Turnaround Letter Buy-recommended Blue Apron (NYSE:APRN) reported a much-smaller 4Q18 Adjusted EBITDA loss. Their turnaround strategy of focusing on high-value customers, as well as launching new initiatives, combined with aggressive cost-cutting, is showing meaningful progress. This boosts our confidence in their guidance for achieving positive Adjusted EBITDA in 1Q19 and for the full year.
Blue Apron’s fourth quarter net loss of ($23.7) million, or ($0.12)/share, was considerably smaller than the ($39.1) million, or ($0.20)/share, net loss a year ago.
Net revenues declined 25% from last year’s fourth quarter.
Adjusted EBITDA, a measure of cash operating earnings, improved to a ($7.8) million loss, much smaller than the ($19.7) million loss a year ago. We consider Adjusted EBITDA to be the best measure of the company’s progress with its turnaround.
For the full year, revenues of $668 million fell 24%, while the Adjusted EBITDA loss of ($61.4) million was much smaller than the ($137.9) million loss for the full-year 2017.
Compared to consensus, revenues were slightly better while earnings were sharply stronger.
APRN shares closed at $1.52 today, up 49% year-to-date.
Blue Apron’s turnaround is making meaningful progress
The revenue declines were driven by the 25% lower number of customers. Management’s strategy of focusing on higher-value customers, at the expense of reducing the number of lower-value customers, appears to be working. Other metrics, including average order value, number of orders per customer and average revenue per customer, were either steady or improved. This is encouraging, particularly as spending on marketing has declined steadily over the past several quarters. Blue Apron is spending its cash better. For 2019, the company will likely continue to see falling revenues and customer numbers, but we think they will stabilize sometime in 2020, with a smaller but higher-value customer base.
New initiatives, including its partnership with Weight Watchers, its Knick Knack product (currently sold through Jet.com) that includes all the proprietary ingredients and directions except the protein which the customer buys at their local store, as well as their on-going Costco program, are helping Blue Apron move into additional channels beyond direct-to-consumer.
The Knick Knack product could be really interesting as it sells for $7.99 for two servings, a relative bargain for essentially a turn-key but shelf-stable meal kit. Blue Apron said its gross margin for this product would be similar to its overall company gross margin.
Gross margins increased to 39.2% from only 29.9% a year ago. The cost reductions produced by the new Linden, New Jersey facility, along with better labor and cost management, are driving this vast improvement. For perspective, the better margins added over $13 million in gross profits in the fourth quarter and could add potentially $50 million or more over the course of a year.
The Product, technology, general and administrative expenses declined by $7.9 million, or 15%, while other expenses fell by about $4.5 million.
Adjusted EBITDA profits (the key to the turnaround) are looking much better
These improvements have led to a much-improved Adjusted EBITDA, which boosts our confidence that Blue Apron can achieve its guidance of a positive Adjusted EBITDA (of $2 million to $5 million) in the first quarter 2019 and for the full year. With positive Adjusted EBITDA profits and essentially no taxes, the company becomes much more financially viable. We estimate that with $20 million in annual Adjusted EBITDA, the company can begin to whittle away at its debt burden and reduce its $9 million in interest payments this year.
Fourth quarter capital spending of only $1.9 million helped preserve cash. For the full year, capital spending of $13.8 million was sharply lower than the full year 2017 spending of $96.7 million. With the Linden facility completed, 2019’s spending is likely to remain subdued.
Debt of $82.6 million was 33% lower than a year ago, although its cash balance declined to $96 million from $229 million. The company renegotiated its credit facility, extending its maturity to 2021. Although the interest cost increased by 2 percentage points, the new terms provide critical financial flexibility.
Many competitors have gone out of business
The financial media believe this bodes poorly for Blue Apron. We see it as exactly the opposite. What could be better than seeing your competitors collapse? Blue Apron is becoming financially sustainable – something that its weaker competitors have failed to do. This is very good for Blue Apron.
We continue to rate shares of Blue Apron (NYSE: APRN) a BUY up to 2.
Disclosure Note: An employee of the Publisher owns APRN shares.