BARK, Inc. Class A

Good day and thank you for standing by. Welcome to BARC's second quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. And please be advised that today's conference may be recorded. Thank you. I would now like to hand the conference over to your first speaker today, Mr. Michael Mugius. Vice President, Investor Relations.

Good afternoon, everyone, and welcome to BARC's second quarter fiscal 2022 earnings call. Joining me today are Manish Joneja, CEO, and John Toth, CFO. Today's conference call is being webcast in its entirety on our website, and a replay of the webcast will be made available shortly after the call. Additionally, a press release covering the company's financial results was issued this afternoon and can be found on our Investor Relations website. Before we begin, I would like to remind you of the following information regarding forward-looking statements. The statements made on today's call are based on management's current expectations and are subject to risks and uncertainties that could cause actual future results and outcomes to differ. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. Also during today's call, we will discuss certain non-GAAP financial measures. Reconciliation to our non-GAAP financial measures are also contained in this afternoon's press release. With that, let me now turn the call over to Manish.

Thanks, Mike, and good afternoon, everyone. Thank you for joining our fiscal second quarter earnings call. I'm pleased to report we delivered another strong quarter underscored by sizable growth in active subscriptions, a robust increase in subscription shipments, and record high average order value. I'd like to begin today's call with some highlights from the most recent quarter, followed by an update on our progress across our key categories and some of our strategic priorities for the year. John will then walk you through our financial results from the quarter and provide guidance for the remainder of fiscal year. Beginning with last quarter's results, we continue to benefit from sector and channel tailwinds, including growing drug ownership, increasing spend on pets, and an expanding share of pet sales occurring online. I'm pleased to report we delivered strong results across several key metrics last quarter. We added 271,000 active subscriptions, bringing our total to 2.1 million as of quarter end, a 39% increase compared to the same quarter last year. We delivered 3.6 million shipments in the quarter, a 34% increase year over year. Furthermore, we achieved a record average order value of $29.73, a $1.55 increase compared to the same period last year, and a 52 cent increase compared to our fiscal first quarter. This drove total revenue of $120.2 million, up 39% year over year, and resulted in a very healthy gross margin of 58%. These figures are impressive, especially considering how strongly the company performed during the COVID-19 period last year, which highlights the resiliency of our business model. I would also like to provide some perspective on a couple of topics very important to our business that have been top of mind and on the front pages for what seems like months. namely how we are navigating inventory levels, the global supply chain congestion, and the rising cost of digital advertising. As many of you are aware, the cost of media advertising has increased significantly this year, and many companies are reporting material increases in customer acquisition costs as a result. At Bark, we have effectively managed these challenges to date through highly engaging content, a significant social media following, and a tactical approach to marketing, which leverages our unique customer relationships, strong word of mouth, and a growing data set. Last quarter, our customer acquisition cost was up just 7% compared to the previous quarter, which resulted in a very healthy LTV to CAC of 4.9 times. In other words, for every dollar we spent in marketing, we generated roughly $5 of gross profit, a highly attractive return. Internally, we target an annual LTV to CAC of 4x. As LTV grows, we are well positioned to spend more in marketing to acquire those high-value customers. In our view, our efficiency at profitably acquiring new customers is a key differentiator for our business and something that sets us apart from not only other companies in the dog space, but the broader DDC and retail segments as a whole. From an inventory perspective, we believe that we are well positioned to meet the strong demand we expect this holiday season. While global freight congestion and increased shipping costs are likely to impact many retail companies' ability to meet demand during the holidays, our team identified this challenge early on and accelerated the shipping of our D2C product for the back half of the year. As a result, our warehouses in the U.S. are already stocked with the holiday inventory that we anticipate needing, which significantly de-risks the potential impact that future freight congestion could have on our D2C business this holiday season. Nonetheless, we are experiencing rising costs on our shipping and fulfillment line as rates continue to increase, and we are often paying for premium shipping to ensure our customers receive their shipments in a timely manner. We do not expect these headwinds to subside for the foreseeable future. However, we are encouraged by the continued growth in new subscriptions and AOV, as well as our healthy LTV to CAC metric, which in our view