Good afternoon, and welcome to Funko's Conference Call to discuss financial results for the second quarter 2020. 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 that 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 will now turn the call over to Andrew Harless, Manager of Investor Relations, to get started. Please proceed..

Thank you, and good afternoon. With us on the call today from management are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Jennifer Fall Jung, Chief Financial Officer.

A press release covering the company's second quarter 2020 financial results was issued this afternoon and is available on our Investor Relations website, investor.funko.com.

Before we begin, I need to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of Form 10-Q for the 3 months ended June 30, 2020, under other filings with the SEC.

Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We'll be referring to certain non-GAAP financial measures on today's call, such as EBITDA and adjusted EBITDA, which we believe may be important to investors to assess our operating performance.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release. We have also prepared a visual presentation that investors can consult and follow along with this discussion and can be accessed at investor.funko.com. I'll now turn the call over to Brian..

Good afternoon, everyone, and thank you for being on the call today. We hope that everyone is staying safe and healthy. In the quarter, our team did a tremendous job of pulling together to navigate the current environment and finding new and innovative ways to connect Funko with our fans.

Although we were challenged by the dynamic retail landscape and broad-based store closures, we delivered net sales of $98 million, maintained strong gross margins and drove significant savings in SG&A, allowing us to achieve breakeven adjusted EBITDA.

When the quarter began, nonessential businesses were closed across the globe, and many of the retailers that remained open were prioritizing the restocking of essential goods. Due to these factors, April was our most challenging month in the quarter.

As government started to relax stay-at-home mandates and retailers began to reopen, we saw order trends improve in May and accelerate into June. As expected, our international business was more impacted in the quarter due to broad government closures, especially within Europe.

In the U.S., we continue to see strong consumer demand within the mass market and third-party e-commerce sites. While our specialty retailers performed better than we initially expected, they were far more impacted by government shutdowns than the other channels.

Importantly, we are also seeing more and more consumers tuned to funko.com and loungefly.com websites to purchase our products, which drove e-commerce sales growth of more than 3x in Q2 compared to last year.

The traction we are seeing online tells us that our products are continuing to resonate with consumers and our fans are engaging with Funko even in time of disruption. We are staying nimble, maintaining financial flexibility and making progress against our 4 key strategies we outlined at the beginning of this year.

These include building on our core pop culture business, diversifying our product mix, further penetrating international markets and expanding our direct-to-consumer business. To that end, during the second quarter, we successfully relaunched funko.com with an expanded product offering allowing fans to purchase from a wider array of Funko products.

We introduced several new products within the games category and unveiled a new high-quality fashion line under Loungefly umbrella. As you can see, we're not staying idle. Over the past several months, our entire organization acted quickly and decisively to mitigate the effects of COVID-19.

We had to make some tough decisions along the way, all of which were necessary to navigate the current environment and build a stronger organization for the future. Most recently, we implemented a workforce reduction that affected approximately 25% of our employees.

This is the only company-wide workforce reduction in Funko's 20-plus-year history and was an extremely difficult decision. Going forward, this will enable us to streamline the organization and redirect resources toward key strategic priorities such as direct-to-consumer and product diversification.

We believe these actions we've taken to increase financial flexibility, coupled with the underlying strength of the business, will enable us to navigate the impacts of COVID-19 and deliver long-term shareholder value.

Looking at the second half of the year, we are continuing to plan conservatively and expect a gradual recovery due to ongoing COVID-19 resurgences and general uncertainty in both our U.S. and international markets. For the third quarter, we currently anticipate a net sales decline of approximately 25% compared to last year.

In the U.S., we expect to see continued strength within both mass market and third-party e-commerce channels as durable consumer demand remains. Additionally, we expect to see ongoing momentum in our D2C channel. However, we expect these factors to be offset by a slower recovery among our specialty retailers.

In Europe, given our retailer base is more specialty in nature, we expect this region to have a more gradual recovery than our domestic business. As we enter the fall retail season, we have never had such a diverse product offering in the market which is enabling us to expand our relationships with our retail partners.

As we have discussed in our last call, we expect to increase our shelf space at one of our mass partners by over 20% this fall within our core collectible category. Incremental to that, we expect to see increased pacings of our board games at all our major mass and online retailers as well as new product placements within the toy aisle.

