BARK - NYSE

Good evening. Thank you for attending today's BARK's Second Quarter Fiscal Year 2023 Earnings Call. My name is Megan, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Mike Mougias, the Vice President of Investor Relations. Mike, please go ahead.

Good afternoon, everyone, and welcome to BARK's second quarter fiscal year 2023 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO; and Howard Yeaton, Interim CFO. 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 highlight the significant progress we continue to make driving towards profitability and becoming cash flow positive. We delivered our strongest revenue quarter ever and our best adjusted EBITDA margin as a public company. Total revenue in the fiscal second quarter was $143.8 million, a 20% improvement compared to the same period last year. Our healthy top line performance, coupled with continued cost efficiencies resulted in an adjusted EBITDA loss of $2 million, a $6.8 million improvement compared to the same period last year, an $11 million improvement from the previous quarter and $6 million ahead of our guidance for the quarter. We are thrilled with these results. And while we still have work to do, we are raising our full year adjusted EBITDA guidance for the second quarter in a row to negative $31 million. Before we discuss our guidance and strategic initiatives in more detail, let me provide some additional color on the drivers of our strong second quarter results. We added 218,000 new subscriptions last quarter ending the period with 2.2 million active subscriptions, and we continue to acquire those new customers efficiently. Our customer acquisition cost came in at $53.19, largely in line with our multiyear historical average, if the customers we are currently acquiring are spending more and shopping across multiple categories. Our average order value was $32.18, a $2.45 increase year-over-year and a $1.11 increase compared to our fiscal Q1. This is exactly what we meant when we said we are aiming to transform our customer base and our strategy is working better than expected. Overall, total revenue was $143.8 million, up 20% compared to last year, and roughly $9 million ahead of our guidance for the quarter. Another key driver to our strong performance this quarter was retail. Our commerce revenue nearly doubled year-over-year to $26.3 million or 18% of total revenue. As we've discussed in the past, our commerce business is lumpier in nature and last quarter was no exception. Several retail partners ordered their holiday product earlier than in previous years, resulting in a timing shift in revenue from the fiscal third quarter to the fiscal second quarter. We continue to expect this segment to represent between 10% and 15% of total revenue for the year. So strong as these results are, our commerce revenue will be lighter in the second half due to the unexpected holiday pull forward here. Essentially, our commerce revenue expectations from Q2 to Q3 slipped. We also shipped to a new retail partner last quarter, Sam's Club. Our products are now availed - at 600 for Sam's Club locations in the U.S. and online and in over 40,000 retail doors nationwide. Looking at our direct-to-consumer business. Total revenue was $117.5 million, up 10% versus last year. This segment was largely driven by the healthy AOV growth I mentioned earlier. Moreover, our Harry Potter collection in August was our strongest performing license product ever. In our view, this is a testament to the resiliency of the dog industry and, more importantly, consumer demand for creative, high-quality products that resonate. We believe that this is a particularly important data point given the current inflationary environment and it illustrates the benefits of selling proprietary products, and experience personalized for each customer. We also had a strong quarter cross-selling. Total cross-selling revenue came in at $10 million, up 64% year-over-year. And on the strength of that capability, BARK Bright contributed $2.8 million of revenue, a 102% increase year-over-year. And in food, we launched our new breed-based format in August. Based on the strong conversion rates and average order values we've seen primarily through cross-selling our existing customers, we expanded from serving 3 breeds to 10 breeds. Moving on. Our total gross margin was 56%, roughly 2 points below last year. However, this is a result of the outsized proportion of revenue that we derived from our commerce business, which again was 18% of revenue this quarter compared to 11% in fiscal 2022. Gross margin in our direct-to-consumer business came in at 61%, roughly 1 point better than last year. As I mentioned on previous earnings calls on a consolidated basis, we lost 4 points of gross margin between fiscal 2021 and fiscal 2022. Getting back to our fiscal 2021 margin profile is a key focus of mine and we've been pleased with the improvements we've realized in the first half of fiscal 2023, and we expect our gross margins to improve even more in the second half of the year. We also delivered operating leverage across our marketing and G&A lines last quarter. Operating margin was negative 6% compared to negative 13% in Q2 of fiscal 2022. As I discussed in our Q4 call, shipping and fulfillment expense increased by 6 points between fiscal year '21 and fiscal year '22 and we have an opportunity to gain some of that back with better inventory controls, more favorable shipping contracts and better overall organization. This is happening. We also discussed