Good afternoon, and welcome to Funko's conference call to discuss financial results for the fourth quarter of 2022. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypads. 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 would now turn the call over to Ben Avenia-Tapper, Director of Investor Relations to get started. Please proceed.
Thank you and good afternoon. With us on the call today are Brian Mariotti, Chief Executive Officer, and Steve Nave, newly appointed Chief Operating Officer and Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, management will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion.
Reconciliations to their most directly comparable U.S. GAAP financial measures and supplemental financial information can be found in the earnings press release in 8-K that we released earlier today. All these items, plus a visual presentation that investors can consult to follow along with this discussion, are available on our investor relations website, investor.funko.com. I will now turn the call over to Brian.
Good afternoon, and thank you everyone for joining us today. As most of you know, this is my first earnings call since I stepped back into the role of CEO in December. I'd like to use this call to provide an update for the important work that is underway at Funko. I want to first emphasize I stepped back into the role of CEO because I fully believe in the power of the Funko brand and its potential, but I also recognize the significant operational issues confronting us. My first priority is a reset of our operations, which we are addressing with urgency, but won't happen overnight. Recognizing our current situation, I think it's important to understand how we got here. Since we IPO'd approximately five years ago, we've more than doubled our revenue.
We have taken a nascent direct-to-consumer business and grown it to 15% of total revenue this past quarter. We've expanded into multiple new geographies, and we've added amazing new brands to our pop culture platform. This rapid growth brought challenges that we are now addressing. Our history proves that we can deliver reliable, profitable growth, but to do so, we will need to reset our operational foundation. With that context, let's turn to the results for the quarter. The demand for our brand is stronger than ever, but we're still early in our operational reset. Looking at our financial results for the fourth quarter, net sales were $333 million, down 1% year-over-year, wrapping up a year in which we grew 29% year-over-year.
In our direct-to-consumer business, the channel we have most control over, we grew 37% year-over-year. On the wholesale side, while we don't typically comment on point of sale trends, wholesale sell-through has been very encouraging. In Q4, we posted double-digit POS growth, well ahead of NPD estimates of flat growth for the broader industry over the same period. While demand remained strong, our fourth quarter profitability was heavily impacted by our operational challenges. Adjusted EBITDA was a loss of $6 million and Adjusted EPS was a negative $0.35. It was clear on our last earnings call that the business and our operations hit an inflection point. A combination of macro factors and Funko's specific issues have disrupted our financial and operating performance to an unacceptable degree.
We'll share more details on our financial results shortly, I want to spend this time discussing the important work that's underway and how we're going to get our operations back on track. Our board and our management team are deeply focused on execution and unlocking the potential of Funko's unique value proposition. To begin, we have strengthened our leadership team. Steve Nave, who is with me on today's call, joined us in early December in an interim operations consulting capacity. We announced that today Steve will serve as both the new Chief Financial Officer and Chief Operating Officer. Steve brings a wealth of expertise spanning retail, consumer, and e-commerce industries. He served as CFO, COO, and CEO of Walmart.com, where he was responsible for all aspects of a multi-billion dollar e-commerce business. More recently, Steve was the CEO of Bluestem Brands, a multi-channel retailer.
We're thrilled to have Steve on board. We've made good progress in aligning the finance and operations sides of the business. That's exactly why Steve will be serving in both capacities as CFO and COO. Allowing Steve to oversee both functions, we believe, will be in better position for him to drive that alignment as we work across the organization to improve efficiencies and ultimately our financial results. Our efficiency improvements fall into three categories: gross margin initiatives, fulfillment cost reduction, and other SG&A savings. These actions are well underway. 2023 is still very much a year to operationally reset. Once completed, we believe these actions will save us between $150 million and $180 million annually.
