Original BARK Co (The) - Ordinary Shares - Class A Stock

Thank you for standing by. And welcome to the BART first quarter fiscal year 2027 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Christina Donnelly, General Counsel.

go ahead good afternoon everyone and welcome to barc's fiscal first quarter 2027 earnings call joining me today are matt nieker co-founder and chief executive officer and brian dostey interim 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 addition a press release covering the company's financial results was issued this afternoon and can be found on our investor relations website. Before I pass it over to Matt, I want to remind you of the following information regarding forward-looking statements. 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. and outcomes to differ. Please refer to our SEC filing for more information on some of the factors that could affect our future results and outcomes. We will also discuss certain non-GAAP financial measures on today's call. Reconciliation of our non-GAAP financial measures is contained in this afternoon's press release. And with that, let me pass it over to Matt.

Thanks Christina and good afternoon everyone. We are off to a good start in fiscal 2027, building on the progress we outlined last quarter. Our first quarter results reflect continued profitability alongside underlying momentum in the parts of the business we are most focused on growing, and they give us early confidence that the in June is working. After one quarter, we remain confident in our ability to build our top line sequentially and deliver a meaningful gain in adjusted EBITDA profitability. This quarter we delivered $78.8 million of revenue at the high end of our $77 to $79 million guidance range. This was powered by strong subscriber retention, better than expected sales in the retail channel, and Bark Air flights filling up. Specifically in D2C, net revenue landed at $66.7 million for the quarter.

While this is down from last year, due to a much lower entry point into the year, The forward-looking indicators of the business are strong. Our subscriber retention rate improved by over 170 basis points compared to the same quarter last year. In addition, our average order value grew by 45 cents per unit versus last year. The lifetime value of a BarkBox subscriber is near its highest level for us as a public company. to commerce we delivered 12.1 million dollars in revenue this quarter and we continue to expand with both new and existing retail partners across wholesale and marketplaces We are winning market share and growing this business with discipline, building a larger and more durable growth engine for bark. We've We expect commerce revenues to increase meaningfully from here as we head towards the holiday season prepare to launch with the Girl Scout cookie program this winter. We couldn't be more excited about what's ahead. Finally, looking at BARC-AIR, we posted $3.2 million in revenue this quarter, a 37% increase from the same quarter last year.

This is despite challenges such as Europe to US routes and fuel surcharges stemming from broader geopolitical conditions. We're happy to report that well over 90% of seats have already been sold for the second quarter. the demand for Barcare business is as strong as ever. And that strong revenue performance came with strong normalized consolidated gross margin of 63.4%. On a reported basis, gross margin was 72.7%. The difference reflects a one-time FY26 tariff refund. recognized entirely in this quarter that is excluded from our normalized gross margin. This refund does not recur. And while included in our net income, its benefit is excluded from adjustediva.gov. This strength is driven by our D to C gross margin, which has expanded steadily over the past several years, adding hundreds of basis points during that time.

I'm proud of our team for delivering this result. Carrying all that through, adjusted EBITDA for the quarter landed at $600,000. Again, within our zero to $1 million guidance range and up from $0.1 million in positive adjusted EBITDA in the same quarter last year. Finally, we ended the quarter with $16.1 million in cash and a debt-free balance sheet. The decline from $19 million at year end reflects both a normal seasonal build in working capital and continued share repurchases under our $40 million buyback program. we remain committed to balancing continued investment in the business with returning capital to shareholders. Looking ahead, I'm excited about our product pipeline and what's coming out in the next few months. There are three products I'd like to discuss today.

First is a new enrichment toy and treat combination product called Licksters. This is a major push into the enrichment category, which is the fastest growing segment of dog toys. Lixter solves two huge problems within the enrichment category for dogs and their people. It designed a durable toy that is easily refillable and cleanable for the human, while still being effective at keeping dogs challenged and engaged for more than 40 minutes, which we believe is more than double the time claimed by the current market leader. Our design team has been working on this for over a year and has developed a three-year innovation pipeline for the Elixir platform that we believe will be very on brand and disruptive to the category. There is somewhat of a razor-splash-razor blade model with the Lixter platform. As we see the Lixter toys into the market, we expect good attachment rates and recurring revenue of the treat refills.

This is currently being introduced to our subscribers and their monthly boxes, and will roll out in Target, PetSmart, Walmart, Amazon, and Chewy this fall. Second, say hello to Crocs again this fall. After the successful debut of Crocs for Dogs last year, our partnership is expanding in October 2026 with new product categories including toys, beds, and accessories, along with additional colorways of our Croc Dog shoes. Our Croc Dog shoes have been our most successful TikTok product launch to date, and we're excited to build on that momentum this fall. Finally, we have a new partnership with Liquid Death that will also launch in the fall. This is a robust, audacious partnership we've been working on for a while. As part of Liquid Death's first ever collaboration in the pet space, Bark will be introducing a new line of toys and accessories, co-designed together with the Liquid Death team. excited for our consumers to get a hold of these products.

There's so much ahead of us to be excited about and to drive our growth. And our excitement and enthusiasm leads us to guidance. So now turning to that guidance for the second quarter of fiscal 2027, we expect total revenue of 83 to $85 million and adjusted EBITDA of one to $3 million. full year we are reiterating our guidance on both the top and bottom lines. reflecting our confidence in the trajectory of the business. We are pleased with this start to the year, entering fiscal 2027 debt free. The quarter reflects continued discipline on the bottom line, strengthening growth throughout the business and steady execution against the strategy we laid out last quarter. There's still more work ahead, but we believe we are building from a stronger foundation and remain optimistic in our ability to deliver meaningful progress and improve profitability for our shareholders. With that, I'll turn the call over to Brian.

Thanks, Matt. Good afternoon, everyone. I'll review our financial results for the fiscal first quarter of 2027, and then update you on how we're tracking against the full year framework we laid out in June. First quarter revenue was 78.8 million compared to 102.9 million in the prior year period. As Matt noted, this reflects a smaller subscriber base we entered the year with as we instilled greater discipline on marketing and promotional spending during our fiscal year 26. And we are seeing green shoots in our underlying DTC metrics now turning In the segments, total DTC revenue was 66.7 million Within that, Bark Air contributed 3.2 million, up 37% year over year, and continues to perform well. Including here, D2C revenue was 63.5 million versus 86.8 million last year. The composition of that decline is the part I'd point you to. DTC orders were down about 28% year over year, while average order value increased 45 cents.

Revenue decline is a volume story tied to the smaller base and the poor order economics continue to improve. That is the exact trade you said we were making. Commerce revenue was 12.1 million, down 11% versus the prior year period. We continue to see commerce as a long-term growth driver and expect to exceed our results from last year as we go forward. Supported consolidated gross margin was 72.7%. That figure includes approximately 7.4 million of IEPA tariff recoveries related to fiscal 2026 cost or revenue. became eligible for submission and were recorded in the quarter. Excluding that recovery, first quarter gross margin was 63.4% compared to 63.8% in the prior year period. on a normalized tariff adjusted basis. 7.4 million recovery relates to cost we incurred last fiscal year.

It is excluded from adjusted EBITDA, and it is not a recurring benefit to our margin structure. Quarter marketing spend was 9.5 million, down more than 5.6 million or 37% year over year. We continue to hold this discipline while remaining prepared to reinvest when efficient customer acquisition opportunities present themselves. SHIPPING IN FULFILLMENT EXPENSES WERE 23.8 MILLION, SHIPPING IN FULFILLMENT EXPENSES WERE 23.8 MILLION, DOWN FROM 31.8 MILLION, WERE 23.8 MILLION, DOWN FROM 31.8 MILLION, AND IMPROVED MODESTLY AS A PERCENTAGE DOWN FROM 31.8 MILLION, AND IMPROVED MODESTLY AS A PERCENTAGE OF NET REVENUE TO 30.2% FROM 30.9%. both the lower D2C volume and continued network efficiency work. Other general and administrative expenses were 23.9 million, down 1.6 million or approximately 6% year-over-year. Adjusted EBITDA for the quarter was approximately $600,000 compared to $100,000 in the prior year period. adjusted EBITDA excludes the IEPA recovery I described along with stock-based compensation, depreciation and amortization, legal matters, warehouse restructuring costs, and executive transition costs. We ended the quarter with $16.1 million in cash compared to $19.3 million at fiscal year end, and we continue to carry no debt.

