Bark – Fighting For Support (NYSE:BARK)

Business Overview & Macroeconomy

BARK is a company that went public via SPAC in 2021, at the height of the SPAC boom. BARK’s business is focused on providing services, products, and content to dog owners. BARK distributes its product through its own e-commerce platform and through 40,000 retail stores within the United States.

BARK is best classified as a consumer discretionary stock, so to access the macro environment, I’ll first look at consumer sentiment and consumer discretionary spending.

The Michigan Consumer Sentiment survey is one of the most reliable metrics for judging consumer sentiment.

Michigan Consumer Sentiment Survey

Source: Tradingeconomics.com

The consumer sentiment survey shows that the most recent reading of 79 in January 2024 is the highest since the lows of 2022, as consumers are feeling more confident amid colling inflation and strong wage growth.

To further support Michigan’s Consumer Sentiment Survey, consumer spending, otherwise known as personal consumption expenditures (PCE), continues to reach new all-time highs.

Personal Consumption Expenditures (PCE)

Source: St. Louis Federal Reserve

With consumer confidence and spending, it’s time to look more specifically at the market BARK is targeting – households that have a pet. As stated in the American Veterinary Medical Association, 62M households within the United States have a dog as of 2022. Of those households that have a dog, they have an average of 1.46 dogs. While the topline number of households with dogs varies by source, it’s believed that the number of households with pets has become saturated, with 65-68% of households within the United States having a pet, a number that has stayed consistent since 2013.

While the percentage of households with pets has stayed flat, there is a growing share of wallets going toward pets as birth rates continue to fall within the United States. According to the U.S. Census, 40% of U.S households have a child, compared to 43% in 2012 and 48% in 2002. With pet ownership rates stagnating, it would typically be taken as a poor indicator for a business like BARK, but with fewer U.S. households having children, that allows a great share of wallet to be funneled toward pets.

To summarize the current macroeconomic environment as it relates to BARK:

• Consumer confidence is positive, with declining inflation and strong wage growth

• Consumer spending continues to increase

• Pet ownership as a percentage of households might have peaked, but pet spending as the share of wallet, given a decline of households with children

Company Financials

In the company’s earnings report in earlier this month, I’ve listed the key metric in the next chart with a high-level summary below:

• 5th constitutive quarter of negative YoY growth

• YoY gross margin improvement of 473bps

• Operating Income still is negative by double digits, 11.2% in the most recent quarter

• Better inventory management as BARK has maintained roughly the same amount of sales YoY but with 20% less inventory, freeing up $20M of cash YoY

• Paid down $41M of debt

A more detailed overview of their financials is provided below:

Source: SEC Quarterly Filings

Other takeaways from the most recent quarter

BARK mentioned that customer it was able to acquire additional customers in the most recent quarter due to the better than expected efficiency of spend. In Q3’24, BARK spent 20.1% of its revenue on marketing vs. 16.2% the year prior. While its initially concerning revenue was down 6% YoY with an increase in marketing spend, the company has shifted its focus to offering its BARKBox, a monthly subscription of treats and toys, so it’s reasonable to assume there will be an extended payback period of greater than three months for those new users.

In the most recent quarter, BARK disclosed it had paid down ~$45M of debt on their 2025 Convertible Note. It’s a positive sign that BARK is beginning to pay down its convertible note balance, since if it does convert in 2025, dilutes existing shareholders. It remains to be seen with the remaining convertible note balance, but as that’s the only material debt on the company’s balance sheet, refinancing will likely be an option over the next year (assuming credit conditions do not worsen).

Company Valuation

At the end of trading on February 16th, 2024, BARK was trading at a market cap of $198M at $1.12/share, down 90% from its SPAC offering in 2021.

As seen in the share above, BARK has never had a period of sustained positive stock performance given BARK went public via SPAC, was (and still is) unprofitable, and the Federal Reserve quickly raised rates. With the current stock price and financial performance from the recent quarters, BARK is becoming a buy. Below is a high-level table of BARK’s key valuation metrics when compared against its main competitors, Chewy (CHWY):

Click to enlarge

While there are certainly financial differences between the two companies, using a revenue multiple when BARK is unprofitable is one of the best ways to common-size the two companies. If the revenue multiple of Chewy was applied to BARK, that would imply a company valuation of $320M, a 62% increase from its current levels. In addition to the revenue multiple, BARK has demonstrated that it’s improving gross margin, gained better management over its inventory, and is paying off debt that would otherwise be dilutive to shareholders.

Near-Term Catalyst

The company does not have its next earnings report until May, but on the heels of the company’s most recent earnings release, BARK is beginning to breach its 200-day moving avg.

BARK certainly has crossed above its 200 DMA before, but there are two things different this time:

• BARK’s stock has consolidated support in the $0.75-$0.80 range, giving any new long-term holders a solid floor in the event BARK cannot hold the 200 DMA

• The last quarter showed dramatic fundamental improvements, making the stock more investable now than before

With this technical support, the fundamental improvements in the company, and the revenue multiple upside when compared against its closest competitor, I’d recommend BARK as a buy, albeit speculative, as the story hasn’t been fully proven yet.