Our first category of focus to improve execution is on the gross margin line. Here we have two primary levers, price and product cost, which together we expect to contribute approximately $60 million-$70 million in annualized Adjusted EBITDA. Last quarter, we discussed extending our price increases to include our exclusive product line. The reception has been encouraging, and we believe our products remain firmly in an affordable price range for our customers. We are also driving down our product costs with the introduction of a more competitive bidding process from our vendors and a more comprehensive assessment of cost throughout the product development life cycle. The second and third categories include addressing our fulfillment obstacles and reducing other SG&A spending. Since the pandemic, we've added approximately $85 million in annual fulfillment expenses despite similar overall throughput in our distribution center.
The mix of the business has changed since 2021, but by focusing on the execution, we can reclaim a significant portion of that spending increase. Combined, we expect fulfillment savings and other SG&A reductions to add $90 million-$110 million in annualized Adjusted EBITDA. The first action addresses the efficiency of our distribution center. We're implementing a warehouse management system that we believe will dramatically improve our cost to fulfill. This system is expected to be up and running this summer. The second fulfillment improvement action is addressing our elevated inventory levels. We are beyond the intended capacity of our Arizona-based distribution center. The volume is restricting our distribution center's throughput and incurring incremental container rental charges.
By eliminating this inventory, which we expect to do in the first half of this year, we expect to both reduce SG&A spending expenses and improve our gross margin by saving on incremental container rental charges. We are taking steps to reduce operating expenses across the board, including a workforce reduction of approximately 10%, tighter marketing spend, and other cost reduction actions to ensure our spending is aligned with our top-line results. These changes are ongoing, we are focused on executing on all these initiatives with a high degree of urgency. We expect the margins in the first half of the year to remain under significant pressure. By the second half of the year, we expect the combination of gross margin initiatives, improved fulfillment, and reduced SG&A spending to return to our Adjusted EBITDA margins to double digits.
2023 is the year for us to focus on operations. Most of that work is already underway and will continue throughout the first half of the year. Many of our retail partners have been very tentative in their post-holiday restocking, and we expect that to weigh in on first half selling. However, as already noted, demand and sell-through remain strong. We expect a robust second half rebound in the content calendar. These factors give us confidence in top-line performance in the second half. That sales trend, coupled with the bulk of our operational improvements coming in the first half, we expect our results to improve in the second half of the year. I look forward to updating you on the progress along the way.
While we are heavily focused on execution, we have not lost sight of opportunities to grow our core business through new collaborations, adjacent product categories, new direct-to-consumer experiences, and new geographies. These opportunities are exciting and expected to help grow our business. Today, however, operational improvements are the most important. Our execution here will help us to ensure we're well-positioned to win these new growth opportunities in the future. We know 2023 will be a year to reset, but I'm confident we will come out of this a stronger Funko from top to bottom. These steps will allow us to regain our operating leverage as we accelerate growth in the near future and deliver long-term value creation for the company and our shareholders. I'll turn it over to Steve to provide more details on the financial results of the quarter.
Thanks, Brian. Hey, everyone. Nice to meet you. I look forward to future conversations with each of you. I'm super excited about this business and helping to unlock Funko's potential. I look forward to getting to know you all over the coming quarters as we continue on the operational and financial initiatives we have underway. Jumping into the results. In the fourth quarter, we delivered net sales of $333 million, down 1% over the prior year. Our direct-to-consumer channel grew 37% to $49 million, driven by very well-received events, including Black Friday and Cyber Monday. The strong performance in our direct-to-consumer business was offset by slower sell-in on the wholesale side. Wholesale declined 6% to $284 million as we managed through a period of muted restocking across most of our retail partners.
In the U.S., net sales declined 5% to $241 million, while net sales in Europe were relatively flat at $64 million. Other international net sales increased 45% to $28 million, with double-digit growth in all of our emerging geographies. On a brand category basis, net sales in our core collectible brands declined 7% to $244 million on lower evergreen content as we prioritize more time-sensitive current content in light of our constrained logistics. The Loungefly brand grew 31% to $71 million, bringing the full year growth to 68% year-over-year as the brand saw strong demand.
