BARK (NYSE: BARK) shares have jumped as much as 120% since I last covered the company in June. The company reported better-than-expected first-quarter profitability results. The company continues to lose money, and this the investment is highly speculative. But I think the outlook for the company is heading in the right direction. I still think BARK shares have considerable upside potential if the company manages to achieve profitability.
Progress towards profitability
BARK’s business model is simple. The company sells its line of branded products to dog owners. Most of its sales are through its direct-to-consumer subscription boxes. This model is simple and coherent. The company has clear profitability drivers. It must increase average revenue per customer and reduce customer acquisition costs.
BARK announced an adjusted EBITDA loss of $13 million in the last quarter. This beat its previous forecast of $5 million. The company increased its average order value by 7% year over year and 3% quarter over quarter. This is largely due to management’s focus on their higher margin products. Products like BARK Eats and BARK Bright generate more profit for the company.
BARK’s subscription business is showing strong fundamentals. Management reports that its customer acquisition costs have not increased. However, the company has experienced strong growth thanks to newly acquired customers. The average revenue generated by new customers has jumped 10% since last year.
At the same time, management is trying to control expenses. The company’s operating expenses increased 18% year over year, compared to revenue growth of 12%. But management has cut operating expenses by 10% in the past two quarters. They discussed the company’s expense growth during their last earnings call.
The year-over-year increase was primarily driven by a 6% increase in subscription shipments in the last quarter and an increase in headcount. Going forward, we do not intend to significantly increase staff numbers from current levels. We expect the majority of G&A expense growth this year to be driven by subscription shipping volume and therefore expect our operating margins to improve in fiscal 2023 compared to last year. fiscal year 2022.
I think that’s a solid prospect. The company continues to record positive revenue growth. BARK’s hiring freeze will allow more of the company’s gross profit to flow into net income. For this reason, management expects the company’s EBITDA loss to narrow to $8 million in the second quarter. This would be a sequential decrease of 38%.
Overall, I think the company’s profitability outlook is quite positive. There is still a long way to go, but all major BARK metrics are moving in the right direction.
Rating is always up to date
Even after a 32% rebound from its lows, I still think BARK shares are cheap. The company has a price-to-book ratio of 1.4 times. Its market cap is around $300 million. It has $177 million in cash on its balance sheet, offset by $76 million in debt. This gives the company an enterprise value of just $190 million. That seems low for a company with over $500 million in annual sales and strong margin potential.
The company has $158 million in inventory on its books, up 54% from last year. This represents more than eight months of inventory. This seems high for a company with this profile. But I don’t think that will be a problem due to BARK’s business model. Management discussed its inventory outlook during its earnings call.
We continue to protect against potential supply chain disruptions. However, we do not expect inventory to be a significant drag on working capital this year and expect our inventory to decline from current levels as we leverage the products available to us over the coming quarters.
It takes time for us to achieve this, because we usually order the product six months in advance. So we’re going to take a few quarters to see our progress reflected on our balance sheet. But a great thing about our subscription model is that the customer is unaware of what products they will receive in their fashion dogs. In a traditional e-commerce business, the customer selects the exact products they want to send to them. In our model, it’s a surprise every month and we can leverage the inventory we have at our discretion.
This inventory model is very effective. This effectively eliminates the risk of BARK having to take large markdowns. This should allow the company to maintain its solid margins above 50%.
The company reduces its cash consumption rate. Last quarter, the company spent $17.4 million on operations. This cost has decreased by almost 70% since last year. At the current pace, the company has enough cash to sustain itself for more than three years.
It is difficult to value a company with so much uncertainty. But the shares are trading at a forward EV to earnings of 0.34 times, so it looks like the market doesn’t think BARK will be able to achieve profitability. I think there is a good risk in rewarding that the business becomes profitable. Even modest margins would make the company’s stock undervalued in my view.
Future drivers of growth
BARK continues to grow its top line even as economic headwinds increase. The company reported 259,000 net new subscribers last quarter. I think BARK can continue to add subscribers sustainably. Spending on pets generally remains constant during recessions. Sectors such as pet food and healthcare are particularly resilient. BARK Bright and BARK Eats are fast growing offerings in these categories.
I also think BARK has good opportunities to sell new products to existing customers. The company generated $10 million in cross-selling in the first quarter. This is an increase of 42% since last year. Management has integrated all of BARK’s offerings into one site. For example, the company began cross-selling BARK Bright food products and toppings to its toy and candy customers in May. This boosted the company’s average order value. It also lowered its customer acquisition costs.
This is where BARK’s data advantage comes in. The company has a list of nearly 2.3 million customers who are currently paying for any of BARK’s services. The company also has basic information on about 10% of the dog population in the United States. This allows the company to be more effective in advertising and marketing. The business can leverage this information to reduce the cost of acquiring customers, thereby increasing margins.
There is still a lot of uncertainty here. But I think BARK’s outlook is becoming clearer. The company is making strong progress towards profitability. I am interested in the next quarterly report from BARK. I want to see how the company handles the current economic headwinds. Overall, my outlook is unchanged. I think this is a decent speculative buy for high value investors with high risk tolerance.