On Thursday, Funko (NASDAQ:FNKO) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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Access the full call at https://events.q4inc.com/attendee/677406952
Summary
Funko reported a 7% increase in sales for Q2, resulting in a 6% growth for the first half of the year, with broad-based performance improvements across regions and product lines.
The company’s gross margin improved to 56.6%, including a $25 million tariff refund; normalized gross margin was a record high at 44.4%.
Funko introduced new products and strategies, such as Pop Mystery and other experiential platforms, as part of the Make Culture Pop strategy to drive future growth.
The company raised its adjusted EBITDA guidance to $100-$110 million, primarily due to tariff credits and improved profitability.
Funko announced a new Chief Commercial Officer, Kristin Hamilton, who brings experience from Crunchyroll and Hasbro, to enhance their commercial and strategic initiatives.
Full Transcript
Josh Simon, Chief Executive Officer
Yeah, I mean, I often think there wouldn’t be the Funko that exists today without Comic Con. So it’s a massive highlight of the year for us. We’re excited you were able to join us and excited to take a little bit of a walk around it a bit here. It does. I mean, you’ll see the folks who work in our booth are largely fans from all over the world who are like taking time off of work and out of their lives to come and, you know, hang out here and help interact. And it’s also a great way for just these community of fans from all across the country and the world to come and, you know, celebrate Funko. Experience the brand. Buy some incredibly coveted limited edition products.
I mean, it’s flattering and humbling and wild to see the lines at our booth for people who are here to kind of get the exclusive product you can only get here at Comic Con.
Yves LePendeven, Chief Financial Officer
Yep, numbers have been great. And it’s really a reflection of our make culture pop strategy gaining traction. So we were really pleased to report sales were up 7% in the quarter. And that’s building on the growth from Q1. So for the first half of the year, we were up 6%. And the good news is it wasn’t really one product or region or IP, it was really broad based. Right. So in the US we were up 3%. In Europe we were up 19%. And then from a product perspective, our core collectibles were up 9%. And although Loungefly was down 2%, it was an improving trend from what we saw in Q1. And we’re really pleased with the better SKU productivity.
Josh Simon, Chief Executive Officer
Well, I mean Eve mentioned the momentum that we’re seeing and I think a big part of that is we’ve talked a lot about the make culture pop strategy and I think we’re really seeing that go from strategy to execution and take form. You know, it’s really about culture sensing and creating demand across, you know, the entertainment and pop culture landscape. Creativity, giving it form in products and then commerce, putting it in fans hands all over the world. You know, on the culture side it’s really about how we get faster at sales, sensing what’s happening and then turning that into products. The last two quick things I’ll mention is creativity on the product side. We’re going to take a walk around in a little bit and you’re going to get to see our brand new pop mystery platform.
And you know, that’s really about taking what people love about pop and just turning it into kind of a broader experience and a new product format. And so excited to show you how that’s about to materialize. It’s great to sort of see that make culture pop strategy coming together and really moving from idea to execution in the quarter. It is. And I think because we can’t predict those things, what we really have to do is build this repeatable offense. So having sort of upstream teams in place that are really ready very quickly to make the licensing deals, the capacity internally to design the products and manufacture them and get them to shelves and then those retail relationships either with wholesale partners or our own DTC channel to get those out to consumers quickly. And I think the magic for us is that we’ve really sort of honed that engine of sensing demand, turning it into products and getting into our fans hands in a really repeatable way.
And we’re starting to see that happen more and more. Exactly. Pop culture in general. And maybe Jimothy the raccoon that’s taking the world by storm right now. Well, should we go take a look at. All right, great. Let’s go. Let’s go check it out. After you. So this is Hasnal, our chief product officer.
Husnal Shah, Chief Product Officer
Yes. At San Diego Comic Con over here, we are launching our pop mystery line. Flora is a plant line that we started off as, you know, a regular, standard pop, and now we’ve made it into a mystery collection piece, and it is absolutely fabulous. Yes. Each plant has six commons with varied cards. And then we have the Chase as well as the global one of one chase, which is. Which is what differentiates us from the market and is extremely exciting. Only one of these. And imagine if you’re a fan with the one.
Lucky guy. Let’s see.
