BARK Q2 2024 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

Key Takeaways

  • Bark delivered its first positive adjusted EBITDA quarter of $1 million and generated just under $1 million in free cash flow, driving $4 million in free cash flow on a trailing 12-month basis.
  • The company paid down $45 million of convertible notes early, boosting net cash by nearly $3 million and securing over $5 million in future interest savings.
  • Amid macro headwinds—dog households down 3 million and a 10% decline in the dog toy industry—DTC revenue fell 11% and commerce revenue dropped 29%, yet customer retention hit its highest level since IPO and average order value exceeded $31.
  • Strategic initiatives drove a 20% year-over-year rise in standalone consumables revenue to $5 million, $19 million in commerce sales, and new partnerships with Girl Scouts, Costco advent calendars, and a U.S. retailer commitment for treats in over 1,000 stores by spring 2024.
  • Gross margin expanded to 61.5% consolidated (+560 bps YoY), with DTC at ~65% (+400 bps) and commerce at 42.5% (+930 bps), and Bark expects further margin gains, cost efficiencies, and a second positive adjusted EBITDA quarter in fiscal Q4.
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Earnings Conference Call
BARK Q2 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Ladies and gentlemen, good afternoon. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to Bark's 2nd Quarter Fiscal 20 24 Earnings Conference Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. Call.

Operator

After the speakers' remarks, there will be a question and answer session. Star key followed by the number 1 on your telephone keypad. Call. Thank you. And I will now turn the conference over to Mike Mujis, Vice President of Investor Relations.

Operator

You may begin.

Speaker 1

Good afternoon, everyone, and welcome to Bark's Q2 fiscal year 2024 earnings call. Call. Joining me today are Matt Meeker, Co Founder and CEO and Zaheer Ibrahim, Chief Financial Officer. Today's conference call is being webcast in its entirety on our website and a replay of the webcast will be made available shortly after the call. Additionally, a press release covering the company's financial results was issued this afternoon and can be found on our Investor Relations website.

Speaker 1

Before I pass it over to Matt, I would like to remind you of the following information regarding forward looking statements. Quarter. The statements made on today's call are based on management's current expectations and are subject to risks and uncertainties that could cause actual future results and outcomes to differ. Barclays' reconciliation to our non GAAP financial measures is contained in this afternoon's press release. And with that, let me now pass it over to Matt.

Speaker 1

Quarter.

Speaker 2

Thanks Mike and good afternoon everyone. Our second quarter results highlight the significant progress we continue to make in improving our long term profitability outlook. Quarter. Last quarter, we delivered positive adjusted EBITDA of $1,000,000 surpassing our guidance range and marking our first positive EBITDA quarter quarter. We also achieved another period of positive free cash flow, which came in at just under $1,000,000 On a trailing 12 month basis, we've delivered positive free cash flow of approximately $4,000,000 quarter.

Speaker 2

When I returned to Bark, we faced a lot of skepticism. We heard that we would never reach profitability that we were going to run out of cash within a year or if we did generate cash, We couldn't do so consistently. Sitting here today with our first adjusted EBITDA positive quarter behind us and positive free cash flow generation on a trailing 12 month basis. I'm thrilled with the progress we've made. 1 EBITDA positive quarter is the first step to 1 EBITDA positive year and that's what's next for us.

Speaker 2

In fact, our confidence in our profitability outlook has grown to such an extent that earlier this week we paid down $45,000,000 of the face amount of our convertible notes early. This decision improved our net cash position by nearly $3,000,000 quarter and saved over $5,000,000 of interest over the remaining term of the note. Overall, we believe our capital structure is stronger as a result. At a recent conference, I shared a quote from an analyst that summarizes the approach I've taken to grow Bark since returning to the CEO role 22 months ago. Quarter.

Speaker 2

Growth without profit is a waste of time. Profit without growth is a matter of time. Profit has been our focus quarter. And as our recent results indicate, we've come a long way. This has meant shedding on profitable revenue streams in lieu of building a profitable business.

Speaker 2

However, it's from that foundation that we can now really focus on returning to profitable top line growth. With that said, there is no denying that the growth environment today is challenging, not just for Bark, But also for our pet and direct to consumer peers. In pet in particular, households with dogs declined by 3,000,000 last year and we anticipate another decline this year. We are essentially returning to pre pandemic levels and the discretionary spend question. Nielsen data through October shows the dog toy industry is down 10% this fiscal year.