Accounts receivable was 20.4 million, up 12.3 million in March 31. That increases substantially the IEPA tariff recovery I described, which was recorded as receivable in the quarter and had no cash impact in the period. As of the balance sheet date, we have received 3.2 million of our IEPA tariff refunds. expect to collect the majority of the remaining IEPA receivable balance over the coming quarters. inventory with 72.4 million, down 75.5 million at fiscal year end, and down more than 25 million from 98.1 million a year ago. We expect to drive further inventory efficiency through the balance of fiscal 2027. We're happy with the solid starts of the year to come into fiscal 2027 debt-free, and our priority is driving consistent cash generation over the balance of the year. There's more work to do, and we're focused on delivering on profitability improvement and against the guidance we reiterated today.

And with that, I'll turn the call over to the operator for Q&A. As a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Myers with Lake Street Capital Markets. Please go ahead.

Hey guys, thanks for taking my questions. Nice work on the progress during the quarter. So just thinking about direct to consumer and the return to growth in the second half of the year, you know, given what you guys saw in the first quarter, are you more confident now on that timeline? And then maybe what are some of the key metrics that you're watching really to determine? whether or not that inflection in fact is happening. Hey, thanks Ryan.

Yes, I would say we're probably the same level of confidence that we were when we came into the year. We put forward the plan and. We did the math and the math being how many new subscribers are we planning to add and what percent will we retain all of our subscribers? And then of course the average order value for each one. We see what we saw in the first quarter here was Really great performance year over year on the retention side. As I mentioned, over 170 basis points. higher on the retention rate. And, um. And really good performance on the AOV, and so we feel great about those. We feel great about the plan that we came into the year with hitting the inflection point when we said we did we would.

And a really nice thing is as we go further into the year, we're, we're, we're feeling extra confident about the commerce side of the business. which is nice to have because it allows us to follow the plan and take all the right actions in D to C. So it's going well. It's right on track.

And we still get about the pacing. Got it. And then just that sort of leads me to my next question on the commerce business, you know, revenue down during the quarter. Can you just kind of unpack what the main drivers were there and then just, you know, as the same thing as I asked with the direct to consumer business, you know, what has excited about commerce? I know Girl Scouts is going to come in, but what are kind of some other proof points as far as that?.

as the kind of confidence level there in the second half. Yes, yes. And this is always the slowest quarter of the year for us. And yes, It's a little bit slower than what we saw last year. It's always a lumpy business and we expect it to be lumpy once again this year. So you've got some timing elements of some things that maybe were splitting up. into Q4 and therefore fell out of Q1 here and the other dynamic, but really a lot of things building for Q2 through four of this year. It also is a long lead time. As we know, there are, of course, ongoing orders every week. but we have really great visibility to where those big lumps are in the road.

And we've been winning, as I mentioned in my script, according to Nielsen, we've been winning market share in the toy category on a consistent basis over the last year, the last quarter, the last month. building good relationships with our major partners, some of which who I mentioned are taking our new Lixters product. in the fall, that being Walmart, Target, Chewy, Amazon, So, very excited about that. We like the outlook there. And again, that just takes, it eases up that pressure on the direct-to-consumer side of When you're when you're rebuilding that we don't have to do anything unnatural that we could just stick to the plan and. it's a nice byproduct that the plan is going well. Got it. Makes sense. Thanks for taking my questions.

Thank you, Ryan. That concludes the question and answer session. Ladies and gentlemen, this concludes the BARC first quarter fiscal year 2027 earnings call. Thank you all for joining. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the BARK Fiscal Fourth Quarter and Full Year 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mike Mougias, Vice President of Investor Relations. Mike, please go ahead.

Good afternoon to everyone, and welcome to BARK's Fiscal Fourth Quarter and Full Year 2026 Earnings Call. Joining me today are Matt Meeker, Co-Founder and Chief Executive Officer; and Brian Dostie, Interim 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.

Before I pass it over to Matt, I want to remind you of the following information regarding forward-looking statements. 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. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. We will also discuss certain non-GAAP financial measures on today's call. Reconciliation of our non-GAAP financial measures is contained in this afternoon's press release. And with that, let me now pass it over to Matt.

Thanks, Mike, and good afternoon, everyone. We set out to do 2 things in fiscal 2026, sustain adjusted EBITDA profitability despite tariff and macro volatility and accelerate the diversification of our revenue to build a more resilient business while laying out a strategy for the way forward. We believe we have delivered on each. Adjusted EBITDA was positive $0.2 million for the year, marking our second consecutive year of positive adjusted EBITDA and meeting our goal of ending the year on the positive side. This builds on the progress we made in fiscal 2025 when we achieved our first full year of positive adjusted EBITDA, an improvement from a $58 million loss just 3 years earlier.

Additionally, Commerce and Air represented 21% of total revenue, up from 15% last year, reducing our reliance on any single channel and improving the durability of the model. With sufficient cash, a debt-free balance sheet and a leaner cost structure, we are well positioned to build on this foundation in fiscal 2027 and beyond as we pursue renewed growth.

Before I discuss the year ahead, let me walk through some of our key highlights from the past year. I will stick to our full year figures, and Brian will go into more detail on the quarter and full year. Starting at the top, total revenue was $395 million. This reflects a deliberate decision to pull back on marketing and promotions to prioritize bottom line durability in the face of historic tariffs and a volatile macro environment. We reduced our total marketing investment by over $24 million year-over-year, choosing to protect our margins rather than chase inefficient growth. While this approach means we are entering fiscal 2027 with a smaller D2C subscriber base, we believe the underlying quality of that base is stronger as evidenced by our steadily improving retention rates and growing average order values.

Our Commerce segment delivered $70 million in revenue, a $1.5 million increase over last year. Notably, while this segment remains a growth engine, the first half of the year was marked by caution among our retail partners as tariff uncertainty weighed on the market. With greater clarity following the Supreme Court's recent ruling, we believe the environment is becoming more manageable. With these headwinds behind us, we expect strong momentum for Commerce in fiscal 2027 with accelerating expansion across wholesale and marketplaces.

BARK Air revenue more than doubled this year to over $12 million. With utilization rates averaging 90% and consistent 5-star reviews, the business has demonstrated a clear demand and a differentiated customer experience. However, in line with our focus on profitability and cash conversion, a priority for BARK Air in fiscal 2027 is the bottom line. We are focused on improving unit economics over top line expansion and as a result, we do not expect significant revenue growth in BARK Air over the next year.

Moving on, we delivered a very healthy consolidated gross margin of 61% for the year, consistent with the prior year-over-year despite Commerce and Air representing a larger share of total revenue. On that note, our D2C gross margin was 68%, up over 200 basis points year-over-year. We also reduced year-over-year costs by $55 million across G&A, shipping and fulfillment and marketing. While we expect these efficiencies to benefit the company in the year ahead, we will remain flexible adjusting our marketing spend up or down based on the returns we see.

