Q4 2023 BARK Inc. Earnings Call
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.
<unk>, we 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 initiatives, 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 our 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 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.
Zahir will discuss our guidance in more detail but.
But we expect to deliver multiple adjusted EBITDA profitable quarters, this fiscal year and be in the neighborhood of breakeven 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 our 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 topline 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.
We have a reasonable line of sight to this acceleration as we have made considerable progress pitching consumables and 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.
<unk> 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 that can be when we take treats and all of our consumable products. The 40000 retail doors, where we sell twice.
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.
Consolidated gross margins to expand sequentially throughout fiscal 2024.
We anticipate this coupled with additional operating leverage in our TNA Airlines will bring us in the neighborhood of breakeven adjusted EBITDA and positive free cash flow for fiscal 2024.
And looking beyond fiscal 'twenty 'twenty four 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.
We do not believe that our recent progress has yet to be reflected in our stock price, let alone our long term potential.
For our 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 Z here.
Thanks, Matt and good afternoon, everyone since participating in my first earnings call back in February .
The opportunity to gain a much deeper understanding of the business and the time of being focused on identifying areas that will drive business performance, both on the topline and bottom line and set up well.
For long term success.
As you heard from us.
We've made significant progress over the past year. However, I believe there are still plenty of opportunities for improvement so our long term profitability profile.
As illustrated by our fiscal 2023 results, we are beginning to see material improvements in our unit economics.
As we progress through fiscal 2024, we will be in a position to transition our focus to growth.
Needless to say, we have a significant runway along with the growing cash balance we have a lot of flexibility to invest in growth, but we are confident will create value for our shareholders.
With that said, let me dive into our financial results in more detail.
As Matt noted, we updated our kpis in this quarter's press release, so I'll speak to those numbers.
We will include our legacy Kpis for the last time and this quarter's 10-K. So you will have the ability to close out the year. However, we will not be disclosing those that goes going forward.
On that note, we shipped $3 6 million orders in the quarter, which includes subscription auto ship and one off.
For the full year, we shipped $14 9 million orders, which were down one 7% compared to the same period last year as we've discussed previously the expectation coming into the year was that virtually all of our revenue growth was going to be driven by improvements in our average order value.
Become more effective at cross selling customers.
This is precisely what huh.
In the fourth quarter.
With $32 72.
$2 and 27% increase compared to last year.
For the full year.
<unk> was $31 and 77.
The $2, an 11% increase versus last year.
You will note that these figures differ slightly from the figures. We were reporting previously this is simply a function of orders being a larger denominator than subscription shipments, which only included subscription customers.
Moving on total revenue for the fourth quarter was $126 million down roughly 2% compared to the fourth quarter last year.
For the full year total revenue was just over $535 million, an increase of five 4% in fiscal 2022 on a segment basis D to C revenue was down slightly by one 5% in the fourth quarter, while <unk> revenue declined by nine 3% for the quarter.
We continue to expect softness on the retail side through the first half of fiscal 2024, with our retail partners and look to sell existing inventory and remain cautious in this macro environment.
Also note on our retail presence to date just solely of toys.
We begin to introduce the less discretionary products like three.
In retail we would expect less volatility on this line the long term for the full year DTC revenue increased five 3%, while commerce revenue increased six 7%.
Gross profit in the fourth quarter was $72 million up 12% compared to last year.
This resulted in a fourth quarter gross margin was 57 seven.
700, plus basis point increase year over year.
As a reminder, in the fourth quarter of last year, we wrote off approximately $13 million of inventory largely relating to products no longer in line with the company's long term strategy.
In the most recent fourth quarter, we took a write down of $4 4 million, which reflects normal inventory shrink aging products and importantly, the need for us to continue to refine our inventory management.
As Matt pointed out this scenario was exacerbated by carrying such a large inventory balance over the course of the year.
Looking ahead, I'm confident that we have stronger processes in place to better forecast manage and control inventory.
Current inventory balance was 124 million is down nearly 25%.
Through fiscal 'twenty three.
Thanks to a major focus from the commercial and operations teams are moving forward. This will also reduce our P&L exposure.
Moving on our full year gross profit was $308 million up 9% compared to fiscal 2022. This resulted in a gross margin of nearly 58% 200 basis points higher than last year. This improvement is a direct result of growing.
