Funko, Inc. NasdaqGS:FNKO
FQ3 2022 Earnings Call Transcripts
Thursday, November 03, 2022 8:30 PM GMT
S&P Global Market Intelligence Estimates
-FQ3 2022SURPRISE
-FQ4 2022-
-FY 2022-
-FY 2023-
CONSENSUS
CONSENSUS
CONSENSUS
CONSENSUS
ACTUAL
EPS Normalized
0.50
0.28
(44.00 %)
0.81
1.91
2.14
Revenue (mm)
319.63
365.61
14.39
381.25
1325.43
1440.30
Currency: USD
Consensus as of Nov-02-2022 9:30 AM GMT
- EPS NORMALIZED CONSENSUS
ACTUAL
SURPRISE
FQ4 2021
0.24
0.38
58.33 %
FQ1 2022
0.22
0.34
54.55 %
FQ2 2022
0.23
0.26
13.04 %
FQ3 2022
0.50
0.28
(44.00 %)
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1
Contents
Table of Contents
Call Participants
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3
Presentation
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4
Question and Answer
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8
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Call Participants
EXECUTIVES
Andrew Mark Perlmutter
CEO & Director
Ben Avenia-Tapper
Director of Investor Relations
Jennifer Fall Jung
Chief Financial Officer
ANALYSTS
Gerrick Luke Johnson
BMO Capital Markets Equity
Research
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research
Division
Megan Christine Alexander
JPMorgan Chase & Co, Research
Division
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Presentation
Operator
Good afternoon, and welcome to Funko's conference call to discuss financial results for the third quarter
of 2022. [Operator Instructions] 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 will
now turn the call over to Ben Avenia-Tapper, Director of Investor Relations, to get started. Please proceed.
Ben Avenia-Tapper
Director of Investor Relations
Thank you, and good afternoon. With us on the call today are Andrew Perlmutter, Chief Executive Officer;
and Jennifer Fall Jung, Chief Financial Officer. Before we begin, I'd like to remind everyone that during
the course of this conference call, management will discuss forecasts, targets and other forward-looking
statements regarding the company and its financial results. While these statements represent our best
current judgment about future results and performance as of today, our actual results are subject to many
risks and uncertainties that could cause actual results to differ materially from what we expect. In addition
to any risks that we highlight during the call, important factors that may affect our future results are
described in our most recent SEC reports and today's earnings press release. .
In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their
most directly comparable U.S. GAAP financial measures and supplemental financial information can be
found in the earnings press release and the 8-K that we released earlier today. All of these items plus a
visual presentation that investors can consult all along with this discussion are available on our Investor
Relations website, investor.funko.com. I will now turn the call over to Andrew.
Andrew Mark Perlmutter
CEO & Director
Good afternoon, everyone, and thank you for joining us today. It was great to meet many of you at our
Investor Day event in September. Funko delivered another quarter of record sales in Q3 up 37% yearover-year to $366 million. Our strong net sales performance was driven by the power of the Funko brand,
supported by the strength of our employees, fans and retail and content partners across the globe. As
discussed on our last earnings call, we continue to operate in an uncertain consumer market. While it is
hard to pinpoint when this environment will normalize, we are confident that we are well positioned to
outperform our marketplace and continue to deliver strong top line performance over the long term. Our
strong results come from across the entire portfolio as we generated year-over-year double-digit growth
in all of our reported geographies and brand categories. Loungefly again led the way growing 57%, while
core collectibles and other brands 34% and 25%, respectively.
Direct-to-consumer grew 36%, while both Europe and other international exceeded 30% growth. We've
managed to distinguish our brands by continually delivering products to connect fans from across all
fandoms with their favorite content characters and stories in a uniquely Funko way. This, in turn, has
cultivated an amazingly loyal and committed fan base of collectors and pop culture enthusiasts. This fan
enthusiasm was particularly apparent with the return of in-person events. We drew massive sold-out
crowds at San Diego and New York Comic Cons as well as our own FunKon. Not only are these events
great parameters of our fan engagement, they also led to many of this year's top D2C sales days.
The enthusiasm our fans have for Funko is palpable. They dress up, they wait in line for hours, they carry
the Funko flag. They are really our greatest brand ambassadors. Among our core collectible brands, our
flagship [indiscernible] continues to generate growth through innovation. Our calendar program is a great
example. We launched this line in 2018, and it has grown more than eightfold in 4 years. This year, we've
expanded the concept to include a countdown to anything as we bring the fun of the countdown calendar
to new holidays such as Halloween.
