The soon-to-be public dog care subscription service Barkbox plans to merge with the special purpose acquisition company (SPAC) Northern Star Acquisition (STIC +0.00%) in the second quarter of 2021. The combined company will trade under the ticker BARK. While it's smaller than big-box competitors Amazon.com (AMZN +2.05%) and Chewy (CHWY 2.98%), Barkbox is poised for impressive growth and customer retention within its unique niche.
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A different kind of subscription business
If you're usually wary of subscription-box businesses because of their typically low margins and frequent cancellations, I don't blame you. However, Barkbox has proven that its story is different from the norm. It has positioned itself perfectly in the fast-growing pet care market with a unique value proposition based on high-quality personalized product bundles for customers' furry friends.
The pet care industry has strengthened through the pandemic and will not stop growing anytime soon. Morgan Stanley released research last month that projected the U.S. pet care market will expand from approximately $120 billion in 2020 to $277 billion by 2030 at a compounded annual growth rate (CAGR) of 8% -- compared to a 3% CAGR over the last decade.
One of Barkbox's most impressive metrics is its retention rate of 95% among its 1.7 million active subscribers. The company clearly has strong brand loyalty, allowing it to retain its customer base and maintain an enthusiastic social following, driving organic customer acquisition. Barkbox has 1.7 million Instagram followers (plus 6.8 million more followers across other social channels) compared to Chewy's 688,000 Instagram followers, despite being a significantly smaller company than Chewy.
Barking up a different tree
Barkbox is unique enough that no competitors are doing exactly what it's doing at scale. General pet care retailers like Chewy and Amazon carry comparable products, but they don't offer subscription boxes with personalized products like Barkbox does. Barkbox has embraced mega-retailer Amazon by selling subscription boxes on the latter company's site -- and you can tell by a quick search that Barkbox ranks highly with stellar reviews.
Its main direct competitor is Bullymake, owned by The Carlyle Group (CG +0.00%). Compared to Barkbox's flagship box, this subscription box service is higher-priced and only suitable for large breeds (hence the pitbull-inspired company name). Barkbox has a large-breed subscription box line called Super Chewer that competes with Bullymake, which has almost identical pricing and contents as its competitor.
Plus, Barkbox manufactures all of its products (Bullymake doesn't), which boosts margins by cutting out the middleman and de-incentivizes customers from switching to another pet care company in a way big-box retailer competitors can't. If your pooch loves Barkbox treats, you have to get them from Barkbox (unlike retailers like Chewy, whose brands can be found elsewhere).
A valuable bank of dog data
The market for personalized products is not just for humans. By collecting 12+ data points (like breed, dietary restrictions, and play style) on its subscribers' dogs, Barkbox can offer 150K monthly customized assortments to fit its canine customers' individual needs.
One of the most effective strategies that Barkbox is developing is its "Add-To-Box" incentive, which uses machine learning to recommend product add-ons to existing customers. This ultra-high-margin strategy accounted for over $3 million in revenue in the most recent fiscal quarter, Q2 2021 -- 3% of the company's total revenue. Along with upselling individual products to the right customers using data, Barkbox is also developing new product lines (like BarkEats, a premium personalized dog food brand) in a plan to quadruple its total addressable market (TAM) per customer.
Path to profitability
By focusing on customer retention, paid marketing, and upselling new product lines, Barkbox can improve further upon its already solid 60% gross margin and reach net profitability by 2023 (according to Barrons analysts).
Revenue ($224 million last fiscal year) and gross profit ($137 million last fiscal year) have both increased steadily over the past three fiscal years. The company projects a compounded annual growth rate of 47% (compared to Chewy's 22.6%, according to Barkbox).
The bottom line is a different story, with earnings before interest, taxes, depreciation, and amortization (EBITDA) projected to fluctuate before stabilizing, with losses getting worse (peaking in 2022) before they get better. Free cash flow was positive for the most recently reported six-month period (ending September 30, 2020); however, the company has burned cash for the past two full fiscal years, according to its S-4.
With the company not sustainably profitable to date, some investors may want to wait and see how Barkbox's performance plays out after it goes public. Considering the instability of post-IPO and post-SPAC stock prices, waiting until the hype has calmed for a more accurate valuation picture is a solid strategy. In the quarters to come, I think it's worth keeping an eye on the merger, considering Barkbox's unique position in a recession-proof, pandemic-proof market.
