2023-03-31 13:06:57 ET
Summary
- SPAC sentiment combined with missed targets has pushed BARK, Inc. well below its fair value.
- BARK is priced for bankruptcy despite having a more than adequate cash balance, a history of profitability, a path back to profitability, and positive Free Cash Flow.
- Insiders are buying hand over fist, and BARK stock could easily rise 100% without anyone noticing.
Company Overview
BARK , Inc. ( BARK ) describes itself as the world's most dog-centric company, devoted to making all dogs happy with the best products, services, and content. BARK's dog-obsessed team applies its unique, data-driven understanding of what makes each dog special by designing playstyle-specific toys, great food for your dog's breed, and easy-to-use dental care.
When you boil it down, BARK is an omnichannel provider of dog products (toys, food, dental products, etc.). In my opinion, one of the big competitive advantages that BARK has is that the platform collects significant data on their customers, which enables a personalized experience thus enabling them to increase order values and have a very high retention rate. Additionally, they customize orders for dogs, by determining which food, treats, and toys each dog breed likes the best.
Thesis
Ultimately, I believe this company has unfairly had a dark cloud of negative sentiment due to the fact that it has just been lumped in with other special purpose acquisition companies, or SPACs, who have all seen significant underperformance due to insiders and investors cashing out. However, now that BARK stock has been beaten down, it is priced for bankruptcy, but the business has a clear pathway to profitability, expanding its market opportunity, and a decent margin of safety. Achieving all of this will minimal to no dilution.
Why has the BARK Share Price Declined?
Since going public via SPAC, BARK stock is down ~93%. It's obviously important to the thesis to look at why this company has been crushed. I believe it has been for the following reasons:
SPAC Sentiment
Almost every single SPAC has been crushed over the past year, and many have gone into bankruptcy. Based on data from SPACtrack.io, only 35 of the 418 companies that have de-SPACed, or gone public via SPAC since 2019, have achieved a positive return. While I agree the overwhelming majority of SPACS seem to have been vehicles for insiders to cash out, I don't think that is the case with BARK, at least not anymore. Thus the extremely negative sentiment is helping to provide an opportunity for us as investors.
COVID Related Costs
COVID did have a very big benefit for BARK, as several people, including myself, ended up getting "Covid dogs" once they had the ability to work from home. That also came with more signups for BARK, and I myself am a BARK customer as my miniature dachshund destroys his toys on a weekly basis. However, this meant that BARK needed to scale up quickly to meet this new demand. As a result, the company scaled up too quickly and had too much headcount and several inefficiencies in their cost structure.
With that being said, the re-appointed CEO Matt Meeker is back at the helm and has embarked on several cost-cutting efforts, including renegotiating contracts with their manufacturing partners, signing a long-term agreement with their strategic shipping partners, reducing headcount by 12%, and eliminating contracts with third-party vendors. While we are in the early innings of seeing the benefits of this, we did see gross margin tick up four bps in the last quarter, and we should see this continue to increase as more of these contracts roll off and the company continues to scale.
Recession Fears
With the yield curve fully inverted and several other warning signs of recession I think the market has almost fully priced in a recession. I believe most investors think that this business will be one of the first things consumers decide to cut when trying to cull their spending in a recession, but I think that is incorrect. BARK has a virtually recession-proof business.
According to a 2020 Euromonitor International ("Euromonitor International") report, pet care-relative to other industries-remained recession-resistant, and even in the midst of the COVID-19 pandemic, many pet owners have been willing to cut back spending on themselves in favor of spending on their pets.
Additionally, the company is expanding and its two fastest-growing segments are food and dental which I consider to be necessary for dog owners. Furthermore, the company is going after what they call "higher value customers" and is laser-focused on getting their average order value higher as this will help get them to profitability.
Recession fears for BARK are overblown and I expect the company's revenue to remain stable, continue to grow, and continue to scale towards profitability.