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Among emerging collectible brands, including solar, Gold and Popsies, we continue to show strong
performance and see a long runway for growth. For example, our launch of Popsies at Walmart has been
such a success that we will be significantly expanding our shelf space allocated to emerging brands in
2023. Our new installation will include Popsies as well as a number of other exciting initiatives to be
announced in coming months.
Finally, the most recent addition to our collectible brands is Mondo, which we acquired last quarter. While
still early in that integration, we've already started to see synergistic benefits as we integrate Mondo into
the Funko support functions. We believe the Mondo acquisition sets us up well for strong growth in music
content. Much more to come on that.
Turning to Loungefly. Demand across all channels, particularly our park partners has been incredibly
strong. Loungefly's 57% growth in the quarter brings their year-to-date growth to nearly 90%.
Importantly, Loungefly's direct-to-consumer sales jumped from 10% of total sales in Q1 to 16% this past
quarter, reflecting the growing strength of the brand. We believe this success is a direct result of our
unique style of fan engagement, including our first brand tentpole event, Summer of Loungefly, which
strengthens the connection between our fans and the brands they love. In toys and games, we are now up
to 180 games in our catalog, which is critical to the long-term revenue central to the Games business.
Our incredible game designers continue to produce hits on both current and timeless IP. Within our
collectible gaming business, our new Kingdomania game has had an extremely strong introduction and
was a finalist for the 2022 Toy of the Year in the collectibles category. We soft launched a title at D23 this
year, and it's sold out every day. On the toys front, we recently launched the latest product in our highly
successful Five Nights at Freddy's lineup, featuring Snap technology we've created an interchangeable
action figure that is true to the game's most fundamental elements. Importantly, this is the first step in
building an entire ecosystem we have planned for this property. Stay tuned for more announcements.
Finally, our digital brands continue to generate very strong growth. Since we entered the digital
collectibles space a year ago, we more than doubled our net sales versus the same quarter last year. Due
to the sustained demand, we have increased drop frequency and grown the average size to well over $0.5
million in net sales. We've had multiple drops that top $1 million in net sales and we've announced digital
collectible collaborations with some of our largest wholesale partners.
Just last month, we released a Halloween drop made up of entirely our own IP that's sold out in under 30
minutes. A key point of differentiation for Funko digital collectors has been the introduction of additional
utility. Our rarest digital collectibles are redeemable for a physical version of similar scarcity. This feature
has been a key factor in bringing physical first collectors into the digital space.
This remains a nascent market, and we're very excited about its future. Turning to channel highlights.
Within wholesale, we saw strong growth from our mass partners despite broadly high levels of inventory
at retail. While Funko products continue to be traffic drivers for our retail partners, we have seen some
order delays or reductions given the broader economic climate. Our results in direct-to-consumer, which
I'll speak to you shortly, highlight the continued strength of the Funko brand. However, we do expect these
wholesale order reductions and delays to persist in the short term given the current macro environment.
These expectations have been reflected in our full year guidance. Our D2C channel saw another quarter
of strong double-digit growth, exceeding 30% and representing what we like to call our single largest
customer by net sales. Average order value and traffic across our e-commerce sites were both up strong
double digits.
Turning to our international geographies. Europe posted another strong quarter with growth across
both established and emerging regions. Demand remains very strong, and we continue to see excellent
progress on our strategic partnership initiatives as we thoughtfully leverage the most efficient retailers
in the region. Among the other geographies, we experienced excellent growth in LatAm and Oceania.
While we're still in the early stages of reaching our growth potential in Asia, we've recently hired leaders
experienced in the region to execute on our growth strategy in this critical market.
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
As described in previous calls, we have experienced very strong growth over the past 1.5 years. This
success necessitates infrastructure investment to ensure we have the capacity and capability to maintain
and build on that growth over the long term. In Q2, we opened our consolidated fulfillment center.
Moreover, we achieved this upgraded infrastructure without the benefit of the warehouse management
software it was designed to operate with.
