Bark, Inc. Q3 FY2023 Earnings Call

Good afternoon. Thank you for joining BARK's Third Quarter Fiscal 2023 Earnings Call. My name is Matt, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, and there will be an opportunity for questions at the end. I will now pass the conference over to our host, Mike Mougias, Vice President of Investor Relations. Michael, please go ahead.

Good afternoon, everyone, and welcome to BARK's third quarter fiscal 2023 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO; Zahir Ibrahim, Chief Financial Officer; and Howard Yeaton, who served as Interim Chief Financial Officer during the period we are reporting on today. Today's conference call is being webcast in its entirety on our website and a replay of the webcast will be made available shortly after the call. Additionally, a press release covering the company's financial results was issued this afternoon and can be found on our Investor Relations website. Before I pass it over to Matt, I would like to remind you of the following information regarding forward-looking statements. The statements made on today's call are based on management's current expectations and are subject to risks and uncertainties that could cause actual future results and outcomes to differ. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. Also during today's call, we will discuss certain non-GAAP financial measures. Reconciliations to our non-GAAP financial measures is contained in this afternoon's press release. And with that, let me now pass it over to Matt.

Thanks, Mike, and good afternoon, everyone. Our results last quarter illustrate the significant progress we continue to make across each of our strategic initiatives we laid out at the beginning of the year, namely accelerating our path to profitability; making meaningful progress in our food and consumables business; and transforming our customer base by acquiring more premium customers. Last quarter, we grew our average order value by $2 year-over-year, improved our gross margin by 4 points to 60%, reduced our inventory by $15 million, and ended the quarter with $164 million of cash on the balance sheet, essentially unchanged from fiscal Q2. And for the first quarter since going public, we generated positive free cash flow. These are important milestones and a direct result of actions we took to diversify our product mix, improve our long-term unit economics, and meaningfully reduce our cash burn. And while the progress we have made across these initiatives is encouraging, we expect these trends to continue further in the quarters ahead. In addition, we announced the cost reduction initiative today to enable more leverage across the business, adding significantly more to our bottom line. I will discuss this initiative more in a moment. First, let me highlight some of the key results for the most recent quarter. Total revenue was $134.3 million, $300,000 ahead of our guidance for the quarter. Our direct-to-consumer segment contributed $120 million. Within that segment, total revenue from cross-selling was $12 million, up 15%, compared to last year. And as we know, not all revenue is created equal, and we saw the strongest growth in our new categories, dental and food. Our dental product, BARK Bright, delivered $2.7 million of revenue in the quarter, up 70%, compared to last year. I'm also excited to announce that we recently expanded our dental catalog with the launch of Bright Durable, which, as the name suggests, is targeted at tougher chewers. We also removed the chicken ingredient from this formula, which is one of the more common dog allergies, thereby growing the population of dogs we can serve. And while Bright Durable has only been available for a month, the initial reception has been fantastic. In our first month, we added nearly 6,000 new subscribers for this product. This is a great example of how we are able to leverage customer data to inform product development and expand our portfolio with products that we are confident will resonate with customers. Our food product is also doing very well and accelerating across all the key operating metrics we use to evaluate and manage the business. Since adding more brief, happy formulas and other variations last fall, the growth is picking up even faster. With each passing month, we are seeing notable improvements in customer engagement, conversion rates, and the number of orders we are fulfilling. Over the next 12 months, we will continue to add more products, which will expand our addressable market and help us engage an even greater subset of our customer base. And virtually all of our progress to date has been achieved by reaching out to current and former BARK customers or through word-of-mouth. Food is a huge market to serve, and we're thrilled with how well this breed strategy is resonating with our over 2 million BARK customers. The related and large consumables market we serve, but haven't discussed much this year, is treats. And BARK does more than just serve this market with roughly one-third of our revenue coming from treats. We are a top treat seller in the U.S. today, and we achieve this without selling a single treat in retail or through partners, which are channels we expect to tap into over the next year. Speaking of retail, let's turn to our commerce segment. We delivered $14 million of commerce revenue in the quarter, roughly 11% of total revenue. This is a segment I'm very bullish on and see a significant opportunity to grow this business long-term. Today, we are partnering with virtually every major retailer in the U.S. Our footprint spans 40,000 plus stores across the country, which enables us to reach new demographics and introduce millions of prospective customers to BARK. That said, today, we are primarily selling toys through our retail network. However, there is an exciting opportunity for us to broaden our offering and grow our commerce business in a substantial way by introducing our full product line to retailers, including toys, treats, toppers, dental, and food. Moving on, our total gross margin improved by 400 basis points year-over-year to 59.7%, and our direct-to-consumer gross margin came in at 61.8%. We have made significant progress this year getting our margin back to fiscal 2021 levels. And as I've discussed for the past year, this was essential to the foundation on which we can grow more profitably. We also have great visibility on our margin drivers, and we expect ongoing gains for several more quarters due to the following developments: First, we renegotiated more favorable contracts with our manufacturing partners. Rather than splitting our business across a dozen different vendors, we streamlined the number of partners we work with, which enabled us to negotiate more favorable terms. We also successfully renegotiated better terms with our freight partners as the spot rate for containers has declined significantly from their