BARK - NYSE

Good morning, good afternoon, and good evening. My name is Robert McArthur, I'll be your conference operator today. At this time, I'd like to welcome everyone to BARK's Fiscal First Quarter 2024 Conference Call. All lines will be mute to prevent any background noise. After the speakers' remarks there will be a questions-and-answers session. [Operator Instructions]. And now we'll turn the call over to Mike Mougias, Vice President, Investor Relations.

Good afternoon, everyone, and welcome to BARK's first quarter fiscal year 2024 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO; and

Thanks, Mike, and good afternoon, everyone. Our last call we discuss the substantial progress we've made an improving our unit economics strengthening the long-term financial health of our business. These efforts coupled with our continued expansion in the large camp categories by consumables and the progress we've made unify in our platform, made us a stronger and more dynamic company as we entered fiscal '24. I'm pleased to report that the year is off to a solid start. At a headline level, we delivered $121 million of total revenue and recorded a 280-basis point improvement in our gross margin, reaching 61% in the quarter. Our first quarter exceeding 60% as a public company. Our adjusted EBITDA loss was $7 million, a 43% improvement compared to last year and ahead of our guidance. All-in-all, the work we have done over the past 18 months is beginning to materialize in a notable way. We continue to expect to be in the neighborhood of breakeven adjusted EBITDA while also generating positive free cash flow for the full year. As a result, we're able to drive growth in a much more meaningful way. Going a level deeper on revenue, we generated $81 million from toys and $40 million from consumables. If we exclude revenue from our subscription boxes, our consumables category grew 39% year-over-year to over $5 million. And remember, this is prior to us generating any consumables revenue in the wholesale channel, which is where we expect meaningful gains in the future. Our confidence there comes from our partnering with virtually every major retailer in the U.S. expanding over 40,000 retail doors today. Simply put, we have the relationships and track record to introduce new products across the $40 billion plus consumables category. Furthermore, while we can't discuss specifics today, we are confident that BARK treats will be carried nationally in fiscal 2025 and possibly as early as the end of this fiscal year. This is exciting as it will contribute meaningfully to our top line, given these partnerships are typically large in nature. Moreover, it will help build awareness of BARK's presence in consumables, given the millions of people that will see our new treat offerings on a daily basis. Treats are also just the tip of the spear. In the spring of 2024, we intend to pitch our retail partners on our full consumables product line, including dental, toppers and food. In light of these opportunities, we expect our commerce segment to grow considerably over the next three to five years. We're often asked how this will affect our gross margin long-term, so let me address that directly. Our gross margin in the commerce segment is lower at roughly 40% compared to the 60% plus we enjoy on our direct-to-consumer business. So our retail expansion will have a drag on our consolidated gross margin long-term. However, remember that our commerce segment has far fewer costs by way of shipping and fulfillment and marketing. So from a contribution standpoint, commerce is in line, if not slightly higher than our direct-to-consumer margin when factoring in operating expenses. Put simply growth in our commerce segment will be an important driver of our long-term profitability. We are very excited about our opportunity in the $40 billion consumables category. Another opportunity is expanding our direct-to-consumer channel within our unified channel, which now features all of our consumables products alongside our huge toy subscription box products. I'm happy to announce this unified site, which can be found at shop.bark.co is growing rapidly. We are still improving and iterating, however our conversion rates on the new site have improved significantly and have remained consistently higher than our legacy box sites over the past few months. This is happening as we ramp up the advertising spend, which is leading to adding more new customers at highly efficient rates. This is great news and it underscores the need for us to invest more aggressively in pushing prospective customers to it. Furthermore, not only are customers on the new site converting at a higher rate, but they're also shopping across categories to a greater degree. Overall, I'm thrilled with how we've been able to diversify our direct-to-consumer business in a relatively short amount of time, shop.bark.co is the future of direct to consumer at BARK, and it's available to everyone today. In our core business on the toy side of the house, we've seen this category stabilize a bit over the last few months, but still experiencing headwinds. This is the case in both our direct-to-consumer and commerce segments, but we see signs of this improving, especially in retail. For