Blue Apron Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings Second Quarter 2018 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's remarks, the Blue Apron team will be taking your questions. With that, I'd now like to turn the call over to Felise Glantz Kissell, Vice President of Investor Relations and Corporate Affairs. Ms. Kissell, please go ahead.

[Felise Kissell:]

Good morning, everyone, and thank you for joining us. On this morning's call, we have Brad Dickerson, Chief Executive Officer of Blue Apron and Tim Bensley, Chief Financial Officer. Brad will first strategically discuss the business and Tim will then review our financial performance. Various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes 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 various important risks and other factors, including those described in our earnings release and 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 financial 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 website located at investors.blueapron.com, under Events & Presentations. With that, I would now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad?

[Brad Dickerson:]

Thank you, Felise, and good morning, everyone. I'd like to begin by welcoming Tim to its first earnings call with Blue Apron. As you know, Tim joined us as CFO late May, bringing over 30 years of leadership in the consumer package goods and food retail industry. Tim has quickly immersed in the business and will make a significant impact as we evolve our product portfolio and the ways consumers access our brand. Before I provide you an update in key areas across the business, I'll highlight four clear themes from our second quarter results. First, we continue to drive operational efficiencies throughout our fulfillment center network, as reflected in the 110 basis points sequential costs of goods sold improvement from the first quarter, despite increased summer packaging costs. Even more impressive is the 400-basis point improvement year-over-year, a testament to the significant progress we have achieved since launching our Linden New Jersey fulfillment center. These efficiency gains have been a key driver of our continued year-over-year improvement and adjusted EBITDA performance. Second, we reached an important milestone that's further build the foundation of our future with the launch of our retail product offering. Third, revenue per customer has been relatively stable over the past few quarters, reflecting steady engagement metrics from our customers, during a period when operational stability took priority over product innovation. And finally, attracting new customers efficiently is an area we must improve. While we have been successful in driving customers to our platform, we must improve the rates at which they convert to pay subscribers. With fulfillment operations strengthening, our primary forward focus is to enhance our product portfolio and delivery seamless, digital experience, which we expect to benefit conversion. Entering 2018, we articulate that this year would be a year of transition in building for sustainable growth and it would take time to build top-line momentum particularly given our significant pull back in marketing spend in the second half of 2017. At the time, we did not have complete visibility into how this transition would impact 2018, including the effects on the business from returning to be more normalized marketing spend case. We did see some positive momentum in the first quarter of 2018, as we increase marketing spend from the fourth quarter of last year. However, it was challenging to maintain this momentum throughout the second quarter, as we implemented a more consistent pace of marketing spend with a focus on efficiency. Our priority is to continue to transition our business and execute on the key strategies that will position us for sustainable long-term growth. While remaining prudent with our marketing spend, with a deliberate focus on attracting customers with high affinity and deepening engagement with current customers. Our strategies are centered on the evolution and expansion of our existing product assortment, enhancement of our overall customer experience and the launch of our retail and on-demand offerings. I will go into more detail in each of these growth opportunities shortly. As we execute on these strategies in the next few quarters, we expect our marketing spend will become more efficient. While we are confident that our approach will build a strong business for the future, our revenue performance will be impacted in the near-term, which Tim will discuss shortly. As we execute throughout the second half of this year, our ability to leverage the strength of our brand, deepen engagement with customers and utilize an increasingly differentiated operational capability will be a powerful asset. We are not wavering from our goal of double-digit revenue growth and adjusted EBITDA breakeven for 2019 with adjusted EBITDA breakeven potentially occurring as early as the fourth quarter of this year, depending on our progress. This milestone will not be easy; however, we believe we are pursuing the right initiatives to achieve this goal. I will discuss some of these key strategies in more detail. To start, a quick update on our multi-product, multi-channel strategies. These strategies will enable us to expand the reach of our brand by meeting new and diverse segments of consumers on their terms. We are focused on serving consumers with specific behaviors in mind, whether they are planning a week of meals, a few days in advance, browsing the aisle of the store, looking for a grab and go offering on their way home, or seeking a product that can be delivered on-demand. As we accelerate this strategy, we are deliberate in selecting distribution channels to best serve these distinct customer mindsets. With this framework in mind, I'll not provide an update on our latest channel expansion initiative. First, we remained focused on our opportunities within retail. Since launching a pilot program with Costco in early May, we have tested our offering in multiple regions across the country, applying learnings to our monthly rotation of recipes to best serve the Costco consumer. Today, our product is available on approximately 80 locations, while still early in this pilot the past three months have further validated to us the power of Costco's retail platform. Second, in the coming months, we planned to test on-demand delivery of Blue Apron Meals through our own e-commerce platform and third-party delivery partners. Among our first initiative is to launch pilot on the East and West Coast to generate learning from these programs and incorporate into our strategies. We view our expansions in new channels as a complement to our existing business. There is a distinct value proposition for our core direct-to-consumer offering, including a more diverse product selection, the ability to preplan multiple meal simultaneously and engaging digital experience and delivery on one's door step. That said, we appreciate that many customers prefer to make their dinner choices closer to the occasion. We expect that solving for these varying consumer needs and behaviors will expand our overall customer reach. We will update you on our progress as we pursue these channel expansion initiatives including our Costco and on-demand pilots as well as additional retail opportunities, we plan to activate. Now, I'll share an update on three strategic priorities guiding our business. One, build an agile and efficient operation infrastructure that serves as key competitive advantage. Two, create