Ladies and gentlemen, good afternoon. My name is Abby and I’ll be your conference operator today. At this time, I would like to welcome everyone to BARK’s Second Quarter Fiscal 2024 Earnings Conference Call. Today’s call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the conference over to Mike Mougias, Vice President of Investor Relations. You may begin.

Good afternoon, everyone and welcome to BARK’s second quarter fiscal year 2024 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO and Zahir Ibrahim, Chief Financial Officer. 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 with 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 second quarter results highlight the significant progress we continue to make in improving our long-term profitability outlook. Last quarter, we delivered positive adjusted EBITDA of $1 million, surpassing our guidance range and marking our first positive EBITDA quarter as a public company. We also achieved another period of positive free cash flow, which came in at just under $1 million. On a trailing 12-month basis, we have delivered positive free cash flow of approximately $4 million. When I returned to BARK, we faced a lot of skepticism. We heard that we would never reach profitability that we were going to run out of cash within a year or if we did generate cash, we couldn’t do so consistently. Sitting here today with our first adjusted EBITDA positive quarter behind us and positive free cash flow generation on a trailing 12-month basis, I’m thrilled with the progress we’ve made. One EBITDA positive quarter is the first step to one EBITDA positive year, and that’s what’s next for us. In fact, our confidence in our profitability outlook has grown to such an extent that earlier this week, we paid down $45 million of a face amount of our convertible notes early. This decision improved our net cash position by nearly $3 million and saved over $5 million of interest over the remaining term of the note. Overall, we believe our capital structure is stronger as a result. At a recent conference, I shared a quote from an analyst that summarizes the approach I’ve taken to grow BARK since returning to the CEO role 22 months ago. Growth without profit is a waste of time. Profit without growth is a matter of time. Profit has been our focus, and as our recent results indicate we’ve come…

Thanks, Matt, and good afternoon, everyone. I’ll begin today’s call with an overview of our second quarter results, along with some recent balance sheet developments, followed by our outlook for the remainder of fiscal 2024. Beginning at the top of the P&L, we generated total revenue of $123 million, which came in at the low-end of our guidance range. Looking at that revenue in more detail, we generated $104 million of revenue in our B2C segment, which was down 11% versus last year. The year-over-year decline in DTC revenue was primarily driven by a 9% decline in total orders and a 2.6% or $0.84 decline in average order value. Overall, the macro environment has had the biggest impact on our subscription box products. And though we continue to expect year-over-year revenue declines in FY ‘24 in the box products, we are seeing signs of improvement from a customer acquisition and retention standpoint, as Matt shared earlier. From a category mix standpoint, we generated $67 million of toys in the quarter, down 12%, while consumables revenue of $37 million was down 9%. It is worth noting the majority of our consumables revenue today is derived from our subscription box products. So, the recent declines there are impacting our overall consumables mix. If we just look at consumables revenue derived outside of subscription box revenue, we generated $5 million of consumables revenue last quarter, which was up 20% compared to last year. And although this revenue is relatively small today, we continue to see good growth across these categories and expect that trend to continue going forward. Turning to our Commerce segment. We generated roughly $19 million of revenue last quarter, which was down 29% compared to last year. Remember, our commerce revenue in the period last year was inflated as we…

Thank you. [Operator Instructions] And we will take our first question from Maria Ripps with Canaccord Genuity. Your line is open.

Good afternoon. And thanks for taking my questions. First, sort of understanding the macro pressure you’re facing for your core discretionary toys business, but sort of given the strength of the platform and direct relationships with consumers you have there, can you maybe just talk about some of the strategies that you perhaps pursue maybe more discounting pricing, maybe lower-priced products or something else to try to keep sort of the wallet share there? And then secondly, could you maybe expand a little bit more on the consumables segment? Are you seeing any macro pressures impact in that segment as well? And at what point would you expect that to become sort of a little bit more meaningful contributor to offset some of the headwinds in the toys business.