how we had over hired and needed to grow into that size, and this is also happening. So to summarize, healthy AOV growth and our focus on delivering operating leverage resulted in an adjusted EBITDA loss of $2 million, a $6.8 million improvement year-over-year. Our EBITDA margin also improved to negative 1.4%, up roughly 6 points compared to Q2 last year and better than our previous five quarters. These are great results. And while we still have work to do, I'm proud of how quickly the team has delivered improvements throughout the business. Let's now discuss our expansion into food and consumables. We've launched our breed-specific format in August, initially targeted at 3 breeds. While it's only been 3 months since launching this format, we are very happy with the early results. Customers are engaging and converting at a significantly higher rate than they were previously, which suggests our breed approach is working well. We're also seeing the majority of new food customers opting to subscribe to recurring shipments, roughly 70% to date. Nonetheless, food is a more considered purchase. It requires additional education and outreach compared to toys or treats. And every day, we are learning more effective ways to engage and convert customers. The same was true for Bright in its early days, and we're now beginning to see the fruits of our labor in that category. With that said, we've been impressed that we have been able to get an existing BarkBox customer to change where they see their dog with an email [ph] This speaks to the strength of the BARK brand and the compelling nature of our food offering. Given the encouraging results from the first 3 breeds, we recently expanded our food offering to include a full suite of products for 7 additional breeds, plus puppy specific formulas. We are now serving [indiscernible] Labs, Pitbulls, Dachshunds, French bulldogs, Boxers, Australian shepherds, German shepherds, Golden Retrievers and Doodles at various life stages with base kibbles, toppers, supplements and accessories tailored to the dietary needs and individuality of each of these breeds. This is important as it meaningfully expands the number of customers we can serve. While it is still early, I have more confidence than ever that BARK's food will become a meaningful driver of our business. Now let's turn to profitability. On our fourth quarter call in May, we laid out our road map to profitability. We discussed our goal of transforming our customer base by focusing on more premium customers, which would grow average order value at a faster rate and improve our margin profile. We also discussed the need to generate operating leverage on our cost structure by improving our inventory controls and reducing cost scenarios like shipping and fulfillment. And I am pleased to report we have made tangible progress across each of these areas. AOV is up, margins are improving, and we are burning significantly less capital. We also expect some of the improvements we've made to the business to materialize in the back end of the fiscal year. For example, converting inventory to cash. Given the subscription nature of our business, we typically order product 8 to 10 months in advance. So while we made important improvements to our inventory controls earlier in the year, we don't expect to see those efforts reflected on the balance sheet for a couple of quarters. Nonetheless, with $166 million of cash and $161 million of inventory on the balance sheet, we are confident that our most profitable and efficient days are still ahead of us, and I remain fully committed to getting us to a sustainable cash-generating business very soon. Let's now turn to guidance for the third quarter and full year fiscal 2023. Beginning with revenue, we are reiterating our guidance of $556 million for the full year. While we did exceed our revenue guidance by a healthy margin last quarter, the lion share of our top line B [ph] is a result of commerce revenue shifting from the third quarter to the second quarter. This also impacts our fiscal third quarter revenue, which we currently expect to be $134 million. With that said, we are raising our full year adjusted EBITDA guidance for the second quarter in a row. We now expect an adjusted EBITDA loss of $31 million for the full year, up $2 million from the guidance we provided on our Q1 call and up $5 million from the guidance we originally provided on our Q4 call. For the fiscal third quarter, we currently expect an adjusted EBITDA loss of $13 million. Consistent with prior years, the holiday quarter is a period where we intentionally invest more in customer acquisition and this year is no different. This investment provides us with a healthy lift in new subscriptions that we carry into the following year. Additionally, we plan for higher customer acquisition costs due to seasonal increases in CPMs, as well as higher shipping rates, which is typical during the holiday period. Nonetheless, our full year guidance of negative $31 million suggests that we will cut our adjusted EBITDA loss nearly in half or a $27 million improvement compared to fiscal year 2022. We also expect to see additional cash flow improvements in the second half of the year. Overall, we are very happy with the results this quarter and through the first half of the year. My biggest priority continues to be getting the business back to generating cash, reaching sustainable profitability and then accelerating growth on that solid foundation. And with that, I will turn the call over to Howard.

