A toy company is writing off up to $36 million worth of stock because it's cheaper to get rid of the product than continue to pay for warehouse fees.
Washington-based Funko has previously seen huge success with its collectable bobble head figures, following collaborations with the likes of Pokemon, Lucas films and Marvel studios. It's Pop! figures have replicated the likeness of Darth Vader, Spider Man and Harry Potter to name a few.
However in a trading update on Friday the company revealed demand for its products had dropped by 1% in the final quarter of 2022 when compared to the final quarter of 2021.
Although a small decrease, Funko's problem is that it banked on continued demand growth and as of the end of 2022 has an inventory of stock nearly 50% bigger than the year before. It admitted its year-end stock levels totaled $246.4 million, an increase of 48% on 2021.
As a result the company "intends to eliminate" vast quantities of its stock in a write-down of between $30 million and $36 million. The aim is to "reduce fulfillment costs by managing inventory levels to align with the operating capacity of our distribution center", it added.
It is not yet clear what "eliminating" entails and whether the vinyl products will be recycled, donated, or sent to landfill. Funko did not immediately respond to Fortune's request for clarification.
Global fanbase
CEO Brian Mariott insisted that the brand still had an "incredibly loyal and resilient global fanbase", but added: "During the fourth quarter and in early 2023, we have made progress in addressing operational issues that impacted our results in the second half of 2022. We have strengthened our executive and operational management team and have taken significant steps to improve our operating efficiency."
The business added its margins decreased for the final quarter of 2022, noting that storage container rental charges associated with excess warehouse inventory had primarily driven the drop. The result was that for Q4 22 Funko posted a loss of $46.7 million compared to a net income of $17.4 million for Q4 21.
At the time of writing, Funko's share price for 2023 so far has dropped by around 9%.
According to CNN, Mariotti told investors last week that a warehouse in Arizona had become so overwhelmed with the dolls that extra space had been rented out. The costs of housing the figures had begun to eat into the bottom line at a rapid pace, he added.
The toy boss continued: “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-specific issues have disrupted our financial and operating performance to an unacceptable degree.”
New man at the helm
Deflating Funko's inventory figures will be one of the first things on the agenda for Steve Nave, who was appointed as chief financial officer and chief operating officer at the company on the same day as the announcement.
Nave began working with the company in December last year and was tasked with driving strategy and operations. When the company began recruiting for a permanent CFO and COO, the former Walmart finance executive was described as the "ideal candidate".
“Over the past few months, I have worked alongside the board and management team to undertake a thorough review of the business and our go-forward strategy," Nave said. "The company has a strong foundation and is committed to enhancing operations that support our financial outlook and growth strategy."