are most important indicators of the health of our business long term. Looking ahead, we are optimistic about our ability to meet customer demand going into what is traditionally our strongest two months of the year. While it is still early days, we are encouraged by our start to the current quarter, and early signs are indicating healthy consumer demand this holiday season. I'd like to now spend some time discussing some of our key categories, beginning with our play business, which includes our themed toys and treats subscription, Bog Box and Super Chewer. We continue to see robust growth in new subscriptions, subscription shipments, and average order value. While the play business is currently our largest category, we believe we still have a significant runway for growth in this category. We ended the quarter with over 2 million active subscriptions, and the total addressable market, the roughly 70 million households in the U.S. with a dog, continues to grow. Our mission is to be in all of them, be it through a single dog toy or through multi-line subscriptions. The market opportunity therefore remains significant. Furthermore, we continue to see a rising share of pet sales occur online. In 2015, e-commerce sales represented a 3% of total pet sales. By 2020, that number jumped to 25%, and that trend is expected to continue with 35% of sales expected to occur online by 2024, according to third-party sources. This shift will serve as a long-term channel tailwind for our business, Especially given we offer one of the best online experiences for dog owners and we plan to continue to invest and win in this category. Put simply, we are still in the early innings of our play business and bark as a whole. The extent of these tailwinds and our ability to execute on this runway is underscored by a recent revenue growth. In the first half of fiscal 2022, our top line is up nearly 50% compared to last year. and we believe we are only just beginning to materially benefit from our cross-selling and add-to-box functionality. Add-to-box is a significant driver of revenue that is bolstered by our innovative data analytics and machine learning tools that enable us to recommend highly tailored items that customers can quickly add to their existing subscriptions each month. Last quarter, our Add to Box feature drove roughly $6 million of DDC revenue, a 75% increase compared to the same period last year. Through the first half of fiscal 2022, ATB revenue was up over 117% compared to the first half of fiscal 2021. Moreover, we expect our newer categories, like food and health, to serve as additional opportunities to cross-sell and attach new products to existing subscriptions. Again, we have made important investments in this area, which we feel will continue to drive top-line growth and strong margins. Moving on, we continue to ramp up our Bark Eats operation, a growth initiative we are very excited about. For those newer to Barg's story, Barg Eats is a highly personalized, subscription-based meal plan that we think has the capability to disrupt the premium pet food market by completely tailoring your dog's food by breed, size, age, and lifestyle. Our offering evolves as the dog matures and their dietary needs change. In essence, we have a highly innovative product offering that affords customers the same high-tech relationship that experience in our Play category at a similar price point to higher-end kibble purchased at a pet retailer. We remain on target to launch this product nationwide in 2022, and we have executed several important initiatives to enable us to achieve that objective. First, we have enhanced our user experience to better appeal to a wider range of customers. Customers now have the ability to quickly purchase a predetermined meal plan based on data they have collected from other dogs in a similar demographic. This shortens the funnel for customers that don't want to speak to a nutritionist up front and prefer a quicker checkout experience. And for customers that do prefer a higher touch or more customized experience, our nutritionists and wellness advisors are on hand. We are also launching an affiliate and referral program for Eats, which will serve as an additional customer acquisition funnel. Second, we recently expanded our Ohio-based Bark Eats Fulfillment Center from 12,000 square feet to 100,000 square feet. This expansion significantly augments our ability to ship to customers throughout the lower 48 in a timely and cost-effective manner. We have also introduced certain operational efficiencies, such as automated packaging. Third, we have bolstered the team supporting EATS. Mike Novotny, who served as chief operating officer since 2019 and has been instrumental in expanding BARC's key businesses since joining the company in 2015, is now president of EATS and works alongside Carly Strife, one of BARC's co-founders. Together, they helped grow BARC to a $500 million revenue business, and I'm excited to have them leading the EATS opportunity. The addressable market for each is massive. To put it in perspective, the dog toy market in the U.S. is roughly $3 to $4 billion, while the dog food market is between $30 to $40 billion. The food category is also less discretionary, resulting in higher customer retention and lifetime value. Based on our data thus far, the average order value for bar keys is also roughly two times higher than that of the play category. Turning to Bark Bright, which is a dental hygiene offering and the first product