BARK, Inc. (NYSE:BARK) Q2 2024 Earnings Call Transcript

BARK, Inc. (NYSE:BARK) Q2 2024 Earnings Call Transcript November 8, 2023

BARK, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.03.

Operator: Ladies and gentlemen, good afternoon. My name is Abby and I’ll be your conference operator today. At this time, I would like to welcome everyone to BARK’s Second Quarter Fiscal 2024 Earnings Conference Call. Today’s call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the conference over to Mike Mougias, Vice President of Investor Relations. You may begin.

Mike Mougias: Good afternoon, everyone and welcome to BARK’s second quarter fiscal year 2024 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO and Zahir Ibrahim, Chief Financial Officer. 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 with 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.

Matt Meeker: Thanks, Mike and good afternoon everyone. Our second quarter results highlight the significant progress we continue to make in improving our long-term profitability outlook. Last quarter, we delivered positive adjusted EBITDA of $1 million, surpassing our guidance range and marking our first positive EBITDA quarter as a public company. We also achieved another period of positive free cash flow, which came in at just under $1 million. On a trailing 12-month basis, we have delivered positive free cash flow of approximately $4 million. When I returned to BARK, we faced a lot of skepticism. We heard that we would never reach profitability that we were going to run out of cash within a year or if we did generate cash, we couldn’t do so consistently.

Sitting here today with our first adjusted EBITDA positive quarter behind us and positive free cash flow generation on a trailing 12-month basis, I’m thrilled with the progress we’ve made. One EBITDA positive quarter is the first step to one EBITDA positive year, and that’s what’s next for us. In fact, our confidence in our profitability outlook has grown to such an extent that earlier this week, we paid down $45 million of a face amount of our convertible notes early. This decision improved our net cash position by nearly $3 million and saved over $5 million of interest over the remaining term of the note. Overall, we believe our capital structure is stronger as a result. At a recent conference, I shared a quote from an analyst that summarizes the approach I’ve taken to grow BARK since returning to the CEO role 22 months ago.

Growth without profit is a waste of time. Profit without growth is a matter of time. Profit has been our focus, and as our recent results indicate we’ve come a long way. This has meant shedding on profitable revenue streams in lieu of building a profitable business. However, it’s from that foundation that we can now really focus on returning to profitable top line growth. With that said, there is no denying that the growth environment today is challenging. Not just for BARK, but also for our pet and direct-to-consumer peers. In pet, in particular, households with dogs declined by three million last year, and we anticipate another decline this year. We are essentially returning to pre-pandemic levels, and the discretionary spend is extra challenging, especially in toys.

Nielsen data through October shows the dog toy industry is down 10% this fiscal year. The reality is it’s challenging and will continue to be in the near term. But regardless of those macro challenges, we need to continue to execute against our strategic initiatives to grow our profit in addition to delivering more efficiency opportunities, and there are more. I’ll touch on this more in a moment, but first, let’s talk about our results last quarter. Starting at the top of the P&L, we delivered total revenue of $123 million, meeting our guidance for the quarter. On the DTC side, our core toy subscription business continued to feel the macro headwinds, particularly from a customer acquisition standpoint. However, despite that, we’ve seen some encouraging progress recently as new customer acquisition has been up progressively since May.

It’s not where we want it to be yet, but we’re improving rapidly in a tough environment. While that’s a challenge, our customer retention rates last quarter were at the highest level since going public. And our average order value remains strong at over $31. So, when we bring new customers onto our platform, they are staying longer and spending a lot with us. When we laid out our strategic priorities at the beginning of the year, we talked about, one, moving towards a consolidated DTC experience, two, turning more of our focus to consumables and three, selling those consumable products in retail. Let’s touch on the recent progress we’ve made across each of those initiatives. On the consolidated DTC experience, I’m happy to report that our new site URL is now just BARK.co, and the site is making good progress.

Having all our products under one domain has improved our ability to convert customers and cross-sell them across our product portfolio, and we’re now able to direct them to a much simpler and more effective domain. Specifically, where we faced headwinds on our toy and toy and treat subscription product lines, if we look at consumables revenue outside of what’s included in our box subscription products, we generated just over $5 million of revenue last quarter, up 20% versus last year. This is largely from BARK.co picking up steam. On expanding more into retail. Last quarter, we delivered $19 million of commerce revenue. We were also able to bring new retail partners and countries into the mix. BARK toys are now in all 450 pet at home stores in the U.K. We’ve also begun to expand beyond just toys and retail.

