BARK, Inc. (NYSE:BARK) Q2 2024 Earnings Call Transcript November 8, 2023
BARK, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations had been $-0.03.
Operator: Ladies and gents, good afternoon. My identify is Abby and I’ll be your convention operator at this time. At this time, I want to welcome everybody to BARK’s Second Quarter Fiscal 2024 Earnings Conference Call. Today’s name is being recorded and all strains have been placed on mute to forestall any background noise. After the audio system’ remarks, there can be a question-and-answer session. [Operator Instructions] Thank you. And I’ll now flip the convention over to Mike Mougias, Vice President of Investor Relations. You might begin.
Mike Mougias: Good afternoon, everybody and welcome to BARK’s second quarter fiscal 12 months 2024 earnings name. Joining me at this time are Matt Meeker, Co-Founder and CEO and Zahir Ibrahim, Chief Financial Officer. Today’s convention name is being webcast in its entirety on our web site and a replay of the webcast can be made available shortly after the decision. Additionally, a press launch masking the corporate’s monetary outcomes was issued this afternoon and could be discovered on our Investor Relations web site. Before I go it over to Matt, I want to remind you with the next info concerning forward-looking statements. The statements made on at this time’s name are based mostly on administration’s present expectations and are topic to dangers and uncertainties that might trigger precise future outcomes and outcomes to vary.
Please discuss with our SEC filings for extra info on a few of the components that might have an effect on our future outcomes and outcomes. Also, throughout at this time’s name, we are going to talk about sure non-GAAP monetary measures. Reconciliations to our non-GAAP monetary measures is contained on this afternoon’s press launch. And with that, let me now go it over to Matt.
Matt Meeker: Thanks, Mike and good afternoon everybody. Our second quarter outcomes spotlight the numerous progress we proceed to make in enhancing our long-term profitability outlook. Last quarter, we delivered constructive adjusted EBITDA of $1 million, surpassing our steerage vary and marking our first constructive EBITDA quarter as a public firm. We additionally achieved one other interval of constructive free money circulate, which got here in at slightly below $1 million. On a trailing 12-month foundation, we have now delivered constructive free money circulate of roughly $4 million. When I returned to BARK, we confronted lots of skepticism. We heard that we might by no means attain profitability that we had been going to expire of money inside a 12 months or if we did generate money, we couldn’t achieve this persistently.
Sitting right here at this time with our first adjusted EBITDA constructive quarter behind us and constructive free money circulate technology on a trailing 12-month foundation, I’m thrilled with the progress we’ve made. One EBITDA constructive quarter is step one to 1 EBITDA constructive 12 months, and that’s what’s subsequent for us. In reality, our confidence in our profitability outlook has grown to such an extent that earlier this week, we paid down $45 million of a face quantity of our convertible notes early. This resolution improved our internet money position by practically $3 million and saved over $5 million of curiosity over the remaining time period of the be aware. Overall, we imagine our capital construction is stronger in consequence. At a recent convention, I shared a quote from an analyst that summarizes the method I’ve taken to develop BARK since returning to the CEO position 22 months in the past.
Growth with out revenue is a waste of time. Profit with out progress is a matter of time. Profit has been our focus, and as our recent outcomes point out we’ve come a good distance. This has meant shedding on worthwhile income streams in lieu of building a worthwhile business. However, it’s from that basis that we will now actually give attention to returning to worthwhile prime line progress. With that stated, there is no such thing as a denying that the expansion surroundings at this time is difficult. Not only for BARK, but additionally for our pet and direct-to-consumer friends. In pet, particularly, households with dogs declined by three million final 12 months, and we anticipate one other decline this 12 months. We are primarily returning to pre-pandemic ranges, and the discretionary spend is additional difficult, particularly in toys.
Nielsen information via October exhibits the canine toy business is down 10% this fiscal 12 months. The actuality is it’s difficult and can proceed to be within the close to time period. But no matter these macro challenges, we have to proceed to execute towards our strategic initiatives to develop our revenue along with delivering extra effectivity alternatives, and there are extra. I’ll contact on this extra in a second, however first, let’s speak about our outcomes final quarter. Starting on the prime of the P&L, we delivered whole income of $123 million, assembly our steerage for the quarter. On the DTC facet, our core toy subscription business continued to really feel the macro headwinds, significantly from a buyer acquisition standpoint. However, regardless of that, we’ve seen some encouraging progress just lately as new buyer acquisition has been up progressively since May.
It’s not the place we wish it to be but, however we’re enhancing quickly in a troublesome surroundings. While that’s a problem, our buyer retention charges final quarter had been on the highest degree since going public. And our common order worth stays robust at over $31. So, after we convey new prospects onto our platform, they’re staying longer and spending so much with us. When we laid out our strategic priorities initially of the 12 months, we talked about, one, shifting in the direction of a consolidated DTC expertise, two, turning extra of our focus to consumables and three, promoting these consumable merchandise in retail. Let’s contact on the recent progress we’ve made throughout every of these initiatives. On the consolidated DTC expertise, I’m comfortable to report that our new website URL is now simply BARK.co, and the location is making good progress.
