FNKO - Funko Reports Slightly Better Q3 Results Stock Price Likely To Drop More (Ratings Downgrade)

2023-11-21 03:42:59 ET

Summary

• Funko has been right-sizing its business operations and inventory stock to improve profits and net income.
• The company reported better financial performance in Q3-2023, but significant improvement will take more time.
• The current strategy with Bitty Pop! and Pop! Yourself may not be enough to change the company's metrics.
• The company's stock price has been on a downtrend, recently hitting its 52-week low.
• I am changing my previous rating of a hold to a sell.

Funko ( FNKO ) has been right-sizing its business operations, inventory stock, and product lines in an attempt to show better profits and net income. The company recently reported better financial performance compared to the last three quarters. It shows improvement but it will take more time for there to be significant improvement. The current strategy with Bitty Pops and Pop Yourself may not be enough to change the metrics.

Since I last covered Funko, the company’s stock has decreased 38.47%. The company has reported three quarters (Q4-2022, Q1-2023, Q2-2023) with an increasing net loss and narrowing profit margins. With such a downtrend and little hope for better financial results, I am changing my rating to a sell. When the company reports improved financial results and investor sentiment becomes more positive on the stock, then a buy signal will occur. I recommend that investors watch this company. Until business improves, it seems that the company’s stock price is currently overvalued.

Business Operations

Funko sells collectable vinyl figures that feature characters from movies, TV shows, comic books, video games, Japanese anime, and major sports. The 4” vinyl bobblehead figure (Funk Pop) is the most popular of the company’s product lines. These items are either common or exclusive runs and may be found at Target ( TGT ), Walmart ( WMT ), Hot Topic, Box Lunch, GameStop ( GME ), and other retailers. The largest selection may be found on Funko’s website along with all of their product lines.

In addition to Funko Pop, the company makes other vinyl figures like Funko Soda, Mystery Minis, and Pocket Pops (keychains). The company’s newest figure line is its Bitty Pops, which consists of 1” figures bought in a pack of four. Funko attributed 5% of its Q3-2023 revenue to the sale of Bitty Pops. The company also continues its digital NFT releases which have physical redeemable pops. The company recently introduced Pop Yourself, where customers can make custom pops.

Funko owns the website Mondo where it sells special run, limited edition 1/6 scale statues. These statues are limited edition and feature characters from comic books and other fan-based series. The items sell at a high price and quickly become hard to find.

Besides toys and games, Funko sells licensed pop culture merchandise through its Loungefly brand. This brand carries backpacks, wallets, pins, and other accessories. Loungefly may be found at the same retailers, that carry Funko Pop, and Funko has a dedicated website for the brand.

The secondary market for Funko products remains robust. Over the last year, Funko has partnered with eBay ( EBAY ) and has designated eBay as the official secondary marketplace for Funko. Funko has its own store on eBay and releases special limited run items there. The company recently announced that its app, which tracks one’s Funko collection, will connect with eBay and allow the collectors to see the last sold price of each piece from their collection.

Q3-2023 Financial Results

Funko reported higher revenues compared to the previous two quarters, but lower revenues YoY. Revenue was 312.9 million, representing a decrease of 14.41% YoY and an increase of 30.37% from the previous quarter. The company credits its higher revenue numbers to higher direct-to-consumer (e-commerce) sales, sales of its Bitty Pops, sales of its Pop Yourself, and sales of its 1/6 scale figures at its website Mondo. The company also cites higher sales to wholesale customers in the US and Europe.

Revenues from wholesale channels were $258.3 million and revenue from direct-to-consumer sales was $54.7 million. Compared to Q2-2023, wholesale channel sales increased 29%, while direct-to-consumer sales increased 38%.

