Blue Apron Holdings, Inc.
Q4 2018 Earnings Call Transcript

Published: 31 Jan 2019

[Operator:]

Ladies and gentlemen, good morning and welcome to the Blue Apron Holdings Fourth Quarter and Fiscal Year 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 Kissell, Senior Vice President of Corporate Affairs and Investor Relations. Ms. Kissell, please go ahead.

[Felise Kissell:]

Good morning, everyone, and thank you for joining us. As a reminder, late yesterday, we issued an 8-K filing related to transferring a substantial portion of the Blue Apron's production volumes from Arlington, Texas fulfillment centers to our largest and most efficient facility in Linden, New Jersey. Additionally at that time, we also released our fourth quarter and full year 2018 earnings results with this disclosure purposely accelerated, so that you have all information readily in hand. Brad Dickerson, Chief Executive Officer of Blue Apron and Tim Bensley, Chief Financial Officer, will now review these disclosures more in depth and be a resource for any questions you might have. Various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these 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 may be referencing 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 Web site located at investors.blueapron.com, under Events & Presentations. With that, I'd now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad?

[Brad Dickerson:]

Thank you, Felise and good morning everyone. On today's call, I will review the strategic actions underway across our direct to consumer business where we are beginning to see positive customer trends as a result of our sharpened focus on attracting and engaging customers who represent high value to the business, continued focus on new channels, including expanding the scope of our strategic relationship with Jet and strengthening operational capabilities where we continue to gain significant efficiencies and have further optimized our network primarily in our Linden fulfillment center. Our progress on each of these actions has reaffirmed our confidence in achieving profitability on an adjusted EBITDA basis, both in the first quarter of 2019 and for full year 2019. I will discuss each of these strategic actions in more detail and then Tim will then provide insights into our fourth quarter and fiscal 2018 results, as well as a view of 2019 before we both take your questions. First an update on our direct to consumer business. Last November, we shared our approach to more thoughtfully and strategically serve our customers by prioritizing segments that demonstrate behavioral attributes, such as proven retention, brand affinity and high potential to increase engagement with our product offerings. This emphasis on further engaging our base of best customers and growing this valuable segment is rooted in our understanding of consistent trends within the business. Specifically, as we discussed on our last earnings call, the top 30% of our customers on a net revenue basis acquired in recent cohorts account for more than 80% of our net revenue from such cohorts in the year after acquisition. These customers have an average payback on our cost to acquire them of less than six months. And the average net revenue per customer for the top 30% of our customers with 10 times greater in the year after acquisition than the average net revenue per customer of remaining 70% of our customers. Since we communicated this more focused and disciplined approach, we have deliberately reduced our marketing spend and strategically invested in attracting consumers who have high potential to be valuable to the business. While it's still early, we are seeing encouraging trends in our customer metrics, most notably average net revenue per customer, which increased on a year-over-year basis, demonstrating the quality of our customer base is strengthening. Continuous product innovation that serves diverse test, cooking and lifestyle preferences, strategic partnerships that enable us to efficiently align our platform with like-minded brands and differentiated brand messaging are and will continue to be strong drivers of our focus to attract and engage high-quality consumers. As you know, in late December, we launched an exclusive national direct-to-consumer partnership with WW, formerly known as Weight Watchers. This partnership is a first of its kind for us, both in customization of our digital platform and continuity, as this dedicated in menu offering is always on and available to health and wellness conscious consumers year-around. While the results are still very early, this partnership has shown higher-than-expected demand to-date. And we have been encouraged by the favorable response and interest in this offering demonstrated by both new and existing Blue Apron customers. In the months ahead, our culinary team plans to iterate and improve upon our offerings, based on the preferences of this health and wellness focus to consumer segment. WW very recently promoted the partnership using tools such as dedicated promotional materials in WW Studios, including at recent open houses for current and prospective members, and email campaigns to its members across the country. We will continue collaborating with WW to elevate the partnership externally. We look forward to building on the launch of WW and plan to pursue additional strategic partnerships that align to our brand, as well as our focus on attracting and engaging more best customers. Turning now to channel expansion. As we've broadened the reach of the Blue Apron brand beyond