Additionally, we are continuing to build unique programs that revitalize nostalgic evergreen properties and create excitement for our fans by utilizing our insights about Funko's consumers and their fandoms. By way of example, we have delivered successful retail programs such as The Golden Girls, Bob Ross and Masters of The Universe.

We will be leveraging this unique ability as we launch amazing new products later this year, including a line celebrating Disneyland's 65th anniversary which highlights a few of its iconic amusement park rides; a Pop! vinyl program of Retro Toys, which will showcase favorite past time toys in games such as Operation, Mr. and Mrs.

Potato Head, Clu, Furby and others; and a new collection focused on nostalgic McDonald's characters. Given the current environment, we are continuing to see movie release dates get pushed out.

Even with the limited new theatrical content, we've been able to create products across other categories such as television, sports, music, anime and nostalgic evergreen properties that resonate with our consumers.

Looking forward, we are refining our merchandising strategy to include new lighthouse programs which are broader and more holistic product sets at retail that will cover multiple categories for figures, apparel, bags, accessories and more.

We are continuing to enhance our go-to-market strategy to ensure we are maximizing each program to offer fans multiple ways to connect with their fandoms. We continue to see passion amongst fan bases around the globe.

Fandom, viewership and the desire to engage with content, properties and teams that consumers love is not diminishing because of the pandemic.

Two weeks ago, we wrapped up Funko's Virtual Con, where we engaged with hundreds of thousands of people around the world through our social media channel, held a charity auction on eBay that supported the NAACP Legal Defense Fund, unveiled new products and offered exclusive convention items through funko.com and other retail partners.

The biggest takeaway from our Virtual Con is Funko's ability to create communities that stretch to all corners of the world from the U.S. to the Philippines, in the U.K., to Brazil, Thailand and India. It was truly amazing to see how large the Funko family has become as the joy and sense of community we bring to our fans at such a disruptive time.

In today's highly dynamic environment, it is rewarding to see Funko's brands and products resonate strongly with consumers. We believe we have the platform in place to continue to diversify our revenue mix across product categories, geographies and distribution channels.

Our culture of innovation and ability to create products across multiple categories and licenses has allowed us to reach consumers around the globe and continually bring new fans into the Funko ecosystem.

Before I turn the call over to Andrew to provide an update on our progress, I want to first take a moment to express my thanks and appreciation to the entire Funko team. The past several months have not been easy, but everyone pulled together as an organization, adapted quickly and achieved successes during a challenging period.

And lastly, thank you to all of our fans, our partners and our shareholders for your continued support as we navigate these dynamic times. I will now turn the call over to Andrew..

Back in Time. Pan Am and Godzilla were initially launched at Target in June and have performed exceedingly well above our initial expectations. Back to the Future was launched at specialty stores and online and quickly sold out. These early reads are encouraging and will allow retailers to react and capture additional demand for holiday.

The board game category continues to perform well across the sector as people look for stay-at-home activities. While our board game portfolio is relatively small today, we plan to continue to expand our offering and believe it will become a more meaningful piece of our business over the long term.

Also in the quarter, Loungefly launched Stitch Shoppe, a high-quality licensed apparel line that includes dresses, skirts, tops and other accessories. Each piece is a limited edition and comes with an exclusive pin, adding an extra layer of collectibility. The initial line includes products for Disney, Coca-Cola and Barbie fans.

This is another example of our ability to innovate and create new ways for our fans to connect with their favorite properties and demonstrate their fandom. Looking at the balance of the year, we remain on track with diverse array of product launches we have slated for 2020, which include multiple new games, toys and figure lines.

Our third area of focus is expanding internationally. Our international business was hit hard by COVID-19 in Q2. And while we're seeing regions begin to improve, we expect to see greater impact in our international regions than our domestic markets in the third quarter.

We continue to believe there is significant opportunity to expand internationally, especially within Europe, Latin America and Canada as those markets normalize. We are in the process of realigning our sales team and implementing a heightened focus on international penetration as global economies begin to recover.

Our fourth area of strategic focus is expanding our direct-to-consumer business. The investments we've been making in our digital capabilities prepared us to meet the heightened demand that we saw in the first half of this year.

