BARK, Inc. Class A

Good afternoon and thank you for attending today's Barks Fiscal Fourth Quarter and Full Year 2023 Earnings Call. My name is Jason and I'll be the 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'd like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Mike Mujiz, Vice President of Investor Relations.

Good afternoon, everyone, and welcome to BARC's fiscal fourth quarter and full year 2023 earnings call. Joining me today are Matt Meeker, co-founder and CEO, and Zaheer 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 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. Last year, when I returned to running the business, we were facing some notable challenges, the biggest of which was that we were burning cash at a high rate. Along with a high burn rate, our cost of goods and fulfillment costs were rising rapidly, our inventory balance was growing out of control, and the faster we grew, the faster we burned cash. My first priority was to reduce this cash spend and return it to the more profitable profile we'd achieved in fiscal 2021. Today, I'm thrilled to report that we've made substantial progress in fiscal 2023, and we are entering fiscal 2024 as a stronger and more dynamic company. First off, we were free cash flow positive for the second quarter in a row. ending the quarter with $178 million of cash, $14 million higher on a sequential basis. To put that in perspective, we burned $194 million of cash in fiscal 2022. In fiscal 2023, that figure was just $17 million. And if we look at the second half of fiscal 2023, we generated positive free cash flow of $17 million. In addition, we reduced our inventory by $29 million over the year, freeing up working capital and ending the year with a much more manageable inventory balance of $124 million. Additionally, we continue to improve our cross-selling capabilities over the course of the year, particularly across our consumable products, which helped drive a $2.11 increase in our average order value compared to fiscal 2022. This, coupled with a sizable reduction in our cost of goods, resulted in a 200 basis point improvement in our consolidated gross margin and resulted in our cutting our adjusted EBITDA loss nearly in half to negative $31 million. That is significant progress in a short amount of time, and I couldn't be prouder of our team. As we turn the year ahead, we expect even greater improvements in the financial health of the business. For example, we anticipate our gross margin to expand at a similar rate to last year, while being in the neighborhood of break-even adjusted EBITDA. Additionally, we expect to be free cash flow positive for the full fiscal year. We believe that this profile will give us a healthy foundation for long-term growth. In the same way that we successfully reset the financial profile of the business this past year, we will now turn our attention to growing faster in the years ahead. As we think about our future growth, there are three key pillars where we believe Bark has big opportunities and a right to win over time. These pillars are, first, our direct to consumer e-commerce and subscription business. This is where we've established relationships and a strong brand with millions of customers who continue to spend more with Bark every year and are eager to buy our next product. Second, our consumables business. Bark has a strong start in consumables with treats, food, toppers, and dental products. We bring fun and the ability to learn from our customers directly and rapidly to better inform future product development. This is a big opportunity for expansion. And looking further out, the third pillar or vision for Bark is services. Bark is synonymous with dog happiness and joy for millions of dogs and their people today. This affords us with a unique opportunity to bring the same approach of bringing fun, joy-filled solutions to more mundane service areas. This is a big opportunity for expansion over the long term. In our view, these pillars capture our broad vision for future growth, and we are well on our way to capitalizing on these opportunities. Before I dive into more specifics of the roadmap for fiscal 24, I'd like to touch on some additional highlights from our fourth quarter and fiscal 2023 results. Zaheer will then discuss our financial results and provide guidance for fiscal 2024. You may have noticed that we updated our KPIs and revenue segments in this afternoon's press release. Since going public two years ago, our business has undergone important changes. We've evolved from a pure place subscription company to a brand selling a diverse catalog of products with the flexibility for customers to purchase all these products on virtually any cadence they choose. If you visit food.bark.co today, you can see this evolution firsthand. Under the legacy subscription-based KPIs, our non-subscription and auto-ship customers weren't included in our active subscription metrics, despite many of them frequently returning to Bark. As a result, we updated our KPIs to reflect how we are managing the business today. These metrics are total orders, which include one-offs or subscriptions, and average order value, which is now calculated from total orders as opposed to the legacy shipments metric. Essentially, we are aiming to achieve a higher volume of orders and increase the value of those orders. We believe these metrics better reflect where the business is today and, more importantly, where the business is going. We also provided a new breakout of our revenue segments to provide more granularity to our product mix, specifically toy revenue and consumables revenue within our DTC segment. For example, in fiscal 23, we generated approximately $307 million from toys, which also include accessories such as beds, apparel, and other essentials, and roughly $165 million from consumables, which include treats, food, toppers, and dental. We recognize that not all revenue is created equal, and thus we believe that providing more granular category information will be beneficial to investors as they follow our journey and expansion into higher TAM areas in the consumable space. Let's now turn to some of our fourth quarter and full year fiscal 2023 highlights. Total revenue in the fourth quarter was $126 million, $5 million ahead of our guidance. For the full year, total revenue was just over $535 million, an increase of 5.5% compared to fiscal 2022. This growth was driven by a healthy $2.11 increase in our average order value, which is largely a result of our strong relationships with our customers. These relationships helped drive total cross-sell revenue of $41 million for the full year, up nearly 35% compared to last year. This is a huge asset and advantage