Together with our ERP implementation in 2023, these software upgrades will better position us to sustain
our double-digit growth and drive efficiency as we continue to scale our operations. Supporting the
complex upgrades to our core infrastructure has resulted in higher-than-expected short-term operating
expenses and increased margin pressure. These actions are critical to service our near-term demand
as well as support our long-term growth objectives. We are actively managing through these interim
fulfillment dynamics, and we believe these investments will result in consistent margin expansion in the
future. Due to the macro headwinds previously discussed, we are revising our full year net sales target to
between $1.29 billion and $1.33 billion, up approximately 27% at the midpoint year-over-year.
We are also lowering our full year EBITDA margin to high single digits as we manage through the
previously mentioned infrastructure upgrades necessary to support the sustained growth. In closing,
we are pleased with our ability to continue to generate and service robust demand. We again delivered
record topline results amidst an uncertain consumer market. While we continue to manage through that
uncertainty in the fourth quarter, we are still on pace to deliver high-teens growth in the second half.
Our very strong results through these 3 quarters and our confidence in the resiliency of our business
model is a testament to the power of the Funko brand and the incredible loyalty of our fans. We remain
similarly confident in our ability to achieve the 5-year objectives we laid out at our recent Investor Day
event both top and bottom line. We are managing through these short-term macro factors and investing
in infrastructure and operation upgrades. When combined, with our focused execution, we believe these
steps will enable future growth and margin expansion over the next several years.
In closing, I'd like to thank our fans, partners and employees for their continued dedication and support
for Funko. Now Jen will provide more details on the financial results of the quarter.
Jennifer Fall Jung
Chief Financial Officer
Thanks, Andrew, and good afternoon, everyone. We delivered strong third quarter net sales growth
of 37% over the prior year. Our results were broad-based with strength across our geographies and
channels. Once again, each of our 3 reported brand categories grew double digits. Multiple factors drove
our top line outperformance, including another 200 from Loungefly. In the U.S., net sales increased 37%
to $262 million, while net sales in Europe grew 33% to $78 million and other international net sales
increased 43% to $25 million. On a brand category basis, core collectible brand net sales grew 34% to
$282 million, driven innovation in our top brand and increased contributions from our emerging brands in
the category. The Loungefly brand grew 57% to $62 million, with particular strength in our parks business,
as Andrew mentioned.
Among our other brands, which includes toys and games and our digital brands, net sales grew 25% to
$22 million. This quarter, we saw particularly strong contributions from our digital category. Turning to
margin and expenses, third quarter gross margin was 35%, a sequential increase of approximately 200
basis points due to a more favorable product mix than the prior quarter. Freight rates have improved
significantly since their recent highs earlier this year. However, we did not realize the benefit in the third
quarter due to the timing of inventory delivery.
For context, if we've been able to receive freight under the in-quarter rate per container, it would
have contributed roughly an additional $7 million in gross profit. We expect to benefit from the rate
improvements as 2023 progresses. We remain committed to gross margin improvement, which will come
in 3 main components; first is the improvement in freight that I just described, second is driving more
efficient sourcing for more cost-effective geographies, and third is a broader application of the price
increases we announced late last year.
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
To provide more detail on the pricing lever, we were deliberately cautious when we implemented our first
price increases in almost 5 years. Based on our observations over the past year from both wholesale and
our D2C channel we've taken steps to apply the price increase more comprehensively, which we expect to
be in full effect by early to mid-2023.
Turning to SG&A. I'll start with a few comments on the significant upgrades to our infrastructure that
we've previously announced. These investments are critical to our ability to keep pace with the strong
double-digit growth we generated over the past 1.5 years. It's also vital to support our long-term growth
plans. In the short term, these investments add additional expense as we operate out of the new [ DCs ]
without the intended software system in place. These higher expenses consisted primarily of greater labor
costs within the facility and additional machinery to support product movement.
We've also added additional third-party logistics or 3PL warehouses. Together these initiatives will enable
us to continue to support our strong demand until our software upgrades are in place next year. We
believe these increased expenses will be short term in nature, but expect them to continue until the rollout
of our new ERP next year.
In the third quarter, these additional investments reduced adjusted EBITDA by approximately $5 million.
As a result of these infrastructure upgrades, SG&A as a percentage of net sales increased sequentially
to 27% or $98 million. For the third quarter, adjusted EBITDA was $36 million with an adjusted EBITDA
margin of 10%, reflecting elevated freight rates, limited application of our pricing increases and the
investments we are making to serve a strong current demand and support future growth. Finally, adjusted
diluted earnings per share were $0.28.