pandemic highs. Looking below the gross profit line, we recently signed a long-term agreement with one of our strategic shipping partners, which will reduce transportation costs and limit surcharges. Collectively, these efforts have improved our unit economics, lifted our margins in a meaningful way, and we look forward to enjoying the benefits of these new arrangements in the quarters and years ahead. If you recall in discussing our path to profitability one year ago, I mentioned from fiscal 2021 to fiscal 2022 we lost 4 points of gross margin, another 6 points on shipping and fulfillment, and added 6 points of revenue on the G&A line. I just mentioned we've made great gains this year in those first two areas and will gain more in future periods. The final area for improvement is on the G&A line. And today, we announced an initiative that will save us around $12 million annually starting this quarter, while also streamlining our work and helping us get more done faster. This is all great progress in a short period of time, and I'm very proud of our team for making it happen this year. Finally, that all rolled to an adjusted EBITDA loss for the quarter of $12.8 million, slightly ahead of our guidance and a 30% improvement compared to the third quarter of fiscal 2022. For the quarter ahead, we are guiding to a $3 million adjusted EBITDA loss. And given all the actions we've taken over the past year, I'm more confident than ever that we are on the doorstep of sustainable and growing profitability. Furthermore, we are also beginning to convert our inventory to free cash flow. As I mentioned on our last earnings call, we typically order products eight to ten months in advance, so our ability to reduce our inventory levels in the short-term was limited. With that said, we have reached a point where we can expect to see more consistent inventory conversion. We demonstrated this in the fiscal third quarter, and we estimate that we can make similar progress in inventory reduction in the year ahead. Now let me touch on the cost reduction initiative that we announced this afternoon. The pandemic served a significant, and in many respects lasting tailwind to the pet space, and we benefited tremendously as our top line grew at a dramatic pace. In an effort to meet growing demand, we quickly scaled our infrastructure, headcount, and other resources. In hindsight, we scaled our cost structure too quickly, which led to operational inefficiencies and, unfortunately, redundancies. This reality became even more evident as the broader macro backdrop became increasingly volatile. In light of this, we conducted a comprehensive review of the business with a goal of streamlining our cost structure, improving our operations, and further accelerating our path to profitability. As a result, we made the decision to reduce our headcount by 12% and eliminate certain contracts with third-party vendors and consultants. Decisions like this are never easy, because they impact people: our colleagues and friends, who have worked hard to support BARK and its customers; to all the employees that were affected, I'm truly grateful for your contributions and dedication. In reality, however, we believe that this is the right direction for the business and it better aligns our cost structure with the current economic environment and allows us to better focus on our highest priorities. Let me now turn to guidance for the remainder of the year. While we saw strong revenue acceleration in our food and dental product lines last quarter, we did see some softness in our toy product line as new additions came in lighter. For our fiscal fourth quarter, we expect revenue to be approximately $121 million and full-year revenue to come in at roughly $530 million. Our full-year guidance implies year-over-year growth of approximately 5%, as compared to our previous guidance of roughly 10%. In our view, this is a reflection of the broader macro backdrop as many consumers remain cautious and are currently favoring less discretionary spend. We believe that this is in part why our food and dental categories are accelerating, which is healthy for our business in the long run. However, it does taper our near-term revenue expectations given the relatively small base of our food and dental categories today. Notwithstanding the lower revenue guidance, we are maintaining our full-year adjusted EBITDA guidance of negative $31 million, which is where our focus has been and continues to be. For the fiscal fourth quarter, we currently expect an adjusted EBITDA loss of roughly $3 million, an 87% improvement compared to the fourth quarter of fiscal 2022. Overall, the improvements we have realized across cost of goods sold and G&A are significant, and our ability to maintain our EBITDA guidance is a reflection of the significant progress we've made in improving our long-term profitability profile. This progress also highlights our long-term LTV to CAC opportunity. The growing AOV on top of a healthier margin profile benefits our LTV to CAC ratio. This, coupled with a leaner G&A structure, provides us with a lot of flexibility to increase our investment in marketing if we are seeing stronger returns, particularly if we continue to cross-sell customers in food successfully as we have recently. To summarize, it has been a successful year back in the spotlight, and we are executing the plan that we laid out a year ago. We've consistently improved our customer quality as reflected in our increased average order value; we've improved our margin profile in a material way. We are beginning to convert our inventory to cash, and we were free cash flow positive for the first quarter since going public. Looking ahead, we expect to continue to deliver healthy year-over-year improvements in adjusted EBITDA and free cash flow as a result of the important actions we took over the course of fiscal 2023, which are beginning to translate to our financials in a more meaningful way. If the market was betting on us running out of cash, because we were speculative, then hopefully our steady progress and performance this quarter should prove that thesis wrong. I continue to believe that our best days are ahead of us, and with $164 million of cash on the balance sheet, we have a lot of exciting opportunities ahead. And before I turn it over to Zahir to walk through our financials in more detail, I'd like to thank Howard for his thoughtful leadership and contributions over the past year. He's been a valuable partner and helped me execute many of the improvements we've made to the business during his time here. I'd also like to welcome Zahir to his first earnings call at BARK. Zahir brings nearly three decades of senior financial leadership experience at public and private companies and a proven track record scaling high-growth direct-to-consumer brands, and we're thrilled to have him on board. With that, let me now turn it over to Zahir.