example, inventory levels at our retail partners have come down to more normalized levels, and we are beginning to deliver new orders in the current quarter with more to come in fiscal Q3. Overall, we continue to expect growth in this category to be largely consistent with overall industry growth long-term. In our direct-to-consumer core channels, we continue to improve our cross-selling capabilities, which generated $10 million in revenue last quarter, and from an average order value standpoint, we saw an $0.82 increase compared to last year. On that note, we had two initiatives that impacted our AOV growth last quarter. First, we ran a really successful four 20 promotion whereby we lowered the base price of our cannabis theme box to $4.20. And second, we reduced the base price of super pure, as we saw the gross margin improvements coming and wanted to drive growth in box subscriptions. As a result, we do expect more moderate AOV growth in this channel in fiscal 2024 compared to last year. As we balance our margin expansion with our focus on driving long-term growth. Turning to gross margin last quarter, we achieved a fantastic gross margin of 61%, impressive 280 basis point improvement in our consolidated gross margin over the last year and our first quarter over 60% as a public company. Looking at our direct-to-consumer segment, our gross margin improved by 200 basis points to over 62%. These are notable improvements and we expect our gross margin to improve even further as the year progresses. Improvements like these power our drive for profitability and open up options for us to pass price breaks onto the customer in order to fuel growth. This is a great position to be in and we expect continuous improvement throughout the year. Furthermore, we are also becoming more efficient across our G&A lines. First shipping and fulfillment expense was 30.1% of revenue last quarter, a 130 basis point improvement compared to the same period last year. Between gross margin and shipping and fulfillment that's a 410 basis point improvement year-over-year. In addition, we've taken out approximately $19 million of annual headcount over the last few months. These are always difficult decisions. However, we believe that these initiatives will enable us to do more with less by becoming a simpler, more nimble organization. And we saw some of the benefits flow through the P&L this quarter. For example, other G&A as a percentage of revenue improved by 160 basis points to 27.5% with more improvements to come. Bringing all of that together, our adjusted EBITDA loss was $7 million, a 43% improvement compared to last year. Looking ahead, we anticipate our collective adjusted EBITDA over the next three quarters to be breakeven or better. We also reduced our cash burn by more than $8 million compared to Q1 last year, ending the quarter with $164 million in cash on hand. In the last nine months, we've generated $3 million in positive free cash flow. This presents us with many opportunities to put this cash to work, including paying down debt, buying back stock potential M&A opportunities, and enjoying the high rate of interest that we are collecting on that balance today. And while we don't expect significant revenue growth for the full year, we're confident that Q1 marked the bottom as we expect our top line to gain momentum subsequent quarters, particularly as we grow our consumables footprint across our direct-to-consumer and wholesale channels. Overall, I'm feeling very good about our position and the quarters ahead. Looking back, when I returned to the CEO role 18 months ago, we faced a number of challenges. In our pursuit of growth, we lost sight of our core vision and lacked the capital discipline that had been ingrained in the organization during my first 10 years running the company. In light of this, it was paramount that we prioritized returning to a simpler or nimble organization and stabilize our cash burn. During the course of fiscal 2023, we took decisive steps to simplify our supply chain, reducing vendors and leveraging our scale. We also improved our fulfillment network and streamlined our people needs. Collectively, these actions are benefiting our unit economics in a meaningful way. To help quantify all of this on a similar revenue base to last year, we expect to be in the neighborhood of breakeven adjusted EBITDA this year. This would reflect a $31 million improvement in 12 months and the nearly $60 million improvement in the last two years. In light of this progress, we can once again direct our focus for driving long-term growth. In conclusion, I'm very pleased with our progress, our new consumables products are growing at a healthy clip. Our gross margin is improving with each passing quarter, our unified platform is ramping up and we are quickly approaching breakeven adjusted EBITDA and sustainable free cash flow generation. And while we do not expect top line growth to be the standout this fiscal year, we do expect our top line to gain momentum from what we believe is the low point here in Q1. Furthermore, we have even greater confidence in our ability to deliver high single to load double-digit top line growth in fiscal '25, given all of our recent progress. With that, I will turn the call over to