On that note, let's turn to our focus for fiscal 2027 and our strategy more broadly. I want to start by spending a few minutes talking about the opportunity for the business and why I'm confident in the way forward. Over the past several months, I spent considerable time listening to our customers, talking with our team and analyzing the data behind our business. I dealt with some hard truth, company moving at the pace we've been moving doesn't always give itself permission to sit there. At our core, BARK is a business with generally exceptional foundations despite the headline results. More than 1.5 million households have invited us into their homes. We've built an exceptional supply chain over the past decade. We have direct customer relationships that few consumer companies of our scale can claim. These are real durable advantages. But to this point, we haven't fully leveraged them.

In many ways, we fought the wrong battles. We've been optimizing a model that the world has started to move past. The revenue trajectory you saw in today's results reflects that. What I want to spend the next few minutes on is what we intend to do about it and why I believe the position we're in is more advantageous than the recent numbers suggest.

Let me start with what hasn't changed because I think it gets lost in the noise around our results. There are 71 million households in the United States with dogs, which is more than half of all households domestically. U.S. spending on pets has grown from $12 billion in 2000 to over $158 billion today. This is not a market in decline. It is not a category under pressure. If anything, the cultural and demographic tailwinds behind pet ownership has strengthened. Dogs occupy a different place in the American household than they did 20 years ago, and that shift is structural, not cyclical. There's also no dominant leader in this space. No single brand owns a dog. That remains true. The category is enormous, resilient through economic cycles and wide open at the top. We built this company on that belief and that belief remains valid. What we need is a sharper answer to the question of where specifically we intend to win and how.

The subscription box, the model we built and which took us from 0 to over $0.5 billion in annual revenue was built in a form of personalization that was, at the time, genuinely differentiated. We understood that a large dog and a small dog are not the same customer. That insight was right, it still is. But the world has evolved. What was differentiated has become the floor. Mass personalization that is knowing your dog's size, your dog's age, whether they're a heavy chewer, that's table stakes now. Our customers know it, our retention data reflects it. The opportunity we see and that we are now building toward is a fundamentally deeper level of specificity, not size, not age, not chew style, the actual dog, the specific nature of a specific dog, what that dog needs, how that dog plays, what that dog's health profile looks like, what the community of owners of that same dog cares about. We are not going to do that by adding a few more quiz questions. We are going to do this by rethinking the purpose of our relationship with the customer.

The insight that's guiding our next chapter is this. BarkBox is not a box. It is a relationship between a brand and a dog mediated by a human who loves that dog. The job is not done when the box arrives. The job is done when the dog is happy. That standard changes everything, what goes in the box, how we measure retention, how we handle service, what we sell and most importantly, what we build next. We are calling this relationship commerce. It has 3 dimensions we're building against depth, how well do we truly understand each customer, density, how many meaningful touch points exist between us and the customer and durability, does the customer give us permission to offer new products and services over time. Those 3 things compounded over millions of customer relationships are what a successful business looks like in this category.

We also believe AI is a competitive advantage that will allow us to adapt and evolve at a rapid scale. We've been studying this carefully. We are not behind the curve on it. We intend to be the ones to get there first and get there right. We have more to share on the specifics of our strategy in the coming quarters. What I can tell you today is that the direction is clear, the team is aligned and the work is underway. The market is huge. The relationship is ours to deepen. And for the first time in a while, I feel like we're asking the right questions.

As we build for the long term, we are consolidating the brands and products we will build around. As part of this, we will sunset products where we have not seen adequate returns, including our Kibble and toppers lines. That decision will allow us to reallocate capital and resources toward higher return categories where we have proven our right to win. This will also simplify the business and help improve overall profitability going forward.

On D2C, we are entering the year with a smaller subscriber base following the deliberate pullback in marketing spend last year. We expect D2C revenue to be down year-over-year in the first half before stabilizing in the second half and returning to growth thereafter. In Commerce, we expect our momentum to remain strong in FY '27 with the segment representing nearly 1/4 of total revenue in FY '27 versus 18% in FY '26 as we continue to expand with both new and existing retail partners.

Additionally, our cookie program with the Girl Scouts is expected to launch late in the fiscal year, providing another incremental revenue growth and brand awareness driver. Despite prioritizing gross margin and profitability over near-term growth on BARK Air, we expect BARK Air and Commerce to collectively represent over $100 million of revenue, further advancing our diversification strategy.

Turning to guidance. For the first quarter of fiscal 2027, we expect total revenue of $77 million to $79 million and adjusted EBITDA of $0 to $1 million. For the full year, we expect total revenue of $325 million to $340 million and adjusted EBITDA of $7 million to $10 million, a meaningful step up from fiscal 2026 and consistent with our commitment to sustained profitability. I also want to note that our Board has authorized a share repurchase program of up to $40 million to be funded by ongoing free cash flow. This reflects the Board's conviction in the long-term value of BARK and our belief that the stock represents compelling value at current levels. Our debt-free balance sheet and improving free cash flow profile give us the flexibility to simultaneously invest in the business and return capital to shareholders. We ended the year with a debt-free balance sheet, $19 million of cash and inventory of $76 million, a reduction of approximately $13 million year-over-year. We delivered our second consecutive year of positive adjusted EBITDA and expect to do so again in fiscal 2027 as well as positive free cash flow.

Taken together, these improvements, along with a sharper product focus and a more diversified revenue base, position us to drive sustained value for our customers, partners and shareholders. We still have work ahead, but we are operating from a stronger foundation and a clear path to growth. We needed to fix the underlying business so we could actually pursue the growth strategy I've outlined. With a lot of this difficult work done, we can now start pursuing a growth plan. I'm more excited about this business than I've been in years and I have confidence we're going to do something truly special. With that, I'll turn the call over to Brian.

Thanks, Matt, and good afternoon, everyone. I'll begin by reviewing our financial results for the fiscal fourth quarter and full year 2026 and then discuss how we're positioning the business for fiscal 2027.

Starting at the top, fourth quarter revenue was $86.6 million compared to $115.4 million in the prior year period. For the full year, revenue totaled $394.8 million versus $484.2 million in fiscal 2025. As Matt mentioned, this top line decline reflects our intentional pullback in marketing spend and promotional activity as we prioritized bottom line durability over inefficient growth.

Looking at our segments in more detail, full year D2C revenue was $324.9 million. This includes $12.4 million from BARK Air for the full year, of which $3.1 million was generated in the fourth quarter. Total fourth quarter D2C revenue was $74 million. While entering fiscal 2027 with smaller subscriber base impact to our near-term top line, the underlying quality of this base is stronger, driven by healthier retention trends and higher average order value.

Turning to Commerce. Full year revenue increased 2% or $59.9 million. Fourth quarter Commerce was $12.5 million, down about 18.3% versus the prior year period. The fourth quarter variance was largely driven by timing of retail shipments year-over-year. And we continue to view Commerce as an important long-term growth driver for the business in fiscal 2027 and beyond.

Moving down to P&L. Consolidated gross margin was 61.3% for the full year and 52.7% for the full fourth quarter. Our cost of revenue this quarter reflects $2.7 million of IEEPA tariff refunds recorded as a loss recovery. We paid an additional $7.1 million in IEEPA tariff refunds allocable to our cost of revenue in FY '26. This was not yet eligible for submission under the U.S. Customs and Border Protection's new IEEPA tariff refund portal. As a result, we were unable to record this amount as a reduction of cost of revenue in FY '26.

Turning to operating expenses. Fourth quarter marketing spend was $12.6 million, down roughly $4.7 million year-over-year. For the full year, total marketing investment was $59.2 million, down more than $24 million from fiscal 2025. Moving forward, we intend to maintain this discipline in the near term while remaining flexible to reinvest if customer acquisition dynamics improve. Shipping and fulfillment expenses for the full year were $119.4 million, down from $139.1 million last year, primarily driven by lower D2C volume. General and administrative expenses were $103.4 million for the full year, representing a $10.8 million drop from fiscal 2025. For the fourth quarter, G&A was $26.8 million, down $1.9 million year-over-year, reflecting our ongoing efforts to streamline our cost structure.

