BARK - NYSE

Good afternoon, and welcome to the BARK Fiscal Fourth Quarter and Full Year 2024 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions] I will now turn the call over to Mike Mougias, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to BARK's fiscal fourth quarter and full year 2024 earnings call. Joining me today are Matt Meeker, Co-Founder and Chief Executive Officer; and

Thanks, Mike, and good afternoon, everyone. Today's call marks a meaningful milestone for BARK. Just over two years ago, when I returned to the CEO role, the company was burning significant cash, had poor unit economics, a bloated organization, and did not have growth momentum. Today I'm proud to share that BARK is back. The team should be proud and I'm proud of them for putting BARK on a solid path to profitability as we improve margins through supply chain mix and organizational changes. Collectively, this has resulted in a strong balance sheet as we improve our working capital, while driving towards profitability. We're now positioned to accelerate growth supported by an A-plus senior management team. Let me dive a bit deeper into some of the specific business improvements over the past two years from fiscal 2022 to fiscal 2024. Gross margin improved by 600 basis points to 61.6% this year with notable gains in product quality and safety. Shipping and fulfillment expenses decreased by nearly 300 basis points with impressive improvements in delivery speed and accuracy. Collectively, that's a 900 basis point improvement in two years. On approximately $500 million in revenue, that's about $45 million of savings. All those improvements led to adjusted EBITDA improving by $47 million, from a loss of $57.8 million to a loss of $10.6 million, along with two quarters of positive adjusted EBITDA in fiscal 2024, including the most recent quarter. To strengthen our balance sheet, we cut our inventory balance by 45%, releasing $69 million of cash without impacting customer satisfaction. Free cashflow improved by over $190 million to a negative $2.8 million this year. We ended this year with $125 million of cash on hand, and that's after repurchasing $6 million of our own shares and $45 million of our long-term debt. Two years ago, we said getting to profitability would be our focus. We focused on improving our operating discipline and invested in great leaders like