Lack of Profitability
I think this relates back to the point of BARK going public via SPAC, as so many of those companies have had to shutter due to their cash burn and inability to raise cash. As a result, I believe many investors are betting on them to run out of cash like their peers. But this is not the case with BARK. BARK still has $164 million in cash on its balance sheet , is slowing cash burn, and just achieved their first quarter of positive free cash flow since going public. We are witnessing the beginning of their turnaround.
By the way, before going public, the core BarkBox business and Super Chewer monthly subscriptions were both EBITDA positive.
Operating Metrics, KPIs, & Pathway to Profitability
Revenue Growth
Through its struggles, BARK's revenue is something that has continued to steadily grow. Currently, the company only breaks out two segments (1) Direct to consumer ((DTC)) and (2) Commerce, but the company is focused on many new product segments.
Dental
BARK is focused on expanding its reach into the dog dental market. They're doing this through their health & wellness subscription box called "Bark Bright." In its last fiscal year, BARK grew its dental revenue by 120%, although this represented a relatively small amount of revenue at only 6 million.
Food
The food business was also launched in August and now covers 10 different breeds. One of which is Dachshund which I will be ordering next time Milo runs out of food. They also serve this market with treats, and over 1/3rd of the revenue is coming from treats. Additionally, they currently sell zero treats via their retail partners and expect to tap them during this year, so we should see growth there.
Toys
This is the bread and butter of the company. BARK is also growing this segment as it's expanding its retail partnerships with Walgreens and Tractor Supply, and most importantly growing their online toy business. I am currently a subscriber of their BarkBox and my dog loves their toys. I realize that this is a small sample size, but I do know their data probably does try to optimize for which breeds like certain toys the best which I think can be very powerful for retention.
Free Cash Flow
I expect to see this metric continue to stay in the positive territory as the company continues its cost-cutting measures, continues to lower inventory, and continues to increase its AOV.
KPIs
The below table shows the Key Performance Indicators that BARK focuses on.
Latest Annual:
10-K
Latest Quarterly:
As you can see, we are still seeing very impressive growth in their subscription shipments. Additionally, although churn rose, it's still at an extremely impressive rate of only 7%. This all boils down to the two very impressive LTV/CAC & AOV.
LTV:CAC is the ratio of Life Time Value of the average customer to Customer Acquisition cost, and AOV is Average Order Value. The two are very intertwined and with both of these growing is how we will continue to see positive Free Cash Flow grow, and eventually get us to positive EBITDA.
The fact that LTV:CAC is high is showing us that their marketing is working well, and that for every dollar spent on customer acquisition, they are expecting 4.7 dollars of customer value. I also expect this to rise as they are focused on increasing AOV with all of the cross-selling channels we previously discussed.
The bottom line is that the company is laser-focused on cutting costs and increasing exposure to a higher-margin customer base which will push up gross margins, increase LTV: CAC, and increase average order value, ultimately resulting in profitability.
Pathway to Profitability
The pathway to profitability is coming via three main points.
1) Expanding Omnichannel Selling
2) Increasing AOV
3) Cost Reduction
As we can see above omnichannel selling is going to be a great lever to scale, increase margins, and increase AOV. The company is already doing a great job at this as they were able to grow dental massively, and are continuing to grow food. Their strategy of going after high-value customers is also great because that means higher margins, higher LTV, and higher AOV.
Analysts are estimating that their first EBITDA positive quarter will occur in FQ4 2024 (calendrer quarter ending March 2024), and analysts expect the company to be EBITDA positive for all of the calendar year 2024 and for every year onward.
Below is a chart plotting estimate actuals and estimates for EBITDA, and clearly we can see a nice trend to the upside. Analysts and myself do not expect BARK, Inc. to run out of cash.
EBITDA estimate actuals + estimates (CIQ Estimates)
Lastly, to support this we see that insiders at the company are buying stock hand over fist and now because of the continued, unwarranted, decline get to buy at prices cheaper than they did.
