Coronaville, USA: The Fall of Funko, AMC and GameStop?
Well, the coronavirus has officially laid waste to the entertainment and leisure industry and has silenced all pop culture retail stores across America. As of right now, all stores, deemed essential, are open, helping millions of Americans live through the day to day of spending 24 hours a day/ 7 days a week at home. As of right now, digital technology is GOD as Netflix, Disney Plus, Amazon Prime and a host of many additional streaming sites have become the escape in this pandemic apocalypse. Even GameStop had to take a knee to the ‘Virus’ as it forcibly closed their stores. Even as we speak, Nintendo, PlayStation, and Microsoft has doubled down on their dollars, promoting digital gaming and are probably now on a Zoom conference call asking the billion dollar question…. ‘Do we even need them [GameStop] anymore?’ This, followed by many other retail corporations are now struggling with this thought as online sellers like Amazon and eBay are perched above the clouds laughing as they are running their digital retail industries…
But that’s a story for another time. As we speak, there are three businesses; corporations; who rely on retail space and foot traffic to survive. One business deals with the business of pop culture whereas the other two rely on delivering entertainment to millions of people nationally and internationally. We’ve all given dollars to these businesses and they have brought joy into our hearts as they provided us with memories that we cherish for the rest of our lives.
And now, there is a possibility that these establishments may actually not survive the viral apocalypse…..
GameStop, AMC and Funko are three companies who rely on the physical interactions of human beings in order for them to survive. Funko; the new toy company whose motto, ‘Everyone is a fan of something’; AMC’s; ‘AMC Amazing’, and GameStop’s, ‘Power to the Players’ are under attack as ‘The Virus’ has put their stores, merchandise and influences to a halt. With pop culture stores closed and AMC movie theaters shut down, a good percentage of their revenue has now gravitated to shopping online with limited results.
For these companies, it might be too little too late or there might be a solution that could help them remain solid as they fight the ‘The Virus’, awaiting a reopening for the masses.
Funko
Funko has been around for some time as part of the trinity in the toy industry. With Hasbro and Mattel leading the pop culture market with their own line of merchandise (Mattel: Barbie, Hot Wheels, American Girl, etc and Hasbro: Transformers, Saban Media, Entertainment One, etc.) Funko is gaining momentum by creating their own lane with thematic licensed board games, apparel, and of course their signature item: ‘Pop Vinyl’ figures.
Now while each ecosystem has their own niche in the industry, what differentiates ‘Mattel and Hasbro’ from Funko in the age of the coronavirus is that their longevity has allowed them to whether the storm, especially with their arsenal of family centered board games and imaginative interactive products like Play-Doh (by Hasbro) and the Classic UNO Card Game (by Mattel). With Funko, their board games are more strategy based with lightweight family fun with possible limited replay value. As Funko, last year, entered the game market with their ‘Funkoverse’ licensed gameplay, the industry still relies on their Pop Vinyl as there bread and butter and living in the age of the coronavirus, buying a Pop is taking a backseat as people are scurrying the globe to find toilet tissue and hand sanitizer.
AMC Theaters
Also named the American Multi-Center, AMC theaters is the largest movie chain theater in the world. With acquisitions of various movie theaters, AMC Entertainment has over 10,000 screens of high class entertainment for the world to see. The issue now is that the coronavirus pandemic has shuttered these screens and as a result has created a serious decline of revenue for the movie theater conglomerate. Additionally, with an absence of attendees, there is also a severe decline of ‘freshness’ with the condiments. Old hot dogs and stale popcorn; can you imagine the financial impact these theaters are experiencing? Stale nachos…..I can’t even hold my stomach on that one. To recoup lost revenue, AMC is now venturing into the over saturated streaming market as they are trying to recuperate their revenue through streaming.
As the decline of the theater viewing experience is happening, streaming sites are now GOD as they are allowing the bills to not be paid and are providing a semblance of a real life with great entertainment options. Thank you, Netflix and Disney+, my kids are loving you right now. With AMC’s streaming services, it might be too little too late.
GameStop
Before the Coronavirus, GameStop was hemorrhaging, I mean life support hemorrhaging; stabbed in the heart and blood leaking out hemorrhaging. In other words, they’ve been losing money for years. It’s sad, they survived the video game retail wars of the 90’s, and as this giant was successful (up until 2017 when they netted a profit of 34 million), they’re now losing money, with net income losses of $470 million in 2019. Death is imminent for them.
