Blue Apron Holdings, Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Ladies and gentlemen, good morning. And welcome to the Blue Apron Holdings Second Quarter 2019 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. As a reminder, this call is being recorded for replay purposes. A slide presentation has been created to accompany today's remarks, and can be accessed on the Blue Apron Investor Relations Web site. Following the conclusion of today's call, the Blue Apron team will host the question-and-answer session and instructions will be given at that time.With that, I'd now like to turn the call over to Louise Ward, Senior Director of Corporate Affairs. Ms. Ward, please go ahead.

[Louise Ward:]

Good morning, everyone and thank you, for joining us. On this morning's call, we have Linda Findley Kozlowski, Chief Executive Officer of Blue Apron and Tim Bensley, Chief Financial Officer. We have created a slide presentation to accompany our remarks today. The presentation can be accessed through the webcast plan on our Investor Relations Web site at investor.blueapron.com.Various remarks that we make during this call about the company's 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 very important risks and other factors, including those described in our earnings release and in the company's SEC filings. In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update these statements.During this call, we will be referring to non-GAAP measures, which are not prepared in accordance with generally accepted accounting principles. You are encouraged to refer to the earnings release and SEC filings where we have described these measures in more detail, and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.In addition, reconciliations of certain forward looking non-GAAP measures referred to during this call are on our Investor Relations Web site located at investors.blueapron.com, under Events & Presentations. With that, I would now like to turn the call over to Linda Findley Kozlowski, Blue Apron's CEO. Linda?

[Linda Findley Kozlowski:]