Insider Open Market Acquisitions (CIQ)
Valuation
Given that, currently, the company doesn't have any profitability, it's difficult to do an earnings multiple. So, I will look at peer's Revenue multiples and discount it for the risks I see in BARK, Inc.
For competitors, I used mostly pet companies, but also included some E-commerce companies since I think that is what BARK boils down to: an ecommerce pet company.
If we look at peer multiples, we can see that BARK is considerably cheaper:
If we look at the peers, we can see that BARK is trading considerably below the mean of its peer group's TEV/Revenue multiple, while having a significantly higher gross margin.
Comps GM (CIQ)
I think BARK should be trading near 1x TEV/revenue given its growth and business strength. Once profitability is achieved, I believe the market will re-rate BARK stock and we could easily see this stock at $3 with a 1x TEV/Revenue multiple. Furthermore, I think this is conservative, and would argue that BARK should trade at a premium given its brand strength and competitive advantages.
Before I end off, I just want to say how powerful I think this competitive advantage is. Having all of this data on pet owners is really powerful, and potentially something that someone who wants to get into the massively growing industry would love to have access to.
Industry Trends
I feel obliged to speak about these trends because of how massive of a growing industry pets are.
According to the American Pet Products Association ("APPA"), annual spend on pets in the U.S. was $123.6 billion in 2021, an increase of $20 billion, or over 19%, compared to 2020. Industries this big rarely grow at 20%, so it's obviously a great industry to be exposed to.
According to the 2021-22 APPA Survey, dogs are the most popular pet in the U.S., with more than 69 million households having a dog as a member of their family. This reflects an increase of roughly 6 million, compared to 2020.
And lastly, I want to speak about the growing trend on social media called #DINKWADs. According to a business insider article , many people are now living dual income no kids with a dog lifestyles, and treating their dogs as kids, which is a very strong force for BARK, Inc. and its retention rate.
The industry and lifestyle tailwinds are a massive plus for BARK and its future.
Risks
We just talked about a lot of good, but like with any investment there is risk, so let's dive in.
- BARK's inability to reach profitability: I would say this is the biggest risk, and in the event that they are unable to reach scale and ultimately profitability, the company would probably go under. That being said, I would put a very low probability on this, and their history of achieving positive EBITDA prior to going public gives me even more confidence that they will get back there.
- Competition: The pet industry is a highly competitive industry. Many of BARK's competitors have been around longer, have brick-and-mortar stores, more capital, and more customers. Additionally, BARK sells through third parties like CVS (CVS), Walmart (WMT), Amazon (AMZN), etc. If any of these partners decide to end their partnership it could negatively affect sales.
- Recession : discretionary spending typically decreases during recessions and dog toys are typically not considered a necessity so if we enter a deep recession their sales could be seriously hurt by this. With that being said, I think their focus on higher-value customers will help to protect them from this.
- Dilution : This kind of relates back to point 1, but more so to the fact that the company has 150 million of convertible debt expiring on 12/1/2025. In the event that company fundamentals are not improving by then, it will be difficult for them to refinance and the dilution could be serious. Again, I don't expect this to happen and expect the company to be profitable by this point. Lastly, the company has a large cash pile of 160+ million and can easily afford to refinance.
- Price: Price is a bit of a double-edged sword in that the company is cheap, but a lot of big money is restricted from buying shares with a price under $5 due to liquidity concerns. Additionally, ever since its IPO, BARK stock has done nothing except go down (screenshot below). BARK also only trades about 1 million shares a day, so it's definitely not super liquid, although bid/ask spreads are tight. With that being said, I think this is part of what gives us the opportunity here.
Conclusion
BARK, Inc. is super cheap and, in my opinion, has an attractive risk-reward. You have a company doing $500 million-plus in revenue, with $160+ million in cash, with positive free cash flow, in a growing industry, with insiders buying heavily, priced at an EV of ~$220 million. This is too cheap.
If BARK, Inc. can execute, we could easily have a multi-bagger on our hands.
For further details see:
BARK: Extremely Cheap And Finally Cash Flow Positive