Thanks, Matt, and good afternoon, everyone. I'm excited to join my first earnings call at BARK. Before discussing our strong Q3 results, I want to share what drew me to BARK, some of my initial observations, and my focus areas. I have a deep love for the pet industry; as a dedicated dog lover and the owner of a 10-year-old golden retriever named Oscar, I truly understand the joy a dog can bring to our lives. This aligns perfectly with our mission to enhance the happiness of dogs. I also see BARK as offering a unique value proposition for dog products, being one of the few companies with proprietary branded items across toys, treats, food, and dental care. Additionally, I admire what Matt and the team have achieved, building a business with millions of loyal customers, a valuable and expanding data set, and early success in new high-growth categories that resonate with customers. We have significant momentum and ample growth potential ahead. I've noticed parallels between BARK and where I joined my previous company in 2015. Over more than six years there, I helped shape and implement our long-term strategy, doubling our revenue while optimizing costs. In the short term, my primary focus is to assist Matt and the team in developing an infrastructure that allows BARK to scale profitably. Much of this work is already underway, but there is more to accomplish, and I'm eager to collaborate with Matt and the team to enhance our operations further. Now, I will detail our financial results. Although I wasn't here for the quarter being reported, the key drivers are straightforward, and I believe our results will reflect this. Total revenue reached $134.3 million, about $300,000 above our guidance for the quarter. Year-over-year, revenue is slightly down due to a pull-forward of commerce revenue that was evident in fiscal Q2, as several retail partners ordered holiday products earlier than usual. This effectively shifted our commerce revenue between fiscal Q2 and Q3, making the year-over-year comparisons in this area less significant. In our D2C segment, revenue hit $120.1 million for the quarter, marking a roughly 2% year-over-year increase. This growth was driven by $3.6 million in subscription shipments, with an average order value of $33.10, up $2 from the previous year and nearly $1 more than the last quarter. Our Bright product line performed exceptionally well, generating $2.7 million in revenue for the quarter and about $8 million in the first nine months of fiscal 2023, which is over 100% improvement compared to the same period in 2022. Additionally, our new food business, launched in August, is growing rapidly without the need for marketing investment. We also achieved healthy margin expansion in D2C for the third consecutive quarter, with D2C gross margin at 61.8%, an increase of 230 basis points year-over-year and 160 basis points compared to Q1 this year. These gains resulted from strong growth in our average order value and improved pricing with our manufacturing and freight partners. Moving to our commerce business, revenue was $14.2 million, down from $22.7 million last year, largely due to timing. The commerce gross margin was 42%, up from 36% last year, primarily due to our holiday promotions occurring in fiscal Q2 this year. Regarding operating expenses, total G&A was $80.2 million, an increase of roughly $2 million compared to last year, mainly from $2.2 million in impairment costs linked to our previous New York head office. As Matt mentioned, we announced a cost reduction effort today to align our costs with the current macro environment and improve operational efficiency. We expect to achieve approximately $12 million in annual cost savings starting this quarter, with around $10 million to $11 million impacting fiscal year 2024. This initiative, along with our existing improvements, will enhance our profitability outlook. Though such decisions are challenging, we believe this approach will better align our cost structure with our operations, making our organization more effective and better positioned to seize the significant opportunities ahead. In terms of advertising and marketing, expenses were $21.7 million, down about $5 million compared to last year. We will maintain disciplined management of our marketing budget to improve returns on our investments. However, we are pleased with the quality of customers acquired in fiscal 2023. With increasing average order values and a healthier cost structure, we have the flexibility to invest more if we continue to see an increase in lifetime value. Nonetheless, sustainable profitability remains our top priority. Lastly, adjusted EBITDA was negative $12.8 million, $200,000 better than our guidance for the quarter and a 30% improvement over the negative $18.3 million reported last year. Overall, our results last quarter highlight significant progress in improving unit economics and moving toward sustainable profitability. On the balance sheet, we finished the period with $164 million in cash, consistent with the previous quarter. Importantly, we reduced our inventory balance by over $15 million this quarter, a substantial improvement. We also achieved positive free cash flow for the first time since going public, which is a major milestone. Looking ahead, we expect positive tailwinds for free cash flow from two sources: balance sheet-driven through continued inventory reductions, and P&L-driven as we anticipate an improved margin profile alongside the cost reductions we announced today. Overall, we had a very strong quarter. We continue to attract higher value customers, our gross margin is rising, we're refining our operating expense profile, and we're starting to generate positive free cash flow. Despite a volatile near-term macro environment, we are poised for substantial growth, and I’m eager to build on our positive momentum. I will now turn the call over to the operator for Q&A.