Turning to the balance sheet. We ended the quarter with $150 million in total liquidity, roughly double
our second quarter position. This comprises $125 million under our revolver and $25 million of cash. We
ended the quarter with total debt of $250 million, up 41% compared to Q3 of last year as we access our
revolver to support the near-term infrastructure investments and offset our increased working capital
needs stemming from our inventory timing. Inventory at quarter end totaled $266 million. Inventory levels
remain higher than the prior year, which was a particularly tight inventory environment due to port delays
and supply chain congestion. We believe that our inventory is generally high quality, we will continue to
work through our inventory levels and expect to make sequential progress.
Now to the guidance for [ 2022 ]. We are revising our full year net sales target to $1.29 billion to $1.33
billion or approximately 27% growth year-over-year at the midpoint. As the fourth quarter is typically
our lowest gross margin quarter, we expect a Q4 gross margin to decline sequentially due to margin
seasonality and ongoing inventory management. Our full year adjusted EBITDA margin, we now expect
high single digits. We expect adjusted net income of $39 million to $41 million based on a blended tax rate
of 25% and adjusted earnings per diluted share of $0.70 to $0.80 based on a weighted average diluted
share count of $55.2 million.
As I previously mentioned, the reduction in our full year net sales and adjusted EBITDA margin outlook
is a function of the broader macro climate and our continued investment in more efficient fulfillment
capabilities to support our future growth. We now expect this SG&A investment impact on our margin
profile to largely persist until the completion of our software upgrade next year. With 1.5 years of very
strong double-digit growth behind us, we are on the right path to deliver on our 5-year objectives layout
in our Investor Day, including increasing net sales to $2 billion and driving adjusted EBITDA margin to
approximately 20%. We look forward to updating you on our progress. We appreciate your time this
afternoon. Now Andrew and I would be glad to take your questions.
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Question and Answer
Operator
[Operator Instructions] And our first question of the day comes from the line of Megan Alexander from
JPMorgan Chase.
Megan Christine Alexander
JPMorgan Chase & Co, Research Division
I guess maybe starting on the top line, 3Q was strong. I think at the midpoint, the guide implies 4Q down,
call it, 5%, given where -- is that related to destocking and the macro? And I guess, given where your
inventory levels are -- are you anticipating destocking continues into '23? And are you -- do you think
you're going to have to take any actions on any of your owned inventory -- and how does that change how
you're thinking about -- or does it change how you're thinking about growing the top line double digit?
Andrew Mark Perlmutter
CEO & Director
Yes. So thank you for the question. Good to speak with you. I'll kick it off and then I can hand it over to
Jen. Yes, we are very happy with our top line growth in Q3. We definitely feel that we've outperformed
the market and have been pushing hard in what's been an uncertain consumer market. I would say our
largest sort of hurdle in the back half is really about our wholesale partners, what they're doing at retail. I
think we've heard from the broader marketplace that some of our retail partners are pulling back, they're
tightening up their inventory, which is -- which kind of -- which was reflected in our [indiscernible]. The
signs that we're seeing on the Funko brand now and in the second -- in the back half are cost, right?
If we go to our dot-com direct-to-consumer side, where people are spending more money and putting
and buying more items than ever before. So that's a really positive sign that we're seeing. Yes, there are
outside pressures that we're dealing with that have had an effect on inventory, and we are always looking
at the health of our inventories, and deciding if we need to [ action ] it or not. I'll let Jen comment on that,
if she's got anything to add.
Jennifer Fall Jung
Chief Financial Officer
Yes. Thanks, Megan. I speak with you. As we think about our inventory, yes, it is up year-over-year.
Remember, last year was a pretty tight inventory environment because we were dealing with the supply
chain challenges. So there is a little bit of nuance in the number underneath the covers. That being said,
we are constantly looking at the quality of our inventory, and we think it generally is very healthy right
now. And in the event where we have seen a pullback a little bit in Q4, we have been making the right
edits to our inventory, whether it be cutting receipts or pushing receipts out to make sure that we are
managing this and managing it down towards the end of the year. Definitely an area to focus thrust.