our direct-to-consumer platform to more households across the country. We are proud to introduce Blue Apron Knick Knacks, our most flexible culinary innovation to-date created for online and brick-and-mortar retail. Our Knick Knacks product gives customers the flexibility to pay our store bought protein and produce of their choice with Blue Apron Knick Knacks, a refrigerated product with an extended shelf life that includes specialty pre-proportion sauces, grains and dairy ingredients from our premium suppliers, proprietary Blue Apron ingredients, including our line of custom spice blends and a step-by-step Blue Apron recipe specially designed the customization in mind for protein and produce preparings to complete a meal for two. This new offering is a differentiated highly scalable product with appealing benefits. Consumers can now elevate their everyday home cooking experience using their preferred protein and produce with the Knick Knacks recipe that delivers the quality, flavors and culinary experience that Blue Apron is known for and trusted to deliver. This offering also gives retailers an extended shelf life solution, and the ability to cost and cross merchandise their own products, which we expect will increase our addressable market by reaching consumers in innovative ways through diverse channels. We are proud to announce that Jet will be our first retail partner to sell Blue Apron Knick Knacks on their city grocery platform beginning tomorrow, February 1st. As you likely recall in late October, we began featuring a rotating selection and two serving Blue Apron recipes on just online and mobile platforms available for same day or next day delivery to consumers across the New York City metropolitan area. To date, we've been pleased with the demand for our selection of products and have since added two additional recipe offerings to our rotation of meals as consumers enjoy the convenience of adding Blue Apron products to their online shopping cart as part of their grocery routine. We look forward to expanding the scope of our relationship with Jet by adding Knick Knacks to our branded experience on city grocery platform. As we make progress in our channel expansion strategy, we continue to apply learningss from previous partnerships, including our Costco pilot last year. In fact, insights from these opportunities lead us to expand our portfolio of products by trading new innovations like Knick Knacks that simultaneously solve for consumer flexibility, while offering retailers tangible benefits. We are in active discussions with additional perspective partners as we focus on expanding our selection of individualized two and four serving meals, and our new Knick Knacks offerings in the retail environment. We are also pursuing additional strategies to expand same day or next day on-demand delivery of Blue Apron products to consumers in other parts of the country. Now, an update on operations. As we continue to optimize our network with a focus on maximizing efficiencies, we have achieved tremendous progress toward operational optimization, particularly in the fourth quarter where cost of goods sold as a percentage of net revenue improved to approximately 61%, representing the strongest cost to goods sold efficiency we have seen in any quarter reported to-date. This performance was primarily driven by improvements in our Linden fulfillment center, which continues to be our largest and most efficient facility. Following an assessment of our operational structure in light of these significant efficiency gains, we identified an opportunity to further optimize our fulfillment processes by transferring a substantial portion of the production volume from our Arlington, Texas facility to Linden and consolidating our Texas fulfillment operations. Under the leadership of our Chief Supply Chain Officer, Alan Blake, we are confident that this transition will be seamless due in part to our close coordination between facilities. Arlington will operate as a smaller facility and serve customers in the Eastern Rockies, lower Midwest and certain southern states. Our operational presence in Richmond, California will continue to serve customers in the Western states, including the Pacific Northwest. Linden will continue to serve customers on the East Coast, Great Lakes, upper Midwest and southeastern U.S. regions. We believe this change will enable us to most effectively utilize our production capacity and automation capabilities in Linden, shorten transit times, decrease our shipping spend and reduce duplicative overhead costs across the business. As a result of this strategy, while we will be hiring in Linden to meet the increased production volumes, our staffing needs in Arlington will change. Specifically, after a transition period, we will be revising production schedules in Arlington, resulting in a substantial decrease in a number of employees needed to meet the new volumes. Decisions that impact our employees are never taken lightly, but we are confident this approach will enable us to continue to optimize our operations as we work to build a strong profitable business. We are entering 2019 with confidence given progress on our strategies, actions currently underway and opportunities that remain ahead for the business. Our focus this year is to implement the appropriate initiatives that will drive a sustainable revenue base and profitability on an adjusted EBITDA basis. I am proud of our team's commitment toward these goals as we build the foundation for future growth. I will now turn the call over to Tim.

