Blue Apron Holdings, Inc.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Good morning. Welcome to the Blue Apron Holdings’ Fourth Quarter 2020 Earnings Conference Call and Webcast. As a reminder, this call is being recorded, Thursday, February 18, 2021, for replay purposes. A slide presentation has been created to accompany today's remarks and can be accessed on the Blue Apron Investor Relations website. On this morning's call, we have Linda Findley Kozlowski, Chief Executive Officer of Blue Apron; and Randy Greben, Chief Financial Officer. Before handing the call over to the company, we will view the safe harbor statement. Various statements that the company makes during today's call about its future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of risks and other factors, including those described in the company's earnings release issued this morning and the company’s SEC filings.
- Linda Findley Kozlowski:
- Thank you, Kate. Good morning, everyone. And thank you for joining us today. Since it's my first chance to speak with most of you this year, I'll start by wishing everyone a Happy New Year and express my hope that you are all staying safe and healthy. We're coming up on nearly a year of dealing with the tremendous challenges of the global pandemic that upended so much of our daily routines and experiences we likely took for granted. I am hopeful that progress towards a safer and healthier new normal will continue so that friends, families, colleagues and investors can come together again and interact with each other in-person around the dining table, and at conferences and other meetings later this year. Before diving into our fourth quarter results, I'd like to introduce Randy Greben, who joined us as Chief Financial Officer in early January. Randy brings more than 20 years of finance, e-commerce, direct-to-consumer and food industry experience, as well as a track record of implementing strategies to drive scale. Randy's skill set is aligned with our near- and long-term objectives and we couldn't be more excited to have him on Board. You'll hear from him in just a few minutes and I'm sure many of you will have a chance to speak with him at length soon. I'll also take this opportunity to highlight that Charlean Gmunder joined us as our Chief Operating Officer in late November. Her background and experience of more than 30 years in food operations including food manufacturing and fulfilment are an excellent complement to Blue Apron’s, leadership and operations teams. She has a broad set of responsibilities, including oversight of our fulfilment, supply chain logistics, food safety and quality assurance, physical operations, and customer experience teams.
- Randy Greben:
- Thank you, and good morning, everyone. It's great to be speaking with you for the first time since joining Blue Apron in January. As highlighted in this morning's release, our fourth quarter results were ahead of the guidance we provided. When you look at the year-over-year comparison, it is clear our return to growth strategy is continuing to move the ball forward. Net revenue in the fourth quarter of 2020 rose more than 22% year-over-year to $115.5 million, which was ahead of the upper end of our guidance range of $112 million and represented our third consecutive quarter of double digit year-over-year net revenue growth. As stated in our third earnings call, our fourth quarter guidance had assumed that we would recover up to $2 million related to credits issued in connection with a voluntary supplier recall of onions from the third quarter. Had we recovered that in the fourth quarter, it would have had up to $2 million of additional positive impact on both the top and bottom line. Fourth quarter meal kits demand was driven by our more expensive menu offerings. The continuation of our celebrity chef partnerships including a successful program with Chef Edouardo Jordan and the continued rollout of new products such as our customization initiative. As Linda noted, product innovation is a key priority for Blue Apron. And even as we rolled out more new product innovations in 2020 than ever before, we expect to launch additional new products in 2021, which will be supported with significantly higher marketing spend. We believe that these efforts will drive future demand. When Blue Apron reported third quarter results, management highlighted some anticipated impacts to the fourth quarter demand as a result of ongoing labor availability challenges. As a result, we did not lean as heavily into marketing as we otherwise would have. That said, we modestly stepped up our marketing investment with fourth quarter spend of $12.5 million or 10.8% of net revenue, compared to $10.9 million or 9.7% of net revenue in the third quarter of 2020. We believe we are well positioned with the right equipment facilities, supply chain, and food safety protocols in place to support higher demand. And in the fourth quarter, we continue to execute operational efficiency products and other initiatives such as supplier pre-packaging of certain ingredients, which ultimately led to reducing labor hours and improved capacity. In addition, we temporarily reopened our Arlington, Texas facility this quarter to enable us to leverage existing assets while we continue to identify