We need to takeover BarkBox

TLDR:

Happy July 4th Weekend.

Let’s Reverse SPAC Barkbox.

Happy America Day!

4th of July is one of my favorite holidays. There are a bunch of reasons.

• I usually spend it with friends on Lake Travis (Austin) having one of the most relaxing weekends of my year.

• I REALLY enjoy grilling and 4th of July is the Grilling holiday of the year.

• It just such an American thing to celebrate ourselves by drinking Beer (German) and watching fireworks (Chinese).

This will be the first year in a while (outside of COVID) I won’t really be doing anything for the 4th. I’m not going to Texas this year and because of the weather/air quality I won’t really be doing much in New York.

It really feels weird. But I hope you all are enjoying the long weekend with your friends and families.

After a couple of weeks building great companies up I’m back on my takeover game.

Let’s dive into everyone 3rd or 4th favorite pet company, Barkbox and how we can save it from bankruptcy.

Barkbox has no right being a public company. Yet.

Barkbox is an overfunded company that didn’t grow into its scale, and the poster child on how SPACs aren’t a good thing for our market. It was dumped on the public markets during the COVID boom and has been in the doghouse ever since. (Sorry I needed to get one in there).

Trading at $1.31/share with a $237m market cap lower then $280m+ it raised, is down -89% since it’s 2020 IPO. With $183m in Cash and $229.8m in liabilities, Barkbox is in a tricky spot. They have time to correct this situation, but it isn’t looking promising.

I’m back at my PE firm and we can acquire this for $230m. That’s right I’m not even offering a premium on the current market cap this time since they torched the $200m they raised post-IPO. Here’s how I would save Barkbox from bankruptcy.

The Financial breakdown

The Financial TLDR:

The company hit the brakes too hard while charting to profitability and is killing growth while not actually a profitable company yet. This is yet another solid unit economics biz that over-invested in overhead and now needs to make tough decisions.

Barkbox is doing the “right things” in this market, but won’t survive it. They have too much overhead for their scale of business, piling on too much debt with a lack of Marketing investment (-8%) to grow into the scale to sustain their costs. This company is buying a bullet train ticket to bankruptcy court.

Here’s my 3 Step plan to save Barkbox from an asset auction.

1) Reduce Overhead + Invest more in Marketing

SG&A at 57% of Revenue is too damn high. This is a classic trend of the overfunded DTC companies. Their overhead is years ahead of their actual scale and now that the ZIRP era is over they’re stuck in no man’s land. Not growing fast enough to be a growth stock. And wandering the desert to the profitability oasis.

Winning companies today have SG&A <40%. For a company that only has 58% Gross Margins this shouldn’t be a massive surprise that they can’t afford to have SG&A eat up 57% of their Revenue. That would leave them with 1% of their revenue to run the rest of the business. They need do the hard thing and cut staff to free up cash to sustain themselves as a business.

Marketing is a big piece of what’s missing in that 1% that’s leftover. Like too many other companies, Barkbox cut Marketing spend (-8% YoY) to become more profitable.

Here’s the issue: Sales come from marketing. To get enough sales to afford their SG&A they need to invest more in marketing. Now they’re in a cutting spiral. Their plane is too heavy without enough fuel.

• They’re eeking out growth (Rev + 6% YoY)

• But not growing fast enough to support its current costs.

• To become more profitable they need to cut more.

• Marketing ‘isn’t driving growth’ so it gets cut.

• The company doesn’t have enough Gross Margin dollars to cover Overhead.

They need to be investing more in Marketing to hit the level of scale where the brand can support itself.

Brands should be spending ~15-20% of Rev on Marketing. Barkbox is currently at 12%. If Barkbox could effectively move 10% of their SG&A ($53m) into their Marketing line item they would be more profitable than 1% Net Income.

Why? If Marketing drives more sales, let’s say at 2x return, the company’s Rev is now $641m making the company’s Net Income $270m vs. -$61m.

Marketing is also more likely to be a one-time expense, especially for a subscription box company, vs. SG&A which is typically more recurring costs related to salary. With SG&A at $250m and 40% of Revenue the company is actually profitable and can afford to invest more in growth.

Takeaway: Marketing is always the first to get cut vs. SG&A which would actually make the company more profitable.

2) Quintuple down on Consumables.

Dog toys were a great first product, they make up 57% of the current DTC business, is the obvious focus of the company, but the Pet toy market is only $5.9B.

