Q2 2023 Bark Inc Earnings Call
Last year.
Our healthy top line performance, coupled with continued cost efficiencies resulted in an adjusted EBIT dialogue us.
$2 million or $6 $8 million improvement compared to the same period last year and $11 million improvement from the previous quarter.
$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 218000, 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 cost came in at $53 19.
Largely in line with our multi year historical average if a customers. We are currently acquiring are spending more and shopping across multiple categories.
Our average order value was $32 18.
A $2 45, <unk> increase year over year kind of $1, an 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, two the fiscal second quarter.
We continue to expect this segment to represent between 10 and 15% of total revenue for the year.
No.
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 Q3 flipped.
We also shipped to a new retail partner last quarter Sams club our products are now available.
600, grit Sam's club locations in the U S and online and then over 40000 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 <unk> growth I mentioned earlier.
Moreover, our Harry Potter collection in August was our strongest performing licensed product ever in.
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 is a particularly important data point given the current inflationary environment.
It illustrates the benefits of selling proprietary products.
<unk> 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 Heartbreak contributed $2 $8 million of revenue and 102% increase year over year and.
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 turn 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% in 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.
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 line 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, 'twenty, one and fiscal year 'twenty, two 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.
Also discussed how we had over hired and needed to grow into that size and this is also happening.
So to summarize.
Healthy <unk> growth and our focus on delivering operating leverage resulted in an adjusted EBITDA loss.
Of $2 million or <unk>.
$6 $8 million improvement year over year.
Our EBITDA margin also improved to negative one 4%.
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 am 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 breeds specific format.
In August initially targeted at three breeds.
It's only been three months since launching this format. We are very happy with the early results.
Customers are engaging and converting at significantly higher rates 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.
Nonetheless, food is a more considered purchase and requires additional education and outreach compared to toys R treats and everyday we are learning more effective ways to engage and convert customers.
The same was true for bright and it's 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 dark box customers to change what they see their dog with an email. This speaks to the strength of the park brand and the compelling nature of our food offerings.
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 Hush puppies specific formulas.
We are now serving two hours labs pitfalls doctrines, 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 grades.
This is important as meaningfully expands the number of customers we can serve.
While it is still early 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.
He 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.
Even the subscription nature of our business, we typically order product eight 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 our most profitable and efficient days are still ahead of us and 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 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.
A 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 planned for higher customer acquisition costs due to seasonal increases in CPM as well as higher shipping north face, 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 our 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.
Thanks, Matt and good afternoon, everyone.
Our business has remained incredibly resilient through the first half of fiscal 2023, and we've made tangible progress across each of the key initiatives, we laid out at the beginning of the fiscal year.
Compared to last year, our average order value grew by $2 45.
Our operating margin improved by seven points, and we reduced our cash burn significantly.
These are all important milestones in big steps toward reaching profitability and becoming cash flow positive.
Let me take you through our fiscal second quarter results in more detail.
Total revenue increased 20% year over year to $143 $8 million as Matt mentioned, we saw a pull forward of certain commerce revenue as several of our retail partners ordered their holiday product earlier than in prior years. This was in large part why we came in nearly 9 million.
Ahead of our revenue guidance for the quarter.
Overall, we were encouraged by our retail partners continued support in this segment remains an important driver of the business.
Turning to our direct to consumer business total revenue increased 10% year over year to $117 $5 million.
Growth in this category was driven by a one 7% increase.
Subscription shipments and an 8% increase in average order value per shipment.
Turning to margins total gross margin was roughly two points lower year over year. This was largely attributable to our commerce business, representing 18% of total revenue in the most recent quarter as compared to 11% last year. Furthermore, our commerce gross margin came in at 33, 2% as <unk>.
<unk> to 41, 7% last year.
The year over year decrease in Commerce gross margin is primarily attributable to seasonal promotions associated with the holidays.
If you recall in fiscal Q3 last year, our commerce gross margin was roughly 36%.
Given this year's pull forward, we saw more of the seasonal impact in our fiscal Q2 results.
Our DTC gross margin came in at 61% one point above last year.
Looking ahead, we expect our gross margin to improve further through the second half of the year.
Turning to operating expenses total general and administration expense was $74 2 million as compared to $68 2 million in the prior period.
However, G&A as a percentage of revenue improved by five points year over year, which reflects the efficiencies we realized in head count and shipping and fulfillment.
