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Is BarkBox out of the Doghouse?

0 | By Alex Kagin

Animals take a special spot in people’s hearts, and more people than ever have felt this in the past year as pet adoptions skyrocketed.

Across the entire country, shelters reported that record numbers of animals had been adopted, many running out of pets completely. Late last year Kitty Block, President and CEO of the Humane Society of the United States talked about how adoption rates had increased 90% in some cities.

The global trends that were pushed along by Covid-19 are going to be a source of economic potential long after pandemic conditions have ended. We can see that by looking at how lockdowns drove the economy online, and made new 5G wireless connections even more important.

My colleague talks more about it right here, but just like people aren’t going to snap back to doing everything in person after the pandemic, people who bought pets to keep them company during lockdown are still going to have them for years to come.

And people love their pets with dog owners spending almost $1,500 annually, just on basic expenses. On top of basic expenses, more than half of millennial pet owners buy their pets gifts at least once a month. This has all helped to create an industry that saw nearly $99 billion in sales in 2020 and could grow to $275 billion by 2030.

We’ve talked about the pet industry earlier with companies like Chewy.com (NYSE: CHWY), which saw its stock rise roughly 300% in 2020 and now I want to talk to you about another pet company that is serving over 1 million dogs a month.

I’m talking about BarkBox, a monthly subscription service providing dog products, services, and experiences that is going public through the SPAC Northern Star Acquisition Corp. (NYSE: STIC).

In December of 2020 BarkBox announced it would be going public through a SPAC merger, valuing the company at $2 billion. While that may sound like a lot for subscription service for dogs, the numbers and size of the industry may give you a different picture given its high gross margins, runway for growth, and expanding businesses.

According to Morgan Stanley, Dogs make up almost 50% of households that have animals and in the United States that is 2/3rds of households. This means that right off the bat, BarkBox has a huge market they can sell into of roughly 82 million based on US Census data. That means if they are currently only serving 1 million customers, they have hardly scratched the surface of their addressable market.

While many outsiders who don’t subscribe think of BarkBox think of them as just a box filled with toys and treats delivered on a monthly basis, they have transformed into a much bigger company than when they were founded in 2012. They now have several difference services including durable toys and treats for larger dogs, toothpaste and dental sticks, custom daily meals, and dog essentials like beds, leashes, and apparel.

BarkBox offers a lot of products and to cut down on costs they have products designed and produced exclusively for their brand so that they can cut out the middleman, improve product quality and capture better margins.

Over the last few years, they have managed to continually increase its subscriber base from less than 100k subs in 2014 to over 1 million in 2021. Looking forward, management expects revenue to grow from $224 million in 2020 to $706 million in 2023, a CAGR of 47%.

The main risk here is that, in the short run, expenses such as SG&A remaining high, which is likely due to capturing as much market share as they can. If they are not able to bring this cost down, it could impact profitability.

I don’t think profitability in the long run will be an issue as gross profit per subscription has gone up four years in a row and the monthly customer retention rate is 94.4%.

One thing I really like on the SPAC side is that Fidelity and Federated are long-only anchors in the $200M PIPE and Fidelity also owns a 15.6% position in the SPAC before the deal has closed, a very bullish sign.

The PIPE subscriber agreement did not restrict investors from shorting and any fast money hedge funds in the PIPE have likely already boxed their share, which could prevent a major slide right on conversion.

Given the way SPACs have been trading, I would wait for two things. First, I would wait until we hear any data points from the March quarter, and second, I would wait until the annual meeting of stockholders where they will be voting on the merger, which is set for the 28th of May.

Once the merger happens and we see how the most recent quarter went, if numbers continue to look strong and outlook stays unchanged from the investor presentation, this could be a great stock to own at around $10. Just remember that once the merger happens you cannot redeem your shares for NAV.

 

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