Good afternoon. Thank you for attending today's BARK's Third Quarter Fiscal 2023 Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Mike Mougias, Vice President of Investor Relations. Michael, please go ahead.

Good afternoon, everyone, and welcome to BARK's third quarter fiscal 2023 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO; Zahir Ibrahim, Chief Financial Officer; and Howard Yeaton, who served as Interim Chief Financial Officer during the period we are reporting on today. Today's conference call is being webcast in its entirety on our website and a replay of the webcast will be made available shortly after the call. Additionally, a press release covering the company's financial results was issued this afternoon and can be found on our Investor Relations website. Before I pass it over to Matt, I would like to remind you of the following information regarding forward-looking statements. The statements made on today's call are based on management's current expectations and are subject to risks and uncertainties that could cause actual future results and outcomes to differ. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. Also during today's call, we will discuss certain non-GAAP financial measures. Reconciliations to our non-GAAP financial measures is contained in this afternoon's press release. And with that, let me now pass it over to Matt.

Thanks Mike and good afternoon, everyone. Our results last quarter illustrate the significant progress we continue to make across each of our strategic initiatives we laid out at the beginning of the year, namely accelerating our path to profitability; making meaningful progress in our food and consumables business; and transforming our customer base by acquiring more premium customers. Last quarter, we grew our average order value by $2 year-over-year, improved our gross margin by 4 points to 60%, reduced our inventory by $15 million and ended the quarter with $164 million of cash on the balance sheet, essentially unchanged from fiscal Q2. And for the first quarter since going public, we generated positive free cash flow. These are important milestones and a direct result of actions we took to diversify our product mix, improve our long-term unit economics and meaningfully reduce our cash burn. And while the progress we have made across these initiatives is encouraging, we expect these trends to continue further in the quarters ahead. In addition, we announced the cost reduction initiative today to enable more leverage across the business, adding significantly more to our bottom line. I will discuss this initiative more in a moment. First, let me highlight some of the key results for the most recent quarter. Total revenue was $134.3 million, $300,000 ahead of our guidance for the quarter. Our direct-to-consumer segment contributed $120 million. Within that segment, total revenue from cross-selling was $12 million, up 15%, compared to last year. And as we know, not all revenue is created equal, and we saw the strongest growth in our new categories, dental and food. Our dental product, BARK Bright delivered $2.7 million of revenue in the quarter, up 70%, compared to last year. I'm also excited to announce that we recently expanded our…

Thanks Matt, and good afternoon, everyone. It's a pleasure to participate in my first earnings call at BARK. Before I dive into our strong Q3 results, I thought it would be helpful to share what attracted me to BARK, some of my early observations and my initial areas of focus. First off, I love the pet space, as an avid dog fan and the parents of a 10-year-old golden named Oscar, I fully appreciate how much joy a dog can bring into our lives. So from the outset, our mission to make dog lives happier, totally resonated with me. Second, I believe that BARK offers a really unique value proposition as a brand for dogs. We are one of the only companies in the space with proprietary branded products spanning toys, treats, food and dental. And finally, Matt and the team have built an impressive business with millions of loyal customers, a business with a valuable and growing data set and with early success expanding into new high term categories, which are all resonating well with customers. We have great critical mass and a major runway for growth ahead of us. I saw a lot of parallels between BARK and where [Indiscernible] was when I joined them back in 2015. During my six plus years there, I helped design and execute our long-term strategy, building capabilities are enabled our revenue to scale 2 times, while we optimize our cost structure. In the near-term, my top priority is helping Matt and the team build an infrastructure that enables BARK to scale profitably. A lot of important work has already been done. However, we still have work to do and I look forward to partnering with Matt and the team to help improve our operations even further. With that, let me take…

Thank you. [Operator Instructions] The first question is from the line of Maria Ripps with Canaccord. Your line is now open.

Great. Thanks so much for taking my questions. First, so it looks like you reported very healthy Q3, but it sounds like Q4 is trending much softer-than-expected. Can you maybe just talk about at, sort of, at what point did you start the deterioration in discretionary spend? And I guess what are your thoughts around reengaging those consumers as you move throughout fiscal 2024?

