Hi, everyone, and welcome to Funko's 2025 Fourth Quarter Financial Results Conference Call. I'm Katie Wilson, and I'm here at the Funko store in Hollywood. With me are Josh Simon, our Chief Executive Officer; and Yves Le Pendeven, our Chief Financial Officer. Welcome, guys.
Hello.
Josh, I have heard this is one of your favorite places in Los Angeles.
It is. Yes, I've been on the job for about 6 months now. I think I've spent the majority of my time in this store. They actually gave me a key to the store earlier this week, so I can come and go even after hours. But what I love about being here is it really embodies the strength and how much fun the Funko brand is. You kind of see around us here from an IP standpoint, KPop Demon Hunters, Mickey Mouse, Michael Jordan in the background. I come here over the weekends. And there are people from all over the world, all ages, all demographics, and it's really fun watching them kind of discover their favorite fandom or IP. And so we thought it would be a fun new way to do the earnings call from here today.
So how have your first 6 months been?
Well, see, we're just getting back from the Toy Fair circuit. So London Toy Fair, Nuremberg, New York Toy Fair. I've been going to these toy fairs for a while in various capacities. And I can say, definitely, I felt more energy around the Funko brand than I have in a bit. It was really fun to meet with our licensors and retailers. In Q4, we also had a great presence at New York Comic Con. So I had a great chance to meet with a lot of our fans and YouTubers. And so the energy was great. And we're seeing that energy translate into momentum on the business side. In Q4, our net sales were better than expected, profitability at the higher end expectations. And I know Yves will dive into that detail here in a little bit.
And I'm guessing some of that was driven by this guy, Derpy, right behind me.
One of my favorites, near and dear to my heart, obviously, KPop Demon Hunters. And look, what's great about that one is I think it really demonstrates one of our superpowers, which is how quickly we're able to move in creating these really great collectibles. I think it was about 4 months from ideation and design to getting into fans and consumers' hands in Q4. We also won the Viral Hit of the Year award from Toy Book, which is a really coveted awards program. So that was great. There were plenty of other really fun ways that we came to life in Q4 as well. It was the final season of Stranger Things sadly, but the Duffers were on the Tonight Show with Jimmy Fallon, and they actually reenacted the season and the series finale using only Funko Pop. So that was really fun to see. We launched Pop! Yourself in Europe, which is the experience where you can create a custom Funko Pop of you or a loved one. And we rolled out Bitty Pop! into Walmart. Bitty Pop! is this great example of how we're able to continue to add dimensions to the iconic Funko Pop silhouette. It rolled out in all Walmart doors in Q4. It was incremental placement in the toy aisle. It was incremental placement at impulse and out of aisle, and it really helped to drive some strong sales in Q4 as well.
So during the last earnings call, you talked about the make culture Pop strategy. I believe you mentioned culture, creativity and commerce. How is that going so far?
If you remember the 3 Cs, everything is going well. The goal is to engage in the moments that are shaping culture. We aim to be the leading brand in transforming pop culture into collectibles and vice versa. Being at the center of discussions among fans as events unfold is crucial. KPop Demon Hunters serves as a prime example of this. We maintain strong relationships with licensors globally, currently managing around 900 licenses. However, there are still many opportunities we can explore. Sports, while still developing for us, see recent success with our new partnership with Topps and Fanatics. We are now included in the MLB Super Pack featuring trading cards and blind Bitty Pop! products, available at Walmart, Target, GameStop, and sporting goods stores like DICK'S. This illustrates just one opportunity in the sports sector, and there are still plenty more possibilities within these large fanbases.
And speaking of sports, by the way, did I see Funko in a Super Bowl commercial?
You did. It was surprising for all of us. I mean I sat down with my family to watch the Super Bowl. And during one of those first commercial breaks, a really great spot from the NFL aired, celebrating the intergenerational love of football. In the opening frame, you could see a young kid's bedroom filled with NFL Funko pops, which was really great to see. In the sports space, there are more opportunities in Miami. Inter Miami, the soccer club, is opening a brand-new stadium, Miami Freedom Park, in a couple of weeks on April 2. We have a presence in their flagship store with a Funko and Loungefly shop-in-shop featuring exclusive products and a unique Pop! Yourself experience available only at the stadium. Additionally, Q4 was strong from an entertainment perspective. We had Zootopia 2 from Disney, which was a massive hit, and Wicked: For Good and Evil was also successful for us. We're also expanding into new areas. We released a teaser video for The Cruel Prince, a popular book on TikTok, which generated about 1 million views within a couple of days. Anime has been big for us too, with well-known titles like One Piece continuing to do well, along with newer titles like Dandadan, which was a top seller for us at Walmart in Q4. We also saw growth in video games, with the franchise Mouse: P.I performing strongly for us in Q4.