Thanks, Matt, and good afternoon, everyone. Our business has remained incredibly resilient through the first half of fiscal 2023 and we've made tangible progress across each of the key initiatives we laid out at the beginning of the fiscal year. Compared to last year, our average order value grew by $2.45, our operating margin improved by 7 points and we reduced our cash burn significantly. These are all important milestones and big steps toward reaching profitability and becoming cash flow positive. Let me take you through our fiscal second quarter results in more detail. Total revenue increased 20% year-over-year to $143.8 million. As Matt mentioned, we saw a pull forward of certain commerce revenue as several of our retail partners ordered their holiday product earlier than in prior years. This was in large part why we came in nearly $9 million ahead of our revenue guidance for the quarter. Overall, we were encouraged by our retail partners continued support, and this segment remains an important driver of the business. Turning to our direct-to-consumer business. Total revenue increased 10% year-over-year to $117.5 million. Growth in this category was driven by a 1.7% increase in subscription shipments and an 8% increase in average order value per shipment. Turning to margins. Total gross margin was roughly 2 points lower year-over-year. This was largely attributable to our commerce business, representing 18% of total revenue in the most recent quarter as compared to 11% last year. Furthermore, our commerce gross margin came in at 33.2% as compared to 41.7% last year. The year-over-year decrease in commerce gross margin is primarily attributable to seasonal promotions associated with the holidays. If you recall, in fiscal Q3 last year, our commerce gross margin was roughly 36%. Given this year's pull forward, we saw more of the seasonal impact in our fiscal Q2 results. Our DTC gross margin came in at 61%, one point above last year. Looking ahead, we expect our gross margin to improve further through the second half of the year. Turning to operating expenses. Total general and administration expense was $74.2 million as compared to $68.2 million in the prior period. However, G&A as a percentage of revenue improved by 5 points year-over-year, which reflects the efficiencies we've realized in head count and shipping and fulfillment. And if we look at shipping and fulfillment specifically, we delivered a nearly 4 point improvement compared to last year. Advertising and marketing, which includes all of our customer acquisition costs, as well as our marketing team salaries, came in at $15.3 million as compared to $17.1 million last year. As a percentage of revenue, this line improved by 3.5 points to 10.7%, compared to last year. As we discussed on our previous call, generating operating leverage on our cost structure is a key factor in driving towards profitability, and we were very pleased to improve our total operating margin by roughly 7 points year-over-year. Moving on. Other income was a negative $153,000 last quarter as compared to positive $23.2 million in the prior period. The large delta is almost entirely related to the change in the fair value of our outstanding warrants, which is a non-cash item. In the most recent quarter, we booked a charge of $1 million related to these warrants, as compared to a gain of $23.4 million in the same period last year. We adjust this figure out of our adjusted net income and EBITDA numbers. However, it can have a large impact on our GAAP numbers in any given period. On that note, GAAP net loss last quarter was $11.9 million as compared to net income of $6.4 million last year. Again, the delta versus last year was driven by the $23.4 million change in the fair value of our warrants. On an adjusted basis, which removes the impact of the warrants and other items, our net loss improved by 39% to $6.7 million as compared to $11 million last year. Adjusted EBITDA was negative $2 million, a 77% improvement compared to the negative $8.8 million we generated last year. Our adjusted EBITDA margin also improved considerably coming in at negative 1.4% versus negative 7.3% in Q2 last year. Overall, our results last quarter underscore the tangible progress we've made improving our unit economics and driving towards profitability. Given our recent progress, we believe positive adjusted EBITDA and free cash flow quarters are in our line of sight. Turning to the balance sheet. We ended the period with $166 million of cash and roughly $161 million of inventory. As Matt mentioned, we've made a lot of improvements to our inventory controls which will enable us to convert inventory to cash more efficiently. We expect this dynamic to play out towards the back end of the year and even more so into fiscal 2024. On that note, we also significantly reduced our cash burn this year. Through the first half of fiscal 2023, we had negative operating cash flows of approximately $35 million which is a substantial improvement compared to last year. Over the past year, we've invested a lot of time building an infrastructure that will enable us to scale responsibly and profitably. And while we still have work to do, we believe the business is in a much healthier place and our best days are ahead of us. To summarize, we had a very strong start to the year. We're adding more premium customers. We're delivering more operating leverage on our cost structure, and we've significantly reduced our cash burn. We've also helped demonstrate the resiliency of the dog industry and from hard goods to consumables, BARK is executing across the board, and we look forward to updating you all again in the near future. With that, I will turn the call over to the operator for Q&A.