Thanks Louise, and good morning, everyone. As I reflect on my past four months at Blue Apron, I remain excited by our position in this emerging category, the significant opportunities ahead of us and our potential to realize these opportunities through a new growth strategy.First, I'll review our results for the second quarter of 2019. We continue to improve on the bottom line through operational improvements and cost optimization. We reduced our net loss 76% year-over-year to $7.7 million compared to a net loss of $32.8 million in the second quarter of 2018. We improved adjusted EBITDA $22 million on a year-over-year basis to a profit of $4.5 million compared to an adjusted EBITDA loss of $17.5 million in the same period last year.Net revenue was $119.2 million compared to $179.6 million in the prior year, and $141.9 million first quarter of this year, reflecting our ongoing sharpened focus on higher performance channels and attracting and engaging more profitable consumers. This focus has resulted in continued progress in our in our key customer metrics, including average revenue per customer, orders per customer and average order value. This sharpened approach to marketing led to a market expenses at 8.2% of net revenue in the second quarter. As we've made improvements in marketing efficiency, we continue to see our expected average paybacks for new customers well within our goal of 12 months or less.On the cost side, our cross functional teams continued to leverage our improved operational capabilities, resulting in significant margin expansion on a year-over-year basis. COGS excluding depreciation and amortization as a percentage of net revenue improved by 470 points from the prior year to 60%. Product, technology and G&A, or PTG&A, for the quarter, reflected our teams' commitment to optimizing our operations and streamlining costs. And was 31% lower year-over-year at $35.1 million and 10.3% lower on a quarter-over-quarter basis.Our team has worked hard over the last several quarters to deliver against our previously stated goal of adjusted EBITDA profitability rooted in strong operational efficiencies and a one deliberate focus on marketing to high affinity consumers. We are pleased to have achieved another quarter of adjusted EBITDA profitability, and we're encouraged by continued improvements in our key customer metrics, as well as year-over-year improvements in our unit economics.The adjusted EBITDA numbers are strong, but we must address revenue. As discussed at the end of 2018, getting revenue in the right direction will take time. What we are strategy about today is Blue Apron's next phase, executing a strategy that we expect will return us to growth in 2020 by focusing on our customers and our core business. This plan is what we'll focus on today's call.First, I want to explain why we believe that there are significant opportunities ahead for Blue Apron. Americans are cooking. 80% of meals are sourced from the home, which is up from a decade ago. Since joining Blue Apron four months ago, I have sent home with our customers to hear about why they cook with us. The specific reasons vary, from health to convenience, to interest in learning a new scale, to a love creating. But there is a common thread throughout most of these conversions. Cooking Blue Apron is a valued experience and important time for connection with friends and family.We believe that few companies have as deeper connection with their customers as we do. Week-after-week, our customers invite them into the most intimate spaces in their homes, their kitchen. And they trust us to help them cook delicious meals for themselves and their loved ones. As we move forward, the heart and soul of our business will remain in a deep connection to make it easier for our customers to have incredible home cooking experiences, even on those nights when they are tired, rushed and stressed.We haven't discussed the total addressable market for Blue Apron since the IPO. However, today, we are updating that TAM and it's meaningful. With adjustments made for household income and family size, we believe our core product, our meal kit, can serve approximately 50 million households today in the United States. If you look at the publicly available frequency with which customers order meal kits and the strong average order value, this results in a current total meal kit opportunity between $40 billion and $45 billion.While meal kits offer a broader, richer experience than just convenience, we think the best proxy for a serviceable portion of the market is online grocery purchases. Based on the current percentage of households in America that are buying food online, we believe our serviceable market is approaching $9 billion. However, this number is rapidly increasing and is estimated to grow 35% between 2018 and 2020.We see further upside from key demographic shifts in consumer trends, such as growing consumer interest in fresh versus highly processed food, time pressured consumers seeking convenience and American spending more time at home. We're in a dynamic category and sit at the intersection of several trends that play to our strength.As we re-evaluated our addressable market, we also conducted a rigorous evaluation over the past four months of our core business and our multichannel expansion initiatives. Here are some of my observations. We have not kept up with the ever evolving needs and preferences of our customers over the past couple of years, and we are behind it. Some of that is due to the operational challenges that business was confronted with in the back half of 2017. And some of it is because we redirected attention of way from innovating in our core offering as we tested alternative distribution channels for the past year and a half.Given these insights, it's become clear that the more attractive opportunity for Blue Apron right now is in our core direct-to-consumer business. The unit economics are strong in a direct-to-consumer model, avoiding many of the challenges as inventory management and shrinkage. We'll be wrapping up with our pilot with Jet.com in the coming few weeks. As we said before, Jet has been a great partnership through which we've build valuable on demand competencies, many of which we are now applying for future considerations for our model. Right now, however, we need to focus our efforts on our core business, engaging with our customers week-in and week-out on our platforms through our direct-to-consumer service.We believe our core business offers a number of unrealized opportunities for growth, and is "the most attractive place" to invest our time and resources right now. Although, there have been challenges with the execution of our core business, we believe that the strategic plan we are discussing today will support a strong sustainable business, going