Hi, Maria, thank you. Thanks for those questions. So, on your first question there, the macro pressure that we’re experiencing in the toy industry, first, it’s the degree that we’re experiencing is largely in line with the broader industry overall. It’s extending across both our direct-to-consumer and our retailer commerce segments pretty equally. And most of that pressure or maybe all of that pressure for us is felt in new customer acquisition. When it comes to keeping the wallet share, expanding the wallet share or expanding the lifetime value of that customer, as I mentioned, our retention has progressively improved throughout this year and last year. And this was likely, I’ll say, one of our strongest, if not the strongest quarter we’ve seen in terms of retention on those core toy subscription businesses and our average order value being over $31, those are the positive signals, which to us is indicating that when we acquire a customer, we’ve learned over the full 12 years how to make them very valuable, very sticky, and we’re getting better and better value from them at a higher margin now. So, we haven’t seen the need to deploy discounting or other tactics to improve that other than running the playbook that’s successful for us for the past decade and rather using those discounts and those enticements for bringing new customers onto the platform. On the consumable side, what we expect is sort of in-line with the strategy we put out at the beginning of the year, and we continue to work through, which is expand into all consumable categories. For us, that’s treats, kibble, toppers and dental and with a real focus on the retailer commerce channel. And the good news we have today is that we have that commitment for a national retailer to feature our first meaningful treat line seven SKUs beginning in fiscal Q4 here. So, in the quarter ahead. And we’re really excited about that progress. We think there’s more on the heels of that, but we’re not in a position to announce it formally. So, we’re kind of right on schedule with that. As you know, those things are longer lead time. We develop the products, we sell it. We make our sales pitch typically in the spring. We hear back around this time. Everything is right on track. And our direct-to-consumer channel when it comes to consumables, specifically BARK.co, is playing the role that it’s always played with our toy business of letting us try different things with how we position our consumable products, different packaging, different pricing and getting those signals from the customer that we can then sell the results to our retail partners. So, we’re making good progress on BARK.co and in those categories in our learning and in our sales to retail partners.

Got it. Thanks so much for the color, Matt.

And we will take our next question from Ryan Meyers with Lake Street Capital Markets. Your line is open.

Hey, guys. Thanks for taking my questions. First one for me. So, it sounds like you said Q4 EBITDA will be profitable. So just kind of walk me through what you expect to see here in Q3? Because I think if I remember back in the last couple of calls, we kind of expected adjusted EBITDA profitability in the second half of the year. Is there just kind of some seasonally high marketing spend as we head into the holiday season? Just kind of any sort of color on that would be helpful.

Hey, Ryan, how are you doing? So yes, you’ve hit them that on the head. So Q3 for us is a seasonally high demand quarter. And also from a marketing perspective, we invest to drive new subs as well as just overall performance to the site. And so, it’s one of our highest quarters from a revenue perspective, but it’s also the highest quarter from a marketing perspective. And that impacts the profitability. If you look at our guidance range for Q3, EBITDA is at minus 5% to minus 8%. If you take us at the midpoint of that, we’ll be about $6 million better than Q3 last year. So, we feel the business is getting great traction from a profitability perspective and moving in the right direction. And because of that traction, as you think about Q4, we’ll be able to post a positive EBITDA along the lines of what we posted in Q2, but I’d expect continued improvement in some of the measures like gross margin as we have new contracts coming into play on the consumable side. So, we’ll have stronger margin performance, equally strong performance through some of the other line items to post positive EBIT in Q4.

Got it. And then if we think back to the commentary that you guys gave last quarter about the high single to low double-digit revenue growth for FY 2025. Obviously, you guys updated the guidance today. Just wondering how we should potentially think about that commentary you guys gave last quarter and how that relates to the FY 2025?

Yes. So, I think just in line with some of the comments Matt just shared, while it’s a challenging environment, we continue to believe that we’ll deliver profitability improvements regardless of where we land from an FY ‘25 growth perspective. When you look at the top line, you step back for a moment and look at the category overall. So, the pet category has grown over the past 12 months. A lot of that on the food side is driven not by volume or units driving the growth, but it’s price inflation. And what we’re seeing is that’s taken a greater share of the customer’s wallet, and it’s impacting some of the discretionary categories impact. And as a result, it’s impacting the toy category. So, we’ll see in terms of where we land from a growth perspective for next year over the next two quarters, recognizing Q3 is a high quarter for us, particularly on the DTC side. And then we’ll know more about timing of some of the plans from the retailers for fiscal 2025 in relation to consumables as well. So those two things and just how the categories trending over the next couple of quarters, it will give us a better sense of how the top line is doing. But nevertheless, we feel good about where we’re at from a profitability growth and free cash flow perspective for next year.

Got it. Thank you for taking my questions.

And we will take our next question from Ygal Arounian with Citigroup. Your line is open.

Hey, good afternoon, guys. I want to dig into the comments that you made about improving better – they are improving customer acquisition since May. So, you’re seeing better customer acquisition, the retention is as strong as it’s been. The outlook for the rest of the year is lower given the macro. And so, I just wanted to maybe tie those two things together. I know some of this is coming from the retail channel too, so maybe that’s the whole answer. But maybe just can help tie those two.