Among our other brands, which includes toys and games and our digital products, net sales declined 13% to $18 million as the ongoing strength of our digital collectibles was offset by fulfillment challenges in our games business. Turning to margin and expenses, fourth quarter gross margin was 28%, well below our expectations due to multiple factors, including container rental charges and to a lesser extent, chargebacks. These two factors reduced gross profit by approximately $15 million. While freight rates do continue to improve, this was offset by container rental charges incurred when capacity constraints within our distribution center prevented us from unloading containers. As Brian discussed, we believe that our ongoing inventory management practices, combined with our lower product costs and increased pricing, will allow us to get back to our historical margin range in the second half of this year. Moving on to operating expenses.
We experienced significant headwinds due to constrained logistics. SG&A was $139 million, which includes a one-time $33 million non-cash charge for the write-down of capitalized costs related to a pivot in our ERP deployment strategy. There was approximately $3 million in incremental labor and third-party fulfillment expenses. For the fourth quarter, Adjusted EBITDA was -$6 million due to container rental charges, chargebacks and additional fulfillment expenses, all of which we are addressing in the first half of this year. Adjusted diluted loss per share was $0.35. Turning to the balance sheet. We ended the quarter with $19 million of cash on hand. We ended the quarter with total debt of $246 million.
Today, we announced an amended credit agreement, which provides us with additional room under our financial covenants as we implement this year's cost savings initiatives. Please refer to our 10-K filing for additional details. Inventory at quarter end totaled $246 million, up 48% year-over-year. As Brian previously mentioned, we've conducted an exhaustive analysis of our fulfillment network and have decided to reduce our inventory levels to improve our overall cost to fulfill by managing our inventory to the proper efficient operating capacity of our U.S. Distribution center. We expect this action to result in an inventory write-down in the first half of between $30 million-$36 million. Before I move on to our guidance, I'll note that we've all been incredibly focused on identifying and addressing opportunities for improvement.
We believe that executing on our initiatives will position us to drive sustained long-term shareholder value. However, these initiatives will take time, and in some cases, several quarters. As a result, we don't expect Adjusted EBITDA to be positive until the second half of 2023, but to improve sequentially throughout the year as these initiatives take hold. For the first quarter, we expect revenue of between $225 million and $255 million, excluding our anticipated inventory write-down. We expect gross margin to be slightly below this past quarter and improve sequentially throughout the year as our inventory actions, pricing, and product costing efforts take hold. We expect SG&A to be sequentially lower by approximately $25 million.
Adjusted EBITDA for the quarter is expected to be between negative $50 million and negative $45 million, returning to positive territory in the second half of 2023. We expect Adjusted net loss of - $53 million - $48 million based on a blended tax rate of 25% and Adjusted loss per diluted share of negative $1.00 - negative $0.90 based on a weighted average diluted share count of 52.3 million. For the full year, as gross and operating margins improve, we expect year-over-year revenue growth between 0% and 5%. We expect Adjusted EBITDA for the year to be between $50 million and $75 million, with effectively all of that coming in the second half of the year. We've made steady progress, and there's still much more to do.
We've identified initiatives to capture between $150 million and $180 million in annualized Adjusted EBITDA. The next two quarters will see us rebuild a stronger foundation for Funko, and we are confident it will produce meaningful benefit in the second half and into 2024 and beyond. We appreciate your time this afternoon. Now I'll turn it back over to Brian.
Thank you, Steve. In closing, we remain very encouraged by the strong support and demand we continue to see from our devoted fans. As I've said, we recognize our results are not where we want them to be, and we are working with urgency to take operational steps we need to deliver margin improvement and drive long-term shareholder value. We are confident in our ability to execute. Thank you for the time today, and I will now turn it over to the operator for Q&A.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your line is unmuted locally. The first question on the line comes from Alexander T. Perry from Bank of America, Merrill Lynch. Please go ahead. Your line is open.