Speaker 2

Quarter. The reality is it's challenging and will continue to be in the near term. But regardless of those macro challenges, We need to continue to execute against our strategic initiatives to grow our profit in addition to delivering more efficiency opportunities And there are more. I'll touch on this more in a moment, but first let's talk about our results last quarter. Starting at the top of the P and L, we delivered total revenue of $123,000,000 meeting our guidance for the quarter.

Speaker 2

Quarter. On the DTC side, our core toy subscription business continue to feel the macro headwinds, particularly from a customer acquisition standpoint. Quarter. However, despite that, we've seen some encouraging progress recently as new customer acquisition has been up progressively since May. It's not where we wanted to be yet, but we're improving rapidly in a tough environment.

Speaker 2

While that's a challenge, our customer retention rates last quarter Barclays' second. We're at the highest level since going public and our average order value remains strong at over $31 So when we bring new customers onto our platform, They are staying longer and spending a lot with us. When we laid out our strategic priorities at the beginning of the year, We talked about 1, moving towards a consolidated DTC experience 2, turning more of our focus to consumables and 3, selling those consumable products in retail. Let's touch on the recent progress we've made across each of those initiatives. On the consolidated DTC experience, I'm happy to report that our new site URL is now just bark.co and the site is making good progress.

Speaker 2

Having all our products under one domain has improved our ability to convert customers and cross sell them across our product portfolio And we're now able to direct them to a much simpler and more effective domain. Specifically, where we faced headwinds on our toy and toy and treats subscription product lines. If we look at consumables revenue outside of what's included in our Box subscription products, We generated just over $5,000,000 of revenue last quarter, up 20% versus last year. This is largely from bark.co picking up steam. On expanding more into retail, last quarter we delivered $19,000,000 of commerce revenue.

Speaker 2

We were also able to bring new retail partners and countries into the mix. Bark Toys are now in all 450 pet at home stores in the U. K. We've also begun to expand beyond just toys and retail. We recently partnered with the Girl Scouts where we are selling co branded products through their online platform.

Speaker 2

This pilot program went exceptionally well And we ended up meaningfully increasing our commitment as products sold out much faster than expected. Longer term, we have an opportunity to significantly This represents not only a massive revenue opportunity, but also a new product category for those channels. Quarter. Furthermore, we recently began selling our treat advent calendar through certain Costco stores in the U. S.

Speaker 2

And the initial feedback has been very strong. In fact, we've already been approached by other retail partners interested in selling our advent calendar next holiday season. And finally, as we announced last month, I'm thrilled to share that we received our first commitment from a leading retailer in the U. S. To begin selling our treats across over 1,000 doors in spring of 2024.

Speaker 2

As we've discussed throughout the year, introducing consumables in our retail channel is a huge opportunity and we've made tangible progress over the past several months. Quarter. And while this recent progress will not have a significant impact on our top line this year, we plan to build on this momentum and continue to anticipate commerce segment to represent around 30% of our total revenue over the next 4 to 5 years. Moving down the P and L, when I returned to CEO, one of the biggest opportunities for reaching profitability Was bringing discipline to our unit economics and the gross margin line. Last quarter, we delivered healthy improvements in gross margin yet again.

Speaker 2

Quarter. Our consolidated gross margin came in at 61.5%, nearly 100 basis points higher on a sequential basis quarter and 5.60 basis points higher than Q2 last year. On the DTC side of the business, our gross margin came in quarter at approximately 65% last quarter, a 400 basis point improvement year over year and up 2 seventy basis points versus the Q1. Overall, we've been very pleased with our ability to quarter. Our margin profile in a relatively short period of time.

Speaker 2

Moreover, we expect this trend to continue through FY 2024 and beyond. And finally, we delivered $1,000,000 of adjusted EBITDA in fiscal Q2, our first positive quarter since going public over 2 years ago. And though we don't expect positive EBITDA in the current quarter as we invest more heavily in growth during the peak holiday period, We do believe that fiscal Q4 will also be positive on an adjusted EBITDA basis. Overall, our top priorities remain. These priorities are to fulfill our mission to make all dogs happy, execute our strategic initiatives and continue to deliver on the path to sustainable profitability.