forward.To realize the opportunity we see in our core business, we've developed a strategy that has three key objectives; one, engage more consumers that have our best customer characteristic; two, better integrate into customers' lives offering more menu choices and flexibility in our product and services; and three, scale our marketing efficiently through stronger customer relationships and new partnerships. I'll walk you through each key objective.For our first key objective, we will aim to reach and engage a larger audience of customers that share our best customer characteristics by pursuing areas of previously under-tapped opportunity. We plan to deploy two new initiatives to meet this first objective.First, we will better meet the individual needs and preferences of contemporary American households through a distinct product, as well as future flexibility. Our customers include the traditional couple and family households that most companies are serving, but what we have also observed is that two of the fastest growing segments of the population, single person household and empty nesters are also among our best customers. Yet, we are engaging these groups to the extent we could be.Second, we'll seek to do a better job at tapping into the growing segment of people who are interested in healthy habits and lifestyles, but not necessarily a rigid diet. The research is clear that cooking fresh food at home is healthier than take out or restaurant dining. And many consumers who want to be healthy are not willing to sacrifice on taste or quality to do so, and they shouldn't have to. Our partnership with WW proven to us just how hungry Blue Apron customers and specifically, our best and most profitable customers are for this type of solution.Our second key objective is to better integrate into our customers' lives by offering more menu choices and flexibility in our products and services. We plan to deploy and explore new initiative to meet this second objective. First, to ensure that we have something that is not just appeals to but excites every customer. Every week our menus will offer a variety of proteins, produce and carbs for a broad array of consumer interest and preferences. That will mean that adding recipes to our lineup as we did recently by adding an additional weekly menu slot to our food serving plan. We will also add the healthier options we know our customers are looking for.This fall, we plan to pilot new changes to our signature menu to offer more recipes and communicate more health choices for those seeking a balanced meal solution. Exciting our customers every week also means that we will double down on our commitment to evoke a sense of culinary discovery with every recipe. For example, we know that a majority of our best customers are interested in plant based meat as an option on our menus. Based on that insight, we introduced plant based proteins from Beyond Meat in our recipes beginning this month with the Beyond Berger on our signature menu.After announcing our new Beyond Burger recipes, we saw strong interest from customers, even weeks out from shipping. The Beyond Meet launch was simply the start of re-introducing unique ingredients that are key part of our value proposition for our best customers. Starting in early September, we'll reintroduce several unique fruits and vegetables into our boxes such as Chinese broccoli, nectarine, shishito peppers and yu choy.Second, as another way to better integrate into our customers' lives and the future, we tend to give customers more freedom to tailor our product and service for the needs and preferences of their households. For example, if a customer wants to double the protein in a recipe or swap out the carbs for extra vegetables, we will work to enable that flexibility to them. Third, we will evolve our products for new eating occasions and offer a thoughtful variety of add-on items. Many of our best customers tell us they want to buy more from us. It's time that we give them a chance to do just that.Finally, in addition to offering a more flexible product, we will enhance our e-commerce platforms to provide a more flexible service experience, making it easier for our consumers to discover Blue Apron and engage with us in a way that best fits their lifestyle. Our technology team under the leadership of our new CTO, Irina Krechmer, will be integral into this work to make all of customer touch points more convenient, intuitive and flexible.Now, onto our third key objective. We aim to scale marketing efficiently through stronger customer relationships and new partnerships. So many of our customers love our products and our brand and we have the opportunity to engage them more deeply every time they interact with us. We plan to continue building brand capital that we can leverage in numerous ways. We have already demonstrated increased efficiency in our marketing over the past two quarters, but there is always more to do. However, and we always see a bigger opportunity in leveraging partnership. Our focus, going forward, is on partnerships that can expose us to large, highly engaged communities who's interest and values overlap of those of our best customers, and who'll be best served by the products we already offer, bringing us faster and more efficient scale of customer growth.As mentioned earlier, while we pursue this new growth strategy, we will continuously work to strengthen our foundation of operational optimization, fiscal discipline and meaningful brand differentiation. We've talked a lot in the last few quarters about our notable progress and operational optimization and fiscal discipline. Our talented employees across the country have a lot to be proud of there. I also want to underscore a meaningful brand recognition, because I believe it to be an important contributor to our ability to implement the strategy we are outlining today.We continue to have the strongest brand in the category with 61% unaided awareness and 85% aided awareness. Consumer recognize our brand within the category, which is a testament to our employees who have been careful stewards of our brand through a significant time of change. We believe that our strong foundation and operational optimization, fiscal discipline and brand differentiation, puts us at a competitive advantage as we pursue for growth. The successful execution is this new three pronged strategy; serving a larger audience and customers, offering more choice and flexibility and scaling marketing through stronger customer relationships and new partnerships, is fundamental to our ability to grow the business in 2020. I believe it's the right strategy to realize the significant opportunity I see ahead for this company.I'll now turn it over to Tim to discuss our financial outlook. And after that, we'll take your questions.

