Gross margin was already down 100 basis points (1% of sales) from its level in Q3 2021 as price increases were insufficient to accommodate increased costs. Funko plans to take care of that problem by expanding its price increases, which it expects to have in full effect by early to mid-2023. Management also noted that freight rates were improving significantly, although they wouldn’t begin to have an impact until Q4.
Funko is also having problems with its new consolidated fulfillment center, which it opened in Q2. The warehouse management software it expected to have available to manage its new warehouse was not installed by the time the warehouse opened, and its new ERP will not be installed until 2023. The company is using manual methods to manage its new warehouse, and "Supporting the complex upgrades to our core infrastructure has resulted in higher than expected short term operating expenses and increased margin pressure," CEO Andrew Perlmutter said in the conference call.
Funko’s challenges in Q3 led to a decline in net income of 39% to $11.1 million from $18.4 million in the year ago period, despite a 37% sales increase to $366 million.
The inventory increases and investments in the new fulfillment center are requiring more cash despite positive earnings; Funko’s total debt was up 41% from the year ago period to $250 million in Q3.
Funko noted its games portfolio as a bright spot, with 180 titles now available and an "extremely strong introduction" for Kingdomania, the new collectible game it launched in October (see "New Collectible Game Launch").