for us as we build out our product pipelines further into consumables and services. Looking at our revenue breakdown in more detail, toy revenue increased 5% to $371 million in fiscal 2023. which includes toy revenue driven by our commerce segment. Total consumables revenue, which has virtually no retail presence today, increased by 7.2% to $164 million. The majority of this growth was driven by food and dental. Turning to our commerce segment, we delivered $63 million of revenue, up roughly 7% compared to last year. Today, this business accounts for approximately 12% of total revenue and reflects only selling toys through over 40,000 retail doors. Selling consumables to these retail partners is a massive opportunity and we expect our commerce share of revenue to more than double in the next five years. As some of you are aware, we are currently presenting a new treat offering to our retail partners and while it is still early days, these conversations have been well received. I anticipate having treats in a portion of our retail footprint toward the end of fiscal 2024 with much greater distribution in fiscal 2025. As a reminder, it takes approximately one year between signing agreements and having products on shelves. So while this is a massive opportunity for BART, it will be much bigger growth driver next fiscal year. Moving on, we generated a full year consolidated gross margin of approximately 58%, up 200 basis points versus last year. Our DTC gross margin was 60.5% for the year, up 241 basis points. We are thrilled with our gross margin improvement in fiscal 2023, which is the direct result of actions we took to improve our long-term profitability profile. Importantly, expect our gross margin to improve by a similar amount or more in fiscal year 2024. Moreover, we reduced our annual G&A expense by $12 million through the cost reduction initiative we announced in February, of which $10 million will flow into fiscal 2024. We also renegotiated contracts with our strategic shipping partners, which lowered transportation costs and limited potential surcharges. These actions, many of which are just beginning to benefit the P&L, improved our full year adjusted EBITDA loss by nearly 50% to negative $31 million. On that note, let's now turn to our strategic priorities for the year, beginning with profitability. As I mentioned earlier, we were free cash flow positive for the second quarter in a row, generating positive free cash flow of nearly $17 million in the fourth quarter, and ending the year with a total cash balance of $178 million. This is encouraging progress, but we need to turn profitable quarters into profitable years, and that is where we are today. Zaheer will discuss our guidance in more detail, but we expect to deliver multiple adjusted EBITDA profitable quarters this fiscal year and be in the neighborhood of break-even adjusted EBITDA for the full year. This would represent another significant step change improvement compared to the $31 million EBITDA loss we recorded in fiscal 2023 and the $58 million loss we recorded in fiscal 2022. Furthermore, we expect to be free cash flow positive on a full year basis this year. This cash profile position gives us several strategic opportunities to expand the business faster and create value for shareholders. We are also confident in our ability to deliver these profitability gains as most of the heavy lifting is complete and the fruits of our labor are largely timing related. For example, the vendor contracts we renegotiated are improving the margin profile on all the new inventory we are bringing in today. We also have more favorable arrangements in place with our freight and domestic shipping partners. And while we realized some of these benefits last quarter, we expect even more material improvements in our margin and cost structure with each passing quarter. Overall, we view profitability as an accelerator to growth. As we begin consistently generating positive free cash flow and adjusted EBITDA, we will have greater flexibility to invest in future growth. And while we do not expect revenue growth for the full year, we do anticipate significant growth in our gross profit this year. On a similar top line to last year, we expect our gross margin to improve by another 200 to 300 basis points for the full year. Furthermore, as we invest in our product pipeline and our sales efforts in the early part of the year, we expect our revenue growth to accelerate in the back end of fiscal 2024 and to a much greater extent in fiscal 2025. As it stands today, I anticipate we will have high single to low double-digit revenue growth next fiscal year, and we have a reasonable line of sight to this acceleration as we have made considerable progress pitching consumables in commerce channels. On that note, let me now turn to our second growth pillar, expanding our consumables business, which includes food, treats, toppers, and dental. Put simply, consumables are a huge part of our business today, and they present an even greater opportunity in the future as we are only beginning to tap into our potential, particularly with our retail partners. Treats alone accounted for roughly one-third of our total revenue last year, making us one of the largest treat companies by revenue in the U.S. However, currently, we do not sell them in retail. Just imagine how much bigger this can be when we take treats and all of our consumable products to the 40,000 retail doors where we sell toys. In summary, I'm proud of the progress we made in fiscal 2023, and I believe we are a stronger company today. Looking ahead, we expect our consumables business to grow at a healthy clip and consolidated gross margins to expand sequentially throughout fiscal 2024. We anticipate this, coupled with additional operating leverage in our G&A lines, will bring us in the neighborhood of break-even adjusted EBITDA and positive free cash flow for fiscal 2024. And looking beyond fiscal 2024, we expect high single to low double-digit revenue growth in fiscal 2025 as we expand our consumables business into new channels like retail. Finally, we do not believe that our recent progress has yet to be reflected in our stock price, let alone our long-term potential. For a business with over $500 million in revenue, gross margins expected to be north of 60%, and a loyal customer base of millions of happy dog households, we feel our stock is undervalued as we trade at levels near our $178 million cash balance. Importantly, however, we have ample runway and flexibility to pursue growth opportunities that we believe will drive long-term value for our shareholders and we are excited about the many possibilities ahead. With that, I will turn the call over to Zaheer.