Today, Consumables make up 31% of the DTC biz and is growing faster than Toys (+7% YoY vs. +4% YOY). The more important insight here the Dog food market will be worth $82B by 2026. The opportunity is just so much bigger it would be foolish not to prioritize it.

Barkbox already has the distribution, product, and angle to be successful in food: The monthly dog box for dental health.

Consumers buy their products originally because they could get more toys for cheaper/convenient by having them delivered to their house. Plus there was a variety factor of different and new products. Those are still value props plus they position them as health for your dog toys.

But let’s be honest consumer wallet share for food and wellness/care is larger and more important. The best part for Barkbox, they already have all the components to be successful in this market. This category is ripe for them aggressively invest in.

If they prioritize cross-selling food into boxes already shipping to customers its a natural win-win. The product extension makes logical sense. Food drives even more repeat loyal behavior and the can tear apart the digital competitors because they already have the customers and can make more money from them (Food + Toys).

At a certain point, Barkbox will have to expand past eCommerce and sell their product in Retail locations as well. Probably why they are starting to break out DTC vs. Commerce in their earnings.

Retail makes even more sense for the Consumable side of the biz, which has heavy usually frozen items that customers want immediately. With strong branded products + a subscription offering on the backend they can be more aggressive than their in-store competitors.

Retail distribution is a trial play where new customers can sample and + a retention play for returning customers to grab emergency pick ups in between subscription shipments.

I’m getting real Yeti Drinkware vs. Cooler vibes here, or Nike Apparel vs. Footwear. Take the wins from category #1 and move into category #2, where the second product line significantly outgrows the original.

Takeaway: Play in the bigger market with bigger opportunities. Consumables.

3) Streamline the online experience into one store.

I try not to be too judgy about other people’s site experiences because I remember my days managing LuMee. Everyone’s buying journey is unique and without data you have how little context on what they’re trying to accomplish.

BUT, This is truly 1 of the worst, most confusing site experiences I’ve ever seen. I don’t even want to link you there because you’ll get lost in a maze. They have multiple properties each one to support a different product catalog and candidly I gave up 1/4 of the way to adding to my cart, because it was too confusing.

Here are all the different URLs and different sites:

• Subscription/Dental: barkbox.com

• Food: food.bark.co

• Toys: barkshop.com

They do link some properties to other’s through a top menu, but candidly it’s still bad. I honestly have no idea how I would buy multiple products across categories in one order. Or even do something as simple as add a toy + food subscription to my cart.

It looks like they ran tests for each new category and never folded them back into the central brand. Defeating the point of expanding the product catalog for the same consumer.

Each site looks somewhat similar but there’s no cohesive experience across all of them that indicates I’m buying from 1 company. The entire site experience should be 1 streamlined experience to buy any Barkbox product I want, either One-off or subscription all from the site. They’re leaving too much money on the table that they don’t have.

Takeaway: Unlock AOV through one cohesive site experience across all product lines.

Final Thoughts

Don’t get me wrong this is a good business with strong fundamentals, but it’s got too much overhead and not enough scale to sustain itself. It also doesn’t have the capital to chase the massive opportunities in front of it.

It’s a great example of what makes the SPAC market so dangerous for the overall market and why we need more PE in the DTC space.

It’s painfully obvious this company never had a stint under a PE to streamline its business. We’ve poo poo’d Private Equity a lot in the DTC space over the last decade and that’s a mistake.

For Barkbox to be a successful Public Consumer company it needs the tough love operational discipline a PE company would instill. Controlled operating expenses, smart responsible marketing investments, and a healthy retail operating mix to grow this company profitably.

This company is ripe for PE turnaround and eventual re-list at a $1b+ valuation when it can actually support itself. And one of the big firms is going to make a handful of cash doing it.

🧠 The Takeaways

Barkbox is a great business that doesn’t have the Operating discipline to be a public company. Today.

1. SG&A is crippling its profitability while it cuts Marketing. Stunting growth.

2. Toys are what got it here. Consumable will be what gets it to $1B.

3. Barkbox’ online stores provide a terrible CX for customers leaving money on the table.

👷 What can you do about this?

1. What’s your SG&A as a % of Rev? Can you get it below 40%?

2. What market are you currently in? Is there a product/catalog you offer in a bigger TAM?

3. Have you bought from yourself recently?

The best ideas in business are usually approaching your same problems with a different approach.

Jeremy Horowitz

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