and implement other operating efficiencies. We expect our progress with efficiency and capacity initiatives will allow us to meet forecasted demand in the first quarter and full year even if some of the pandemic driven challenges persist. We believe we are positioned to execute on the critical parts of our growth initiatives, focused squarely on driving demand, including the increased investment in product innovation and increased investment in marketing as I noted earlier. Turning now to a review of our key customer metrics, which continue to reflect the benefit from our focus on customer engagement and retention. We had 353,000 customers in the fourth quarter of 2020, up from 351,000 in last year's fourth quarter and down slightly from the third quarter, largely reflecting our decision to manage demand given the capacity constraints we've discussed. Orders per customer of 5.3 remained at improved levels and were up more than 15% year-over-year. Orders per customer continue to track around our highest levels over the last five years. Average order value was a record $61 compared to $58 in the fourth quarter of 2019. Average revenue per customer was more than $300 for the third consecutive quarter rising 22% year-over-year for the second consecutive quarter to $327 and marking our second highest quarter ever. Reflecting our operating momentum the last three quarters have been the only time Blue Apron has recorded the average revenue per customer of more than $300 since prior to 2015. On the cost side, cost of goods sold excluding depreciation and amortization as a percentage of net revenue improved year-over-year by 40 basis points to 60.6%. Our variable margin was 39.4% in the fourth quarter of 2020 compared to 39% even in the fourth quarter of 2019. The improvement in COGS and variable margin as a percentage of net revenue largely reflects our continued focused on cost efficiency, which more than offset the frontline wage and bonus investments we've made in our fulfillment centers since the beginning of the pandemic. Our focused on cost discipline is also evident in products technology and G&A costs with PTG&A as a percentage of net revenue declining 550 basis points to 31.9%. On the bottom line, we reported a net loss of $11.9 million, which compares favorably to our guidance for a net loss of no more than $15 million. Adjusted EBITDA loss was $1.7 million, a favorable comparison to our guidance for adjusted EBITDA loss of $5 million and an 80% year-over-year improvement. For the full year 2020, net loss and adjusted EBITDA improved to 24% and 88% to losses of $46.2 million and $1 million respectively, demonstrating our ability to manage costs throughout the organization and maintain efficiencies in our fulfillment center network. We recorded negative operating cash flow and free cash flow of $1.3 million and $2.5 million respectively. These metrics demonstrate significant improvements of roughly $10 million each compared to last year's fourth quarter. As detailed on our third quarter conference call, we strengthened our balance sheet and improved our financial flexibility in 2020. At December 31, 2020, we had cash and cash equivalents of $44.1 million and $34.1 million in total outstanding borrowings under the senior secured term loan of which $30.6 million was classified as long-term debt and $3.5 million was classified as the current portion of long-term debt. As such, we remain confident that we have positioned Blue Apron to better compete in the marketplace, and we continue to believe we have the necessary capital resources to drive the profitable growth. Turning to our financial outlook for the first quarter. Let me first share some assumptions. Our guidance assumes both the consistent benefit to our business from the execution of our strategic growth initiatives and ongoing operational improvements, as well as continued higher levels of demand as a result of changes in consumer behavior and our plan increases in marketing initiatives and spending. Further, our guidance assumes that we will not experience any unforeseen significant disruptions in our fulfillment center operations or supply chain as a result of the pandemic or otherwise. In addition, because the timing of the onion recall recovery remains uncertain, we are not assuming recovery of $2 million of credits in our first quarter outlook. Reflecting these factors and assumptions, we expect first quarter net revenue will increase year-over-year by approximately 23% to 27% to approximately $125 million to $129 million, which would be our fourth consecutive quarter of double digit year-over-year revenue growth. This growth is expected to reflect a year-over-year and quarterly sequential increase in customers driven in part by the significant increase in marketing investment we have planned for the first quarter. We expect to incur a net loss of no more than $16 million in the first quarter and an adjusted EBITDA loss of no more than $6 million. Looking forward to the full year 2021, we expect to achieve double digit net revenue growth. For easy reference, a reconciliation table from net loss to adjusted EBITDA is included in our earnings release, which has been posted on Blue Apron's investor relations website. Linda and I will now take your questions.
