Funko's Q2 2025 Earnings: Navigating Tariffs and Strategic Turnaround

Funko Inc. (NASDAQ: FNKO) has faced a turbulent Q2 2025, marked by a 21.9% year-over-year revenue decline to $193.5 million and a net loss of $41.0 million. While these results reflect the company's struggle with tariffs, supply chain bottlenecks, and shifting consumer demand, they also highlight a critical inflection point. The question for investors is whether Funko's aggressive cost-cutting, sourcing diversification, and brand innovation initiatives can catalyze a meaningful rebound in the second half of 2025—and whether this represents a compelling entry point for value-oriented investors.

Operational Resilience Under Pressure

Funko's Q2 performance was a stark departure from its historical growth trajectory. Revenue declines were broad-based, with the Core Collectible segment down 15.7% and the Loungefly line falling 23.2%. Gross margins contracted to 32.1%, a 990-basis-point drop from 42.0% in Q2 2024, driven by tariffs, inventory write-downs, and logistics costs. Total debt surged to $256.6 million, raising concerns about liquidity. Yet, beneath these numbers lies a company actively recalibrating its operations.

The company's cost-cutting measures, including a 20% global workforce reduction and SG&A expenses rising to $82.3 million (despite prior-year non-recurring benefits), signal a painful but necessary restructuring. While these actions have yet to reverse the net loss, they are designed to reduce fixed costs and align the business with lower revenue levels. The long-term feasibility of these cuts hinges on their ability to stabilize cash flow and reduce leverage.

Sourcing Diversification: A Strategic Lifeline

Funko's most impactful initiative is its shift away from China, where U.S.-bound product sourcing is expected to fall to just 5% by year-end 2025. This move, while costly in the short term due to transition expenses and operational disruptions, aims to mitigate tariff risks and stabilize margins. By diversifying manufacturing to Vietnam, Cambodia, and other regions, Funko is reducing its exposure to geopolitical volatility and potentially lowering logistics costs.

The success of this strategy will depend on execution. Early signs are mixed: Q2 gross margins remain depressed, and inventory levels rose to $101.3 million. However, the company's focus on renegotiating freight contracts and optimizing SKU rationalization suggests a disciplined approach to cost management. If sourcing diversification takes hold, it could restore margin stability and free up capital for reinvestment.

Brand Innovation: Reclaiming the Pop Culture Niche

Funko's long-term growth hinges on its ability to innovate beyond its core Pop! Vinyl line. Recent initiatives, such as the Bitty Pop micro-collectibles and Bitty Boxes, have expanded the brand's appeal to younger demographics and casual collectors. The DTC channel now accounts for 25% of sales, driven by exclusive offerings like Pop! Yourself customization kits. These efforts are not just about product diversification but also about deepening emotional engagement with fans.

The company's foray into gaming, sports, and music fandoms—categories with $35 billion and 3 billion-dollar market potential, respectively—further underscores its ambition. By leveraging data-driven insights to target high-growth niches, Funko is positioning itself to capitalize on the “kidult” trend and the enduring appeal of nostalgia-driven collectibles.

H2 2025 Outlook: A Cautious Optimism

Funko's guidance for H2 2025 is cautiously optimistic. The company expects a high-single-digit revenue decline compared to H2 2024, with adjusted EBITDA margins projected to reach mid- to high-single-digit ranges. Q4 is anticipated to outperform Q3, suggesting a gradual recovery. While these forecasts exclude potential new tariffs, they reflect confidence in the effectiveness of cost-cutting and sourcing diversification.

For value investors, the key question is whether Funko's current valuation offers a margin of safety. With a market cap of ~$1.2 billion and a P/E ratio of -29x (based on FY2025 estimates), the stock appears undervalued relative to its long-term potential. However, risks remain: the cost-cutting measures may take longer to materialize, and consumer demand for collectibles could remain soft in a high-interest-rate environment.

Investment Thesis: A High-Risk, High-Reward Play

Funko's Q2 results are a wake-up call, but they also reveal a company with a clear roadmap to recovery. The combination of sourcing diversification, cost discipline, and brand innovation creates a compelling narrative for a turnaround. For investors with a 12–18 month horizon, the stock could offer asymmetric upside if the company executes on its strategic priorities.

However, entry points should be approached with caution. A pullback to $5–$6 per share (a 30–40% decline from current levels) might provide a more attractive risk-rebalance, particularly if the market overreacts to near-term challenges. Investors should monitor Q3 and Q4 results for signs of margin stabilization and revenue stabilization.

In conclusion, Funko's Q2 2025 earnings underscore the challenges of operating in a volatile global environment. Yet, the company's strategic pivot—combining operational rigor with creative brand evolution—positions it for a meaningful rebound. For value-oriented investors willing to navigate short-term volatility, Funko represents a high-conviction opportunity in the collectibles sector.