Thanks, Matt, and good afternoon everyone. Having spent seven months in the CFO seat, I've gained a much deeper understanding of our business, and I've become increasingly optimistic about our long-term prospects with significant opportunities for market expansion in new and exciting categories like consumables. Importantly, these prospects can now be pursued with a profitability focus framework in place. To that end, our overarching focus over the past year has been improving our unit economics and establishing a solid foundation for long-term profitability. Clearly, we're seeing this come through in our recent results, which now enables us to begin redirecting our focus toward driving long-term top line growth, particularly in consumables where we have a massive runway both in D2C and retail. With that said, let's jump into our financial results for the quarter, which are playing out largely as we anticipated coming into the year. Beginning at the top of the P&L, we delivered total revenue of $120.6 million broadly in line with the low end of our guidance range. Total revenue was down 8% compared to last year, which was primarily driven by an 8% decline in total orders, partially offset by an $0.82 or approximately 3% increase in our average order value. It is worth noting while social orders were down, our customer base today is of a much higher quality compared to this point last year. Nonetheless, as we mentioned on our Q4 call, we expected revenue to be down year-over-year in the first half and then begin to gain momentum in the second half. So these dynamics were largely anticipated coming into fiscal '24. From a segment basis, we delivered 111.9 million of DTC revenue and 8.7 million of commerce revenue. Within our DTC segment approximately 64% of the revenue was derived from toys and accessories, while 36% of the revenue was driven by consumables. Moving on, we delivered 73 million of gross profit in the quarter versus 75.8 million last year. As Matt highlighted earlier, we achieved healthy margin expansion last quarter, and we expect this trend to continue throughout the year. Our consolidated gross margin was up 280 basis points while our DTC gross margin improved 200 basis points versus last year. For the full year, we continue to expect our consolidated gross margin to improve between 200 and 300 basis points. Where we fall in this range will come down to how much margin we choose to give back to customers to help drive top-line growth. Moving down the P&L, total G&A was 69.4 million in the first quarter down nearly 10 million compared to Q1 last year. Looking at our G&A line in more detail, shipping and fulfillment expense was 36.2 million, while other G&A was 33.2 million. Factoring in volume impacts shipping and fulfillment was down 130 basis points, and G&A was down 5.3 million, compared to Q1 last year. Reflecting the tangible progress we have made in reducing expenses throughout the P&L. As many of you're aware, we took out roughly 19 million of annualized other G&A expenses, primarily related to headcount costs through the two cost reduction initiatives that we announced earlier this year. To provide to more color on the announcement we made last month, we reduced our net headcount by approximately 8%, which is expected to generate roughly 7 million of annual savings. These are always difficult, challenging decisions. As Matt discussed, the organization has grown more complex over the last two years, and this initiative was largely aimed at simplifying our organizational structure, allowing us to become more efficient and nimble. It's also worth mentioning that this initiative was in the works during our fourth quarter call and was included in the adjusted EBITDA guidance we had previously provided. We anticipate that these initiatives will help bring us to the neighborhood of breakeven adjusted EBITDA for the year on a similar revenue base to FY '22 and FY '23. This would reflect a significant improvement from the 58 million and 31 million adjusted EBITDA losses we have recorded in those fiscal years, respectively. We also anticipate that operating as a leaner organization will allow us to gain greater leverage as we scale. Moving on our marketing expense for the quarter of 17.6 million, 1.3 million above last year. As I mentioned on the Q4 call, the progress we've made in improving the financial health of the business affords us the opportunity to invest more in areas like marketing, including driving more traffic to our new unified site, which as Matt mentioned, is converting at a very encouraging rate. Of course, we'll remain disciplined with respect to our marketing investment. However, we do expect this line to be up for the four-year compared to last year. And lastly, our adjusted EBITDA loss for 7.4 million, approximately 3 million better than the midpoint of our guidance range. We did benefit from some timing related items in the quarter and therefore do not expect all of the beat for this quarter to flow through to the full year. Compared to last year, adjusted EBITDA was $5.6 million better reflecting the significant strides we have taken to improve our unit economics and cost structure throughout the P&L. Let me turn to our balance sheet for a moment. As we articulated on our last call, we expected negative free cash flow for the first two quarters of FY '24, followed by a transition to positive cash flow for the second half and for the full year. And while we're still early into the fiscal year, this is largely how we see it playing out. During the first quarter, free cash flow was negative $14 million resulting in a quarter end cash balance of $164 million. About half of the $14 million outflow was timing related. As our accounts payable balance run up in Q4 and came down in fiscal Q1. On the inventory front, we reduced our balance by an additional $12 million versus the fourth quarter. Overall, we've been very pleased with our ability to consistently reduce inventory levels, which in turn has lowered logistics costs while also freeing up working capital. To put this progress in perspective, our total inventory is down nearly $50 million from its peak in Q2 of fiscal '23, and we continue to expect further progress during the remainder of the year. Let me now turn to guidance for the second quarter and full year. Starting with the full year, we are reiterating the top and bottom-line guidance we had originally provided on our fiscal fourth quarter call. From a revenue standpoint, we expect total revenue to be flat to down 5% compared to fiscal '23. The bookends of this range are essentially where we landed in FY '22 and FY '23. However, we expect significant profitability improvements compared to the prior two years. From an adjusted EBITDA standpoint, we expect to be in the range of negative $8 million to positive $2 million for the full year. Beyond FY '24, we expect to deliver high single to low double-digit revenue growth in FY '25. As we continue to make progress in growing our consumables footprint in both D2C and retail channels. For this year's fiscal second quarter, we expect total revenue of $123 million to $127 million. The midpoint of this range would reflect a year-over-year decline of around 13%. Part of the decrease is D2C, while for commerce, we are comping a significant pull forward of revenue associated with a holiday period in Q2 last year, which inflated our top line in the quarter. This year, we expect more evenly distributed commerce revenue between the second and third quarters. From an adjusted EBITDA standpoint, we currently expect an adjusted EBITDA loss of $3 million to $1 million, the midpoint of which would be in line with our EBITDA loss for the year. Despite the difficult top line comp, which again benefited from the holiday commerce fall forward last year. In conclusion, fiscal '24 is off to a strong start. We continue to see step change improvements in our unit economics, A trend we expect to continue as a year progresses. And while we face difficult top line comps in the first half, we expect our top line to gain momentum as we enter the second half, particularly as our consumables product lines gain traction across our D2C and retail channels. Overall, we've made a lot of progress in this area and there are a number of sightings things in the pipeline that give us confidence in our ability to return to growth and growth, which will be supported by a much more profitable infrastructure. With that, I'll turn the call over to the operator for Q&A.

