BARK - NYSE

Good afternoon. Thank you for attending today's BARK's Third Quarter Fiscal 2023 Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for 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, 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;

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 has 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 [Indiscernible], 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 [Indiscernible] 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 now 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. As 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 a 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 of the actions we've taken over the past year, I'm more confident than ever that we are in 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 10 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 both benefits to 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 the food successfully as we have recently. To summarize, it has been a successful year back in the [CEFC] 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 spec, then hopefully our steady progress and performance this quarter should prove that thesis is 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

Thanks Matt, and good afternoon, everyone. It's a pleasure to participate in my first earnings call at BARK. Before I dive into our strong Q3 results, I thought it would be helpful to share what attracted me to BARK, some of my early observations and my initial areas of focus. First off, I love the pet space, as an avid dog fan and the parents of a 10-year-old golden named Oscar, I fully appreciate how much joy a dog can bring into our lives. So from the outset, our mission to make dog lives happier, totally resonated with me. Second, I believe that BARK offers a really unique value proposition as a brand for dogs. We are one of the only companies in the space with proprietary branded products spanning toys, treats, food and dental. And finally, Matt and the team have built an impressive business with millions of loyal customers, a business with a valuable and growing data set and with early success expanding into new high term categories, which are all resonating well with customers. We have great critical mass and a major runway for growth ahead of us. I saw a lot of parallels between BARK and where [Indiscernible] was when I joined them back in 2015. During my six plus years there, I helped design and execute our long-term strategy, building capabilities are enabled our revenue to scale 2 times, while we optimize our cost structure. In the near-term, my top priority is helping Matt and the team build an infrastructure that enables BARK to scale profitably. A lot of important work has already been done. However, we still have work to do and I look forward to partnering with Matt and the team to help improve our operations even further. With that, let me take you through our financial results in more detail. And while I was not here for the quarter we are reporting on today, the drivers are fairly straightforward and I believe our results will largely speak for themselves. Total revenue was $134.3 million, roughly $300,000 ahead of our guidance for the quarter. Compared to the same period last year, our total revenue was down slightly, which is a function of the pull forward of commerce revenue that we experienced in fiscal Q2, as several retail partners ordered their holiday product ahead of schedule. If you recall, this effectively swapped our commerce revenue between fiscal Q2 and Q3 this year, making the year-over-year comps in this segment for this quarter less meaningful. For our D2C segment, revenue was $120.1 million in the quarter, up roughly 2% year-over-year. The driving force behind the increase was $3.6 million subscription shipments at an average order value of $33.10, $2 more than the year ago period and nearly $1 more versus the previous quarter. Our Bright product line has been performing exceptionally well, delivering $2.7 million of revenue in the quarter and roughly $8 million through the first nine months of fiscal 2023, up over 100% on the corresponding period for 2022. Furthermore, our new food business, which launched in August is growing at a strong pace and that's without us investing in marketing. We also achieved healthy margin expansion in D2C for the third quarter in a row. D2C gross margin was 61.8%, up 230 basis points, compared to Q3 last year and up 160 basis points versus Q1 this year. These improvements were driven by strong growth in our average order value and improved ongoing pricing with our manufacturing and freight partners. Moving on to our commerce business, revenue came in at $14.2 million down from $22.7 million in the same period last year. As mentioned earlier, this was largely timing related. The commerce gross margin was 42%, up from 36% in the year ago period as a result of our holiday promotions hitting fiscal Q2 this year. Turning to operating expenses. Our total G&A expense was $80.2 million, up roughly $2 million, compared to the same period last year. The increase was primarily driven by $2.2 million of impairment costs related to our previous New York head office. As Matt discussed, we announced the cost reduction exercise this afternoon in an effort to better align our cost structure with the current macro environment and further improve our operational efficiency. To quantify the magnitude of this exercise, we expect to achieve approximately $12 million of annual cost savings starting this quarter with around $10 million to $11 million flowing into fiscal year 2024. This initiative coupled with the improvements we have already realized will significantly improve our profitability profile. These are always difficult decisions to make. However, we believe this initiative better aligns our cost base with our scale will make our organization more effective and better enable us to capitalize on the tremendous opportunity ahead. Moving to advertising and marketing, expenses were $21.7 million, down approximately $5 million, compared to last year. We will continue to manage our marketing budget in a disciplined fashion to ensure we are continuing to improve the returns on our investment. Nevertheless, we are very happy with the quality of customers that we have been acquiring throughout fiscal 2023 and with growing average order value and a healthier cost structure, we increasingly have the flexibility to lean into our effort, if we continue to see our lifetime value increase. That said, sustainable profitability remains the foremost priority. And lastly, adjusted EBITDA was negative $12.8 million, $200,000 ahead of our guidance for the quarter and a 30% improvement, compared to the negative $18.3 million we generated last year. Overall, our results last quarter underscore our significant progress in improving unit economics and driving towards sustainable profitability. Turning to the balance sheet. We ended the period with $164 million of cash broadly in line with the prior quarter, notably we reduced our inventory balance by over $15 million in the quarter, which is a step change improvement. And lastly, we achieved positive free cash flow in the quarter for the first time since going public, which is a major milestone. When looking ahead, we anticipate positive free cash flow tailwinds in two areas. The first is balance sheet driven as we continue to focus on reducing our inventory levels and the second is P&L driven as we expect to see an improved margin profile coupled with the cost reduction exercise we implemented today, all of which should boost our profitability and free cash flow generation. Overall, we had a very strong quarter. We continue to add higher value customers. Our gross margin continues to rise, we're improving our operating expense profile and we're beginning to generate positive free cash flow. And while the near-term macro environment remains volatile, we have a tremendous runway ahead and I look forward to building on our positive traction. With that, I will turn the call over to the operator for Q&A.