Thanks, Matt, and good afternoon, everyone. I will start by providing additional color on our fourth quarter financial performance and then expand on Matt's comments regarding our outlook for fiscal 2025. Overall, we executed the strategy we laid out at the beginning of the year. We delivered healthy gross margin improvements, gained operating leverage in the P&L, and significantly reduced our inventory levels and cash burn. For fiscal 2025, we are focused on driving long-term top-line growth and now have the cost structure to enable it. Beginning at the top of the P&L, total fourth quarter revenue was $121.5 million, down 3.6% compared to last year. To put this in perspective, last quarter the toy industry in retail for dogs was down 10% year-over-year according to Nielsen data. So we're continuing to improve our execution relative to industry headwinds. From a segment perspective, direct-to-consumer revenue was $109.3 million, down 5.9%. The year-over-year decline in B2C revenue is primarily due to carrying fewer total box subscriptions into the current period. Total shipments in the quarter declined 3.3% to $3.5 million, while average order value was down roughly 2.5% to $31.25. Total commerce revenue was $12.1 million, up 21% compared to last year. The large uptick in this line is driven by incremental revenue from our new treat line in Target and PetSmart, along with Girl Scouts' revenues. Total revenue for the year was $490.2 million, down 8.4%. On a segment basis, B2C was down 7.5% to $436.4 million. As Matt mentioned, we face headwinds in our more discretionary toy category, particularly in the first half of the year. Nonetheless, we have been encouraged by our second half customer acquisition trends, and we'll look to build on this momentum in the quarters ahead. It is also worth reiterating that our consumables category, excluding consumables in our subscription boxes, grew nearly 30% to $20 million in fiscal 2024. This is encouraging and we expect this category to become an increasingly important revenue driver in the future. Moving on, commerce revenue was down 15% to $53.7 million. As I noted on our Q4 call last year, we expected softness in commerce in fiscal 2024 as our retail partners were focused on managing down their inventory levels and remain cautious throughout the year given the macroeconomic environment. And that's how the year played out. Nevertheless, we are excited to introduce our new treat line in over 2,400 doors nationwide and plan to broaden our retail offerings over the next 12 to 24 months. From a margin perspective, we delivered an impressive 580 basis points increase in our fourth quarter gross margin. DTC gross margins improved 590 basis points, while commerce gross margins improved 990 basis points in the quarter. For the full year, our consolidated gross margin was up 410 basis points to 61.6%, while DTC and commerce gross margins came in at 63.9% and 43.4% respectively, reflecting a 340 basis points and 730 basis point improvement respectively. We have made significant improvements in delivering productivity savings in our cost of goods. Looking ahead, we anticipate our consolidated gross margin to remain strong in fiscal 2025, driven by new vendor contracts on the consumable side of the business, although these will be partly offset by channel mix dynamics. Turning to G&A, shipping and fulfillment expense was down 6.6% to $33.6 million in the fourth quarter. For the full years, shipping and fulfillment expense was $139.8 million, down nearly 11% compared to last year. While lower order volume was responsible for some of the decline, we also drove efficiencies through our network. In Q4, we entered into new long-term agreements for both shipping and fulfillment, which will continue to bring meaningful benefits for FY 2025. Other G&A in the fourth quarter was down $2.9 million to $30.2 million and down $17.2 million for the full year to $128.6 million. The $17 million full year savings were driven by the two cost reduction initiatives we instituted in February and July, 2023. In fiscal 2025, we will have some run rate benefits from the July 2023 initiative. Furthermore, as we move all of our sites to the bark.co platform later this fiscal year, additional efficiencies will flow through the P&L. Total advertising and marketing expense was $18.8 million in the quarter and $79.3 million for the year. The full year figure represents a 14.7% increase compared to last year. As we discussed in previous calls, our improved profitability profile delivers stronger LTV from new subs and affords us more flexibility to invest in marketing to drive the top line. We will continue to balance this investment with profitability. However, we anticipate increasing our marketing spend in the current fiscal year, although not to the extent we did in fiscal 2024. This includes traditional marketing, as well as new initiatives such as BARK Air, where we'll be investing $1 million to $1.5 million in marketing this year. Moving on, we delivered fourth quarter adjusted EBITDA of $2.2 million, a $5.7 million improvement compared to last year. For the full year, adjusted EBITDA was negative $10.6 million and almost $21 million improvement compared to last year and $48 million better than two years ago, driven by our significant margin and cost improvements. We also reduced our total cash burn to just $2.8 million for the year and nearly $14 million improvement compared to last year and over $190 million better than fiscal 2022. The profit improvement has been a major component of this as is the reduction in our inventory levels, which ended the period at $84 million, reflecting a $14 million reduction to fiscal Q3 and a $40 million reduction during fiscal 2024. We ended the quarter with a total cash balance of $125 million. In addition to repurchasing $45 million via convertible note in Q3 ahead of schedule, the cash balance reflects purchasing $2 million of common stock in the fourth quarter and over $6 million throughout fiscal 2024. We ended the year with a cash position net of debt of approximately $86 million, which affords us ample opportunities to invest in growth, continue repurchasing shares, or pay down the balance of our convertible note. To that end, we also announced that our board of directors authorized a $15 million share repurchase program, which we plan to use opportunistically in the periods ahead. As we deliver year-over-year improvements in our profitability profile in fiscal 2025, this will allow for further flexibility in the future. On that note, let's turn to guidance, beginning with the fall year. Overall, we're seeing encouraging trends across several indicators. Year-over-year we've grown new place subscriptions for two consecutive quarters. In addition consumables are growing across the DTC channel, and our new cereal treats are available nationwide at Target and PetSmart. Like Matt said, it's early days, and we would like to err on the side of caution, particularly given our pay subscription business is more susceptible to macroeconomic trends. On that note, we anticipate total revenue of between $490 million and 500 million, reflecting year-over-year growth of flat to up 2% compared to fiscal 2024. From a profitability perspective, we currently expect an adjusted EBITDA range of $1 million to $5 million for the year, reflecting a strong improvement of between $12 million and $16 million year-over-year. This is a pivotal moment reflecting Mark's first year of profit delivery in our history. For the first quarter we expect total revenue between $113 million and $116 million. This reflects a year-over-year decline between 6.3% and 3.8%. The anticipated first quarter decline is primarily from carrying fewer total box subscriptions into the current period compared to Q1 last year, due to lacking our first half new subs performance last year. Nevertheless, on the back of our second half fiscal 2024 new subs performance, coupled with anticipated momentum building through fiscal 2025, we anticipate year-over-year growth in DTC in the second half of this year. From an adjusted EBITDA standpoint, we currently expect first quarter loss between $4 million and $2 million, reflecting a $4.4 million year-over-year improvement at the midpoint of that range. Relative to Q4 fiscal 2024, our profit is down $4 million to $6 million, driven by the top line, which is impacted mainly by commerce seasonality and partly from the promotions calendar in DTC in Q1. All in all, we are seeing encouraging trends across the business. We expect our top line to accelerate out of Q1, while our gross margins for DTC and commerce will continue to perform strongly. And segment profitability will largely show improvements over each quarter versus fiscal 2024. As I mentioned earlier, we also expect 2025 to be our first full year of adjusted EBITDA profitability. Improving approximately $60 million since fiscal 2022 demonstrates great progress in the financial health of the business over a relatively short period of time. And as our consumables category gains momentum, we believe there is a lot of ongoing growth potential across the P&L. In addition, our balance sheet is in a strong position. And so we will have ample opportunities to invest in growth and deliver long-term shareholder value. And with that, I will turn the call over to the operator for Q&A.

