July 18, 2018 | 2:11 PM by Fahad Khalid | fkhalid@jaguaranalytics.com

Unlock: Funko (FNKO) – Cheers!

It pays to do fundamental research. This bullish view was presented to clients on May 6 with stock trading at $9.05. Several partnerships announced since then, including today’s news about Epic Games partnership for Fortnite toys. Stock has doubled in little over 2 months. To learn more about our approach and how you can become a successful trader, sign up for a 4-week trial and test drive the JaguarLive chat room with some of the best traders: SUBSCRIBE

Funko is a leading pop culture consumer products company, that creates licensed-based figures, plush, accessories, apparel, and homeware, enabling fans to express their affinity for their favorite “something” (i.e. a movie, television show, video game, musician, or a sports team), which are distributed and sold across multiple channels including specialty retailers, mass merchandisers, and e-commerce sites

Back on March 8th, the company reported its fourth quarter numbers that beat street estimates:

-EPS of $0.22 vs $0.16 estimate – Beat
-Revenue of $169.5M vs $146.6M estimate – Beat
-Q4 Net Sales increased 28%
-FY Net Sales increased 20.9%

As BMO Capital stated in their post-earnings note, growth was driven by consumer demand, an expanded distribution footprint, as well as the acquisitions of Underground Toys and Loungefly. Growth in the quarter was also broad-based with Blind Bags (Mystery Minis and Pint Size Hero), Pop! figures (+30% Y/Y in 2017), and action figures called out as outperformers. Specifically, properties cited were Harry Potter, 5 Nights at Freddy’s, Rick & Morty, Disney, Star Wars, Overwatch, and Thor: Ragnarok.

Management initiated revenue growth guidance of 16-20% (ahead of its long-term mid-teens revenue growth target) supported by:

1. Continued growth in content across multiple categories
2. Expanding U.S. shelf space (improving presentation and in-stock levels at retail)
3. International growth especially in Europe
4. New categories including apparel, accessories and home supported by the LoungeFly acquisition.

In addition, 2018 should be another solid content year supported by: Han Solo, Avengers Infinity War, Predator, Fantastic Beasts 2, X-Men, Black Panther, Aquaman, Wreck it Ralph, Incredibles 2, Stranger Things, and Fallout.

CEO Brian Mariotti would comment,

“We believe our financial results in the fourth quarter and for the year are a testament to the diversity, flexibility and strength of our business. Our products are gender, age and channel agnostic, our fan base is large and highly engaged, and our mix of business is balanced between older classic content and newly released content. We are executing our strategic initiatives in line with our plans and delivering against our financial and operating targets. We are off to a great start in 2018 and see strong growth opportunities this year and beyond.

Toys’R’Us

One of the first concerns one may have revolves around the recent Toys “R’ Us liquidation. As you will notice on the chart at the end of this report, shares in the middle of March did fall as a result of that news. BAML, in a March 21st note, believed the pullback was overdone, especially after Funko filed its 10-K that week. In it, the company disclosed a $2M increase in 4Q17 bad debt expense in SG&A stemming from the TRU liquidation announcement (occurred after the 4Q release). It should also be noted that Toys “R” Us only represented ~3.4% of net sales for Funko in 2017 compared to Mattel (MAT) and Hasbro (HAS) (7% and 9%, respectively). BAML believes the TRU liquidation will not materially impact Funko’s 2018 revenue outlook. “We see potential upside to our forecast given we have already lowered our sales and EPS to reflect the TRU liquidation. We believe Funko will be able reallocate the TRU inventory to other retailers because of Funko’s strong sell-through rates and low product crossover across channels.”

In addition, on April 12th , SunTrust analyst Michael Swartz was out with a note on Hasbro (HAS) in relation to Toys “R” Us, but also said that he is positive on Funko, adding that its guidance range has likely already reflected most of the TRU business going away.

Channel Checks

This Thursday, after the bell, the company will be reporting its Q1 earnings and ahead of those numbers, certain bullish channel checks have become available.

BAML – After speaking with CEO Brian Mariotti and CFO Russel Nickel at the BAML Consumer Conference in mid-March, they came away saying that they believe strong 4Q17 revenue momentum has continued into 1Q18 supported by floor space expansion in existing U.S. accounts and significant Europe growth.

Stifel – Analyst Drew Crum would issue a Toy Industry Update on April 3rd where he discussed his quarterly online analysis for the toy category during CY1Q. Taking a look specifically at Funko, the analyst said that based on their diligence,

“We noted solid “rankings” for Funko (on Amazon sites) across select markets, including Mexico (amazon.mx) where Pop! dolls enjoyed 40% share during March. The company also had placement in France and Spain (both were up Y/Y).”

**During ’17, Amazon represented mid/high single-digit percentages of Funko’s annual sales.

Finally, on May 1st, the analyst was out with a Funko Earnings Preview note where they are forecasting a solid start to 2018. A couple of other notable points they make are:

Management suggested Y/Y growth would be highest in 1Q18, partly due to the timing of a new 3PL location + the implementation of an ERP system in Europe, which is expected to pull forward shipments (into 1Q).

GameStop (GME) noted its collectibles business was up 20%+ during its FY4Q, and is forecasting growth in ’18. “We mention this because the company identified Funko’s Pop! Vinyls as its, “most popular category”, and GameStop was one of Funko’s largest retailer partner last year (8% of net revenue).”

#FNKO

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