a diverse product portfolio that consumers can access through multiple channels and three, strengthen and amplify our brand. First on operations. As I said earlier, we continue to gain efficiencies throughout our fulfillment center network, which has resulted in greater cost savings increased speed of execution and improved agility. Our margin gains, which have improved sequentially over the past three quarters as well as our ability to fulfill demand created by our pilot of Costco reinforced our progress. Building an agile and efficient fulfillment center in logistics network supports our growth strategy while providing a competitive advantage for the business. While we are pleased with the steady improvements, there are many additional efficiencies yet to be realized. In June, we announced the appointment of Alan Blake, our Chief Supply Chain Officer. Alan is an accomplished supply chain leader with more than three decades of experience that leading consumer packaged goods, beverage and food companies. Alan has also managed an extensive network of both internal and third-party distribution centers, a competency that will be valuable to us as we expand our product and channel portfolio. The leadership and discipline that Alan brings to Blue Apron are tremendous assets as we work towards driving improvements in our end-to-end processes, including further optimizing costs, automating additional steps from a process and enhancing the customer experience. Our ability to be flexible and adaptive for new product offerings creates differentiated customer experiences and achieve our 2019 goal of double-digit revenue growth with breakeven adjusted EBITDA is inexplicably linked to continuous optimization of our operational capabilities. We are extremely pleased to have Alan onboard to build upon our recent progress. Now an update on our focus to create new product offerings and expand the channels that consumers used to access our brand. Earlier I discussed how we are transforming the business to serve consumers with specific needs, behaviors and purchase considerations in mind. I will highlight initiatives we have planned, many of which are already underway to propel our direct-to-consumer revenue performance. These actions are directed by two objectives. First, expanding our menu offerings to address a wide-range of cooking, taste and dietary preferences and second, strengthening our e-commerce platform to enable a seamless and exceptional experience throughout the customer journey. We are working to bring consumers more choice with new products that are informed by extensive data and analytics. In other words, what we know consumers want from us. For example, this quarter we increased our recipe and protein options on our family plan menus to increase flexibility for customers. We also recently launched two new offerings to select customers that can be purchased on our direct-to-consumer platform. Our special occasion meal and our summer grilling box, both designed for larger gatherings. We will continue to innovate with unique culinary occasions in mind leveraging the capabilities we have built to fulfill these needs. And in the coming months, we will add new customized recipe offerings to our menus. In September, coinciding with back-to-school season, we planned to introduce a selection of recipes that can be prepared to 20 to 25 minutes, a significant time saver compared to many of our current menu selections. Also, in the fall, we planned to offer recipes compliant with Whole30, a popular lifestyle program that encourages consuming wholesome nutritious foods. As you may recall, we launched a successful eight-week partnership with Whole30 in January. We know based on extensive feedback that the Blue Apron Whole30 recipes are a solution for a health focused consumer and we look forward to extending this partnership. We have mostly safe [ph] behaviors on our direct-to-consumer platform to identify ways you can remove friction from the experience to best attract and retain high affinity customers. For example, we plan on shortening the period between customers make their meal selection and when they receive their box. We also planned allowing customers to easily toggle between our two plan offerings, two servings and finally, to better serve their lifestyle needs. With our preliminary test, we have seen encouraging engagement from customers as we implement these platform enhancements. Providing an exceptional end-to-end experience for our customers is an ongoing priority. We will continue to critically evaluate our platform and make any necessary changes to delivering more seamless customer experience. As we evolve our product portfolio, we remain committed to sourcing high quality ingredients for our customers and ensuring the health and well-being of animals raised throughout our supply chain. In June, we publicly shared the results of these efforts and to announce a set of additional goals to drive further progress in our animal welfare work. As part of this announcement, we were recognized by Compassion in World Farming, a leading international farm animal wealth organization for our commitment to using higher healthier chickens, becoming the first U.S. based company to receive the Organizations Prestigious Good Chicken Award. Lastly, I'd like to share an update on our work to further strengthen and amplify the Blue Apron brand. Building trust and confidence in our brand is a key driver of our growth strategy. This quarter we launched two exclusive partnerships and a series of experiential activations across the country to create new touch points and engage customers. In May, we announced the partnership with Chrissy Teigen, a New York Times best-selling cook book author widely known as The Passionate Home Cook that created additional relevance for our brand. In late June, we announced the partnership with 20th Century Fox to bring three recipes from Bob's Burgers, the Emmy Award Winning Animated Series to our menus. We have been pleased with the enthusiasm and the life spread interest we received from consumers from both of these partnerships which speaks to our ability to line our brand with high profile influencers and demonstrate how we are creating discovery for our customers. In the second quarter, we also launched Blue Apron Unboxed, a series of National pop up activations intended to bring communities across the country together in celebration of Home cooking as well as build additional awareness and affinity for our brand. The events included a short-term experiential retail location in New York City, Movie Nights in Austin, Dallas and Minneapolis and mobile pop up experiences in Los Angeles, Seattle and San Francisco. These events are opportunities to extend our brand, increase physical emergence outside of the home where customers typically enjoy our product. We'll be launching several additional brand activations in the coming months. Before I turn the call over to Tim, I want to reiterate that we are focused on the priorities we expect to have a positive impact and our ability to return the business to our growth trajectory, evolving and expanding our existing product portfolio, enhancing our overall customer experience, and continuing to launch our retail and on-demand offerings, all fueled by our increasingly differentiated operational capabilities. Our focus is on the future. Building the foundation for long-term sustainable growth, while our transition is taking longer than we expected, our teams are driving toward our goals for the business, all while deserting sound financial discipline. Tim, I'll turn the call over to you now.