We recently partnered with the Girl Scouts where we are selling co-branded products through their online platform. This pilot program went exceptionally well, and we ended up meaningfully increasing our commitment as products sold out much faster than expected. Longer term, we have an opportunity to significantly expand this partnership and become the first brand partner to participate in the Girl Scouts larger sales channels. This represents not only a massive revenue opportunity but also a new product category for those channels. Furthermore, we recently began selling our Treat advent calendar through certain Costco stores in the U.S. and the initial feedback has been very strong. In fact, we’ve already been approached by other retail partners interested in selling our Advent calendar next holiday season.

And finally, as we announced last month, I’m thrilled to share that we received our first commitment from a leading retailer in the U.S. to begin selling our treats across over 1,000 doors in the spring of 2024. As we’ve discussed throughout the year, introducing consumables in our retail channel is a huge opportunity, and we’ve made tangible progress over the past several months. And while this recent progress will not have a significant impact on our top line this year, we plan to build on this momentum and continue to anticipate the Commerce segment to represent around 30% of our total revenue over the next four to five years. Moving down the P&L. When I returned to CEO, one of the biggest opportunities for reaching profitability was bringing discipline to our unit economics and the gross margin line.

Last quarter, we delivered healthy improvements in gross margin yet again. Our consolidated gross margin came in at 61.5%, nearly 100 basis points higher on a sequential basis and 560 basis points higher than Q2 last year. On the DTC side of the business, our gross margin came in at approximately 65% last quarter, a 400 basis point improvement year-over-year and up 270 basis points versus the first quarter. Overall, we’ve been very pleased with our ability to materially improve our margin profile in a relatively short period of time. Moreover, we expect this trend to continue through FY 2024 and beyond. And finally, we delivered $1 million of adjusted EBITDA in fiscal Q2, our first positive quarter since going public over two years ago. And though we don’t expect positive EBITDA in the current quarter as we invest more heavily in growth during the peak holiday period, we do believe that fiscal Q4 will also be positive on an adjusted EBITDA basis.

Overall, our top priorities remain. These priorities are to fulfill our mission to make all dogs happy, execute our strategic initiatives and continue to deliver on the path to sustainable profitability. To that end, we expect ongoing improvements in our gross margin line well into fiscal 2025, we also believe there are additional areas where we can reduce expenses in shipping and fulfillment as well as G&A. In short, we expect to continue to deliver healthy year-over-year improvements in profitability going forward. And success here will better enable us to fulfill our mission to make all dogs happy. Overall, we have many exciting things happening and coming to market soon. While we continue to expect toys to face challenges in this environment, we anticipate our newer consumables products to grow at a healthy clip in both DTC and retail, which is in line with our strategy.

This growth, coupled with our continued efforts to reduce costs, improve margins and deliver operating leverage on our cost structure is expected to have meaningful benefits to our bottom line and free cash flow generation with each passing quarter and ending last quarter with over $160 million of cash on hand and a business that just turned in its first EBITDA positive quarter and its free cash flow positive over the railing 12 months, we believe we’re in a strong position for the long-term. And with that, I will turn it over to Zahir.

Zahir Ibrahim: Thanks, Matt, and good afternoon, everyone. I’ll begin today’s call with an overview of our second quarter results, along with some recent balance sheet developments, followed by our outlook for the remainder of fiscal 2024. Beginning at the top of the P&L, we generated total revenue of $123 million, which came in at the low-end of our guidance range. Looking at that revenue in more detail, we generated $104 million of revenue in our B2C segment, which was down 11% versus last year. The year-over-year decline in DTC revenue was primarily driven by a 9% decline in total orders and a 2.6% or $0.84 decline in average order value. Overall, the macro environment has had the biggest impact on our subscription box products.

And though we continue to expect year-over-year revenue declines in FY ‘24 in the box products, we are seeing signs of improvement from a customer acquisition and retention standpoint, as Matt shared earlier. From a category mix standpoint, we generated $67 million of toys in the quarter, down 12%, while consumables revenue of $37 million was down 9%. It is worth noting the majority of our consumables revenue today is derived from our subscription box products. So, the recent declines there are impacting our overall consumables mix. If we just look at consumables revenue derived outside of subscription box revenue, we generated $5 million of consumables revenue last quarter, which was up 20% compared to last year. And although this revenue is relatively small today, we continue to see good growth across these categories and expect that trend to continue going forward.