While our D2C business represents less than 10% of our sales, we view this as a significant growth opportunity going forward and an important vehicle for expanding our reach and broadening our relationship with our fans. In the second quarter, our total D2C business, which includes our 2 flagship retail stores and e-commerce sites, grew by over 80%.

As Brian mentioned, our e-commerce sites alone grew over 350% in the quarter. Notably, Loungefly drove more sales through its e-commerce site in Q2 2020 than it did in all of 2019, reflecting our ability to bring new consumers into the Loungefly's ecosystem through product expansion and innovation.

We reopened our 2 flagship stores in mid-June at reduced capacity. And while they were closed, we initiated a buy online, pickup curbside options to continue to support our fans. As Brian mentioned, we relaunched funko.com in June.

The refresh site includes an expanded product offering, enhanced usability and interface, additional payment options and speedier checkout, among other features. In its initial weeks, the relaunched site has resulted in a lift in our key operating metrics.

Also during the quarter, we opened a new e-commerce fulfillment area within one of our existing warehouse facilities. This has allowed for more streamlined pick-and-pack process and is expected to strengthen our operational infrastructure and allow us to drive scale.

While we've made great progress, there's still more work to be done as we continue to build out our e-commerce platform. Over the remainder of the year, we plan to enhance the site and improve upon our customer journey and experience.

Importantly, we will be piloting and launching new marketing programs aimed at driving traffic and consumer acquisition across specific products and properties. Additionally, in the second half of 2020, we will be deploying resources towards building out our e-commerce capabilities in Europe.

As we continue to grow our D2C footprint, we are excited about the opportunity to reach new consumers as well as utilize trends and data to inform our overall business strategy.

While the second quarter was challenging due to COVID-19, we remain excited about our future opportunities and committed to driving progress against key strategies which we believe are critical to the long-term health and success of our business. I will now turn the call over to Jen to take you through the financials..

Thanks, Andrew, and good afternoon, everyone. Although we faced significant headwinds in the quarter, sales came in better than anticipated, margins held, and we reduced SG&A spending. Our actions allowed us to maintain a strong liquidity position, ending the quarter with $87 million, up more than 15% from year-end.

In Q2, net sales totaled $98 million, down 49% versus a year ago, reflecting the impact of COVID-19. The overperformance compared to our expectations primarily reflect a strong reopening cadence across the U.S. and international markets during the latter half of the quarter.

The number of active properties in Q2 was 644, which declined 5% from Q1 2020 and increased 9% from Q2 2019. Net sales per active property were $152,000 in the quarter, down substantially compared to last year, reflecting the broad-based retail store closures in the quarter.

Our Top 10 performing properties in the second quarter were The Mandalorian, Harry Potter, Pokemon, Star Wars Classic, DC Comics, Marvel, Disney Classic, Dragon Ball Super, Funko IP and The Office. We continue to see durability in the evergreen category.

As a percentage of our total mix, evergreen properties accounted for 66% of net sales in Q2, up from 46% a year ago. Second quarter net sales in the U.S. decreased 36%, reflecting ongoing business closures in April and a partial reopening in May followed by improved performance in June.

International sales decreased 71%, reflecting the ongoing effects of COVID-19 on overseas markets within the quarter particularly in Europe. On a product category basis, Q2 net sales figures were down 52% to $77 million, while other sales decreased 34% to $21 million. Sales of our Pop branded products were down 51% in the quarter.

We saw resiliency in our Loungefly brand in the quarter, which performed better than the overall company as it declined 25% despite many of the retailers being closed. Second quarter gross margin was 36.6%, down 60 basis points versus a year ago.

The decline primarily reflects higher shipping, freight and packaging costs as a percentage of sales due to decreased volume and a lower percentage of FOB shipments in the quarter, which were partially offset by improved product margins.

Although we saw an increase in margin due to the growth in D2C sales, this was offset by geographical mix in the quarter. SG&A in the quarter came in at $39 million. As we anticipated, this was down both sequentially and compared to the prior year.

The cost-cutting initiatives we implemented in Q1 enabled us to capture over $15 million of savings against our plan during the second quarter, primarily within personnel and marketing.