[Tim Bensley:]

Thanks Brad, and good morning, everyone. Turning to our financial performance, for the fourth quarter, we improved are not loss by 39% year-over-year to $23.7 million and reduced our adjusted EBITDA loss by 60% year-over-year to $7.8 million. For the full year 2018, net loss on adjusted EBITDA improved 42% and 56% year-over-year, respectively. The bottom line outperformance in the guidance provided on our November earnings call was driven by effective expense management, purposeful acquisition marketing strategies and ongoing gains and operational efficiencies across all of our fulfillment centers and in particular in our Linden New Jersey, our most efficient facility. Net revenue in the fourth quarter was $141 million, slightly higher than our original outlook compared to $188 million in the prior year and $151 million in the third quarter. Fourth quarter marketing spend was 14.4% as a percentage of net revenue compared to 13.4% in the prior year, and 15.4% in the previous quarter. Our revenue performance was a result of both typical fourth quarter seasonality and the transition to a more deliberate customer acquisition strategy, focused on the most efficient acquisition channels. This disciplined customer acquisition mindset also contributed to higher average net revenue per customer, both sequentially and year-over-year. Going forward, we will continue to hone our strategy and focus on attracting and engaging customers with proven affinity with our direct-to-consumer platform to deliver paybacks on our customer acquisition spend of on average 12 months or less. We continue to build and leverage our operational capabilities, resulting in significant COGS efficiencies within the quarter. COGS, excluding depreciation and amortization, was 60.8% as a percentage of net revenue, improving 930 basis points from the prior year and 720 basis points quarter-over-quarter. We made great strides in labor and food costs as a result of enhanced planning and process driven strategies. Given the significant operational progress as announced will be transferring substantial production volume to Linden from our Arlington fulfillment center, and consolidating our Texas fulfillment operations in the Arlington facility. I'll discuss the impact of the transition in more detail in a moment. Product technology and G&A or PTG&A cost decreased 15% year-over-year to $45 million, and were 6% lower quarter-over-quarter as we continue to tightly manage cost and specifically as a result of the actions taken in mid-November to streamline our workforce. We incurred employee severance and other cost of $2.2 million in the fourth quarter related to these actions, and we remain committed to our ongoing cost savings initiatives as a key part of our plans to achieve profitability on an adjusted EBITDA basis in 2019. Our cash flow profile was strong in the fourth quarter, driven by improved adjusted EBITDA performance and lower capital expenditure needs, with cash and cash equivalents of $96 million at year-end. CapEx spending in the fourth quarter was minimal at $2 million with limited capital expenditure needs expected in the foreseeable future. Entering 2019, I am confident that we are taking the right steps to optimize the business, including; allocating marketing investment to attract and engage consumers with high affinity attributes; initiating strategic partnerships that advance our product and platform innovations; managing resource allocation and expenses with a rigorous discipline; and implementing ongoing operational efficiency gains across our fulfillment centers, including leveraging Linden at greater scale. Specifically, in regards to that last point, I'd like to speak to those financial implications with actions we announced late yesterday related to our Arlington facility. We expect to incur approximately $1 million in restructuring costs over the first and second quarters of 2019, including severance of $0.3 million and other exit costs of $0.7 million. We expect to generate annual savings of $7 million beginning in the third quarter of 2019, including $4 million in COGS and $3 million in PTG&A. As Brad mentioned, our Arlington facility will remain in operation, but will serve as a smaller geographic footprint. Overall, we continue to expect reduction in the PTG&A expenses of $40 million in 2019 compared to 2018. Now, turning to our outlook for the first quarter. Given the improving financial performance of the business, we expect to achieve significant bottom line improvements with net loss in the range of $11 million to $14 million in the first quarter of 2019 compared to a net loss of $32 million in the same year ago period. We expect to achieve profitability on an adjusted EBITDA basis in the range of positive $2 million to $5 million in the first quarter of 2019 compared to an adjusted EBITDA loss of $17 million in the first quarter of the prior year, as we build upon sequential quarterly improvement in net revenue, variable margin, and PTG&A expenses. For easy reference, we have posted a reconciliation chart from net loss to adjusted EBITDA on Blue Apron's investor relations Web site. For full year 2019, we expect that our net loss will significantly improve from 2018, and we remain confident in achieving profitability on an adjusted EBITDA basis for the year. We are building a foundation for a strong profitable business by cultivating a high quality and loyal customer base that we believe will ultimately put us on a path for top line growth. As I mentioned on our last earnings call, we are deliberately not pursuing unproductive revenue. While we expect this to result in a lower overall net revenue and customer count in 2019, we anticipate average net revenue per customer and orders per customer leading indicators of the strengthening customer base to notably improve during the year, while reflecting typical seasonal trends in the business. We believe that our new products and platform innovations and strategic partnership opportunities could accelerate our anticipated growth. We will certainly keep you updated on this progress. In summary, we continue to emphasize focused execution, working cross functionally across the organization to propel improved performance, and actively pursuing the appropriate strategic initiatives to create value for our stakeholders. Brad and I will now take your questions.

[Operator:]

We will now begin the question-and-answer session [Operator Instructions]. Our first question will come from Edward Yruma of KeyBanc Capital Markets. Please go ahead.

[Unidentified Analyst:]

This is Sarah on for Ed, thank you for taking our questions. It's nice to see the WW partnership is off to a good start. Can you give us a bit more detail on behavior of those customers you brought in through that, and how big the business could be for you this year? And do you expect to offer WW meals or anything WW related any when you rollout to brick and mortar?

[Brad Dickerson:]

So, I think it's important to note that and again this really ties specifically to our best customer strategy in going after high affinity customers with the thought being that partnerships like WW is a great opportunity for us to attract and acquire customers in group stages versus individual consumers one at a time. So we love this idea about partnerships and partnering with folks that have large subscriber basis that we can speak to and talk to in relation to our offerings. So obviously it's just kicked off at the end of December early January, it's still very, very early obviously. This is a unique relationship for us. It's our first all year round offering. So we are in this for the long game by all means. And it is still very early and we're working very closely and collaborating with WW, and making sure that we launch this in the correct manner, and a great consumer experience. And in doing that, we wanted to be careful knowing that January typically is a high demand month anyway for our type of product and also for WW. We wanted to be careful that we caps kind of the capacity of this product in January to begin with. Just to make sure that we could match supply and demand and have a great consumer experience. And out of the gate what we recognized was that there was a pretty high demand from our customer base, both new customers coming in and that we're interested in the WW offering, and also our existing customer base. And that did create some challenges with just mean that capacity cap we put in place to make sure we had a great customer experience. And in collaborating with WW again in the spirit of a long gain here, we wanted to make sure that we didn't stress and challenge that capacity anymore than we needed to early on. And what you've seen is WW has kind of been a little bit pull back a little bit more on the messaging of the Blue Apron products in January. They are also going through a rebranding effort, focused a lot on messaging their rebranding and so forth. So we've been careful here in the early stages not to really challenge our ability to meet supply and demand. Now that we have about a month under our belt to get a better feeling on demand, what you are going to start to see again us collaborating with WW, you are going to start to see the message some more going forward on their platform on our product offerings, which should increase hopefully the idea of being -- should increase the demand coming from their platform to match with the demand we've been seeing in our platform and continue to expand this offering going forward. So in summary, we are really pleased with the interest in the product and that really has been without any significant WW messaging and push to-date, which will start to change in February. So we are really excited about that. And again still early here, it's the year-round effort, so this is going to be a consistent collaboration with WW going forward. We love the idea of partnerships like this going forward to attract larger consumer basis to our product offering. And it also matches up obviously very nicely with our ability to have product offerings in the health and wellness category, which is important for us too. As far as the retail offering, we are the exclusive provider for them in a direct-to-consumer basis. We just kicked-off this relationship and we are very focused on that right now, we want to be successful on that. But obviously, the partnership is off to a great start. We are collaborating in a great level of detail with them right now. And we would be happy to continue to expand those conversations and product offerings down the road. But at first, we got to be successful with things just kicked off right now, which is a direct-to-consumer offering.

