sales.
(2) Represents a one-time $16.8 million charge for the three
months ended December 31, 2019 to cost of goods sold for additional
inventory reserves to dispose of certain inventory items. This
charge is incremental to normal course inventory reserves and was
recorded as a result of the Company’s decision to dispose of slower
moving inventory to increase operational capacity.
The following tables reconcile Adjusted Net Income, Adjusted
Earnings per Diluted Share, EBITDA and Adjusted EBITDA to the most
directly comparable U.S. GAAP financial performance measure:
Estimated Range for the Three Months Ended December 31, 2019
(In millions, except per share amounts) Net income (loss)
$
(6.7
)
$
(6.0
)
Interest expense, net
2.9
2.9
Income tax expense (benefit)
(2.6
)
(2.2
)
Depreciation and amortization
11.0
11.0
EBITDA
$
4.6
$
5.6
Adjustments: Equity-based compensation (1)
3.2
3.2
Certain severance, relocation and related costs (2)
0.6
0.6
Foreign currency transaction gain (3)
(0.6
)
(0.6
)
Tax receivable agreement liability adjustments
0.2
0.2
One-time inventory write-down (4)
16.8
16.8
Adjusted EBITDA
$
24.7
$
25.7
Net income (loss)
$
(6.7
)
$
(6.0
)
Equity-based compensation (1)
3.2
3.2
Certain severance, relocation and related costs (2)
0.6
0.6
Foreign currency transaction gain (3)
(0.6
)
(0.6
)
Tax receivable agreement liability adjustments
0.2
0.2
One-time inventory write-down (4)
16.8
16.8
Income tax expense (benefit) (5)
(5.3
)
(5.2
)
Adjusted net income
$
8.1
$
8.9
Weighted-average shares of Class A common stock outstanding
34.9
34.9
Equity-based compensation awards and common units of FAH,LLC that
are convertible into Class A common stock
15.4
15.4
Adjusted weighted-average shares of Class A stock outstanding -
diluted
50.3
50.3
Adjusted earnings per diluted share
$
0.16
$
0.18
(1) Represents non-cash charges related to equity-based
compensation programs, which vary from period to period depending
on timing of awards.
(2) Represents certain severance, relocation and related costs.
For the three months ended December 31, 2019, includes $0.4 million
of severance costs incurred in connection with the departure of our
former Chief Financial Officer and $0.3 severance, relocation and
related costs associated with the consolidation of our warehouse
facilities in the United Kingdom.
(3) Represents both unrealized and
realized foreign currency losses (gains) on transactions other than
in U.S. dollars.
(4) Represents a one-time $16.8 million
charge for the three months ended December 31, 2019 to cost of
goods sold for additional inventory reserves to dispose of certain
inventory items. This charge is incremental to normal course
inventory reserves and was recorded as a result of the Company’s
decision to dispose of slower moving inventory to increase
operational capacity.
(5) Represents the income tax expense (benefit) effect of the
above adjustments. This adjustment uses an effective tax rate of
25% for the three months ended December 31, 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200205005784/en/
Investor Relations: Sean McGowan Gateway Investor
Relations investorrelations@funko.com
Andrew Harless Funko Investor Relations
investorrelations@funko.com
Media: Jessica Piha-Grafstein, Funko
jessicap@funko.com
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