Speaker 2

To that end, we expect ongoing improvements in our gross margin line well into fiscal 2025. We also believe there are additional areas where we can reduce expenses in shipping and fulfillment as well as G and A. Quarter. In short, we expect to continue to deliver healthy year over year improvements in profitability going forward. And success here will better enable us to fulfill our mission to make all dogs happy.

Speaker 2

Overall, We have many exciting things happening and coming to market soon. While we continue to expect toys to face challenges in this environment, We anticipate our newer consumables products to grow at a healthy clip in both DTC and retail, which is in line with our strategy. Quarter. This growth coupled with our continued efforts to reduce costs, improve margins and deliver operating leverage on our cost structure Is expected to have meaningful benefits to our bottom line and free cash flow generation with each passing quarter. And ending last quarter with over 100 and $60,000,000 of cash on hand and a business that just turned in its 1st EBITDA positive quarter and is free cash flow positive over the trailing 12 months.

Speaker 2

We believe we're in a strong position for the long term. And with that, I will turn it over to Zaheer.

Speaker 3

Quarter. Thanks, Matt, and good afternoon, everyone. I'll begin today's call with an overview of our second quarter results, Along with some recent balance sheet developments, followed by our outlook for the remainder of fiscal 2024. Quarter. Beginning at the top of the P and L, we generated total revenue of $123,000,000 which came in at the low end of our guidance range.

Speaker 3

Quarter. Looking at our revenue in more detail, we generated $104,000,000 of revenue in our D2C segment, which was down 11% versus last year. Quarter. The year over year decline in D2C revenue was primarily driven by 9% decline in total orders and a 2.6 quarter. Our quarter.

Speaker 3

And though we continue to expect year over year revenue declines in FY 2024 in the box products, We are seeing signs of improvement from a customer acquisition and retention standpoint as Matt shared earlier. From a category mix standpoint, We generated $67,000,000 of toys in the quarter, down 12%, while consumables revenue of $37,000,000 was down 9%. It is worth noting, the majority of our consumables revenue today is derived from our subscription box products. So the recent declines There are impacting our overall consumables mix. If we just look at consumables revenue derived outside of subscription box revenue, quarter.

Speaker 3

We generated $5,000,000 of consumables revenue last quarter, which was up 20% compared to last year. And although this revenue is relatively call today. We continue to see good growth across these categories and expect that trend to continue going forward. Quarter. Turning to our Commerce segment, we generated roughly $19,000,000 of revenue last quarter, which was down 29% compared to last year.

Speaker 3

Remember our commerce revenue in the period last year was inflated as we saw a sizable pull forward of holiday related orders from several retail partners. This year, we expected our commerce mix to be more evenly distributed between fiscal Q2 and Q3. Quarter. And so the year over year commerce comparisons are less meaningful across this segment. It is also worth noting that our retail partners Are also experiencing headwinds in discretionary categories like toys, and therefore, we do expect lighter commerce revenue this year as a result.

Speaker 3

Quarter. With that said, we have made a lot of important progress introducing new products like treats into retail and expect this segment to grow in fiscal 2020 quarter as a result. Moving down the P and L, our consolidated gross margin improved 560 basis points to 61.5%, Our strongest gross margin quarter as a public company. The only other time we delivered gross margins over 60% since going public was Q1 of this fiscal year. So momentum is building and we anticipate further improvements in our gross margins going forward as the new inventory we are bringing in today quarter.

Speaker 3

A stronger unit economics on a like for like basis. Total D2C gross margin improved 400 basis points quarter. Our commerce gross margins improved 9 30 basis points to 42.5%. Quarter. Again, our Commerce segment last year was impacted by the pull forward I mentioned earlier.

Speaker 3

So the year over year comps are not apples to apples. Regardless, we expect year over year margin improvements in both segments in fiscal 2024 compared to fiscal 2023. Moving on, Total G and A expense was $68,900,000 down $5,200,000 versus last year. Within G and A, shipping and note, G and A this quarter included certain non recurring charges, primarily related to a non cash impairment charge of $3,000,000 quarter related to a previously capitalized software cost and $1,400,000 of cost stemming from the July reduction in force. Adjusting for these add backs, other G and A was nearly $6,000,000 lower than last year, reflecting the considerable improvements we have made in our organization and cost structure.