[Operator:]

Our next question comes from Rupesh Parikh of Oppenheimer. Please go ahead.

[Rupesh Parikh:]

So on the product innovation the Knick Knacks product line that you're discussing. I was curious if you've tested the product, thoughts on the margin profile. And then what you plan to do from a marketing efforts for some of these new products? Thank you.

[Brad Dickerson:]

So the Knick Knacks product again came out of our learnings from the Costco pilot last year and some of the challenges that we talked about in the November earnings call was around shelf life and shrink and so forth in that business model. And the great thing about Knick Knacks is that it gives us a much more shelf stable product, a longer shelf life. And it really focuses on what I call the backbone of the recipe, it's the taste profile of the recipe, it's the sauces, it's the grain to the spices. And obviously, the most important thing it's the recipe itself and a step-by-step recipe. So this was really -- this innovation came from the idea of coming in from more flexible offering for our consumer, where they can match up some of their preferences and be more flexible around which type of protein or which type of produce they may want to match up with the taste profile. So it was a combination of lessons learned on the challenges of the retail environment, along with the view of how can we have a more flexible offering to the consumer. So this product has been tested a little bit with consumers. Obviously, historically, we have done testing with this. The great part about this right now is with the Jet relationship is we've been speaking with them and we are going to launch this in collaboration with Jet, and you'll see much more from us around the launching of this from a media perspective and a PR perspective next week that is the plan of getting collaboration with Jet. So we will be really excited to do that, kick that off next week. But the idea with this product obviously is it can go beyond the platform of online retail and could be obviously an interesting take into brick-and-mortar retail in other areas and other channels going forward also. From a margin profile perspective, obviously, we are looking to match our current margin profile. This product will be priced -- the pricing of this product may change a little bit based on recipe. But in general, the product pricing right now is 7.99, which again is for a two serving product that the customer would go match protein in produce uplift. And the margin profile in general should be similar to our core product margin profile.

[Operator:]

Our next question comes from Michael Graham of Canaccord. Please go ahead.

[Michael Graham:]

I just really wanted to ask about the cadence for next year on the customer front -- or this year rather on the customer front. You have talked in the past about Q1 being heavier marketing quarter. And just wondering how that flips relative to your outlook for lower number of customers? And I'm wondering if you could make a comment on whether you feel like there's a chance that as we exit 2019, you may be sequentially adding to the customer count by then or just any thoughts you can give us on that.

[Tim Bensley:]

Yes, absolutely. I'll give Brad a break and take a shot on that. And then Brad, you can jump in with any color at the end of this. As I said in my script, Q1 we do expect to see some sequential improvement in revenue as we normally do, because of the seasonality of the business. But overall we move through the year based on our more deliberate marketing spend. And as we said at the end of the third quarter and said it so far on the call today that does mean that we -- the marketing spend both in absolute dollars and as a percentage of net revenue. As we move through the year, we would expect in the first phase of this strategy for us to see overall net revenue decline and customer count decline on a seasonal basis the way that you would expect from previous years. We are committed to grow certainly in the long-term and that path to growth or the first step of it is this idea of building or landing on a sustainable profitable customer base. And then the strategy we've got in place that we should be building on that. The exact timing of when we return to that growth, both in customer account and revenue. In fact, I probably should point out that going back to my prepared comments that we would expect probably to hit return to revenue growth before customer count growth as you should see the key metrics of customer revenue per customer and orders per customer increasing as we move through the year, and we get a higher mix of this best customer into our base. But then the precise timing of when this thing turns around and back to growth is going to really depend on how well we do and the timing of how well we do against our Q3 strategies that Brad has really gone through already, how well do we execute this. But that customer strategy and the part of it were, we're actually out there and starting to acquire a higher mix of people that we expect to act more like our best customers post acquisition and do it more efficiently as well but getting to that better than one year payback. The second thing is just the results of this things like the WW partnership. I mean that's obviously a big deal to us now. As Brad said, we're in it for the long-term but we also are looking for -- continue to look for and explore other partnerships that we think will be right on point for us to be able to have access to a partner that's got a customer base that we can bring onboard efficiently and quickly as well. So to the extent that we can find more partners like WW will be important to where that inflection point comes as well. And of course the last thing is our channel expansion initiatives, how quickly they ramp-up. We are pretty excited about this Knick Knacks product, and that being a breakthrough in the category, but obviously it's early days where they're just getting out there now with our first retailer jet.com, so we will see how that goes. But how those three strategies basically progress overtime and how quickly we're successful on them is really to determine where that inflection point back to growth happens.

