Funko(FNKO)2024-03-08 03:51Financial Data and Key Metrics - Q4 2023 net sales were 216.7 million and direct-to-consumer (D2C) sales of 109.4 million, with a gross margin of 37.6%, up from 33.2% in Q3 2023 [27] - Adjusted EBITDA for Q4 was 119 million, down more than 50% from 36.5 million, after paying down $26.2 million of debt in Q4 [37] Business Line Performance - D2C sales in Q4 represented 26% of net sales, up from 17% in Q4 2022, with a nearly 30% YoY increase [6][27] - Pop! Yourself and limited edition products were key contributors to D2C growth, with Pop! Yourself driving significant sales through both online and in-store channels [20][59] - The company launched Bitty Pop! and Pop! Yourself in 2023, both of which were well-received and contributed to business growth [20] Market Performance - Inventory levels in the channel for larger retail partners were 32% lower at the end of 2023 compared to 2022, reflecting healthier levels relative to POS sales [7] - POS sales were down high-single-digit percentages YoY, but this was offset by a mix shift towards the D2C channel [80][81] Strategy and Industry Competition - The company completed a transformation plan in 2023, which included eliminating unprofitable product lines, reducing workforce, and aggressively lowering inventory levels [5][22] - The focus for 2024 is on long-term profitable growth, with an emphasis on expanding the D2C business, increasing sales of Pop! Yourself, and limited edition products [8][23] - The company plans to achieve positive comps later in 2024, despite expecting lower Q1 net sales compared to Q1 2023 [30][31] Management Commentary on Operating Environment and Future Outlook - Management expects 2024 full-year adjusted EBITDA to be considerably higher than 2023, driven by growth in higher-margin product lines and the D2C business [23][39] - The company anticipates improved financial results in the second half of 2024 due to seasonality, easing Hollywood strikes, and reduced shipping disruptions [108] - Shipping costs remain uncertain due to hostilities in the Red Sea, which could impact transit times and revenue recognition [32][89] Other Important Information - Steve Nave, CFO and COO, will resign effective March 15, 2024, with Yves LePendeven taking over as acting CFO [10][35] - The company expects to announce a permanent CEO in Q2 2024 [11] - SG&A expenses in the second half of 2023 declined to 32% of net sales from 38% in the first half, driven by cost reductions [36] Q&A Session Summary Question: How is the company managing the transition after Steve Nave's departure? - Mike Lunsford has been actively running the company since July 2023, and Yves LePendeven is well-qualified to take over the CFO role [75][76] - The company does not anticipate any operational disruptions, as the leadership team is strong and aligned [76] Question: What are the drivers of D2C growth in 2024? - D2C growth is expected to continue, driven by Pop! Yourself, limited edition drops, and expansion into new territories [74][101] - The company plans to focus on higher-margin products and direct connections with fans [95] Question: How is the Red Sea situation impacting the business? - The Red Sea disruptions primarily affect shipments from Asia to Europe, leading to longer transit times and higher costs [89][97] - While the impact is more pronounced in Q1, the company does not expect it to disrupt full-year sales projections [97] Question: What are the expectations for EBITDA margin improvement? - EBITDA margin improvement is expected through a mix shift towards D2C and higher-margin products, as well as annualizing cost reductions from 2023 [83][85] - SG&A expenses will increase due to higher marketing spend for D2C growth, but overall margins are expected to improve [85] Question: When will the new CEO be announced? - The company expects to announce the new CEO in Q2 2024, with hopes of introducing them on the next earnings call [78]