Thank you for that. Ladies and gentlemen, we're going to transition into our Q&A session of today's call. And your first question comes from the line of Maria Ripps from Canaccord.

First, could you maybe just talk about your assumptions behind your Q2 guidance, sort of what kind of consumer engagement you're seeing on the platform, if you exclude the pull forward from last year and the comp. And can you maybe just expand on some of the growth drivers that you're assuming for the second half of this year?

Sure. So, you mentioned in the question there's the retail comp to last year where we had the big pull forward. So that takes care of the retail side. On the drivers for the second quarter, it is this continued rotation away from the core or the legacy platforms that we have onto the unified platform. And as I mentioned, uh, now all of our products are [email protected]. The conversion rates and performance there are very strong and improving month by month. So we're very encouraged by it. And it is more consumables heavy almost exclusively consumables up until recently. So there's a different dynamic to it and it's just rotating into that and building the customer base on that site as we maintain the core platforms. So we're going to continue that rotation through for the rest of the year and then rotate out of those core sites probably sometime next year.

And then I just wanted to ask you about your food business. Can you maybe just talk about sort of the second slate of breeds that you introduced sort of last year. and at this point, what are you actively investing in as it pertains to that segment of your business? Is it sort of investing, sort of expanding your existing breeds or working towards rolling out more breeds or just maybe talk about that a little bit?

Expanding more with the existing, but also viewing the customer more holistically. And again, everything's centered around that bark.co platform where we're trying to have every customer engage with a wider set of products. So one of the reasons for going to the unified platform is that in our core platforms, there's really the opportunity to only engage with a single product at a time. You can't have 1.2 items per order. You can only have one item per order. So we're trying to have the customer engage with more products and doing so quite successfully. Thereby raising the average order value, food being one of those and have recurring relationships as often as we can or whenever it makes sense. So thereby stretching out the lifetime value of that customer or the life of that customer. Just to give you an example, we love a customer who comes in, subscribes to a BarkBox, also puts food in their cart, subscribe and save on that, and throws toppers in just as a one-off purchase. That customer might normally last with a BarkBox for 15 months and churn, but now because they've got food in the basket, they're going to extend out several more months or years beyond. And we have the ability to add things to their shipments as they're coming, like the toppers we know their daughter already enjoyed or treats or new products. That's the perfect customer and that's the profile we're developing. So the food is obviously an important component of it, but it's only one component of the whole mix.