Thank you. We will now open the line for questions. Our first question comes from Ryan Meyers with Lake Street Capital Markets. Please go ahead.

Hey guys, thanks for taking my questions. First one for me, I'm serious the continued softness in the discretionary categories. I mean, is that largely what you have been expecting and there's really been no changes there? And then do you bake in any sort of improvements in those categories into the 2025 guidance?

Hey, Ryan. Thanks for the question. I think overall we're monitoring those macro trends and the signs. And maybe there's some positive signals that we're seeing, but I think for us it's a little too soon to call it an industry turnaround, given the past couple of years of significant pet food inflation and where does that go and maybe some uncertainty around like election and just the economy overall. As you may have heard from Chewy last week, they reported that calendar Q1 was the first time since 2022 that adoptions were greater than relinquishments within shelters. So that's a positive signal. On the flip side Nielsen's showing that dog toys and retail were down 10% in Q4, but relative to that, BARK toys were only down 1.5%. So, while we're still down, we're gaining some share there. We're taking all that factoring it into the year ahead and making the best assessment that we can. And maybe just to add to that a little bit because you're asking of how does that factor into the guidance. There's a -- obviously as I mentioned, the retail sales cycle is a long lead sales cycle. So adding someone as amazing as Michael Black, it's not going to pay off with big results this year because he could be the best salesperson in the world and you're never going to change the way Target or Walmart or any retailer runs their business. That's another way of saying, we have a lot of visibility for the year in that channel. It will be affected positively or negatively to some extent by the macro, but a lot of this is baked already.

Okay, got it. That's helpful. And then just thinking about sort of the cadence and seasonality. You said on the top line you expect revenue acceleration coming out of Q1, so I think that makes sense. But then on the EBITDA side, I mean, do you guys plan to follow kind of similar seasonality that you did here in 2024 as in investing more in marketing in Q3 and that's kind of how sort of the EBITDA will shake out. Just any commentary on kind of the cadence of the guidance would be helpful.

Hey Ryan, how you doing? This is

Got it. Thanks for taking my questions.

Our next question comes from Kaumil Gajrawala with Jefferies. Please go ahead. Kaumil Gajrawala, your line is now open.