- Operator:
- We will now begin the question-and-answer session. Our first question is from Maria Ripps from Canaccord. Go ahead.
- Maria Ripps:
- Good morning. And Randy congrats on joining the company. Thanks for taking the questions. So first, as we look at your 2021 projected revenue growth, any color you can add around how to think about customer growth versus highest spend per customer? And I guess related to that, can you share your view on how your marketing spend may play out outside of Q1 and for the balance of the year? And then I have a quick follow up.
- Linda Findley Kozlowski:
- Sure. I'll start that question. And if Randy wants to add to it, he certainly can. We are not specifically disclosing some of those spend lever. However, what we have said is that we are going to continue to lean into marketing in Q1 based on our planned investments that we stated last year and this quarter as we added more liquidity to the company through the equity offering last year. So this is primarily to invest in customers. And so, we plan to invest in long-term strategic growth where we can make sure that we can maintain our customer growth in a healthy manner on a long-term basis. So I can't give more guidance than that. But what I can say is we plan to continue to lean into investment as appropriate by quarter, but maintaining significantly efficient paybacks as we have always done. And we stated previously that it would be within a year of payback and we had seen acceleration in that payback and we intend to continue to see that that same acceleration. Randy, anything do you want to add.
- Maria Ripps:
- Yes, thank you.
- Randy Greben:
- Yes, the only thing that I'd add is just to double down on the last point that you made Linda, which is we remain extremely diligence about ensuring that our marketing paybacks are efficient and effective, and it's something that we continue to monitor always. Beyond that nothing else to add. Thank you.
- Maria Ripps:
- Thank you. That's very helpful. And then, can you maybe talk about your fulfillment capacity and how long do you expect to utilize the Arlington facility and maybe more broadly what's your sort of high level view on where your fulfillment capacity. And do you see a need to expand your capacity ahead of expected demand? And then can you just maybe talk for a minute about some of the steps you have taken to increase labor availability?
- Linda Findley Kozlowski:
- Sure. I'll try to, and if I miss any of those, please remind me Maria, as I'm going through. But we've taken several steps in order to increase capacity. And as we've discussed before, we wanted to make sure that we're not just thinking about the immediate term, but thinking about long-term efficiencies that we can build into our operations in order to build ahead of capacity going forward or ahead of demand going forward. Plus of course, the more efficient that we get the better we can not only continue to scale, but continue to invest in the growth of the business as we move the business forward. So a few things that we've done specifically is establishing better packing process across our lines to save labor there. We've adjusted the distribution of labor in our facilities to make sure that we're best utilizing our labor across our kitchen and our pack operations. Better use of our equipment as you know, we are a very automated facility and we have a lot of fantastic automation equipment that helps us be a lot more efficient. And now we're better utilizing that equipment. And then also using some of our strategic supplier relationships to pre-pack certain ingredients where we have an advantage to having those pre-packed with the same level of quality that we would hold ourselves to as far as our high standards but be able to more efficiently use labor. So those are just a few of the things that we've actually done. And we are seeing that result in a much more efficient use of our labor that while we still continue to hire additional labor, we also can scale capacity while we're building in that complexity for our new product initiatives all at the same time. So we're very confident in all of those different areas around the fulfillment center. We are looking ahead and making sure that we can always continue to scale above and beyond the demand that we have in place, because we do want to be prepared for those new products initiatives and the investment in marketing, of course as we continue to accelerate that throughout the year as well. I'm not sure if I missed any of your questions. I apologize, but feel free if, because I know you had several there Maria. Did I miss anything?
- Maria Ripps:
- Yes, that's very helpful. And just to click on for how long do you expect Arlington facility to stay open?
- Linda Findley Kozlowski:
- Got it. So we're basically looking at that on an ongoing basis to see what makes the most sense with the combination of both consumer demand and also of course, making sure that we have redundancy and capabilities as we continue to ramp up some of these new product initiatives. So we don't have an official date to say yet. But we continue to monitor that on an ongoing basis.
- Maria Ripps:
- Got it. That's very helpful Linda. Thank you so much for the color.
