Executive Summary / Key Takeaways

• Funko (NASDAQ:FNKO) is executing a strategic turnaround, leveraging its dominant position in pop culture collectibles and a vast licensing portfolio to drive growth despite significant macroeconomic and tariff-related challenges.
• The company's "Make Culture POP!" strategy, focusing on culture, creativity, and commerce, aims to accelerate speed-to-market for trending fandoms, innovate new product formats like Bitty Pop! and Premium Blind Box, and expand its international and direct-to-consumer channels.
• Despite a "substantial doubt about its ability to continue as a going concern" due to debt covenants and liquidity pressures, management is actively pursuing refinancing, strategic alternatives, and has implemented aggressive cost-cutting and supply chain diversification.
• Recent financial performance in Q3 2025 showed net sales of $250.9 million (down 14.3% year-over-year) but better-than-expected gross margin of 40.2% and adjusted EBITDA of $24.4 million, demonstrating resilience from price increases and cost controls.
• Investors should monitor the success of debt refinancing efforts, the impact of ongoing tariff mitigation strategies, and the execution of new product launches and international expansion as key indicators for future growth and profitability.

The Enduring Appeal of Fandom: Funko's Strategic Foundation

Funko, Inc. has carved out a unique and influential niche as a global pop culture lifestyle company, transforming beloved characters and icons into tangible collectibles. With a history spanning 27 years, the company has become synonymous with fan expression, particularly through its iconic Pop! vinyl figures, which recently surpassed the remarkable milestone of 1 billion units sold. This deep connection with its diverse fan base, evenly split between male and female and spanning an 18- to 55-year-old demographic, is a foundational strength, evidenced by a 27% growth in its Fan Rewards loyalty program membership and 9 million social media followers.

The company's business model is built upon an industry-leading portfolio of over 900 active licensed properties from more than 250 content providers, including multiyear renewal agreements with giants like The Walt Disney Company (DIS) (Pixar, Marvel, Lucasfilm), Warner Bros. (WBD), NBC Universal (CMCSA), and Paramount (PARA). This extensive network creates a formidable competitive moat, ensuring a continuous pipeline of culturally relevant products across film, television, video games, and music. Funko's strategic initiatives are now unified under the "Make Culture POP!" strategy, a three-pronged approach centered on culture, creativity, and commerce, designed to capitalize on the burgeoning "Kidult economy" and evolving global fandoms.

In a highly competitive industry characterized by low barriers to entry, Funko differentiates itself through its agility and unique product experiences. While larger toy companies like Hasbro (HAS) and Mattel (MAT) boast broader portfolios and greater operational scale, Funko's specialized focus on fan-driven collectibles allows for faster innovation cycles and a more direct connection with its community. For instance, Funko's speed-to-market was demonstrated with its KPop Demon Hunters product line, brought to shelves within months, positioning it as one of the few companies offering these items for the holiday season. This contrasts with the more traditional, often slower, product development cycles of some competitors. Similarly, Funko's Pop! Yourself experience, offering customized figures, provides a unique, personalized offering that rivals struggle to replicate, fostering deeper fan engagement. While direct quantitative comparisons of market share and profitability margins across all niche competitors are challenging to ascertain, Funko's strong brand recognition in pop culture collectibles and its direct-to-consumer channels suggest a competitive edge in targeted segments. However, Funko's smaller scale compared to industry behemoths like Hasbro means it may face challenges in overall financial performance and operational efficiency, particularly in areas like supply chain management and broader retail presence.

Technological Edge and Product Innovation

Funko's commitment to innovation is a critical component of its "Make Culture POP!" strategy, particularly within the "creativity" pillar. The company is not merely replicating existing pop culture icons but is actively developing new ways for fans to engage with their passions.

A key technological differentiator is the Pop! Yourself platform, which allows fans to create customized Funko Pop! figures of themselves or friends. This platform is slated for a significant enhancement with the planned introduction of a new AI-powered builder later this year. This AI integration aims to transform the user experience by allowing customers to upload a picture and receive recommended options for quicker, more intuitive customization. The tangible benefit is a more seamless and engaging personalization process, which is expected to drive further adoption and D2C sales. This technology directly contributes to Funko's competitive moat by offering a unique, interactive product that strengthens fan loyalty and provides valuable first-party data.

Beyond customization, Funko is expanding its product offerings with innovative form factors. The Bitty Pop! line, mini vinyl figures, is integral to a strategic partnership with Walmart (WMT), having been introduced in toy aisles and featured in Walmart's 2025 top toy list and catalog, reaching over 40 million homes. An out-of-aisle placement is also expected in 1,800 Walmart stores. The company plans to expand the Bitty Pop! line to include more licensed and original characters, enabling "world-building" for fans. This initiative diversifies product appeal and taps into the growing miniature collectibles trend.

