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Investors Business Daily

Funko Tops Expectations, Raises Outlook On Record Sales But Breakout Fails

People can't get enough of Funko Pop!s The pop culture collectibles company Funko cleared Wall Street expectations with its second-quarter report after market close Thursday. Funko continued its streak of revenue growth with record sales for the quarter and first half of the year. And the company raised its outlook on the performance. FNKO stock broke out in the days leading up to the report. But it failed to develop and shares fell into stop loss territory on Funko's first earnings decline in six quarters.

Funko has posted steady revenue and earnings growth since December 2020. During the second quarter, sales continued to balloon, but earnings took a dip. Funko earnings dropped 35% to 26 cents per share. Revenue grew 34% to $315.7 million over the year, driven by 114% growth in its Loungefly brand sales.

Despite the slip, earnings topped Wall Street expectations for 23 cents per share, down from 40 cents last year. Revenue was predicted to be $293 million for the quarter, up from $236 million a year ago.

"We are thrilled to report record second-quarter net sales to cap off the strongest first half net sales in Funko's history. All of our reported brand categories grew double digits, indicating robust demand across the brand portfolio," said CEO Andrew Perlmutter.

Pop Culture Stock Breaks Out Ahead Of Comic-Con

Like most companies this year, Funko is feeling the effects of supply chain issues.

Gross quarterly margins fell to 32.7% from 39.1% in 2021 due to higher freight costs. Net income fell to $15.8 million for the quarter with a 5% margin, vs. $20.9 million and 8.9% margin last year. Quarter-end inventories soared 170.9% to $234 million as it received products delayed by supply chain disruptions. Funko says it's starting to see those issues improve and raised its guidance after the report.

Funko Outlook

For the year, Funko forecasts 26% to 31% sales growth to range from $1.3 billion to $1.35 billion. Funko anticipates adjusted earnings between $1.88 per share and $1.99 per share, up from $1.42 per share last year. Wall Street predicts Funko will post earnings of $1.91 per share on $1.33 billion of revenue.

Funko Pops Into Video Games

At San Diego Comic-Con on July 24, Funko announced it's breaking into the video game market. Funko is collaborating with developer 10:10 Games on an AAA action platform set to launch on consoles and PCs next year. The AAA classification means the game will be distributed by a midsize or major publisher. And Action platforms are games like Super Mario, where the goal is to navigate to different points and avoid obstacles.

"Creating iconic products that emotionally connect fans to their favorite fandoms is critical to each product portfolio decision," Perlmutter said.

Partnering with 10:10 Games provides "the talent to deliver games that reflect Funko's unique look and feel across its lines and varied products," he added.

10:10 Games was founded last year by video game veteran and five-time British Academy of Film and Television Arts awards winner Jon Burton. Burton launched the development studio Traveller's Tales in 1989. He also worked with Disney Interactive Studios and Sega on a number of games including the acclaimed Lego Star Wars and Sonic series.

Funko's results come after toy-industry competitors Hasbro and Mattel reported earnings at the end of July. Hasbro also beat earnings estimates thanks to profit growth in its Magic: The Gathering card game. And Barbie and Hot Wheels maker Mattel reported its earnings soared an incredible 500% for the quarter.

FNKO Stock Analysis

FNKO broke out from a 15-month cup-with-handle base ahead of its earnings report. It passed its official buy point of 26.03 in MarketSmith near the end of July. On Thursday's close, FNKO stock traded near the top of its buy range, which extends to 27.22. Buy ranges extend 5% above a stock's buy point.

But Funko shares tumbled after hours and closed Friday's trading down 16.81%. The fall put FNKO stock in stop loss territory, meaning its current breakout failed. Stop loss zones stretch 7% to 8% below a stock's buy point to prevent investors from potentially losing money. For now, it's best for investors to wait and see where it goes. If FNKO stock consolidates for at least six or seven weeks, a new base could emerge with another possible entry.

FNKO stock leads IBD's Leisure, Hobbies and Games group. It has a perfect Composite Rating of 99, which combines a number of key technical indicators. FNKO stock has a Relative Strength Rating of 98, indicating strong performance against its peers in the S&P 500 over the last 12 months. Though Funko slipped up on its earnings growth streak, it still has a solid EPS rating of 91.

You can follow Harrison Miller for more news and stock updates on Twitter @IBD_Harrison.

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