What happened

In response to Funko (FNKO 2.27%) announcing terrible preliminary results for the holiday quarter and sharing weak guidance with investors, shares of the specialty toy maker had plunged 36% as of 11:00 a.m. EST on Thursday. 

So what

Here's a look at the preliminary fourth-quarter numbers that are causing traders to flee:

  • Sales in the U.S. and international markets are expected to decline by 9% and 8%, respectively. For context, Wall Street was expecting growth of more than 13%.
  • Management has decided to write down $16.8 million worth of inventory, which will have a negative impact on margins and profits.
  • The gross margin is expected to be in the range of 29.2% to 29.4%. Excluding the writedown, this figure would be between 37% and 37.3%.
  • Net loss is expected to be between $6.7 million and $6.0 million, or $0.12 to $0.11.
  • Adjusted net income -- which excludes the impact of the writedown -- is expected to land between $8.1 million and $8.9 million, or $0.16 to $0.18 per share. That's not even close to the $0.43 that Wall Street was expecting.
Businessman with hands over head looking worried

Image source: Getty Images.

Brian Mariotti, Funko's CEO, offered investors the following commentary: "While we are disappointed in our fourth quarter results, we are confident that our strong track record of innovation through new product categories and properties, as well as continued international expansion, will continue to propel the Company in 2020 and beyond."

Management also provided investors with guidance for 2020, noting that sales are expected to grow "in the high-single-digits to low-double-digits." 

That sounds good, but management also noted that "the top-line is expected to improve gradually throughout 2020 and will be largely weighted toward the second half of the year, with net sales in the first half expected to be down low-single-digits to flat compared to the first half of 2019."

In other words, investors should expect the first half of 2020 to be rough.

Given the horrendous fourth-quarter results and weak guidance, it's no surprise to see shares being mauled today.

Now what

It's possible that management's plan to reignite growth will work, but consumer tastes for discretionary items such as toys can be fickle, so there are no guarantees that the turnaround plan will work.

With everything heading in the wrong direction at the moment, it's hard to know where the bottom could be with Funko's stock. For that reason, my plan is to keep far, far away from this troubled company.