Having all our merchandise underneath one area has improved our capability to transform prospects and cross-sell them throughout our product portfolio, and we’re now capable of direct them to a a lot easier and more practical area. Specifically, the place we confronted headwinds on our toy and toy and deal with subscription product strains, if we take a look at consumables income exterior of what’s included in our field subscription merchandise, we generated simply over $5 million of income final quarter, up 20% versus final 12 months. This is essentially from BARK.co choosing up steam. On increasing extra into retail. Last quarter, we delivered $19 million of commerce income. We had been additionally capable of convey new retail companions and international locations into the combination. BARK toys are actually in all 450 pet at home shops within the U.Okay. We’ve additionally begun to increase past simply toys and retail.
We just lately partnered with the Girl Scouts the place we’re promoting co-branded merchandise via their on-line platform. This pilot program went exceptionally effectively, and we ended up meaningfully growing our dedication as merchandise bought out a lot quicker than anticipated. Longer time period, we have now a possibility to considerably increase this partnership and grow to be the primary model companion to take part within the Girl Scouts bigger gross sales channels. This represents not solely a large income alternative but additionally a brand new product class for these channels. Furthermore, we just lately started promoting our Treat introduction calendar via sure Costco shops within the U.S. and the preliminary suggestions has been very robust. In reality, we’ve already been approached by different retail companions desirous about promoting our Advent calendar subsequent vacation season.
And lastly, as we introduced final month, I’m thrilled to share that we acquired our first dedication from a number one retailer within the U.S. to begin promoting our treats throughout over 1,000 doorways within the spring of 2024. As we’ve mentioned all year long, introducing consumables in our retail channel is a big alternative, and we’ve made tangible progress over the previous a number of months. And whereas this recent progress is not going to have a major affect on our prime line this 12 months, we plan to build on this momentum and proceed to anticipate the Commerce phase to characterize round 30% of our whole income over the subsequent 4 to 5 years. Moving down the P&L. When I returned to CEO, one of many largest alternatives for reaching profitability was bringing self-discipline to our unit economics and the gross margin line.
Last quarter, we delivered wholesome enhancements in gross margin but once more. Our consolidated gross margin got here in at 61.5%, practically 100 foundation factors increased on a sequential foundation and 560 foundation factors increased than Q2 final 12 months. On the DTC facet of the business, our gross margin got here in at roughly 65% final quarter, a 400 foundation level enchancment year-over-year and up 270 foundation factors versus the primary quarter. Overall, we’ve been more than happy with our capability to materially enhance our margin profile in a comparatively quick time period. Moreover, we anticipate this pattern to proceed via FY 2024 and past. And lastly, we delivered $1 million of adjusted EBITDA in fiscal Q2, our first constructive quarter since going public over two years in the past. And although we don’t anticipate constructive EBITDA within the present quarter as we make investments extra closely in progress through the peak vacation interval, we do imagine that fiscal This autumn can even be constructive on an adjusted EBITDA foundation.
Overall, our prime priorities stay. These priorities are to meet our mission to make all dogs comfortable, execute our strategic initiatives and proceed to ship on the trail to sustainable profitability. To that finish, we anticipate ongoing enhancements in our gross margin line effectively into fiscal 2025, we additionally imagine there are extra areas the place we will scale back bills in transport and achievement in addition to G&A. In quick, we anticipate to proceed to ship wholesome year-over-year enhancements in profitability going ahead. And success right here will higher allow us to meet our mission to make all dogs comfortable. Overall, we have now many thrilling issues occurring and coming to market quickly. While we proceed to anticipate toys to face challenges on this surroundings, we anticipate our newer consumables merchandise to develop at a wholesome clip in each DTC and retail, which is in step with our technique.
This progress, coupled with our continued efforts to scale back prices, enhance margins and ship working leverage on our cost construction is anticipated to have significant advantages to our backside line and free money circulate technology with every passing quarter and ending final quarter with over $160 million of money available and a business that simply turned in its first EBITDA constructive quarter and its free money circulate constructive over the railing 12 months, we imagine we’re in a robust position for the long-term. And with that, I’ll flip it over to Zahir.
Zahir Ibrahim: Thanks, Matt, and good afternoon, everybody. I’ll begin at this time’s name with an summary of our second quarter outcomes, together with some recent stability sheet developments, adopted by our outlook for the rest of fiscal 2024. Beginning on the prime of the P&L, we generated whole income of $123 million, which got here in on the low-end of our steerage vary. Looking at that income in additional element, we generated $104 million of income in our B2C phase, which was down 11% versus final 12 months. The year-over-year decline in DTC income was primarily pushed by a 9% decline in whole orders and a 2.6% or $0.84 decline in common order worth. Overall, the macro surroundings has had the most important affect on our subscription field merchandise.