Yes. Thanks, Maria. We did and as you know, fiscal Q3 is typically our biggest quarter from a net adds perspective and from an AOV growth standpoint. And it was difficult to expect in this environment how the consumer is going to respond. It's cut pretty much across everything in a proportional way, the way you would expect. So if you look at commerce, there's certainly the headwinds that we're feeling where our retail partners have their inventory built up and we saw some of that pull forward last quarter and they're just built up. So there's a lot to move through there and I'd expect that continues through at least this quarter that we're in here and maybe the next. And then on the direct-to-consumer side, there are a few different stories, but there's the net adds overall came in lighter than we would have hoped. Most of that happened in our biggest business, which is BarkBox, and then as you move to Super Chewer, better performance and then really, really strong performance in food and dental, but obviously growing on a smaller base. So what we're seeing there is that really healthy rotation we've been after for the better part of the year or longer. Rotating from toys into food and dental now. The nice thing is especially in food, we're picking up all that momentum from the toy customer base and it's going very, very well, which suggests we're probably in the past quarter and we've probably been a bit too conservative in what we're willing to spend to acquire a customer. Their value is growing more and more as the quarters go on, you see that in AOV. And then the margin is increasing. The retention is hanging in there or even a little bit better. So I think we just needed some time to adjust to this dynamic at food and get some confidence in it. And As we push through next year, I think you'll see more and more of that acceleration.

Got it. That's very helpful, Matt. And then it seems like your Eats business is seeing strong momentum, sort of, how are you thinking about investments in the product over the next couple of quarters, especially given your cost savings initiatives here? And then are there any sort of specific milestones like certain level of scale or certain number of markets that you have in mind that sort of need to be achieved before you start marketing it externally to people, who are not already existing subscribers?

Yes. In terms of the investment and the team, there's a very good narrowly focused type team on it, that's doing a fantastic job. So we've got the right group of people around it and they're expanding it nicely. So we don't need -- I'll say, we don't need big G&A investments in it to make it go faster, that's happening all on its own. The question about marketing is a good one, because as I said, most of this momentum has been driven off of cross-selling into the toy customer base and there's a whole lot more we can still do there and we’ll do there. But to your point, we should be starting to spend some external marketing dollars to acquire direct food customers, but even more so now that we have this internal engine running where we can take a toy customer and more effectively turn them into a food or dental customer, we should be increasing our cost of acquisition on that side as well. So the marketing spend will start to move up to reflect that higher LTV and the strength that we're seeing in the cross-selling.

Got it. That's very helpful. Thank you, Matt.

Thanks, Maria.

Thank you for your question. The next question is from the line of Cory Grady with Jefferies. Your line is now open.

Hey, thanks for taking my questions. I want to follow-up on cash generation, so you made a lot of progress on converting inventories this quarter and it sounds like there's still more room there? And if you can talk about how much more room is there left, so how much more inventories are there left to work down? And what you're targeting is kind of like a normal level?

Hi, Cory. How are you doing? This is Zahir. In terms of just maybe a better context around supply chain, so we have a sizable amount of lead time in supply chain from ordering products to it landing in our warehouse and ultimately flowing through to customers. So typically that's anywhere between eight to 10 months. So that's really important context as you think about how much reduction or how much you can influence inventory change in the near-term. So as we think about what happened in Q3, that $15 million reduction was as a result of us making decisions back in March, April. From a purchases perspective where we decided we wanted to take a step change reduction in our inventory. And so you're seeing that now flow through in our December financials. And as I said, it was a sizable reduction, and what it does is it rebases us back down from the 160 level and now around 145 as we enter 2024 and calendar 2024 that is. And so we use that as our new baseline as we plan for future reductions. I'd say in the near-term, inventory is going to move up or down depending on consumer demand relative to purchases that we place with suppliers some months ago. But looking forward for fiscal 2024, I’d expect inventory levels to come down by a similar, sort of, amount that we saw in Q3 with a greater impact likely in the second half of 2024, due to the supply chain lead times. Does that help?

Got it. Yes, that's really helpful. Thank you. And then just on profitability, so kind of following up on cash generation. So you reported a pretty solid gross margin expansion this quarter and then obviously the 12% workforce reduction, and you can talk about any updates on timing on getting to adjusted EBITDA profitability? And what the remaining steps are to get there? Thanks.

Yes. I think you're seeing it. And as we're guiding to a loss of $3 million in this current quarter. But as I said in the call, the building blocks are there and you're pointing it out, the gross margin leap forward to roughly 60%, the best we've posted as a public company to-date. And we still feel there's a lot of room for growth in that or we know there is, we see it through a lot of those contracts that we've put in place with our vendors. And as Zahir said, we're just working through the inventory that would be on old contracts. So we've got some visibility to ongoing improvement there in addition to the AOV improvement. That makes the gross margin go up, improvement on the shipping and fulfillment line and as you mentioned, the cost reduction. It's a long way of seeing we're right there and we're guiding to being right there. When it comes to the when we're getting our arms wrapped around the full-year plan for fiscal ‘24 and here has been on board with us now for five weeks. So we're getting our arms around it and I think we'll have visibility to that very soon.

Thank you.

Thank you for your question. The next question is from the line of Ryan Meyers with Lake Street Capital Markets. Your line is now open.

Hey, guys. Thanks for taking my question. First one for me, just wondering if you can unpack the AOVs during the quarter a little bit more? And then kind of maybe what percentage of revenue came from cross selling?