Josh Simon, Chief Executive Officer
What I think is great, and we’re. We’re obviously revealing this here at Comic Con, but there’s other sort of licensing partners. This, as you mentioned, is original IP we’ve created. And then, of course, we’re also launching with some of the biggest IP in the world as well.
Husnal Shah, Chief Product Officer
It’s with One Piece, as well as with the Warner Brothers, with the Horrors line. Yes. And we are giving away the Flora line in that activation, so you might want to go check it out.
Josh Simon, Chief Executive Officer
Let’s go take a look. Give it a knock. Yeah. Let’s see. This is Nick, our head of marketing and brand.
Nik Rupp, Senior Vice President of Brand and Marketing
Welcome to the Pop Flora Greenhouse. 100%. You know, this is such a special opportunity to be at San Diego Comic Con. We really consider this sort of our World cup, our super bowl all in one. It just provides us an amazing opportunity to be on the ground with our fans. As part of the launch of Pop Mystery, we created these mystery game rooms. This is the Pop Flora greenhouse. And we really wanted to bring our own iPad and our fandom to life. This isn’t just a banner ad. This isn’t a shelf display.
This is a greenhouse that you can stand in to experience this world yourself. 100 now let’s. Let’s get you out of here. Thank you for stopping by.
Josh Simon, Chief Executive Officer
Good, good. All right, let’s take a look around this way. Okay. You know, obviously we talked about this earlier, but you know, selling a lot of exclusive products that you can only get here. Obviously kind of massive lines of people, which is like super humbling. And look, I think what you experienced and saw over in the Mystery Room is sort of our first step into doing something that’s more. More experiential. And then one of like the most compelling experiences that, you know, we’ve become known for both online and soon rolling out into some wholesale partners is the Pop Yourself experience. I’ve been able to do that the Funko Hollywood store as well. You can do it at the Hollywood store. There’s a couple stores we’ll announce soon where you’ll be able to start doing it as well. You can do it at the Inter Miami Stadium with the football club there. And then of course here, celebrating the upcoming launch of Brand New Day, we have a great Pop Yourself experience as well for folks here at Comic Con.
You sure can. A limited edition. You can only get it here. But obviously sort of a version of our kiosk experience where you can pick your body type, your skin tone, your hair, your clothes, that, and like I said, some very specific spidey outfits that you can only get here at Comic Con. Alright, you want to give it a try? Pop yourself exclusive only here to Comic Con. Yeah. Get to really customize it here. Your lashes. Your hair. It’s your trademark.
Yes. And then some exclusive accessories as well. It comes with a Bitty Pop Hulk. There you go. Look at that. And obviously these. The ability to create these sort of geo specific experiences is something that will start to roll out and test later this year with some retail partners. So you can imagine something like this starting to kind of pop up in other parts of the world and really create something unique and specific to a location, which is really great because obviously Some other places as well. Yeah.
I am. I’m across the pond spending some time with our EMEA team and partners. But it’s a late night, but, you know, excited to be reunited with you here live.
Yves LePendeven, Chief Financial Officer
Sure, I’d be happy to. So like I mentioned earlier, sales were up 7% in Q2 and 6% in the first half. In addition to that, we reported a gross margin of 56.6% compared to 32.1% last year. And to be clear, our Q2 gross margin benefited from the recognition of a $25 million credit that was related to the expected tariff refunds and release of accrued tariffs. So just to for sake of comparison to our guidance range of 42 to 44%, our gross margin normalized for that $25 million credit was 44.4%, which was still a record high for Funko.
SGA expenses improved as a percentage of sales by over 400 basis points compared to last year. And finally, adjusted EBITDA was $40.9 million compared to negative adjusted EBITDA of $16.5 million last year. Again, excluding that tariff related benefit, we delivered adjusted EBITDA of $15 million, well above our guidance range. I’d also like to highlight that in the quarter we executed a sale of our IPA tariff claims, a total of $22 million for proceeds of $19 million.
And we used that to pay down debt by a total of $15 million, making more progress on deleveraging our balance sheet. Yeah, so for the outlook, we’re reiterating our net sales guidance flat to up 3%. And we’re raising our adjusted EBITDA guidance to $100 to $110 million. And that raise is driven by again, that $25 million tariff credit from Q2, as well as $5 million from improved profitability.