[Tim Bensley:]

Thanks, Linda. We're proud of the strong financial and operational foundation we've worked so hard to build over the last year that has now put us in a position to be able to pursue growth and specifically profitable revenue growth.I'm going to now to turn to our financial outlook as we implement our growth strategy but I'll stay relatively brief today to allow time for questions on our strategy. In order to realize the full benefits of our growth strategy, we plan to invest behind some of these key initiatives. We plan on increasing marketing spend over the next several quarters as a percentage of net revenue relative to our first half 2019 run rate. We also expect to have some additional capital expenditures over the coming quarters to enhance some of our e-commerce platform and fulfilment center capabilities.We believe these upgrades will enable us to transform the Blue Apron customer experience by unlocking the additional choice, flexibility and adaptability of our product that our customers are asking for, as Linda spoke about earlier. We expect that these investments, along with the execution of our growth strategy, will lead to healthy quarter-over-quarter net revenue and customer growth in our seasonally high period of Q1, 2020, and will lead to year-over-year quarterly net revenue and customer growth in the back half of 2020.In the shorter-term, as we progress through our strategy for the back half of this year, we expect similar year-over-year net revenue performance as we saw in the first half of 2019, while continuing to strengthen our customer base to set us up for meaningful execution in 2020. On the bottom line, we expect net loss in the third quarter of 2019 of $26 million to $29 million, and adjusted EBITDA loss of $12 million to $15 million, reflecting seasonally higher COGS as a percentage of net revenue, and these increased investments as we move the business forward. For full year 2019, we expect net loss of $55 million to $62 million and adjusted EBITDA of breakeven to a loss of $7 million.As Linda said, we have demonstrated our ability to prudently manage costs throughout the organization, and continuously drive efficiencies in our fulfillment center network. Financial discipline, including key marketing efficiencies, as well as operational optimization, will continue to be foundational to our business as we enter our next phase of growth. We are confident that upon successful execution of our strategy, we'll achieve the growth expectations that we've outlined today. We look forward to updating you on this progress. For easy reference, we have posted a reconciliation chart from our net loss to adjusted EBITDA outlook on Blue Apron's Investor Relations Web site.

[Linda Findley Kozlowski:]

Thanks Tim. We will now take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Shweta Khajuria from RBC. Please go ahead with your question.

[Shweta Khajuria:]

Two questions please. Linda, on your third strategy on scaling marketing through customer relationships and partnerships. It'd be great to hear what your thought are in potential types of partners that you think about to strategically partner with Weight Watchers and Beyond Meat are great. What are some of the things that the company thinks about in terms of engaging and creating new partners? And second on integrating into lives of your consumers by better dealing your menu options, or expanding your menu and making it more flexible. Could you talk about what that additional cost that you could incur given the greater menu optionality, and the ability to offer substitutes even on an on-demand basis? Thank you.

[Linda Findley Kozlowski:]

Sure. Thanks so much for your questions. First on the partnership question, there is a variety of partner available to us. So again, we continue to enjoy our partnership with WW. And we are very excited that this fall we're launching a pilot program on the West Coast, that actually we will allow us to integrate some of our healthier options from WW with our core signature menu to offer 11 difference choices to our customers across a variety of options that let them tailor their diet to their preference, and mix and match between all of our different menus. So, that's a pilot that we are going to be launching in the fall that does includes our WW partnership.But I think for us, we think about partnership not just when it comes to potential ingredients we can have in the box or in healthy options. We think there is a lot more within the healthy option space between a variety of both health and fitness oriented organizations. But we also think that there's additional distribution and acquisition partnerships that really increase in scale over what we have seen in the past, that not only focused on beginning people in for healthier options for better lifestyle, for better connection, all within the idea of flavor enjoyment, but also frankly scale on our core business.I think some of our partnerships in the past have required significant list in creating new product options. But what we've actually found is that within our core offering, we have great opportunity to expand and really drive more customers into that option to get significant scale. So that's really what we're focused on, and they can be in a variety of types of partners across health, across entertainment, across travel and across more. So that's really on the partnership side.On the product side, this actually goes hand-in-hand. What we see from our customers is that they really, really love the idea of flexibility, but flexibility on their terms. And so, what we're trying to do, both with this pilot that you're seeing coming in the West Coast in the fall but also longer-term development, is how can we put choice in the hands of our customer and really let them chose across a variety of different menus in one -- variety of different recipes in one menu, to allow them the ultimate control and flexibility over what they serve themselves and their families. But that's only one part of that.I think going above and beyond that, as we referenced in our comments. We really have the opportunity to help people think about how can they expand and maybe swap out ingredients, how can they add proteins or upgrade proteins if they want to and then how do we think about subscription model going forward to get people more flexibility in their choices. So those are all possibilities that we have in front of us.