And if we look at shipping and fulfillment specifically, we delivered a nearly four point improvement compared to last year.
Advertising and marketing, which includes all of our customer acquisition costs as well as our marketing teams salaries came in at $15 3 million as compared to $17 $1 million last year.
As a percentage of revenue. This line improved by three five points to 10, 7% compared to last year as.
As we discussed on our previous call generating operating leverage on our cost structure was a key factor in driving towards profitability and we were very pleased to improve our total operating margin by roughly seven points year over year.
Moving on other income was a negative 153000 last quarter as compared to positive $23 2 million in the prior period.
The large delta is almost entirely related to the change in the fair value of our outstanding warrants, which is a noncash item.
And the most recent quarter, we booked a charge of.
$1 million related to these warrants as compared to a gain of $23 $4 million in the same period last year.
We adjust this figure out of our adjusted net income and EBITDA numbers. However, it can have a large impact on our GAAP numbers in any given period.
On that note GAAP net loss last quarter was $11 9 billion.
As compared to net income of $6 4 million last year.
Again, the Delta versus last year was driven by the $23 $4 million change in the fair value of our warrants.
On an adjusted basis, which removes the impact of the warrants and other items, our net loss improved by 39% to $6 7 million as compared to $11 million last year.
Adjusted EBITDA was negative $2 million, a 77% improvement compared to the negative $8 8 million, we generated last year.
Our adjusted EBITDA margin also improved considerably coming in at negative one 4% versus negative seven 3% in Q2 last year overall, our results last quarter underscore the tangible progress we've made improving our unit economics and driving towards.
Profitability given our recent progress we believe positive adjusted EBITDA and free cash flow quarters are in our line of sight.
Turning to the balance sheet, we ended the period with $166 million of cash and roughly $161 million of inventory.
As Matt mentioned, we've made a lot of improvements to our inventory controls, which will enable us to convert inventory to cash more efficiently.
We expect this dynamic to play out towards the back end of the year and even more so into fiscal 2024.
On that note, we also significantly reduced our cash burn this year.
Through the first half of fiscal 2023, we had negative operating cash flows of approximately $35 million, which is a substantial improvement compared to last year.
Over the past year, we've invested a lot of time building, an infrastructure that will enable us to scale responsibly and profitably.
And while we still have work to do.
We believe the business is in a much healthier place and our best days are ahead of us.
To summarize we had a very strong start to the year.
We're adding more premium customers, we are delivering more operating leverage on our cost structure and we've significantly reduced our cash burn.
We've also help demonstrate the resiliency of the dog industry and from hard goods to consumables bark is executing across the board and we look forward to updating you all again in the near future.
With that I will turn the call over to the operator for Q&A.
Thank you.
Anthony I would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove that question. Please press star followed by two.
Again to ask a question Crestar one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Corey Grady with Jefferies. Your line is now open.
Hey, Thanks for taking my question, So I wanted to ask about Europe .
<unk> expanded the breeds specific offerings and add it up you formulations, but maybe you can talk about how much of your customer base are you touching with those first 10 formulas and then just on the point you made about additional outreach can you provide any color on where food customers are coming from.
Sure. Thanks for the question.
First on the.
The first 10 brands that we've launched with.
That is reaching or serving specifically about 30% of the customer base so far.
And obviously as we add more reidsville will reach more customers.
On the second question.
So very much an internal home.
Internal to bark marketing effort.
Where we're marketing to our own customers first and not out there buying media against bringing new people into the into the bark universe.
<unk>.
The customers that we're acquiring four.
$53 in this past quarter.
Through the play side of the business and then.
As any food to them, which.
Comparable to other direct to consumer food brands.
It's quite a low cost of acquisition.
Got it sorry, if I can clarify.
Wherever those customers buying their food previously.
You have the color.
Sort of types of food, where they are buying.
Oh, I'm, sorry, I misunderstood the question.
I don't know where they were necessarily buying their food previously so I'm not sure I can help you with that one.
Alright.
No problem.
And then I wanted to ask just for my next question just on the Commerce segment and the resilience of the category. So you saw the timing shifts of retailers pulled forward orders, maybe you can talk about holiday order levels relative to your expectations.
Any change in tone from retailers.
The category just given the pressure on the consumer.
Certainly.
Yes, we have noticed a change in tone.
I think we've all heard the same thing about retail that the big retail partners out there.
