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Bear of the Day: Funko (FNKO)

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Funko, Inc. (FNKO - Free Report) shocked the Street by warning on fourth quarter sales and issuing weak 2020 guidance. This Zacks Rank #5 (Strong Sell) saw its earnings estimates slashed.

Funko makes pop culture consumer products, including vinyl figures, action toys, plush, apparel, housewares and accessories for consumers who have favorite pop culture brands and characters. This includes movie, television and book characters, and sports figures, including popular coaches.

Warns on the Fourth Quarter

On Feb 5, Funko surprised the Street by announcing preliminary fourth quarter results and 2020 guidance that were both below expectations.

For the fourth quarter, which was the crucial holiday quarter, sales were expected to decline 8% to $214 million from $233 million a year ago.

Sales were below expectations in mature markets, including the US, due to the challenging retail environment as well as softness in sales related to certain tentpole movie releases.

Europe and the Loungefly brand both remained strong in the quarter, but weren't enough to offset the other weakness. Europe grew by double digits in the quarter.

Net sales of figures were down about 10% and net sales of other products fell about 3% year-over-year. However, Loungefly was a bright spot, as it continued to see double-digit growth in the quarter.

2020 Looks Awful

The first look at 2020 was also disappointing.

It expects its 2020 net sales growth rate to be in the high-single-digits to low-double-digits, with the first half of the year slower. The first six months are expected to be  down low-single-digits to flat.

There was no mention of the impacts of the coronavirus on the company in the press release.

It won't report earnings until Mar 5, where it will share more details.

2019 and 2020 Earnings Estimates Cut

Given the dismal news, it's not a surprise that the analysts all moved to cut their 2019 and 2020 estimates.

4 estimates were cut for 2019 since the announcement, pushing the 2019 Zacks Consensus Estimate down to $1.06 from $1.21.

That's still earnings growth of 29.3% as Funko made $0.82 in 2018.

But you can see the slowdown in growth with the 2020 consensus. 5 estimates were cut for 2020 in the last week, pushing the 2020 Zacks Consensus Estimate down to $1.10 from $1.40.

That's earnings growth of just 3.2%.

Shares Hammered on the News

After riding high for 2019, the fourth quarter warning was a shock to investors and analysts. There was no hint of a possible slowdown of this magnitude on the prior earnings call in October.

Shares plunged 44% on the news.

They are now trading with a forward P/E of just 7.8.

But is that cheap enough to dive in with all the unknowns?

And what about Disney's DIS Baby Yoda toys as a driver in 2020?

Investors might want to stay on the sidelines until they have some clarity. I'm a long-term investor in the shares, and I am holding my position but not adding at this time.

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