Turning to our Commerce segment. We generated roughly $19 million of revenue last quarter, which was down 29% compared to last year. Remember, our commerce revenue in the period last year was inflated as we saw a sizable pull forward of holiday-related orders from several retail partners. This year, we expected our commerce mix to be more evenly distributed between fiscal Q2 and Q3. And so, the year-over-year commerce comparisons are less meaningful across this segment. It is also worth noting that our retail partners are also experiencing headwinds in discretionary categories like toys. And therefore, we do expect lighter commerce revenue this year as a result. With that said, we have made a lot of important progress introducing new products like treats into retail and expect this segment to grow in fiscal 2025 as a result.

Moving down the P&L. Our consolidated gross margin improved 560 basis points to 61.5%, our strongest gross margin quarter as a public company. The only other time we delivered gross margins over 60% since going public was Q1 of this fiscal year. So, momentum is building, and we anticipate further improvements in our gross margins going forward as the new inventory we are bringing in today has stronger unit economics on a like-for-like basis. Total B2C gross margin improved 400 basis points to 64.9%, while commerce gross margins improved 930 basis points to 42.5%. Again, our commerce segment last year was impacted by the pull forward I mentioned earlier. So, the year-over-year comps on our apples-to-apples. Regardless, we expect year-over-year margin improvements in both segments in fiscal 2024 compared to fiscal 2023.

Moving on total G&A expense was $68.9 million, down $5.2 million versus last year. Within G&A, shipping and fulfillment was $34.5 million, down $4.1 million due to lower volumes, while other G&A was down $1.1 million to $34.5 million. Note, G&A this quarter included certain nonrecurring charges primarily related to a non-cash impairment charge of $3 million related to a previously capitalized software costs and $1.4 million of costs stemming from the July reduction in force. Adjusting for these add-backs, other G&A was nearly $6 million lower than last year, reflecting the considerable improvements we have made in our organization and cost structure. While the year-over-year declines in G&A are encouraging, we believe there are additional opportunities to deliver further improvements in both of these line items in the future.

Total sales and marketing expense was $17.8 million in the quarter, up $2.5 million compared to last year. As we discussed coming into the year, the progress we have 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 bark.co site. Regardless, we will remain disciplined with respect to our marketing investment and will pay back this investment if we’re not seeing adequate returns. And finally, we delivered $1 million of adjusted EBITDA ahead of the top end of our guidance range and our first positive EBITDA quarter as a public company. This is an important milestone, and we expect positive adjusted EBITDA quarters to become a more regular occurrence moving forward, given all the progress we’ve discussed on today’s call.

And before I turn to our outlook for the remainder of the year, let me touch upon some balance sheet and cash flow items. Last quarter, we reduced our inventory balance by $3 million from our fiscal Q1 and ending the period with a total balance of $109 million. All-in-all, we’ve made a lot of progress on this front over the last 12 months, reducing inventory by over $50 million during that time, and we believe there are opportunities to further reduce this balance in fiscal 2024 and into fiscal 2025. From a free cash flow standpoint, we generated $1 million of positive free cash flow in the quarter. Looking back over the past 12 months, we have achieved positive free cash flow in three out of the past four quarters and expect more to come.

Sitting here today, we believe that we have more than enough capital on hand to run the business. And therefore, we have been exploring potential uses of cash that we believe will provide an attractive return and create shareholder value in the long run. On that note, we repurchased 2.8 million shares last quarter at an average cost of $1.49 per share. The resulting spend in the quarter was $4.1 million. And while the average cost is above where the shares are trading to date, we continue to see a lot of value in our shares at these levels, particularly given the significant progress that we have made from a profitability standpoint. Moreover, we repurchased $45 million or approximately 53% of the outstanding principal amount of our convertible notes at a 6% discount to par value this week.

