Funko, Inc. has reported its consolidated financial results for the third quarter ended September 30, 2019.
Net sales increased 26% to $223.3 million in the third quarter of 2019 from $176.9 million in the third quarter of 2018. The growth was driven primarily by an increase in the number of active properties and strong sales demand in the United States and Europe.
“Funko once again delivered another quarter of strong growth and financial performance,” said Brian Mariotti, Funko’s CEO. “We are driving results by executing against our strategic initiatives and investing in the long-term success of Funko.”
“More and more people are choosing Funko to be the platform in which they engage with pop culture. We are focused on finding new and innovative ways to connect people to their favorite entertainment through fan experiences as well as digital and physical goods.”
“There continues to be strong global demand for our products as the proliferation of content persists around the world. We are continuing to make the investments needed to capitalize on our expanding growth opportunities in both new and existing markets.”
In the third quarter of 2019, the number of active properties increased 13% to 627 from 553 in the third quarter of 2018 and net sales per active property increased 11%. On a geographical basis, net sales in the United States increased 21% to $147.3 million and net sales internationally increased 37% to $76 million with strong growth in Europe. On a product category basis, net sales of figures increased 24% to $176.5 million and net sales of other products increased 33% to $46.8 million versus the third quarter of 2018, driven primarily by continued growth of Loungefly and other softline products and the introduction of a games product line.
Gross margin in the third quarter of 2019 decreased 10 basis points to 38.3% compared to 38.4% in the third quarter of 2018. The decrease in gross margin in the third quarter of 2019 compared to the third quarter of 2018 was driven primarily by higher duties related to Funko’s Loungefly products, partially offset by lower license and royalty costs as a percentage of net sales and lower shipping and freight costs as a percentage of net sales.
SG&A expenses increased 27% to $52.4 million in the third quarter of 2019 from $41.3 million in the third quarter of 2018, primarily driven by growth and investment in the business and the continued expansion of Funko’s office, retail and warehouse facilities, reflecting an increase of $5.0 million in personnel and related costs (including salary and related taxes/benefits, commissions and stock compensation expense), an increase of $2.1 million in administrative and other costs, an increase of $1.3 million in warehouse and office support and an increase of $1.1 million in rent and related facilities costs. In addition, SG&A expenses included $2.9 million of legal, accounting and other related costs incurred in connection with the company’s investigation of the underpayment of customs duties at Loungefly. SG&A expenses increased 20 basis points as a percentage of net sales.
Net income for the third quarter of 2019 increased to $15.5 million from $7.6 million in the third quarter of 2018, and adjusted net income increased $6.3 million to $19.9 million from $13.6 million in the third quarter of 2018. Factors that led to net income and adjusted net income growing faster than net sales in the third quarter of 2019 compared to the third quarter of 2018 include lower depreciation and amortization expense as a percentage of net sales, a reduction in interest expense, net and the reduced impact of foreign currency gains and losses relating to transactions denominated in currencies other than the US dollar compared to the third quarter of 2018.
Adjusted EBITDA in the third quarter of 2019 rose 20% to $40.6 million or 18.2% of net sales from $33.9 million , or 19.2%, of net sales in the third quarter of 2018. The decrease in Adjusted EBITDA as a percentage of net sales in the third quarter of 2019 compared to the third quarter of 2018 resulted primarily from higher SG&A as a percentage of net sales reflecting investments we made in the business.
The company is reiterating its outlook for the full year 2019. The company expects net sales to be in a range of $840 million to $850 million. Adjusted EBITDA is expected to be in a range of $140 million to $145 million. Adjusted earnings per diluted share is expected to be in a range of $1.15 per share to $1.22 per share and is based on estimated adjusted average diluted shares outstanding of 53.5 million for the full year 2019.