we launched in our health vertical, I'm pleased to report that we began selling our Bright product in PetSmart last quarter. This product is an exciting opportunity for Bark as we are able to sell it through multiple channels. We sell it on a D2C subscription basis as a one-off add-to-box item as well as in retail stores. We believe Bright also serves as an additional tool to grow average order value and extend customer retention. Health is another exciting opportunity, and we expect to broaden our health offering with unique and innovative products over time. The last yet meaningful strategic initiative that I would like to touch on is called One Bark. One Bark is an opportunity to create a unified customer experience across our various product categories. enabling customers to easily attach different products to their current subscriptions, and offering multi-line subscribers an even more premium experience. Currently, the customer experience across the various vertical fields stand alone. Subscribing to Bark Eats is a different experience, for example, on a different website than Bark Box. We are in the process of evolving this to create a unified experience that not only makes it easier to purchase across our various product categories, that also rewards customers that have multi-line subscriptions and remain Bark customers for extended periods of time. One Bark will deepen our relationship with our customers, positioning us as a company that understands the full demands of living with your dog and easily and effectively services all of your needs as a dog parent. This will be an ongoing and evolving initiative, but we expect to offer this unified experience live in the first half of calendar 2022. Megan Null, who joined BARC in 2015 and has been overseeing our SuperTour business, is currently leading this effort, and I'm highly confident in her ability to execute this key strategic initiative. The power of a brand is not only evidenced by our recent performance, but also by the other world-class brands that lean into Bark. To date, we have partnered with Universal Studios, Warner Brothers, the NBA, NCAA college football, the WWE, Dunkin' Donuts, and Subaru, to name a few. And as we mentioned in the last call, we have partnerships with Netflix and many others to come. During the current quarter, we continue to invest in new talent to help support the continued growth of Bark ecosystem. Anil Nair, who I work closely with at Amazon, is now our Chief Supply Chain Officer and is leading all of our global supply chain operations effort. Supporting him in these efforts are two seasoned operation leaders, James O'Leary and Tyler Bronson. James also comes from Amazon, while Tyler Bronson spent the previous 12 years at Dick's Sporting Goods. I'm also excited to note that Ollie Downs recently joined the team as VP of Data and Machine Learning. Ali is an accomplished machine learning scientist and will lead Bark's machine learning and data capabilities with the ultimate goal of expanding our existing personalization and user experience efforts. All in all, there are a lot of exciting things happening at Bark. We have a world-class team in place, our player vertical continues to grow at a healthy clip, we're making a notable progress on our new categories like food and health, and we're improving the overall customer experience across the Bark ecosystem. Collectively, we believe these efforts will have a meaningful impact on customer retention and will help drive cross-selling revenue across our categories. I'm also pleased with our team's ability to navigate the challenging macro environment of increasing shipping costs, freight congestion, and rising media rates. While we are not immune to these challenges, our anticipated DTC product inventory for the holiday season is already stateside. Our gross margins remained strong, and we maintained a healthy customer acquisition cost, underscoring our marketing team's continued effectiveness, our strong customer engagement, and a powerful brand. In conclusion, Bach remains one of the largest digitally native dog brands in the world today. We are benefiting from both secular and channel tailwinds, which we believe enable us to grow at scale. Furthermore, a technology stack allows us to foster meaningful customer relationships that result in strong customer retention and some of the highest NPS scores in the broader consumer space. And before I turn it over to John, I'd like to provide an update on our CFO search. Over the past couple of months, we have interviewed a number of high-quality candidates and believe that we will bring this process to a close in near term. In the meantime, we have appointed Howard Heaton to serve as interim CFO and assist in managing the company's day-to-day finance responsibilities. Howard worked closely with us during our merger with Northern Star and is very familiar with Bark and the team. He has over 25 years of senior financial and strategic business experience, including as CFO for other public companies, and will be steady hand as we conduct our ongoing search. To that end, this will be John's last week as a full-time employee at Bark. John will remain an advisor to the company as the onboard permanent replacement, and I want to personally thank him for his valuable contributions to the company. He was crucial in building a strong financial and reporting infrastructure for Bark and helping us get to where we are today. With that, I will turn the call over to John.