BARK, Inc. Class A

Good evening, thank you for attending today's BARC's second quarter fiscal year 2023 earnings call. My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host Mike Mujiz with the Vice President of Investor Relations. Mike, please go ahead.

Good afternoon, everyone, and welcome to our second quarter fiscal year 2023 earnings call. Joining me today are Matt Meeker, co-founder and CEO, and Howard Eden, interim 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 I pass it over to Matt, 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 is contained in this afternoon's press release. And with that, let me now pass it over to Matt.

Thanks, Mike, and good afternoon, everyone. Our results last quarter highlight the significant progress we continue to make driving toward profitability and becoming cash flow positive. We've delivered our strongest revenue quarter ever and our best adjusted EBITDA margin as a public company. Total revenue in the fiscal second quarter was $143.8 million, a 20% improvement compared to the same period last year. Our healthy top-line performance coupled with continued cost efficiencies resulted in an adjusted EBITDA loss of $2 million, a $6.8 million improvement compared to the same period last year, an $11 million improvement from the previous quarter, and $6 million ahead of our guidance for the quarter. We are thrilled with these results, and while we still have work to do, we are raising our full-year adjusted EBITDA guidance for the second quarter in a row to negative 31 million. Before we discuss our guidance and strategic initiatives in more detail, let me provide some additional color on the drivers of our strong second quarter results. We added 218,000 new subscriptions last quarter, ending the period with 2.2 million active subscriptions. And we continue to acquire those new customers efficiently. Our customer acquisition costs came in at $53.19, largely in line with our multi-year historical average, yet the customers we are currently acquiring are spending more and shopping across multiple categories. Our average order value was $32.18, a $2.45 increase year-over-year, and a $1.11 increase compared to our fiscal Q1. This is exactly what we meant when we said we are aiming to transform our customer base and our strategy is working better than expected. Overall, total revenue was $143.8 million, up 20% compared to last year, and roughly $9 million ahead of our guidance for the quarter. Another key driver to our strong performance this quarter was retail. Our commerce revenue nearly doubled year over year to $26.3 million, or 18% of total revenue. As we've discussed in the past, our commerce business is lumpier in nature, and last quarter was no exception. Several retail partners ordered their holiday product earlier than in previous years, resulting in a timing shift in revenue from the fiscal third quarter to the fiscal second quarter. We continue to expect this segment to represent between 10 and 15 percent of total revenue for the year. Strong as these results are, our commerce revenue will be lighter in the second half due to the unexpected holiday pull forward here. Essentially, our commerce revenue expectations from Q2 to Q3 flipped. We also shipped to a new retail partner last quarter, Sam's Club. Our products are now available in 600 Sam's Club locations in the U.S. and online, and in over 40,000 retail doors nationwide. Looking at our direct-to-consumer business, total revenue was $117.5 million, up 10% versus last year. This segment was largely driven by the healthy AOV growth I mentioned earlier. Moreover, our Harry Potter collection in August was our strongest performing licensed product ever. In our view, this is a testament to the resiliency of the dog industry, and more importantly, consumer demand for creative, high-quality products that resonate. We believe that this is a particularly important data point given the current inflationary environment, and it illustrates the benefits of selling proprietary products and experience personalized for each customer. We also had a strong quarter cross-selling. Total cross-selling revenue came in at $10 million, up 64% year over year. And on the strength of that capability, BART Bright contributed $2.8 million of revenue a 102% increase year over year. And in food, we launched our new breed-based format in August. Based on the strong conversion rates and average order values we've seen, primarily through cross-selling our existing customers, we expanded from serving three breeds to 10 breeds. Moving on, our total gross margin was 56%, roughly two points below last year. However, this is a result of the outsized proportion of revenue that we derived from our commerce business, which again was 18% of revenue this quarter compared to 11% in fiscal 2022. Gross margin in our direct-to-consumer business came in at 61%, roughly one point better than last year. As I mentioned on previous earnings calls, on a consolidated basis, we lost four points of gross margin between fiscal 2021 and fiscal 2022. Getting back to our fiscal 2021 margin profile is a key focus of mine, and we've been pleased with the improvements we've realized in the first half of fiscal 2023, and we expect our gross margins to improve even more in the second half of the year. We also delivered operating leverage across our marketing and G&A lines last quarter. Operating margin was negative 6% compared to negative 13% in Q2 of fiscal 2022. As I discussed in our Q4 call, shipping and fulfillment expense increased by six points between fiscal year 21 and fiscal year 22, and we have an opportunity to gain some of that back