Hey, sorry about that, guys. I was speaking to myself on mute. On guidance, can you maybe dig down a little bit further on your EBITDA guide is positive? Does that also mean free cash flow should be positive for the year?

Hey, Kaumil, how are you doing? This is

Okay, great. Yes, so nothing strange in the figures. It should be aligned.

Yeah.

I guess, Matt, you've been cautioning us at how quickly, or maybe cautioning us not be -- not to add revenue growth from some of the new retail opportunities too quickly. But what should be the incremental contribution maybe for that year 2026 when we're past the sort of shelf resets and that sort of thing.

I don't know that I have a numerical answer for you. I think I can give you sort of a directional answer in terms of activity. Again, we've got like new talent in the revenue driving side of the house and that gives us a full year of working with Michael and his team, developing products for that channel, and then taking those into retail and selling them. And we wouldn't have bet on him if we didn't feel very bullish about his ability to do that, given his background. In addition to that, this year with the treat line that we put into Target and PetSmart, we purposely put exclusivity in with those two so we'd have time to learn and get feedback from them and our customers and get the right assortment and learn how to market it so then we can take it out and get a much wider and more effective bang, if you will, across all retail channels. So that should help. And then hopefully we're expanding more into the…

Toppers and dental.

Yes, toppers and dental categories, but also from a channel perspective into the e-commerce side of things or the marketplace side, like an Amazon marketplace and including internationally. So I think those are some directional indicators of why we think this might accelerate significantly in 2016.

Yes, I mean, Kaumil, just on that point, this year commerce was about 11% of our revenue in fiscal 2024. We expect next year for it to be about 12% to 13% of our revenue. And then looking beyond fiscal 2026, over the next three years, we expect commerce to be about 30% to 35% of our business. So clearly that gives you a signal of the growth over those following couple of years.

Got it. That's useful. Thank you guys.

Our next question comes from Maria Ripps with Canaccord. Please go ahead.

Great. Thanks so much for taking my questions. First, I just wanted to follow up a little bit more on marketing spend. Can you maybe just talk about sort of how your incremental marketing spend performed in Q4? Are you still sort of seeing healthy ROI sort of efficiencies after some of the sort of restructuring or optimizing some of the marketing functions late last year? And I guess, can you just tell us again, how should we think about your marketing spend as we move through this year and as revenue returns to growth?

Yes, the good news is, what we started in Q3 last year continued right through Q4. It was very steady, very solid. Our number of new subscribers acquired was up significantly year-over-year. The quality of those subscribers, or all of them, are up significantly, reflected in our lifetime value being up. I think the opportunity to further improve our customer acquisition and our marketing overall again comes from our new CMO, Michael Parnas, joining the team. And in spite of these past two quarters being very strong in terms of customer acquisition and the payback that we're getting from those customers, our weakness that we know we have is that we are very focused on the bottom of the funnel or only direct response and digital tactics to acquire a customer. And that's just not good enough. That leaves a huge amount of opportunity when it comes to upper and mid funnel activity, creating awareness, working across all of our sales channels together, not having them siloed. So now we have a leader who's got great experience in two great companies in the pet industry over the last 12 years, joining the team, leading that function, taking that approach. And I think what we've seen with BARK Air in particular is a fairly modest investment, especially relative to what we spend on direct-to-consumer marketing, giving us this enormous outsized awareness benefit, shows that some smart investment in upper and mid funnel can have big gains for us and actually aid the bottom of funnel activity that we've got. So we've got some change there to do, we've got the right leader to do it, we just got to give them a little time to roll that through.

Got it. That's very helpful, Matt. Thank you. And then secondly, if I heard this right, I think as I heard you mention, you said that carrying a little bit fewer boxes in the quarter contributed to sort of slower DTC revenue growth. Just can you maybe talk about how you're thinking about sort of your inventory levels here, and especially as [indiscernible] worked towards returning your DTC business back to growth?

