2023-06-09 16:13:09 ET
Summary
- BARK is down over 90% since going public in 2020.
- The company's shift to consumables should increase its growth in the expanding pet product market.
- The latest earnings continue to show impressive improvements in the bottom line, and the current valuation is extremely discounted.
- I rate the company as a buy.
Investment Thesis
BARK ( BARK ) has plummeted over 90% since going public in late 2020, as many investors lost confidence in SPAC-related companies amid their disappointing performances. Unlike other SPAC companies that have problematic fundamentals, Bark actually has solid products and is showing improvements in its financials. The company's valuation is extremely discounted, which could present substantial upside potential if management can continue to improve the bottom line. The current risk-to-reward ratio looks favorable, and I rate the company as a buy.
Shifting To Consumables
BARK is a New York-based dog brand that sells dog toys, treats, dental products, etc primarily through its subscription services. The company operates under multiple brands including BarkBox, BARK Food, BARK Bright, and BARK Home.
It is targeting the massive and fast-growing dog product market. According to Morgan Stanley , the pet product market is estimated to grow from $70 billion in 2019 to $158 billion in 2030, representing a solid CAGR (compounded annual growth rate) of 7.7%. With dogs accounting for 39% of the market , the company's current TAM (total addressable market) should be around $36.7 billion. The market is poised to continue its expansion as the number of pets continues to rise.
BARK's increasing focus on consumables (treats, food, toppers, and dental products) should be a major growth driver in my opinion. The company has historically focused on toys, but the segment is highly non-discretionary. On the other hand, consumables are much stickier products as they need to be repurchased regularly. This vastly improves customer retention rate and LTV (lifetime value). Consumables currently only account for 30.8% of total revenue, and its rising penetration should continue to fuel growth.
Matt Meeker, CEO, on the consumables business
BARK has a strong starting 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 the future product development. This is a big opportunity for expansion.
Encouraging Financials
BARK announced its latest quarterly earnings earlier this month. While the top line was impacted by the slowing economy, the bottom line saw meaningful improvement, which is very encouraging.
The company reported revenue of $126 million, down 2% YoY (year over year) compared to $128.8 million. DTC (direct-to-consumer) revenue decreased by 1.5% to $116 million, while commerce revenue decreased by 9.3% to $10 million. The drop was largely due to the decline in the number of orders, which decreased 8.4% from 3.95 million to 3.62 million. This was partially offset by higher AOV (average order value), which grew 7.7% from $29.8 to $32.1 amid the success of cross-selling efforts.
Matt Meeker, CEO, on the cross-selling initiatives.
The strong relationships with our customers help 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.
The bottom line was particularly impressive, as the company focus on profitability. While revenue was down, gross profit grew 12.2% YoY from $64 million to $71.8 million, as the company continue to optimize costs. The gross profit margin expanded 730 basis points from 49.7% to 57%. Spending also slowed meaningfully, with operating expenses down 14.5% from $98.9 million to $84.6 million. The drop is mostly attributed to lower shipping and fulfillment expenses.
The lower costs and expenses resulted in the net loss improving by 61.3% from $(36.7) million to $(14.2) million, or (11.3)% of revenue. The company also posted a free cash flow of $16.7 million, its second consecutive quarter of positive free cash flow. The balance sheet remains healthy, with $177.9 million in cash and only $134 million in debt. The shift to positive cash flow and a negative net debt should eliminate the skepticism around bankruptcy.
Depressed Valuation
While BARK is in no way near bankruptcy, it is priced like it is going to have one soon. With its share price down over 90%, the company's valuation is extremely compressed, currently trading at an EV/sales ratio of just 0.2x. I believe the market is still worried about its profitability, but the company has been making solid progress and is now cash flow positive. It should also report a positive adjusted EBITDA in 2024 (or FY25).
Assuming an adjusted EBITDA margin of 5% (which is very conservative considering the industry's average of 10.9%) and a revenue of $572 million , the company should be able to generate an adjusted EBITDA of 28.6 million in FY25. Using the current enterprise value, this translates to a fwd EV/EBITDA ratio of 5.6x, representing a significant discount of 41.7% compared to the industry's average of 9.6x.
Risks
Management execution and the macro environment are two potential risks that could impact BARK's outlook. The macro environment is my bigger concern, as it is basically uncontrollable. Being a retail brand, the company is quite exposed to the economy. While the unemployment rate is still low at the moment, an uptick in the second half of the year will likely impact demand.
The company's recent improvement in profitability is also partially attributed to lowered shipping, fulfillment, and material costs, as inflation eased. However, whether it will continue to trend down steadily remains uncertain, which poses a probable risk as well. I believe these are things investors should keep an eye on moving forward.
Investor's Takeaway
I believe BARK is a compelling high-risk play. The company's strategy of shifting to consumables should be highly accretive, and its recent improvements in profitability are also very encouraging. There are certainly risks regarding execution and the macroeconomy, as both could meaningfully impact profitability, which is the key to my thesis. However, I am not worried right now as things continue to trend in the right direction. Given the depressed valuation, there could be massive upside potential if the company can generate a positive adjusted EBITDA in the coming year. The current price looks attractive, and I rate BARK as a buy.
For further details see:
BARK: A High Risk, High Reward Play