Thank you. [Operator Instructions] The first question is from the line of 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 reengaging 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. And 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. So 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 continues through at least this quarter that we're in here and maybe the next. And then on the direct-to-consumer side, there are a few different stories, but there's 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 then really, really strong performance in food and dental, but obviously growing on a smaller base. So 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, which suggests we're probably in the past quarter and 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 at food and get some confidence in it. And 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, sort of, 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 sort of specific milestones like certain level of scale or certain number of markets that you have in mind that sort of 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 type 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 whole lot more we can still do there and we’ll 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 that 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? And if you can talk about how much more room is there left, so how much more inventories are there left to work down? And what you're targeting is kind of like a normal level?

Hi, Cory. How are you doing? This is

Got it. Yes, that's really helpful. Thank you. And then just on profitability, so 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, and you can talk about any updates on timing on getting to adjusted EBITDA profitability? And what the remaining steps are to get there? Thanks.

Yes. I think you're seeing it. And as we're guiding to a loss of $3 million in this current quarter. But 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 or we know there is, we see it through a lot of those contracts that we've put in place with our vendors. And as

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. So that continues to be a core strength of ours. And as I mentioned, and I've talked about it for a lot in the past year that we had become very good at in our past couple of years was 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. And that's been the unlock we've been looking for. So that's the game changer for us, and what we've been going for. 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 at exercise and before that we turn in a free cash flow positive quarter, and then you take all that forward. So one priority was to get profitable, another was to have real momentum in food. We've got that too. So 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? And do you guys have any sort of timeline as to when that might be complete?

Yes. Not a specific timeline, but if you will see it. It's not -- 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. And so we're bringing this out day by day, little by little and learning how to sell in new ways and learning how to introduce new products in new ways. So if you look at the food platform right now, food.bark.co, what you have there is 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, so still in the food family, treats, and soon you'll see our dental products start to appear there. And now we're starting to move more and more into having all the products on that platform. And the platform is really where we're getting the leverage, because it is -- it's far more flexible, much easier for us to optimize and improve on. And we're seeing those day-to-day gains in our conversion rate and our cross-selling ability. And so we're taking it one step at a time moving those products over, but it's going rapidly. And then we'll have the, I'd say, the window dressing of, there's going to be a date where we changed the URL from food.bark.co to bark.co, create some new navigation. But you'll see in the coming weeks, changes start to be made there, especially new products being introduced.

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.

Hey, good afternoon, guys. And apologies if I address this, but jumping around a few calls, but I just want to kind of come back to the demand environment, I think some of the credit card data we've -- you've been following this in surveys that we've seen suggest that the pet category remains resilient in this kind of environment and obviously there's a little bit of a step down here? Are you seeing something different or do you think this is more broad-based? Is the subscription component of the business? And I know people can turn on and off. Is that a factor? Just how should we think about that? And how do we get back to a rebound? Is it just the macro environment improving? Are there other things that you can kind of put in place to drive some improvements in the demand environment? And then second, it's very related. Your LTV to CAC is still -- it’s strong, it’s improving as your [AOV] (ph) goes up and your cross-selling on these products. But how do you think about marketing spend in a softer environment? Do you slow down marketing? Are you a little bit more cautious on it? Do you step into marketing to keep demand higher? How do you think about that LTV to CAC in that environment? Thanks.

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, and those are the ones that 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. And we're seeing that too. We're seeing it just really, really take on. And for us, that's really healthy. The great thing about it is the toy and treat businesses offer to us really 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 on those other categories. And then to your -- and that dovetails into 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 that's available there, we probably have been too conservative on the cost of acquisition side. And everything is just starting to come together. The cross-selling into that the big pickup quarter-over-quarter in the gross margin, the retention holding up the AOV gain all that came together this quarter. And we're probably too conservative about the cost of acquisition. So it's in the pursuit of positive EBITDA. It's not going to be a case of us, reigning in the marketing spend. It'll probably go the other way where we push on it harder and try to grow it faster, because we feel so confident about taking those toy customers and making them food customers.

Great. Thanks so much.