Blue Apron Needs to Find a Way to Grow While Still Axing Spending

 | Aug 11, 2017 | 10:32 PM EDT
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As Blue Apron Holdings Inc. (APRN) trades about 50% below its $10 late-June IPO price following a dispiriting Q2 report, the online meal-delivery provider is facing some hard questions about how much damage the company's attempts to get its sizable losses in check will do to its top line. And these questions, in turn, are tied to what's arguably a more fundamental question about how large the addressable market is for the kind of service Blue Apron can provide in light of its cost structure.

Blue Apron plunged earlier this week after reporting Q2 revenue of $238.1 million (up 18% annually) and GAAP EPS of negative $0.47. With the caveat that analysts tend to be conservative with their estimates for a company's first post-IPO earnings report, revenue beat a $235.8 million consensus estimate. EPS, however, missed a negative $0.47 consensus.

Perhaps more importantly, Blue Apron guided on its earnings call for second-half revenue of $380 million to $400 million, well below a pre-earnings consensus of $525 million. At the midpoint of Blue Apron's guidance range, revenue is expected to drop 19% sequentially and 7% annually.

The company also forecast a second-half net loss of $121 million to $128 million after factoring $26 million to $28 million in one-time costs. That's higher than the $83.8 million net loss recorded during the first half of the year.

As it is, annual revenue growth slowed to 18% in Q2 from Q1's 42%, and on a sequential basis, sales actually fell 3%. This stemmed from a 9% sequential drop in paying customers to 943,000, partly offset by $1.58 increase in average order value to $58.81 and a slight increase in orders per customer to 4.3. Due to the last two factors, average revenue per customer grew by $15, to $251.

Margin pressure contributed to Blue Apron's larger-than-expected loss: Gross margin fell to 31.3% from 36.9% a year ago. So did an 86% increase in product, technology and G&A expenses to $65.7 million, driven by aggressive hiring and fulfillment center buildouts, and to a lesser extent a $3.6 million increase in depreciation and amortization expenses.

These factors easily offset Blue Apron's attempts to rein in its heavy use of ad spending to land new customers: Marketing spend fell 43% sequentially to $34.5 million. It was still up 8% annually and equal to 14.5% of revenue.

Clearly, Blue Apron's attempts to pare its ad spend are taking a toll on its customer adds. Which, together with seasonal factors (demand for delivered meal kits is stronger when it's cold outside) and the kind of churn one would expect for a service that typically charges $60 to $144 for a set of weekly meals that buyers still have to prepare at home, led to a noticeable drop in paying customers.

And though it's possible the company is being a little conservative with its guidance, that customer decline appears set to continue during the back half of the year. Aside from lower marketing spend, Blue Apron claims "unexpected complexities" related to the opening of its new Linden, NJ fulfillment center are hurting near-term sales, both by slowing the pace at which it rolls out new meal-kit offerings -- the company is looking to address a wider variety of eating preferences, and expand its recently-launched lineup of meals taking only 30 minutes to make -- as well as the rate at which it's able to deliver meals on time in full (OTIF). The latter issue, management candidly admits, is impacting order rates and customer retention.

One also has to wonder if Blue Apron's operational cost-cutting is an issue. Last week, the company disclosed it's shuttering a Jersey City, N.J., facility and giving employees the option to transfer to the Linden facility. About 470 workers aren't expected to make the move.

The good news: Blue Apron, for all its challenges, does seem to have a core base of customers who find its meal kits an effective and convenient alternative to buying all of the items one needs for a meal from a grocery store. For certain relatively well-off, time-constrained consumers who enjoy cooking at home, the company's meal plans get the job done. And from all signs, Blue Apron remains much more popular among such consumers than rival services such as HelloFresh and Plated.

The bad news: This addressable market is looking markedly smaller than it did in 2015, when Blue Apron was valued at $2 billion (more than twice what it's worth right now) in a private funding round, and perhaps even relative to early 2017. At least when the company's cost structure typically requires customers to subscribe to meal plans providing either 2 or 3 two-person meals or 2 or 4 four-person meals (users can "skip" a given week, but have to manually do so).

If Blue Apron was able to sell its meal kits on an a la carte basis, its customer base would likely be much larger, and its churn much lower. But the company's large fixed costs and still-large customer acquisition costs don't make that a viable option right now. As a result, lower marketing spend and operational cost-cutting aren't doing much to improve profitability for the time being, as the lower spending is is leading to lower revenue.

Over the long run, one also has to wonder if rivals able to leverage the infrastructures they've built up to handle online and/or offline food sales will be able to undercut Blue Apron's pricing. Such rivals also might find it easier to sell meal kits on an a la carte basis, in the event that they're being shipped in tandem with other items. Inc. (AMZN) , due to buy Whole Foods Market Inc. (WFM) , is one obviously possibility here. Online grocery delivery startup Instacart, which has partnerships with several big grocery chains, is another.

But such longer-term concerns aren't why shares have tumbled to $5 since the IPO. Until Blue Apron can show that new meal offerings and a more efficient infrastructure can allow its customer count to start growing again in spite of a lower cost base, questions about the underlying health of its business model are likely to keep shares depressed. And while it's conceivable that the company could pull this off, it certainly won't happen overnight.



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