On Thursday, Stocks Under 10's trading position in Blue Apron (APRN) came under pressure following an article at MarketWatch.com that attempted to poke holes in Blue Apron's comments that on its Jan. 31 earnings conference call it, "plans to reaffirm confidence in achieving profitability on an adjusted EBITDA basis, both in the first quarter of 2019 and for full year 2019, as it actively pursues the appropriate strategies to create value for its stakeholders."
The article centers on "adjusted EBITDA," which focuses on the operating prospects and cash flow generation of the business. For those less than familiar with EBITDA, it's short for earnings before interest, tax, depreciation and amortization, or a company's operating income plus its depreciation and amortization.
The heart of the issue is the stink the article makes over Blue Apron reporting adjusted EBITDA rather than just GAAP EBTIDA. If we canvas quarterly financial reporting, we quickly find that Blue Apron isn't the only company that shares this metric and excludes stock-based compensation. Fitbit (FIT) does it, the latest earnings report from Delta Air Lines (DAL) included both GAAP and adjusted metrics for pre-tax income and net income, as did the one from Alcoa (AA) . Frankly most CFOs will give you an earful about just how flawed GAAP reporting is when it comes to giving an accurate picture of their business.
The reason we added APRN shares to the Stocks Under $10 portfolio was the positive potential to be had from its late-December partnership with WW WW, formerly Weight Watchers, and what it would mean directionally for 2019 revenue and EPS expectations. As the company shared earlier this week, it is seeing "favorable consumer response... to its exclusive direct-to-consumer national partnership with WW, launched at the end of December, which has experienced higher-than-expected demand to date."
The bottom line is there is no "smoking gun" to be found in a company using EBITDA to discuss its performance, as this is a common practice.
Wall Street and the investment community use adjusted financial metrics to remove non-cash charges, such as stock-based compensation, and non-recurring items in order to get a clearer picture of a company's true operating performance.
Is Blue Apron a stand out for offering such metrics? No, but if Blue Apron is guilty, then so are a number of other companies in and out of the S&P 500.
-- Chris Versace and Stephen "Sarge" Guilfoyle are co-portfolio managers of Stocks Under $10