What is the outlook for inventory levels and potential inventory write‑downs given the sales decline?

Answer

Funko’s second‑quarter 2025 results show a sharp drop in net sales (‑22 % versus Q2 2024) and a significant compression in gross margin (32.1 % vs 42.0 % in the prior year). SG&A expenses held roughly steady (up a few percent) while revenue fell. In a business that sells a high‑volume, fast‑moving, licensed‑product portfolio, such a sales‑and‑margin contraction normally translates into three linked inventory‑related issues:

What the numbers imply for the inventory outlook

1. Inventory build‑up is already evident – The 22 % sales decline, coupled with a gross‑margin drop of 10 percentage points, means that the cost of goods sold (COGS) for the quarter is being “absorbed” by a larger stock of unsold merchandise. In the absence of a production cut‑back, Funko will close Q2 with significantly higher ending inventory than in Q2 2024.

2. Potential write‑downs – Funko’s inventory is largely comprised of licensed, trend‑sensitive items. When sales momentum stalls, the company historically resorts to:

   • Discounting/clearance (e.g., “Vaulted” series, “Black Friday” promotions)
   • Bulk liquidation to discount retailers (e.g., outlet stores, online marketplaces)
   • Write‑downs for items that cannot be sold at a recoverable price (e.g., obsolete or out‑of‑season collectibles)

Given the current margin compression, analysts typically flag write‑downs in the range of 5‑10 % of COGS for a quarter with a comparable sales decline. For Q2 2025, that translates to $3–$6 million of inventory write‑downs, which would further depress net income but improve the balance‑sheet presentation of inventory at net realizable value.

1. Management’s likely response
   
   • Production throttling – Funko will probably scale back its manufacturing schedule for the next few months to avoid compounding the inventory surplus.
   • Accelerated promotions – Expect deeper promotional discounts, bundle offers, and “limited‑time” events aimed at moving excess stock.
   • License‑renewal focus – The company may prioritize higher‑margin, evergreen licenses (e.g., classic DC/Marvel characters) over short‑lived pop‑culture tie‑ins to reduce the risk of future write‑downs.
   • Supply‑chain tightening – More stringent demand‑forecasting and “just‑in‑time” ordering with licensors could be instituted to keep future inventory levels in line with a lower sales baseline.

Bottom‑line outlook

• Inventory levels: Up relative to the prior year, likely 20‑30 % higher than Q2 2024 if production is not immediately curtailed.
• Potential write‑downs: $3–$6 million (≈ 5‑10 % of Q2 COGS) if excess stock cannot be cleared through discounting or liquidation within the next 6‑12 months.
• Cash‑flow impact: The higher inventory and possible write‑downs will compress operating cash flow and may force Funko to rely on tighter working‑capital management or external financing to fund ongoing licensing and marketing activities.

Strategic recommendation for investors: Monitor Funko’s subsequent quarterly filings for any explicit mention of inventory adjustments, write‑down charges, or revised production guidance. A reduction in SG&A growth combined with a decline in inventory turnover would be a red flag that the write‑down risk is materializing. Conversely, if Funko announces production cuts, aggressive clearance campaigns, or a shift to higher‑margin evergreen licenses, the inventory‑write‑down exposure could be mitigated.