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$STIC -- Northern Star Acquisition Corp. (merging with Bark aka Barkbox which will become $BARK)
Current stock price: $12.40
Market cap: $2.5 billion
Enterprise value: $2.1 billion
2020 fiscal year revenues (est): $224 million
2021 fiscal year revenues (est): $370 million
2022 fiscal year revenues (est): $516 million
2023 fiscal year revenues (est): $706 million
Website: https://bark.co
Investor Presentation, December 2020 [click here]
Last Thursday, December 17th, Northern Star Acquisition Corp (SPAC) announced they will be merging with Bark to take the company public. Bark is the parent company of Barkbox and several other similar pet brands. The deal which is expected to close in approximately 3-4 months (early 2021Q2) gave Bark an enterprise value of $1.6 billion. This included $454 million of cash proceeds, $200 million of which came via PIPE from firms/funds including Fidelity and the Federated Hermes Kaufmann Fund). Bark will use these funds to accelerate growth through product development & new product launches as well as customer acquisition via retail channel partnerships and DTC marketing. After the deal closes the ticker symbol will be changed from $STIC to $BARK.
The image below gives you a rough idea of the capital structure and balance sheet:
Bark is the global omni-channel brand leader for dogs which includes their main brand Barkbox as well as their other brands BarkEats, BarkBright, BarkPost, BarkShop and Super Chewer.
Barkbox is a subscription service that delivers customized boxes of toys and treats [website]
BarkEats creates custom meals for your dogs based on their nutritional needs [website]
BarkBright is their doggie dental brand to keep your dog’s mouth, teeth and gums healthy and fresh [website]
SuperChewer is a subscription box full of extra tough toys and treats [website]
Across their multiple brands $BARK has more than 1.1 million active subscriptions and 6.5 million lifetime customers which includes sales on Amazon and 23,000 retail locations through Target, Petco, PetSmart, Costco and others. Here are some of Bark’s toys being sold on Target.com [click here]
With more than 300 million pets in the US and the global pet industry expected to reach $100+ billion in sales this year it means $BARK is operating within a massive TAm. With that large TAM means plenty of competition but I strongly believe $BARK has carved out a nice niche for themselves which means plenty of room for exponential growth.
Part of $BARK’s strategy going forward is to launch new products and services they can upsell to their 1.1+ million subscription customers. This strategy should keep customer acquisition costs low leading to better operating margins and quicker profitability. In the first half of FY2021 $BARK saw 179% YoY revenue growth from new product lines so this could be a massive growth engine moving forward. $BARK knows what their customers want and now they have the capital to build it for them. Since the company has so much data on both dogs and pet owners they are able to create new products and launch new brands with a high probability of success.
$BARK is also planning to expand their relationships with Amazon and their other retail partners. Over the past year $BARK’s sales on Amazon were up 2.5x so it makes sense why this is a focus for them.
For Bark’s current fiscal year which ends on March 31, 2021 the company expects $370 million of revenues which is 65% revenue growth over fiscal year 2020. The company is also forecasting 60% gross margins (was 61.2% in the first half of FY21). These gross margins are superior to any other public companies in the pet industry such as $CWHY and $FRPT
Going forward the company is forecasting $516 million for fiscal year 2022 and $706 million for fiscal year 2023 -- they are probably low-balling the forecasts because it’s always better to under-promise and over-deliver once you’re a public company.
If these forecasts come to fruition it would represent 40% revenue growth and 37% revenue growth respectively for FY2022 and FY2023. $BARK expects gross margins to stay around 59-60% for the foreseeable future. The company expects to lose money through 2023 which is slightly disappointing but not surprising for a consumer products company in growth mode. Personally I think the company’s estimates in their investor presentation will prove to be too low and the company should beat them quite easily. Don’t underestimate the increased brand awareness that goes along with being a public company. Once $BARK is trading under its own ticker symbol and being talked about in the media, on blog sites, on trading platforms and of course on FinTwit it means this really awesome company is now getting exposure to millions of new potential customers.
In terms of public company comparisons, I’d say Chewy which trades under $CHWY is the best one to use. Chewy was founded a year earlier than Bark and is forecasted to do $7 billion of revenues in their FY2021 with a current market cap of $42 billion. As of Friday’s close, $CHWY’s stock price is now up 245% YTD for 2020. $CHEWY's revenue growth is expected to decline from 45% YoY in their FY2020 to 25% YoY in their FY2021. Throw in their 25% gross margins and it’s easy to see why I think $BARK could be the better growth stock going forward.