Hi. Thanks for taking my question. I guess just first, sort of is there any indication on when the operational headwinds from the lack of the warehouse management software at the new DC will be behind us? Then I guess the obvious question is
How much of a drag on sales, you know, gross margin, SG&A is that this year? If we sort of exclude the operational headwinds, what would the guidance have been? You know, you mentioned some pretty positive color about wholesale POS being up double-digit % in the quarter. Is that the type of growth rate that 2023 sort of would be if it, you know, weren't for the operational issues you guys are facing? Thanks.
Yeah, sure. Hey, this is Steve. I'll take the first cut at this. On your first set of questions around the operational efficiency initiatives that we have underway, it's going to kind of come in kind of phased throughout the year. For example, we're already taking action on the inventory, and we're already seeing some efficiency gains from that, although we're not done with that work yet, but we're starting to see some benefit there. We've already started to see these container rental charges that we've been incurring. We've basically cut those in half as of a couple of days ago, so we're seeing that benefit already, and that benefit's going to continue to get bigger and bigger as we work through the inventory.
On the systems side, which is really the biggest hamstring in our U.S. distribution, we expect to have a warehouse management system in place this summer. You know, normally in a systems implementation like that, it takes, you know, 45, 60 days to fully burn in and work out the kinks, but we're confident that after that burn in period, we'll see some really nice efficiency, especially on the variable labor side of fulfillment.
Great. That's really helpful. I guess, just on the sort of two follow-up questions, can you give us a little more color on the anticipated inventory write-down? Was this due to sort of lower wholesale reorders, or was it primarily just the logistics issue, which didn't allow you to unload the containers? You know, my last question is what sort of led to the decision to not go through with the ERP implementation and take the charge in the quarter? Thanks.
Sure. On the inventory, it's purely an operational thing. The products are good, the facility was running at over 100% capacity when it needs to run around 80% capacity to be as efficient as we'd like it to be. We were incurring all these kind of storage costs, both in terms of the container rentals as well as some offsite storage that we had to procure in the fall of last year and then another temporary one that we've had to put in place a few weeks ago. The inventory reduction is purely in order to be able to operate more efficiently and save a lot of money on storage costs.
We worked that trade-off through pretty tightly to understand that, you know, takes a hit to get rid of that inventory, but we're very confident that, of the payback that we're gonna get as a result of being, just being more efficient and saving on storage costs. On the ERP question, it's a little bit of an involved answer. We figured out in early part of this year, call, let's call it January, that we were not going to be on time with the launch of the ERP that was scheduled to happen this summer. Unfortunately, the warehouse management system for the Buckeye facility would have been tied to the launch of the ERP.
We took a look at the landscape, other system solutions that were out there that maybe we could implement much more quickly, including the ERP that we run very successfully in our AMEA business, and basically made the decision that we could move forward, invest less money in a pivot in the strategy than it would've cost to complete the original strategy. The side benefit is it gives us the ability to actually launch a warehouse management system in advance this summer. Full-blown ERP phase I will not be completed until sometime in 2024, but we're able to separate warehouse management from that now and go down that path separately.
Perfect. That's really helpful. Best of luck going forward.
Thank you. Appreciate the questions.
The next question on the line comes from Linda Bolton-Weiser of D.A. Davidson & Co. Please go ahead.
Yes. Hi. I'm sorry if you answered this 'cause I missed the very beginning of your commentary. Like, my understanding was that this distribution center was, like, almost inaccessible. Like, it was just so many problems and that therefore you had to have duplicative storage and inventory in third-party locations. Are you saying now that you are accessing the DC or, l ike, I'm trying to figure out, like, what has happened since the last time you spoke about all this?
Yeah. Sure. I mean, we've been operating that distribution center since, I believe, June or July of last summer when it went live. The problem with the inventory is it just became too cumbersome to operate in any sort of efficient manner. The notion that we've not been able to access it, I would say is not quite accurate. We've been using it. It's been incredibly inefficient, both because of the system issue as well as the inventory starting to pile up. Yeah, I mean, like I answered for the last caller, we're already seeing some of the benefits of the changes that were taking place. Did that cover everything you asked?