Speaker 3

Quarter. While the year over year declines in G and A are encouraging, we believe there are additional opportunities to deliver further improvements in both of these line items quarter. Total sales and marketing expense was $17,800,000 in the quarter, Up $2,500,000 compared to last year. As we discussed coming into the year, the progress we have made in improving the financial health of the business affords us the opportunity to invest more in areas like marketing, including driving more traffic to our bart.co site. Regardless, we will remain disciplined with respect to our marketing investment and we'll care about this investment if we're not seeing adequate returns.

Speaker 3

And finally, we delivered $1,000,000 of adjusted EBITDA ahead of the top end of our guidance range and our first positive EBITDA quarter as a public company. This is an important milestone and we expect positive adjusted EBITDA quarters to Become a more regular occurrence moving forward given all the progress we've discussed on today's call. And before I turn to our outlook for the remainder of the year, Let me touch upon some balance sheet and cash flow items. Last quarter, we reduced our inventory balance by $3,000,000 from our fiscal Q1 quarter. And in the period with a total balance of $109,000,000 All in all, we've made a lot of progress on this front over the last 12 months, reducing inventory by over $50,000,000 during that time.

Speaker 3

And we believe there are opportunities to further reduce this balance in fiscal 2024 and into fiscal 2025. From a free cash flow standpoint, we generated $1,000,000 of positive free cash flow in the quarter. Looking back over the past 12 months, we have achieved positive free cash flow in 3 out of the past 4 quarters and expect more to come. Sitting here today, we believe that we have more than enough capital on hand to run the business And therefore, we have been exploring potential uses of cash that we believe will provide an attractive return and create shareholder value in the long run. Quarter.

Speaker 3

On that note, we repurchased 2,800,000 shares last quarter at an average cost of $1.49 quarter. The resulting spend in the quarter was $4,100,000 And while the average cost is above where the shares are trading to date, We continue to see a lot of value in our shares at these levels, particularly given the significant progress that we have made from a profitability standpoint. Moreover, We repurchased $45,000,000 or approximately 53 percent of the outstanding principal amount of our convertible notes At a 6% discount to par value this week. As a result, we increased our net cash, which we define as cash less our outstanding convertible debt quarter by approximately $3,000,000 and we will also save $5,000,000 in interest over the remaining life of the note. Quarter.

Speaker 3

Following this transaction, we have roughly $131,000,000 of cash on the balance sheet and $38,500,000 of outstanding debt related to the remaining convertible balance. Note, we will accrue roughly $2,000,000 of annual interest on December 1. And so come Q3, quarter. The note balance you will see will be around $40,600,000 Overall, we believe our capital structure is stronger as a result and this transaction is testament of our confidence in our future free cash flow generation. It is worth mentioning our share buyback capacity is limited as a quarter.

Speaker 3

Okay. Let's now turn to guidance for the fiscal third quarter and full year. Starting with the full year, we anticipate the current macro headwinds to continue to impact our more discretionary toy products quarter. Across both B2C and Commerce channels. As a result of this, we are taking a more cautious approach to our top line guidance And lowering the overall range.

Speaker 3

We currently expect total revenue to be down between 8% 11% year over year versus our previous guidance range of flat to down 5%. Again, this revision largely reflects the headwinds that the overall toy category is experiencing And our view that the environment will remain challenging for the foreseeable future. From an adjusted EBITDA standpoint, we now expect our full year loss of between $6,000,000 $12,000,000 versus our previous guidance of positive $2,000,000 to minus $8,000,000 quarter. While our EBITDA range has come down slightly, the midpoint of $9,000,000 would reflect a significant improvement from the $31,000,000 loss we recorded last year and the $58,000,000 loss we recorded in fiscal 2022. Moreover, we expect year over year improvements in adjusted EBITDA moving forward.

Speaker 3

Quarter. Turning to our guidance for fiscal Q3, we currently expect total revenue between $123,000,000 $119,000,000 From an adjusted EBITDA standpoint, we expect between negative $5,000,000 negative $8,000,000 Similar to prior years, We invest more heavily in growth during the holiday quarter and expect that trend to continue this quarter. This adjusted EBITDA guidance will imply a positive fiscal Q4, which would mark our 2nd quarter of positive adjusted EBITDA since going public. We expect to improve on this in FY 2025. Quarter.

