Funko Looks to Rebound From IPO Meltdown With Overseas Push

(Bloomberg) -- Brian Mariotti had one of the worst first days imaginable for the chief executive officer of a public company last month, when toymaker Funko Inc. plummeted 41 percent in its debut on the Nasdaq Stock Market.

“I’m not going to lie -- it was a bit disappointing, a bit shocking,” Mariotti said in an interview. “That 24 hours didn’t go as expected, but it put a hell of a lot of fire in each one of our management team’s bellies to prove everyone wrong.”

Investors took a dim view of growth prospects for the company, which sells figurines and other collectibles based on pop-culture franchises. But since then, the shares have begun to rebound. And seven analysts have initiated coverage of the company with buy recommendations.

Aiming to keep that momentum going, Funko posted better-than-expected earnings on Tuesday -- helped by inroads overseas.

Revenue rose 21 percent to $142.8 million, with sales outside the U.S. almost doubling. The bulk of the international growth came from Europe, where Funko is still building the infrastructure to keep up with demand, Mariotti said.

The Everett, Washington-based company is just scratching the surface in other major foreign markets, he said. In China, the world’s second-largest economy, sales are tiny, but Funko is making headway. It’s in talks to get distribution at Toys “R” Us Inc. stores in the Asian country.

Funko shares rose as much as 10 percent to $10.25 in extended trading after the results were released. The stock’s initial public offering priced at $12 on Nov. 1.

Net income amounted to $8.3 million last quarter, more than double the $3.4 million projected by analysts.

Toys ‘R’ Us Effect

The CEO chalked up Funko’s IPO woes to investors struggling to understand its story. The bankruptcy of Toys “R” Us in September -- and the struggles of major toymakers like Mattel Inc. -- didn’t help either.

“It is a little bit of an interesting story to tell, we realize that,” Mariotti said. “But we believe in the model.”

Funko is the brainchild of Mariotti, who bought the company with an investor group in 2005. Seeing the global growth of entertainment franchises like Marvel, he wanted to build a consumer-products focused specifically on pop culture. The idea was to move quickly to respond to trends and breakout characters.

Over the past decade, that morphed into a firm that makes low-priced licensed merchandise for properties ranging from Star Wars to the Netflix series “Stranger Things.”

Funko, which is part-owned by private-equity firm Acon Investments, will continue to have plenty of licenses to pursue. The U.S. media industry is churning out an increasing amount of content that is viewed globally. And sales of licensed toys have grown an average of 6.6 percent a year since 2008, according to Goldman Sachs Group Inc. analyst Michael Ng. That’s double the rate of non-licensed items.

The company also is expanding into more product categories, thanks in part to the $22 million acquisition earlier this year of Loungefly, which makes handbags and other accessories. This will help Funko gain more business from entertainment brands, Ng said.

On Tuesday, Funko also announced that it completed a $4 million purchase of A Large Evil Corp., an animation studio based in Bath, England, that had already been making commercials and digital shorts for the company. Content is a proven way to lift sales, and this will allow Funko to do more of that, Mariotti said. The company also will use the studio to build its own brands through entertainment.

“There is an absolute, tangible result of acquiring them in terms of growing sales,” he said. “Content drives eyeballs.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net.

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net.

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