And how are you participating in those surprise moments that pop up?
I mean a lot of it is through speed, as I mentioned earlier, related to KPop Demon Hunters, but we have a new program called Hyper Strike. The idea behind that is how can we design, manufacture and get products and collectibles into our fans' hands in a matter of days or weeks. So we'll be rolling that out in a more commercial way later this year, but we started experimenting with it in Q4. We were doing a lot of like one-on-one characters for celebrities and friends of Funko. One thing we tried to kind of experiment with is the insane world of the online videos, user-generated content meme culture that come up. So there's a great guy named Jason Gyamfi. He's known as the quarter zip guy. It was one of these crazy viral trends in Q4. We decided let's make a video of Jason and his Matcha and just send it to him as a gift. And his reaction was great. I think we have a little clip of it to show.
Yes. And it's really exciting because this is a new type of product we're offering.
It is. And one example of a new type of product we're offering because that second C creativity is really about how we take these pop culture moments and then translate them into physical form in some way. So obviously, Bitty Pop!, I talked a little bit about as a new example of a product that's been around for a couple of years, and we're really seeing some strong growth there. It capitalizes on what people love about Funko Pop. We've sold 1 billion units of pops over the years. It's this really iconic silhouette. And so there are more dimensions of Pop! and some net new products that we're working on to drive additional growth. The thing that's great about that iconic silhouette is starting to think about how we can reach fans and tell stories in new ways. And so we recently announced a partnership with an incredible production company called Rideback, really great storytellers. I think they're experts at creating worlds from products. They produce the LEGO movies. They produced the live action, Lilo & Stitch. Really, really excited to work with them. We're developing some new ideas with them from big feature and animated series ideas in addition to a really interesting unique AI-based animation toolkit they have called Spuree that will allow us to create some content much faster and bring new and iconic forms of storytelling to Funko fans everywhere.
You also mentioned commerce as a part of Make Culture POP!. I have a guess that this store is a part of that. Are you expanding how you think about commerce? And is that happening around the world?
Yes. We really have fans all over the world, and we want to make sure that we're showing up wherever our fans shop. As we like to say, turning shelves into stages, this store is obviously a best expression of how we're able to do that. But there's a ton of other opportunity in the U.S. from a retail standpoint and outside of the U.S. Europe, which has been our primary driver outside of the U.S. for a number of years now is really strong. At the end of the year, we are actually the second largest collectible brand by market share right after Pokémon, which was great. From January '25 to January '26, our sales were up 20% in the EU. That was basically about double the market growth there according to Circana Retail Tracker. And similar to what we've been able to sort of grow in Europe, the next idea is how do we do that in Latin America and Asia. So as part of that, we just created a new role for a guy named Andy Oddie, who is our long-time Chief Commercial Officer.
He has 40 years of really great experience in the toy and collectible space building businesses. He's our new Chief International Officer. He's going to be focused on growth in Asia and Latin America. And I think his dedicated focus is really going to help us to get traction there. And the opportunity is big for 2 reasons. I mean you think of China, Japan, Korea. China and Japan are the second and third largest toy markets outside of the U.S. So there's a lot of incremental business growth we know we can get in those countries. But the other great thing is so many cultural trends now globally are being influenced by Asia. So obviously, anime has always been a really big fandom for us, largely coming from Japan. We've seen a huge growth in all things, K-Culture, Korean beauty, K-Pop, Korean food. So I think our business opportunity to grow there is strong, and then the cultural influence that I think will provide a halo of growth all over the world as we develop more relationships with licensors and creators in that region, I think will also be pretty massive for us.
Turning to you, Yves. Could you say a little bit more about the financial results?
Sure. Happy to. This is an earnings call after all. So let's get to the numbers. So for the fourth quarter, our net sales were $273 million. We were pleased to finish the year on a high note. We had guided to Q4 being up modestly over Q3. We were actually up 9%, so better than we expected. And by the way, there's more details, including these slides that are posted on our IR website. For gross margin, we were at 41%, and that was again slightly higher than guidance. And by the way, with the exception of the second quarter in 2025, we've now been above 40% for the last 7 of the last 8 quarters. So really pleased with that trend. Our SG&A expenses were $91 million, and that was down 12% from Q4 of last year. And finally, adjusted EBITDA was $23 million, which again was at the high end of our expectations.