[Operator:]

Our next question comes from Ross Sandler of Barclays. Please go ahead.

[Mario Lu:]

This is Mario Lu on for Ross. I just had a question on the volume shipped to Linden and a follow-up after. First, can you give us a little more detail into what you guys saw differently at the turnaround? When you did your assessment of your operational structure as on prior quarters, you mentioned that the fulfillment center in Texas and California looks relatively close behind Linden, what changes turnaround?

[Tim Bensley:]

Let me jump in on this first and then again I'll past it off to Brad for little more color. So as you know last year as we're getting Linden up and improving their operational efficiency, it actually made sense for us to put more volume into Arlington, because Arlington was a significantly more efficient facility back then. There was a pretty big geographic overlap that Arlington or Linden could handle in terms of how we can get fresh and good product to our customers. But what we're doing now basically is saying, hey based on just geographic proximity and the fact that Linden is now overall more efficient, there's a bigger geography that Linden can handle at a better variable margin or lower overall COGS than Arlington can. It's still really important that we have Arlington. In fact, Texas itself as it turned out is one of our largest market, so it's important that we keep a base of operation in that part of the country to both efficiently and from a quality standpoint get great product to our customers. But really as Linden became overall more efficient from an operating standpoint, it just expand the geography that we can serve from Linden at a better overall cost in Arlington, and that's essentially what's happening now with the move of volume, transfer of volume from Arlington into Linden.

[Brad Dickerson:]

Yes, and just to add on to that. Obviously, Linden is now performing what it was built to do. It was built to be our largest and most efficient center. And to Tim's point, we wanted to be careful in that. Linden just crossed the efficiency threshold of the other two centers over the last couple of quarters. So we wanted to make sure that with the sustainable efficiency gain and we still see the path even increase efficiency going forward in Linden. So the timing of this really was more around the confidence we have in the Linden facility going forward now based off of a couple quarters of results. And now that we feel good with that, that this just made sense. And so from a geographic perspective, literally Arlington we are shipping to geographic regions that probably Linden should have been shipping to. But we had to wait for Linden to get the consists efficiency, which is now at that. And that’s what this was the timing and the shipping time as we go forward.

[Tim Bensley:]

And I guess just to tackle on one last thing, the point you brought up. It is still true that all three of our fulfillment centers improved their efficiency, improved their overall variable margin last year. And obviously, we expect to work with all three and to continue on those trends in 2019. But really is with Linden being our most efficient and having some pretty good geographic reach in the eastern half of the country that just really makes sense at this point.

[Mario Lu:]

Just a quick follow-up, if I could. So the volumes shift to Linden just see lot of benefits in the long term. But do you guys expect any short-term gross margins drag from the volume shift as you did in the past when you shifted volumes from Jersey City to Linden?

[Tim Bensley:]

No, not at all. And Linden is really operating very well. Like Brad said, it's doing basically what it was designed to do. It’s our most efficient and most automated facility, and we have really made tremendous progress there, especially in the second half of 2018. So it's basically up and running and ready to take on more volume.

[Brad Dickerson:]

And remember historically, we were shifting volume into Linden when it was a new center. It is now, to Tim's point, it's up running an efficient center. So this is a much different circumstance.

[Operator:]

Our next question comes from Matt Trusz of Gabelli Research. Please go ahead.

[Matt Trusz:]

I'm just wondering out of the 537,000 customers you have today. How many would you characterize in rough numbers are 30% type of customers? How much more we have to go and maybe what turn or retention looks like that’s evolved?

[Tim Bensley:]

Without quoting a specific number, I would tell you that the customers that we have on hand today obviously make up multiple cohorts all the way back to the beginning of -- people that were really here from the first day that we started the company. So the older cohorts have a much higher percentage of best customers, because those are the people that have retained and bid on. One of the definitions of our best customers, are people that have high retention and high order rate. So there is a higher percentage certainly than 30% of that number that we consider to be best customers. The most recent cohort that we brought on were each New Year about 30% of people coming on fall into that category of best and your best customer. So clearly, from our acquisition strategy from the last couple of years, there is still some people that will continue to fall off that are in that category. The idea though is as we bring these new cohorts on, for instance now starting in 2019 that’s just a higher percentage of those people come in from day one being in that category of people that can progress to be retained high order rate and best customers moving forward. So certainly, higher than 30% of that base but still a number of people that from the most recent acquisition cohorts that are not in that group.

[Matt Trusz:]

And just related to that as far as your ability to bring people on, and as you are studying your brand in the marketplace. Have you seen brand perception of evolve at all? I wonder now on the positive side, the effect of these partnerships and what that has and then on the negative side or potentially negative the effect of losing scale and marketing last on a relative basis?