with better inventory controls, more favorable shipping contracts, and better overall organization. This is happening. We also discussed how we had overhired and needed to grow into that size, and this is also happening. So to summarize, healthy AOV growth and our focus on delivering operating leverage resulted in an adjusted EBITDA loss of $2 million, a $6.8 million improvement year over year. Our EBITDA margin also improved to negative 1.4%. up roughly six points compared to Q2 last year, and better than our previous five quarters. These are great results, and while we still have work to do, I'm proud of how quickly the team has delivered improvements throughout the business. Let's now discuss our expansion into food and consumables. We launched our breed-specific format in August, initially targeted at three breeds. While it's only been three months since launching this format, we are very happy with the early results. Customers are engaging and converting at a significantly higher rate than they were previously, which suggests our breed approach is working well. We're also seeing the majority of new food customers opting to subscribe to recurring shipments, roughly 70% to date. Food is a more considered purchase. It requires additional education and outreach compared to toys or treats, and every day we are learning more effective ways to engage and convert customers. The same was true for Bright in its early days, and we're now beginning to see the fruits of our labor in that category. With that said, we've been impressed that we've been able to get an existing BarkBox customer to change what they feed their dog with an e-mail. This speaks to the strength of the bark brand and the compelling nature of our food offering. Given the encouraging results from the first three breeds, we recently expanded our food offering to include a full suite of products for seven additional breeds, plus puppy-specific formulas. We are now serving chihuahuas, labs, pit bulls, dachshunds, French Bulldogs, Boxers, Australian Shepherds, German Shepherds, Golden Retrievers, and Doodles at various life stages with base kibbles, toppers, supplements, and accessories tailored to the dietary needs and individuality of each of these breeds. This is important as it meaningfully expands the number of customers we can serve. While it is still early, I am more confident than ever that Bark Food will become a meaningful driver of our business. Now let's turn to profitability. On our fourth quarter call in May, we laid out our roadmap to profitability. We discussed our goal of transforming our customer base by focusing on more premium customers, which would grow average order value at a faster rate and improve our margin profile. We also discussed the need to generate operating leverage on our cost structure by improving our inventory controls and reducing costs in areas like shipping and fulfillment. And I am pleased to report we have made tangible progress across each of these areas. AOV is up, margins are improving, and we are burning significantly less capital. We also expect some of the improvements we've made to the business to materialize in the back end of the fiscal year. For example, converting inventory to cash. Given the subscription nature of our business, we typically order product 8 to 10 months in advance. So while we made important improvements to our inventory controls earlier in the year, we don't expect to see those efforts reflected on the balance sheet for a couple of quarters. Nonetheless, with $166 million of cash and $161 million of inventory on the balance sheet, we are confident that our most profitable and efficient days are still ahead of us I remain fully committed to getting us to a sustainable cash generating business very soon. Let's now turn to guidance for the third quarter and full year fiscal 2023. Beginning with revenue, we are reiterating our guidance of $556 million for the full year. While we did exceed our revenue guidance by a healthy margin last quarter, The lion's share of our top line beat was the result of commerce revenue shifting from the third quarter to the second quarter. This also impacts our fiscal third quarter revenue, which we currently expect to be $134 million. With that said, we are raising our full year adjusted EBITDA guidance for the second quarter in a row. We now expect an adjusted EBITDA loss of $31 million for the full year. up $2 million from the guidance we provided on our Q1 call, and up $5 million from the guidance we originally provided on our Q4 call. For the fiscal third quarter, we currently expect an adjusted EBITDA loss of $13 million. Consistent with prior years, the holiday quarter is a period where we intentionally invest more in customer acquisition, and this year is no different. This investment provides us with a healthy lift in new subscriptions that we carry into the following year. Additionally, we plan for higher customer acquisition costs due to seasonal increases in CPMs, as well as higher shipping rates, which is typical during the holiday period. Nonetheless, our full year guidance of negative $31 million suggests that we will cut our adjusted EBITDA loss nearly in half or a $27 million improvement compared to fiscal year 2022. We also expect to see additional cash flow improvements in the second half of the year. Overall, we are very happy with the results this quarter and through the first half of the year. My biggest priority continues to be getting the business back to generating cash, reaching sustainable profitability, and then accelerating growth on that solid foundation. And with that, I will turn the call over to Howard.