Funko built $246M of stock on growth that stalled — then scrapped up to $36M of it

In a trading update on 3 March 2023, Washington-based collectibles maker Funko said demand for its products fell 1% in the fourth quarter of 2022 against a year earlier. Fortune wrote that the company had banked on continued growth: year-end inventory totalled $246.4M, up 48% from 2021.

Funko said it intended to 'eliminate' large quantities of stock in a write-down of between $30M and $36M, to reduce fulfilment costs by aligning inventory with its distribution centre's operating capacity. CEO Brian Mariotti told investors that a warehouse in Arizona had become so overwhelmed with the figures that extra space was rented, and that the cost of housing them had begun to eat into the bottom line quickly. Fortune noted it was unclear what 'eliminating' would involve.

Fourth-quarter margins fell, which the company tied mainly to storage container rental charges for excess warehouse inventory, and it posted a net loss of $46.7M compared with net income of $17.4M a year earlier. Mariotti said a combination of macro factors and Funko-specific issues had disrupted financial and operating performance 'to an unacceptable degree', and that the management team had been strengthened.

Write-down of $30M-$36M; Q4 2022 net loss of $46.7M against $17.4M profit a year earlier.

Funko planned inventory for continued demand growth, but demand fell 1% in the fourth quarter, leaving stock nearly 50% higher than the year before.

Its distribution centre could not hold the volume, so it rented extra space and storage containers whose cost eroded margins.

Management described Funko-specific operational issues as well as macro factors in the second half of 2022.

It judged that destroying product was cheaper than carrying it, so it took a write-down.

Inventory built for growth that does not arrive turns into a storage bill. Once warehouse costs exceed what stock can earn, destroying it becomes the cheaper option.

Steve Nave was named chief financial officer and chief operating officer on the same day and was tasked with working down inventory. Funko's share price had fallen about 9% in 2023 by the time of Fortune's report. CEO Mariotti said the brand still had an 'incredibly loyal and resilient global fan base'.