GameStop’s 10-K Statement
Their losses are due to the rapid changing landscape of gaming. From physical to digital, GameStop has been trying to recover by adapting to the pop culture market by incorporating collectibles into their revenue stream and it’s been working. From 2017 to 2019, their revenue stream has increased via collectibles from $638 million (2017) to $711 million (2018) to $737 million (2019); while experiencing heavy losses in the hardware and software markets.
The Issues…
Venom: Funko Pop
Now these three companies are in a state of flux. They rely on human interactions and the experiences in order for them to make money. Additionally, they also rely on each other as one successful hit movie or video game leads to the selling of a successful figure, especially if the product make up 82% of the companies’ revenue (Funko). For example, with the Sony movie hit, Venom (AMC), this movie led to the creation of some very successful Venom [Funko Pops] followed by a successful ‘Venom’ character in the Marvel: Ultimate Alliance Video Game (GameStop/DLC) series thus creating 3 forms of revenue for each perspective company. All in all, these businesses’ lives are inexplicably linked and all rely on the human experience to survive.
So now these companies are stuck in a quandary; The CDC and the federal government are estimating that America will be back to normal, hopefully by Summer (June – August, hopefully), furthermore, these businesses followed by the National Association of theaters are asking the feds for a loan to ensure that they will be able to survive this difficult time by paying their workers, keeping their businesses stable and hopefully jumpstart their perspective businesses.
With the introduction of the coronavirus, the era of the physical retail store is quite possibly extinct and now these companies are going to have to create solutions to ensure their businesses will remain afloat. Digital commerce is now emerging as the lifeline of the retail industry and these companies are trying to find their niche in this market.
Possible Solutions:
Funko
In regard to solutions, Funko is ahead of the game. One of the many key attributes this company has is that their products are sold at multiple locations, adorned by many and have a vast array of licenses from many companies. Additionally, they are opening up flagship stores in various areas of the country as well. Now in the midst of the Coronavirus pandemic, 1st quarter returns for 2020 may be really shaky as retail stores are shut down. Now, while they have a wide array of retail channels, their bread and butter are those retailers and if they shut down, the following formula applies:
Retail stores closed + canceled pop culture events x Funko merch = a lot of unsold merchandise
Funko has responded with furloughing their employees, but now their stock price is getting affected as well. Over the last six months their stock price has declined and are experiencing another Securities Action Lawsuit, due to losses from the Christmas Season (Pre-Coronavirus) and their write-down of their inventory:
'“Defendants misrepresented and failed to disclose material facts regarding Funko's business, operations and prospects. According to the complaint, while promoting the demand for Funko's products and representing that it properly accounted for inventory, Defendants concealed that (1) Funko was experiencing lower than expected sales, and (2) as a result, Funko was reasonably likely to incur a write down for slower moving inventory.” - Yahoo Finance
In other words, the company is stating that sales were low due to a sluggish Christmas season and the company also documented their slow moving inventory as a write-down. Litigants are saying that they knew and hid it from shareholders.
This is true, Christmas did suck. I’m not sure why, but other retailers also missed their earnings as well. Retailers like Target and Walmart missed their estimates, but Amazon killed their retail environments with Black Friday Savings, ‘deep-deep-discounts’ and that awesome 2-day shipping. As for Funko, not every fan wanted a ‘Funko -Product’ this year. One of the reasons was the pop culture market at large. Largely based on the TV and Movie industry, a lot of shows in 2019 weren’t exactly to die for. As for the movie industry, superheroes weren’t exactly in season for 2019 Q4 (Christmas Season). As a matter of fact, only 3 movies were worthy of receiving merchandise: Frozen 2, Star Wars: Episode IX – Rise of Skywalker, and rounding out 3rd place, Joker.
Within the scope of these three movies, there weren’t any Funko pops for the Joker movie, but Frozen 2 and Star Wars did move some units. For the other movies (love flicks, social dramas, and sci-fis) they didn’t warrant unworthy of any merchandise creation.
With lackluster movie sales, Funko did move units via the anime’ scene with seasonal releases of Dragonball Z, Yu Yu Hakusho, and a host of redesigned Marvel and TV Series merchandise. Additionally, with the release of various products like the Funkoverse, children’s books and card games; Funko is looking for ways to move their products.
Below are some solutions I feel could work:
Funko Solutions
FunkoCon:
Funko is famous for being the staple of pop culture at various conventions. With events like San Diego Comic Con, NY Comic Con, Emerald City Comic Con; Funko’s booth is always flooded with long lines as customers are trying to get their exclusives. One solution would be to incorporate their own Funko based convention. I believe they have something like this in the state of Washington, but imagine if they have it in other major cities? They could move a lot more units.
