BARK, Inc. Class A

Good afternoon. Thank you for attending BARC's third quarter fiscal 2023 earnings call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for 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, Michael Mugis, Vice President of Investor Relations. Michael, please go ahead.

Good afternoon, everyone, and welcome to BARC's third quarter fiscal 2023 earnings call. Joining me today are Matt Meeker, co-founder and CEO, Zaheer Ibrahim, chief financial officer, and Howard Eaton, who served as interim chief financial officer during the period we are reporting on today. 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 illustrate the significant progress we continue to make across each of our strategic initiatives we laid out at the beginning of the year, namely accelerating our path to profitability, making meaningful progress in our food and consumables business, and transforming our customer base by acquiring more premium customers. Last quarter, we grew our average order value by $2 year over year, improved our gross margin by four points to 60%, reduced our inventory by $15 million, and ended the quarter with $164 million of cash on the balance sheet, essentially unchanged from fiscal Q2. And for the first quarter since going public, we generated positive free cash flow. These are important milestones and a direct result of the actions we took to diversify our product mix, improve our long-term unit economics, and meaningfully reduce our cash burn. And while the progress we have made across these initiatives is encouraging, we expect these trends to continue further in the quarters ahead. In addition, we announced a cost reduction initiative today to enable more leverage across the business adding significantly more to our bottom line. I will discuss this initiative more in a moment. First, let me highlight some of the key results of the most recent quarter. Total revenue was $134.3 million, $300,000 ahead of our guidance for the quarter. Our direct-to-consumer segment contributed $120 million. Within that segment, total revenue from cross-selling was $12 million up 15% compared to last year. And as we know, not all revenue is created equal, and we saw the strongest growth in our new categories, dental and food. Our dental product, Bark Bright, delivered $2.7 million of revenue in the quarter, up 70% compared to last year. I'm also excited to announce that we recently expanded our dental catalog with the launch of Bright Durable, which as the name suggests, is targeted at tougher chewers. We also removed the chicken ingredient from this formula, which is one of the more common dog allergies, thereby growing the population of dogs we can serve. And while Bright Durable has only been available for a month, the initial reception has been fantastic. In our first month, we added nearly 6,000 new subscribers for this product. This is a great example of how we are able to leverage customer data to inform product development and expand our portfolio with products that we are confident will resonate with customers. Our food product is also doing very well and accelerating across all the key operating metrics we use to evaluate and manage the business. Since adding more breeds, puppy formulas, and other variations last fall, the growth is picking up even faster. With each passing month, we are seeing notable improvements in customer engagement, conversion rates, and the number of orders we are fulfilling. Over the next 12 months, we will continue to add more breeds, which will expand our addressable market and help us engage an even greater subset of our customer base. And virtually all of our progress to date has been achieved by reaching out to current and former BART customers through word of mouth. Food is a huge market to serve, and we're thrilled with how well this breed strategy is resonating with our over 2 million Bark customers. The related and large consumables market we serve, but haven't discussed much this year, is treats. And Bark does more than just serve this market, with roughly one-third of our revenue coming from treats. We are a top treat seller in the U.S. today. And we achieve this without selling a single treat in retail or via our partners, which are channels we expect to tap into over the next year. Speaking of retail, let's turn to our commerce segment. We delivered $14 million of commerce revenue in the quarter, roughly 11% of total revenue. This is a segment I'm very bullish on and see a significant opportunity to grow this business long-term. Today we are partnered with virtually every major retailer in the U.S. Our footprint spans 40,000-plus stores across the country, which enables us to reach new demographics and introduce millions of prospective customers to Bark. That said, today we are primarily selling toys through our retail network. However, there is an exciting opportunity for us to broaden our offering and grow our commerce business in a substantial way by introducing our full product line to retailers, including toys, treats, toppers, dental, and food. Moving on, our total gross margin improved by 400 basis points year-over-year to 59.7%, and our direct-to-consumer gross margin came in at 61.8%. We have made significant progress this year getting our margin back to fiscal 2021 levels. And as I've discussed for the past year, this was essential to the foundation on which we can grow now more profitably. We also have great visibility on our margin drivers, and we expect ongoing gains for several more quarters due to the following developments. First, we renegotiated more favorable contracts with our manufacturing partners. Rather than splitting our business across a dozen different vendors, we streamlined the number of partners we work with, which enabled us to negotiate more favorable terms. We also successfully renegotiated better terms with our freight partners as the spot rate for containers has declined significantly from their pandemic highs. Looking below the gross profit line, we recently signed a long-term agreement with one of our strategic shipping partners which will reduce transportation costs and limit surcharges. Collectively, these efforts have improved our unit economics, lifted our margins in a meaningful way, and we look forward to enjoying the benefits of these new arrangements in the quarters and years ahead. If you recall, in discussing our path to profitability one year ago, I mentioned from fiscal 