[Tim Smith:]

Thanks, Brad and good morning, everyone. It's great to be at Blue Apron and partnering close with Brad and the team to advance our strategies with the particular focus on driving sustainable top-line growth across multiple products and channels, gaining additional COGS efficiencies, prudently managing expenses and optimizing the business for value creation. As someone who has been a consumer centric companies for over three decades, I'm confident that we are making the right strategic improvements in the business to benefit the organization long-term. We expect many of these actions to favorably impact our financial performance later this year and pave the way for a strong 2019. As Brad mentioned, our leadership team is now fully in place and in the weeks that we had been together we've already begun implementing several initiatives to accelerate growth in the core business and pursue opportunities across new distribution channels. The team is aligned on the immediate work ahead to reach the levels of performance that we expect of ourselves and is highly focused on driving results. Turning to our second quarter performance, net revenue was $180 million compared to $238 million in the year ago period and $197 million in the first quarter, reflecting in part the seasonal cadence of the business. In the second half of last year, we deliberately prioritized operational stability to ensure better customer experience and position us with the future. Fast forward to today, while this action resulted in near-term revenue headwinds and enabled us to solidify a strong operational foundation that allows us to capitalize on strategic opportunities. Simultaneously, we are taking decisive actions to reinvigorate our direct-to-consumer platform. This includes implementing the customer-focused strategies that Brad mentioned such as broadening improving our product portfolio, while creating a frictionless customer experience. On the cost side, COGS, excluding depreciation and amortization as a percent of net revenue improved 400 basis points over the prior year to 64.7%, primarily due to efficiencies in food cost relating from enhanced planning processes. COGS improved 110 basis points quarter-over-quarter, largely from increased efficiencies in labour and shipping cost, which more than offset our typical summer packaging cost. As part of our ongoing effort to effectively manage costs and provide an enhanced customer experience, we recently signed a new multi-year contract with our largest transportation and logistics provider, FedEx. We anticipate this action will consolidate and increase efficiencies and much of our last mile delivery network. We are proud of this operational milestone, primarily given the significant pricing challenges in today's transportation environment. Marketing as a percentage of net revenue was 19.3% in the second quarter compared to the prior year of 14.5% and 20% in the first quarter of 2018. In the second quarter, we remained deliberate in our spend with the focus on efficiency, as well as investments in influential brand partnerships and experiential activations. As the year progresses, we will continue to align to our marketing efforts closely with the product and channel launches - with the product and channel launch strategies we expect to unveil in the remainder of 2018. Product, technology and G&A or PTG&A cost decreased 22% year-over-year to $51 million, reflecting our commitment to tightly manage cost, primarily in personnel and overhead with the slight increase in PTG&A cost quarter-over-quarter. We'll continue to pursue opportunities to optimize our cost structure in the second half of 2018. Driven by expense management and ongoing COGS efficiencies, we improved second quarter adjusted EBITDA by 27% to a loss of $17.5 million compared to the prior year. Our adjusted EBITDA performance in the second quarter was relatively consistent with the first quarter despite the expected seasonal trends in our business. Finally, our cash flow profile continues to improve in both the second quarter and year-to-date as a result of narrowing our adjusted EBITDA loss and a significant reduction in CapEx spend versus the prior year. We are investing prudently and now expect full year CapEx to be in the low-end of our $20 million to $25 million range. We are proactively working towards refinancing our revolving credit facility given our improving cash flow and our path to breakeven adjusted EBITDA. We expect to provide additional updates as these efforts progress. Turning to our financial outlook for the remainder of 2018, we now expect net revenue will take longer to return to growth than originally anticipated with net revenue declining year-over-year in both the third quarter and to a lesser extent in the fourth quarter as we implement the customer-focused strategies we spoke of earlier. Despite this lower revenue outlook, we remained confident in our ability to drive bottom-line performance led by additional operational efficiencies in COGS and PTG&A savings. COGS as a percentage of net revenue is still anticipated to be approximately 65% to 66% in 2018, a 500 basis points to 600 basis points improvement from 2017. As a result of the slower recovery in revenue and improved outlook on cost, we now expect full year net loss for 2018 to be in the range of $135 million to $140 million and adjusted EBITDA loss of $65 million to $70 million, a year-over-year improvement of approximately 50%. Specifically, for the third quarter, we currently project net revenue to be approximately $150 million to $160 million. Marketing spend as a percent of net revenue to be 17% to 18%. COGS excluding depreciation and amortization as a percent of net revenue to be in the range of 67% to 68% with higher seasonal packaging cost during the peak summer months. Net loss of approximately $40 million to $45 million and adjusted EBITDA loss of approximately $20 million to $25 million. In summary, our now fully formed leadership team is intensely focused on execution against our strategic initiatives. The expansion of our multi-product multi-channel strategy and the execution of our plans to further improve our direct to consumer offering or examples of the growth opportunities that had. We're also committed to make significant progress on bottom-line performance with our focus on operating efficiencies and cost savings continuing to reduce losses on our path to adjusted EBITDA breakeven. Thank you. With that, Brad and I will now take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question will come from Mathew DiFrisco from Guggenheim securities, please go ahead.

[Unidentified Analyst:]

Hi, this is Marko for Matt. Brad, I have two questions on the multi-channel strategy. The first can you provide a cadence of the 80 store pilot with Costco. I'm just trying to be determining an organic number for 2Q and therefore, derive the impact on the second half of the year, from the Costco orders. And secondly, what is potential for additional SKUs or additional retail pilots as we look forward.

[Brad Dickerson:]

So, on the Costco question specifically. Obviously, it's been a valuable opportunity for us to test our on-demand concept more broadly. And as we went through the second quarter, if you remember, we started this pilot with approximately 17 locations in two regions. And during the course of the quarter, we're able to really test more regions, so we've actually tested in seven of the eight Costco. And as I stated in my prepared remarks, and approximately 80 stores, right now. A lot of this is - pilots, the test for learning about a lot of different things, how to manage through varying recipe velocities. How to manage through changing recipes on a monthly basis. Different regional case profiles and so, for so the purpose of the whole pilot is to work through all the things that were great, some of the things that are more challenging and learn from them and be able to manage the business going forward. So, great news here is obviously that we've expanded our presence with Costco and 80 stores. But this is something that continues to be a pilot, we'll keep testing going forward and hopefully test some more locations, obviously would be testing more recipes, learning about more - again, the regional case profiles and continues to hopefully expand going forward. So, happy with where we're at right now and taking it from 17 stores that we started with to know approximately 80, but still in the process, got lot to learn and we will keep moving forward. In that process and the linear process. We have tested some locations within regions also and in the slopping out of some recipes, there are some stores we may have been in one week and maybe not the next in that transition from one recipe to the other. So, it hasn't necessarily been a linear process. But, the important thing for us is continuing pace of increasing exposure and increasing store count overall on a month-by-month basis for Costco. On the second piece, on additional SKUs and additional retail partners, going into this, the one thing, we were really focused on was being very deliberate in the partners that we choose to work with going forward and we talked about how exciting we are working with Costco and their prominence obviously in the grocery business. So, we've been speaking to many other partners. We've talked about that historically also and we're working through potential other partnerships and arrangements going forward. But we want to make sure that we're speaking with and engaging with brand right partners for our brand. And we also want to make sure, we're setting ourselves up for success as we enter into future pilots and tests with other partners down the road. Obviously, that also comes with product and variations and products and recipes, from existing core product and also, what we're serving at Costco. So, more to come on that, we are in varying conversations right now and again, we would expect that we had some more partners along the way, as we work our way forward.