Thank you. The first question is from Maria Ripps with Canaccord. Your line is now open.

Great. Thanks so much for taking my questions. First, so it looks like you reported very healthy Q3, but it sounds like Q4 is trending much softer than expected. Can you maybe just talk about at, sort of, at what point did you start the deterioration in discretionary spend? And I guess what are your thoughts around re-engaging those consumers as you move throughout fiscal 2024?

Yes. Thanks, Maria. We did and as you know, fiscal Q3 is typically our biggest quarter from a net adds perspective and from an AOV growth standpoint. It was difficult to expect in this environment how the consumer is going to respond. It's cut pretty much across everything in a proportional way, the way you would expect. If you look at commerce, there's certainly the headwinds that we're feeling where our retail partners have their inventory built up, and we saw some of that pull forward last quarter, and they're just built up. So there's a lot to move through there, and I'd expect that to continue through at least this quarter that we're in here and maybe the next. On the direct-to-consumer side, there are a few different stories, but the net adds overall came in lighter than we would have hoped. Most of that happened in our biggest business, which is BarkBox, and then as you move to Super Chewer, better performance, and really, really strong performance in food and dental, but obviously growing on a smaller base. What we're seeing there is that really healthy rotation we've been after for the better part of the year or longer. Rotating from toys into food and dental now. The nice thing is, especially in food, we're picking up all that momentum from the toy customer base, and it's going very, very well, suggesting that over the past quarter, we've probably been a bit too conservative in what we're willing to spend to acquire a customer. Their value is growing more and more as the quarters go on, you see that in AOV. And then the margin is increasing. The retention is hanging in there or even a little bit better. So I think we just needed some time to adjust to this dynamic in food and get some confidence in it. As we push through next year, I think you'll see more and more of that acceleration.

