Good afternoon and welcome to Funko's 2023 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at the time. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization from the company. As a reminder, this call is being recorded. I'll now turn the call over to Funko's Director of Investor Relations, Rob Cassidy. Please proceed.

Hello, everyone, and thank you for joining us today to discuss Funko's 2023 third quarter financial results. On the call are Mike Lunsford, our Interim Chief Executive Officer, and Steve Nave, the Company's Chief Financial Officer and Chief Operating Officer. This call is being broadcast live at investor.funko.com. A playback will be available for at least one year on the company's website. I want to remind everyone that during this call, management's discussion will include forward-looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recent SEC reports. In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Funko's press release announcing its 2023 third quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today. I will now turn the call over to Mike Lunsford. Mike?

Thanks, Rob, and good afternoon, everyone. We're pleased to report better than expected financial results for the third quarter. Net sales were $313 million, adjusted net income was $2 million and adjusted EBITDA was $25 million, all of which were above the high end of our guidance range. These results were primarily driven by strong direct-to-consumer sales, improved sales to several of our larger wholesale customers both in the U.S. and in Europe, and the cost reductions and operational improvements we've implemented over the course of this year. On the last call, we outlined a path to achieve long-term profitable growth. We said that this strategy and approach will inform everything we do going forward. By focusing on the fans and our unmatched brand, by running the business with financial discipline, rejecting complexity, and focusing on fewer products done extremely well. By investing in areas we can control, measure and grow profitably and by keeping the flywheel turning where each action we take builds on the previous one, propelling positive momentum. I'd like to call out a couple of highlights from the quarter that demonstrate the progress we've made executing that plan. I'll start with the first element of the plan, though some of the highlights relate to multiple elements of the plan. We believe our fans and customers are excited and engaged that our brand is strong. So how do we quantify this? First, we grew direct-to-consumer sales 32% year-over-year, with D2C sales in Q3, representing 17% of our sales mix versus 11% in the third quarter of last year. Second, across our website, the average order value grew 8% year-over-year to $60. Third, the successful online launch of Pop Yourself in August contributed to the strong D2C sales in Q3, and we expect sales to continue to ramp…

Thanks Mike. Hey everybody, thanks for joining us today. I'm going to dive right in on the financial results. For the third quarter, net sales were $312.9 million which included wholesale channel sales of $258.3 million and direct-to-consumer sales of $54.7 million. Q3 wholesale and D2C sales increased 29% and 38% respectively, compared with the second quarter. Gross profit for the quarter was $104 million and gross margin was 33.2%, which, as expected, was well above our Q2 gross margin of 29.2%. The increase in gross margin was primarily driven by price increases fully in effect for the quarter, lower inbound freight costs, partially offset by increased levels of discount sales and inventory reserves. Included in the Q3 gross margin was $6.4 million of non-recurring charges related to factory purchase order cancellation. If not for the one-time charges, gross margin would have been higher at approximately 35%. SG&A expenses were $94 million and as a percentage of net sales improved considerably to 30% in the third quarter versus 36% in the second quarter. Some additional color on SG&A. First, SG&A in Q3 included $9.9 million of one-time expenses, which included $6.2 million related primarily to the termination of a lease agreement and $3.7 million for severance and related charges. Second, excluding the one-time expenses, SG&A in dollars remained essentially flat in Q3 from Q2, which is quite an achievement considering net sales in Q3 were $73 million higher than Q2. It also gives you a sense of the progress we’ve made carrying out our cost reduction plan. And then third, the workforce reduction announced in August generated a partial cost savings benefit in the third quarter. We expect to see the full benefit beginning in our current fourth quarter. Adjusted net income was $1.7 million equal to $0.03 per diluted…

Thanks, Steve. I’ll close with some high level thoughts about 2024. We’re currently developing our outlook for next year, which we expect to provide in our next earnings report. This involves weaving together the elements of our plan, focusing on our brands and fans, running the business with financial discipline and selectively investing in areas we can grow profitably given our opportunities and challenges. Our Q3 performance is a good starting place that reflects the strength and resilience of our brand, the cost reductions and operational improvements we implemented this past year, as well as a reenergized attitude within the company to build a solid foundation for a more profitable future. I will now turn it over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question today comes from Linda Bolton Weiser of D.A. Davidson. Your line is open.

Hi. This is Christina Xue on for Linda. So I want to ask, what are the factors would result in the high end of the EBITDA guidance range for the fourth quarter versus the low end?

Hey there. It’s Steve. I’m sorry, I didn’t follow that question. Could you repeat that for me?

Yeah. So I was wondering what are the factors that would possibly result in the high end of the EBITDA guidance range for the fourth quarter versus the low end?

Sure. So, I mean, it’s going to come down to sales, and probably most specifically to the D2C sales, because a lot of the retailers for holiday, they’ve done their stocking up, et cetera. So I think it’s going to come down to how well we do with our e-commerce business right up until ground cut off, as well as our couple of retail stores.

Okay. Thank you. Maybe a follow-up. So can you give us like a general idea to the trend of your retail POS growth?

Our own internal – our retail store POS.

Yeah.

I don’t know that at the top of my head.

No, I mean, external – okay.

External POS growth?

Yes. Sure. I’ll jump in. Hi. This is Yves LePendeven, I’m Deputy CFO. Sure. Yeah. We don’t have specific stats on our retail POS, but for those retailers in the mass channel that report the data to us, we’re still down year-over-year in POS sales. But we have seen an improving trend over the past six months. We’ve commented on this before I think the most encouraging thing that we’re seeing is that our sell-in continues to be lower than our sell-through. And we’re just seeing improved levels of inventory in the channel as we head into the holiday sales period. So I think that the trend is encouraging from what we’re seeing.

Okay. Thank you. I’ll pass it along.

Tell Linda we miss her.

Yes.

Thank you. There are no further questions in the queue, so I’ll turn the call back over to management for any closing remarks.

Okay. Thank you, everyone, for joining us on the call today. As always, thanks to our fans, employees, and our partners for their support. And thank you to our investors and analysts for joining the call and listening in. We look forward to sharing our progress on our next call, and we’ll talk to many of you in the next 48 hours as we do follow-up calls. Thank you.

This concludes today’s call. Thank you for joining. You may now disconnect your line.