[Unidentified Analyst:]

Great, is it possible to provide an organic revenue growth number in the second half of the year?

[Brad Dickerson:]

It's too early right now, I mean again, I think when we're in pilot stage and I want to be really careful because there is so many things that we're testing and we're learning on this. So, I want to be careful with that, Again, our goal here is to continue to expand our presence within Costco, that's we want to keep driving forward and hopefully, engage with some other partners along the way here, but in this early stage it's really hard, to kind of give you that number

[Operator:]

The next question will come from Rupesh Parikh of Oppenheimer. Please go ahead.

[Unidentified Analyst:]

Good morning. This is actually Elk [ph] on for Rupesh. Thanks for taking our questions. So, I wanted to touch on the top-line here, so clearly you have a lot of initiatives under your belt, and so I was hoping maybe you could talk about your confidence in getting back to that double-digit revenue growth next year. Just any thoughts you can provide here would be super helpful.

[Tim Bensley:]

Hey, thanks for the call. This is Tim and I'll probably go ahead and jump and take a shot at that first. As we move into next year, there is probably a number of things that we have to do to get to our overall goal of breakeven EBITDA, but certainly getting to revenue growth is an important part of it. And one thing that's interesting in the way that our equation is built this year is, we're continuing doing a really nice job of driving people to our site and doing it efficient with our marketing spend. Where we've really had more difficulty as once we get people to the site, I am getting to convert to the actual subscribers. And we think that the key to solving that kind of conversion problem is the initiatives that Brad talked about earlier. So, we're talking about, how do we get, how do we create new product offerings that address basically a wider range of consumer preferences. How do we strengthen our DTC platform to drive what we describe as kind of a more frictionless and more flexible experience for our customers? Doing those things is what we believe is actually going to drive that conversion number up on the kind of consistent number of site visitors that we have and if we do that that direct to consumer model will return to growth, and hopefully return to growth than with continued efficient spend on marketing. Clearly, the second part of it is what Brad was just talking about and we've got to be successful in the expansion of our multi-channel strategy as well. Costco is the first place we're doing that, we think it's the best place for us to learn and be successful and hopefully it will allow us to expand and some other retail partners beyond that. But that idea of sort of getting out there and meeting customers on their term channel strategy is a big part of our ability to return to growth as well.

[Unidentified Analyst:]

Okay, that's helpful. And then maybe you could just touch a little bit on how you're thinking about cannibalization at retail under DTC offering and how you kind of view the incrementality of that at this juncture now that you've had a couple of months into your belt with the Costco launch?

[Brad Dickerson:]

Yes, great question, and obviously we are very focused on that. But the way we're approaching this and again this is kind of in my prepared remarks, we believe there is a distinct value preposition for our customer in our core product offering today and that there is the ability to acquire numerous meals at once could it deliver to your doorstep. Obviously much more variety and choice in a week by week basis, that's changing, and the rest be change in a week by week basis. So, we believe there is a consumer that's a distinct value preposition for. We also recognize that many customers who may have left our subscription platform in the past and we surveyed have cited subscription as a challenge for them based on their lifestyle and what they need to do week-by-week. And also, we believe that many customers that we haven't accessed historically. Also, we believe that subscription or the challenge maybe of them historically that they have been buying their food physically in a retail location and buying food online is a challenge for them. We believe many customers would choose to access our brand through more of a retail location. So, when we look at our on-demand offering, I'd say two things. One, in a physical retail location, we believe it gives us the ability to actually access many, many more customers that we would be able to access through our core offering. For whatever reason whether it'd be subscription holding them back or ordering online holding them back. And second, starting to test our own on-demand product, on our platform with some delivery partnerships going forward. That gives us the ability to also access the customer on our platform where subscription and the commitment of subscription maybe something that's more challenging for them based on their lifestyle. So, although there is likely to be a little bit of cannibalization and we would expect that to happen. The purpose of this expansion is less about that it's more about accessing an increasing number of customers and giving customers access to our brand that we otherwise probably wouldn't have because of the challenge for them of subscription and on ordering food online.

[Unidentified Analyst:]

Okay, perfect. Thanks so much.

[Operator:]

The next question will come from Edward Yruma of KeyBanc Capital Markets. Please go ahead.

[Edward Yruma:]

Thanks for taking my question. I guess first on advertising, obviously you didn't take it up quite as much as you would have expected flat year-over-year. What is the advertising dollar you're spending today? Tell us about your new customers, are they turning faster? Kind of what behaviors are you seeing? And you kind of intimated that you may be changing or shifting advertising strategy. I guess what do you hope to achieve through some of the changes you're contemplating?

[Tim Smith:]

Hey, good morning, this is Tim, let me jump in and take a shot at that, I wouldn't say that we're changing advertising strategies. Although I would say that we are getting smarter and smarter about understanding what the most efficient channels are where we're spending our marketing's as well as what are the most efficient times of year or to spend that money. And, so as we move forward, the idea is to really leverage both of those to be as efficient and our marketing spend as we possibly can going into the future.