[Brad Dickerson:]

Yes, in general, we haven't seen a significant change relative to the brand piece of it. The idea on the partnership side is just what you're saying it's to elevate our brand and having our capability. So partnerships like WW and introducing our brand and our culinary expertise to different consumer bases, especially in the health and wellness area that WW participates and is something that we think is an elevation of our brand and our culinary team and expertise for sure. Partnerships like our partnership with Jet gives us the ability to show capability in a non-subscription on-demand manner, which we think is important. And obviously, increase addressable market for us pretty substantially outside of the subscription business. So those things are important from us from a brand perspective. And I'd say equally is important from a capability perspective as we build those competencies going forward, especially in the on-demand area. I think from pulling that on marketing and so forth, I think this gets back to us being very strategic about where we place our messaging and where we place our dollars. And I think we don't want to get into too much detail on all the attributes of best customer, because that's a very obviously competitive sensitive thing for us to be sharing. But we have some external help in these matters too around not just what are the attributes of the best customer but what is the best way to reach them and the best messaging, and way to talk to them. So I think that even though we were pulling back on marketing dollars, I think we're focusing that messaging on the right messages to get to the right customers. And therefore, I think the positive offset of the pullback on dollars is better, more consistent more on focused messaging that that offset those less dollars.

[Operator:]

Our next question comes from Heath Terry of Goldman Sachs. Please go ahead.

[Heath Terry:]

Just to get back to Linden and the operational side of things a bit. Can you give us a sense of with this move on of some of the volume from Arlington to Linden? Where will Linden be from a capacity utilization standpoint? How much headroom will you have in that facility? And then if you can also give us a sense I guess unrelated of what you're seeing in shipping costs generally? Obviously, a lot of press around shipping costs, broadly across e-commerce going higher. Is that something you guys are experiencing? And to the extent that that's going to be or sub mitigation, or that is going to be a benefit of shifting volume to Linden. Is that something we should be taking into account as well?

[Tim Bensley:]

First of all, in terms of capacity and naturally of course with our overall revenue coming down in 2018, and plan to be down a bit more in 2019, we have ample capacity across our fulfillment center network for growth. So we don't expect to have to put any significant amount, or really any growth capital into Linden, Arlington or Richmond, California over the coming year to be able to -- or over the coming number of years, to be able to handle the capacity that we foresee. So yes, there is no issue. We have plenty of capacity in Linden to bring this on. And then when we hit our inflection point to grow beyond that, so no issues there. As far as shipping cost go, actually over the last couple of quarters, we've actually improved our shipping costs. It's not improved as much as the labor and food components of COGS, but shipping continues to be an area that we're improving. We've got a great contract that we entered into last year with FedEx, as well as a lot of great last mile local carriers. We've done a good job in optimizing the mix of those carriers, as well as just optimizing the mix of overall shipping routes. So, so far the productivity that we've seen with more optimal shipping routes, the new contract we have actually done a good job of allowing us to keep our shipping cost low and in fact actually improve year-over-year in 2018. Yes so, so far good shape. The actual movement from Arlington to Linden has a positive impact on shipping cost, because when we move things from Linden into Arlington during 2017, we are actually taking a shipping penalty. At the time that made sense, because Arlington was more significantly more efficient from a COGS standpoint. Moving back to Linden actually gives us some shipping cost upside. So feel pretty good going into next year that we're not going to see a bunch of pressure on shipping as an overall cost to our COGS line.

[Operator:]

Our next question comes from Matthew Kirschner of Guggenheim Securities. Please go ahead.

[Matthew DiFrisco:]

It's actually Matt DiFrisco also with Matt Kirschner. Quick question I guess on the 25% or so customers if you look on a year-over-year basis that you have lost, or taking the opportunities for not go after. Is there a certain region that they skewed to or age bracket? Can you give us somewhat of the demographic that you have lost? And then I'm curious about the snowbird effect later Easter or anything. Is there a benefit there also and that sometimes later Easter keeps snowbirds down in Florida a little longer. I know that's been historically somewhat of a thing where you've seen people turn off the subscription when they come back north?

[Tim Bensley:]

I'll take the first part of that, and I'll let Brad handle the snowbird question. But I think on the first part of the question, which was…

[Matthew DiFrisco:]

25% loss from certain region or demographic...

[Tim Bensley:]

No, absolutely not. It's interesting. We have -- our customer base is very geographically disbursed. We actually, we do see obviously a little bit young and a little bit higher income in overall demographics. But we have a pretty broad customer base generally. And as we lost customers during the year, generally speaking the loss has been mixed across our customer demographics, both geographically and by all other metrics. So, it's not -- we haven't lost a big percentage -- disproportionately big percentage in any one geography versus another.

[Matthew DiFrisco:]

What about demographic one, would the demographic though wouldn’t that be counter intuitive to trying to target your 30%.

[Tim Bensley:]

Yes, but when you think about that, it's really especially in the newest cohort that you are at 70% of your mix that's in that other not best or near best customers, that’s a pretty big percentage. So I think it washes out the overall demographic impact. So the overall number of people that we're losing look like the average customer that we have.