Funko is also expanding its "Blind Box" offerings, including its existing Mystery Minis and a new "Premium Blind Box" collection. Launched with specialty retail partners, this artist-driven product line features gold and imaginative new designs, including "chase variants" for collectors. These initiatives demonstrate Funko's ability to innovate within established collectible formats, catering to both casual and avid collectors. Furthermore, the company possesses a diverse product archive spanning 25 years, which management believes can be leveraged in more relevant ways for today's fans, indicating potential for future product revitalization.

In the digital realm, Funko, through its wholly-owned subsidiary TokenWave, LLC, operates the Droppp.io platform for buying and selling NFTs. While the market for digital collectibles is nascent and subject to evolving regulatory frameworks, this venture positions Funko at the intersection of physical and digital fandom, offering a unique value proposition as the industry matures. The "so what" for investors is that these technological advancements and product innovations are designed to expand Funko's addressable market, deepen fan engagement, and drive higher-margin direct-to-consumer sales, thereby strengthening its competitive position and long-term growth prospects.

Financial Performance and Liquidity Under Pressure

Funko's recent financial performance reflects a company grappling with significant external pressures while simultaneously implementing aggressive internal reforms. For the nine months ended September 30, 2025, net sales decreased by 16% to $635.1 million compared to $756.1 million in the prior year period. This decline was primarily attributed to tariff disruptions and general macroeconomic uncertainty, particularly impacting the U.S. market where net sales decreased by 22.7% to $389.6 million. However, Europe showed resilience with a 1.6% increase in net sales to $192.1 million. The Core Collectible category, representing approximately 79% of sales, saw a 12.1% decrease, while Loungefly sales declined by 13.6%. The "Other" category experienced a substantial 62.1% decrease, largely due to rationalizing underperforming product lines.

Despite top-line challenges, Funko has demonstrated a notable improvement in profitability metrics, particularly in gross margin. For the three months ended September 30, 2025, gross margin was 40.2%, which was "better than expected" and largely offset the impact of increased tariffs through price adjustments. This marks a consistent trend, with the company maintaining a gross margin in the 40%+ range for six of the last seven quarters, excluding Q2 2025 which was heavily impacted by tariffs. The nine-month gross margin, however, declined to 37.7% from 41% year-over-year, primarily due to increased shipping, freight, and duty costs, and higher inventory reserves. Selling, general, and administrative (SG&A) expenses decreased by 13.9% in Q3 2025 to $79.8 million, driven by a $5.1 million reduction in personnel costs, a $4.6 million cut in advertising and marketing, and a $1.4 million decrease in facilities and rent, reflecting the company's aggressive cost-cutting initiatives, including a global workforce reduction of over 20% during 2025. This operational discipline helped mitigate the impact of lower sales, though net income for Q3 2025 was $0.9 million, down from $4.6 million in Q3 2024, primarily due to the decrease in net sales. For the nine months ended September 30, 2025, the company reported a net loss of $68.1 million, an increase from $13.7 million in the prior year period, as the decline in net sales outpaced operating expense reductions. Adjusted EBITDA for Q3 2025 was $24.4 million, exceeding expectations, but for the nine months, it stood at $3.2 million.

The company's liquidity and financial condition present a more immediate concern. As of September 30, 2025, Funko had cash and cash equivalents of $39.2 million and working capital of $157.5 million. However, the 10-Q filing on November 6, 2025, disclosed "substantial doubt about our ability to continue as a going concern for the next twelve months." This is primarily due to anticipated non-compliance with the maximum Net Leverage Ratio and minimum Fixed Charge Coverage Ratio financial covenants by December 31, 2025, and potential non-compliance with covenants related to a Refinancing Transaction or Sale Transaction. The Credit Agreement, with approximately $241 million in total debt as of Q3 2025, matures in September 2026, and the company is not forecasted to have sufficient cash reserves for full repayment, necessitating refinancing.

To address these challenges, management has engaged Moelis & Company LLC (MC) to advise on refinancing and strategic alternatives, including a potential sale of the company. An amendment to the Credit Agreement in July 2025 waived financial covenants for Q2 and Q3 2025, but these reset for Q4 2025. Furthermore, "Outstanding Milestone Covenants" related to a refinancing or sale transaction have not been satisfied, though the Administrative Agent extended the first milestone to November 25, 2025, with provisions for further extensions if a financial advisor is engaged. The company has also filed a Form S-3 registration statement to offer up to $100 million in securities and an At-the-Market (ATM) equity offering for up to $40 million to bolster liquidity. These actions underscore a proactive, albeit urgent, effort to stabilize the financial foundation.