Limit the Corny:
Although Funko makes great products, not all products are created equal. There are some POPs that are just plain corny. They started to realize that and as a result, identified abut $16.8 million of inventory that sucked. For example, during the Funko Shazam release, the only sought-after Pop was Shazam and the other pops associated with that release was left in the clearance section. My advice would be to do a blind survey on the new releases (if they haven’t) and based on the data, decide and limit how many they would make of each pop. This would reduce their costs and as such, would allow them to increase their revenue, if not keep it stable.
Expand the ‘Other’ Category - Collaborate with Outside Artists to Create Innovative Products:
I stated this before in a previous article. There are people who are making really awesome custom-made pops and some of them are better than those made from those employed with the Funko company. I would place them on a freelance contract, create a design contest, even have them create a mold that the company could use. This could benefit the company’s revenue a lot. A lot of graphic designers, artists and other creatives need a job right now. I would hire them ASAP!!! This would expand their ‘Other’ category with a chance to create a stronger revenue stream.
Continue to Pay Down the Debt:
They owe money to creditors…..still. Approximately $242 million to be exact. What makes this very scary is that the company took out another loan to pay off their previous loan, followed by acquiring a revolving credit of of $75 million. Add interest to these loans…. OH BOY!!! While their debt did decrease from the $247 million from the last fiscal year, their new loans mature in 2024, which means that they need to seriously create new avenues to pay this debt down. In the wake of the pandemic, they recently announced that they pay some of this debt down.
Although, Funko is a household brand, their majority stake still revolves around their beautiful ‘Pops Vinyl’ brand. Even though they made $795 million in net sales 2019, that amount minus the cost of operations and taxes actually netted them an annual net income of $27 million. With a hanging debt of $242 million compared against an annual profit of $27 million, it’s possible that if they experience another loss in profits, they could be in the red and might have to ‘eliminate’ employees and no one wants that.
AMC Theaters
Reports have been coming in saying that AMC theaters probably won’t open anymore. After receiving a reduced credit rating of CCC- from a B-, it’s a possibility that these theaters will probably not open up at all during the Summer.
For the 2019 fiscal year, they made $5 billion+ in revenue. Minus operating costs, interest expenses and taxes, they’re in the hole $171 million; meaning that they are broke and actually owe money. Because they are considered the #1 premiere go-to movie theater, they are now in danger of not even opening. Furthermore, if they close down. Local movie theaters in surrounding neighborhoods will win the summer season as they will recoup the rewards of being low priced with inexpensive concessions. In 2018 AMC had a very successful season as Superhero movies (Avengers: Infinity War) dominated the box office leading AMC to an overall net income of 265 million (From 5.4 billion+ in revenue minus Operation costs, taxes, ect.).
AMC theaters can’t rely on movie production companies to create the next big hit in order for them to make money. As a matter of fact they’re losing revenue as they have multiple screens and are carrying around a debt of 4 billion+:
From AMC’s 10-K Report
‘We have a significant amount of debt.
As of December 31, 2019, we had outstanding approximately $4,853.3 million of indebtedness ($5,010.7 million face amount), which consisted of $1,961.4 million under our Senior Secured Credit Facility ($1,985.0 million face amount), $515.6 million of our existing Convertible Notes due 2024 ($600.0 million face amount), $2,276.4 million of our existing subordinated notes ($2,325.8 million face amount), and $99.9 million of existing finance lease obligations…..
The amount of our indebtedness and lease and other financial obligations could have important consequences to our stockholders. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to obtain additional financing in the future for working capital, capital expenditures, dividend payments, acquisitions, general corporate purposes or other purposes;
require us to dedicate a substantial portion of our cash flow from operations to the payment of lease rentals and principal and interest on our indebtedness, thereby reducing the funds available to us for operations, dividends and any future business opportunities;
limit our planning flexibility for, or ability to react to, changes in our business and the industry; and
place us at a competitive disadvantage with competitors who may have less indebtedness and other obligations or greater access to financing.
In other words, they overspent and now, owe a lot. So as of right now, it’s a possibility that AMC may not be part of the 2020 Season.
AMC Solutions
During the Coronavirus pandemic, America has faced the stark reality that AMC is not a necessary item in the movie watching experience. With companies like Netflix, Hulu, Disney+, Amazon Prime and many others; AMC, in the turn of the decade, isn’t really needed for society. As a matter of fact, in the absence of AMC Theaters, consumers are now saving close to $100 dollars in income as they have a $4.99 - $15.99 subscription price tag, microwave popcorn and unlimited refills from the fridge for the entire family. So, the million-dollar question is how can AMC survive in a full retail shutdown?