2021 to fiscal 2022, we lost four points of gross margins, another six points on shipping and fulfillment, and added six points of revenue on the GNA line. As I just mentioned, we've made great gains this year in those first two areas and will gain more in future periods. The final area for improvement is on the GNA line. And today we announced an initiative that will save us around $12 million annually starting this quarter. While also streamlining our work, and helping us get more done faster. This is all great progress in a short period of time, and I'm very proud of our team for making it happen this year. Finally, that all rolled to an adjusted EBITDA loss for the quarter of $12.8 million, slightly ahead of our guidance, and a 30% improvement compared to the third quarter of fiscal 2022. For the quarter ahead, we are guiding to a $3 million adjusted EBITDA loss and given all the actions we've taken over the past year, I'm more confident than ever that we are on the doorstep of sustainable and growing profitability. Furthermore, we are also beginning to convert our inventory to free cash flow. As I mentioned on our last earnings call, we typically order products eight to 10 months in advance, so our ability to reduce our inventory levels in the short term was limited. With that said, we have reached a point where we can expect to see more consistent inventory conversion. We demonstrated this in the fiscal third quarter, and we estimate that we can make similar progress in inventory reduction in the year ahead. Now, let me touch on the cost reduction initiative that we announced this afternoon. The pandemic served as a significant and, in many respects, lasting tailwind to the pet space, and we benefited tremendously as our top line grew at a dramatic pace. In an effort to meet growing demand, we quickly scaled our infrastructure, headcount, and other resources. In hindsight, we scaled our cost structure too quickly, which led to operational inefficiencies and, unfortunately, redundancies. This reality became even more evident as the broader macro backdrop became increasingly volatile. In light of this, we conducted a comprehensive review of the business with the goal of streamlining our cost structure improving our operations, and further accelerating our path to profitability. As a result, we made the decision to reduce our headcount by 12% and eliminate certain contracts with third-party vendors and consultants. Decisions like this are never easy because they impact people, our colleagues and friends, who have worked hard to support Bark and its customers. To all the employees that were affected, I am truly grateful for your contributions and dedication. In reality, however, we believe that this is the right direction for the business and it better aligns our cost structure with the current economic environment and allows us to better focus on our highest priorities. Let me now turn to guidance for the remainder of the year. While we saw strong revenue acceleration in our food and dental product lines last quarter, We did see some softness in our toy product line as new additions came in later. For our fiscal fourth quarter, we expect revenue to be approximately $121 million and full-year revenue to come in at roughly $530 million. Our full-year guidance implies year-over-year growth of approximately 5% as compared to our previous guidance of roughly 10%. In our view, this is a reflection of the broader macro backdrop as many consumers remain cautious and are currently favoring less discretionary spend. We believe that this is in part why our food and dental categories are accelerating, which is healthy for our business in the long run. However, it does taper our near-term revenue expectations given the relatively small base of our food and dental categories today. Notwithstanding the lower revenue guidance, we are maintaining our full year adjusted EBITDA guidance of negative $31 million, which is where our focus has been and continues to be. For the fiscal fourth quarter, we currently expect an adjusted EBITDA loss of roughly $3 million, an 87% improvement compared to the fourth quarter of fiscal 2022. Overall, the improvements we have realized across cost of goods sold and G&A are significant and our ability to maintain our EBITDA guidance is a reflection of the significant progress we've made in improving our long-term profitability profile. This progress also highlights our long-term LTV to CAC opportunity. A growing AOV on top of a healthier margin profile left benefits to our LTV to CAC ratio. This coupled with a leaner GNA structure provides us with a lot of flexibility to increase our investment in marketing if we are seeing stronger returns, particularly if we continue to cross-sell customers into food as successfully as we have recently. To summarize, it has been a successful year back in the CEO seat, and we are executing the plan that we laid out a year ago. We've consistently improved our customer quality as reflected in our increased average order value, We've improved our margin profile in a material way. We are beginning to convert our inventory to cash, and we were free cash flow positive for the first quarter since going public. Looking ahead, we expect to continue to deliver healthy year-over-year improvements in adjusted EBITDA and free cash flow as a result of the important actions we took over the course of fiscal 2023, which are beginning to translate to our financials in a more meaningful way. If the market was betting on us running out of cash because we were a SPAC, then hopefully our steady progress and performance this quarter should prove that thesis was wrong. I continue to believe that our best days are ahead of us, and with $164 million of cash on the balance sheet, we have a lot of exciting opportunities ahead. And before I turn it over to Zaheer to walk through our financials in more detail, I'd like to thank Howard for his thoughtful leadership and contributions over the past year. He's been a valuable partner and helped me execute many of the improvements we've made to the business during his time here. I'd also like to welcome Zaheer to his first earnings call at Bark. Zaheer brings nearly three decades of senior financial leadership experience at public and private companies and a proven track record scaling high-growth direct consumer brands, and we're thrilled to have him on board. With that, let me now turn it over to Zaheer.