2023-06-14 12:03:59 ET
Summary
- BARK has developed from a subscription-based business model into a strong brand sold across major retailers.
- BARK is benefiting from its product line extension into consumables and has long-term growth potential in a billion-dollar pet industry.
- I'm cautious of its short operational history and lack of profitability.
When you first look at BARK, Inc. ( BARK ), it may not seem like a worthy investment. The company is currently unprofitable, and its stock price has drastically decreased since entering the stock market through a SPAC agreement with Northern Star Acquisition Corp. Additionally, there is a relatively high short interest in the stock at 10.07%.
However, over the last eleven years, BARK has built up a solid and loyal brand following through its tailored subscription-based business model and online social media engagement. It has recently taken its brand to a larger addressable market by selling to non-subscribers through large retail stores such as Target ( TGT ) and Amazon ( AMZN ). It taps into a growing pet market, which saw Americans spend $136.8 billion on their pets in 2022. Furthermore, the last two quarters have indicated upward trending top and bottom line financial performance with positive free cash flow. While cautious that we have little financial history to go off and the company has yet to produce profits, increasing its product selection and the total addressable market has significant upside growth potential. Therefore, investors may want to take a bullish stance on this stock.
Overview
BARK is a dog-centric company founded in 2011, run by dog-obsessed individuals aspiring to become the globe's number one dog brand through its consumable and toy products that are personalized and scalable. A large part of the company's success is its ability to tailor products to customers through data collection and machine learning from its digital platforms. The company's roots stem from a subscription-based box which includes personalised and tailored dog goodies, it has 2.2 million active subscribers, and the subscriptions cost between $22 and $35 per month.
Monthly subscription fees (bark.co)
More recently, it has developed its business into an omnipresent channel. Products are sold direct-to-consumers (88.2% of total revenue in FY2023) and through 40,000 retail partners (including Target, Walmart, Kroger, Petco, and PetSmart) across the USA.
The company has expanded its market by entering into retail and offering more products, including consumables. This move has the potential to drive long-term growth for the company.
Targeting a Larger Audience
The business has benefited from a strong brand and a loyal online and engaged social media following. Extending its brand through retail channels and expanding its product selection increases its reach and can benefit from a shopping shift to online buying behavior. By 2026, 45% of all US pet sales are predicted to take place online. Online pet sales are currently estimated at around 36% for 2022.
Furthermore, BARK is in an exciting growth industry that saw US-based consumers spend $136.8 billion on pets in 2022, an increase of 11% YoY. Moreover, dog ownership is increasing in the USA; in 2022, 65.1 million households in the USA owned at least one dog. A significant reason for the considerable market potential is that 85% of dog owners perceive their dog as part of the family.
Financial Highlights
BARK has been growing its revenue over the last five financial years. Most recently, its quarterly revenue increased YoY by 5.3% to $126 million in Q4 2023. Gross profit has increased YoY by 9.2%, and net losses were reduced by 9.9% YoY. The company has benefited from its consumables segment, which increased its average order value by $2.11 .
Annual revenue (seekingalpha.com)
BARK has been producing positive free cash flow for the second consecutive quarter by improving its inventory control. The new CFO predicts positive free cash flow for FY2024 and to break even in EBITDA by the end of 2024 due to a focus on increasing average order value and targeting higher-value customers.
Levered free cash flow by quarter (seekingalpha.com)
Although the company has yet to produce profits, it has a very low enterprise value-to-sales ratio of 0.42, indicating that it may be undervalued. Furthermore, although its YoY growth is only 5.50%, it has a healthy CAGR of 33.63% and is broadening its reach and product line within a booming pet industry.
Risks
BARK is a new and small company with a brief history and has not made any profits yet. Although there has been some progress in generating cash flow, it remains uncertain whether the company's efforts will result in profits soon. Additionally, since BARK is a consumer discretionary stock, it can be affected negatively by a weak economy. Until the economy recovers, there may be a decrease in demand for BARK's products.
Final Thoughts
Investing in a young and unprofitable company like BARK can be risky. However, BARK has a strong brand and is expanding its reach to a larger market through sales channels and product line extensions. Although the business has not yet delivered profits, it has generated positive free cash flow for the past two quarters, and its revenue has been increasing. Additionally, the pet industry has billion-dollar potential and is growing as more households choose to treat their pets as family members. For these reasons, investors may want to consider a bullish stance on this stock.
For further details see:
BARK: More Than A Monthly Subscription Box For Dogs