- Linda Findley Kozlowski:
- Thanks so much, Maria.
- Operator:
- Our next question is from Matt from Morgan Stanley. Go ahead.
- Unidentified Analyst:
- Thanks for taking the question. I have two if I may. You guided to double digit percent revenue growth in 2021. Can you talk a little bit more about one or two of the key factors that gives you confidence in the sustainability of this growth trend as we emerged from COVID? And then second, can you provide context around the evolution of customer churn as you've increased optionality for the consumer? Thanks.
- Linda Findley Kozlowski:
- Sure. So I will start on that and again, Randy can add any additional color. So first let me start on the comments about sustaining growth. And again, we've said this time and time again, that we have always been focused on building sustainable growth for the company, not just short-term growth. And a big part of that goes back to what we were talking about with the product initiatives that we're putting into place. The product innovation and the acceleration the fact that we were able to still introduce more products in 2020 than we had in any previous year even during pandemic time. Also adding to that, the fact that there were several products that we did have on the roadmap that we had pushed to 2021, in addition to new product innovations that we're going to do in 2021 is really the competitive advantage that we're looking at going forward. So specifically we feel strongly that the customer roadmap and the innovation roadmap that we put into place has been designed to both increase the engagement and retention of our existing customers, as well as our attractiveness in it. And the ability to recruit new customers on top of that more efficient marketing programs that we have put in place. So in addition to the external factors that say, people are going to continue to cook at home in larger numbers beyond to the pandemic, we're really more focused on what are we doing structurally with our product and with our marketing programs to make sure that we can more efficiently attract and retain customers going forward. And so we're confident in that roadmap, we've already seen results from the initiatives that we've put in place so far. And we expect to continue to see results going forward. On the customer churn question, we don't currently discuss any of our customer churn numbers. What I will say is we have specific programs in place for 2021 to make sure that we are both growing and retaining our customer base. Randy, anything you want to add to that?
- Randy Greben:
- The only thing that I would add on the last point is while we will not disclose our churn numbers, you can see real evidence in the quarterly results that we just announced around the effectiveness of some of the things that we've been doing as measured by things like increase in orders per customer and average orders per customer. Those are indicative of the company's ability and focus on decreasing churn and driving more benefits to our existing customers.
- Linda Findley Kozlowski:
- Yes. And just one added little point on top of Randy's. And again, just to reiterate, we are seeing significant increase in those customer metrics including our record AOV number that we saw in Q4.
- Unidentified Analyst:
- Great. Thank you very much.
- Linda Findley Kozlowski:
- Thank you.
- Operator:
- Our next question is from Ari Cole with Cole Capital . Go ahead.
- Unidentified Analyst:
- Thank you very much. Linda, a happy New Year to you as well, and your fellow colleagues. And glad to see that all your hard work improving operations internally at Blue Apron are beginning to show good signs of continued improvement. Question number one, just in terms of market size opportunities, clearly, you are kind of in the in the meal kit and the meal prep portion of the market. If you look at the entire online meal delivery market as a whole, could you give us a sense for how large each of the segments are? So you're kind of in meal prep, there's also other portions, one might call oven-ready or ready-to-heat and you may want to have one or two other categories. But I'm trying to get a sense for how large the category you focus on right now is relative to some of the other categories where you don't have offerings today?
- Linda Findley Kozlowski:
- Sure, I can give you a little bit of context there. I think probably, we'd have to dig into some of the numbers about some of the categories above and beyond as we have further calls. And by the way, happy New Year to you as well, it's great to talk to you. So specifically, though, I want to go back to what we had previously stated about our total addressable market. And I think it's interesting because what we're seeing is that market is of course, expanding. We had originally stated that we feel like the addressable market is around the $8 billion to $9 billion range that we could specifically address at this time, meaning what we had the opportunity to do within meal kits. And that was based on looking at the overall market size for online grocery delivery, et cetera. And assuming this was about a year and a half ago, assuming a fairly rapid growth in online grocery spend. Now, of course, what we're seeing is an acceleration in online grocery spend, which we still see as a leading indicator. And actually, we are in the process of looking at how we can identify those expansion opportunities as they impact the $8 billion to $9 billion that we first saw as far as the potential addressable market for the meal kit industry. I can't quite speak yet to the market opportunity beyond that, except to repeat that we are looking at a lot of product initiatives this year that do expand into other meal locations. And we will be continuing to update on how we see those markets playing out throughout the year.
