What happened

Shares of Funko (FNKO -0.33%) were taking a dive today after the toy maker missed earnings estimates in its third-quarter earnings report, and its guidance called for flat growth in the key holiday quarter.

As a result, the stock tumbled 59.3% on the day.

So what

Revenue growth from the maker of POP figurines was actually strong, rising 36.6% to $365.6 million, with solid growth in all regions and categories. That easily beat estimates at $319.6 million

Despite that growth, profits fell as gross margin declined 100 basis points due to higher product costs, and the company ramped up spending on increased infrastructure investment. As a result, earnings per share slipped from $0.28 to $0.19, well below the consensus at $0.50.

Now what

What really sent the stock crashing was a drastic cut in guidance. Management forecast a decline in fourth revenue to $310 million to $330 million, which is even more concerning because the fourth quarter is typically its seasonally strongest time of year.

Management also slashed its full-year earnings per share guidance from $1.88 to $1.99 to just $0.85 to $0.95, implying earnings per share of just $0.12 to $0.22 in the fourth quarter. In addition, management indicated that higher investment spending will continue to impact profitability into 2023.

Several Wall Street analysts cut their rating on the toy maker, and the market seems to doubt its ability to grow in a slowing economy. 

As a company targeting purely discretionary spending, Funko seems likely to struggle during a recession. Given the much weaker guidance, the crash in the share price is understandable.