Toymaker Funko (FNKO -4.65%) had a terrific third quarter. Sadly, the fourth quarter is shaping up to be something less than terrific.

Three months ago, Funko should have been riding high on an "earnings beat" and "revenue beat" quarter, with both sales and profits coming in ahead of expectations. Funko kind of shot itself in the foot, though, warning investors at the time that as good as Q3 was, Q4 sales and profits would probably fall a bit short of the extravagant hopes Wall Street had set for them.

Investors predictably sold off the stock then, and they're doing it again this week -- for pretty much the same sad reason.

A chalkboard sketch of a chart showing a stock price falling

Image source: Getty Images.

Second verse, same as the first

On Wednesday, Funko announced in an SEC filing that its preliminary results for the fourth quarter 2019 ending in December 2019 are in, and business is not looking all that great. Q4 sales should come in around $214 million, says Funko, down 8% from last year's Q4 "due to the challenging retail environment, which resulted in lower than expected purchases among Funko's top customers throughout the holiday season." 

Although sales are going great guns in some locations (in Europe, sales are up double digits percentage-wise), U.S. sales will fall 9% and international sales as a whole will be down a similar 8%.

Adding to Funko's misery, the company has elected to take "a one-time $16.8 million charge related to the writedown of ... slower moving inventory," which will be "dispose[d]" of. Funko wasn't clear on whether that means the unwanted inventory will be sold off through discounters, or simply trashed. Either way, it's expected to weigh heavily on profit margins (the gross margin should sink to about 29.3%), and will prevent Funko from reporting a profit for the quarter.

Instead, a net loss of from $0.11 to $0.12 per diluted share is expected.

Not all bad news

On the plus side, Funko's "adjusted" net income will still be positive -- $0.16 to $0.18. Seeing as Wall Street was looking for Funko to report a $0.43 adjusted net, however, this is hardly good news for Funko investors.  

If it's any consolation, Funko management says that it, too, is "disappointed in our fourth quarter results." And Funko is looking to stage a comeback in 2020. CEO Brian Mariotti boasts that "the underlying strength of our Pop! and Loungefly brands, combined with Funko's unique ability to leverage evergreen properties will enable the Company to achieve high-single-digit to low-double-digit sales growth in 2020."

But more bad news than good

Before you get too excited about that, though, Mariotti also notes that even assuming this growth arrives as promised, it "will be largely weighted toward the second half of the year." For the entire first half of the year, however, Funko is anticipating sales "down low-single-digits to flat" when compared to H1 2019.

What it means to investors

So what's the upshot for shareholders invested in Funko? After growing strongly in Q3, sales will slump in Q4. They'll slump even further for the next six months, followed by a return to growth only in the second half of 2020.

In the meantime, with Q4 earnings coming in at least $0.25 below expectations, analyst projections for a 2019 earnings year of $1.22 per-share profits is not in the cards. We're probably looking at something more like $0.97 a share -- or less -- for 2019 as a whole, and sales for the year will probably come in about $50 million below estimates (based on the new $214 million Q4 projection from Funko, versus the $264 million Wall Street was expecting).

Granted, the good news here is that if Funko at least hits its own new earnings target, well, $0.97 a share means the stock is selling for only about a P/E of 10, when valued on Funko's 36% decline in share price after-hours last night. If Funko can deliver on its promise of "high-single-digit to low-double-digit sales growth" for 2020 as a whole, that's a pretty attractive valuation.

But based on how things are going right now, it's also a pretty big "if."