Megan Christine Alexander
JPMorgan Chase & Co, Research Division
Okay. And then maybe a follow-up for you, Jen as well. Can you just help us maybe better understand the
components of the margin in 4Q . Maybe how much of the -- can you give us like a full year gross margin
range? And just to try and understand how much of the additional pressure is gross margin versus SG&A?
And then -- just trying to understand what's in that, how much of it is transitory and may be related to
inventory actions that you can get back next year?
Jennifer Fall Jung
Chief Financial Officer
Yes. So in general, what we typically see in a normal year is that our Q4 gross margin does come down a
little bit from Q3 simply because that is when all of our retailers will take advantage of their contractual
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
discounts with us. So that's a normal trend that we see underneath the covers. We have accounted for in
the event we might have to do a little bit discounting because -- we know that inventory is tight across our
retailers in the back half of the year. So we've taken that into consideration.
From an SG&A perspective, I'll let you guys to work on your models. But yes, we'll see a slight uptick in
Q4 from Q3 from a total dollar basis, but that's really related to some of the infrastructure that we've had
to put in place to make sure that we can maintain and continue to grow the business. So we'll see a little
bit of dollar uptick in SG&A in Q4, not significant, but that's where you see the pressure points.
Megan Christine Alexander
JPMorgan Chase & Co, Research Division
And then when do you expect the ERP software system to be rolled out? And should this -- if it's in the
middle of next year or should this pressure -- should you get this pressure back in the second half of next
year?
Andrew Mark Perlmutter
CEO & Director
So I think that the way that we're looking at next year is there are 3 main areas of gross margin and
we're working at actioning to help us improve that in the near term. We talked about price increases,
aggressive sourcing out of Asia to leverage price -- cost decreases from our factories, and then lower
shipping containers, which we're seeing come down between 8,000 and 6,000 per container. So as we flow
in that new inventory at lower container rates, we should start to get some of the upside benefit of that.
On the SG&A and the additional costs with the growth and the infrastructure that we're having to invest
in to support the growth. We would expect that to be middle of next year. We are pushing hard to get that
ERP up and running, which also, by the way, brings the software to optimize our warehouse which -- we
built a warehouse to run on WMS. And because of the ERP delay, that's pushing back at WMS.
So we've obviously found a lot of manual work around especially to get the record 37% product out last
quarter where they continue to do so until we get this up and running, which is, like I said, middle of next
year is what we're looking at.
Operator
Our next question comes from the line of Linda Bolton-Weiser of D.A. Davis.
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
So I'm trying to figure out the math here just for the fourth quarter. I mean are we talking EBITDA down
50%, 30%, I'm just trying to like figure out the math here, there's a lot of moving pieces, but EBITDA in
dollar terms will be down significantly in the fourth quarter, correct?
Jennifer Fall Jung
Chief Financial Officer
Pardon me? Down compared to?
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
So down -- will EBITDA in dollars be down significantly year-over-year in the fourth quarter?
Jennifer Fall Jung
Chief Financial Officer
Well, what we guided to was high single-digit EBITDA percentage on the year. So I'll let you guys kind
of work out how you want to -- given we only have one quarter left, let you guys work on your models
there. But we are seeing pressure on the margin front, as we mentioned, and we do have some additional
investments for future growth that we're maintaining.
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
So it feels to me a little bit like a bomb has dropped down my head. Like you've really up until the second
quarter when you did have an EBITDA decline, you've had pretty strong EBITDA growth in the last 5
quarters. And you just had a big analyst meeting or you stood up in front of everybody in September.
And you talked about really kind of aggressive margin goals going forward. So I guess I'm having trouble
marrying like the 2 ideas here. I mean when you had the analyst meeting, did you know that you had
these operational issues?
Andrew Mark Perlmutter
CEO & Director
So on the Investor Day, if that's what you're referring to, I think that's what you're referring to. I just want
to take a minute to remind that, that is a long-term view of our business. So we're still very bullish on
and we absolutely believe in the long-term vision of this. I think what you're experiencing right now is a
contraction of the retail marketplace, which we're seeing across the entire industry and you're seeing us
executing these 2 major infrastructure projects in order to deliver that future revenue. It just still happen
to fall in a year where there was this broader economic pressure.
And again, I think that, that's what you're seeing, which is why we're confident this is a short-term
situation we have to overcome. We are rolling out multiple large infrastructure projects in a tough year,
and that's what you're seeing in the back half.