Yeah. Yeah. That's, that's fine. Honestly, I know you were just giving very rough guidance before because you didn't quite know probably. I know you were talking about an SG&A, Adjusted SG&A level of $100 million per quarter or thereabout. Is that still the case? I know you said it like it's gonna be that high in first quarter, then it's gonna come down or, what's the color on that?
Our SG&A expenses this year, we've got some headwinds there. The annualization of some expenses and new payroll that we incurred last year. We are working very aggressively to bring that down. Inside SG&A is the variable labor, well, it's more than just the variable labor, but mostly the variable labor of our distribution center. You're gonna see improvements there. Again, back to my previous answers, probably not until... I mean, we're seeing some benefit now, but real benefit not until later this year. We've got a number of cost takeout initiatives that Brian alluded to that are underway that are gonna bring it down even more.
Sorry, I didn't glance at your SG&A in fourth quarter yet, but what was that number? How much of that in the fourth quarter SG&A is unusual type expenses that will eventually go away?
I might need to follow up with you on that question just to make sure that I'm capturing it correctly. Our fourth quarter.
Mm-hmm
SG&A was about was $139 million.
Mm-hmm. Mm-hmm.
T hat includes a $32 million charge for the ERP write down that I just discussed. A small single digit millions of other non-recurring one-time expenses.
Right. Even excluding the charge, that's like, whatever, $100 million. That's a very large number for a company of your size. I'm trying to figure out, like, what's normal if you've got all these things going on, 'cause just a few quarters ago, your SG&A was like, I don't know, it was like below $70 million or something. How much of it is, like, unusual, like, that's non-recurring sort of once you've fixed all your problems?
Well, I mean, the things that I just mentioned, that's going to total about $40 million of non-recurring expense that we got hit with in the fourth quarter that we're not going to see going forward into 2024. There are some other headwinds in the number for this year. The annualization of any new hires that took place last year is the best example of that. Again, the cost takeout initiatives that Brian mentioned, and that I've mentioned as well, you're going to see a pretty dramatic reduction in our SG&A's expenses over time.
Will that be noticeable in third quarter 2023 or not till fourth quarter?
It will be, it will be noticeable in third quarter.
Okay. Gotcha. Thank you. Then one more thing on just the retail situation. I've had a lot of my other companies talk about how specialty retailers didn't stock up as much inventory, so they're not reducing inventory 'cause they never had it, but it's the bigger big box retailers that are more problematic. I think you talked about that. However, Walmart said their inventory was flat year-over-year in the last quarter. It seems like the problem is, like, fixed almost pretty much. Is that the case? If, like, why wouldn't your sales growth then kind of snap back a little bit more quickly?
Linda, this is Brian. I would say that you're accurate on the first part. Definitely, specialty has not had the dip that some of our bigger partners did when they had some over inventory positions, and they began basically canceling orders in late third quarter and also fourth quarter. We are seeing some rebound, but we're also still seeing a little bit of conservative nature in terms of ordering with some of the bigger accounts. I mean, the one thing that is in our favor and always has been is our lack of concentration, right? I mean, no one retailer is more than 8% of our overall business, and then obviously our number one customers are self at close to 15 for the quarter %, which is our direct-to-consumer channels.
Yeah, I mean, it's been a slow but starting to thaw, you know, take on our bigger retailers in terms of increasing their orders with exclusive content and the everyday items.
Okay. All right. Thank you very much. I really appreciate it.
Appreciate it, Linda.
Thank you, Linda.
The next question on the line comes from Megan Alexander of JPMorgan. Please go ahead. Your line is open.