As a result of our continued cost saving actions, including the workforce reductions announced in June, coupled with the refocusing of resources to our key priorities, we anticipate that SG&A dollars in the second half of 2020 will continue to be below 2019 level. From an earnings perspective, adjusted EBITDA came in slightly positive at $224,000.

Turning now to the balance sheet. As a reminder, we ended the second quarter with total liquidity of $87 million, which consisted of $41 million of cash and cash equivalents and $46 million of availability under our revolver. Total debt, net of unamortized discounts, was $240 million.

Inventory totaled $60 million, down 20% versus a year ago and 3% from year-end. During the first half of 2020, we took actions to cut costs, preserve cash and increase flexibility.

We have lowered expenses across the organization, reduced planned capital expenditures by 1/3 and proactively managed our working capital requirements through inventory reductions. These actions, coupled with successfully amending our credit facilities, provided us with greater near term flexibility.

As we consider the balance of the year, we are planning conservatively given the dynamic environment. Taking into account the current landscape and trends, Brian discussed by channel and region, we expect Q3 net sales to decline by approximately 25% compared to last year.

Additionally, we anticipate that Q3 gross margin will strengthen from Q2 levels but will be down year-over-year primarily due to geographical mix. Also, due to continued cost saving actions, we anticipate SG&A in Q3 will decline on a dollar basis in the mid-single digits compared to the prior year.

Given the macro uncertainties and the fluid impacts of COVID-19, these expectations could be affected by heightened effects from the pandemic as the quarter progresses. We are closely managing cash and liquidity, aligning inventory to anticipated demand and carefully controlling cost.

We believe the actions we're taking in the current environment, combined with the underlying strength of our business model, will enable us to continue navigating the anticipated effects of COVID-19. Thank you, and we appreciate your time this afternoon. Now Brian, Andrew and I would be glad to take your questions..

[Operator Instructions] Your first question comes from Steph Wissink from Jefferies..

We just have a couple of questions. The first, Jen, is on your comments on SG&A when you mentioned decline in dollars in the mid-single digits.

Are you talking about $5 million? Or are you talking about a mid-single-digit rate of dollar decline?.

Absolute dollars..

Got it. Okay. And then, the second question is more thematic based on your e-com trends.

Can you just give us an update on the percentage of sales in total that were through funko.com or loungefly.com in partnership with funko.com?.

As - in general, we did see a threefold. Keep in mind that our D2C business is still relatively small compared to our total business, so we felt really good about the success of the business, but it's still small compared to the total portfolio..

Okay.

And just as a follow-up to that, what are you learning about your merchandise assortment on your .com that might lead into some of your merchandising strategies in the back half or even into 2021 in terms of where you're seeing your fan, both enthusiast or casual, gravitating towards new merchandise?.

Yes, Steph, it's Brian. A lot of lessons learned. One is, as we added more products on to the website, obviously, we started to see a mentality change from just impulse buying on flash sales or exclusives to going there for an exclusive and adding to the basket.

So whether a Mandalorian dropped, you might - they might pick up a couple of common Mandalorian items that they would buy at another retailer because we had the full lineup. So I think that's number one.

Number two is just evolving the entire site experience by putting out the new website, it has recommendations, it has better search capability, it's a better overall shopping experience, minus a close to 200,000 people visiting the website in the first minute during the Virtual Comic-Con when it came to selling our products. It's been pretty good.

Always striving to get better there. But we've learned that diversity of licenses, just like anywhere else, is absolutely key. But they want a loyalty program. They want fast shipping. They want quick customer service. And we're getting better in all those areas and are extremely excited about the progress we've made.

And in addition to this, again, we've moved up by 3 years, the EMEA D2C operation when it comes to e-commerce. And we'll have that hopefully up sometime in September..

Your next question comes from Erinn Murphy from Piper Sandler..

A couple of questions for me as well.

Maybe first, on the improvement that you spoke to through June, can you speak to what you're seeing in July and if you saw that continue? And then how are you seeing within the channel kind of a sell-in versus the point-of-sale or sell-through dynamic at this point?.

Yes. Jen, I'll let you take the first part and, Andrew, the second..

Yes. We - I mean, as we noted on the call and I perceive, it's pretty consistent across most consumer goods. We did see significant increase in terms of - as the economy started to open up and doors started to open, June was our best month of the quarter.