[Brad Dickerson:]

And I was just adding on to that, as you know, marketing obviously is connected to a lot of other strategies that we have in our organization. So, we have talked about doing more brand engagement. And you saw that during the course of the second quarter with our Unbox program. And beyond just the transactional acquisition marketing that we've historically done, we believe it's really important to continue to drive brand and highlight credibility and authority in our space. And you've seen that from us. So, taking some of those dollars, and making sure that we're having deeper engagement with customers, and doing some more non-traditional brand building for our space, at least non-traditional is important to us the keys to drive that brand. We think that's going to be important in an increasingly dynamic environment that we have in our industry. And then to Tim's point, around conversion so forth, it's interesting that, there is a lot of things that impacts the efficiency of our marketing. So, we're very focused on, one of those things that can actually help marketing moving forward. And to Tim's points before, as we spend marketing, we're getting the site visits. So, I think that goes to the strength of brand and the credibility of our brand in our space, people are interested in looking at our brand, in our space, what's been a little bit more challenging for us as we progress through the second quarter was on converting those site visits to paid subscribers. And that, obviously, is a trickier part of, there's numerous things that go into that around, everything from pricing, to merchandising, to product offering to customer experience, and again, in an increasing dynamic industry, we think we need to be excellent, and all those things. So, we're really focused and all those things that can help drive conversion and make marketing more efficient. As we look to continue to spend marketing going forward. So not necessarily changing the strategy of how we spend marketing but focusing on those key drivers that can make marketing more efficient for us, which just so happened to align very clearly to some of our product strategies, and customer experience, strategies, and so forth. And then you'll also, the good news here is that, when we do get customers on our platform, if you look at our revenue per customer number, it's been relatively stable over the last few quarters. So, the good news there is, when the customers do get on our platform, their opinion, they're relatively engaged in the same manner. And obviously, the margins of that engagement that we operate in or getting better overtime, too. So, there's a lot of positive things once we get customers in our life cycle here. So, we have to make sure that we are doing the strategic things that make it easier for them to join our platform.

[Edward Yruma:]

Great. And one more follow-up if I may. Obviously, some nice gross margin performance. You have a number of tests underway, right, Costco, the pop-ups. I guess, how should we think about the headwinds to some of those tests play into gross margin? How does that kind of go moving forward? Thanks so much.

[Tim Smith:]

Yeah, no, I think that's great. It's a great question. One way to think about this is. While we've had improving gross margins, and we're really proud of the improvements that we made in overall cost. The other really big thing that we've done with the facility centers is they become way more operationally capable. And that's as important many ways as the gross margin improvements that we've shown. So being able to do things like expand our product portfolio, the much more flexible and the menus that we're offering, all the things that Brad talked about, in addition to supporting this multi-channel strategy out of our fulfillment centers. That's the capability we really wouldn't have had a year ago that we now have today. In addition to facility centers that are operating more efficiently. So, as we move forward, obviously, during the test phase, we're not scale at this point. So, we're not really seeing the gross margins at a retail that we expect to see ongoing. But as we move forward, there's a lot of tradeoffs in the two equations. In the retail model, we essentially have a model where we have much lower acquisition cost, much lower marketing costs we have in the DTC model. We actually have lower shipping costs for shipping full trailer loads into retail distribution centers versus shipping direct-to-consumers. And all of those we have less packaging costs and that actually have to go into the packaging as the material stay in refrigeration. The flip side for that is obviously we have to share margins with the retailer, but the net of all that is we really feel like once we get to scale that the retail business should be margin neutral to potentially even gross margin accretive, I mean that's what we're working towards.

[Operator:]

The next question will come from Matt Trusz of Gabelli & Company. Please go ahead.

[Matt Trusz:]

Good morning. Thank you for taking my questions. Can you talk more about the on-demand opportunity with respect to how are the conversations going with third-parties both in the delivery fulfillment side and the marketplace or platform side. Do you already have any agreements in place there?

[Brad Dickerson:]

Yeah, Matt. We are currently working through that. So, we are talking about some specific locations on the East and West Coast until we have more definitive agreements. I want to be careful in announcing the locations and our partners. So, we are in negotiations with some partners. We're working down towards the path of this. We do anticipate in the coming months that we're going to be able to launch both at East Coast and West Coast test and pilot. And it maybe as the same partner on both and maybe different part on the East Coast versus West Coast that we're still kind of working through that. So, I want to be careful to wait till we have more definitive agreements there. But the whole idea here again is first and foremost, the test and the pilot. So, this is another opportunity for us to reach a customer outside of our core that for whatever reason that maybe, our core offering is an appealing to them again whether it's subscription or something like that. So, our first opportunity will be to reach out and access customers who engage with us in the past in these locations. Many of which did not have a problem with our brand and our product offering, but more it was a fit in their lifestyle for the most part that was part of the reason why they're no longer on our platform. So, the ability to give them an option now to access our brand, same day on-demand and a non-subscription manner, I think it's going to be pretty powerful for a lot of consumers and to engage with us. So, that's what we're going to test, and pilot is how successful are we in engaging and accessing customers who have been with us before or maybe are not with us now. How successful can we and attract new customers in this? Again, people who maybe have not engaged with our brand for whatever reason in the past, who now have the ability to engage with us on kind of a one-off basis. And the same thing on-demand piece, I think it's another one it's really important for us. We do believe that a majority of customers like to make their choice on meals and what they're going to do for meals little bit closer to the occasion. So, although, our core offering is probably aligned to many consumers relative to preplanning and stocking the refrigerator for meals for the coming week. We believe that many, many customers like to make that choice closer to the occasions. So, this will be again the ability for us to match, be a little bit more flexible and meeting the customer on their terms and see how that offer tests out. So, coming months, we look for some more announcements on this in the coming months. It will be a test, it will be a pilot when we learn a lot. And then basically take those earnings and move forward from there.

[Matt Trusz:]

Okay, thanks. And just a follow-up on something you had said earlier about lowering the lead time from recipe choice the time of delivery. Is that thing that would result in higher cost for you? And what is that have been possible in the past or is it totally unlocked by the recent operational improvements you've made.

[Tim Smith:]

I think it's highly unlocked by the recent operational improvements that we've made and also improvements to our e-commerce platform. It doesn't create any additional cost for us at all. It's really something that that we just have the capability to do. And we think it is actually a big improvement to the overall experience. If you think about today, if you got to make a decision on whether or not you want your Blue Apron Box to arrive 6 days from now and sudden we say hey, we can cut multiple days off of that. You have a longer time to make that decision. We think it's a big improvement to the customer experience as well as it should improve our order rate, because I see people will have longer few more days to make that decision know what's going on in the life before they make a commitment to that box arriving. But I think really those an increased cost for us at all. But the capabilities that we built in our fulfillment centers along with the improvements that we've made to our e-commerce platform just allow us to go ahead and start implementing that going forward.