Your next caller comes from the line of Ryan Meyers from Lake Street Capital Markets.

First one for me, just wondering if you can highlight what you guys are doing to currently market the consumables business? Then on top of that, the new shop.bark.co platform and kind of how you've seen customers respond to that?

Well, the marketing of consumables and the marketing of the shop.bark.co platform are very tightly coupled today because that is the main place where we are selling all of our consumables, until they start to hit retail channels. Hopefully later this fiscal year or definitely next year. So those two are coupled tightly together. Up until very recently, up until I'd say like through the end of June, we were doing very little outbound marketing or media spend against that platform and promoting those individual consumable products mainly pulling from our installed user base on the core or legacy side of our business. We were doing that in order to constantly learn and test and optimize and improve our conversion rates and get the behavior of that customer where we wanted it to be. We accomplished that we saw enough of a trend that we felt it was permanent and therefore the media spend starting in July has really ramped up. It's, as you might expect with us in the early days here, it's a lot of digital, it's a lot of direct response, social media search, that type of thing. But we're going to add much more to that mix, as we go forward. But that's the start of it right now and super encouraged by what we've seen in terms of the results.

And then can you talk a little bit about how you are prioritizing the use of cash? You talked about paying back debt, maybe going into some buybacks and then M&A, just some more color there would be helpful?

Hi, Ryan. So the great news is that at the very least we're earning about 5% interest today on the existing cash balance. But that said, there are likely higher returns we can generate by putting some of that to use elsewhere. So our first preference is taking out our debt. So we have convertible notes that mature in 2025. To the extent we're able to take those out at some meaningful discount, that would make a lot of sense. But it would have to be a meaningful discount given the strong interest rate we're earning on our cash at present. We continue to think also that our stock is undervalued and so if we're unable to reach a favorable agreement on the debt. Our next best opportunities to use some of our cash for a buyback program. Obviously, that's within the constraints of our debt agreement. And then, those options aren't mutually exclusive given our strong balance sheet. We could choose to take out some or all of the convertible and buyback shares and still have plenty of cash on hand to run the business.

Your next question comes from the line of Ygal Arounian from Citigroup.

I guess looking at the consumables business, it's a really interesting growth opportunity. I guess could you kind of a multi partner. Could you tell us like where you are with the investment side? Like do you think you have to do more on the food business and the treat side to get into retail? What's the sales cycles to get in there? I think you maybe by the end of the year, but I guess what's the process to get into retail, that retail source of those? And then longer term, how do you see this impacting the mix of the business and the unit economics? As I believe, the retail segment has lower gross margins than DTC?

The consumables area in terms of a lot of the prep work that you're talking about, is something we've been investing in for certainly the past year and a half since I've returned the business. And you start with the base product development of the actual consumable itself, the treat, the topper, the food in the bag or the dental product. And we've got a really strong product development team, who have great backgrounds and just a lot of experience in this area. They've both moved our offerings forward in a material way, but also simplified it. And now we've restructured all of our, our agreements with a few key suppliers on that side. Bringing our costs down on a unit basis in a pretty material way as well. So that's to say we've done the hard work of getting the products developed really well, got the right partners lined up the right cost structure lined up. And on the retail side, a big push for us was, well, a push was a pull, our retail partners where we were being very successful with our toy business. They were pulling us and saying, can you please bring fun to our tree aisle? Can you please bring the fun to consumables? So that was encouraging for us, and I would say fueled our enthusiasm and development around that. And we did that with the idea of going to those same partners this past spring, pitching them on what we'd come up with to bring fun to their aisles and started those pitches. Like I said, in the spring, March, April, our feeling is that the response we've had is very encouraging. We're pretty happy with the response in the back and forth. So, like we said in the script, there's nothing official to report today, but I'd say we feel, we feel very, very strong about where we stand on that. So at this point, it's hopefully some positive news, a sign off, some purchase orders, and then, if all goes according to plan, you would hit shelves in the spring of next year. Did I cover everything that you asked there? I'm sorry if I forgot something.