Hi. Thanks for taking my question. I guess maybe to follow up on that, is there any way, you know, within the guide of the first quarter, you know, at the midpoint, maybe down 25%, that you could unpack the impact from, you know, maybe some normalizing seasonality, the impact of destocking? You know, just help us understand what the actual core underlying demand that you're projecting there is and maybe what you're expecting for POS. Are you seeing more destocking than your POS might suggest given your inability to fulfill product, and when would you expect that, you know, dynamic to reverse? Yeah, I think there's a lot to unpack there, and it's gonna take a little bit of time to unpack that for you.
I mean, great questions. Also you've gotta keep in mind that we are trying to comp an artificially high quarter in the first quarter of last year. When we look at our sales guide for the first quarter, it's taking into consideration that especially January and February of last year had really high sales as a lot of supply chain challenges caused orders and replenishment orders specifically to move into... from like a November, December timeline into January and February. A big part of the basically flat to 5% growth, which is pretty muted obviously for the first quarter of this year as a result of that.
Yeah. We're still definitely seeing great trends on the sell through on POS. We're definitely the brand continues to do extremely well. It's just a slower amount of orders coming in from some of the bigger customers, that again, like I said on the last question by Linda, starting to thaw a little bit, and it's looking a lot better for us. We're very encouraged by the strong POS.
Okay. You know, maybe separate question. Are there more investments in capacity needed after this? I think you mentioned you were running additional 3PLs and, you know, last I heard you hadn't moved Loungefly into the new DC. If that warehouse is kind of already at 100% capacity, you know, how should we be thinking about additional investments beyond this needed to achieve the growth you expect? You know, related to that, how much of the $180 million of savings, you know, actually flows through to the bottom line?
Sure. The first thing that I'll say is we're leaving no stone unturned on the supply chain side. We're looking at every possible option to enhance the network in a way that's more financially efficient than what we're delivering today. Specifically on things like Loungefly, we've moved the Loungefly direct-to-consumer business into Buckeye. If that hasn't happened already, it's like happening this week or next. We're gonna start fulfilling that product out of the Buckeye, Arizona facility here very soon. We are looking at all of the third party logistics partners that we have, not just the Loungefly partners, but all of them to understand if there are some synergies we can get by collapsing those into, you know, one or two larger facilities, et cetera.
As it relates to Buckeye specifically, the inventory reduction initiative is going to allow that building to handle the capacity that we need it to handle for the next couple of years for sure. We are also still looking at potential long-term 3PL solutions as we grow into more and more volume.
Yeah. I'll add just one more thing onto what Steve said, which is a real hyper-focus on FOB pickups from some of our bigger customers that we finally had a chance to set up direct ship. We're also pushing a lot more volume out of Asia in 2023 than we ever have before. That's another encouraging trend for us as we put into WMS for midsummer and then really think that the efficiencies in the warehouse in terms of just getting product out the door and cost to fulfill will be on their way down starting as soon as third quarter.
Okay. That's helpful. Maybe if I could sneak in one more just as a follow-up to the previous question. Is there any way you can share what, you know, DTC looks like through the first two months of the year relative to, you know, the 37% you talked about in the fourth quarter?
Yeah. I mean, look, it just continues to grow for us. I mean, it is our strongest growth category. The fact that we have control of the narrative on that, it makes it a little bit easier with some of the difficulties in the last, you know, quarter and a half with some of the bigger retail partners. We continue to just broaden the ability to fulfill quicker out of those direct consumer orders, and we have great content coming out of the DTC channel. We do expect, you know, again, significant growth for direct to consumer throughout the entire year.
Obviously, the content slate gets a little bit better toward the middle and end of the year, as compared to the content slate in 2022, which was about as poor as I've seen it in years. Again, Loungefly and Funko continue to do really great things in direct-to-consumer. Mondo's business, which is gonna grow significantly this year since we acquired it, is, you know, pretty much all direct-to-consumer. We will continue to see a lot of heat on that channel for us, and we're really happy about that.
Okay. Thank you very much.
Thanks, Megan.
The next question on the line comes from Gerrick Johnson of BMO. Please go ahead. Your line is open.