[Brad Dickerson:]

And the most important part of the attributes here we are talking about for best customers is more behavioral, it's less demographic as far as regional and so forth. It's more -- are they interested in cooking, do they have a lifestyle that matches up with our type of product, that is more than match of what we are seeing with best customer the 30% versus the 70%. Instead of things like you know where they live and things like that. So just remember that that’s something we also talked about back in November too. On the planning piece that you talked about, what you're talking about is something we call seasonal planning basically. It's looking at our seasons and there is obviously definitive seasons in our business. This is somewhere in the middle of our busiest season relative to new year and year's resolutions, people want to eat healthy, people want to cook more and during this time of the year. And obviously we have talked a lot at length historically about our different seasonal patterns around the strong month being January and then back-to-school in September, the weaker ones being more in the holidays when people are either travelling or having larger type of family meals, or busy doing their things, there're some where people are traveling also on outdoors. So how we are approaching this going forward is we're planning our business on a seasonal basis. And this is something we started to put in place towards the end of last year. So every season, we are taking into account the timing of holidays and what our consumers and our best customers what's important to them during those parts of the season or not important to them. So the thing you're talking about would be something like in the spring, taking into account when holidays fall and how that looks during that season. And also one of our best customer is doing this goes back to the behavioral attributes, and we've had a lot of help from third-parties on this. So what do our best customers do outside of cooking with Blue Apron, so that gives us an idea of how we can better serve their needs going forward. Those are the types of things we're kicking through. So the timing of holidays does impact demand a little bit. Easter is a unique one because it falls in various time frames during the course of the spring. But that is something that we take into account in our new seasonal planning efforts that we started that at the end of last year and we'll be doing going forward. It's probably worth mentioning, because you're bringing up the issue specifically also of migration of people going back and forth and cohorts, etcetera. Some of the things that we're doing last year to improve or reduce the points of friction in our e-commerce model made it way easier for subscribers or for our customers to switch the delivery location, used to be a little bit more difficult. Now, it’s basically click of a button, hey, I'm going to be on vacation. I'm going to be in my vacation in Florida. Have my box there instead. And we've done a pretty good job of communicating that new capability to our customers and hopefully that's helpful in overcoming some of those issues as well.

[Operator:]

Our next question comes from Mark May of Citi. Please go ahead.

[Mark May:]

Just a couple questions. I'm wondering if you can speak to the retention rates for some of the more recently acquired cohorts in terms what retention looks like in months, two or three, etcetera and if that's changed much for some of the more recent cohorts? And then in terms of marketing, just wondering if there's anything that the company is doing new or different with your marketing campaigns that you think is enabling you or will enable you to better target and identify this 30%?

[Tim Bensley:]

Yes, I'll take the first part of that. On retention rates, we're early into this best customer strategy. So our most recent cohort acquired through 2018, retention rates look relatively similar on the same retention trends that we've seen evolving overtime. Of course, the whole idea is as we get into this best customer thing that our average retention rate should pick-up as we get a higher mix of best customers. And so we'll see how that goes. But for now it's -- and by the way, we also hope that some of these partnerships like WW, it will bring on, give us customers that have higher affinity, both for the health and wellness offerings that we were putting out there, as well as just for the overall idea of our subscription model. And so hopefully that'll help us with our mix of customers and hopefully higher retention and order rates. But for now, we're early days of this new strategy. So our most recent cohorts are our retention rates are, like I said, performing on similar trends that we've seen historically.

[Brad Dickerson:]

And on the marketing side, Mark, it's typical as we talk about our strategy. If you think about trying to get more tailored and targeted to get the best customers. What you would expect from us from the change and that is going to media that it's easier to do that. So in the past when you we're looking to acquire as many customers as possible, you tend to use avenues that continue to be very broad and not very specific in the target audience, things like offline, like TV type media and radio and so forth, where you're trying to reach a broad audience, and not necessarily specific types of audience. Where on the online facet, you can obviously be much more targeted in messaging and much more targeted in the people you are going after based off of data and information and so forth. So not surprising you will see our shift to be more online type advertising and marketing, and less offline. And maybe you have seen from us historically, because we want to make sure that we are targeting more best customers. This is not a perfect science by any means but it's that online avenue gives us the ability to target much better. Type of messaging important I mentioned earlier. So we have had a lot of help from some outside agencies to understanding the attributes of what our best customer are, trying to understand how we think they would best want to be spoken to. And we are making sure that we are messaging them in the right way. An example of that might be something like; although, promotions still play a part in our business, we are being very careful in how much promotions we put out there; but maybe not as much leading with the promotion messaging; overall, as making sure we are also messaging the attributes of our brand; the benefits of our brand, or calling our expertise and so forth, because it shows that our best customers are very interested in those types of things beyond just a promotional aspect to get them in the door too. So you will see some of that change with us also.

[Operator:]

Our next question comes from Mark Mahaney of RBC Capital Markets. Please go ahead.

[Mark Mahaney:]

I just want to go back to the challenge of when or how you get visibility into when the active customer base can stabilize? And so could you just again talk through that. The level of visibility you have into, what number, what percentage of those active customers you have now? You are pretty certain are with you for the foreseeable future for the next couple of years. And then what that level is? And then is it that active customers start growing, because you whittled down to that level then it stabilizes? Or do you think it's going to be a mixture of that? And new initiatives that actually get a new type of customer to come in different demographically or economically, or attitudinally than what you have had in the past? I know it’s a broad question. I'm just trying to get at what's the visibility into when active customer base can stabilize and then start growing again. I know it’s a broad question. But, thank you.