Outlook and Strategic Momentum

Funko's outlook for the remainder of 2025 and beyond is a tale of two halves, with management anticipating an improved performance in the latter part of the year driven by strategic initiatives. For the fourth quarter of 2025, net sales are expected to increase modestly from Q3 2025, with a gross margin of approximately 40% and adjusted EBITDA margin in the mid-to-high single digits. This expected ramp-up is predicated on several key factors.

Crucially, Funko aims to fully offset the estimated $40 million in incremental tariff costs for 2025. This will be achieved through accelerated sourcing diversification, with U.S.-bound product manufacturing from China projected to reduce from one-third to approximately 5% by year-end, significantly faster than initially planned. Price increases, such as the $14.99 price point for Pop! figures, implemented in July 2025, are also contributing to this offset, with management noting a "fan first" approach by investing in sculpt quality and packaging rather than further price hikes. Cost discipline, including the aforementioned workforce reduction, further supports margin protection.

The "Make Culture POP!" strategy is central to the anticipated growth. In the "culture" pillar, Funko is expanding into new fandoms like K-pop, sports, and music tours, and leveraging content creators. The rapid success of KPop Demon Hunters products, brought to market quickly, exemplifies this. In "creativity," the expansion of Bitty Pop! with "world-building" capabilities and the launch of the "Premium Blind Box" collection are expected to drive engagement. The "commerce" pillar focuses on international expansion, particularly in Asia and Latin America, and enhancing direct-to-consumer capabilities. The launch of Pop! Yourself in Europe and the planned AI-powered builder for the platform are key initiatives here.

Josh Simon, the newly appointed CEO, expressed confidence in the company's ability to "transform the company for substantial growth" over the long term, citing the strength of its brand, fan community, and licensing relationships. The company's international business, which accounts for approximately 39% of net sales, continues to be a strong performer, with Europe showing low double-digit POS growth in Q3 2025. This international momentum, coupled with a healthier inventory position that reduces the need for discount channel sales, is expected to revitalize brand value.

Risks and Challenges

Despite the strategic initiatives, Funko faces significant risks. The "substantial doubt about our ability to continue as a going concern" is paramount, stemming from potential non-compliance with debt covenants and insufficient working capital. The success of ongoing debt refinancing efforts and the evaluation of strategic alternatives, including a potential sale of the company, are critical. Failure to secure additional financing or refinance existing debt on favorable terms could have a material adverse effect.

Macroeconomic factors, including tariffs, inflation, rising interest rates, and geopolitical instability, continue to create a dynamic and uncertain operating environment. These factors can reduce consumer discretionary spending and impact net sales and profitability. The challenging retail environment, characterized by slowed restocking and canceled orders, further exacerbates sales pressure.

Funko's heavy reliance on license agreements (top ten licensors accounted for 65% of sales in the nine months ended September 30, 2025, with Disney-owned properties representing 30%) introduces risks related to renewal, terms, and licensor-driven competition. The highly competitive nature of the industry, with low barriers to entry and the presence of larger, more diversified players, means Funko must constantly innovate to maintain market share. The emergence of a competing collectible company founded by former Funko executives also poses a competitive threat.

Operational risks include managing inventory levels to avoid obsolescence or stockouts, and dependence on third-party manufacturers, primarily in Vietnam, China, and Mexico, which exposes the company to supply chain disruptions and compliance issues. The nascent and evolving regulatory landscape for digital assets and NFTs also presents uncertainty for Funko's digital collectible business. Finally, the company's market valuation decline in Q3 2025 indicates a potential for goodwill impairment, which could result in significant non-cash charges.

Conclusion

Funko stands at a pivotal juncture, balancing the inherent strengths of its pop culture brand and expansive licensing portfolio against pressing financial and macroeconomic headwinds. The "Make Culture POP!" strategy, spearheaded by new leadership, represents a clear and actionable roadmap to reignite growth through cultural relevance, creative product innovation, and expanded commerce channels. The company's ability to maintain strong gross margins amidst tariff pressures and its aggressive cost-cutting measures demonstrate a resilient operational core.

However, the immediate future hinges on successfully addressing the "going concern" qualification, primarily through the ongoing debt refinancing process and the evaluation of strategic alternatives. The successful execution of supply chain diversification, the continued momentum in international markets, and the traction of innovative product lines like Bitty Pop! and the AI-powered Pop! Yourself platform will be crucial indicators of its long-term viability and growth trajectory. While significant risks remain, Funko's deep connection with its fan base and its strategic adaptability offer a compelling narrative for investors willing to consider the potential for a significant turnaround driven by a renewed focus on its core strengths and a proactive approach to market challenges.