Josh Simon, Chief Executive Officer
Well, I mean, look, I think, you know, the results that you’ve just talked about this quarter really highlight the model that we’re building. You know, sensing demand earlier, creating more repeatable ways to sort of take that demand and, you know, create products that can scale selectively through the right retail channels around the world. Look, I think in the second half our consolidated sales will reflect, you know, more of a normalized year over year shipment comparison.
And, and you know, I think we’ll continue to be prudent just sort of given some of the broader consumer environment that’s out there. And also just to kind of double back on one of the things Eve mentioned earlier about Loungefly and the SKU reductions that we’ve discussed, now we’ve made some meaningful progress in that area. I definitely would not declare the work there finished. We have an exciting, exciting plans, but still, you know, ways to go.
But the encouraging signal in Q2 was that as Eve said, sales were down 2% with approximately 50% fewer SKUs. So really seeing that increased productivity for the remainder of the year. Importantly, I think the headline is that we definitely expect core collectibles to continue growing in the second half. So when you step back from it, the core is growing, Loungefly is becoming healthier, our underlying earnings power is improving, and Q2 is really a strong and early proof point that, you know, everything we’ve talked about in the Make Culture Pop strategy is underway and our focus is now just about consistent execution.
Well, I mean, there’s a lot to choose from and I’m super excited about. I guess a couple of things that I would highlight first overall is just speed. You know, I’ve talked about this a lot. How do we make sure that we’re part of these really great cultural or entertainment moments while they’re happening. And, you know, really the key to speed is being able to sort of sense demand earlier and respond quickly and hopefully in some cases with even less inventory exposure.
So one thing I’ve mentioned a couple of times, but excited to kind of more formally announce now, we formalized a partnership with HP on the additive manufacturing front. This is part of our Hyper Strike strategy, which means we’re able to create products in a matter of weeks instead of months or sometimes years that go into the traditional manufacturing process. We’ve already sort of launched our first product with this partnership at Fanatics Fest a couple of weeks ago.
We did a really awesome mashup between WWE and the Garbage Pail Kids. The products sold out at Fanatics Fest. They’re selling for multiples more than what we originally sold them for on eBay. So, you know, we’re really excited to work with HP on that front. By the way, our normal quick strike offense from a speed standpoint has also continued to be off and running. We had preorders for Heated Rivalry, Off Campus and Obsession. So a lot of like surprise entertainment hits out there that, that we’ve been able to get after pretty quickly, including a preorder when the Knicks won the NBA championships.
The night that they won, we went live with a championship five pack. So we’re really kind of building that repeatable speed capability. The second thing I’ll mention is we actually are announcing today that we’re hiring a new Chief Commercial Officer. It’s a role that we’ve had open for a little bit now. Kristin Hamilton, she joins us most recently from Crunchyroll where she was Senior Vice President, Head of Global E Commerce and Direct to Consumer.
Obviously excited about her commercial experience there and her experience in the anime world, which is obviously a huge fandom for us. Before Crunchyroll, she spent about 15 years at Hasbro across a ton of different leadership roles. Global E Commerce, consumer product strategy, transformation, brand management, marketing. She’s done a ton there. She officially starts on August 24th. And so I guess that’s another big exciting thing for me in the second half of the year.
Yves LePendeven, Chief Financial Officer
Sure. So I’ll take that one. I think what we’re seeing this year we continue to have about three or four months visibility with our wholesale customers placing orders. I would say compared to last year, we’re seeing a return of a little bit more normalized seasonality. Like Josh mentioned, last year Q2 was pretty disrupted post Liberation Day announcement. And then there was an element of kind of catching up with people’s orders in Q3 and into Q4.
This year obviously we’re kind of shipping orders as our customers want them. We’re seeing great POS trends in our wholesale channel. Globally our POS sales were up 6% year over year. So again, always looking for that balance between sell in and sell through which we saw in Q2. So by all the metrics that we gauge, the business is healthy, inventory in the channel is healthy. And we see that there’s a good demand from our wholesale partners and from our end customers as well.
Nik Rupp, Senior Vice President of Brand and Marketing
Let’s see. Well, look, I think I’ll start off just kind of by the fact that I’m here in Europe and have been spending some time with our European retailers. You know, we’ve secured extra diorama displays in about 350 stores across Smyths, which is, you know, one of the most preeminent toy retailers in Europe and certainly even I would say in the world, HMV, Gift Universe, a bunch of independent retailers. And look, those are sort of like fully designed, kind of built-out displays that really showcase our product out of the packaging and on shelves.