[Operator:]

The next question will come from Youssef Squali of SunTrust. Please go ahead.

[Youssef Squali:]

Okay, thank you. Good morning. Couple of questions. Brad I want to go back to the marketing efficiency comments that you said. I think you said something to the effect that it was challenging for you to maintain, the marketing efficiency you saw in Q1 relative to Q4. Maybe can you dig a little deeper into why that was, how much of that is you versus potentially competition having just gotten a little stronger, in particular to maybe what was going on in the marketplace? And then, Tim, can you speak to just liquidity and capital resources, maybe speak to your cash burn levels for the second half and the comments on whether the model as it senses today is fully funded through profitability? Thank you.

[Brad Dickerson:]

Yeah, Youssef. Thanks for the questions, the marketing efficiency piece. Yeah, I think as we worked our way through the front half of this year, obviously we went from one of our lowest spend quarters in recent history for us in Q4 marketing spend to a much more higher level of spend in Q1. So, a lot of the benefit we saw coming out of Q4 and into Q1 and through Q1 was just the sheer fact that we put more dollars into the market. Understanding though that there was a little bit of momentum working against us because of the pullback in marketing in the back half of 2017, but we put a lot more dollars in comparably in Q1 versus Q4. So, we obviously saw some benefit to bumping that spend up in Q1 coming out of Q4. As we started getting into the second quarter, now getting into a more normal cadence of marketing. And if you recall, in the last few quarters of 2017 and so forth, they really haven't been on a normal cadence of marketing for a few quarters now. So, Q1 to Q2, a little more of a normal cadence. We saw some challenges in the efficiency side, on the conversion side especially. So, part of that I think is on us and I think part of that is the dynamic environment that we're in right now. The last piece, we have obviously in the focus on operations and the focus on improving margins. Unfortunate things that you're not focusing on when you're very, very focused on improving your margins and improving your bottom-line are things like innovation and things like product creation and things like customer experience and digital experience. So, understanding those things are very, very important drivers of acquiring new customers and keeping customers. It's very important for us to start to obviously elevate and accelerate that going forward. So, from a strategy perspective, we've always been talking about adding new products as we get to the back half of the year and so forth. And now, we're in the position with the margins where we're at, where we can start to actually launch and land some of these initiatives around new products and enhance customer experiences of the ones we just talked about. We believe those things will help us in marketing efficiency and that it will help attract new customers. When new customers come on our site with more products to choose from, more flexibility and ways to get to us and better customer service options, we believe that can only help in getting those customers to convert from a site visit to a paid subscriber. So, we do believe some of those things are on us. Just as an anecdote, some things we play it around and test it with pricing a little bit in the front half of the year. And as we moved our way through the second quarter towards the end of the second quarter and even recently post second quarter, although we've seen some declines in conversion year-over-year and sequential declines as we booked away through kind of the second quarter, we have seen some of that stabilize in the most recent weeks towards the end of the second quarter and a little bit post that. And some of that I think is from some of the things we've done over the course of the last few months relative to pricing and also some things that we have put in the place relative to new products and so forth. So, on the external part of this, obviously, a lot more focus in the space, very dynamic space that only strengthens the need for things like product innovation and great customer service experience. So, although those are things that we cannot point the finger at ourselves for this because of our focus on operations which was very much needed over the course of the last few quarters. The fact of the matter is that in an increasingly competitive environment, those things only compound themselves in the challenge of that. So, I think it's important for us as we look forward now that launch new products, focus on digital experience, focus on the physical experience with the customer, attract new customers, give customers more reasons to interact with our brand. We think that can only help not only from the perspective of us as a company need to do that but us doing that in a more dynamic environment also.

[Tim Smith:]

Let me pick up the second part of the question which is about our liquidity and cash burn outlook. First of all, certainly just kind of finishing up or just starting my third month - just kind of pass on my June month anniversary one of the key focuses when I came in here was on continuing to improve the strength of our balance sheet. Couple of probably three different items to talk about here the first one is as we certainly year-to-date as we've improved our EBITDA performance and lower significantly lower capital than it was a year ago cash burn has significantly dropped versus what we're doing in 2017. As we go into the second half of this year, if we are able to - first part of it is EBITDA we're able to deliver in the low end of the guidance that we brought in EBITDA or cash burn will continue to improve sequentially in the second half, it's also going to of course significantly be better than it was in the prior year. The second part is CapEx and I talked earlier about the brief, I've put out some improved guidance on CapEx we expect to spend about $20 million versus the older guidance of about $25 million we're targeting that would imply there are CapEx spend in the second half is going to be similar to the first half. So as long as we can maintain that we should continue to be in good shape on second half cash burn. And the third part of the equation is obviously what we do with our current outstanding revolving credit facility and I think I'd mentioned earlier that we're proactively working towards refinancing that and that's taking out highly - our ability to do is highly based on our improving cash flow profile as we continue to work to our EBITDA guidance and hopefully start to approach something like breakeven EBITDA in the fourth quarter in 2019 and then hopefully we'll have that refinancing wrapped up in the coming months when we do look at back and provide additional updates on it.

[Operator:]

The next question will come from Ross Sandler of Barclays. Please go ahead.

[Ross Sandler:]

Hey guys Brad just going back to the prior question on marketing efficiency and retention rates I guess you addressed the marketing efficiency but what are you seeing on the retention rate side as you build out these new flexible menu options. Have you seen any change in retention rate and then if you look at the 3Q guidance that implies around a mid-20% revenue decline and a reduction in marketing? Think historically you guys have used the fall season is a good time to ramp up marketing so what's holding back that side of the strategy why not crack things back up. Any color there would be helpful?