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
So right. So if we think about the long-term, I'm going back and looking at your EBITDA margin. And since
2016, it has declined in every single year except for 2021. So you had an EBITDA margin of 22% in 2016.
And now here we are at high single-digit EBITDA margin.
So you've been investing all along because that's been impacting your margin all these years, all the
infrastructure investments. And so I guess I'm just not seeing with relatively strong top line growth
most of the time, why your margin has declined so much over the last 5, 6 years, can you just help me
understand? And then how do I get confidence that all of a sudden, you're going to have a big period of
margin expansion, even though you've had 5, 6 years of margin decline.
Jennifer Fall Jung
Chief Financial Officer
We are absolutely focused on improving our overall margin. And as we noted in the Investor Day, we
see it pass 20% over the longer term. As Andrew mentioned earlier, there are several factors that we're
already putting into place that are going to help that. We have already negotiated some better pricing
with our factories. We are rolling out starting in next year, it will take place in Q2, more broad-based price
increases across the board.
And we will also see the benefit of the reduced shipping rate. What you're seeing this year is that we didn't
quite get all the pricing that we had anticipated, and our shipping expense, we are still amortizing those
higher shipping costs that we brought in with our inventory. So we are feeling very good about being able
to achieve that. It's absolutely a priority of ours, and that's why we did want to share that number at the
Investor Day.
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
So can I just ask how is the consumption, the demand for your products? Is it strong? Or has it
weakened?
Andrew Mark Perlmutter
CEO & Director
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Yes. I mean I think if you took a look at the Q3 versus the market and other people in our sort of sector,
that tells you everything you need to know, right? The demand is there, right? We are seeing record
numbers of consumers come to funko.com. They're spending more dollars per transaction and buy more
items. That tells us everything we need to know -- what you're seeing from a broader perspective is
largely something that's not really within 100% within our control, right? If a retailer has a mandate to
lower their inventory, we are going to be caught ultimate, even keeping key programs exclusives that are
driving foot traffic to those retailers, there is a broader event for our wholesale, retail partners to end the
year with wider inventory. I think that that's -- that's what you're seeing.
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
But it sort of implies that you've been selling into the channel at a pace that exceeds your POS growth? I
mean, is that the case?
Andrew Mark Perlmutter
CEO & Director
I'm sorry, say that again?
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
It sort of implies that in the last 2, 3 quarters, 4 quarters, you've been selling into the channels into
Walmart and Target at a pace that exceeds your POS growth. Do you have a sense as to if that has been
happening, you've been shipping more in at a rate that's higher than what it's been selling through at?
Jennifer Fall Jung
Chief Financial Officer
Yes. It's a broader context, Linda. As you've heard across the board, retailers across the board are
bringing down their inventories. It's not a direct reflection of our selling versus our sell-through. It's
really the macroeconomic environment as well as our own internal operational issues that we're currently
working through to make sure that we can deliver goods on time. So that's -- that's what you're seeing.
And if you look at the back half, we are still up in the low teens on the back half of the year. And overall,
approaching the high 20s growth on the year. So we're still feeling there is demand out there for our
products. Our online channel has demonstrated over that. And we feel good. It's about working through
this near term as retailers want to get clean for their inventory by end of year. So that's -- those are
the challenges that we're working through, but we think it's prudent just to make sure that we align our
inventory with our sales, and that's what we're doing, and that's what's reflected in our guidance.
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
Can you tell me the incremental investment by having duplicative 3PLs or whatever you were talking
about, in dollar figures, how much will that increase SG&A in the first half of 2023?
Jennifer Fall Jung
Chief Financial Officer
Yes. We haven't given 2023 guidance, just said. We'd like to give a more holistic picture on that. We did
disclose about a $5 million hit in terms of warehouse labor in Q3, just as we'd had to put more bodies to
get the goods out the door versus having the systems in place to do so. It's definitely been a headwind for
us in the quarter and will be in Q4.
Linda Ann Bolton-Weiser
D.A. Davidson & Co., Research Division
But those expenses of whatever magnitude it's going to be in like the first quarter and the second quarter
of 2023. Is that what you're thinking for the elevated expenses?