All right. Good afternoon. Thank you very much. Steve, can you talk about the inventory that you are liquidating, what type of product that is? I think it's important given that a lot of your customers are collectors. Where is that product being liquidated, and how is that being done?
Sure, obviously we went after the oldest inventory first. Again, inventory that we felt like we could sell over time, but due to the operational constraints, it's just better to get out of it. We've looked at all the inventory that's been the oldest as our first bucket. Then we're looking at anything where we feel like, sure, we're selling quite a bit of it, but we might have, you know, more weeks of supply than we need, right, to manage the business efficiently.
I mean, there are about eight different lenses that we're using to look at all of our inventory to determine which units are gonna get destroyed. Speaking to how and where that's happening, we're using a third party, and they're not far from our distribution center in Buckeye, Arizona. We're not gonna incur too much transportation expense to do that, but we're using a facility that can certify the destruction for us so that we can provide certificates of destruction to our licensors.
Okay. It's being destroyed, clear, and the product, I guess would be a whole range of product from Pop! on to other product that you sell? I don't know.
Yeah. Absolutely, Gerrick. Yeah.
Okay. Okay. Steve, can you talk about the inventory at hobby and specialty a little bit more? More importantly, I'm wondering now that you've stepped into this role and you've had a look under the hood, do you have confidence in Funko's systems and ability to track that inventory?
Well, That's a two-part question for sure.
Yeah.
My confidence level, yes. You know, we don't have the best systems right now, which is why we talk about things like an ERP and a warehouse management system. I have confidence that we're gonna get to a place where our systems infrastructure supports the business the way it needs to. In the meantime, a lot of this stuff is done semi-manually, and we've, especially on initiatives like this inventory effort, we've put in so many redundant controls in the generation of the products that we've flagged to get rid of, as well as kind of the execution of getting the files passed back and forth between our planning group and the distribution center, that I'm confident that we'll do this without messing it up. Very confident.
One thing that I wanted to go back and just emphasize for you though, Gerrick, is yes, we are destroying this product, but we're doing it through a very green third-party firm that's gonna recycle everything, to the extent it can be recycled. I just wanted to make sure that everybody knew that we're trying to do this the most responsible way we possibly can.
Okay. Great to hear. Thank you very much.
Yep. Thank you, Gerrick.
The next question on the line comes from Stephen Laszczyk of Goldman Sachs. Please go ahead.
Hi. Thanks for taking the question. Maybe just one more on the new distribution system. I was wondering if you could talk a little bit more about what the biggest differences will be between the new system, compared to the one proposed last year. Do you anticipate that the new system once implemented, will have as much opportunity for efficiency over the long term as the plan you laid out at Investor Day last year?
Yeah, Steve. That's a good question and prompts me to clarify something for everybody. The new warehouse management system that we're talking about deploying this summer is what I would call a warehouse management system light. It's not necessarily the permanent solution, but it's something that we know we can deploy very quickly with very little incremental cost, relatively speaking. It may be that as we complete our analysis around what the right permanent solution is that would be tied to a full ERP launch, it may be that we go in a different direction again. Although I expect what we're gonna find with the lighter system that I just mentioned, is we're gonna end up with about 70%-80% of the feature and functionality that we would've gotten with a full-blown, you know, top-shelf warehouse management system.
It's such a leap forward for our business to have the 70%-80% that it's gonna produce amazing benefits in terms of our ability to operate efficiently, but it may not be the full-term solution going forward. The one benefit that I will say of taking this bifurcated approach to the deployments is we won't be dependent on the actual ERP to get the systems implemented. That also means that when we implement the new ERP, we don't at the same time have to implement a new top-shelf warehouse management system if we decide to go down that path.
We can still keep it bifurcated, do the ERP, let that burn in, figure out the tweaks and the issues that every systems implementation has, and then go back and upgrade our warehouse management system if we decide that's worth the juice is worth the squeeze.