I don't want to comment yet on July given that it is part of the Q3, but we were pleased with the progression that the quarter made. And that was key to us actually exceeding our initial expectations..

Yes, in regards to the inventory question, out of the customers that we give data for, I would say that the - what we're seeing is that the inventory is down pretty significantly at the end of the quarter. So we feel like we're in a pretty good position heading into Q3 and Q4 as far as the channel inventory goes.

So yes, we're feeling optimistic about that..

Okay. And then, just on Europe or just international; I think, broadly, it sounds like, Jen, from your perspective, there's still a little bit of pressure more so in those markets in the back half.

Is that just tied to the distribution model there, seeing more towards specialty? Or is there something different about how the consumer is behaving just there? So just curious on how we should think about the glide path from here in the balance of the year..

Yes. I can take. Yes, I can take that one. Yes, Erinn, we're still - majority of our business in EMEA is still specialty. It's not as mature as we have in the United States with big partners like Amazon and Target and Walmart.

So a lot of that is just smaller retailers, slow to open, and it's just taken a little bit longer for that to open compared to the U.S. that really a lot of the big players never really closed. So we had some areas of time where it was just essential goods. But definitely, I would think of Europe is about 3 years behind the U.S.

in terms of the development of pop culture retail compared to the United States. And I think other parts of the country are maybe closer to 5 years behind. But definitely heavy specialty focused, but we are seeing some positive trends there in Europe that is starting to rebound..

Got it. And then, just the last question is just on the trends you're seeing in board games and the stay-at-home activities broadly.

How big do you see that business being by the end of this year and maybe even longer term, if you've seen some really good traction with some of your new launches?.

Yes.

Andrew?.

Yes, I can take that one. So the board game business for Funko, we're still new. We're just in our second year. We're not even to the point where we're comping year-over-year number since we launched in October. With that said, it's still a pretty small portion of our business.

We are extremely optimistic about its future growth potential to become more meaningful part of our business as we go forward. And we're very enthusiastic about some of the wins that we're seeing in the market this year..

Your next question comes from Drew Crum from Stifel..

Okay.

Can you share with us the percentage of stores or doors that were closed exiting 2Q versus where you were exiting 1Q?.

Yes. I can tell you that. Drew, this is Brian. In Europe alone, I would say that through the majority of Q2, I would say that between 90% to 95% of our stores were closed that we service in EMEA. And I would say that probably closer to 70% to 75% in Asia.

And then obviously, Latin America has had a little bit of a - a slower development when it comes to COVID. And then now they're obviously hitting the brunt of it, and so we've seen a lot of store closures there. So internationally, it has been significant.

Domestically, obviously, there's been some wins at the Walmarts and Targets and Amazons because they were the ones that were consistently open. But we are obviously starting to see some traction with specialty. But I would say that, that specialty is always going to play a large role in Funko's success.

And we obviously have been hurt more than the traditional toy companies that have a more higher concentration in mass. So yes, I think domestically, probably more like 40% to 50% of the store count but definitely higher internationally..

Got it. Okay.

And then, Brian, on The Mandalorian, can you talk about what your plans are in terms of expanding that line? And are you expecting the tailwind you saw in 2Q to continue into the second half?.

Yes. Drew, you know what's funny, you look at the top 10, and that's the only, I would call it, tent pole or current license in the top 10, which just shows Funko's strength.

That when people that are concerned about us and shifting tent poles and shifting content slates, here we are with a great quarter, our first quarter ever having Funko IP in the top 10, and 9 of the top 10 are evergreen. And so yes, Mandalorian has continued to perform for us much better than we ever had hoped.

And obviously, they're on track to launch the second season in October. And so we believe there's a tailwind going into Season 2, and we will have some products in the market that is Season 2-centric before the season launches. And then, we are all ready to go with some super-secret stuff as the episodes are released.

So we anticipate a nice tailwind on this and obviously very thankful. This is one of the few properties that is kind of cemented in stone with the release date. So it's been a nice surprise for us..

Got it. Okay. And then, one more, maybe for Jen. You mentioned the D2C part of your business was additive to margin.

Can you comment on the margin for total e-commerce relative to your bricks-and-mortar retail business?.

