Bark (BARK -1.27%) shouldn’t be the dog that it’s been. Since going public in late 2020, the direct-to-consumer pet care company has lost 88% of its value even though consumer spending on pets remains resilient to belt tightening.
Although pet ownership dipped a bit during the pandemic — just 52% of households own one versus 54% in 2018, and most of those pets (69%) are dogs — spending continues to climb. While we’re waiting for the latest data to be published, the American Pet Products Association says $123.6 billion was spent in 2021, a 19% spike from the year before, and there is no sign it won’t keep growing.
Even though over two-thirds of U.S. households are cutting back on general expenses, only 15% are reducing what they spend on Fido and Fifi. It’s an environment that should see Bark thriving; yet, the market values it at just a fraction of its half a billion dollars in annual sales. So let’s take a look at whether this pet-oriented subscription box business is a buy.
Can’t run with the big dogs
Focusing exclusively on dog owners, Bark sends a monthly BarkBox to members based on the size of their dog. The package includes a selection of pet toys, treats, and chews for $35 a month.
Despite the willingness of pet parents to keep spending on their pets, Bark’s fiscal third-quarter revenue of $134 million fell 5% from last year as sales were apparently pulled forward into the second quarter. Shipments dropped 4% as active subscriptions dipped around 2%.
But it appears the online, direct-to-consumer stock is having trouble attracting new customers — new subscriptions plummeted 29% and the cost of acquiring them rose 3%. This comes even though Bark spent a fifth less on marketing this quarter, which could be part of the reason why it was having difficulty attracting new subscribers.
That should be a warning sign for investors as it is reminiscent of another subscription service, meal kit delivery company Blue Apron, that would see new subscriber numbers tumble every time it cut its marketing budget. It’s lost 98% of its value since its IPO.
New tricks for this dog
In its defense, Bark is caught up in a malaise that has struck many direct-to-consumer companies, including Allbirds, Peloton Interactive, and Warby Parker. Inflation, rising interest rates, and high energy costs have all weighed heavily on consumers, causing them to cut back.
Bark has tried to offset the weakness in sales by expanding beyond toys and treats into products that could carry higher margins, such as canine dental products, collars and beds, and dry dog food tailored to specific dog breeds. Although currently dog-centric, it’s possible Bark could expand to cats as a new vertical (maybe call it Purr).
Dog food in particular is a huge opportunity as it represents 40% of all pet spending. Bark saw sales in food and dental products soar 64% last quarter, helping to narrow its losses for the period to $21.3 million from $27.1 million. And Bark did turn free-cash-flow positive for the first time in the third quarter, generating $331,000. But there are bigger problems for the company.
All bark and no bite
A new toy or treat can be a fun diversion for your pet, but unless you’re already routinely spending $20 to $30 or more on such things, your living room is quickly going to become cluttered with an ever-growing supply of toys.
That’s what Bark itself is finding. Consumers apparently don’t want to receive so much stuff every month so they’re limiting their purchases. Bark had inventory issues in the past that it had to write down — it admitted last year it had a material weakness in that area that it’s working to resolve — and it has significantly narrowed its selection of items to send out.
However, the real weakness is its business model, which requires attracting an ever-larger list of customers to the service. Bark stopped reporting its subscriber churn this year, but ended fiscal 2021 at 7% and growing. Whether it can grow revenue long term and ever be consistently profitable is the real risk for investors, who could find themselves barking up the wrong tree.