2023-03-29 09:17:32 ET
Summary
- BARK, Inc. operates in a large and growing market that should continue to fare well in the long run.
- The firm's revenue has also skyrocketed in recent years, but growth is slowing and bottom line results are bad.
- The company is not the greatest prospect in this market, and investors might be better off looking elsewhere for opportunities.
As the world has grown and becomes wealthier, the list of things that people can afford to spend money on has also increased. This creates sizable industries that did not exist previously. One example of this is the pet industry. As it stands today, the space dedicated to things like pet foods and treats, pet medical care, toys, and so much more, has grown into a rather large opportunity for investors and companies alike. Moving forward, that trend is likely to continue. And one company that is capitalizing on this is BARK, Inc. ( BARK ), a firm that's focused on producing a variety of products dedicated to dogs. Over the past few years, the company has exhibited rapid growth on the top line. Though, it is also true that the bottom line has suffered tremendously. From a purely bottom line perspective, we are starting to see some improvements. Though, the company is exhibiting weakness on other fronts. Given the mixed picture that investors are faced with and growing economic uncertainty, I do think that the company makes for a better 'hold' prospect right now than anything else. But if financial performance does continue to improve in the years to come, it could eventually make for an appealing opportunity.
A large and growing market
According to the American Pet Products Association , 66% of all households in the US own a pet. That works out to 86.9 million households in all. The most commonly owned pet is, beyond any doubt, the dog. 65.1 million households have at least one. That compares to the 46.5 million for cats. A distant third place when it comes to specific animals is the bird, with 6.1 million households owning one. Interestingly, pet ownership has grown over the years. Only 24% of pet owners are Baby Boomers. That number inches up to 25% for those in Generation X before jumping to 33% for Millennials. Generation Z is far lower than this, at only 16%. But when you consider that many of those are still in school, such a disparity is not a surprise.
The sheer number of pets that are owned in the US, particularly the trend of younger households owning them, means that a large industry must exist in order to support the demands of pet owners and the needs of their pets. For the 2022 fiscal year, the total pet industry in the US was responsible for $136.8 billion in revenue. That's 10.7% higher than the $123.6 billion for the 2021 fiscal year. Although this growth rate seems unrealistic, it's important to realize that from 2018 through 2022, the annualized growth rate of the market was about 10.9%. The largest segment of the market falls under the pet food and treats category at $58.1 billion. But other products like medicine, pet care, toys, and more, are also significant. According to Morgan Stanley ( MS ), the total pet industry in the US should climb to $277 billion by 2030. If this comes to fruition, it would translate to an annualized growth rate between now and then of 9.2%.
BARK looks set to capitalize on this trend
One company that looks set to capitalize on this large and growing market is BARK. The company began as a firm focused on the play category with an offering called BarkBox. This served as a monthly themed subscription of toys and treats, all tailored to the needs of each customer based on the size of the dog, the play style, allergies, and other factors. From there, the company has grown into a more diverse business that sells not only BarkBox, but also pet food, pet health products, pet food dishes, collars, harnesses, leashes, and more.
Financially speaking, the growth the company has exhibited has been astounding. In 2020, for instance, the business generated revenue of $224.3 million. Sales more than doubled over the next two years to hit $507.4 million. This increase in revenue was driven by two primary factors. The most significant was a rise in the number of active subscribers from 1.21 million to 2.27 million. The second was an increase in the average order value from $26.80 to $30.06. The rise in active subscribers, it's worth mentioning, allowed the number of subscriber shipments to expand from 7.62 million to 14.91 million.
Unfortunately, bottom line results for the company have been something else. The firm went from generating a net loss of $31.4 million in 2020 to generating a loss of $68.3 million in 2022. Operating cash flow went from negative $19.7 million to negative $172.3 million. Even if we adjust for changes in working capital, it would have gone from negative $26.7 million to negative $60.7 million. And over that same window of time, EBITDA turned from a negative $17.8 million to a negative $57.8 million. As you can see in the chart below, revenue growth for the company continued through the first nine months of the 2023 fiscal year, and with the exception of net income, the firm's bottom line has shown signs of improvement.
This is great news for investors. However, the company has shown some negative developments as well. These can be seen in the chart below. But the most notable is that the number of active subscribers to their services actually dropped from 2.25 million at the end of the third quarter of the 2022 fiscal year to 2.21 million at the same time of the 2023 fiscal year. Customer acquisition cost rose from $64.42 to $66.32, and the number of subscriber shipments declined from 3.80 million to 3.63 million. Management attributed some of this pain to headwinds that the company is facing. These headwinds are associated with its retail partners still dealing with excess inventories and the discretionary nature of the BarkBox subscription. In the latter case of the subscription, it is worth noting that discretionary spending does tend to contract during times of economic uncertainty or weakness. Though, the company did say that less discretionary offerings like food and health products are seeing robust and growing demand.
In the long run, I suspect that the company would do just fine. However, the bottom line picture of the business requires significant improvement before the company can be a truly viable opportunity. The firm does benefit from the fact that it has cash exceeding debt totaling $83.1 million. That gives it some runway to work with. But even if the company were to warrant trading at a price to operating cash flow multiple as high as 30 and an EV to EBITDA multiple as high as 30, cash flow would need to be positive to the tune of $7.9 million, while EBITDA we need to be positive to the tune of $5.2 million. Considering that management is now forecasting revenue of only $530 million compared to the $556 million previously anticipated, marking a year-over-year increase of only 4.5%, and is forecasting that EBITDA will still be negative for the 2023 fiscal year to the tune of $31 million, I believe that cash flow neutrality is at least one full fiscal year into the future, if not more. Add in economic uncertainty, and this is not the most ideal prospect for investors to consider.
Takeaway
Right now, I find BARK to be an intriguing opportunity. But it is most certainly not the kind of company that I would consider buying at this time. Growth is slowing thanks to economic issues, the active subscriber base of the company is contracting, and the firm is generating significant negative earnings and cash flows. In the long run, I suspect the company will do just fine, thanks in large part to the continued attractive growth in the space in which it operates. But until we see something more concrete that signifies a turn toward profitability, or at least positive cash flows, I do believe that there are better opportunities that could be had right now.
For further details see:
BARK: One Company I'm Not Wagging My Tail Over