Digital Platforms:
Even though their digital platform is out, this is a little too late for them as they are providing overpriced rentals compared to their competitors. Additionally, with this platform offering the use of the STUBS programs, if their theaters are in danger of not opening, why would you give your money to a failing business whose product you bought may not even work for you later on? For example, take Star Wars: The Rise of Skywalker. AMC’s promoting a rental rate of $5.99, Amazon Prime’s rental rate is $4.99; with both platforms offering a price rate of $19.99. The only issue one should worry about is whether or not your movie will run if the site shuts down on the AMC website.
Stimulus Package:
They’re now praying that the US government will bail them out. The Times stated that ‘the National Association of Theater Owners, a trade group representing more than 33,000 screens in 50 states, asked the federal government for loan guarantees to help the industry through a time when strangers cannot gather in the dark to see the latest films’. The association has also asked for tax benefits to help theater owners pay their workers and make up for their losses’. With that being said, if they get bailed out, it would be enough to pay down on some of that $4 Billion debt and allow them enough time to recoup lost ticket sales.
Now let’s assume the above situations fail or don’t come through at all; what could they do?
Shut’em Down:
With over 900 theaters, they only own 62 of them while the remainders are leased, Including their own corporate headquarters. So, in essence, the main company only owns about 6% of their product. Not a good look. What they should do is use some of their cash reserves (if any) and buy some of the lessees out. Some may be able to pay and others may not meet the requirements and taper off from those businesses.
Another way would be for them to shut down their lowest revenue generating theaters. In the US, almost every state has a few theaters, with too many in some states. Based on the amount of revenue, AMC should let them go.
Digital Platform Collaborations:
AMC can’t compete with the digital platforms, not in the slightest. Rather than try to fight them, they should work out exclusive distribution deals with these companies that will allow the platforms to play more of their portfolio of original releases in theaters.
YouTube anyone?
Additionally, they should also start reaching out to YouTube as well. Why? There’s a lot of original content out on YouTube’s platform [the internet] and as such, some of that content deserves to be in an actual movie theater. If I were them, I would reach out. Work out a deal.
Retail Space:
Some AMC theaters are so huge, they could actually hold and incorporate retail space. AMC could portion some of their space for additional retailers who specialize in pop culture. AMC did that by purchasing pop culture items for retail in their theaters, but because of their heavy overheads, the majority of these items stay on the shelf with a high price tag. They should sublease their space, they could make more money that way.
Reduce Ticket Prices:
Tickets cost too much. Bring those prices down. When a movie ticket costs the same as the price of a full tank of gas, multiply that by the size of your family and add kids, congratulations you’ve just purchased the price of groceries for the month in the timespan it takes to go in the theater, watch one movie, and buy concessions. By reducing the ticket prices, this allows more movie goers to come in, eat good and enjoy the movie and the change in their wallets.
Patents:
AMC theaters has been around for quite some time and as they are considered the #1 theater chain in the world, I’m shocked that they have not contributed or incorporated any movie based ‘patents’ into their repertoire. If they are smart, they should look through their catalog of innovations to certify their creations and sell their patent licenses to other movie-based chains and/or markets or at least buy a movie-based patent that could benefit them in the long run.
In order for AMC to survive, they’re going to need that bailout. It’s the only way. Once they get it, they should liquidate some theaters right away. Additionally, they shouldn’t rely on big name movies for survival as well. This won’t work in the long run on account that their ticket prices are too high. As their 1st quarter results abruptly came to an end for 2020, I’m sure it will show a loss in revenue. The only difference is that some companies had extra money for a rainy day (on standby), whereas AMC did not. They may not even survive the 2nd quarter as they are trying to grab revenue with online streaming and probably use that to hire lawyers to help them against bankruptcy issues.
GameStop
GameStop has gone under scrutiny after their retail shops drew fire for staying open in the midst of the Coronavirus pandemic. I definitely understand why they were trying to stay open. 2019 sales led them into the red as net sales landed them $6 billion+, but costs and overhead placed them into a -$470 million-dollar balance. They’re F*****!!!; So much so, that they were willing to sacrifice a few pawns (their workers) for the bottom dollar. Just recently, a Boston GameStop was heavily fined for still staying open in the midst of the pandemic.