- Unidentified Analyst:
- Great, thank you. And then an operational question regarding the meal customization. Meal customization, I know was rolled out during the fourth quarter, so only some of your customers haven't the beginning of the quarter. On average for the December quarter what portion of your 350,000 odd customers had access to meal customization, the full quarter. And then the second question is operationally how accurate has been, I guess, your fill rate and other things for the customization? Because I know it's difficult to do and difficult to get 100% accuracy when someone asks for shrimp versus chicken, but just trying to get a sense for how well you are doing that.
- Linda Findley Kozlowski:
- Yes, so I think part of the reason that we did the sort of staged rollout of and of course, I think, this is standard practice of this actual program is to make sure that we were accounting for any concerns or issues we might have in the process, and getting the fulfilment center operation smoothly ramping up into that. We actually very quickly went to a national rollout in Q4. So, a good portion of Q4 saw full national availability of customization for our customers, because we started some of the pilot rollout, actually in Q3. And so, we did have pretty broad availability. Although I will say that we are continuing to add customization, particularly on the areas of protein swaps, and the ability to – add availability to additional vegetables, et cetera, in the swap. But we did get to 100% availability in December. We are not actually talking about the attach rates, specifically to those customizations, but we did have 100% of customers be able to access those customizations. And we're getting very, very positive customer feedback, and response and attachments from those. Again, continuing to add more in Q1 and throughout the year, because we do think that this is an advantage for people who are looking to either bulk up their meals, particularly for our family customers and – sorry for key customers who are looking to expand and add more food; and/or people who are trying to manage specific dietary restrictions; and/or taste preferences in their households. So, it's going quite well, and we are continuing to see success with it.
- Unidentified Analyst:
- Okay, thank you. Just one last question that’s marketing related. I've been a customer for a long time. But my question is for people who are not customers today, how do you more effectively convince or persuade them before they have become a trial customer, that your solution really is better for them versus others? Because when you go on the Internet, and you type in meal kit, and you read reviews, it becomes a little overwhelming as a consumer to see 10, 15 choices where the where the reviewers say they are all pretty good. So, the question really is when you are marketing to a prospect, how do you more effectively persuade them at Blue Apron today really is a very, very good solution for them versus the other competitors?
- Linda Findley Kozlowski:
- It's a great question Ari . And as you know and as we've said before, we do significant brands research twice per year, and continue to be the number one recognized brand in the space. And so, our big priority at this point is building off of that and looking at those purchase-intent drivers that match with the differentiators for Blue Apron, including the fact that people are really appreciating the discovery aspects of new ingredients and new techniques, appreciate the quality and the high animal welfare standards, as well as high quality standards of our produce. And the quality and flavor of our recipes, which really sort of go beyond your average meal, but continue to get simpler, and easier to prepare, and easier to clean up from but aren't sacrificing any of that flavor. And this ties in very closely with our wellness program as well, which is really designed to maintain all of those great things Blue Apron is known for, but help you enjoy a well-rounded, healthier lifestyle that does not necessarily sacrifice or involve restrictions in that process. So, we're working very hard to make sure that we're bringing those messages forward more clearly, and continuing to enhance our targeting, and our efficiencies in reaching those audiences so that they know the advantages of Blue Apron, even before they get their first box.
- Unidentified Analyst:
- Great, thank you. Best of luck going forward.
- Linda Findley Kozlowski:
- Thanks so much Ari.
- Operator:
- This concludes our question-and-answer session. I would now like to turn the conference back over to Linda Findley Kozlowski for closing remarks.
- Linda Findley Kozlowski:
- Thank you very much, and we really appreciate everyone's time on the call. On behalf of everyone at Blue Apron, we want to wish you your families, colleagues and friends well, and let you know that our teams are working diligently and effectively to bring incredible home cooking into people's homes. We look forward to providing an update when we report our first quarter results.
- Operator:
- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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