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
Jennifer Fall Jung
Chief Financial Officer
We'll continue to have the 3PL expense as we work through, but we are actually currently working on
getting more equipment into our distribution center to more streamline our fulfillment and get some of
those costs down. We've also opened an additional 3PL in Arizona to help some of our throughput. So
we are -- there are some additional expenses, but these should be further help continue to support our
growth, and we are looking to get those down as we kind of move forward.
Operator
[Operator Instructions] And our next question is from the line of Gerrick Johnson of BMO.
Gerrick Luke Johnson
BMO Capital Markets Equity Research
I'd actually rather give my time back to Linda if she wants to keep going. Seriously, performance at your
recent Comic Con events, wondering how those events, New York and San Diego have gone for you guys
now that everything is back in person? And how are those events comparing to pre-pandemic, and then
related just to this infrastructure thing, how did it become a surprise? How did it catch you off guard that
you'd be -- was it the delay in the operating system? Or was it that caused a surprise?
Andrew Mark Perlmutter
CEO & Director
So let me kick it off with Gerrick, it's Andrew. Thanks for the question. So let's talk with the in-person
events. We'll start there. San Diego Comic Con was up strong double digits. New York Comic Con was up
triple digits as far as our sell-through was concerned. We could not even handle the demand that we had
in our [indiscernible]. That was the biggest complaint was, Matt, how do you guys grow your footprint
here so that you can satisfy more of the consumer demand. So it's like [ tricking ] out of the firearms,
let me put it that way. So we could not -- when I talk about the confidence that I have in our brand, that
compiled with what -- or combined with what we're seeing on funko.com is exactly what I'm talking about.
So does that give you a good idea?
Gerrick Luke Johnson
BMO Capital Markets Equity Research
That's great .
Andrew Mark Perlmutter
CEO & Director
Great. So on the -- why was it a surprise? So I think that it's a combination and Jen can chime in here as
well. It was a -- we launched the new warehouse. We made the decision to move the new warehouse with
a delayed ERP and part of that ERP is what's called WMS, which is warehouse management software thing.
And basically, that's how you optimize the layout of that warehouse. And so when that ERP is laid, it came
with the extra work around having to create manual processes to optimize that warehouse, which would
normally have been done in an operating system, but unfortunately, we didn't have.
So that's -- was it a surprise? I would say it caused us more manual processes than we expected. So yes,
I think that, that was something that caught us a little bit off guard. But obviously, we're pushing through
and we're creating the manual workarounds to continue to get that revenue on the door.
Jennifer Fall Jung
Chief Financial Officer
And I would add to that, given that we did launch it in Q2, we did expect, any new DC, we did expect
hiccups around the launch of it, what I think is the bigger -- unfortunate part is that they continued on
whereas we expected them in the Q2. So you're seeing a little bit of that as well. But we are, again,
investing in growth and investing in 3PLs, we specifically left our Loungefly business in a 3PL and not
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
move it in here to continue to support its growth; it grew 15% [ a quarter ]. So we want to protect that
business as well. So we are doing everything we can to fix our operational hiccups.
Gerrick Luke Johnson
BMO Capital Markets Equity Research
Okay. Great. And I know it's difficult given the nature of your distribution to give us a POS number for the
quarter, but how about POS performance that your major mass market accounts?
Andrew Mark Perlmutter
CEO & Director
Yes. We are happy with what we're seeing, what we have registered. Obviously, you're right. Our POS is a
lot different than some of the other people in the marketplace because of our distribution is so much more
specialty oriented. But yes, we're very happy. We continue to see not only good unit sell-through, but also
higher ASPs. So it's largely positive.
I will say, obviously, there is the over-inventory situation that the retailers are dealing with across the
board. And maybe it's not over-inventory, but they're trying to cut back inventory. I'm sure you've heard
that from other people, where they are booking to end the year clean on inventory. So I think that's some
sort of effect on the newness that we're pushing in.
Operator
[Operator Instructions] It appears we have no further questions being registered at this time. So I'll hand
back to Andrew for any closing remarks.
Andrew Mark Perlmutter
CEO & Director
All right. Thank you very much. We appreciate everybody's questions today and look forward to talking to
you again soon. Thank you.
Operator
Thank you to everyone who has joined us today. This concludes the call, and you may now disconnect
your lines.
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FUNKO, INC. FQ3 2022 EARNINGS CALL | NOV 03, 2022
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