Blue Apron Holdings, Inc.
Q4 2019 Earnings Call Transcript

Published: 19 Feb 2020

[Operator:]

Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings Fourth Quarter and Full Year 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. [Operator Instructions]. Following the conclusion of today's call, the Blue Apron team will host a question-and-answer session and instructions will be given at that time.On this morning's call, we have Linda Findley Kozlowski, Chief Executive Officer of Blue Apron; and Tim Bensley, Chief Financial Officer.Before handing the call over to the company, a few remarks about this call. Various statements that company makes during this 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 very important risks and other factors, including those described in the company’s earnings release and SEC filings.In addition, any forward-looking statements represent the company’s views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements.During this call, the company 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 it has 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 the company’s 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:]

Thank you and good morning, everyone. Thanks for joining us. Our teams remained focused on pursuing our previously announced three-pronged strategy to drive revenue and customer growth by; one, engaging more consumers that have our best customer characteristics; two, offering greater menu choice and flexibility in our products and services; and three, scaling our marketing efficiently.As we discussed when we laid out our strategy in August, we are simultaneously optimizing our operations and maintaining fiscal discipline to provide us with the strong foundation for future growth. We continue to believe that this is the right strategy to resume growth in the business and position Blue Apron as the trusted solution for home cooked; seeking quality, discovery and variety in their culinary experiences.That said, while we continue to launch additional capabilities and test new product offerings, it will continue to take investment to realize the benefits of these efforts as we are working to reverse negative trends from prior years. As such, yesterday, we announced that our Board, with the support of our management team, is evaluating a range of strategic alternatives to maximize shareholder value.These alternatives could include, among other things, a strategic business combination, a capital raise through the public or private markets, a transaction that results in private ownership or sale of the company, or some combination of these. This process, together with cost optimization initiatives that I will discuss later on the call, is being undertaken to provide additional liquidity to support our growth strategy and enable us to best position the company for the future.These efforts reflect the commitment of the Board, management and myself to doing what’s in the best interest of the business, Blue Apron's shareholders and other stakeholders. Our Board has not set a timetable for this process nor has it made any decision related to any strategic alternative at this time, and we do not intend to comment further on this until it’s appropriate to do so.I will now review the work that we've accomplished in the fourth quarter. After that, Tim will walk through our financials for the fourth quarter and fiscal year 2019. And then we’ll both take your questions.As we continued to our strategy into fourth quarter, our results were in line with our guidance range provided on our October earnings call. We continue to see improvement in the metrics we’ve always said will be key indicators of a strengthening customer base; average revenue per customer and orders per customer.In fact, although total customer numbers declined in the fourth quarter, we saw these metrics at their highest levels since the first quarter of 2016, reflecting four consecutive quarters of year-over-year improvements.On our last earnings call, we discussed that in the near term we would prioritize the second pillar of our strategy, providing more choice including health-conscious choices and enabling more flexibility to accommodate a wider range of household needs and preferences. I’ll review the progress we made on this front in the fourth quarter.First, in early December, we launched our latest menu expansion nationally, enabling all customers to select from any 11 recipes on our Signature two-serving menu each week. This increase from 8 to 11 recipe options is an important step for us, building on the expansion of our four-serving menu last summer as we continue to work to add additional options in 2020.Our goal is to ensure that every week there is something on the menu for every type of home cook. Our customers should never have to skip a week because they didn’t see recipes that meet their preferences. Second, on this new expanded menu, not only do we offer multiple recipes each week that take 30 minutes or less to prepare, but at least 50% of our recipes that we now offer cater to a healthy lifestyle.What we believe continue to distinguish Blue Apron from other options is that while we’re committed to delivering health-conscious recipes ranging from carb conscious to plant forward, we never compromise on delicious. The high quality of our meals, diverse flavors and regular integration of unique produce and on-trend ingredients reflect our unwavering focus to delight our customers with every meal.Third, we introduced customers to the latest evolution of our WW partnership transitioning from a standalone menu plan where WW choices could not be combined with other selections on our menu to a much more flexible user experience. Now, customers on both our two-serving and four-serving plans can review a variety of labels on our recipes to curate the menu that works best for their household each week, including WW improved offerings.Fourth, we launched a collaboration with the American Diabetes Association introducing new Blue Apron diabetes-friendly recipes that meet ADA’s nutrition guidance. Each week, we now offer at least two diabetes-friendly recipes on our Signature two-serving menu. The recipes appeal not only to the 30 million people living with diabetes in the U.S., but also the segment of people striving to be generally more health-conscious by reducing added sugar while emphasizing fresh produce and lean protein.Our teams are proud that while implementing our expanded choice and additional flexibility in our products, we were