We’re also seeing increased end cap displays at Smyths for Biddy Pop. You know, if you walk around the city right now, we have pretty high-profile windows at Hamleys, another iconic toy retailer. That sort of is a Disney and Funko collaboration that’s really giving us a lot of high visibility in prime tourist destinations. And actually, right now even, we have another partnership across Sony and Disney with HMV on a big Spider-Man activation at HMV Oxford Street.
So, look, things like Biddy Pop have continued to lead incremental shelf space for us. Things like Spider-Man have led to incremental placement with pallet trains at Walmart. So I think, you know, alongside these big entertainment releases and alongside our new and growing product lines, we’re seeing it generate incremental shelf space for us at retail.
Andrew Oddie, Chief Revenue Officer
Nice. I look forward to seeing people post some photos with photo ops with all those displays there. All right, well now we have some questions from McKeegan Cox at DA Davidson in regards to the strong entertainment slate we have had this year. Which franchises or categories are generating the strongest demand? Any highlights this quarter and what properties are you most excited for in the second half of the year?
Josh Simon, Chief Executive Officer
Well, thanks. Thank you, Keegan, for the question. Look, I mean, look, for us, obviously a strong content slate always helps. And, you know, we knew going into this year, at least suspected, that there would be some big, you know, some big hits. And I think you’re really seeing that in box office attendance and box office records overall. But we have a pretty—first, I’ll just say—broad base across fandoms. We’ve seen momentum for us across anime, gaming, obviously theatrical, sports, and some of our own programs.
I’ll remind everyone, in this quarter I think our top 10 franchises and programs represented about 32% of Q2 sales. So, you know, our business is not necessarily dependent on any one property, but they obviously help. So, you know, Mando Grogu was great for us. Toy Story 5, which was a massive hit for Disney, also doing really well for us. You saw our Spider-Man Brand New Day activation at Comic Con that has recently proven to be huge for us, and we’re really glad that we made a bet on that film early on.
And then, you know, couldn’t be more excited for Avengers Doomsday and what the Russo brothers and Marvel and Disney are going to kind of bring to screens at the end of the year. But look, beyond that, One Piece and Pokémon in sort of the anime and gaming space continue to be huge. Sports delivered. I mentioned, I mean, the excitement around the Knicks was somewhat, you know, unprecedented for us, certainly in the world of NBA championships compared to past seasons.
The excitement around the World Cup I think was palpable and reflected in some strong sales for us. And then, look, I have to just sort of mention again on the quick strike front. You have movies like Obsession which, you know, kind of came from out of nowhere as a surprise and, you know, was a major record-setting box office. And so we were able to very quickly go on presale for that film along with things like Heated Rivalry and Off Campus, and I’ll even say a personal favorite of mine in this past quarter, a great line of products celebrating the Spice Girls.
And I’m not just saying that because I’m over in the UK right now. I would have said that if I were in America as well. But across Loungefly and Funko, a dream come true, honestly, to be able to collaborate with those folks. So a pretty broad representation of franchises, Keegan.
Andrew Oddie, Chief Revenue Officer
All right, save me a Mel B Funko Pop. I need that. All right, inputs and takes on the guidance. What are the assumptions that you get to the high and low ends of your guidance? Have you seen any impact from higher input costs like freight?
Yves LePendeven, Chief Financial Officer
Sure. So I would start by, you know, to the upside, especially on sales. I mentioned our order book visibility in Q3, so we feel good about that. Obviously then the holiday period in Q4 we have a bit less visibility to, but we’re excited about the content slate. You know, I think obviously any upside would depend on continued sell-through performance. We’re hoping the consumer stays resilient through the holiday period. To the downside, I would call out tariffs.
Obviously we factored in the latest announced tariffs that are in effect of 10% to 12%. But for everyone who’s following the news, there can continue to be surprises on that front. So again, we chose to be prudent within our gross margin guidance in particular. And then as far as freight costs or raw materials costs, we’re cautiously optimistic, but obviously any kind of higher oil prices and things like that could negatively impact us as well.
Andrew Oddie, Chief Revenue Officer
Understood. All right, here’s some questions from Steven Lachik at Goldman Sachs. So Funko noted that point-of-sale tailwinds from the first quarter entertainment slate carried into early second quarter. Did this positive trend continue through the remainder of the quarter? And what gives management confidence that these trends are sustainable through 2026?