Yes. Thanks for that question. And you are right, like the retention is quite strong. And like I just was saying to Maria, the strongest we have seen in some time. And so it is that new customer acquisition that is the greatest challenge we face. We have made very consistent improvements since May. One of the things that holds us back, I would say, from making faster improvement today is the current platform that we are on, our Ruby on Rails platform at barkbox.com carries 12 years of tech debt. It’s incredibly expensive. It’s difficult to optimize. So, that makes it difficult for us to drive conversion improvements and keep it, I would say, current and modern. But that’s exactly why we are really excited about a move to a more modern platform at bark.co, where we have tremendous flexibility to do that. But for the foreseeable future, consumables is going to be the main driver of our revenue. And like we talked about, we have our first major deal with a retailer there. We expect more in the future and we expect to continue making great progress with bark.co. One thing that we didn’t call out in the call that is out there for you to see is on that progress as we go for consolidation and we go for a more modern platform where you can make those updates and optimizations hourly, if you like, with a very light effort or lift is, we were selling our dental product at barkbright.com. We got to a place where within the bark.co context, we are able to do that more effectively and have a greater lifetime value associated with those customers at a lower cost of acquisition, almost the day that we reached that point. We have now stopped taking new orders at barkbright.com, and we have moved those customers over onto our new platform. So, once we have achieved that with BarkBox and Super Chewer, we will take the same actions and we are feeling pretty good about where we are in terms of the progress.

Okay. Thanks. For a follow-up, I guess I will ask about the converts being down, the converts and maybe just want to understand very clearly the ambitions here to clean up the capital structure. Given the macro environment is getting more challenging, there is probably less visibility. And you are still kind of targeting free cash flow or EBITDA profitability again back in fourth quarter. But there is less visibility. You spent a fair amount of your cash balance here to do this. So, maybe just why was now the right time to do it? And then how you think about the remaining balance? Is that something you can now just kind of hang on to a little bit longer, closer to maturity and see what happens? But just want to get your thoughts given the challenging macro. Thank you.

Sure. So, we talked about it before. We have got excess capital on the balance sheet. We felt really strong and good about our cash position. And as we have posted our third quarter out of the last four in terms of free cash flow, and we have signaled the quarter after next will be the second quarter of the year, that will be positive EBITDA. We are seeing line of sight to more courses of positive free cash flow and profitability in the business. And that level of confidence, the cash balance that we have gives us the flexibility to look at things like this now. The note was going to mature in a couple of years’ time anyway. And we were able to get a fair discount, the 6% discount that we were able to achieve on it allowed us to save close on $3 million on the amount that we paid down. And on the other side of that, we are going to be saving go-forward interest in excess of $5 million as well. And we still sat here with well over $100 million of cash on the balance sheet. So, given the financial health of the business, the unit economics that we are now performing at and our cash flow performance, we felt very confident about taking the pay-down that we did.

Great. Thank you.

And we will take our final question from Max Rakhlenko with TD Cowen. Your line is open.

Great. Thanks a lot for taking my question. So first, can you speak to learnings from conversations with the national retail partner and the confidence that it gives you to grow additional relationships down the road?

Hey Max, how are you? So, the conversations, especially as we moved into treats – as you know, we have got relationships with pretty much every major retail partner in the U.S., both in and out of pet. So, you know all the names across 40,000 doors. And we have good partnerships there with them on the toys side. So, especially in treats, the interest there has been more of a pull than a push over the past 12 months to 18 months. I am sharing a quote with you that we use is somewhat of a design spec was we would love for BARK to bring fun to the treat aisle. So, we took that seriously. We took our approach to toys and developed this first line of treats that we are pretty proud of and sold that in the spring or earlier this year. And we were thrilled with the results. We were thrilled with the reaction. It seemed we hit the spec right on. And we believe that product is going to stand out in a big way. And so, it’s been – I would say it’s collaborative because we treat these retailers as our partners, and we are always listening to their feedback and sharing new learnings of our direct-to-consumer relationships with them and how we might want to enter new categories. So, I would say it’s just a very good partnership. I hope I am answering the question in the spirit you were asking it there.

Yes, absolutely. That’s helpful. And then as you continue to improve your gross margin, does that change what you think the long-term profile can be as your channel mix thus continues to evolve?

Yes. So, I mean we have done a nice job of improving gross margins during the course of this year. We expect that to continue through the balance of the year going into fiscal ‘25. Right now, we are seeing a lot of the benefit of the contracts that we renegotiated on the toys side of the business, and that’s starting to flow through our P&L. As we go into Q4 and into fiscal ‘25, we will see the benefits of the new consumables contracts kicking in as well. So, that will improve on a current channel mix basis, shall we say. And then as you look at our respective channel margin profiles, D2C has margins in the 60s. Commerce has margins around 40, low 40s. And so, as we have said before, we will be looking to grow consumables, particularly within the commerce channel. And so that commerce mix being lower at the gross margin level will bring down our overall consolidated gross margins. But the key here is not to just focus on gross margins because the cost to serve on the commerce channel is lower from a shipping and fulfillment and marketing perspective relative to B2C. And actually, when you look at the two channels at a contribution margin level, they are both very similar at around 20%. So, we are ultimately indifferent in driving growth between the two channels and not – the gross margin mix isn’t necessarily the driver.

Perfect. That’s great. Thanks a lot guys.

Thank you.

And ladies and gentlemen, this concludes today’s conference call and we thank you for your participation. You may now disconnect.