[Brad Dickerson:]

Let me take the beginning of it, and I'll let Tim add onto it. But the overall goal for us in this strategy is to get a bigger mix of what we call best customers. So today when the metric we are talking about is 30% of our customers we are saying our best customers. And we are defining that more of a financial metric of how quickly they pay back and we bring them on board compared to obviously the spend we have to get them on board. So we basically look at our current cohorts historically and said what 30% of them payback in a time frame, which we think is healthy from a sustainable business model going forward. So therefore, our goal in all of this is to increase that 30% that payback in a healthy timeframe to a higher percentage, whether it's 40%, 45%, 50%, 60%. This is going to take some time. It's not going to happen overnight obviously. But our ability to understand the attributes of best customer, target them at the top of the funnel, get them in, onboard and keep them, retain them, give them the products of the tools that engage them and retain them in our subscription businesses is going to be really important for us going forward. So that's the overall goal here is how quickly can we keep moving that mix of customers to a best customer. And the ability for us to do that is obviously going to turn the ability for us, to Tim's point earlier around you are going to have the revenue per customer lead the way for the customer count, because you're getting a better mix of good customers. And therefore, we should see the ability for us to get to a stabilization and growth of revenue overall before a customer base, because of that mix shifts that we're targeting and going for. So that's the overall goal, the metric we're trying to achieve. As far as the timing of specifically when we are going to see that, I think that -- Tim answered that question before. But maybe he can articulate that again.

[Tim Bensley:]

Yes, I mean, it really depends on how quickly our strategies ramp-up and how successful they are across our three, particularly our two core strategies on the DTC side of how well we're able to do what Brad just said, how well are we able to go out there and do a better job of targeting new customers coming in and being ones that will act more like our best customers, which means they will have a higher retention rate as well as the higher order rate. And then of course we would really think that this idea of partnerships out of gates with WW is another great way for us to access customers, both efficiently, as well as the ones that should have a higher affinity to our model. But I think the premise that you put at the beginning of your question, which is, yes, we are going to still shed some net customers as we move through this journey in 2019. Before we get that point of inflection, will we start growing again off of the smaller customer base is exactly the way we expect it to work. And then as Brad said and I said earlier, probably likely to expect that we would return back to revenue growth a little bit before we return back to customer growth just because of the value as defined by revenue per customer as those average customers should go up as we execute these strategies.

[Operator:]

Our next question comes from Brian Nowak of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

This is John calling for Brian Nowak. Some of your largest competitors in the mill kit space remain committed to spending behind the growth and customer acquisition. Can you talk about the strategic rationale for letting up on marketing at the time when competition is still high? And related to this, are you concerned that reducing marketing might result in some of your highest value customers switching to one of your competitors offerings, or hurt your ability to acquire new customers?

[Brad Dickerson:]

Yes, consistent with our messaging from last earnings call, we are focused on building a sustainable, profitable business going forward. And that is our focus. So we believe there is a good model here, business model and financial model that is here and it is sustainable and can be profitable going forward and that's our focus to achieve that. That being the case that understanding that historically in our business and industry, and that there has been to throw a lot of dollars at the top of the funnel, and to see what sticks in a high growth timeframes that might be a good strategy for us right now. We're really focused on getting to that sustainable great foundation, strong foundation to grow off going forward. So we are less concerned about what our competition is doing relative to their financial model and more concerned about how we are performing to get to that strong sustainable model going forward. That being the case, if pulling back on marketing does impact our ability to maybe get to some of the customers you want, so be it. Our strategy and focus on getting to best customers we think is going to enable us to increase the mix of our best customers going forward. It also I think goes back to new product initiatives, new channel expansion initiatives, these are things that what we are doing we feel are unique in the marketplace that are also important avenues in ways to attract customers beyond just spending money at the top of the funnel.

[Operator:]

Our next question comes from Youssef Squali of SunTrust. Please go ahead.

[Unidentified Analyst:]

This is Sagar on for Youssef. Thanks for squeezing me in. Couple of follow ups on Linden, with it now becoming the most efficient facility and the other two continuing to improve. Directionally, how much more leverage can we expect on the operational side? And also from a mix perspective before New Jersey was handling about 50% of order volume I believe. Where should we expect that to be by the end of the year with the new orders moving over there?

[Brad Dickerson:]

You are exactly right. We do still have room to improve overall efficiency. And clearly, as efficiency improve in the back half as we move into the first half, we still got the opportunity in the first half of the year, particularly in 2019. I would say that we are very, very pleased with the overall variable margin that we put up at 39.2% in Q4. And I think that’s a pretty good benchmark for the performance you can see going forward. For that matter, Q3s significant improvement and obviously Q3 is seasonally going to be a little bit lower variable margin for us with having to have incremental packaging during the hottest part of the year. But I think Q3 and Q4 are good indication of what our COGS/variable margin performance look like going forward, which would imply pretty big improvement obviously in 2019, particularly in the first half of the year. As far as Linden, yes, it is now growing to more than 50% of our overall box, our overall revenue going forward. And as things evolve and we see where our overall customer count and revenue goes, we will make the right decisions about where to source that revenue from, from our fulfillment center. But yes, as we move through the year now, obviously Linden's mix of our overall revenue is picking up.

[Operator:]

As we approach the conclusion of our call, I'll now turn it back over to Mr. Dickerson.

[Brad Dickerson:]

Thank you everybody for your time today. A lot of interesting and exciting things going on in our company and our brand, a lot of hard work going on with our teammates across all of our company. We look forward to updating you in future conference calls around our strategy on best customer, around partnerships, specifically our WW relationship and our Jet relationship and obviously, the expansion into other channels and new products. So thank you again and we'll talk to you later.

[Operator:]

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