Collectively, these structural cost improvements protected our bottom line and resulted in our second consecutive year of positive adjusted EBITDA. For the full year, adjusted EBITDA was $200,000, including the fourth quarter where we generated $3.2 million. While macro factors compressed our absolute margins for the year, hitting our full year profitability goal demonstrates the resilience of our leaner operating model.

Turning to the balance sheet. We ended the year with a healthy cash balance of $19 million. Our accounts receivable balance as of March 31, 2026, includes $3.3 million of IEEPA tariff refunds, $2.9 million of which we subsequently received. I previously mentioned that not all IEEPA tariffs paid by the company were eligible for submission under the Cape portal. We currently expect an additional $12.1 million of IEEPA tariffs, of which $7.1 million relates to cost of revenue in FY '26 and $5 million relates to current inventory or cost of revenue for FY '27 that we will be able to recognize upon eligibility of submission. We closed the year with $75.5 million in inventory, down nearly $13 million year-over-year, and we expect to drive further inefficiencies throughout fiscal 2027. This disciplined working capital management, combined with our full year free cash flow expectations should result in a strong liquidity position.

In summary, the actions we took throughout fiscal 2026 delivered meaningful operational and financial improvement. All those decisions resulted in smaller subscriber base entering fiscal 2027, the underlying quality of the subscriber is higher, reflecting the healthier cohorts and improved retention. Combined with a leaner cost structure and continued focus on profitability, we believe we're well positioned to further improve adjusted EBITDA and generate positive free cash flow in fiscal 2027. And with that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Kontji Seerawong Thanawatti with Jefferies.

This is Koungy filling in for [indiscernible] at Jefferies. Can you provide the building blocks to your $7 million to $10 million adjusted EBITDA guidance? You're operating from a lower revenue base compared to years past, given the focus on a smaller base of DTC customers. Just curious what the levers are? And then I'll have a follow-up.

Sure. Koungy, this is Matt. The levers are, as Brian was saying that throughout the year, we've improved our unit economics pretty well across the board. The average order value of a subscriber is higher. The costs have come down. And then when you -- last year's product costs were certainly burdened by tariffs, and we don't see that burden nearly to the same extent going forward. So that's very helpful.

But more efficiency throughout the P&L, stronger retention leading to those stronger cohorts. So the quality of the customer is one aspect of that. Another is the cost reduction efforts that we've taken earlier this year -- earlier in the calendar year that is downsizing the team, really leaning in quite a bit on AI and automation across the team, replacing more expensive SaaS software contracts, things like that. So across the board, just a leaner -- more lean operation with much better unit economics all the way through. And that sets us up for being able to invest in growth once we get the new playbook that we have in mind in place for that.

So on top of that, can you kind of just remind me or us in terms of -- is the situation -- like if I recall correctly, you're mainly relying for the most part on one specific country like from a production perspective. Does that still stand true? Or are you doing something quite different on a go-forward basis?

It's not entirely true. Now coming into fiscal '26, we almost entirely on the toy side of things, or non-consumable side, we're almost entirely reliant on China. Once we came into the year and faced the tariff headwinds that the whole world faced, we quickly got to building diversification throughout our supply chain. So we're now -- not including the consumables in the U.S. or any other U.S.-based products, we're now -- we at least have the option of bringing products in from a handful of Southeast Asia countries and South America as well. So there's a bit of mixing and matching based on the overall cost, including any cost of tariffs, quality. So we've got much more diversification and flexibility there. And theoretically, if a large tariff pops up somehow in China, it's a pretty quick operation for us to fail over or move over to another country.

Got you. And I apologize for misspeaking earlier, yes, specifically for toys and you answered that question.

That concludes our question-and-answer session. Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Good morning, and welcome to the BARK's 2025 Annual Meeting of Stockholders. I would now like to introduce Matt Meeker, the company's Chief Executive Officer and Chair of the Board. You may begin.

Good morning, everyone, and welcome. I am Matt Meeker, and in accordance with our bylaws, I will act as the Chair of this Annual Meeting of Stockholders. Allison Koehler, our Chief Legal Officer and Secretary, will act as Secretary of the meeting and record the minutes. I would now like to introduce the other members of our Board who are present at today's meeting. We have Larry Bodner, Paulette Dodson, Michele Meyer, Jim McGinty, Betsy McLaughlin and Henrik Werderlin. In addition, we are joined by members of our management team. Also present are Brendon Massey of Deloitte, our independent registered public accounting firm as well as Francis H. Bird, the duly appointed representative of Broadridge Financial Solutions, Inc., our Inspector of Election.

The formal business for today's meeting is described in our 2025 proxy statement and includes the election of the Class A director nominees, Betsy McLaughlin and Henrik Werderlin, the ratification of the appointment of Deloitte as our independent registered public accounting firm for the fiscal year 2026, the advisory vote on say-on-pay and the amendment to our certificate of incorporation that would affect a reverse stock split at a ratio between 1:2 and 1:30, if and when determined by our Board of Directors. After voting on these matters and allowing our stockholders to submit questions, we will adjourn the meeting. I will now turn the meeting over to Allison, who will conduct the formal part of this meeting.

Thank you, Matt. Hello, everyone, and thank you again for joining us today. Before we begin the formal part of this annual meeting, I would like to note the following: to vote or submit questions while participating in this meeting, you must have accessed this meeting as a stockholder with a 16-digit control number that you received with your proxy materials. If you have already voted by proxy and do not wish to change your vote, your vote will be cast as previously instructed and no further action is necessary. We welcome questions from our stockholders. If we receive appropriate questions regarding the matters on the agenda or the business of the company, we will post our answers within 48 hours of the conclusion of this annual meeting on our Investor Relations website at investors.bark.co.

For further information, please review the rules of order in the Meeting Materials section of this virtual meeting website. An audio recording of this annual meeting will be available on our Investor Relations website within 48 hours of the conclusion of this annual meeting. Now on to the formal part of this annual meeting. Broadridge Financial Solutions, our proxy service provider, has indicated by affidavit that the notice of Internet availability of the proxy materials was mailed to all stockholders of record as of the close of business on January 28, 2026, the record date for this annual meeting.

Francis H. Bird has been duly appointed as a representative of Broadridge Financial Solutions, our Inspector of Election and has signed an oath of office promising to faithfully execute the duties of the Inspector of Election. The oath of office will be filed with the minutes of this annual meeting. The Inspector of Election has determined that a sufficient number of shares entitled to vote at this annual meeting are present virtually, in-person or by proxy to constitute a quorum, and we may proceed with business.

It is now 12:04 p.m. Eastern Time, and the polls are open. The first item of business is the election of the Class A directors. Betsy McLaughlin and Henrik Werderlin have been nominated by our Board of Directors to serve as Class A directors until our 2028 Annual Meeting of Stockholders or until her or his successor is duly elected and qualified and her or his office is otherwise vacated. Our Board of Directors recommends that you vote for the director nominees. The second item of business is the ratification of the appointment of Deloitte as our independent registered accounting firm for our fiscal year ending March 31, 2026.

Our Board of Directors and the Audit Committee recommend that you vote for the ratification of the appointment of Deloitte. The third item of business is the vote on an advisory basis to approve the compensation of our named executive officers. Our Board of Directors recommends that you vote for the approval of the executive compensation of our named executive officers. The fourth item of business is the approval of the amendment to our certificate of incorporation that would affect a reverse stock split at a ratio between 1-for-2 and 1-for-30 if and when determined by our Board of Directors. We will now pause for a moment to allow any stockholder who wishes to vote to conclude voting through this virtual meeting website.