As a result, we increased our net cash, which we define as cash, less our outstanding convertible debt by approximately $3 million, and we will also save $5 million in interest over the remaining life of the notes. Following this transaction, we have roughly $131 million of cash on the balance sheet and $38.5 million of outstanding debt related to the remaining convertible balance. Note, we will accrue roughly $2 million of annual interest on December 1. And so come Q3, the note balance you will see will be around $40.6 million. Overall, we believe our capital structure is stronger as a result, and this transaction is a testament of our confidence in our future free cash flow generation. It is worth mentioning our share buyback capacity is limited as a percentage of the outstanding principal amount of our convertible notes each calendar year.

Okay. Let’s now turn to guidance for the fiscal third quarter and full year. Starting with the full year, we anticipate the current macro headwinds to continue to impact our more discretionary toy products across both B2C and commerce channels. As a result of this, we are taking a more cautious approach to our top line guidance and lowering the overall range. We currently expect total revenue to be down between 8% and 11% year-over-year versus our previous guidance range of flat to down 5%. Again, this revision largely reflects the headwinds that the overall toy category is experiencing and our view that the environment will remain challenging for the foreseeable future. From an adjusted EBITDA standpoint, we now expect to have full year loss of between $6 million and $12 million versus our previous guidance of positive $2 million to minus $8 million.

While our EBITDA range has come down slightly, the midpoint of $9 million would reflect a significant improvement from the $31 million loss we recorded last year and the $58 million loss we recorded in Fiscal 2022. Moreover, we expect year-over-year improvements in adjusted EBITDA moving forward. Turning to our guidance for fiscal Q3. We currently expect total revenue between $123 million and $119 million. From an adjusted EBITDA standpoint, we expect between negative $5 million and negative $8 million. Similar to prior years, we invest more heavily in growth during the holiday quarter and expect that trend to continue this quarter. This adjusted EBITDA guidance will imply a positive fiscal Q4, which would mark our second quarter of positive adjusted EBITDA since can public, we expect to improve on this in FY 2025.

In conclusion, we continue to see step change improvements in our unit economics, a trend we anticipate to continue through fiscal 2024 and beyond. And while we continue to face headwinds on the top line, we expect to gain momentum as we enter fiscal 2025 on the back of our consumables business. At the end of the day, we have plenty of cash and a business that is turning the corner on consistently generating positive free cash flow. There is no denying that the environment has been challenging. However, we are very confident in our ability to continue to deliver healthy year-over-year improvements in profitability. Overall, we believe we are in a solid position to capitalize on promising trends in our new consumables categories and also expect the toy side of the business to improve as macro headwinds subside over time.

With that, I’ll turn the call over to the operator for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we will take our first question from Maria Ripps with Canaccord Genuity. Your line is open.

Maria Ripps: Good afternoon. And thanks for taking my questions. First, sort of understanding the macro pressure you’re facing for your core discretionary toys business, but sort of given the strength of the platform and direct relationships with consumers you have there, can you maybe just talk about some of the strategies that you perhaps pursue maybe more discounting pricing, maybe lower-priced products or something else to try to keep sort of the wallet share there? And then secondly, could you maybe expand a little bit more on the consumables segment? Are you seeing any macro pressures impact in that segment as well? And at what point would you expect that to become sort of a little bit more meaningful contributor to offset some of the headwinds in the toys business.

Matt Meeker: Hi, Maria, thank you. Thanks for those questions. So, on your first question there, the macro pressure that we’re experiencing in the toy industry, first, it’s the degree that we’re experiencing is largely in line with the broader industry overall. It’s extending across both our direct-to-consumer and our retailer commerce segments pretty equally. And most of that pressure or maybe all of that pressure for us is felt in new customer acquisition. When it comes to keeping the wallet share, expanding the wallet share or expanding the lifetime value of that customer, as I mentioned, our retention has progressively improved throughout this year and last year. And this was likely, I’ll say, one of our strongest, if not the strongest quarter we’ve seen in terms of retention on those core toy subscription businesses and our average order value being over $31, those are the positive signals, which to us is indicating that when we acquire a customer, we’ve learned over the full 12 years how to make them very valuable, very sticky, and we’re getting better and better value from them at a higher margin now.