[Tim Bensley:]

I think on the cost side of it -- yes, I think to jump in on the question about the cost side of it, a couple of comments. First of all, this year, we were able to significantly increase our menu offering with the WW program. We actually put out six new items that are all in that healthy space that Linda referred to, and we're able to do that with a significant improvement in our variable margin. And year-to-date our variable margin is approaching 41%, we're about 35% in the same time period last year. So -- and we're pretty confident in our ability to do that.The second thing I mentioned during my comments that we are going to make a very manageable capital investment to allow us to have some of this flexibility over the coming number of quarters. And we think that that investment and our capabilities will also give us the ability to handle any additional complexity efficiently. Probably the last thing to say is we have made significant improvements in our operational efficiencies this year, but we don't believe that's the end of the upside or operational facilities. This is really the first year that we've been able to make that kind of a move.And we think next year, as we continue to focus on continuous improvement in operations, any additional improvements will certainly be able to offset any complexity from the increased menu offerings. Not to mention the fact that as we return to revenue growth in the second half of next year, that revenue growth will give us some leverage in our ability to continue to hold costs down as well. So we think with that whole package, we're in pretty good shape for cost next year, even as we go to the expanded consumer offerings that Linda referred to.

[Operator:]

[Operator Instructions] Our next question comes from Youssef Squali from SunTrust. Please proceed with your question.

[Unidentified Analyst:]

Hi, this is Sagar on for Youssef. Just want to ask -- after two quarters of adjusted EBITDA profitability, want to expand more on the commentary given in the prepared remarks on the sustainability and cadence of it, especially as you start going down the road of achieving customer revenue growth through the execution of the strategy you outlined, which we assume comes with reacceleration of sales and marketing among other costs?

[Tim Bensley:]

Yes. This is Tim. Absolutely. One of the things that I talked about in my comments is in the second half of the year, we do expect to basically go a bit in the other direction in terms of EBITDA profitability. Year-to-date, obviously, we are quite positive in the second half of the year, both because of the seasonal nature of our costs in Q3, as well as leaning into some of this marketing investment, at least leaning in, in terms of higher marketing spend in the second half of the year and in the coming quarters as a percentage of net revenue versus what we spent in the first half of the year. We expect that to basically take us in the second half to somewhere between a full year breakeven EBITDA and $7 million EBITDA loss. So that basically -- that's where we expect those initiatives to basically take us.We're still on the specific planning phases for how all this will impact 2020. We will come back and talk to you more specifically in the coming quarters as we get closer and closer to be able to talk about those numbers. The other thing I would say is, as we move forward, particularly with the marketing impact on our -- both growth and EBITDA performance. We still intend to invest marketing in way that has a very strong ROI, and still try to meet our goals of within a one year payback. And the nice thing is we've developed the capability to be relatively agile as we move forward. We'll continue to make investments in a week-over-week, month-over-month and quarter-to-quarter basis, and adjust as necessary as we see those results as we move forward.

[Linda Findley Kozlowski:]

One of the exciting things that we see out of this, if you note, as we've constantly talked about the increasing quality of our customer, and you can see very clearly that our average order value, orders per customer and average revenues per customer, all continue to be strong and healthy and develop as we get better and better at bringing in these really great customers into the platform and continuing to nurture them.

[Operator:]

And ladies and gentleman, this will conclude today's question-and-answer session. As we approach the conclusion of the call, I'd like to turn the conference back over to Mr. Kozlowski for any closing comments.

[Linda Findley Kozlowski:]

Thank you very much everybody for your time today. We are excited about what's in store for Blue Apron. And we're looking for you to updating you on our growth strategy in future dialog. Please have a great day.

[Operator:]

And with that, we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.