It is now 12:06 p.m. Eastern Time, and the polls are closed. Based on the preliminary review of the votes prior to this meeting, the Inspector of Election has informed me that the director nominees have been elected, the appointment of Deloitte has been ratified. The say-on-pay vote has been approved and the amendment to our certificate of incorporation has been approved. We plan to publicly announce the official voting results on Form 8-K after all verifications have been completed by the inspector of election. This concludes the formal business of our 2025 Annual Meeting of Stockholders.

Thank you again for attending our 2025 Annual Meeting of Stockholders. On behalf of our Board of Directors and our leadership team, I'd like to thank you for your continued support. This meeting is now adjourned.

This concludes today's annual meeting. You may now disconnect.

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the BARK Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mike Mougias, Vice President of Investor Relations and FP&A. You may begin.

Good afternoon, everyone, and welcome to BARK's Third Quarter Fiscal Year 2026 Earnings Call. Joining me today are Matt Meeker, Co-Founder and Chief Executive Officer; and Zahir 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.

Before I pass it over to Matt, I want to remind you of the following information regarding forward-looking statements. 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. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. We will also discuss certain non-GAAP financial measures on today's call. Reconciliation of our non-GAAP financial measures is contained in this afternoon's press release.

And with that, let me now pass it over to Matt.

Thanks, Mike, and good afternoon, everyone. Before we dive into the quarter, I want to briefly acknowledge the recent headlines regarding potential strategic proposals you may have seen. Given the nature of those proposals, we are unable to comment on them during today's call. Today's discussion will center on our third quarter results and how we're continuing to drive our business results. With that said, let's jump in.

Our priorities throughout fiscal '26 have remained consistent, strengthening the business by improving profitability and operating with discipline in a volatile macro environment. Entering the second half of the year debt-free with a leaner cost structure and greater financial flexibility has helped us navigate tariffs and broader market uncertainty while continuing to invest thoughtfully in the areas that matter most.

Turning to the quarter. Adjusted EBITDA was negative $1.6 million, within our guidance range and consistent with last year. We also generated $1.6 million of positive free cash flow, driven in part by inventory normalizing following a buildup in the first half as tariff rates came down. We plan to continue to optimize inventory levels to further support cash conversion in the near to midterm. Total revenue of $98.4 million came in below our guidance range, driven in part by a deliberate pullback in marketing spend. Marketing expense was approximately $11 million lower than the third quarter last year, reflecting our continued emphasis on bottom line durability and disciplined capital deployment.

Nonetheless, we delivered a healthy 62.5% consolidated gross margin with both our direct-to-consumer and commerce segments showing year-over-year and sequential improvement. We've been deliberate about where we invest and where we don't, focusing investments on areas with clear returns rather than chasing short-term growth. One of the areas we've consistently emphasized this year is diversification, and we continue to see progress there.

During the quarter, Air and Commerce represented approximately 23% of total revenue, up from 18% last year. Our Commerce segment generated $18.8 million of revenue with a gross margin of 46.4%. BARK Air also delivered $3.4 million of revenue, up 71% year-over-year. Together, these businesses are scaling, becoming a more meaningful part of our overall revenue mix and helping make the business more resilient as we navigate a changing cost and demand environment. In our direct-to-consumer business, we remain disciplined in our marketing investment, pulling back on promotions and reducing customer acquisition costs as evidenced by the 40% year-over-year reduction in marketing expense.

Last quarter, total CAC was down 7% versus prior year and marked our most efficient quarter in nearly 3 years. As part of this approach, we are prioritizing the quality of customers we acquire over sheer volume. This has resulted in our subscriber base shrinking over time and therefore, pressuring D2C revenue, an outcome we are comfortable with as we focus on profitability and cash conversion. We expect this trend to continue in the coming quarters.

Importantly, the customers we are acquiring today are of higher quality with stronger engagement and spending behavior, which we believe will support better retention and higher average order value over time. For example, our average order value reached $31.41 last quarter, our strongest quarter in nearly 2 years as more customers opted for Double Deluxe, extra toys and Add-to-Box options. One additional area of execution worth calling out is shipping. In the second quarter, we transitioned our last mile delivery to Amazon, meaning BARK products now ride on Amazon's Blue trucks. This should reduce shipping costs and get packages to customers quicker.

Overall, I'm pleased with how the team has continued to execute in a dynamic operating environment. Despite ongoing tariff uncertainty, changes across our shipping partners and broader macro volatility, we've remained focused on protecting profitability and running the business with discipline. We are debt-free following the repayment of our $45 million convertible note in November, and we're beginning to see improvements in free cash flow conversion as we reduce inventory and continue to make the organization leaner and more efficient.

Taken together, our recent results reflect our running the business with intention, balancing profitability, operational discipline and diversification while continuing to improve the underlying quality of our revenue. The actions we've taken throughout the year position us to exit fiscal 2026 on a strong foot and better equipped to navigate uncertainty while continuing to invest thoughtfully in the long-term growth of the brand.

And with that, I will turn the call over to Zahir.

Thanks, Matt, and good afternoon, everyone. Let me provide some additional color on our third quarter results. Starting at the top. Total revenue for the quarter was $98.4 million. As Matt discussed, revenue came in below expectations, driven primarily by a measured pullback in marketing spend as we prioritize profitability and cash generation during the quarter.

That said, we are seeing promising trends in our DTC business around the quality of customers we're acquiring. This includes higher AOV and improved efficiency across acquisition channels. Additionally, retention remains stable and the customers we're bringing in today are of a higher value than those acquired through more promotionally driven strategies of the past. This is encouraging given the challenging macro backdrop. Commerce delivered $18.8 million of revenue in the quarter, roughly $1.5 million below last year, partially driven by timing shifts.

Overall, our Commerce segment remains a key part of the business from both a growth and a margin perspective, and we expect it to remain an important contributor to our overall revenue mix as we add new partners, introduce additional SKUs and expand distribution within existing retailers. Turning to gross margin. Consolidated gross margin was 62.5% for the quarter. From a segment standpoint, D2C gross margin, which includes Air, was 66.4%, 10 basis points above last year.

Commerce gross margin was 46.3%, up 240 basis points year-over-year. The margin improvements we saw across the business last quarter not only reflect the quality of revenue, but also the important work the team has done mitigating tariff impacts through a variety of tactics, including alternative sourcing, packaging and in Commerce instituting a price increase.

Turning to operating expenses. Total marketing spend was $16.1 million, down $11.3 million versus last year as we continue to prioritize premium customers CAC efficiency and profit performance. Shipping and fulfillment expense was $29.1 million, down nearly $8 million year-over-year, driven largely by lower volume in our D2C segment. G&A expense was $25.4 million, down $2.1 million versus last year, reflecting lower headcount and ongoing cost management initiatives. We remain focused on building a leaner organization while maintaining the capabilities needed to support future growth, and we continue to see opportunities to drive additional operating leverage and cash generation over time.

As one example, we recently downsized our office footprint, moving from 120 Broadway to a more appropriately sized space in Brooklyn and generating more than $2 million in annualized savings. Looking ahead, we expect to realize further efficiencies through continued process improvements infrastructure optimization and disciplined cost management. Overall, while total revenue was lower year-over-year, we operated with greater efficiency with adjusted EBITDA of negative $1.6 million, in line with third quarter last year. We also generated $1.6 million of positive free cash flow during the quarter. Profitability remains our key focus, and we're pleased by our recent results given the challenging macro backdrop.

Turning to the balance sheet. We ended the quarter with approximately $22 million of cash following the repayment of our $45 million of convertible notes in November. Inventory was $91 million, roughly $10 million down on the prior quarter. We expect inventory levels to continue to decline in the fourth quarter as we sell through the build accumulated earlier in the fiscal year.

In summary, while revenue was impacted by deliberate decisions to prioritize profitability and cash flow, the underlying financial profile of the business continues to improve. We're seeing progress across margins, operating efficiency and diversification. And we believe these actions position us to exit fiscal 2026 in a stronger and more resilient position.