How is the financial outlook for 2026?
So for 2026, we expect net sales to be up modestly year-over-year, but a substantial improvement in profitability. So specifically, we're guiding to net sales being flat to up 3% compared with 2025 and our adjusted EBITDA between $70 million and $80 million. So let me give you a little bit more color on that. For sales, we expect our Funko core product lines to be up high single digits year-over-year, but that's offset by Loungefly down double digits, and that's primarily due to the SKU cuts that we implemented last year.
And one thing that I'll jump in and add about Loungefly is that we are really excited about what the growth potential for that business could be. I think there's a really unique way to own this space of wearable storytelling as we like to call it. We know there's a really passionate fan base there for the product. So as a result of that, we just put in place our first-ever GM for the Loungefly business, Jessica Kong. She's a lot of really great experience across lifestyle brands and experiential. We think she'll be really great for the business. She's about a month in. We're already pretty far along in building the strategy and plans to get that brand and business back to growth, and we'll share more details about that in the next quarter.
Thanks, Josh. So back to our guidance. For gross margin, we expect 41% to 43% for 2026. And that increase over the recent trend is really driven by the renewal of some key licensing agreements with our major studio partners, which will result in lower minimum guaranteed royalties. As far as tariff assumptions, we're assuming that tariff rates remain around 15% for the remainder of the year. And in terms of refunds, we're exploring all avenues, and we'll update our guidance when we have more information later this year. So finally, with regard to adjusted EBITDA, we expect a substantial improvement. That really is driven by actions that we've already taken. That includes all of the tariff mitigation strategies that we implemented last year, including price adjustments and cost reductions annualizing, the renewal of the licensing contracts that I mentioned. And finally, just beginning to see traction on some of our growth initiatives, primarily in the Funko product lines, including Bitty Pop! and Pop! Yourself, which we launched in Europe last quarter.
Josh, how do you see 2026 shaping up?
We're all really excited for 2026. I think it has the strongest entertainment lineup I've seen in the last four or five years. From a film perspective, we have Mandalorian and Grogu, Toy Story 5, and a live-action version of Moana, along with many other fantastic projects for Disney. There’s Supergirl from DC, Masters of the Universe, Minions 3, Spider-Man: Brand New Day, and Avengers: Doomsday set for later in the year. This week, Netflix debuted the live-action series of One Piece, as well as Season 2 of One Piece, which is always significant for us. In sports, it's a World Cup year featuring England, the U.S., and French teams. I also mentioned our new deal with McLaren and some upcoming product launches that I'm just hinting at for now. When we take a step back and analyze what's driving the toy industry, there are three trends: growth in collectibles, growth in licensed IP, and growth in the kidult market. These areas align perfectly with Funko's focus. This year is all about us executing well.
Well, with that, we'll turn to our questions here. And the first question is coming in from Stephen Laszczyk of Goldman Sachs. Please describe the shape of the flat to plus 3% guidance past Q1. Should it be pretty consistent throughout the year? And what gets you to the top versus low end of that guide?
Sure. I'll take that one. Yes, it should actually be pretty consistent throughout the year. This is not a hockey stick plan where we depend on having a huge second half of the year. We actually expect Q2 to comp up a little bit over last year that was pretty disrupted by the tariff impact when those were first announced and then also pretty steady growth throughout Q3 and Q4 as well.
To what extent does Funko view original content creation as a growth driver? How much does the company plan to invest in original content? And how does AI play into this strategy?
I mean, look, I'd say as a growth driver, I think it can be a serious growth driver in the long term. I mean obviously, our entire business is driven by entertainment content and IP. And so I think as we explore more dimensions of storytelling through the Funko universe, I think over time, assuming those things are hits and people love it and watch it, we think it can actually drive growth, but it's going to take time to develop, produce and sort of get that content out to audiences. Look, I think we're seeing the same trends everyone is from an AI standpoint in storytelling. We really believe in the power of people to tell great stories, our design teams and creative teams internally to craft these great characters. So far, it's been a great tool for efficiency and letting our teams focus more on the creative work than the busy work. And then I think from a capital standpoint, I mean, look, we're looking to partner with the same exact partners who we already work with on the licensor side, some of the biggest studios around the world to help us develop and create these elements of content, movies, TV, etc. So from our standpoint, we're looking to rely on their expertise on the storytelling side and the partnership side and shouldn't be a significant capital investment from us.