Speaker 3

And while we continue to face headwinds on the top line, we expect to gain momentum as we enter fiscal 2025 on the back of our consumables business. At the end of the day, we have plenty of cash and a business that is turning the corner on quarter. There is no denying that the environment has been challenging. However, we are very confident in our ability quarter. Overall, we believe we are in a solid position to capitalize on promising trends in our newer consumables categories and also expect the toy side of the business to improve as macro headwinds subside over time.

Speaker 3

With that, I will turn the call over to the operator for Q and A.

Operator

Thank you. And we will take our first question from Maria Ripps with Canaccord Genuity. Your line is open.

Speaker 4

Question. Good afternoon and thanks for taking my questions. First, sort of understanding the macro pressure you're facing for your core discretionary toys business. But sort of given the strength of the platform and direct relationship with consumers you have there. Can you maybe just talk about some of the strategies that you perhaps pursue, maybe more discounting pricing, maybe lower priced products or something else to try to keep sort of the wallet share there.

Speaker 4

And then secondly, could you maybe expand a little bit more on the consumables segment? Are you seeing any macro pressures impacting that segment as well. And at what point would you expect that to become sort of a little bit more meaningful contributor to offset some of the headwinds in the toys business.

Speaker 2

Hi, Maria. Thank you. Thanks for those questions. So on your first question there, the macro pressure that we're experiencing in the toy industry, the first it's The degree that we're experiencing is largely in line with the broader industry overall. It's extending across both our direct to consumer and our retailer commerce segments, pretty equally.

Speaker 2

And most of that pressure or maybe all of that pressure for us is felt in new customer acquisition. When it comes to Keeping the wallet share, expanding the wallet share or expanding the lifetime value of that customer. As I mentioned, quarter. Our retention has progressively improved throughout this year and last year. And this was likely, I'll say one of our strongest, if not the strongest quarter we've seen in terms of retention on those core toy subscription businesses And our average order value being over $31 those are the positive signals, which to us is indicating That when we acquire a customer, we've learned over the full 12 years how to make them very valuable, very sticky, quarter.

Speaker 2

And we're getting better and better value from them at a higher margin now. So, we haven't Seeing the need to deploy discounting or other tactics To improve that other than running the playbook that's successful for us for the past decade, and rather using Those discounts and those enticements for bringing new customers onto the platform. Quarter. On the consumable side, what we expect is sort of in line with the strategy we put out at the beginning of the year and we continue to work through, which is expand into all consumable categories. For us, that's Treats, kibble, toppers and dental and with a real focus on the retailer commerce channel.

Speaker 2

And the good news we have today is that we have that commitment quarter. National retailer to feature our 1st meaningful treat line 7 SKUs beginning in fiscal Q4 here, so in the quarter ahead. And we're really excited about that progress. We think there's more on the heels of that, but we're not in a position to announce it formally. So we're kind of right on schedule with that.

Speaker 2

As you know, those things are longer lead time. We develop the products. We sell it. We make our sales pitch typically in the spring. We hear back around this time.

Speaker 2

Everything is right on track. And our direct to consumer channel when it comes to consumables, specifically bark.co is playing the role that it's always played with our toy business of letting us try different things with how we position our consumable products, Different packaging, different pricing and getting those signals from the customer that we can then sell the results to our retail partners. So we're making good progress on bark.co and in those categories in our learning and in our sales to retail partners.

Speaker 4

Got it. Thanks so much for the color, Matt.

Operator

And we will take our next question from Ryan Myers with Lake Street Capital Markets. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my questions. First one for me. So it sounds like you said Q4 EBITDA will be profitable. So just kind of walk me through what you expect to see here in Q3.

Speaker 5

I think if I remember back on the last couple of calls, we kind of expected adjusted EBITDA profitability in the second half of the year. Is there just kind of some seasonally high marketing spend as we head into the holiday season? Just kind of any sort of color on that would be helpful.

Speaker 3

Hey, Ryan. How are you doing? So yes, you've hit the nail on the head. So Q3 for us is a seasonally high demand quarter and also from a marketing perspective. We invest to drive new subs as well as just overall performance To the site.