[Brad Dickerson:]

Yeah, so Ross on marketing efficiency and retention, the challenge for us we believe is more on the acquisition side of the business, not on the retention side of the business. If we can acquire customers in an efficient manner, the retention side of the business shouldn't be a challenge for us as much and retention for us hasn't changed drastically year-over-year relative to what we've been seeing compared to history. So, this is more top of the funnel type things that we're focused on right now. it's just so happens though that a lot of these strategies that we're talking about that are needed strategies that can improve the way we acquire customers more products, more flexibility, better customer service, obviously should also help retention to some level also so there's a byproduct benefit to retention that in theory so we're more focused on the top of the funnel knowing that some of these things should also help on the retention side of the business too. As far as the Q3 guidance goes. It's just for us focus on efficiency in marketing, focus on all that efficiency is really important to us so before we start to press the paddle down too much on marketing although we're kind of in the kind of normal cadence now of how we're spending, we really want to execute on some of these strategies. So for us just putting more money into the top of the funnel when you're working on things that likely will help your conversion and make your marketing more efficient our goal here is to land some of these initiatives during the course of the back half of this year around products and around customer experience and see what the impact of conversion is and if we can get a positive impact to conversion and see some positive metrics there that will give us more confidence to put more dollars at the top of the funnel so we want to be careful in the timing of how we do that based on what we see in the results from some of our strategic initiatives more than anything.

[Operator:]

The next question will come from Michael Graham of Canaccord. Please go ahead.

[Michael Graham:]

Yeah, thanks just to kind of build on that last dialogue there, Q4 has typically been down quarter for ad spends for marketing sequentially, I think what you are talking about - continuing to be talking about the transition year. And I guess should we think about sort of having things from a product logistics capability in place and really sort of lean back into that, at the beginning in next year and I guess that really when you think e-commerce customers can start to grow again on a more sort of regular basis. And then I just wanted to ask also on the multi-channel stuff, I mean one of the real strengths of the business. Outlook has been the ability to positively impact the supply chain by the enabled of sort of predict what you're going to be offering from menu selection and those types of things. Does that - does the multi-channel strategy have those same benefits to the supply chain and helping sort of build relationships with the suppliers and helping them sort of predict what they need to produce for you?

[Tim Smith:]

Sure. Yes, maybe let me jump in and talk about the first half which is the relationship between marketing spend in the fourth quarter and what we're expecting for revenue in the fourth quarter and then how will that impact as we transition into Q1. We haven't provided specific revenue guidance for Q4, but a couple of things will have an impact on that we can talk about very quickly. First of all, as we do spend marketing coming to the third quarter into the fourth quarter, the one place within the quarter that we do ramp it up a little bit and really lean in is during the back to school time, that is a part where we - time of the year we can engage customers and hopefully it brings some more people into the top of the funnel. And that can have a positive impact on Q4 and that will be a focus of ours for sure. The second thing is, Q4 to your point really is where we should start seeing the impact of the rollout of some of these new consumer facing initiatives that Brad talked about earlier, both on the side of the kind of improved product offering as well as the more frictionless e-commerce platform. And to the extent of those things actually kick in that we can see some improvement in Q4 revenue as well, I mean at a minimum we would expect Q4 to be no worse than our Q3 performance then to the extent that those initiatives that I just talked about have an impact that could actually pickup. Now as we roll into Q1 of course, Q1 is the time of the year that we would lean more into marketing as we have in each year, that's the real - a big time for us to engage consumers and really bring kind of new people into the top of the funnel, I mean we'll have some pretty exciting things going on, if we move into the first quarter, we'll get marketing spending behind them and hopefully that ramp up in Q1 and that has a previous year as well, resulting a ramp up in new subscribers coming on as well.

[Brad Dickerson:]

And Michael on the second question, multi-channel environment and the impact to the supply chain, suppliers and pushing demand so forth. The good news here is we obviously have a lot of data from our six-year history and we obviously touch millions of customers along the way in that six-year history and we have a lot of data around taste profiles and regional taste profile, seasonal taste profile, the impact to unique ingredients that we put on menus and recipes. So, we - that data is very, very - is very impactful to when we enter the retail space in a multi-channel space and on-demand. So, utilizing that data is going to be very powerful for us, in predicting what types of recipes that we believe will work the best in the multi-channel environment. Obviously, the one unique facet of this though is that in a pure on-demand - pretty core subscription business, our recipe standalone from a consumer offering on our core platform so the one nuance will be obviously that as we enter other - especially physical retail, there is a lot of other choice around us in physical retail location. So, obviously the one challenge that we'd be taking all the data from the last six years and making sure we look at that relative to being in a different environment, where there is a lot more choice around us. So, we got a really strong culinary team, working with our sourcing department and working with our partners specifically in this case Costco and utilizing all this data to determine what we think-- what recipes are the best recipes to serve to the Costco customer based on a lot of the data we have and seasonal taste profiles and regional taste profiles and so forth. So, I think that data was going to come into, it's going to be very, very handy for us as it works towards predicting demand in a retail space and also as it works towards the ingredients and the sourcing that we will need not only in the current recipe rotations, but future recipe rotations in the retail environment. So, the data will be a big asset for us in that aspect.

[Operator:]

The next question will come from, Heath Terry from Goldman Sachs. Please go ahead.

[Heath Terry:]

Great, thanks, wondering as you look at the customer attrition that you saw in the quarter. Any sense, either from exit surveys or any survey indicators you have to look at. Whether there are customers or billing they are dropping out of your customer base altogether or they are going over competitors, just any sense as, you know, what's driving that overall, trying to be seeking. And then particularly to the extent, as looking at customers that have kind of reactivated overtime. What you are seeing in trends on that front particularly as you guys have made some of the operating efficiencies and marketing efficiency improvement that you have. And then, last one, as you look at the plan for incremental SKUs on the, with your core online products sort of where you are in terms being able to have options of - scaling up and down the number of meals that are offered, the number of family members that are better served. This in terms of that flexibility that you've talked about in the past.