Thank you for joining us today, and we look forward to providing additional updates in the future.

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

Thank you for standing by, and welcome to the Bark Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Mike Mougias, VP of Investor Relations. You may begin.

Good morning, everyone, and welcome to Bark's Second Quarter Fiscal Year 2026 Earnings Call. Joining me today are Matt Meeker, Co-Founder and Chief Executive Officer; and Zahir Ibrahim, Chief Financial Officer. Today's conference call will be webcast in its entirety on our website and a replay will be made available shortly after the call.

Additionally, a press release covering the company's financial results was issued this morning and can be found on our Investor Relations website. Before I pass it over to Matt, I want to remind you of the following information regarding forward-looking statements. 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.

Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. We will also discuss certain non-GAAP financial measures on today's call. A reconciliation of our non-GAAP financial measures is contained in this morning's press release.

And with that, let me now pass it over to Matt.

Thanks, Mike, and good morning, everyone. Midway through the year, we're on track with expectations and gaining confidence and momentum as we go. But first, I'm happy to start this call with an important update. Last week, we paid off our $45 million convertible note using cash from our balance sheet. Bark is now debt free.

We're proud of our decision and our ability to pay this off in cash rather than refinance it, which reflects our long-term confidence in the business. In addition, we extended our $35 million credit line with Western Alliance Bank, continuing a nearly decade-long partnership that gives us added flexibility on competitive terms.

Together, these actions strengthen our balance sheet and position Bark to grow and create long-term value even in a volatile macro environment. Our confidence comes from how well we've executed on the plan we set at the start of the fiscal year to drive revenue diversification and maintain bottom line discipline.

This quarter reflects that progress with total revenue of $107 million, above the high end of our guidance range and adjusted EBITDA of negative $1.4 million within our guidance range. Adjusted EBITDA would have been stronger, but we chose to invest roughly $1 million in incremental efficient growth during the quarter, an investment we expect will pay off as the year goes on.

So let's talk about our progress this quarter on diversification and the bottom line. First, our Commerce segment delivered another standout quarter with $24.8 million in revenue up 6% year-over-year and representing 24% of total revenue, an all-time high revenue mix contribution.

Year-to-date, we're seeing strong traction across key partners, including Walmart, Chewy, Amazon and Costco where our popular advent calendar is already sold out for the holiday season. And speaking of Chewy and Amazon, you can now find our [indiscernible] on both of their digital shelves following its August launch.

Second, when it comes to diversification, Bark Air continues to exceed expectations delivering $3.6 million in revenue this quarter, up more than 138% from last year and 54% from the prior quarter. We also maintained a 99% 5-star review rate, which speaks volumes about the quality of experience we're delivering. This quarter, we achieved our highest gross margin driven by a 93% seat fill rate.

Bark Air continues to validate the incredible demand for dog first travel and reinforces our belief that we're solving a real problem for dog parents. And finally, as a reminder, we received the green light from the Girl Scouts to participate in their annual cookie program and will begin shipping products next summer.

This partnership represents a huge opportunity, not just for revenue but for awareness. Millions of families will see Bark alongside one of the most iconic brands in the country, and we're thrilled to partner with the Girl Scouts. Each of these are initiatives that only Bart can do. When we do mark things, we excel.

So we made great progress on diversification this quarter. Now let's talk about our bottom line performance. This has been a challenging year with tariffs, changes at the U.S. postal service and a volatile macro environment. But as planned, we're emerging stronger. A meaningful milestone this quarter was moving our last-mile delivery to Amazon.

That means your BarkBox now arrives on those Amazon blue trucks. We're off to a great start with this partnership, which reduces our last-mile delivery cost and gets packages to customers about a day faster. That's a meaningful improvement to the customer experience. In addition, this quarter marked the lowest customer acquisition costs we've seen since fiscal 2023.

And with that efficiency, we saw an opportunity to deploy an additional $1 million beyond our plan at a highly efficient rate to drive both short- and long-term growth. And for the second quarter in a row, 2/3 of our new subscribers opted into our more premium Super cure and combo box offerings.

On top of that, we've seen 6 consecutive months of improvement in subscriber retention as we continue to capitalize on the Shopify platform. One driver of that progress is finding new ways to deepen our relationship with dog parents and strengthen our core offering. Last month, we launched Bark subscriber perks.

A new membership benefit that gives BarkBox subscribers access to exclusive discounts and offers from Park and our partners, delivering up to $1,500 in annual value at no additional cost is another way we're rewarding loyalty and adding everyday value for our most engaged customers. Bringing all of that together, we acquired more new subscribers and planned at our most efficient rate in several years.

Those subscribers are retaining longer and with partnerships like Amazon for last mile delivery, they'll generate higher margins for us while enjoying an even better customer experience. Our brand now extends well beyond subscriptions with strong sales across 50,000 retail locations and record passengers and revenue for Bark Air.

Finally, we feel so good about our performance that we paid off our convertible debt and cash ahead of schedule without refinancing or selling equity to do it. Our strategy is working. We're balancing growth and profitability, expanding into new categories and channels and doing it with a debt-free balance sheet.

I'm excited about what's ahead in the second half of the fiscal year. And with that, I'll turn it over to Zahir.

Thanks, Matt, and good morning, everyone. We've made solid progress executing our plan through the first half of fiscal 2026. We're diversifying revenue beyond our subscription business. Our profitability discipline remains strong. And as Matt highlighted, Bark is debt-free for the first time as a public company. a tremendous milestone for our team and our shareholders. Let me walk you through the quarter in more detail.

Total revenue for the second quarter was $107 million, above the high end of our guidance range. This outperformance was driven by stronger-than-expected DTC performance and a modest timing benefit in commerce. Excluding Barker, DTC revenue was $78.5 million, down versus last year, primarily from entering the year with a smaller subscriber base and our decision to moderate marketing spend in light of tariffs and macro uncertainty.

However, as we saw stronger new subscriber momentum in the quarter, a highly efficient acquisition cost we leaned in and invested an incremental $1 million on marketing spend. Even with the incremental spend, total marketing expense will still be down 18% versus last year and we expect H2 to decline at a greater pace. While total subscribers are down year-over-year, retention remains strong and the customers we are acquiring today are higher value.

This improvement reflects our deliberate shift away from discount-driven acquisitions toward higher-value loyal customers supported by ongoing Shopify enhancements and initiatives like Amazon last mile delivery. Our Commerce segment delivered another strong quarter with $24.8 million in revenue, up 6% year-over-year and reaching 24% of total revenue.

This segment continues to be a highlight we expect sustained growth in the years ahead as we expand both retail distribution and product assortment over time. Bark Air also continued to outperform expectations contributing $3.6 million in revenue, our strongest quarter yet. Consolidated gross margin was 57.9%, down 250 basis points year-over-year.

2 primary factors impacted the quarter. First, revenue mix as commerce and Air represented a larger share of total revenue, 26.5% versus 20% last year and second, higher tariff-related costs. Through the first half, we've incurred roughly $7 million in elevated tariff-related costs and we expect to incur between $12 million and $13 million for the full year.

Vendor pricing, productivity improvements and the move in DTC from box to bag have partially offset these costs. In addition, in the second half of fiscal '26, will further mitigate these headwinds by sourcing products from other geographies and implementing a price increase in commerce. As a result, we expect gross margins in both DTC and commerce to improve in the balance of the year.

Turning to operating expenses. Marketing was $15.4 million, down 18% year-over-year, reflecting continued discipline and a focus on efficient customer acquisition. Shipping and fulfillment expense was $31.5 million, down about 8% year-over-year, driven by lower DTC volume. G&A expense was $25.7 million down over 11%, benefiting from lower headcount and ongoing cost management.