Reducing inventory write downs and starting to see improved product costs flow through the P&L, we expect even stronger growth in our gross margin throughout fiscal 2020 full particularly in our <unk> segment.
For example, <unk>.
<unk> gross margin was 65% in fiscal 2023 or 241 basis points versus last year. Looking ahead, we expect to see gross margin to improve 200 to 300 basis points over the course of fiscal 2024 <unk>.
Moving down the P&L total G&A was $69 2 million in the fourth quarter down roughly $16 million compared to the same period last year about 45% of this reduction is driven by improved shipping and fulfillment costs, while the remainder as a result of tighter cost management along with some.
Timing shifts with the earlier quarters.
Total G&A for the year was $303 1 million up $1 3 million versus last year.
Looking at G&A in more detail shipping and fulfillment expense was roughly a 157 million down $1 6 million compared to fiscal 2022.
On a related basis shipping and fulfillment cost cutting down 200 basis points from 31, 3% to 29, 3%.
As a result of improved logistics network management on recently renegotiated contract with our shipping and fulfillment partners.
Both of these drivers to result in around a 100 basis points improvement in our shipping and fulfillment expense in fiscal 2024.
For other G&A spend we expect our annual run rate to improve from the $12 million cost reduction exercise, we announced in February of which $10 million will flow into fiscal 2024, we expect to see some headwinds on this line such as inflation, but I'm confident that we will be able to offset these with discipline.
Cost management.
Marketing expense in the quarter was $15 4 million two.
$2 million higher than last year, we decided to invest more heavily in mostly in the fourth quarter.
We were seeing was encouraging we arguably under invested in the fiscal third quarter.
For the full year marketing expense was $68 8 million about $5 6 million below fiscal 2022.
With improvements in our gross margin shipping and fulfillment and other G&A areas. We have the ability to further invest in media to drive awareness and traffic and as opportunities arise.
Lastly, we recorded an adjusted EBITDA loss of $3 4 million in the fourth quarter largely in line with guidance on an 85% improvement versus Q4 last year for the full year, we recorded an adjusted EBITDA loss of $31 3 million or 46% improvement compared to fiscal <unk>.
22, and nearly 5 million ahead of our original guidance coming into fiscal 2020 three.
From a balance sheet perspective, we ended the quarter with $178 million of cash 14 million higher on a sequential basis and we ended the year with $124 million of inventory down $21 million versus fiscal Q3.
The improved P&L performance reduction in inventory.
With timing on payables helped drive a second consecutive quarter of positive free cash flow with the fourth quarter coming in plus 17 million.
About $7 million of the payables timing will impact Q1 fiscal 2024.
Let me now turn to guidance beginning with revenue.
For the full year, we're expecting revenue to be flat to down 5% compared to last year.
Going into more detail, we expect total revenue from poised to decline.
Set by growth in our consumables business.
For example, we generated approximately $371 million of revenue from employees in fiscal 2023, which includes toys revenues from our <unk> segment. We expect this category to decline in fiscal 2024, given the broader macro backdrop, and then will discretionary nature on the other hand, we.
Consumables, which delivered $164 million of revenue in fiscal 'twenty three to grow over last year.
Moreover, we expect year over year revenue declines in the first half of the year given the difficult comps as a result of our growing revenue by nearly 16% in the first half of fiscal 2023 versus fiscal 2022.
We're also expecting softness on the promo side of the business in the first of all as retailers continued to closely manage their inventory levels.
We got to the second half of the year, we expect total revenue to begin to accelerate particularly in the fourth quarter from there we expect high single to low double digit revenue growth in fiscal 2025.
Nonetheless, we do expect healthy growth in our gross profit this year and currently expect on our gross margins improved 2% to 300 basis points year over year.
With that said, we currently expect first quarter revenue of between 121 on a $123 million.
Adjusted EBITDA loss of between 10 and $11 million.
Which would be an improvement of $2 million to $3 million as compared to the first quarter of last year.
For the full year adjusted EBITDA, we expect a loss of between negative $8 million and positive $2 million. This would reflect a significant improvement from the $31 million loss, we recorded last year and a negative $58 million, we recorded in FY 'twenty two.
Where we fall in this range will come down to a couple of factors first we may choose to invest some margin with customers to help fuel growth and second we will be nimble with our multiyear investment in may choose to invest more heavily.
Nonetheless, we expect to be free cash flow positive for the year and expect our year end cash balance to exceed $180 million all else being equal from a timing perspective, we expect free cash flow.