able to maintain our high animal welfare and responsible sourcing standards, our high-quality proteins and our high-quality produce and dairy along with culinary exploration Blue Apron is known for.While we recognize that other players in our states also have a wide range of weekly menu choices and health-conscious choices, ultimately, we believe that our strong brand and culinary differentiation set us apart in this space and that taking the time to thoughtfully ramp our selection while remaining focused on taste, flavors and high-quality specialty ingredients will benefit us in the long term.Before I turn it over to Tim, I want to briefly note some initiatives we’ve already launched in the first quarter of this year as well as capabilities we’re ramping up to unlock even more options for consumers to engage with Blue Apron in 2020. First, we’re continuing to offer regular cadence to select culinary partnerships. Our partnership with Chef Christian Petroni from this past fall demonstrated once again that these opportunities can engage customers with compelling stories and personalities behind our recipes.Two weeks ago we were excited to launch our latest collaboration with Chef Seamus Mullen who is an influential chef known for his dramatic health transformation through food. Seamus shares our same philosophy of cooking and health, the idea that when you cook from scratch you’re already making a healthier decision both mentally and physically for yourself and the people you cook for.Second, next week we’re excited to ship our first Meal Prep by Blue Apron boxes through a regional pilot out of our Linden facility. Customers regularly talk about how they hack Blue Apron to fit their busy lifestyles by preparing all of the meals in their basket once, for example, on a Sunday and then portion out the meals throughout the week for lunches and dinners.This practice of Meal Prep has become a movement, fueled by a network of passionate online influencers, blogs and cookbooks and over 11 million Meal Prep hashtag posts on Instagram. The notorious challenge with Meal Prep, however, is striking a balance of efficiency and variety. There's an art to ensuring that you're not eating the same exact thing every day.Meal Prep by Blue Apron is specifically designed to address this challenge and make the upfront cooking faster and easier than traditional Meal Prep methods with recipes designed for a variety in freshness throughout the week. Whether you choose our Signature, Pescatarian, Multi-Cooker or Carb Conscious option, as little as 90 minutes of prep will yield eight servings to enjoy when you choose with each meal featuring elevated twist, like flavor-packed sauces and garnishes.Meal Prep by Blue Apron fits squarely within our growth strategy, helping us to expand new customer segments, for example, singles who want to cook and eat well while consolidating cooking time into a quicker prep, better tap into the growing demand for health-conscious cooking solutions and enable more flexibility in our products and service to meet more preferences and needs.Third, our teams are working to launch additional capabilities that will enhance flexibility and solve for even more culinary occasions for our customers. For example, within the next couple of months, we plan to offer the option to opt-in to elevated recipes every week at new price points. These recipes will feature a more enhanced cooking and eating experience, combining more specialty proteins, a greater variety of cooking methods and more elaborate plating and serving techniques, further underscoring what Blue Apron is known for, a trusted home cooking solution rooted in culinary authority.Finally, in January, we put the Blue Apron brand back on the national spotlight with a new video campaign to reinforce our product experience as well as our point of view on the benefits of home cooking, including physical and mental health. The 32nd spot aired across TV and streaming video platforms with a focus on channels that have previously proven effective for us. The campaign is part of our strategy to restart top of the funnel brand marketing that we believe will have a halo effect on our other marketing initiatives, making our overall customer acquisition more efficient.As I mentioned earlier, we are building a foundation of operational optimization and fiscal discipline to support our strategy and return to growth. As part of this focus on optimization, we announced that we have decided to close our Arlington facility and transfer the production volume that remained in Arlington following last year's downsizing to our facilities in Linden, New Jersey and Richmond, California.Given advancements in surfing, production and logistics, we believe this consolidation of volume into Linden and Richmond will enable us to more efficiently continue to serve our national footprint with the same high level of service that our customers expect with us. This action is also expected to create annual savings in our fixed costs of approximately $8 million while also resulting in a neutral to positive margin impact and allowing us to redirect financial resources to other parts of the business, including growth initiatives.Although the closing impacts approximately 240 of our Arlington associates, we are and will be continuing to hire at our Linden and Richmond sites to align with increased volume as a result of the transfer of production. We expect to be adding up to 140 roles across our Linden and Richmond sites. Decisions that impact our people are never taken lightly, and we thank all of our Arlington associates for their contributions to the company. It’s imperative that we constantly examine the business and redirect resources to grow our revenue and customer base, while continuing to provide a high-quality products and this action reflects another critical step we're taking to do just that.As I said earlier, we continue to believe that we have the right strategy to drive customer and revenue growth in the business and we continue to work to launch additional capabilities and test new product offerings. We know that while we need to keep customers engaged and serve even more audiences with our products and service, and as noted at the outset of the call, we are evaluating a range of strategic alternatives which together with our continued cost optimization initiatives is intended to support the execution of our growth plan.I’ll now turn it over to Tim to talk through our financials in more detail. And after that, we'll take your questions.