Thanks. That's helpful. maybe separately, could you talk some more about the assumptions behind your 2023 outlook, maybe just in terms of your outlook for the economy, the health and pacing of the consumer, and what you're hearing out of the retail channels in terms of the back half, orders picking up? That'd be helpful.
Yeah, I'll take that one. Yep, absolutely. Look, we have obviously visibility to our order book through all the way through Q3, and we also know there's a lot of great content in 2023 compared to 2022. We're seeing, like I said, like I said earlier, a thawing of some of the bigger customers in terms of like getting back to their normal levels of ordering on a week-to-week basis for us. Between the combination of all three, I mean, we think we're in a really good position to start building momentum toward the second half of the year.
As we do that, obviously the implementation of the parachuted in WMS, the FOB fulfillment increasing dramatically in Asia and just better systems in places like Steve said. Every angle that we're looking at in terms of getting better in fulfilling, getting faster at fulfilling and reducing our cost to fulfill should all be taking place and hold in the Q3 and Q4. Ultimately based on, you know, the super positive POS for the brand. Specialty always been a big part of our overall business with the lack of concentration we have. We see this thing continuing to build back to, you know, what we think are really good levels in the second half of the year. Great. Thank you.
Thank you, Steve.
The final question on the line comes from Andrew Uerkwitz of Jefferies. Please go ahead, your line is open.
Great. Thank you. I appreciate the time. Just two quick ones. The first one is, with all these moving pieces and kind of a stronger back half, could you share with us kind of a little bit more color around what you think like exit rate gross margins or exit rate operating margins would be as we exit this year and get a lot of these issues behind us?
I'm not sure if we're sharing that level of.
Okay
D etail yet about the exit rate on the year. We'll certainly bring you along for the ride throughout the year. You can see for yourself as those trends improve.
Got it. I.
If you wanna. Yeah.
Yeah. Go ahead.
Yeah. I was gonna say, I think as we get toward the very end of Q3 and Q4, we're gonna start seeing our EBITDA in the double digits in the positive. We are getting back to historical numbers that Funko's operated for years and years. Again, like Steve said, it's gonna take us a little while to get there, but as we end the year, we're gonna feel like we're in a really, really good place going into Q1 of 2024. With numbers that are much more in line with how we've easily operated the business for the last couple years.
Got it. That's helpful. I appreciate it. Last question. I guess, how is this affecting. Now that you've kind of come back in the seat and you've always been a creative guy, Dealing with all these issues, is it holding back R&D projects or growth initiatives or anything along those lines?
No, look, we made some conscious decisions on some of our initiatives to push into 2024 so that the entire company was focused on one thing, which is to be operationally a heck of a lot better than we have been and to cut SG&A. I think, yeah, we've made a couple sacrifices for the very short term. It will not affect, you know, the promising nature of some of those investments in 2024. We wanted the entire company pulling in the same direction in terms of fixing our aisles as fast as we possibly can. You know, look, we had a fairly botched ERP process and unfortunately a really nice warehouse that was configured for an ERP and WMS that never arrived on time.
I think it was important for us to continue all of the company pulling in the same direction on fixing these two problems. Meanwhile, though, we have three new product lines that are all launching middle of this year or later that have had a phenomenal response from our retail partners on a global basis, one of which is Bitty POP! that we're just insanely excited about, which is a micro Pop collectible. So we feel like a much better content slate, three great new products dropping. Plan to more than double Mondo since we've acquired it. Loungefly seems to be on fire. We just have to fix our fulfillment issues and some of our operational issues while we reduce SG&A.
The focus has been on that, but I think you're still gonna see some new disruptive products in the market. Then we'll pick up with some of the other new initiatives we have in 2024 as we get that the business back in order as fast as we possibly can.
Got it. I really appreciate the candor on that. Appreciate it, guys. Thank you.
Yep. Thank you, Andrew.
We currently have no further questions. I'll hand back to the management team for any closing remarks.
We just appreciate everybody's questions and their time, so thank you very much.
This concludes today's conference call. Thank you all for joining. You may now disconnect from the call.