[Brad Dickerson:]

Yeah, Heath. So, as far as the first question, surveys on the way. We're not seeing anything that's standing out drastically different as far as reasons why people would be leaving the platforms. So, I think there is a lot of the similar challenges that we've historically had along the way. We're not seeing anything stand out specifically that would be unique and different than what we've been seeing from trends over the 60 years. So, nothing that withstanding out that point in time. As far as reactivations go, obviously as we add new customer experience initiatives and we launched them, we launched more flexibility and more products. We obviously - we tend to try to match those up with exit surveys of customers historically who have left us, where those offerings may be more of their concern, So, especially in the family side, if we've had some family customers in the past, who may have exited, but, we expand our family offering, those will likely be the first people that we reach out to. So, we've some positive traction in the reactivation side when we have products and or customer experience initiatives that match specific survey results for folks and with specific customers and their exit survey. So, we will continue to do that obviously as we expand many offerings and so forth going forward. Reactivation will be major, major part. On the acquisition side, obviously trying to get some ex-customers back on board as we expand offerings and so forth. As far as, the increase SKUs and the core online and so forth so, a couple of things, I have mentioned there is the - again ability to focus on flexibilities, so toddling between, two serving or a four serving on a week-by-week basis gives obviously a lot more choice and flexibility to customers, expanding menu options. It's something that's we're very focused on. What we're doing as we do that though is our operations team, we now have Alan on board. We're being very, very careful and clear on those things that how we do that and how we execute on that. So, it won't impact of the efficiency of our operations. So, balancing really the benefits to the customer with more flexibility and choice, balance with our ability to execute on that internally, is what the teams have been working through and we've been able unlock some pretty good efficiencies and how we approach them and look at menus and recipes and ingredients and so forth, to enable expansion without really increasing complexity to any large in our fulfillment centers. And then obviously, we've talked about this in the past and this is going to be a focus of ours going forward and Alan brings a lot of great experience and this is the ability to also use third party fulfillment and manage third party fulfillment and the ability for us to scale offerings and product offerings and offer more to our customers. So, in some of those offerings that may be, would add too much complexity to our existing footprint, leaning on third party fulfillment platforms to help us execute on some revenue driving initiatives or product initiatives would be something that we'd be interested in doing or working towards and we are talking with few folks right now. Alan brings a lot of experience in managing both internal and external fulfillment capability, so he'll be really instrumental in our ability to do that and that will be a big, big part as we start working our way through. The end of this year into 2019 and beyond, helping accelerate product offerings is opening a bracket past to do that

[Operator:]

The next question will come from Mark Mahaney of RBC Capital Markets. Please go ahead.

[Zachary Schwartzman:]

Hi, Zachary [ph] on for Mark, Thanks for taking our question. I have a follow-up to Edward's earlier question. Can you talk more about your retail and on-demand learning so far from the marketing and spend side? In particular, does the in-store retail environment could be more or less competitive than initially thought? I guess at another way, do you believe you can effectively grow sales and market share here without heavily investing in trade promotion? That is typically required to gain and maintain share and the traditional brick and mortar retail space or is it really still too early to tell? Thank you.

[Brad Dickerson:]

Yeah, I think it is still too early to tell because there is so many nuances of testing this out of around, the nuances of recipe velocity and so forth. So, recipes play a big part and this taste profile play a big part in this. There are some recipes whose standalone, will perform very well. There might be some other recipes were requiring us to explain to the customer a little bit more about that recipe offering. So, early on right now we have tested doing similar store marketing versus locations where we don't. There is obviously a benefit to doing in store marketing. We're trying to make sure that, over time we understand and quantify but that level is and the impact on the upside is to revenue. But I think it's really early to tell at this point, however it will impact the business overall. I mean we have to get through some more months, have more locations, test different regions, test different taste profiles, different recipes to really get kind of an overall handle on that and not just that issue, but the overall P&L I think just to take a little bit more to that.

[Operator:]

The next question will come from Mark May of Citi. Please go ahead. Mr. May your line is open if you wish to ask your question.

[Mark May:]

Yes. Thank you. Most of my have been covered, maybe a question on customer profiles. When you look at your customers are there any interesting characteristics of your best highest repeating customers that you could possibly use to, I don't know more narrowly target your product offering or your marketing that might end up narrowing your 10 but ultimately improve the profitability of the business in terms of demo or income level or geo-location or food tastes or anything like that that kind of stands out as you study the customers? Thanks.

[Brad Dickerson:]

Yeah, Mark. I think the biggest thing there that we've seen and looking at this is more fit into lifestyle than anything. Obviously, customers have different taste profiles and different recipes for different customers obviously have different results. There are some regional buys to, but I would say the bigger thing on our core subscription business is more lifestyle of people, who understand and value the proposition of choosing numerous meals on a weekly basis taking that decision off the played for them on a weekly basis of what's for dinner for numerous meal occasions. And they have a consistency of lifestyle where that it can be a great fit for them. And I think that's kind of been our best customers. Where there is kind of a consistency of lifestyle where they're able to plan ahead and order on a regular basis and know that from a week-to-week basis, but they're going to be able to cook with our brand. I think that, as we work our way forward. The interesting thing here is going back to the on-demand piece is, really trying to understand and identify based and all the data we have in the profiles of people that we have, people I have are with us and active or people who may have left us along the way. How does this on-demand piece play into this and kind of relevant to your question is. In the future, our goal is to meet customers on their terms and give our customers great products in whatever terms that they may choose to interact with our brand. And in the future would be nice for us to be able to obviously focus our online core business acquisition marketing on the folks who are most likely to be those kinds of customers that you're talking about, who are sticky in order on a regular basis versus understanding and identifying those customers, who probably would rather interact with our brand more and on-demand feature. So really trying to align our spend in our voice-to-consumers to match more how they want to access us versus just throwing a bunch of money at the top of the funnel to see what happens. I think we need to be much more thoughtful as we work our way forward. And that's part of our strategy around aligning spend to customers and how they would most likely interact with us. And that could play a part in efficiency to and to your point. Could it impact the team of our core subscription business potentially? However, we believe that it could actually expand our reach of greatly beyond our course inscription business in matching the needs of customers on an on-demand basis, which we think that number of people could potentially far exceed what our core subscription business looks like today over the long-term.

[Operator:]

With that, I will now turn the call over to Brad Dickerson for concluding remarks.

[Brad Dickerson:]

Thanks everyone for joining today. And we look forward to continuing the dialogue going forward. Thank you and have a good day

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.