[Tim Bensley:]

Thank you and good morning, everyone. Turning to Blue Apron’s fourth quarter performance, our results were in line with our guidance range provided on our October earnings call. We improved our net loss by 8% year-over-year to $21.9 million while our adjusted EBITDA decreased 7% year-over-year to a loss of $8.3 million.For the full year 2019, net loss and adjusted EBITDA improved 50% and 86% year-over-year, respectively. This quarter marks the sixth consecutive quarter of year-over-year net loss improvement as we continue to demonstrate our ability to manage costs throughout the organization and maintain efficiencies in our fulfillment center network.Net revenue in the fourth quarter of 2019 was $94.3 million compared to $140.7 million in the fourth quarter of the prior year and $99.5 million in the third quarter. As we’ve previously stated, we anticipated lower overall net revenue and customer count in 2019 as we reduced overall marketing investment and focused on the acquisition channels that we believe will drive long-term value and attract high affinity customers.As Linda noted, this disciplined customer acquisition mindset continues to contribute to the strengthening of our customer base with certain key customer metrics, average revenue per customer and orders per customer improving 6% and 7% year-over-year and 4% and 2% quarter-over-quarter, respectively, finishing the year at the highest levels since the first quarter of 2016.Marketing spend in the fourth quarter was 12.8% as a percentage of net revenue or $12.1 million, a 160-basis point reduction compared to the fourth quarter of the prior year and a 60-basis point increase from the previous quarter. For the full year 2019, marketing spend in absolute dollars decreased 59% from 2018.On the cost side, COGS, excluding depreciation and amortization, was 61% as a percentage of net revenue in the fourth quarter, a slight increase from 60.8% in the fourth quarter the prior year. COGS as a percentage of net revenue improved 670 basis points from the prior quarter reflecting the expected seasonal cadence of the business.Our cross functional teams continued to leverage enhanced planning and process-driven strategies which enabled the successful national launch of our newly expanded Signature menu without sacrificing efficiencies in our fulfillment network.Product, technology and G&A, or PTG&A, costs reduced 22% year-over-year to $35 million as we remained focused on expense management and optimizing our cost structure. Other operating expense for the fourth quarter was $2.1 million related to a charge for an estimated non-recurring legal settlement.Now I’d like to speak to the financial implications of our decision to close our Arlington facility in order to better leverage our fulfillment centers in Linden and Richmond. In the first half of 2020, we expect to incur approximately $1.5 million in cash restructuring costs primarily severance and other exit costs and non-cash asset-related charges in the range of $5 million to $8 million. We expect this action will generate annual savings in fixed costs of approximately $8 million beginning in the second quarter of 2020 by also resulting in a neutral to positive impact on variable costs.Now turning to our financial outlook for the first quarter of 2020, for net revenue we continue to expect net revenue to improve on a sequential quarter-over-quarter basis where we focus on strengthening our customer base in our seasonally high period of the year. On the bottom line in the first quarter of 2020, we expect net loss in the range of $22 million to $26 million which is inclusive of the previously discussed Arlington closure charges and an adjusted EBITDA loss of $5 million to $7 million.As Linda noted, we believe that the strategy we shared in August is the right strategy to drive customer and revenue growth. That said, it will take additional investment to realize the benefits of our efforts and therefore we are prudently working to maximize shareholder value through continued cost optimization initiatives and the pursuit of strategic alternatives.If we are not able to implement or deliver the expected results of our growth strategy, we have a plan in place to manage the business which would include prudent expense management and additional cost optimization initiatives. We look forward to providing updates on our business outlook for the remainder of 2020 on future calls. 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’ll now take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Youssef Squali with SunTrust. Please go ahead.