Drew, yes, we actually don't break that out, but a good way to think about it is that we are selling at retail prices on our D2C business versus the wholesale prices. So you do have that added benefit, and it does help improve the overall margin.

Keep in mind though that we did also have the headwinds with the international piece of the business that has typically higher margins being depressed kind of offset some of that gain as well..

Your next question comes from Alex Perry from Bank of America..

Just first, could you just elaborate more on sort of what came in above your plan 90 days ago? Was it better-than-expected demand from one of the wholesale channels? Or what exactly came in better than expected?.

Yes. I can start, and Jen and Andrew, please feel free to chime in. I would just say, obviously, before the last 3 or 4 weeks where there was a resurgence in COVID, obviously, it was more than anything else, just stores opening. Stores opening gradually in Europe as they got control of the pandemic quicker than the United States.

And then obviously, before we had the re-spike in COVID cases, starting to see the specialty stores open for us. So it's just about doors being open. And - but we like the fact that there's still just a tremendous amount of enthusiasm and demand for our products that has not waned.

But yes, I just think more than anything else, it's just doors opening..

Perfect. That's really helpful.

And then just my second one, can you talk through sort of longer term, how you're thinking about the specialty channel given the sort of traffic declines and store closure headwinds they may be facing? And then maybe some color in terms of additional channel distribution that you think could potentially be an offset there?.

Yes. I'd always tell you that we consider ourselves channel agnostic. We've proved this during the Toys "R" Us bankruptcy when the Hasbros, the Mattels, the Spin Masters had a concentration of anywhere between 17% and 22% of their business was at TRU. And then obviously, they have a lot of business with the big guys, at Amazon, Walmart and Target.

We didn't have any effect at all with the TRU business. It was supposed to be about 6% of our business that year. We just spread it around amongst a bunch of different retailers. We kind of think about that the same way, channel agnostic.

If specialty is impacted, you're going to see, obviously, we're off to a great start this year with the mass channels. That ability to take our products and point our fan base to anywhere in any retailer around the globe, is something being that flexible and that liquid, is a real strength of the company, and we're very proud of it.

Now with that being said, we are going to be more affected with so many specialty accounts being closed versus the big guys who have, obviously, a higher concentration with mass than with the Toys "R" Us situation. And so obviously, there's a bit of an opposite effect with the pandemic versus TRU bankruptcy.

So I do think we have that unique ability to see one sector maybe struggling with mall foot traffic and be able to shift some of that content and that demand over to different retailers. So we like that position to be in..

Your next question comes from the line of Mike Ng from Goldman Sachs..

I just have two. First, for Andrew, I was just wondering if you could talk a little bit about the increased shelf space that you're getting at one of your mass partners.

Is that a function of more dedicated space to the toy aisle or to collectibles? And then second, for Brian, I was just wondering if you could talk a little bit about the Loungefly performance in the quarter.

Why did that outperform the rest of the portfolio so much?.

Sure. I could jump in. I would say that it's a great question. Thank you for asking it because it's a good one for me to answer. One, I would say the 20% referenced at the mass partner is within the collectibles area. So that actually doesn't include all the incremental space that we're getting in new categories as we diversify our product line.

An example of that is the number of pacings within the game department that we're growing; toys, to some degree as well. Those aren't included in that 20% increase. Those are over and above. And so we're very pleased with the incremental space that we're getting, holding.

And obviously, the goal is to grow that space in the games department, the toy aisle, the soft lines areas of the stores..

Yes. And to answer the second question, obviously, Loungefly is a much smaller business, so it's a little bit easier to affect it in a positive way.

They garnered most of that with D2C, the ability to kind of flip that switch and fulfill those items with - when you're talking about margin share and what you make off of a product, obviously, when it gets to direct-to-consumer, they're even more profitable than even sometimes we are with our own D2C channel.

So they offset a lot of those store closures with direct-to-consumer business. So I think that bodes very well as we continue to grow our whole philosophy on direct-to-consumer. But it is also a little bit easier, it's a smaller chunk of business overall..

And keep in mind, they're less - they're a little less exposed to the international markets as well. They're more primarily based - most of their business is in the U.S. so they didn't have that headwind..