Sure. I think if we go back in time, we drove our inventory levels up during the -- around the time of COVID, supply constraints and concerns about supply continuity. And the reality is that, we overbuilt inventory. So what we've been doing over the last couple of years, and the supply chain team has done a great job of it, has managed down inventory levels over that period of time. Where we're at now, we're carrying a healthy level of inventory. We still see opportunities over the next 18 months to pair that inventory back further, but not anywhere near the extent that we've done in the rear view mirror. There'll be more modest incremental improvements but from a customer service level perspective and all of those metrics our inventory level is more than adequate and we carry appropriate levels of safety stocks.

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

Our final question comes from Ygal Arounian with Citigroup. Please go ahead.

Hey guys, good afternoon. You have [Max More] (ph) on for Ygal. I just want to maybe start off with the unified platform. You're expected to finish that this year. Maybe just help us walk through what's left to do there. And then understand it should help with the cross-selling by bringing the different brands out of the same platform. But are there other added benefits from going to the Shopify platform that you're expecting? Maybe better data or better ability to engage with marketing? And then maybe help us understand some of the cost benefits too from that?

Yes, thanks for the question Max. I think the most exciting thing when it comes to that is Meghan Knoll joining the team today to lead direct-to-consumer and she's the perfect person for it. We know that from her experience at BARK in the past and her learning as a CEO of direct-to-consumer brand over the past year and a half. So that's -- it'll be hers to lead us there. Maybe surprisingly the easy part of this or the easier part -- none of it's easy, but the easier part is the technical integration. The bigger thing that's -- I don't want to say standing in the way, but the bigger thing for us to accomplish here is that, we don't -- in moving our BarkBox and Super Chewer customers over, that we don't have deceleration in their activity, that we maintain our retention rate, which is very good. We maintain our add-to-box revenue, and that we're able to acquire the same number of customers at the same rate or better. And as soon as we have comps that look that we're comfortable with, then it's moving the full base of subscribers over. The benefits are, as you mentioned, certainly the cross-sell and up-sell opportunity. We're not limited -- there are so many ways we're not limited. We're not limited by the product set, the timing, when we can ship, having all of our products in a shared warehouse or shared fulfillment centers. There's so many ways that we benefit there. Another is from the marketing overall. And I was just talking about upper and mid funnel and driving awareness. Right now we go out in the world and we talk about our BARK product. That BARK product drives to barkbox.com or superchewer.com. Not one place. And so flash forward to a unified platform. There's one home. You might hear about BarkBox, but you come into a unified platform and you discover the full universe of all of our products at that place. So it gives -- it makes our marketing just a lot more both effective and efficient in doing that. Certainly some consolidation benefits with the team. But really it's something where we're very eager to get there. We just want to make sure that as we get there, the business is accelerating as we go into it.

Okay, great. Super helpful. And then maybe just get on BARK Air there a little bit. It looks like you guys might have filled out some flights, but I'm just curious on how this has kind of progressed compared to your expectations. And then maybe a bigger picture with -- it seems like the demand has been pretty good, or interest has been good. Now, how does this kind of change or impact your thoughts on expanding to other kind of services, tangentially related to dogs going forward?

Yeah, I think relatively the expectations, it has blown away our expectations. Or at least mine. We're just so encouraged and so grateful for the response that we've had and seeing it really everywhere and the notes we get from people about how meaningful it is to their lives, to their dogs. So it's a really, really special product, and you see that. And the nice thing is that, the bookings are following that, and you see a lot of opportunity that comes with it. When it comes to services that follow, I'd say at this point, we have a load of ideas and a lot of opportunities, but getting this one right -- we're not taking a victory lap at all. We've put four flights in the air. So there's a lot more work to do. We have to continue to make this a great experience then continue to make it a great business. And once we get that and we get some infrastructure built around it and we really know how to run the thing, then I think we can start talking about what's the next service that we pile on but we're not we're not close to that yet.

Awesome. Thanks. Super helpful.