So, we haven’t seen the need to deploy discounting or other tactics to improve that other than running the playbook that’s successful for us for the past decade and rather using those discounts and those enticements for bringing new customers onto the platform. On the consumable side, what we expect is sort of in-line with the strategy we put out at the beginning of the year, and we continue to work through, which is expand into all consumable categories. For us, that’s treats, kibble, toppers and dental and with a real focus on the retailer commerce channel. And the good news we have today is that we have that commitment for a national retailer to feature our first meaningful treat line seven SKUs beginning in fiscal Q4 here. So, in the quarter ahead.

And we’re really excited about that progress. We think there’s more on the heels of that, but we’re not in a position to announce it formally. So, we’re kind of right on schedule with that. As you know, those things are longer lead time. We develop the products, we sell it. We make our sales pitch typically in the spring. We hear back around this time. Everything is right on track. And our direct-to-consumer channel when it comes to consumables, specifically BARK.co, is playing the role that it’s always played with our toy business of letting us try different things with how we position our consumable products, different packaging, different pricing and getting those signals from the customer that we can then sell the results to our retail partners.

So, we’re making good progress on BARK.co and in those categories in our learning and in our sales to retail partners.

Maria Ripps: Got it. Thanks so much for the color, Matt.

Operator: And we will take our next question from Ryan Meyers with Lake Street Capital Markets. Your line is open.

Ryan Meyers: Hey, guys. Thanks for taking my questions. First one for me. So, it sounds like you said Q4 EBITDA will be profitable. So just kind of walk me through what you expect to see here in Q3? Because I think if I remember back in the last couple of calls, we kind of expected adjusted EBITDA profitability in the second half of the year. Is there just kind of some seasonally high marketing spend as we head into the holiday season? Just kind of any sort of color on that would be helpful.

Zahir Ibrahim: Hey, Ryan, how are you doing? So yes, you’ve hit them that on the head. So Q3 for us is a seasonally high demand quarter. And also from a marketing perspective, we invest to drive new subs as well as just overall performance to the site. And so, it’s one of our highest quarters from a revenue perspective, but it’s also the highest quarter from a marketing perspective. And that impacts the profitability. If you look at our guidance range for Q3, EBITDA is at minus 5% to minus 8%. If you take us at the midpoint of that, we’ll be about $6 million better than Q3 last year. So, we feel the business is getting great traction from a profitability perspective and moving in the right direction. And because of that traction, as you think about Q4, we’ll be able to post a positive EBITDA along the lines of what we posted in Q2, but I’d expect continued improvement in some of the measures like gross margin as we have new contracts coming into play on the consumable side.

So, we’ll have stronger margin performance, equally strong performance through some of the other line items to post positive EBIT in Q4.

Ryan Meyers: Got it. And then if we think back to the commentary that you guys gave last quarter about the high single to low double-digit revenue growth for FY 2025. Obviously, you guys updated the guidance today. Just wondering how we should potentially think about that commentary you guys gave last quarter and how that relates to the FY 2025?

Zahir Ibrahim: Yes. So, I think just in line with some of the comments Matt just shared, while it’s a challenging environment, we continue to believe that we’ll deliver profitability improvements regardless of where we land from an FY ‘25 growth perspective. When you look at the top line, you step back for a moment and look at the category overall. So, the pet category has grown over the past 12 months. A lot of that on the food side is driven not by volume or units driving the growth, but it’s price inflation. And what we’re seeing is that’s taken a greater share of the customer’s wallet, and it’s impacting some of the discretionary categories impact. And as a result, it’s impacting the toy category. So, we’ll see in terms of where we land from a growth perspective for next year over the next two quarters, recognizing Q3 is a high quarter for us, particularly on the DTC side.

And then we’ll know more about timing of some of the plans from the retailers for fiscal 2025 in relation to consumables as well. So those two things and just how the categories trending over the next couple of quarters, it will give us a better sense of how the top line is doing. But nevertheless, we feel good about where we’re at from a profitability growth and free cash flow perspective for next year.

Ryan Meyers: Got it. Thank you for taking my questions.

Operator: And we will take our next question from Ygal Arounian with Citigroup. Your line is open.

Ygal Arounian: Hey, good afternoon, guys. I want to dig into the comments that you made about improving better – they are improving customer acquisition since May. So, you’re seeing better customer acquisition, the retention is as strong as it’s been. The outlook for the rest of the year is lower given the macro. And so, I just wanted to maybe tie those two things together. I know some of this is coming from the retail channel too, so maybe that’s the whole answer. But maybe just can help tie those two.