Negative over the next two quarters and returned to positive in the second half and for the full year.
In summary, we have made significant progress in diversifying our product mix, improving our average order value.
In the U S.
Economics of the business. We expect these efforts to result in bought being full year free cash flow positive and closing in on a breakeven adjusted EBIT, though.
As we turn the page on profitability, we will quickly transitioned to growth mode on a profitable structure from a new CFO perspective, we have plenty of cash a significant runway for growth and a management team that is laser focused on delivering long term share holder value I couldnt be more excited about bulks journey.
With that I'll turn the call over to the operator for Q&A.
Our first question comes from Maria <unk> with Canaccord. Your line is now open.
Great. Good afternoon, and thanks for taking my question first how are you thinking about sort of the longer term mix for the business in terms of subscriptions versus standalone purchases and each purchase is becoming a greater portion of the business mix.
Does this mean in terms of fulfillment and marketing and are there any changes that need to be implemented on that front.
Thanks Maria.
We what we're thinking for the mix over time is today of course, it's still heavily subscription.
But in the past couple of quarters, we have started to offer that.
That mix or that choice to the customer that they can subscribe.
Subscribe and save or they can buy one off in order to raise the conversion rate.
How that evolves over time is really going to depend on the mix of products that we offer to them. So you'll of course expect bar crocs and super cure to be subscription experiences going forward by and large a product like food to have more regular delivery.
So more more prone to a subscription relationship, but but that's one where today, we we offer the one off to customers and they appreciate that and and so it's not 100%.
And then some products where it just makes no sense at all and and so how that falls out in our mix over time is going to follow the trajectory of.
The products, especially on the consumables that we offer.
Got it.
Probably a marine I would probably add to that.
With increasingly.
Focusing on consumables.
Expanding our portfolio and offering both online and then we're taking those two retailers as well so overtime youll see this increased mix of consumables.
This is toys in our portfolio as well.
This is toys in our portfolio as well.
Got it that makes sense and then secondly, you talked about Joe was just one of the growth.
Can you maybe just talk about how you're thinking about that category. What are some services that you have in mind and what kind of investments will be required to get that business up and running.
Sure.
It's a I would take it as a visionary statement on where we are in a really unique position in the market, where our brand is synonymous with bringing joy the dogs and their parents.
And we also have as you know millions of first party data points that are unique to us. So what we know is we know dogs really well, we know talks and there are people really well and we have a brand that's synonymous with happiness and joy.
And we are solely focused on dog share for not selling hamster food.
So there are ways that we think we can leverage that relationship and that data in these unique assets and that brand that go beyond the packaged goods services.
Next logical step in that.
And if we just think about.
The obvious and non obvious are parts of the world there.
That really opens up a big opportunities for us.
It's still for US early days, so we're not ready to elaborate further as to what the specifics are but if you look across the pet industry and then maybe take a little page from the relationship between parents.
Human children and their kids and how the world has evolved to serve them.
In multiple different ways, its not just baby formula, but its packaged goods and into services and how the world.
Treats them Theres, a similar long term vision for park and so we wanted to share that that vision with you today.
Got it that's very helpful. Thank you very much for the color.
Our next question is from Ryan Meyers with Lake Street Capital markets. Your line is now open.
Hey, guys. Thanks for taking my questions.
First one for me just wondering if you could unpack a little bit you know how many of the consumable customers are new customers to the bark platform versus how many of them are from cross selling to existing <unk> customers.
Today, so far I don't have an exact percentage or figure, but I will say the large majority are from the cross selling to existing customers.
So just.
As a reminder of the historical progress here.
Back in August so nine months ago.
We stood up a standalone platform or a new platform food dot bark Darko.
We were selling only our food our cable product no other consumable no treats no toppers.
Certainly now twice our park box or Super tour experiences and over time, we've added more and more and more of our products to that we're now all of those products live on that platform.
Unfortunately still at food dark dark hole, but only recently did we add Bart box and super tier or so.
We'll update that you are able to make that a little more current or reflective of what's there.
Hi.
But as it was experimental and what we're trying to do is increase conversion rates on our kibble initially and then increasing conversion rate.
How the customer engages with each of those products and then raise cross sell between those in the same session.
It's been a testing environment.
And in order to test that as cost effectively as possible we've been leveraging are rather large.
<unk> of customers.
