Good afternoon and welcome to BARK's Third Quarter Fiscal 2024 Earnings Conference Call. Please note this call is being recorded. 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] I will now turn the call over to Mike Mougias, Vice President, Investor Relations. You may begin your conference.

Good afternoon, everyone, and welcome to BARK's third 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 Web site, 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 Web site. 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. Reconciliation 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. We have momentum. These past few quarters are the best we've performed in several years, and that momentum is building. We delivered our strongest customer acquisition quarter in two years, surpassing the high end of our revenue guidance range. Through the first nine months of fiscal '24, we've improved our gross margin by over 350 basis points versus last year. We've also generated $13 million of free cash flow last quarter, and $17 million on a trailing 12-month basis, ending the quarter with a cash balance of $131 million. In addition to our strong financial performance, we secured commitments from two of the country's leading retailers to offer our new treat line in over 2,400 doors nationwide beginning this spring. In addition, on the back of our successful pilot program, we have an opportunity to significantly expand our partnership with the Girl Scouts of America. This broad distribution would greatly increase revenue and customer awareness of our consumables offerings. Strong customer acquisition, gross margin expansion, cash flow generation, and revenue diversification are all coming together. We believe our financial profile is strong, and expect to carry this momentum into fiscal 2025. This puts us in a great position. Now, let's talk about our fiscal third quarter. Starting at the top of the P&L, we delivered total revenue of over $125 million, ahead of the high end of our guidance range for the quarter. Driving this outperformance was our strongest customer acquisition quarter in two years across our BarkBox and Super Chewer products. This is particularly encouraging given the challenging macro environment for discretionary products. As I discussed on our last call, there was room for us to execute better, and so we evolved our acquisition approach. First, we reorganized our creative and marketing functions,…

Thanks, Matt, and good afternoon, everyone. I'll begin today's call with an overview of our third quarter results, followed by our outlook for the remainder of fiscal 2024. Overall, it was a strong quarter across the board. Starting with the P&L, we generated $125 million of revenue, which came in ahead of our guidance range driven by the better than expected new subscribers that Matt discussed. Our direct-to-consumer segment came in at 111 million, which was down 7.6% compared to last year. The year-over-year decline is largely a factor of entering the quarter with fewer BarkBox and Super Chewer customers compared to the same period last year. Total orders in the period were down 5.8% compared to last year, largely related to the same dynamic. In the quarter itself, we saw healthy growth in new customer acquisition, which will benefit the top line in the periods ahead. It's also worth highlighting while new customer acquisition was challenging in the first-half of fiscal 2024, we've been very pleased with our customer retention this year, which is near all-time highs. From a category basis, we generated $71 million from toys and accessories and $40 million from consumables. Turning to the commerce segment, we delivered $14 million of revenue, which is roughly in line with last year. Our retail partners continue to see headwinds across various discretionary categories, which is all the more reason why we are excited to be entering their doors with the less discretionary consumables products this spring. And as macro discretionary challenges eventually ease, we expect the retail toy sales to return to growth. Moving down the P&L, our consolidated gross margin improved 210 basis points to 61.8%. As Matt mentioned, we anticipate further margin improvements in Q4 and into fiscal 2025. Total D2C gross margin improved 200 basis…

Thank you. [Operator Instructions] Your first question comes from Maria Ripps with Canaccord Genuity. Please go ahead.

Thanks. Good afternoon. I wanted to ask about your strong customer acquisition trends in Q3. And thanks for all the color there. How sustainable do you think the strength can be going forward? Are there any other areas that could drive further improvement? And how does this inform your marketing strategy and budgeting as you look into calendar 2024?

Hi, Maria, thanks for that. I would say we're cautiously optimistic about it. It's one good quarter of customer acquisition activity. And we're attributing that mainly to some of the reorganization of our team, and putting some of our creative resources closer to the customer. We're really encouraged by that performance, but again it's one quarter. So, let's see a couple before we call it a trend, and how that factors in, obviously, today, that those activities are almost entirely direct-response-oriented. And that will continue to be a big part of our marketing playbook or mix as we go forward. It works really well for a product like BarkBox that is more impulse purchase in nature. So, we'll use it there. What -- where we've been, I don't even want to say weak, but underutilized in the past is awareness marketing. And so, I'd expect to see that ramp up and become some percentage of our overall spend and share. And so, you'll see some of the dollars shift over there, and especially to promote bark.co as a platform, and the consumable products that aren't as impulsive in nature.