Hey, thanks for taking my question. I wanted to ask about your foods and you've expanded the breed specific offerings and added puppy formulations. But maybe you can talk about how much of your customer base are you touching with those four - first 10 formulas? And then just on the point you made about additional outreach. Can you provide any color on where food customers are coming from?

Sure, Corey. Thanks for the question. First, on the first 10 breeds that we've launched with, that is reaching or serving specifically about 30% of the customer base so far. And obviously, as we add more breeds, we'll reach more customers. On the second question, it's still very much an internal to BARK marketing effort. Where we're marketing to our own customers first and not out there buying media against bringing new people into the BARK universe. So leveraging the customers that we're acquiring for - about $53 [ph] in this past quarter through the play side of the business and then presenting food to them, which comparable to other direct-to-consumer food rent is quite a low cost of acquisition.

Got it. Sorry, if I can clarify, where were those customers buying their food previously? And if you have the color, what sort of types of food where they're buying?

Oh, I'm sorry, I misunderstood the question. I don't know where they were necessarily buying their food previously. So I'm not sure I can help you with that one. Sorry about that.

No problem. And then I want to ask just - for my next question, just on the commerce segment and the resiliency of the category. So you saw the timing shifts, the retailers pulled forward orders. Maybe you can talk about holiday order levels relative to your expectations? I mean, have you noticed any change in tone from retailers about the category, just given the pressure on the consumer.

Certainly. Yeah, we have noticed a change in tone. I think we've all heard the same things about retail that the big retail partners out there have - they have a good amount of inventory on hand and they're thinking about how to move those and they're worried about their margins. And so we're in those conversations with them regularly and trying to thread that needle of giving them products that continue to perform really, really well and sell well for them and help them meet their margin goals, and we have to meet our margin goals. So we're trying to be a great partner and have everybody reach the targets. But you definitely feel the tension and pressure more than we have in the past. I will say, I think we've benefited by having those orders pulled forward just given that the pressure is probably increasing on the retail partner. So it's good that we got them out when we did.

That's a great point. Thanks for the color and taking my question.

Thanks, Corey.

Thank you. Our next question comes from the line of Maria Ripps with Canaccord. Your line is now open.

Good afternoon and thanks for taking my questions. First, as we look ahead to 2023 and sort of bearing in mind that a chain profitability is one of your main strategic initiatives. Can you maybe talk about how you're thinking about the cadence of investments throughout the year? And what are some variables that could cause increase or decrease your investments?

Sure. I mean, when we look into the future, the quarter we're in right now is our traditional holiday quarter, especially on the direct-to-consumer side, where the big investment, as we discussed on the call was, it's always in marketing and acquiring a lot of subscribers at very good rate, and this year, higher quality subscribers than we've ever seen before. So that's the big investment right now. As we go into the future, get past January 1, where we're really - where we continue to focus, the priorities are on, first, generating positive cash flow. And we feel we can do that fairly soon. Second is then EBITDA positive. And obviously, being EBITDA positive mix generating cash flow - positive cash flow easier. And then third, generating revenue growth. But definitely in that order, we have to be growing from a foundation of solid unit economics and a profitable, healthy business that's generating cash on a consistent basis. So the priority is there. So what that means is what we're looking at for the future generally is leveraging the areas and the assets that we have on hand and how do we best put those to work next year. So let's take an example that we're talking about here. We talked about $166 million of cash on the balance sheet, $161 million of inventory. And for those not familiar with how our business works, we're sending a box of toys and treats every month that is a bit of a surprise to the customer, which gives us a lot of flexibility in what we send to that customer and how we use the inventory we have. That allows us to serve our recurring customer base and every new customer with inventory that's already in the house and has already been paid for. So that generate cash. On top of that, we have the opportunity to package those products up and take them to retail partners, as I just described and give them greatest assortments that haven't been on their shelves before and work with them on the margin [ph] side, again, to generate positive cash flow. So we're looking at opportunities of leveraging the assets that we have and meeting the times as they are to get to, again, positive cash flow and then investing in being more and more and more efficient all the way through the business, how we work together, how we're organized as a team, our relationships with our vendors, our shipping and fulfillment providers. Every point within there is critical for us to get into that EBITDA positive. And then from that foundation, there are a lot of fun ideas in terms of how do we grow revenue beyond that next year and in the future, but it's got to come as the third priority on that list.

Got it. That's very helpful. And if I could ask one more. Can you maybe just talk about the sequential progression of net subscriptions in the quarter? Sort of any color in terms of what drove this modest decline in net additions? And how should we think about this going forward? Thank you very much.

Thanks, Maria. Yeah, the way we're thinking about it is the same we thought about it when I came back in January, which was in order to have that solid foundation and a profitable, sustainable business ongoing, we needed to change the complexion of our customer, the profile of that customer. And so we talked about through the year, our plan was to probably stay pretty flat on the total number of subscribers we're serving but raise the quality. And so you see that starting to bear out, as the average order value that a customer spent this quarter year-over-year raised by $2.45 versus just last quarter, raising $1.11. So we're getting a bigger lift on that average order value or we're getting it faster than we expected. And we're getting the same performance that we thought we would get in the active subscribers. I would expect that to continue throughout the rest of this year, especially given the macroeconomic environment around us. I'd expect that to remain flat, but that was the plan from the start. We're executing it well. We're executing it actually better than we expected to. So - sorry go...

Back to the first answer, but once we have that solid foundation in place, then we start to think about how do we grow and accelerate that number of total subscribers.

Great. Thank you so much for the answer and good luck for the rest of the quarter.

Thanks, Maria.