For GameStop, the last year they were in the green was in 2017 when they cleared a net $34.7 million after expenses. As GameStop relies on retail stores for their income and as gamers are relying on digital more, GameStop is in the hot seat. Overall, they might not make it to the end of 2020/2021.
Aside from local video game retail stores, GameStop is the leading seller of all video game platforms and gaming. One aspect of gaming they quite didn’t figure out or are in the process of gaming is digital gaming. With hardware companies creating and selling digital copies of their video games through own online channels, GameStop’s anchor into the gaming era is diminishing.
The question they should be asking themselves is ‘Are we really needed’? For some, they would say ‘yeah, if you need hardware’; but other than that, YouTube reviewers, gaming competitions, and a host of sponsored games and gamers from various companies are dominating the markets promoting digital gaming and streaming. Additionally, with gaming communities and online platforms like Twitch and STEAM offering mega discounts that beat GameStop’s discount on any level, even if GameStop received a lifeline (bailout), it wouldn’t work.
However, there’s hope for the gaming conglomerate. Below are some ways in which, I feel, GameStop’s relevancy can still be a staple in the gaming markets:
GameStop’s Solution
Eliminate the Past, Go Full Digital:
If you’ve ever walked into their store, one of the key aspects of GameStop is their relationship they with the past, especially in older hardware and software. As GameStop is slowly transitioning into the digital markets, they should totally eliminate the past by abandoning the physical and completely go digital. Chances are they’re probably doing this, but they need to really speed things up and pump out those classic hits digitally. By going digital, they would be able to build up their ‘digital arsenal’ by also including various movies for purchase and rental thus freeing-up retail space.
Keep Going with the Collectibles:
GameStop found a niche market in the collectible arena. With increasing revenues, from $638.7 Million in 2017 to 737.5 million in 2019; GameStop is definitely winning their fair share of the collectible market. I would focus more on the pop culture market, seeing what is out there for people to buy and consume, which I believe they are doing. Anime’ markets would be great for them as they could actually become the biggest sellers of manga and anime’ titles.
Give up the Trades:
I’ll probably get shot for this. Give up the trades. Period. Trading doesn’t work anymore. All the company is doing is confiscating items, giving out credit and maybe, about 50% of the time, resell those items to others. There are some items that don’t get resold and as a result, gets shipped out to other stores for selling and sometimes, it doesn’t get sold there as well. So they just keep reshipping it, again, and again and again, tying to sell it. Be like Frozen, ‘Let it Go’.
Attend Conventions:
FYE started attending pop culture conventions and sold their exclusives, capitalizing on the bottom dollar and increasing their revenue. One interesting aspect of conventions is that everyone who attends is there to spend money. GameStop could start gaining more revenue by attending their conventions and sell their big ticket and exclusive items. After all, GameStop does have exclusives as well.
Trim the Fat:
There is too much spending going on. How can a company make $6 Billion+ and be in the hole $470 million? I just don’t get it…. their costs for 2019, was an estimated $4.5 Billion and that, right there, is too much. Find out where the costs are and terminate them, ASAP. Eliminate some leases if you have too.
Less is More:
About 70% of net sales are in the US and while that is great compared to the other countries, eliminating retail stores in minimized traffic areas would be great for the bottom dollar. By incorporating a full digital strategy in these areas, revenue could increase as well. This could also be the experimental phase of a digital gaming revolution.
GameStop has been under scrutiny for quite some time and during this pandemic, they are doing everything they can to remain open and allow their employees to get in the crosshairs of obtaining their bottom dollar, doing everything they can to remain open to ensure they get your money. One major aspect they need to focus on right now is garnering the trust of the community and employees again.
Final Thoughts
Overall, these three companies are in the danger zone and if retail stores don’t reopen, they might go extinct. Above were some suggestions that could help. The biggest issue theses companies should worry about would be a hostile takeover as their competitors could literally buy them out; especially AMC and GameStop as they owe creditors. Funko on the other hand might be able to fight it (with their $50 million cash reserves) if Mattel and Hasbro don’t jump on them first.
The coronavirus has revealed the truth about companies and exposed their weaknesses in their business plans. While two of these businesses were already knocking on death’s door, the virus just hurried things along as is arranging the meeting between the businesses and the grim reaper sooner rather than later. A bailout might salvage them, it’s possible, but these companies may not survive the 2nd and 3rd fiscal quarter even if they get it.
As far as investing in the companies go:
AMC: Don’t touch it, its flatlining…
GameStop: On Life support….Wait until the virus is over….then make your decision.
Funko: Somewhat Stable…..wait until the retail stores open, then make your decision.