Got it. That's very helpful, Matt. And then it seems like your Eats business is seeing strong momentum. How are you thinking about investments in the product over the next couple of quarters, especially given your cost savings initiatives here? And then are there any specific milestones like a certain level of scale or certain number of markets that you have in mind that need to be achieved before you start marketing it externally to people who are not already existing subscribers?

Yes. In terms of the investment and the team, there's a very good narrowly focused team on it that's doing a fantastic job. So we've got the right group of people around it, and they're expanding it nicely. So we don't need—I’ll say we don’t need big G&A investments in it to make it go faster, that's happening all on its own. The question about marketing is a good one because, as I said, most of this momentum has been driven off of cross-selling into the toy customer base, and there's a lot more we can still do there, and we will do there. But to your point, we should be starting to spend some external marketing dollars to acquire direct food customers, but even more so now that we have this internal engine running where we can take a toy customer and more effectively turn them into a food or dental customer, we should be increasing our cost of acquisition on that side as well. So the marketing spend will start to move up to reflect that higher LTV and the strength we’re seeing in the cross-selling.

Got it. That's very helpful. Thank you, Matt.

Thanks, Maria.

Thank you for your question. The next question is from the line of Cory Grady with Jefferies. Your line is now open.

Hey, thanks for taking my questions. I want to follow up on cash generation. So you made a lot of progress on converting inventories this quarter, and it sounds like there’s still more room there? If you can talk about how much more room is there left, so how much more inventories are left to work down? What you're targeting is kind of like a normal level?

Hi, Cory. How are you doing? This is Zahir. In terms of just maybe a better context around supply chain, we have a sizable amount of lead time in the supply chain from ordering products to it landing in our warehouse and ultimately flowing through to customers. So typically, that's anywhere between eight to ten months. So that's really important context as you think about how much reduction or influence inventory change in the near term. So as we think about what happened in Q3, that $15 million reduction was a result of us making decisions back in March, April from a purchases perspective, where we decided we wanted to take a step change reduction in our inventory. You're seeing that now flow through in our December financials. It was a sizable reduction and what it does is it rebases us back down from the $160 level and now around $145 as we enter 2024. We use that as our new baseline as we plan for future reductions. I'd say in the near-term, inventory is going to move up or down depending on consumer demand relative to purchases that we placed with suppliers some months ago. But looking forward for fiscal 2024, I’d expect inventory levels to come down by a similar amount that we saw in Q3, with a greater impact likely in the second half of 2024 due to the supply chain lead times. Does that help?

Got it. Yes, that's really helpful. Thank you. And then just on profitability, kind of following up on cash generation. So you reported a pretty solid gross margin expansion this quarter and then obviously the 12% workforce reduction. Can you talk about any updates on timing for getting to adjusted EBITDA profitability and what the remaining steps are to get there? Thanks.

Yes. I think you're seeing it. As we're guiding to a loss of $3 million in this current quarter. As I said in the call, the building blocks are there, and you're pointing it out: the gross margin leap forward to roughly 60%, the best we’ve posted as a public company to date. And we still feel there's a lot of room for growth in that; we know there is. We see it through a lot of those contracts that we've put in place with our vendors. As Zahir said, we're just working through the inventory that would be on old contracts. We've got some visibility to ongoing improvement there in addition to the AOV improvement. That makes the gross margin go up, improvement on the shipping and fulfillment line, and as you mentioned, the cost reduction. It's a long way of saying we're right there, and we're guiding to being right there. When it comes to the when we’re getting our arms wrapped around the full-year plan for fiscal ‘24, Zahir has been on board with us now for five weeks, so we're getting our arms around it, and I think we'll have visibility to that very soon.

Thank you.

Thank you for your question. The next question is from the line of Ryan Meyers with Lake Street Capital Markets. Your line is now open.

Hey, guys. Thanks for taking my question. First one for me, just wondering if you can unpack the AOVs during the quarter a little bit more? And then kind of maybe what percentage of revenue came from cross-selling?

