Spin Master, Funko Move to Broaden Distribution

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Spin Master Corp. and Funko are moving to broaden distribution and revenue as they seek to offset the loss of Toys R Us sales, company executives told analysts as they reported quarterly results.

Spin Master, for whom Toys R Us accounted for 12% of annual sales, wants to increase e-commerce sales and has received interest from “non-traditional” toy retailers, CEO Ronnen Harary said. He didn’t identify the retailers, but analysts speculate that department stores are likely candidates. Spin Master took a $15.2 million bad debt charge tied to the Toys R Us liquidation in Q1 ended March 31.

For its part, Funko is working with Walmart to shift its Pop! vinyl figures and other products into the DVD/home entertainment section from the toy department  to create pop culture sections, Funko CEO Brian Mariotti said. Funko has taken a similar at approach at Target, where it gained more shelf space by moving outside the toy department. Funko incurred $1.8 million in costs tied to unsold inventory at Toys R Us, which typically accounted for 3-4% of its annual sales. In contrast, Toys R Us accounted for 11.4% ($10.6 million) of Jakks Pacific’s revenue in Q1 ended March 31, down from 14% ($13.2 million) a year earlier, according a Jakks SEC filing.

Both companies also are creating animated and other video content to help raise the profile of their brands. Spin Master credited outbound licensing of its Hatchimals collectibles – the program has 50 licensees – as being partly responsible for a 45% increase in “other” revenue (which also includes Sago Mini and Toca Boca’s apps and content distribution) to $29 million in Q1. Spin Master also is developing short-form video featuring Hatchimals collectible characters for YouTube that will be released late this year.

Funko, having acquired the production company Evil Corp. and renamed it Funko Animation Studios, has created short-form video based its Pop! vinyl figures that garnered about 50 million views on YouTube in Q1 ended in March, up from 40 million views in all of 2017, Mariotti said.

“A large factor of that is the ability for kids to watch the content based on these toys on YouTube and that is driving a lot of growth and opening up opportunities for companies in our space,” Harary said. “So we are taking a very focused approach in terms of expanding what Hatchimals means from a character standpoint.”

In seeking to burnish its Pop! brand, Funko is readying t-shirts and other apparel trimmed with colors found in the vinyl figures, and affiliate Loungefly is readying Pop! purses, backpacks and other bags.

“We are able to get a premium” for the Pop! brand because “we know there is brand affiliation and the POP! brand paves the way for us being able to get retailers into the pop culture business,” Mariotti said.

The company’s Q1 revenue increased 38.5% to $137.2 million. Revenue from sales of its figures jumped 39.1% to $115 million, while those from Loungefly, Funko Animation and other businesses rose 35% to $21.6 million. Top-selling figures in the quarter were those for the Avengers, Rick and Morty, Game of Thrones and Five Nights at Freddy’s.
The company turned a $2.2 million Q1 profit, reversing a year-earlier $5.6 million loss. Its number of active properties increased 8.6% to 456, with each producing an average of $302,000 in sales.

Spin Master’s net income declined 14% to $8.6 million in Q1 (largely because of the bad debt expense tied to Toys R Us) despite a 25% rise in revenue to $285.7 million. The increased revenue was partly generated by a 95% rise in sales of remote control and interactive characters, which includes Hatchimals, to $91.1 million. That increase  offset a 2.5% decline in sales of pre-school and girls products to $82.6 million amid a downturn in Teletubbies and Power Puff Girls-related revenue.

Meanwhile, Spin Master expects to have integrated newly acquired Gund into the company by year-end, including 50-75 employees and a list of licenses led by the Cartoon cat Pusheen. Gund posted $60 million in revenue in 2017, about 20% of which came from international markets, something Spin Master wants to expand closer to its own 30% figure, CFO Mark Segal said.As a result of the Toys R Us liquidation, Spin Master reduced its forecast increase for revenue in Q2 ended June 30 to a low single digit percentage from and earlier projection in the mid- to-high single digits.

Contact:

Funko, Russell Nickel, Chief Financial Officer, 425-783-3616, Russell@funko.com

Spin Master Corp., Mark Segal, Chief Financial Officer, 416-364-6002 x2333, marks@spinmaster.com