Yes, this quarter $15 million of revenue came from cross-selling out of the total $134 million or $120 million of direct-to-consumer. So well over 10% of consolidated and certainly over 10% on the direct-to-consumer side. So that continues to be a core strength of ours. And as I mentioned, and I've talked about it for a lot in the past year that we had become very good at in our past couple of years was addressing a toy customer and selling them more toys. We became really great at that. What's changed in the past quarter or two really since we updated the format and went to the breed-based format of food is we've really unlocked how to take a toy customer and turn them into a food customer. And that's been the unlock we've been looking for. So that's the game changer for us, and what we've been going for. In this past quarter, if I go back to the question Cory just asked, we've done a couple of things. I mean, we've certainly expanded the gross margin overall in that 60% neighborhood. We've improved our shipping and fulfillment percent of revenue that we spend there. We have our cost reduction at exercise and before that we turn in a free cash flow positive quarter, and then you take all that forward. So one priority was to get profitable, another was to have real momentum in food. We've got that too. So we're pretty happy with where all that is.

Got it. And then kind of the integration of the one BARK brand, how is that progressing? And do you guys have any sort of timeline as to when that might be complete?

Yes. Not a specific timeline, but if you will see it. It's not -- we don't feel the best way to bring this out is to work on it under the covers for a long period of time, and then just debut a whole new platform. And so we're bringing this out day by day, little by little and learning how to sell in new ways and learning how to introduce new products in new ways. So if you look at the food platform right now, food.bark.co, what you have there is we're selling the core kibble and the food on that breed-based approach. But we introduced new products there as well, like food toppers, so still in the food family, treats, and soon you'll see our dental products start to appear there. And now we're starting to move more and more into having all the products on that platform. And the platform is really where we're getting the leverage, because it is -- it's far more flexible, much easier for us to optimize and improve on. And we're seeing those day-to-day gains in our conversion rate and our cross-selling ability. And so we're taking it one step at a time moving those products over, but it's going rapidly. And then we'll have the, I'd say, the window dressing of, there's going to be a date where we changed the URL from food.bark.co to bark.co, create some new navigation. But you'll see in the coming weeks, changes start to be made there, especially new products being introduced.

Got it. That's helpful. Thanks for taking my question.

Thanks.

Thank you for your question. The final question is from the line of Ygal Arounian with Citigroup. Your line is now open.

Hey, good afternoon, guys. And apologies if I address this, but jumping around a few calls, but I just want to kind of come back to the demand environment, I think some of the credit card data we've -- you've been following this in surveys that we've seen suggest that the pet category remains resilient in this kind of environment and obviously there's a little bit of a step down here? Are you seeing something different or do you think this is more broad-based? Is the subscription component of the business? And I know people can turn on and off. Is that a factor? Just how should we think about that? And how do we get back to a rebound? Is it just the macro environment improving? Are there other things that you can kind of put in place to drive some improvements in the demand environment? And then second, it's very related. Your LTV to CAC is still -- it’s strong, it’s improving as your [AOV] (ph) goes up and your cross-selling on these products. But how do you think about marketing spend in a softer environment? Do you slow down marketing? Are you a little bit more cautious on it? Do you step into marketing to keep demand higher? How do you think about that LTV to CAC in that environment? Thanks.

Yes, thanks. So really good questions, and I'll start with the first on the demand environment. It's again not all revenues created equal, and so we're seeing that softness and acceleration. I think, it's similar to what we're hearing from others in terms of what they're seeing. So the more discretionary products and for us. The most discretionary would be subscription BarkBox, and those are the ones that are facing the headwinds. Those that are holding up and very resilient and even surging are less discretionary food and health products like our dental product. And we're seeing that too. We're seeing it just really, really take on. And for us, that's really healthy. The great thing about it is the toy and treat businesses offer to us really strong unit economics. They bring in good cash flow and they also bring in a relatively inexpensive way to acquire customers for the food and dental categories. A toy customer costs a whole lot less out in the market than a food customer. So I think what you're seeing in the demand environment is the same as us. We're just growing from a smaller base on those other categories. And then to your -- and that dovetails into your LTV to CAC question and the marketing spend. It's exactly that the strength we're seeing in those categories and the market opportunity that's available there, we probably have been too conservative on the cost of acquisition side. And everything is just starting to come together. The cross-selling into that the big pickup quarter-over-quarter in the gross margin, the retention holding up the AOV gain all that came together this quarter. And we're probably too conservative about the cost of acquisition. So it's in the pursuit of positive EBITDA. It's not going to be a case of us, reigning in the marketing spend. It'll probably go the other way where we push on it harder and try to grow it faster, because we feel so confident about taking those toy customers and making them food customers.

Great. Thanks so much.

Thank you for your question. That concludes the conference call. Thank you for your participation. You may now disconnect your lines.