Speaker 3

And so, it's one of our highest quarters from a revenue perspective, but it's also The highest quarter from a marketing perspective and that impacts the profitability. If you look at our guidance range for Q3, EBITDA is at minus 5 to minus 8. If you take us at the midpoint of that, we'll be about 6,000,000 quarter. Better than Q3 last year. So, we feel the business is getting great traction from a profitability perspective and moving in the right direction.

Speaker 3

And because of that traction, as you think about Q4, we'll be able to post a positive EBITDA Along the lines of what we posted in Q2, but I'd expect continued improvement in Some of the measures like gross margin as we have new contracts coming into play on the consumable side. So we'll have stronger margin performance, equally strong performance through some of the other line items to post positive EBITDA in Q4.

Speaker 5

Got it. And then if we think back to the commentary that you guys gave last quarter about the high single to low double digit revenue growth for FY 2025. Obviously, you guys updated the guidance today. Just wondering how we should potentially think about No, that commentary you guys gave last quarter and how that relates to the FY 2025.

Speaker 3

Yes. So I think just in line with some of the comments Matt just shared, while it's a challenging environment, we quarter. We continue to believe that we'll deliver profitability improvements regardless of where we land from an F-twenty five growth perspective. When you look at the top line, you step back for a moment and look at the category overall. So The pet category has grown over the past 12 months.

Speaker 3

A lot of that on the food side It's driven not by volume or units driving the growth, but it's price inflation. And what we're seeing is Barq's taken a greater share of the customer's wallet and it's impacting some of the discretionary categories in pet. And as a result, It's impacting the toy category. So we'll see in terms of where we land from a growth perspective for next year over the next two quarters. Recognizing quarter.

Speaker 3

Q3 is a high quarter for us, particularly on the D2C side. And then, we'll know more about timing of some of the Plans from the retailers for fiscal 2025 in relation to consumables as well. So those two things And just how the category is trending over the next couple of quarters will give us a better sense of how the top line is doing. But nevertheless, we feel good about where we're at from a profitability growth and free cash flow perspective for next year.

Speaker 5

Got it. Thank you for taking my questions.

Operator

Question. We will take our next question from Ygal Arounian with Citigroup. Your line is open.

Speaker 6

Hey, good afternoon guys. I want to dig into the comments that you made about improving better improving customer acquisition since May. So you're seeing better customer acquisition. The retention is as strong as it's been. The outlook for the rest of the year is lower given the macro.

Speaker 6

And so I just want to maybe tie those two things together. I know Some of this is coming from the retail channel too, so maybe that's the whole answer. But maybe just can we help tie those 2? Question.

Speaker 2

Yes. Thanks for that question. And you're right, like the retention is Quite strong and like I just was saying to Maria, the strongest we've seen in some time. And so it is That new customer acquisition that is the greatest challenge we faced. We have made very consistent improvements since May.

Speaker 2

One of the things that holds us back I'd say from making faster improvement today is The current platform that we're on, our Ruby on Rails platform at barkbox.com carries 12 years of tech debt. It's incredibly expensive. It's difficult to optimize. So that makes it difficult for us to drive conversion improvements and keep it I'd say current and modern. But that's exactly why we're really excited about a move to a more modern platform barc.co where we have tremendous flexibility to do that.

Speaker 2

But quarter. For the foreseeable future, consumables is going to be the main driver of our revenue. And like we talked about, We have our first major deal with a retailer there. We expect more in the future and we expect to continue making great progress with barq.co. One thing that we didn't call out in the call, but is out there for you to see is on that progress quarter.

Speaker 2

As we go for consolidation and we go for a more modern platform where you can make those updates and optimizations hourly, if you like, with a very light effort or lift is, we were selling our dental product atbarkbright.com. We got to a place where within the bark.co contacts, We're able to do that more effectively and have a greater lifetime value associated with those customers at a lower cost of acquisition. Almost the day that we reached that point, we've now stopped taking new orders at barkbright.com and we've moved Those customers over onto our new platform. So once we've achieved that with BarkBox and Super Chewers, We'll take the same actions and we're feeling pretty good about where we are in terms of the progress.