Funko said that it experienced a 17% increase in direct-to-consumer sales versus an 11% increase YoY. The average order on the company’s Funko website grew 8% to $60 per order. The company’s Mondo website released a 1/6 scale Masters of the Universe Battle Cat figure . The figure sold at $500 apiece and the company reported over 3,500 figures were sold. The limited-timed “drop” represents one of the highest single revenue events for the company.

The company reported an adjusted net income of $1.7 million and an unadjusted net loss of $15 million. The net loss has decreased by 79.45% from the previous quarter. The company credits its right-sizing and other current strategies for the decrease. The company’s net loss for Q3-2023 represents a 256% increase YoY.

The company’s margins improved compared to the previous three quarters and stayed about the same YoY. The Bitty Pop line does not require new molds, so it is cheaper to manufacture. The company also produced less of its Funko Pop figures overall. Funko reported an adjusted EBITDA of $25 million.

The following chart contains the last five earnings reports for Funko.

Source: Seeking Alpha

The company reported a total outstanding debt of $299.5 million. Inventory numbers have decreased 39% YoY and 13.45% from the previous quarter. Lowering inventory is a key part of right-sizing the company’s operations. The company’s profit versus expense for Q3-2023 were basically break-even. The company has made strides to lower costs, but the outcome has not been enough.

Although the company looks forward to higher holiday sales for Q4, Funko expects revenue numbers to decrease for the next quarter. The company expects Q4-2023 revenues between $260 and $300 million. It foresees an increase in gross margin and an adjusted net income of $2.8 million or diluted EPS of $0.05. It suggests an adjusted EBITDA between $16 and $26 million. Performance in terms of margins may increase while operating costs decrease, but overall the report will show a decrease in performance.

Stock Price Downtrend

The stock price is down nearly 50% from its 52-week high of $13.42. The stock price has lost 23% over 12 months, 37.40% YTD, and 9.89% over the last month. The stock price has seen a few rally days, gaining 4.75% over the last week and 15.37% over the last three months. It is trading below its 20/50/200 moving-day averages.

Between April 2023 and June 2023, the stock price was on an uptrend. It has since fallen to a new all-time low of $5.27 and then regained some higher channels. It is currently moving sideways between $7.50 and $6.80. The price is finding resistance at $8.00.

The volatility of the larger stock market is negatively affecting Funko’s stock price. Investor sentiment is not strong on the company’s performance while there are greater uncertainties, like inflation and interest rates. The company is a retail stock and inflation is a concern of retail sellers. Funko said that it has increased its prices for Q3-2023 and that is one reason for its higher revenue. Better financial performance in the future should bring the stock price to higher ground.

Valuation

Source: TIKR

The company’s stock price would seem undervalued. It trades below its street targets and has traded much higher in the past. The company’s book value per share would imply that it is currently overvalued. If future financial performance is weak, while the market experiences more volatility, then the stock price will likely drop more.

Funko cites its fanbase as a main mover of its sales and value. The company points to its online sales and increase in customer base as indicators of this successful strategy (of catering to fans). While demand for Funko exclusives has risen, demand at big box stores for regular-run Funko Pops may have decreased. It is unclear whether revenue from the company’s fan base will be enough to equate better performance like higher revenues or showing a net income.

Risk and Investment Strategy

The company is at low risk of liquidity, but there is a moderate risk of poor future financial performance. There is a moderate risk of the company’s stock price decreasing before a new uptrend begins. There is great potential in the company’s long-term strategy. One should sell positions that have lost more than 20% and consider better entry points. I recommend that investors keep an eye on Funko’s stock price and future financial performance.

Conclusion

Funko reported better financial results for Q3-2023. The company has been right-sizing its operations and inventory in order to show better profit. The strategy has worked so far, but the growth is slow. Funko has introduced some new products to its offerings and they have helped push revenue numbers. The company is still operating at a net loss, while profit and operating costs are at a break-even point. Greater stock market volatility has caused Funko’s stock price to decrease and it is unclear what will bring it back. For now, I rate the company as a sell and recommend investors keep an eye on its future performance.

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