They have a good amount of inventory on hand, and they're thinking about how to move those and they are worried about their margins and so we're.
We're in those conversations with them regularly.
Trying to thread that needle of giving them products that continue to perform really really well and sell well for them.
And help them meet their margin goals, we have to meet our margin goal. So we're trying to be a great partner and have everybody leach reached the targets but.
You definitely feel the.
The pension and pressure more than we have in the past.
I will say I think we've.
Benefited by.
Having those orders pulled forward just given that the pressures probably increasing on the retail partner. So it's good that we got them out when we did.
That's a great point, thanks for thanks for the color and taking my question.
Thanks Mark.
Thank you.
Our next question comes from the line of Maria <unk> with Canaccord. Your line is now open.
Good afternoon, and thanks for taking my questions.
First as we look ahead.
Sure.
<unk>.
Myles Walton.
Switching initiative.
We will talk about how you're thinking about the pool of announcements throughout the year.
Some variables.
But of course, we increase or decrease.
Thanks.
Sure.
When we look.
Into the future.
The quarter, we're in right now.
As our traditional holiday quarter.
Especially in the direct to consumer side, where the big investment as we discussed on the call was it's always and marketing and acquiring a lot of subscribers at very good rates and this year higher quality subscribers than we've ever seen before.
That's the big investment right now.
As we go into the future.
Sure.
Get past January one.
Where we're really.
We continue to focus.
The priorities are on first generating positive cash flow and.
And we feel we can do that fairly soon.
Second is then EBITDA positive and obviously.
Being EBITDA positive makes generating cash flow positive cash flow easier and then third <unk>.
Generation revenue growth, but definitely in that order, we have to be growing from a foundation of.
Solid unit economics, and a profitable healthy business, that's generating cash on a consistent basis. So the priority is there.
So what that means is we're looking at for the future generally is leveraging the areas and the assets that we have on hand.
And how do we best put those to work next year. So.
Let's take an example that we're talking about here.
We talked about $166 million of cash on the balance sheet $161 million of inventory.
For those not familiar with how our business works, we're sending a box of toys and treats every month that is a bit of a surprise the customer which gives us a lot of flexibility in what we send to that customer and how we use the inventory we have that allows us to serve our recurring customer base and every new customer.
With inventory that's already in the house and has already been paid for that.
And our cash.
On top of that we have the opportunity to package those products up and take them to retail partners as I, just described and give them greatest assortment that haven't been on their shelves before.
And work with them on the margin side again to generate positive cash flow. So we're looking at opportunities of leveraging the assets that we have.
And meeting the times as they are to get to again positive cash flow and then investing in being more and more and more efficient all the way through the business, how we work together.
Our organized as a team.
Our relationships with our vendors are shipping and fulfillment providers every point within there is critical for us to getting to that EBITDA positive and then from that foundation. There are a lot of fun ideas in terms of how do we grow revenue beyond that.
Next year and in the future, but it's got to come as the third priority on that list.
Got it that's very helpful and if I could ask one more can you maybe just talk about the sequential progression of net subscriptions in the quarter.
I'll call in terms of what drove this modest decline that additions and how should we think about it going forward. Thank you very much.
Thanks Maria.
The way we're thinking about it is the same we thought about it.
It came back in January which was.
In order to have that solid foundation, and a profitable sustainable business ongoing we needed to change the complexion of our customer the profile of that customer and so we talked about through the year our plan was to.
Probably stay pretty flat on the number on the total number of subscribers were serving but raise the quality and so you see that you see that starting to bear out.
As the average order value that a customer spent this quarter year over year raised by $2 45.
Versus just last quarter raising $1 11.
We're getting.
We're getting a bigger lift.
That average order value or we're getting it faster than we expected.
And we're getting the same performance that we thought we would get in the active subscribers I would.
I would expect that to continue through throughout the rest of this year.
Especially given the macro macroeconomics.
Environment around us.
I would expect that to remain flat, but that was the plan from the start we're executing it well actually better than we expected to so.
Sorry to go.
Back to the first answer but once we have that solid foundation in place then we start to think about how do we grow and accelerate that number of total subscribers.
Great. Thank you so much for the answer and good luck for the rest of the quarter.
Thanks Ram.
Thank you.
There are no additional questions waiting at this time, so that will conclude the <unk> second quarter fiscal year 2023 earnings call.
You for your participation you may now disconnect your line.