Got it. That's very helpful. And then, Matt, you touched on this a little bit, but you've had a pretty strong retail presence for some time. But now that you are sort of starting to introduce consumables in the retail channel, can you maybe talk about what kind of impact to BARK's brand recognition do you expect to see as a result?

Well, if the toy business is any indication, then a very positive one. We certainly had, I'd say, okay brand awareness for the first five or six years of BarkBox being a product, and then our toys started to appear in Target stores, and then on to other retail partners. And we saw a significant lift in our brand awareness, and that spilled over into an acceleration in our subscription or direct to consumer businesses. And so, as we introduce consumables and you put them in 2,500 doors of major national retailers like that, like a Target, for example, has 30 million every week walking the aisle right past what is often our end cap. So, that kind of traffic puts your brand front and center. And then, it's up to us to capitalize on that and build recognition from there, so hopefully a very positive effect.

Got it. Thank you for the color, and congrats on the quarter.

Thank you.

Your next question comes from Ryan Meyers with Lake Street Capital Markets. Please go ahead.

Hey, guys, thanks for taking my questions. First one for me, obviously, you're set to launch in the retail this spring with the treats. Just wondering if you could provide any commentary on the potential revenue impact that you guys expect to see? And then, maybe if you expect to see any of that in FY'24 [relative to] (ph) what comes from FY'25?

Hey, Ryan, how's it going? In terms of fiscal '24, the impact's not material. Obviously, we'll be loading in some initial orders to both of the national retailers, and then they'll clear through and hit shelf for the early part of fiscal '25, obviously a lot more traction during the quarter of fiscal '25. That, coupled with some of the momentum we're also seeing on the Girl Scouts, which Matt mentioned. When we look at our Commerce business, the additional revenue from the two retailers plus Girl Scouts will add about double-digit percentage-wise to our overall Commerce revenue for fiscal '25.

Okay, got it, that's helpful. And then, if we think about the gross margin in FY'25, it sounded like you guys expect to see margin improvement there. But I just want to make sure I understand that, especially as retail begins to make a larger contribution?

Yes, on a like-for-like basis, as you've seen during fiscal '24, sequentially our margin has improved. And we expect that to continue through till the end of the year. Most of that's been driven by the consolidation of the toy suppliers, we've got some improvement as well as we've managed down our inventory levels, you're doing better from an ageing and obsolescence cost management as well. So, both of those have helped in terms to drive the 300-plus margin improvement for this year. Q4, we'll start seeing the benefit of consumer vendor consolidation as well. And then, you'll see that coming through for the bulk of fiscal 2025, and that'll be the major driver. The level of that lift won't be as much as what we saw this year, but it'll still be a healthy improvement. We don't expect significant shift in fiscal '25 in terms of the channel mix, so it'll stay pretty similar. That'll probably be a bigger factor beyond fiscal '25.

Got it. Thank you for taking my questions.

Thanks, Ryan.

Your next question comes from Ygal Arounian with Citigroup. Please go ahead.

Hey, good afternoon, guys. I want to dig into the D2C side a little bit more in the comments, maybe in particular about the consumables or the products, particularly sales in general, coming outside of the subscription box, that being up 30% year-over-year. Can you expand on that opportunity a little bit more? How much of a mix do you think that could be over time? What to expect from that in the coming quarters? And then I guess that's all that's tied into the unified platform. Just give us an update on timing around that when we get the full transition and the timeline?

Yes, on the consumables question, like we said, $15 million and that 30% growth. And that's obviously continuing to grow quarter-over-quarter as we get more of that emphasis on bark.co. And it's really as more traffic moves over there either, as we take the legacy BarkBox customers in that direction, and we take the ad spend in that direction, it's going to accelerate the cross-sell and up-sell opportunities. The timing of that, we're looking for that to happen in fiscal year '25, ideally before the holidays, but it's a big move, so we'll go when we're ready, but in fiscal year '25, where that takes us in terms of the consumables, if I look out over four or five years, you're looking for something like 35% to 40% of the business moving into the consumables realm instead of the toys, or counter the toys.

And that's across D2C and commerce.

Yes. Thank you.