And we've done that really successfully the growth there has been.
Fantastic Super encouraging for the first nine months to the point that.
Only now are we starting to invest.
Any media dollars against bringing new people into the fold so while I don't have a.
A specific percentage as to what that breakdown is it's going to skew very heavily towards peak.
People, who are already in the park universe prior.
But now that's starting to change with the media spend.
Got it that's helpful. And then you kind of touched on this a little bit but when we think about the adjusted EBITDA Guide in Q1, and then for the full year.
So there's a lot of things going on in the gross margin there, but wondering if you can kind of unpack sort of that improvement from Q1 to exiting the year.
Just a little bit more so we have a good understanding of kind of how that sort of progressed through the year.
Thanks.
Hi, Justin.
So just talking about Q1 firstly.
Relative to where we are exiting Q4, you know just a couple of things that drive the Q1 guidance one is.
The revenue.
It's slightly soft during Q1, driven by just the retail.
Inventory that we're seeing with some of our retailers and the macro environment that we're seeing so that's reflected in the.
Q1 revenue guidance and arguably in the first half revenue that we're expecting to see.
Specifically for Q1 in terms of other.
Parts of the P&L there'll be higher levels of investment from marketing.
We continue to see appropriate levels of return on investment and then in Q4 'twenty three we saw some.
Timing benefits that came through in Q4 relative to the.
Earlier parts of the year and we haven't model with those what I expect to see those come through in Q1 2024.
As we look at 2020 full across the year Youll see from a top line perspective, we will continue to gain traction both on D to C. On also on the commerce side.
Commerce as I mentioned you know.
Retailer inventory starts aligning you start getting into Q3 and greater levels of just a notional.
A window as well Q4, we start getting traction with consumables on shelf as well so you gain more and more momentum on that side and then from the D to C perspective, you're seeing.
Continued traction as Matt mentioned on the new site increased cross sell more momentum from the increased marketing investment that we have so that is continuing to build in terms of topline momentum and velocity.
As we look at overall P&L.
During 2023, we had really strong margin gross margin improvement.
And we'll expect that to continue at a similar clip in 2024.
As new contracts continue new contracts and new contract pricing kicks in and we will see that.
<unk> flow through inventory and through the P&L in the first half we've got additional contract renegotiations I'll kick in for the second half of the year as well as improved gross margins during the course of the year shifts.
Shipping and fulfillment, we had a really strong performance in 2023, some of the benefits of that will flow into 2024, and we see a lot of opportunities from a network planning.
Active on.
On the logistics side, so we expect that benefit.
To increase during 2024.
And then finally on G&A.
We did the <unk>.
Cost reduction initiative in February .
About $10 million of that benefit is going to flow through in 2024, and then as we look across the various parts of our G&A base those areas for us to be tied to from a cost management perspective. So we'll see that gained momentum during the course of the year. So.
You'll have.
What I'd say a couple of quarters in the year, while we expect to see positive EBIT.
Continued top line traction on margin improvement going through the year.
Got it makes sense, thanks for taking my questions.
Thank you.
Our next question is from <unk> <unk> with Citigroup.
First on the on the subscription.
And the new Kpis.
Okay.
No I was always the vision for the company to move a little bit more away from subscription.
Different options to your customers or was this something that you guys were seeing within the subscription model that.
Maybe you want to move.
Move away and changed our approach.
It's it's certainly.
Being responsive to the customer again, since we launched that new unified platform.
We started at food based and as I've mentioned, we've added all of the various products to their we added our dental product in February and.
That one.
A really good example, a very Stark example of all we offered previously was subscription.
And a real hunger or demand from the customer too.
To purchase the one off items, so they might be on a subscription and for example run out of their gel and.
It didn't have an outlet to repurchase or to purchase just the dollar just the choose.
Or to say it doesn't last me exactly a month lag.
Asked me three weeks or six weeks.
So that gave us a pretty clear signal and as we push further in Detroit or I'm, sorry into treats and toppers.
Even more of that activity so.
I would say over the past six months.
It's become very apparent that the customer wants a lot more flexibility and we convert much better and have a better relationship when they do.
And it's just a reflection of our move into consumables and that there's a different buying rhythm there's a different customer experience built around those.
So it's being responsive to that.
Reflecting that in the results we share with you, but also the way we manage the business.
Okay. That's really helpful on the unified platform is it.
Where you want it to be.