Yes, this quarter $15 million of revenue came from cross-selling out of the total $134 million or $120 million of direct-to-consumer. So well over 10% of consolidated, and certainly over 10% on the direct-to-consumer side. This continues to be a core strength of ours. As I mentioned, and I've talked about it for a lot in the past year, we had become very good at addressing a toy customer and selling them more toys. We became really great at that. What's changed in the past quarter or two, really since we updated the format and went to the breed-based format of food, is we've really unlocked how to take a toy customer and turn them into a food customer. That's been the unlock we've been looking for. That’s the game changer for us. In this past quarter, if I go back to the question Cory just asked, we've done a couple of things. I mean, we've certainly expanded the gross margin overall in that 60% neighborhood. We've improved our shipping and fulfillment percent of revenue that we spend there. We have our cost reduction exercise, and before that, we turned in a free cash flow positive quarter. Then you take all that forward. One priority was to get profitable; another was to have real momentum in food. We’ve got that too. We’re pretty happy with where all that is.

Got it. And then kind of the integration of the one BARK brand, how is that progressing? Do you have any sort of timeline as to when that might be complete?

Yes. Not a specific timeline, but you'll see it. We don’t feel the best way to bring this out is to work on it under the covers for a long period of time and then just debut a whole new platform. We’re bringing this out day by day, little by little, learning how to sell in new ways and learning how to introduce new products in new ways. If you look at the food platform right now, food.bark.co, we’re selling the core kibble and the food on that breed-based approach. But we introduced new products there as well, like food toppers, still in the food family, treats, and soon you'll see our dental products start to appear there. We’re starting to move more and more into having all the products on that platform. The platform is really where we’re getting the leverage because it is far more flexible, much easier for us to optimize and improve on. We're seeing those day-to-day gains in our conversion rate and our cross-selling ability. We're taking it one step at a time, moving those products over, but it's moving rapidly. We’ll have a window dressing of a date where we change the URL from food.bark.co to bark.co, creating some new navigation. You’ll see changes start happening in the coming weeks, especially with new product introductions.

Got it. That’s helpful. Thanks for taking my question.

Thanks.

Thank you for your question. The final question is from the line of Ygal Arounian with Citigroup. Your line is now open.

Good afternoon, everyone. I apologize for interrupting, but I want to revisit the demand environment after attending a few calls. The credit card data we've been analyzing suggests that the pet category is still holding strong, even with recent shifts. Are you experiencing different trends, or do you believe this is more widespread? How does the subscription aspect of your business factor into this, considering customers can easily switch it on and off? What strategies can we implement to encourage a rebound? Is it mainly about the macroeconomic environment improving, or are there other measures that can stimulate demand? Additionally, your customer lifetime value to customer acquisition cost ratio is strong and improving as your average order value rises and you enhance cross-selling. How do you approach marketing spending in a softer market? Do you reduce marketing efforts, take a more cautious stance, or continue investing in marketing to sustain demand? How do you assess that customer lifetime value to customer acquisition cost ratio under those conditions? Thank you.

Yes, thanks. So really good questions, and I'll start with the first on the demand environment. It's again not all revenues created equal, and so we're seeing that softness and acceleration. I think it's similar to what we're hearing from others in terms of what they're seeing. So the more discretionary products, and for us, the most discretionary would be subscription BarkBox, are facing the headwinds. Those that are holding up and very resilient and even surging are less discretionary food and health products like our dental product. We're seeing that too; we’re seeing it really take on. For us, that's healthy. The great thing about it is the toy and treat businesses offer us strong unit economics. They bring in good cash flow, and they also bring in a relatively inexpensive way to acquire customers for the food and dental categories. A toy customer costs a whole lot less out in the market than a food customer. So I think what you’re seeing in the demand environment is the same as us. We’re just growing from a smaller base in those other categories. To your LTV to CAC question and the marketing spend, it's exactly that—the strength we're seeing in those categories and the market opportunity available there. We probably have been too conservative on the cost of acquisition side. Everything is just starting to come together. The cross-selling into that big pickup quarter-over-quarter in the gross margin, the retention holding up, the AOV gain—all that came together this quarter. We’ll probably be more aggressive with marketing, trying to grow it faster because we feel so confident about taking those toy customers and making them food customers.

Great. Thanks so much.

Thank you for your question. That concludes the conference call. Thank you for your participation. You may now disconnect your lines.