Yves LePendeven, Chief Financial Officer
Sure. I mean, I’ll start with the trends that we saw in Q2. So again, I mentioned in the wholesale channel, 6% growth in units year over year in POS sales. For the year to date, it’s 9% growth. And again for the year to date in the U.S., up mid-single digit. In Europe, slightly over 20% POS growth. So it’s a really strong trend. We’re loving to see that momentum. I believe, based on the content slate and some of the products that we have coming up in the lineup, that we should see that trend continue.
And that’s kind of what we factored into our guidance.
Andrew Oddie, Chief Revenue Officer
Okay. Now, to what extent does management expect new formats like Biddy Pop, Pop Mystery, and the sports-related launches to be revenue contributors in 2026? And what does management view as the key growth levers for Funko in 2026 and beyond outside of the core Pop products?
Husnal Shah, Chief Product Officer
Well, I’ll jump in. I mean, I think first on Pop Mystery, it’s a little bit too early to sort of size that one responsibly. But what I think is most important about it, and I think kind of signals a lot of what we’ve been talking about as part of our strategy, is just the platform potential of it. So, you know, if you think about Pop Mystery just as another dimension and extension of the core Pop product, it can really extend across any entertainment franchise, sports.
We’re doing it with our own IP that you saw down at Comic Con with the Floor line. It can go in multiple channels, markets around the world. I would say sort of that blind box craze is showing no signs of slowing down. And for us, I think it’s a unique way that kind of encourages what our fans have always loved: that thrill of the chase, discovery, and then that motivation for repeat participation. They want to try and seek out that one specific item that they love.
So, you know, we’ll keep a close eye on the initial launch and judge sell-through and reorders and consumer behavior and scale based on that. But I’d say from a licensor standpoint, we have a pretty exciting and awesome lineup of Pop Mystery products going all the way through next year. So I am feeling encouraged about that one. And then, you know, you mentioned Biddy as just another example that I mentioned. We’re seeing incremental placement now at Smyths around Europe—another extension of what people love about Pop and what makes it iconic—but it’s becoming its own platform, appealing to a slightly different consumer, getting us incremental placement. We’ll continue to look at new ways to dimensionalize Pop. We have a few different ideas that are in development that will roll out end of this year and early next year. And then, look, honestly, there’s about, I would say, half a dozen totally brand-new formats that we have in development that will start to roll out early next year and beyond. And the idea with all of those is trying to establish new platforms for our fans to engage, capitalizing on what we know best around culture and our licensor relationships and being part of these iconic entertainment and cultural moments, but in new and exciting ways that I think hopefully will set the stage for, hopefully, the next Pop franchise to come.
Andrew Oddie, Chief Revenue Officer
All right, well, we’ll look forward to all of that, and I definitely look forward to seeing who gets a one-of-one worldwide chase out there with these Mystery Pops. All right, well, that’s all the time we have for questions for today. Yves, Josh, thank you so much for all your information about the success as well as how you handle certain challenges. So, Josh, are there any thoughts before we let everyone go today?
Josh Simon, Chief Executive Officer
Yes. Well, first of all, thank you for being with us down at Comic Con and in the office there in Burbank. And look, for me, I would just say the financial highlights that this quarter shows us is really early evidence that the Make Culture Pop strategy is beginning to take hold, and it’s really becoming a more deliberate and disciplined growth engine for us. Ultimately, I think we’re getting better at sensing where fan demand is coming from, moving faster to turn those signals into distinctive products and in repeatable ways, and building platforms like I was just talking about and then scaling them through channels all over the world.
So, look, this quarter, I think, was an early proof point—not the end of the work—but I think the growth and SKU productivity and certainly that record underlying gross margin gives us confidence that we’re on the right track. And, look, other than that, I just want to say thank you to our shareholders for your continued confidence. Most importantly, thank you to our fans for showing up in the way that you always do. I loved the energy and everyone who made their way down to Comic Con this year.
I love talking with everyone, hearing their ideas. It’s just an awesome reminder of why we do this, and we’re certainly excited for the rest of the year. So I’ll just say again, Andre, thanks everyone for joining us, and we will see you all next quarter.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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