[Youssef Squali:]

Hi. Good morning, guys. A couple of questions, I guess starting with you Linda. Can you just speak broadly about your views around just the state of the meal kit industry today? We’ve seen a number of players kind of going away, some new players and merchants spending more to acquire customers, maybe just speak to the growth rate you’re seeing in that business, the competitive landscape, has it gotten tougher or easier over the last couple of quarters? And then, Tim, maybe can you speak to the financial liquidity of the business just in light of your new – not new, but your strategy of trying to restart the top of the funnel marketing which we’ve seen displayed on social media and TV advertising, et cetera in the last couple of months? Thank you.

[Linda Findley Kozlowski:]

Sure. So first I’ll comment quickly on sort of the state of the industry. I’ve said before on calls and I still feel strongly about this that this is actually still a very new industry. And so as one of the larger players in this space, we do still see significant opportunity for upside particularly tracking against growth in online grocery spend and other areas. We do think one of the biggest opportunities and also challenges that a lot of the companies in this space face is getting to a level of efficiency and also driving marketing forward. And we do think that all the financial rigor and the operational rigor that we’ve put in the place over the last years put us in a good position to be able to capitalize on that marketing opportunity going forward with the right level of investment. So we also do still believe that our brand remains the strongest in the U.S. industry and we’re seeing increased pressure from the competitive landscape, particularly on a dollar-for-dollar marketing spend standpoint, which is part of the reason that is our focus when we think about strategic alternatives is how we further invest with a focus in marketing going forward. We’re seeing strong results from the product initiatives that we’re actually putting out there and introducing as we talked about on this call and also previous calls, and so we’re confident that there is opportunity ahead with the right level of marketing investment. We also frankly do believe that some of the growth we’ve seen from companies like HelloFresh is a helpful prove point that you have – when you have the right resources and the marketing muscle, there is opportunity in the industry. So we look at that as a positive.

[Tim Bensley:]

Hi, Youssef. For the second part of the question that relates to liquidity and our overall customer plans, and just to kind of start off backing up what Linda said, we definitely believe that we had the right strategy to resume growth in the business. But as we’ve said today, we now believe that we will or we will actually need to raise capital to execute that plan to fully execute that growth plan. I’ll tell you that at the same time if we’re for whatever reason unable to raise that capital, we do intend to continue to manage cost prudently to continue to operate the business and maintain compliance with our debt covenants. We don’t see any issue with that. But at this point for us to fully execute the plans that we’ve talked about, we do need to raise capital and that’s one of the reasons why we’ve announced our pursuit of the strategic alternative process that we talked about earlier on the call.

[Youssef Squali:]

Got it. All right. Thank you.

[Operator:]

[Operator Instructions]. The next question comes from Maria Ripps with Canaccord. Please go ahead.

[Maria Ripps:]

Good morning and thanks for taking my questions. I just wanted to ask about your outlook in terms of improvement on a sequential basis in Q1. Should we still expect to see growth in customers and revenue here sequentially in Q1, or should it be just kind of more gradual improvement? And can you also kind of update us on your view in terms of the possibility of returning to year-over-year growth in the second half of this year?