And although we proceed to anticipate year-over-year income 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 satisfactory returns. And lastly, we delivered $1 million of adjusted EBITDA forward of the highest finish of our steerage vary and our first constructive EBITDA quarter as a public firm. This is a vital milestone, and we anticipate constructive adjusted EBITDA quarters to grow to be a extra common incidence shifting ahead, given all of the progress we’ve mentioned on at this time’s name.
And earlier than I flip to our outlook for the rest of the 12 months, let me contact upon some stability sheet and money circulate gadgets. Last quarter, we decreased our stock stability by $3 million from our fiscal Q1 and ending the interval with a complete stability of $109 million. All-in-all, we’ve made lots of progress on this entrance during the last 12 months, lowering stock by over $50 million throughout that point, and we imagine there are alternatives to additional scale back this stability in fiscal 2024 and into fiscal 2025. From a free money circulate standpoint, we generated $1 million of constructive free money circulate within the quarter. Looking again over the previous 12 months, we have now achieved constructive free money circulate in three out of the previous 4 quarters and anticipate extra to return.
Sitting right here at this time, we imagine that we have now greater than sufficient capital available to run the business. And due to this fact, we have now been exploring potential makes use of of money that we imagine will present a sexy return and create shareholder worth in the long term. On that be aware, we repurchased 2.8 million shares final quarter at a median cost of $1.49 per share. The ensuing spend within the quarter was $4.1 million. And whereas the common cost is above the place the shares are buying and selling up to now, we proceed to see lots of worth in our shares at these ranges, significantly given the numerous progress that we have now constituted of a profitability standpoint. Moreover, we repurchased $45 million or roughly 53% of the excellent principal quantity of our convertible notes at a 6% low cost to par worth this week.
As a end result, we elevated our internet money, which we outline as money, much less our excellent convertible debt by roughly $3 million, and we can even save $5 million in curiosity over the remaining lifetime of the notes. Following this transaction, we have now roughly $131 million of money on the stability sheet and $38.5 million of excellent debt associated to the remaining convertible stability. Note, we are going to accrue roughly $2 million of annual curiosity on December 1. And so come Q3, the be aware stability you will notice can be round $40.6 million. Overall, we imagine our capital construction is stronger in consequence, and this transaction is a testomony of our confidence in our future free money circulate technology. It is value mentioning our share buyback capability is restricted as a proportion of the excellent principal quantity of our convertible notes every calendar 12 months.
Okay. Let’s now flip to steerage for the fiscal third quarter and full 12 months. Starting with the complete 12 months, we anticipate the present macro headwinds to proceed to affect our extra discretionary toy merchandise throughout each B2C and commerce channels. As a results of this, we’re taking a extra cautious method to our prime line steerage and reducing the general vary. We at the moment anticipate whole income to be down between 8% and 11% year-over-year versus our earlier steerage vary of flat to down 5%. Again, this revision largely displays the headwinds that the general toy class is experiencing and our view that the surroundings will stay difficult for the foreseeable future. From an adjusted EBITDA standpoint, we now anticipate to have full 12 months lack of between $6 million and $12 million versus our earlier steerage of constructive $2 million to minus $8 million.
While our EBITDA vary has come down barely, the midpoint of $9 million would mirror a major enchancment from the $31 million loss we recorded final 12 months and the $58 million loss we recorded in Fiscal 2022. Moreover, we anticipate year-over-year enhancements in adjusted EBITDA shifting ahead. Turning to our steerage for fiscal Q3. We at the moment anticipate whole income between $123 million and $119 million. From an adjusted EBITDA standpoint, we anticipate between unfavourable $5 million and unfavourable $8 million. Similar to prior years, we make investments extra closely in progress through the vacation quarter and anticipate that pattern to proceed this quarter. This adjusted EBITDA steerage will indicate a constructive fiscal This autumn, which might mark our second quarter of constructive adjusted EBITDA since can public, we anticipate to enhance on this in FY 2025.
In conclusion, we proceed to see step change enhancements in our unit economics, a pattern we anticipate to proceed via fiscal 2024 and past. And whereas we proceed to face headwinds on the highest line, we anticipate to realize momentum as we enter fiscal 2025 on the again of our consumables business. At the top of the day, we have now loads of money and a business that’s turning the nook on persistently producing constructive free money circulate. There isn’t any denying that the surroundings has been difficult. However, we’re very assured in our capability to proceed to ship wholesome year-over-year enhancements in profitability. Overall, we imagine we’re in a stable position to capitalize on promising developments in our new consumables classes and likewise anticipate the toy facet of the business to enhance as macro headwinds subside over time.
With that, I’ll flip the decision over to the operator for Q&A.
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