Pet care remains a growth industry. Even during the pandemic, consumers still spent money on their pets with total sales reaching $103.6 billion in 2020, the first time ever more than $100 billion was spent on our companions, according to the American Pet Products Association (APPA).
Last year, pet spending soared 20% to $123.6 billion with most ($50 billion) going to food and treats. Direct-to-consumer (DTC) pet-care company Bark (BARK 0.94%) is trying to cash in on the humanization of animals trend and the willingness of owners -- or pet parents, as animal lovers like to call themselves -- to spend freely on their four-legged friends.
Focusing solely on dogs, Bark sends a monthly package of toys, treats, and other goodies -- a BarkBox -- to members based on the size of their pet. But Bark's just-reported fourth-quarter earnings show why this pet-centric stock might be all bark, no bite for your portfolio.
Image source: Getty Images.
Who let the dogs out?
Sales of $128.8 million were 15% higher than a year ago and narrowly eclipsed Wall Street's expectation of $126.7 million. But adjusted losses of $0.15 per share far exceeded the consensus analyst forecast of only a $0.05 per share loss. Losses in general are rapidly expanding as the full fiscal year saw them more than double to $68.3 million from $31.4 million the year before.
Yet it's not a problem related solely to Bark but to DTC stocks in general. Allbirds, Rent the Runway, and Warby Parker have all reported significant and growing losses as have Purple Innovation, Hims & Hers Health, and Peloton Interactive after the pandemic boom.
Bark should arguably be different since pet-oriented businesses tend to be recession-resistant if not recession-proof. But as the Pets.com debacle of 2000 showed -- it declared bankruptcy nine months after its initial public offering (IPO) -- even pet stocks need to have a solid business plan to survive.
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Working like a dog
On the surface, Bark's business is growing. Subscription shipments jumped 28% in fiscal 2022 while the number of subscribers rose 24% from the year-ago period. But the cost of acquiring a subscriber rose 12% to $53.43 while the lifetime value obtained from each subscriber compared to the cost of acquiring new ones fell to a ratio of 4.7 from 6.3 last year.
Moreover, customer churn (the average monthly subscriptions that were canceled in the last three months divided by the number of shipments in that period) also rose to 7% from 5.9% the year before.
It's getting more expensive to acquire customers, which certainly could be a function of rampant inflation and supply-chain issues. But it's also getting more difficult to hold onto customers, and Bark is deriving less value from each one.
Image source: Getty Images.
Barking up the wrong tree
Getting a few new toys for your dog can be fun, but how many toys does Fido really need, and after a year, or even just a few months, will dog owners really want to continue adding more? Sure, there are owners for whom Bark is a perfect fit, but after getting a BarkBox for my lab-pit mix, I realized that filling my living room with more toys month after month would soon create a mess that would only grow over time. I assume I'm not alone.
Bark is also finding that customers aren't as excited about receiving large groups of items. The company had to take a $13 million charge in the fourth quarter related to an inventory write-down. As a result, it opted to "strategically narrow" the products it ships. The write-down also caused its gross margins to slide to 50% from 61% a year ago.
Bark has characterized the dry dog food component of its business as "underserved," but this seems a stretch considering the number of companies making dog food, both online and offline, including many that have greater financial resources available than Bark.
Can this dog learn new tricks?
Dogs are our most popular pets with the APPA saying that 69% of U.S. households owns one, followed by cats at 45%. So Bark has targeted the right market, and its BarkBox brand readily resonates with consumers. But the DTC space does not have a good track record lately for companies that can both grow and be profitable.
Trading at less than $2 a share, Bark is very much a penny stock, meaning investing in it entails greater risk. As the SEC warns, "Investors in penny stocks should be prepared for the possibility that they may lose their whole investment." With Bark's stock down 82% from its high, it would seem the market right now doesn't think this will be one old dog that can learn a new trick.