Not that I ever invest in companies based on the potential of them being acquired however that is a real possibility for $BARK. I can think of at least 3-4 companies that could be potential acquirers in the future -- $CHWY, $AMZN, $WMT and $TGT just to name a few.
I’m not saying that $BARK is going to be the next $CHWY because they are very different companies with very different business models but it does show how large the opportunity is for pet focused e-commerce and omni-channel companies especially ones that put a priority on making the customer happy.
Here’s why I’m really excited about $BARK and why I started a 2.5% position in the company last Thursday as soon as the news broke that $STIC was merging with them…
$BARK’s current retention rate of 95% is phenomenal for a consumer products company. This retention rate is more evidence on how much Barkbox customers love their products and see tremendous value in the monthly pricing options. Consumers are realizing you can save a lot of time and money by buying directly from the manufacturer in bulk which is essentially what you’re doing with Barkbox plus you’re not paying all the overhead costs associated with retail locations.
People love their dogs which means making them happy as much as possible. I have friends that post videos of the “unboxing” every month of the Barkbox with their dogs because it’s such a fun event for them. The dogs go wild as soon as they see the Barkbox coming towards them. As we return to a more normal world after Covid and millions of people are back in offices (at least part-time) they will start to feel the regret and guilt of being away from their dog(s). I believe Barkbox can be one of the solutions to help relieve some of these feelings. We love to spoil our dogs but why deal with the inconvenience of going to the pet store every month when you can just subscribe to Barkbox, save some money, make your dog happy, bring a smile to your own face and take one more errand off your to-do list.
Through the first 3 quarters of FY21 $BARK’s customer acquisition cost on subscriptions have dropped from $56 to $42 (25% decrease). They’ve also been able to increase their gross profit per subscription by 20% during the same time period. These are both strong trends to watch closely as the company stays in growth mode. I think these numbers are moving in the right direction because of my #6 reason down below (social media & influencer marketing).
When Barkbox first launched they were using toys and treats from other companies but over the years as they’ve gotten to know their customers and analyzed the data...now they design and manufacture more than 90% of their SKUs. On average they design 15 new products every month which means they are always trying to stay ahead of the competition and create the next cool toy or treat rather than playing catch-up. $BARK wants to be the premier innovator and disrupter in the pet industry which I love.
Bark has embraced the omni-channel strategy which means selling across multiple platforms, both ecommerce and in retail locations. Not only are they doing phenomenally well with their subscription boxes and BarkShop.com website but they are landing huge retail partnerships.
Bark does an amazing job on social media, they are one of the best I’ve seen at sharing great content although let’s be honest… the cute dogs make it easier. Across all social media platforms Bark and Barkbox now have more than 8 million followers and fans. I’ve also noticed that they’re doing a great job working with influencers and affiliates to help drive website traffic, brand awareness and subscription customers.
As of Friday’s close I had a 2.5% position in $STIC which reflects my early excitement and enthusiasm for this company. The stock did rally a little bit last week on the merger announcement however I still think the current stock price and impending enterprise value of $BARK is not yet reflecting the growth potential of this company. I did own $CHWY earlier this year and exited with a decent profit but personally I felt the valuation was getting too rich. I still love the pet industry and I want to be involved but no other company got me excited until I heard that Barkbox was coming public via $STIC. Once I dug into the numbers I knew that I needed to start a position right away which I’ll continue to add to in the coming weeks especially on any pullbacks.
Price Target:
If we consider $BARK’s 40-50% revenue growth potential over the next few years plus their 60% gross margins plus their current operating margins and net cash positions I think it’s very fair to consider a 12x sales multiple (conservative) on FY2022 sales of $516M (conservative). This would put the market cap in 15 months (end of FY2022) at around $6.2 billion / 202M outstanding shares equals 15-month price target of $30 to $31 which would be 140-150% upside from Friday’s closing price of $12.40
If you have any thoughts or comments regarding $BARK feel free to email me at jonah@luptoncapital.com or find me on Twitter at @JonahLupton
Disclaimer: The stocks mentioned in my newsletters are not intended to be a list of buy recommendations but rather some ideas for your watchlist. Perhaps they end up in your own portfolio after you conduct your own research and due diligence. Some of the stocks mentioned in my newsletters have smaller market capitalizations and therefore can be more volatile. I always encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizing in accordance with your own risk tolerance and investment objectives.