[Tim Bensley:]

Yes, certainly, absolutely. This is Tim, again. For the first part of the question, as Linda talked about we started to rollout our new growth initiative program in the fourth quarter and we’re continuing to rollout those initiatives this year which include things like the expanded menu offerings and the Meal Prep that Linda talked about in her earlier comments. That in combination with the marketing spend that we’ll have in the first quarter we believe will result in both improving our ability to efficiency acquire customers, improving our ability to drive the performance of the customers that we have in terms of driving things like order rate and that combined will result in the first quarter revenue being sequentially improved versus the fourth quarter. So kind of all of those things will come together to show that sequential improvement. For the second part of the question, right now we want to be clear on the call today that for us to reap the benefits of our four growth plans and hit our four growth objectives, we are going to now have to raise capital to invest in that growth plan. And our ability to do that will obviously have an impact and we’ll talk about that if and when we have more to comment on.

[Maria Ripps:]

Got it. Thank you. I appreciate the color.

[Operator:]

[Operator Instructions]. The next question will come from Aria Cole with Cole Capital [ph]. Please go ahead.

[Unidentified Analyst:]

Good morning and best of luck here in 2020. First question is for Linda. You had a press release recently about the introduction of your meal kit plan. I know it’s not available on the Web site yet, but can you explain how you’re going to – how you’re going to combine the meal kit menu offering with the existing 11 meals that are available currently? I’m just wondering to what degree you’re – for customers who like the choices today, to what degree will you keep things as is available for them but at the same time provide room for people who prefer Meal Prep as a new way to go about selecting meals for the week?

[Linda Findley Kozlowski:]

Thanks so much, Aria, and good to talk to you. So, yes, in fact it is actually available today. So starting next week you can select it as part of your menu. You can actually select it now, but for next week’s delivery. And the way that you actually select Meal Prep is to go into your planned choices on that week’s plans and click on the dropdown and that’s how you actually select Meal Prep. Right now it is an individual offering because it is eight servings at a similar price point to our family plan. So it’s a strong value for eight servings a week for a variety of audiences. And we are really excited about the potential for that particular product given the uniqueness and the demand that we see in this space. So we have had a lot of interest in the product. It is available currently out of our Linden facility which covers most of course the Eastern seaboard in several states across the South as well. And so it is actually available to a large portion of our customers today and then we’ll be rolling out nationally as soon as we can. In the process of launching this, we are testing to understand the different demands of customers and how they want to combine Meal Prep with other parts of their menu. But for now it is actually available as an individual option and we hope to continue to expand how we offer Meal Prep in the future to make it available to not only more people but along with other options on the menu at the same time.

[Unidentified Analyst:]

Great. Thank you. And then second question is just about your new choices for people who would like to eat meals that are diabetes friendly. Clearly, if one has diabetes it’s – your choice for meals is going to involve your meals you eat on a daily basis as part of your new lifestyle. Is two choices a week sufficient, because I’m just wondering if – because in essence a person with diabetes is only looking at your diabetes friendly meals. Two choices it would seem could really be expanded to a couple more choices in order for them enough variety, because with two choices, the variety at least is limited for now.

[Linda Findley Kozlowski:]

So the interesting thing I think about the diabetes choices that we have available is in fact they also match lifestyle choices of a lot of other types of audiences. And as we said in the script, a lot of diabetes friendly meals actually do include fresh produce, lean proteins, low sugar, et cetera. So those types of meals actually appeal to a much broader audience than simply those who are suffering from diabetes. Even with that audience alone is really a huge and impactful population in the country. So this is just the beginning and we will continue to expand and involve the menu. We’ve mentioned on several calls that we want to add lots of levers of flexibility over the next several months and quarters, and so that will continue to expand as we think about holistically how we offer healthy options to people that don’t sacrifice on flavor or taste.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. As we approach the conclusion of our call, I would like to turn the call back over to Ms. Kozlowski for closing remarks.

[Linda Findley Kozlowski:]

Thank you very much everyone for joining the call today. And we look forward to keeping you updated in the future on future calls. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.