Next question comes from Christopher Horvers from JPM..

So my question is, in the second quarter, U.S. sales were down 37%, international was down 70%. In the context of the down 25% for the third quarter, does that gap close? And how close to flat are you thinking about that the U.S.

business can be in the third quarter?.

Jen, do you want to take that one?.

Yes. No, we've - as we kind of look out into the - into Q3, the way we're really approaching it is we do know there have been consistent resurgences. There's been inconsistency around store openings and store closures.

So as we look forward to Q3, we just - we don't have quite the sharp return currently as we're looking at the business as I think some folks have, but we feel very confident that we have a strong business going into Q3. We do feel Q2 was our worst quarter, but we're looking forward to rebounding throughout the year..

And so do you think the rebound in the U.S.

is sharper? Or does international rebound faster as those doors perhaps open up?.

We did see in Q2 that the rebound was much more quick in the U.S. versus in the international markets, and we're contemplating that as we look forward as well..

Got it. And then, thinking about the holiday season; can you just remind us what the typical sort of order cycle is for the holiday season? You heard a lot of stories out there. The mass merchants want to be more just in time.

Typically, are you receiving the orders for holiday - for 4Q holiday now? Or are they coming later this year?.

Andrew, do you want to take that one?.

Yes, I can take that one. So it's a little bit of a mix depending on the channel of distribution. Most of our retail partners have pretty firm plans at this stage for Q3 and Q4.

There are some retailers that - a lot of our online partners have a lot of tools at our disposal to help us maximize their sales off of a baseline of business that they're expecting, and so we're taking full advantage of those. But for the most part, I would say we've got firm plans, not necessarily firm orders across the board.

There's a lot of replenishment that happens in Q3 and Q4. And so I would say it's a good mix of both. But the signs that we're seeing outside of the potential setback of the resurgence of COVID out there, which is rearing its ugly head again, obviously, are very positive..

Got it. And then, I guess as you think about, of course, any comments on how you're thinking about the fourth quarter, but maybe if you would, but maybe the right way to ask it is, what turns, let's say, the U.S. - let's just focus on the U.S. Like what turns the U.S.

business positive again? Is it theatrical releases? Is it the specialty shops open and movie theaters opening? Is it specialty shops in the mall, let's say, opening up? Like how are you thinking about the biggest drivers of the U.S.

business turning positive other than sort of the lap of getting to the first half of next year?.

Yes, Chris, I think it's all those, right? I think the sooner we see some sort of semblance of better foot traffic is there - I mean, the resurgence of the COVID cases go backwards, do this content slate stabilize again, right? And they - some of these anchors they put in like Black Widow, Wonder Woman 1984, stay in their current positions, Tenet.

All this is really going to help us. And I think that, obviously, that provides an ability to maybe get some upside. But with that kind of uncertainty around all of that and the resurgence of COVID, obviously, we're being very, very conservative, and we just have to kind of see how that plays out.

But I think all of those things are going to play a part in what Q4 looks like for us..

I guess, if I could just sneak one last one in.

Just as you think about just trying to weigh out the content, the theatrical content portion of that headwind of demand, if you just think about - if you were going to weigh the lack of theatrical content versus people not engaging and going to specialty stores and not shopping as much as they had prior, how would you weight the 2 of those factors as the....

Yes, I would say a way of looking at it, Chris, if you look at Q2 and 9 of the 10 properties were evergreen and not current content and the one that was, was a content that aired in October of last year, meaning Mandalorian.

I would tell you that we are looking at the second half of the year expecting not to see any tent pole movies be a part of it, right, where we're being conservative, where we're looking at our models, thinking that this isn't going to bounce back and people aren't going to be in theaters, and there isn't going to be a bunch of big theatricals.

The theatrical impact is going to be minimal at best anyways, and there's only a couple of movies there that are - that have managed to cement themselves in the second half of the year. A lot of them switched to '21, and that is the Wonder Woman and Black Widow are the two big ones. But everything else is pretty much moved.

There are some TV shows that are going to be a part of the second half of this year as well, and there's been some TV shows that have moved. So I think there's some upside there, some stuff that stabilizes, but we're certainly not counting on it..

Your last question comes from the line of Gerrick Johnson from BMO Capital Markets..