Does Funko need to use any of its extended credit agreement in 2026? Or will the company continue to pay down debt like they did in Q4?
So the answer is no, we don't expect to need to do any additional borrowing. We're managing right now on our operating cash flows and expect to continue to do so. We make regular quarterly principal and interest payments on the debt, and we plan potentially later in this year and certainly early next year to make some incremental debt paydowns like we did in Q4.
Eric Wold of Texas Capital asks, can you break out the POS trends and inventory restocking domestically versus Europe? And if you saw any noticeable trends positive or negative as the quarter progressed? What about so far during Q1?
Yes, great question. We did see a continuation of the trend that we spoke about in Q3. We continue to see great double-digit growth in POS sales in Europe. And in the U.S., we actually saw an improving trend throughout Q4 to a positive comp year-over-year. And actually, we've seen that trend continue into Q1. From a retailer inventory point of view, we watch that obviously very closely from the larger partners that report that information to us. And I think it's in a healthy place right now, and restocking is kind of going as we'd expect. Yes.
Within the 2026 guidance, what would you highlight as the key initiatives to both drive top line results and margin versus 2025?
I’ll begin by discussing the top line growth, which is significantly driven by our content slate this year. Bitty Pop! is a prime example of this. Many broader initiatives I've mentioned will begin to take shape this year, including international growth and new products. These will contribute to future growth. Additionally, we have some exciting new initiatives planned, such as our participation in the World Cup and a lineup celebrating America's 250th anniversary, as well as the launch of Pop Mystery products. All these factors will contribute to our overall growth. The strength we've observed in Bitty and our entertainment offerings should primarily drive top line growth. Would you like to discuss margins?
Yes, sure. From a margin perspective, I spoke about some of the main drivers already. The good news is we're forecasting to have a better margin than we've ever had. That's largely driven by things that are in our control, such as the price adjustments we made last year and the renewal of some of our major licensing contracts. As we go through the rest of the year, there will probably be ups and downs. I'm hoping for some favorable trends within the tariff landscape. Currently, we're paying 10% under the newly announced tariff rates, which may go up to 15%. It's uncertain what that might be later on in the year. On the other hand, we're also monitoring the situation regarding oil prices and the potential impact on shipping costs. So there are a few unknowns. But for the most part, we feel confident about maintaining that level of gross margin.
Keegan Cox of D.A. Davidson asks, can you quantify the tariff impact you experienced in 2025? And what incremental pressure you expect in the first half of 2026?
Sure. So in 2025, our total tariffs and duties were close to $40 million, and about half of that was related to the IEEPA tariffs, so the ones that were recently struck down.
And for the first time, we've also invited investor questions from our investor base. So the first one is to what extent has Funko signed new or expanded IP partnerships ahead of the relatively strong film slate in 2026?
Well, look, I think as it relates to the film slate itself, the good news is last year, we renewed licenses with all of the major studios around the world. Disney, which is inclusive of Lucasfilm; Pixar; Marvel; Netflix; Paramount Universal. We really value those relationships. We spend a lot of time with those partners. So from a '26 slate standpoint, I think we're in pretty great shape there. I mentioned some of the World Cup teams that we signed licensing deals with. I think for us, like kind of talking about some of the white space earlier, for me, the focus is really thinking about what are those net new kind of white space incremental areas where we don't currently operate. So I'd say the world of creators is a huge example of that. We appointed a new Board member, Reed Duchscher, who represents some of the biggest creators in the world who everyone is familiar with on Twitch and YouTube and TikTok. He's been a really invaluable adviser and looking to tap into his expertise and guidance as we embark more in that space.
Coming in from an investor in South Africa. The whole of South Africa would love it if you would make Funko pops of the Springboks Rugby team.
Interesting. Well, let's see, I don't want to let South Africa down. So we will look into it. But it's funny, it's a great question. I can't expound a lot on Rugby, which I apologize to any fans out there, but I respect the sport. But it's a great question. I think it definitely showcases both the opportunity that exists in sports and also just kind of the global extent of our fandom. So fun to hear a question from an investor in South Africa. But we will look into it.
Well, that does wrap up our questions. Josh, any final words?
Well, I just want to thank you for hosting and being here today. Thank everyone for watching. Excited to be back in May with our next earnings call and continue to share our progress across the business.