Maybe the actual.
You are out.
Or is it more.
We'll keep you there then.
Youre getting down there.
About the.
But in the northeast.
Yeah, a little bit more about what you're.
Youre looking for there on.
President of the gas.
Or not.
Hi, there.
Okay.
We are not so focused on driving that either but also.
One off.
Okay.
Yes.
So really happy with it.
It's not there in terms of it's done it does have it reflects.
The breadth of products that we have and they're all under one roof. So in that way they are reflected there.
Like you said you want to make the you are all a little bit.
[laughter] more less descriptive I guess or more generic too to bark.
But overall, what we're looking for there is when it when a new customer enters bark.
Their lifetime value greater than the sum of the parts when scattered across the other four websites.
And of course, that's a collection of.
B.
The retention or the repeat purchase rates that we're seeing our average order value.
Are there margin the items per basket like how much theyre, adding to their orders are how effective we are at upselling. So.
All of that needs to come together, there are parts of that where we're already outperforming.
<unk>.
Core or the legacy part of the business conversion rate being one of those and Thats, where most of our focus has been.
And so now we're focusing more on on the <unk>.
Overall move the lifetime value of that customer that we're converting really well.
The other really key thing for us to learn and prove before we.
We fully embrace it is can we acquire new customers into bark onto that platform that have a superior LTV at an attractive or faster.
Cost of acquisition.
And do they have the same behavior in the same profile. So again, we just we've just recently started spending money against that and acquiring customers and learning that rhythm.
But as far as an experiment goes it's.
It's doing very very well, it's one of those one of those early things. So early is a keyword there but.
Where.
Almost every metric in the businesses one of those up into the right for nine consecutive months kind of thing.
<unk>.
But it's definitely got work left to do.
That's very helpful. Thank you.
Okay.
Our next question is from Corey Grady with Jefferies. Your line is now open.
Hi, Thanks for taking my question just wanted to ask what you're up to expand assortment at retail it sounds like treats start showing up in Q4, but can you also address timing for.
Adding toppers too and then expanding distribution for dental thanks.
Yeah.
Treat our are definitely the focus for this upcoming Q4, there are there's a focus right now on the sales side and I would say if thats one AD in one b is dental because we have a.
We have a proven finished product there and we have near term.
Your line of sight to.
A much improved margin profile on that product. So one of the things that has kept us challenged Ah.
Taking dental into retail to date has been making the margins work for us and for our retail partners and with a new formulation that's soon to come out.
We've.
We've really addressed that and now there's a big growth opportunity. There. So we put it in the hands of our sales team.
The ideal time for any dental product to launch in retailer launched anywhere is dog dental month, which is February so our team is pushing very hard for that but.
<unk>.
But we don't have anything secured there so.
Definitely one a is our new line of treats which we're super excited about one b is dental.
<unk>.
And then we will follow with toppers and food and if we stay on the same cycle that would show up near the end of fiscal 'twenty five there's the potential that you could push it faster and have some small retailers.
Take you a little bit off off cycle, but I wouldn't count on that.
Got it that's helpful. And then just my follow up just on your sales guidance, you guys Q1 down 7% and you're planning to exit the year with growth in Q4, maybe expand on the assumptions for the year that underpinned that trajectory.
Yes.
Sure well, we just talked about some of them there in retail and with consumables and bringing them certainly a new category and a new line.
We really benefit and we havent, we havent, yet leveraged our retail or wholesale channel enough in this way, but one of the benefits for US is we're in 40000 retail doors with our toys and quite successfully and we have great relationships. So that's something we need.
Need to leverage we are leveraging.
And we're introducing ourselves into much bigger categories than twice treats being one of those so that's one of the drivers as we introduce that to our to our retail partners.
Another is.
<unk>.
We're again certainly encouraged by the progress on our <unk> platform.
And as I said, starting to spend some of our dollars there to acquire new customers.
And the profile of that customer gets better and better so.
Some of that is.
Subscribe and save activity some of that is us learning to bring a one off customer back to reap repurchase again and again, but the acceleration there is compounding and that compounding leads to our direct to consumer channel is getting better but as with any.
Compounding business. It just takes a few months or a couple of quarters to build on itself and then and then we move into our holiday season or really get a surge on that on both sides of the house.
Thank you.
There are no more questions. So I'll pass the call back over to the management team for closing remarks.
Alright, Thank you everyone.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.