Adjusted EBITDA for the quarter was negative $1.4 million, within our guidance range. As I mentioned, this includes the additional $1 million investment to acquire customers more efficiently, which we expect will contribute to near-term and long-term growth. We ended the quarter with $63 million in cash down $22 million sequentially, primarily due to working capital timing, including higher receivables tied to stronger commerce sales and inventory build ahead of the holiday season.

We expect to exit the year with lower inventory than the prior year-end despite carrying the impact of added tariff costs. As mentioned, we also repaid our $45 million convertible note in cash days ago, which will be reflected on our balance sheet next quarter. With the debt fully repaid and our $35 million credit facility extended.

We've strengthened our financial flexibility and simplified our balance sheet. Turning to guidance. We're continuing to maintain a cautious stance as many external variables remain fluid, including supplier transitions and tariff developments. As such, and consistent with previous quarters, will only be providing this quarter's guidance.

For the fiscal third quarter, we expect total revenue between $101 million and $104 million and adjusted EBITDA between negative $5 million and negative $1 million. In conclusion, we're in a strong position entering the second half of fiscal '26. Revenue is tracking well to expectations. We're maintaining strong cost discipline. We're building strong momentum across each segment, and our gross margin should improve, thanks to a number of measures we have taken this year.

We're proud to be debt-free and with our ongoing focus on profitability and diversification. We're confident that Bart will exit fiscal 2026 as a stronger, more resilient and more diversified company.

And with that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] Your first question today comes from the line of Ryan Meyers from Lake Street Capital Markets.

First one for me, congrats on getting the convertible debt paid off. So I'm just curious what kind of flexibility do you think that now provides you guys with? Are you able to go out and invest more in the business, drive more subscriber growth, drive more of the commerce business, just kind of at a high level now that you guys don't have to worry about that potential overhang.

How does that really change things for you?

Ryan, it's Matt. Thanks for the question. And I think you heard some of it. we ended the quarter ended September with $63 million in cash on the balance sheet, pay off $45 million. That gives you a sense of where the cash is right now, which as we've executed through the year, that's been our plan all along was to not dilute the shareholders any further by issuing equity to raise capital and pay off that debt to pay it off the balance sheet as we did.

Not to burden our financials with interest payments in order to service it by refinancing it. So that's played out exactly as we hoped or even better than we hoped and that kind of carries forward into the answer here, which is keep going, keep executing because we're just -- as the year goes on, we're executing well and a little bit ahead of the plan in a pretty tumultuous environment.

So we're happy about that, but not yet because of the external environment in a place to take really big swings or risks because you never know where -- like I think in the past 30 days, the tariffs from China were 30%, 130% and 20%. So we really have to look around those corners and not get too far out over our skis.

So the simple answer is keep delivering, keep executing our plan, get the bottom line stronger and stronger, reinvest that back into growth as we go on. But it's keep executing.

Okay. Got it. And then I just want to circle back to commentary that you guys have provided last quarter as far as for the full year, expecting to be profitable on an adjusted EBITDA basis by the end of the year, I know you guys gave the third quarter guidance. But what's your level of confidence or comfortability and kind of that full year profitability that you guys communicated last quarter?

I'm sorry, Matt. So yes, that's our goal, so Ryan, and we expect to be in that ZIP code. But as Matt just said, obviously, there's a lot of volatility out there, a lot of unknowns still particularly in respect to tariffs, but also the broader consumer sentiment.

So we're just bearing that in mind in terms of goal is still to deliver EBITDA positive, and we expect to be somewhere in that ZIP code.

Okay. Got it. And then lastly, the commerce growth for the quarter, obviously nice to see that business now roughly 25% or so and growing. But can you unpack kind of the growth within the commerce business and that just increased demand at the retailers that you are selling? Is it more products? Is it more stores? Just so we can get a sense of that business?

Yes. It's a combination of factors, right? We continue to expand our toy distribution across existing customers as well as some new customers, but primarily existing customers, example, we increased our footprint within Walmart in the quarter, and that will continue to benefit us in terms of growth.

We continue to grow on Amazon and Chewy for the year-to-date, and that's just a function of product being available online, level of reviews increasing and therefore, you could continue to grow in terms of your momentum on those channels. Overall, quarter benefited slightly from timing as well from a couple of million of orders that shifted into Q2 from Q3.

But yes, we feel really good about the growth year-to-date on commerce and expect growth in the second half of the year to continue.

Your next question comes from the line of Maria Ripps from Canaccord.

So Matt, you talked about acquiring more new subscribers at an efficient course and seeing improved retention. Can you maybe give us a little bit more color in terms of what's driving that? Are there any specific media channels or tactics that you would highlight and then secondly, can you maybe talk about retention within your existing subscriber base?

And at what point would you expect that to stabilize sort of given all the improvements that you've outlined?

Let me take the first one, and I wasn't quite sure I heard or understood the second, but the first is -- there is a bit more of a favorable mix on channels and more so towards organic channels. So direct customers, those that we're acquiring via our e-mail and SMS list.

So anything that would be more on the organic or brand side. So as we've ramped up some of our brand activities, we've shifted those dollars away from the meta channels from Google channels, and that seems to be paying off instead of paying those very high rates to acquire a customer, you pay very, very little for someone who just shows up on the platform.

So it's a more favorable mix and that seems to be pretty sustainable and should grow as time goes on. But we're happy that the rate has come down to the level it has and that there seems to be good momentum in customer acquisition. On the retention side, I wasn't quite sure I heard or understood the question properly.

Yes. I was just trying to -- I was just trying to see if you can talk about retention within your existing subscriber base. And you've talked about sort of all the improvements on the platform. So that are driving sort of high retention, at least within the new subscriber base. So I was just wondering if you can talk about retention within your existing subscriber base.

Sure. I mean, overall, we've seen retention improve each month throughout the year as a whole. Some of the newer cohorts they're still fairly new. Obviously, if we start at the beginning of the fiscal year in April, they're maybe 6 months in here at most.

What we see is certainly higher quality in terms of they are opting more for our Super Chewer line, which has a higher AOV and a pretty similar retention. They are upgrading into higher-value plans like adding an extra toy to their plan, prepaying at higher rates instead of paying their on month-to-month over that term, pay it all at once upfront for a discount. All those things are really, really good.

And we seem to be making just bits of improvement each month. As you mentioned, some of that is platform related. Some of that is returning value to the customer and making them happier with what we're delivering. And we still see a lot of possibility in that, especially as some of these trends continue out over time.

As I said, the newer customers who are in their first 6 months are showing pretty good signs, but they're certainly coming in at a different environment right now. So we want to see how that plays out before getting too excited about it.

Your next question comes from the line of Kaumil Gajrawala from Jefferies.

Congratulations on being debt-free. Can you maybe just talk about are there areas of investment or things that you may want to do now that your balance sheet is in a different place or are you thinking about buybacks as it relates to cash that you're generating in the coming?

Yes. Similar to what I had said to Ryan, really looking at continuing to execute the plan as Zahir was talking about, our aim is still to be EBITDA breakeven for the year. And in a year like this, that's a real challenge, but that's still the goal, that's still the aim.

While we invest in the diversification, so more of the business moving over to commerce as it has the air business more than doubling revenue this year on a similar level of investment. And adding more services and new products into the mix. All of that has been part of the plan. And then we are meeting with our board next week.

And we'll be talking about our long-range plan and the new state of our balance sheet and our investments and our plans for capital. So I'd say over the next months for the rest of this year, execute the plan, keep try everything we can to keep this company on the positive side of EBITDA and gear up and really understand what our long-term investments need to be.

Okay. Got it. That's something very interesting we ask you the last question on churn reducing. Is there something specific about those customers? Or is there something related to your marketing and your execution that sort of...