Okay, all right, great. And then, just a big picture one, Matt, I see you made a comment about the current valuation. It's got about 50% of your market cap is in net cash. And so, sometimes you just don't see the opportunity, maybe the company would. And just want to see if you could expand on that thought a little bit. How do you think about that? How much time do you give it? What else can you talk about there that might be helpful for investors? Thank you.

I think the situation remains the same that we -- given all these dynamics, the strength of the balance sheet, we talked about having over $130 million of cash, the free cash flow over the past 12 months, the inventory position, the gross margin expansion, just everything. We feel really good about the business overall. And when you -- I'd say like when I or we look at that objectively and look at the value of the company, we would say to investors we think it's a great opportunity. And so, we also have to look at ourselves as potential investors, again, given the cash balance and what our cash needs or generation that we expect in the future will be. So, we have to take that same lens and view it as an opportunity, and that's exactly how we'll behave.

Thanks, Matt.

Your next question comes from Kaumil Gajrawala with Jefferies. Please go ahead.

Hey, guys. Good evening. This is Keith Devas on for Kaumil. I'd love to jump back to the customer acquisition on the quarter and if you could provide any context really on any differences you're seeing in the cohorts from a purchasing habits standpoint, the types of products are in the box, any initial term assumptions. I think in the past you shared that some of the cohorts during COVID, et cetera, were unprofitable. So, I'm trying to gauge, get a sense of the difference between the two, if you could?

Just so I make sure I answer that question, and thank you for it, are you talking about the recent cohorts where we associated with those customers we acquired here in this quarter -- this past quarter?

Yes, that's right.

Okay. Well, in some ways, a little too early to tell because we have anywhere from one month of renewal to two or three. So, a little bit early in the lifespan, but from a retention point of view, from an average order point of view, and all the dynamics that go around that, pretty on par, pretty steady with what we've seen over the last, call it at least four quarters, maybe eight quarters. And those have been strong. And so, when we sort of bubble all that up together and you look at the trend line of our lifetime value, we're seeing a real acceleration there to our highest point. This quarter was our highest point of lifetime value. And of course, that's propelled by really solid or strong retention combined with the gross margin expansion you're seeing that's leading to on a gross profit basis that very high lifetime value, so, feeling great about that. Obviously, we will continue to monitor it, but often running that cohort looks historically pretty consistent.

Got it. Thank you. And then, on the retail rollout, I know you guys are there with toys. Now you're going into treats. Trying to get a sense of where you need to incrementally invest to kind of capture that different customer, understanding that maybe they're already devoted to certain treat brands, et cetera. So, how do you kind of capture that customer as you roll out into retail and where do you need to invest to do so?

Hi Keith, this is Zahir. We're launching with the two retailers that we've already shared, and we hit the shelves at the start of fiscal 2025. We've got strong distribution, so six to seven SKUs in each of the retailers, national distribution. That's going to give us a lot of visibility in both of those retail chains, good shelf placement. We'll maximize opportunities to do things like -- and aisle placements, seasonal opportunities, and things like that. So, you'll amplify the inline performance with doing other things as well. We'll have a comprehensive shopper marketing and in-store marketing program to go with it. And then beyond that, we'll be having conversations with other retailers in parallel. And based on their research, we'll be looking to expand distribution to other retailers towards the back end of fiscal 2025.

Maybe just to add a point or two to that as well, Zahir, we also bring to this a couple of unique advantages, and one of those we've already got in motion here, which is we are sending out millions of BARK boxes every month to people and their dogs. And starting in November, we started to preview this new line of treats in every BarkBox and with one-ounce sample packages. That continues today. That will continue through next month and through the launch. And so, we're also creating habit in millions of homes, which is, again, a really unique advantage. That should give us a leg up and have people looking for the replenishment on shelf at their favorite retailers. In addition, we get to be cost competitive right out of the gate. If we were a startup company doing our first deal in a big retailer with treats, we probably wouldn't have significant volume and we'd have higher costs and maybe be pressured on price. But being one of the largest treat companies in the U.S. by revenue today, it allows us to come out of the gate really strong with great buying power, price it really appropriately, have good margins from right there. And so, we're not fighting on winning battle as a new brand. We're a recognized brand with a lot of trial already in the market at a really competitive price point.

Got it. Thank you, great color.

This will conclude BARK's third quarter fiscal 2024 earnings conference call. Thank you all for joining us today. You may now disconnect.