I have three questions, one for each of you.

Jen, on the layoffs that were announced in June, the 250 people, when does that charge hit? Has it hit already? Or how big will that be? And then what's the annual run rate savings from that action?.

Gerrick, yes, so from our last perspective that happened in Q2, the majority of that is behind us. There are some additional payments that we'll be making for per brand, within - for the rest of the year, but it's not significant in terms of the overall picture.

And I'm sorry, what was the second part of your question? What was the run rate savings for the full year?.

Yes..

Yes, I mean the way you have to think about it is that was a pretty significant savings that we saw in Q2. As we look forward into Q3 and Q4, and this is another reason why you will see the SG&A go up sequentially from Q3 - to Q3 from Q2 is that of the furloughed folks that we had furloughed, some have come back into the business.

In addition to that, as we continue to focus on our priorities, our D2C expansion as well, you will see some - we'll have to backfill some of the roles or have to make sure that we continue to focus on our priorities. So we don't really have a run rate that we're looking at per se.

It's more about how do we look at the organization on a go-forward basis to make sure that we are putting the resources against the priorities that we have..

Okay, fair enough. Andrew, look, COVID's still here. It doesn't look like it's going anywhere soon.

So can we talk about your end consumer for a second? How has their demand been affected during the pandemic? Are these collectors finding comfort in their collections? Or are they perhaps gravitating towards more activities or experiences? So what's your research telling you about your core customer?.

Yes, that's a really good question.

I will say that not only our research but the conversations that we're having with some of our partners who have remained open during this time have been really surprising in a positive way, right? The Walmarts, the Targets, the Amazons, these ones that haven't really had a shutdown, the demand that we've continued to see at those retailers tells us that collectors are still out there.

They're still looking for products. They're still interested in getting products as soon as they drop. That's still - the pandemic hasn't really affected that. They're still shopping in stores, which I think was something that we were really worried about.

Was everyone going to just go to the .com portions of the websites or Amazon to go find our products; and we haven't seen that be the case. We are obviously seeing, I believe, the benefits of some of the stay-at-home activities that we talked, that I talked about on the call within the emerging game business that we have.

But Gerrick, even the impulse purchases that we're seeing at the mass are very positive. So I would say, yes..

Yes. I would say, Gerrick, I'll add, we had almost 200,000 people in the first minute trying to buy the Comic-Con items we had for sale on funko.com for SDCC. And we had a voice of share at San Diego Comic-Con greater than any other company, including San Diego Comic-Con and more than Hasbro and Mattel put together.

So there's still palatable excitement for how we connect fans to the things they love. I don't think that dissipated at all. And I think it gives us great hope that, as things on a macro trend stabilizes, we're going to be back to where we're at in clients..

Okay. Perfect segue to the question I was going to ask you. I'm getting broader and broader as I go up the food chain here. How do you feel your business will perform in an economic downturn? Should we have - we get through government stimulus in the election. We have a garden-variety recession that might last a little while.

What - how does your business hold up?.

Yes. No, it's a great question, Gerrick. I would tell you, it took a global pandemic for us not to grow. We've grown every single year since I acquired the company back in 2005. And I would tell you that the #1 thing that gives us confidence, no matter what the economic situation is going forward, is a couple of things.

One, our products, for the most part, are sub $10, and most of them will average around $8. And two, its diversity, diversity, diversity.

That means that the license portfolio is spread so diversely across sports and music and anime and video games and television and theatrical tent poles, that we're going to connect you to something you love at a very, very affordable price.

And I think that, look, during tough economic times, companies like Sideshow Collectibles or Hot Toys selling $200 action figures could be impacted. They make wonderful products. I think both those companies are utterly amazing.

But that's where the high-end collector - the collector or the super fan of the product, the enthusiast of a property might say, hey, look, I can't afford that, but a pop at $8, I think they can. And I think that gives us hope.

And we have a very big track record that says for essentially 16 straight years before the pandemic, we've grown, even during some tough economic times in 2008, 2009 and 2010..

And I have no further questions at this time.

Are there any closing remarks?.

Thanks, everyone, for joining the call today. And we'll talk to you next quarter. Thank you..

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation and ask that you please disconnect at this time..