Speaker 6

Okay. Thanks. For a follow-up, I guess, I'll ask about the converts, paying down the converts and maybe just want I understand very clearly the ambitions here to clean up capital structure. Given the macro environment is getting more challenging, there's probably less visibility. You are still kind of targeting free cash or EBITDA profitability again back and forth quarter.

Speaker 6

But there is less visibility. You spent a fair amount of your cash balance here to do this. So Maybe just why was now the right time to do it and then how you think about the remaining balance? Is that something you can now kind of just kind of hang on to A little bit longer closer maturity and see what happens, but just want to get your thoughts given the challenging macro. Thank you.

Speaker 3

Quarter. Sure. So we talked about it before. We've got excess capital on the balance sheet, Felt really strong and good about our cash position. And as we've posted our 3rd quarter out of the last 4 in terms of free cash flow.

Speaker 3

And we've signaled the quarter after next will be the second quarter. That will be positive EBITDA. We're seeing line of sight to more quarters of positive free cash flow and profitability in the business. And that level of confidence, the cash balance that we have gives us the flexibility to look at things like this. The note was going to mature in a couple of years' time anyway.

Speaker 3

And we were able to get a fair discount. The 6% discount that we were able to achieve on it allowed us to save close on $3,000,000 on the amount that we paid down. Quarter. And on the other side of that, we're going to be saving go forward interest in excess of $5,000,000 as well. Quarter.

Speaker 3

And we're still sat here with over $100,000,000 well over $100,000,000 of cash on the balance sheet. So given The financial health of the business, the unit economics that we're now performing at and our cash flow performance. We felt very confident about taking the pay down that we did.

Speaker 6

Great. Thank you.

Operator

And we will take our final questions from Max Rakutenko with TD Cowen. Your line is open. Great.

Speaker 7

Thanks a lot for taking my question. So first, can you speak to learnings from conversations with the national retail partner and the confidence that it gives you to grow additional relationships down the road.

Speaker 2

Call. Hey, Max. How are you? So The conversations, especially as we moved into treats, as you know, We've got relationships with pretty much every major retail partner in the U. S.

Speaker 2

Both in and out of Pet. So, you know all the names across 40,000 doors. And we have good partnerships there with them on the toy side. So especially in treats, the interest there has been more of a pull than a push Over the past 12 to 18 months, I'm sharing a quote with you that we used as somewhat of a Design spec was we'd love for Bark to bring fun to the treat aisle. So we took that seriously.

Speaker 2

We took our approach to toys and develop this first line of treats that we're pretty proud of and Sold that in, in the spring or earlier this year. And we were thrilled with the results. We were thrilled with the reaction. It seemed we hit the spec right on. And we believe that product is going to stand out in a big way.

Speaker 2

And so it's been I would say it's collaborative because we treat These retailers are our partners and we are always listening to their feedback and sharing new learnings of our direct consumer relationships with them and how we might want to enter new categories. So I'd say it's just very good partnership. Hope I'm answering the question in the spirit you were asking out there.

Speaker 7

Yes, absolutely. That's helpful. And then as you continue to improve your gross margin, does that change what you think the long term profile can be as your channel mix does continue to evolve.

Speaker 3

Yes. So I mean, We've done a nice job of improving gross margins during the course of this year. We expect that to continue through the balance of the year going into fiscal 2020 five. Right now, we're seeing a lot of the benefit of the contracts that we renegotiated on the toy side of the business, And that's starting to flow through our P and L. As we go into Q4 and into fiscal 'twenty five, we'll see the benefits of The new consumables contracts kicking in as well.

Speaker 3

So that will improve on a current channel mix basis, shall we say. And then as you look at our respective channel margin profiles, B2C Has margins in the 60s. Commerce has margins around 40 low 40s. And so quarter. As we've said before, we'll be looking to grow consumables, particularly within the commerce channel.

Speaker 3

And so that commerce mix being lower at the gross margin level will bring down our overall consolidated gross margins. But the key here is not to just focus on gross margins because the cost to serve on the commerce channel is lower from a shipping and fulfillment and marketing perspective relative to DTC. And actually, when you look at the 2 channels at a contribution margin level, They're both very similar at around 20%. So, we're ultimately indifferent in driving growth between the two channels and not The gross margin mix isn't necessarily the driver.

Speaker 7

Perfect. That's great. Thanks a lot guys.

Speaker 1

Thank you.

Operator

Call. And ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.

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