I think it's a combination of factors. One is we've spent basically, the last year, getting our Shopify tools are the subscription-oriented Shopify tools or platform to do what I would call a lot of little blocking and tackling things, put those in place that each one of them might contribute 10 of point, but you add up all of those and all of a sudden, you've got like 15 points or 2 points of monthly retention.

And they're either like silent wins or silent killers depending on how you look at it, but it's a lot of platform gains that we've made throughout the year. And there are still more of those in front of us, but we've made great progress. So that's one element of it. Another is as we've had really good wins over the years in our supply chain and getting our costs into a much better place.

We're now able to -- and we've started to return some value to the customer that makes them happier and therefore, it leads to better retention. And then I'd say finally is when we're not I guess that favorable mix of an organic customer coming in hearing about Bark from word of mouth because we return value because the customer is just happier with us overall versus reaching to the furthest customer we can reach to on Meadow with the most aggressive offer we can, the organic customer is going to return better.

So as we've shifted that mix, we've also brought in higher value customers that have a better retention profile and a better profile overall. So it's kind of a mix of all those elements.

And that concludes our question-and-answer session and today's conference call. We thank you for your participation, and you may now disconnect.

Matt; James, Chief Supply Chain Officer. James, we thought it would be cool to talk about something new that's happening in the world, in a world of ever-changing dynamics when it comes to supply chains.

Do you want to -- Matt, do you want to frame it a little bit and then maybe James can explain what it is?

I can frame it, James, is the driver and the brains behind it. So I guess the high-level framing is when it comes to our last mile delivery, well, and beyond that, even we have an exciting new partnership with Amazon that will sustain or lower our costs, give us a new revenue expansion opportunity and improve our performance for our direct-to-consumer customers when it comes to their last mile delivery. That's my framing. So James, do you want to talk more about it?

Yes, sure. As you know, Matt, and Henrik, we've had a lot of increased costs recently with UPS, FedEx and other well-established carriers who used the USPS quite a bit for their last mile delivery. The USPS took the decision at the beginning of this year to roll back on some of those agreements. So products like SurePost from UPS. The cost of those products increased significantly and it had a fairly significant impact to us. So what we did, we worked with Amazon. They had a ship with Amazon products that they're offering on a regional basis. We worked with them over a 6- to 9-month period to get them to accept the BARK product into their last mile network. So it's great news for us. We've been able to significantly improve our costs. We improved our transit times from 1 to 3 days for 90% of our customers. So it's a fantastic outcome for us.

And so was this problem something that was just for us? Or was that for everybody doing?

The problem is industry-wide. So there's still a lot of companies out there that have increased costs as a result of USPS pulling away from what they call consolidators like FedEx, UPS and other last mile networks. So as part of our negotiation with Amazon and partnership with Amazon, we've been able to agree with them that under the BARK umbrella, we'll be able to work with select companies or customers that we see have the similar issue. So like costs for last mile have increased 30%, 40% since last year. So it's an industry-wide issue.

And is this something that we're already doing or something that we're planning to do?

It's already up and running, implemented and running very, very well.

So the BARK product is now coming on an Amazon truck?

It's coming on an Amazon truck, yes. And it's coming 7 days a week, which is a great improvement for our customers. Amazon uniquely delivers on a Sunday, which is -- is a big win. Like I said, our on-time delivery has improved. The overall speed of our network has gone from 1 to 3 days depending on metro, non-metro. So it's a significant faster service than what we've experienced before.

And historically, we see a lot of causation between when or how quickly our packages are delivered and how consistently they are to customer retention. So this should be a revenue driver as well as a cost savings.

So is this a little bit way to think about it is in the same way that Amazon kind of made available some of the infrastructure with AWS. They're now making some of their infrastructure and last mile delivery.

Yes. It's exactly. So Amazon has built and continue to build this fantastic network across the United States, sort centers, delivery stations, employing people locally to deliver to households across the U.S. And Amazon is uniquely positioned as a network that delivers the houses, like it wants D2C traffic, its own or others in this case. As opposed to UPS, FedEx, they're pretty much B2B. And if you look at some of their strategies, D2C or delivering to households is not really their core business at all and something that they struggled with over the last 10 years that I've dealt with them directly.

The prices fluctuate like every couple of years. You get into agreement, your volume is really important. We ourselves were locked into some long-term agreements with some of these last mile carriers. The market shifts a small bit, their strategy shifts and they start to pull away from D2C. So I'm fairly confident with this partnership with Amazon, like we are putting our volume and our customer promise in with a company that has a network that's nationwide and growing and is dedicated to D2C. So it's a lot stronger for us.

So delivering faster, more days a week for cheaper. What's the catch?

There isn't much -- sometimes we have to realize in BARK that we're shipping over 1.1 million packages per month. We're fairly consistent. Our boxes or poly bags are the same dimensions, pretty much the same weight. It's the same days a week that we ship every month. So like our volume in the network like that is absolutely perfect because they can plan all of their utilization of their trucks, their vans fantastically with our type of volume. So we leverage that, obviously, our strengths when working with Amazon, understanding what they want to try to achieve and what it is that we want to try to achieve both with our own BARK customers and in the future with other customers that we look to serve.

It was a perfect fit. It wasn't an easy negotiation, as you can imagine, Henrik, I'd like to negotiate, but it was a good exercise. It was 2 companies that share the same goals coming together. We're quite a significant shipper, not to the same scale as Amazon, but the volumes that we ship are quite impressive. And yes, we got to a deal that I think is really, really good.

And do you think it's too early to talk a little bit about this idea that we'll be helping companies like us getting on this network?

I don't think so. And we're helping companies across their supply chain, not just with last mile, but last mile is significant. But if you think about the problems that supply chains have had over the last couple of years and will continue to have, on tariffs and the inbound and where to source products, how to change factories, how to get it into the country on a reliable transit times. Ocean freight has been a big problem for a number of companies. We have had our own problems with it. Again that guaranteed capacity at a reasonable price, customs clearance, tariffs again, like how to manage those the best way.

Fulfillment, East Coast, West Coast, we take it for granted, obviously, with the size of our network that, that's obvious, but it's not an option for a lot of companies. And then ultimately, the last mile, which tends to be the most expensive part of the supply chain journey, getting a good network, a good network partner, and it's not just the execution of delivery, it's the management of Amazon or other partners that you probably need, have been able to coordinate and orchestrate that whole supply chain. It's very costly and it's changing constantly. So what we believe very strongly in that we're developing and continuously developing strong supply chain. So been able to work with companies to help them navigate that is quite significant. We can save costs.

What we've seen over the past 3 to 4 years in our business, too, is that our gross margin and well, our cost of goods and our shipping and fulfillment costs have improved by about or maybe over 900 basis points over that time frame. I don't think coincidental since James joined the company. And so without those, BARK doesn't exist without those improvements over that period of time, we don't exist today.

And then you add on the challenge of tariffs, changes with the postal service, all the fun that can be delivered in 1 year to sustain that, push through all of those headwinds and still come out the other side, running towards EBITDA positive for the -- hopefully, for the second year in a row. That's -- for us, it's the difference between we're here or we're not here. And so we're here and now we're EBITDA positive. And James and his team can make that possible for other companies who are facing similar struggles.

That's awesome.

In addition, we've got one more kicker here with the Amazon relationship. Just one more thing.

And if you buy now, there's also...

One more thing. Just because of the strength of the relationship here, we've also -- I don't think it's 100% transitioned, but we've transitioned quite a bit to being an Amazon first-party seller instead of third party, meaning instead of selling through their marketplace, they act more as a retailer, us as a wholesaler, and they take responsibility for selling the products on their platform instead of us taking that responsibility, which is a big change and a significant, I'd say, improvement or deepening of our relationship.