Funko's Leadership Shift: Can Lunsford's Return Ignite a Turnaround?

The appointment of Michael Lunsford as Interim CEO of Funko (NASDAQ: FNKO) marks a critical pivot for the pop-culture collectibles giant. Lunsford's return—after a prior interim stint in 2023–2024—signals a deliberate strategy to stabilize operations, restructure debt, and reignite growth. Yet, with Funko's stock down 65% since early 2024 and facing $202 million in debt, the question remains: Can Lunsford's proven cost-cutting and turnaround expertise transform Funko from a value trap into a compelling speculative buy?

The Financial Crossroads

Funko's Q1 2025 results underscore both fragility and resilience. Net sales fell 11.6% year-over-year to $190.7 million, driven by a 16.7% decline in U.S. sales due to tariff pressures and weak consumer spending. However, Europe emerged as a bright spot, with sales holding steady at $54.2 million amid market-share gains. Gross margins improved to 40.3%, aided by disciplined cost management, while adjusted EBITDA turned negative ($4.7 million) due to operational headwinds.

The company's debt burden—now $202.2 million, up from $182.8 million a year ago—is a critical challenge. With cash reserves at $25.9 million and a net leverage ratio of 3.5x (exceeding its covenant limit of 2.5x), Funko risks lender actions unless it renegotiates terms. Lunsford's priority must be to refinance debt on favorable terms, possibly through equity raises or asset sales, while curbing cash burn.

Lunsford's Turnaround Playbook

Lunsford's track record at companies like RealNetworks and EarthLink highlights his focus on cost discipline, operational simplification, and strategic prioritization. At Funko, this translates to three key initiatives:

1. SKU Rationalization & Premium Pricing
   Funko plans to slash its product catalog by 30%, focusing on high-margin lines like Bitty Pop!, Pop! Yourself, and the premium Project Fred line (priced at $295 per 11-inch vinyl figure). Starting Q2, core Pop! figures will see MSRP hikes of $1–$3 to offset rising costs and boost margins. This strategy aims to reduce inventory gluts, improve sell-through rates, and shift demand toward premium, collectible tiers.

2. Debt & Tariff Mitigation
   Lunsford is accelerating efforts to reduce reliance on Chinese manufacturing, targeting 5% of U.S. products sourced from China by year-end. Shifting production to Vietnam and Mexico could cut annual tariff costs by $45 million. Meanwhile, workforce reductions (20% globally) are projected to save $20–22 million annually, aiding liquidity.

3. International Expansion & DTC Growth
   Europe's 8% sales growth in Q1 2025 signals untapped potential in G5 markets. Lunsford plans to capitalize on this momentum while expanding into Southeast Asia and the UAE via licensed stores. Direct-to-consumer (DTC) sales, which now account for 22% of revenue, will be prioritized for their higher margins.

Valuation: A Discounted Play on Collectibles

Funko's stock trades at $4.86—0.93x book value—far below peers like Hasbro (3.2x book value). Analysts at DA Davidson and Texas Capital have rated the stock “Buy” with $7–$8 price targets, citing undervaluation and margin-recovery potential.

Key metrics to watch:
- Margin Recovery: Gross margins must stabilize above 40%, and EBITDA needs to turn positive by year-end to justify optimism.
- Debt Covenant Compliance: Refinancing or equity raises are critical to avoid covenant breaches.
- DTC Momentum: Growth here will validate the shift toward higher-margin channels.

Risks and the Bear Case

• Tariff Volatility: Further U.S.-China trade tensions could disrupt supply chains and trigger inventory gluts.
• Consumer Sentiment: Discretionary spending remains fragile, with legacy Pop! figures struggling at full price.
• Execution Risk: Lunsford's success hinges on rapid debt restructuring and SKU cuts without alienating core fans.

Investment Thesis: A Speculative Buy for the Long Game

Funko presents a high-risk, high-reward opportunity for investors with a 3–5 year horizon. Assuming Lunsford can:
1. Refinance debt and stabilize liquidity,
2. Achieve 38% gross margins (vs. current 40.3%), and
3. Grow DTC sales to 30% of revenue with 50%+ margins,

Funko could see EBITDA margins rebound to 10–12% by 2026, driving a valuation re-rating. A 20–40% upside from current levels is plausible if these metrics improve, aligning Funko's book value with industry multiples.

Final Take

Funko's turnaround hinges on Lunsford's ability to balance cost discipline with strategic growth. While near-term risks are significant, the combination of undervalued shares, margin-recovery potential, and untapped international markets positions Funko as a speculative buy for patient investors. Monitor Q3 2025 results for signs of margin stabilization and debt progress—these could be catalysts for a sustained rebound.

In a market starved for undervalued growth stories, Funko's mix of brand power, Lunsford's track record, and a 65% stock decline since 2024 creates an intriguing, albeit risky, opportunity. For bulls, the reward could far outweigh the risks—if Lunsford can spark the turnaround.