And then longer term, how should we think about like, the mix between the retail and DTC businesses with this best.

Yes. So right now the mix has consistently been about 12% of our revenue from the wholesale channel versus direct-to-consumer. When we set out our five-year plan or vision at as we entered this fiscal year, we signal that what we would like to do is, take that up to as much as tripling that. So, call it mid-thirties, even low forties percent of our business on the wholesale channel. And that would be powered by consumables, bringing the, that's a major, major market opportunity, over $40 billion of consumer spending there. And a lot of that, obviously through the wholesale or retail channel versus our toy business only being 3 billion. So we've demonstrated the success in the toy business through that channel. We've got the consumable products lined up. We feel like the margins are in a great place for success. We started the conversations and, so if we've done our job well, you'd see a big evolution, away from or towards consumables going from about 30% of our total revenue last year to more than half or over the next five years. And the wholesale channel going from 12% to say mid-thirties percentage over the next three to five years as well.

And then just one quick on the macro, what are you guys seeing with the consumer discretionary spending, maybe just holding up a little bit than expected, but still kind of under pressure? And then if there's any difference between like the DTC and the retail segments?

Yes. I think you described it well there where, we're starting to see our retail partners taking more inventory. So that's a positive sign for us. And we sort of expected that we had that pull forward a year ago in the second quarter for us. And then quite the slowdown and the headwinds, and now we're starting to see that loosen up a bit as our partners clear their inventory. On the direct side, the retention on our new customers and our cohorts look fantastic, as good as they ever have looked, if not the best they've ever looked. So very, very strong on retention. Certainly headwinds in acquiring new customers there, on the direct side, relative to the toy or subscription box business. But that's really the only headwind and even that we're starting to see, loosen up a little bit. So, I think the way you described it at the top was pretty spot on.

And our final call today comes from the line of Max Rakhlenko from TD Cowen.

So I know it's early, but you've spoken a bit about a framework for fiscal '25 revenue growth, so I was hoping if you could speak maybe directionally to how growth could look by channel, next year. And then just the key puts and takes that could get you to the low versus the high-end guidance?

Hey Rob, how's it going? So, in terms of the general direction as Max said, in terms of our revenue profile this year, D2C is about 88%, commerce is 12% of our business. And then looking at the product breakdown, you have 70% toys and other, and around 30% consumables. As we start to see consumables in retail exiting this year and then going network wide with a couple of customers during 2025, and then branching out to other customers during the course of the year. As well as introducing new product lines like dental products and start to introduce cable as well into retail. We expect retail to have a meaningful step-up next year and probably grow the majority of that high-single-digit, double-digit growth that we're expecting on our top-line. As we continue to invest in our unified platform, we expect consumables to drive growth there as well. So, majority of our growth on that high-single-digit, double-digit overall top-line coming from retail, but with strong performance also on the DTC side.

And then as we think about EBITDA margin expansion over the longer term. What are the top opportunities within G&A to run more efficiently and improve the cost structure? And then where do you think G&A as a percent of sales needs to go in order for you to reach your longer-term profitability targets?

Maybe start this one, maybe

So a couple of things. One within our G&A obviously we have shipping and fulfillment in there as well. We've made great progress on that over the last 12 to 15 months. We continue to see improvements over the course of this year and going into next year. Just to give you a sense of that, we're reducing our warehouse footprint. We're consolidating the number of third-party service providers as well. And both of those are just driving efficiencies in carrier rates better network planning for us and just reduced overall costs on shipping and fulfillment. So we expect that to continue going into 2025. And then just to Matt's point on other G&A, obviously we've taken the two measures that we have recently, so we feel good about where we're at overall from the other G&A perspective. We'll look at opportunities in some areas of spend, like consultancy spend, professional services and so forth. But a lot of the upside, I think, on other G&A now comes from scaling the top line. We've got a strong base there that we can now scale.