Turnaround Letter Buy-rated Blue Apron (APRN) reported first quarter 2019 results, where it delivered on its goal of achieving positive EBITDA. This is an important step in the right direction. Not only did the company show an ability to meet its promises but also that it can produce a cash operating profit while nearly all other competitors have not. The company reiterated its guidance for positive Adjusted EBITDA for the full year.
To continue its turnaround, Blue Apron is concentrating its marketing efforts on high-value repeat customers. New CEO Linda Kozlowski brings much-needed marketing expertise to help Blue Apron produce more revenues, after the company’s highly-inefficient cost structure was brought under control by former CEO Brad Dickerson.
Blue Apron’s revenue decline of 28% reflect both a natural run-off of shorter-term customers as well as fewer new subscribers as the company cut its marketing spending. A key component of its turnaround is to concentrate on “high-affinity clients” – those who will are or will become regular and frequent buyers. This group leans toward high-earning, relatively young and professionals.
We think this is the right strategy, while we also recognize that the company is experimenting in a relatively new industry. The pricing, product mix, distribution channels and other variables have not yet been completely figured out. Blue Apron is probably at the leading edge of the industry along with its rival Hello Fresh.
We think CEO Kozlowski’s prepared remarks of her goal to “establish a customer-centric strategy” explained the situation well. Its prior strategy was scattershot… advertising everywhere to get as many new customers as possible, and then scrambling, regardless of cost, to deliver meal kits to them. Its marketing costs were inflated to keep generating a steady stream of (low-quality) customers, and its cost of goods and its operating costs were high as it had an inefficient approach to fulfilling the demand.
To reverse the company’s decline, Blue Apron is working both ends of this problem. It is slashing marketing spending (down 64% from a year ago) as most of these dollars attracted short-term customers that it doesn’t really want. It has invested in more efficient distribution (its New Jersey facility), greatly reducing its kit assembly and other costs. The cost of goods sold has fallen by nearly 20 percentage points in the past 18 months, to a record-low 58.3% of revenues. And, it has pruned its Product, Technology, General and Administrative costs by 21% to free up dollars for more productive uses.
The most visible effect of this new strategy has been the 28% decline in revenues. Yet, favorably, essentially all of this was due to fewer customers (down 30%). Other metrics, including average number of orders per customer (4.5/month) and average order value ($57.15) improved, however modestly. We want to see these metrics continue to improve, which would indicate more success in attracting higher-value customers.
We think new CEO Kozlowski (former Chief Operating Officer of Etsy) will bring considerably stronger expertise to help Blue Apron boost its revenues. She will likely expand the company’s appeal through current channels (internet, Weight Watchers, Jet.com, Costco and others) as well as develop on-demand (order by noon, receive by 4pm-6pm) and find new channels.
Key Risks
The largest risk is that Blue Apron’s revenues continue to decline, either because industry demand weakens or because Blue Apron is unable to capture or gain market share. Given their management team, we think they will maintain/gain market share, but will still remain directly exposed to the unpredictable nature of this very new industry.
The company’s limited disclosures on its performance indicators leaves outside investors like us guessing about the depth of its issues and its turnaround progress. We’d like to see more information on new customers, churn rates and customer acquisition costs, for starters.
Blue Apron’s recent CAPEX was only $1 million. That is probably an unsustainably low number. Expect it to grow, at least a little bit, in the quarters to come.
Prospects encouraging
Blue Apron is making real progress. Turning a cash operating profit and generating positive cash flows was a critical first step. We remain confident in the company’s ability to reverse the revenue declines, although this might take at least several more quarters. New CEO Kozlowski is likely up to the task.
We continue to rate Blue Apron (APRN) shares a BUY with a price target of $2.
Disclosure Note: An employee of the Publisher owns APRN shares.