How Blue Are Blue Apron Shareholders After Its First Post-IPO Earnings Report?

In this MarketFoolery segment, host Mac Greer, David Kretzmann of Supernova and Rule Breakers, and Ron Gross of Motley Fool Total Income tuck into the numbers from the meal delivery service, which has seen its stock go nowhere but down since it went public a couple months ago. Its second-quarter report wasn't entirely bad, but once management started talking on the earnings call, it was one problem after another.

A full transcript follows the video.

This video was recorded on Aug. 10, 2017.

Mac Greer: Not a lot of high points for Blue Apron (APRN), the meal-delivery service. Shares down big on Thursday. David, they reported better-than-expected second-quarter revenue. So that sounds good. But then things really started heading south once the earnings call happened this morning. Do tell.

David Kretzmann: Yeah. They had a lot of unexpected complexities and costs, in management's words. They're rolling out a new manufacturing facility, a facility where they put together these meal kits, in New Jersey. It's supposed to be very automated, but that's taking longer than expected, they're running into issues as they try to ramp it up. So that's one thing. They also raised less cash than anticipated with the IPO, because their timing really couldn't have been worse after the Amazon - Whole Foods announcement, so they had to slash the entry price for the IPO, so they raised less capital. They still raised about $275 million. But as a result of having less cash than anticipated, as well as these other headwinds for the business, they're also reducing their marketing expense. This is a company that has spent a ton on marketing trying to get new customers in.

As a result of all these different headwinds, they're having to shift their strategy a bit. Something that they found is that once someone signs up for Blue Apron, they really only stick around for about a month. So when you're trying to build a business model on a subscription model, that's awful. That's not going to turn out very well. As a result, they're losing a lot of money. Over the past year, they've spent over $450 million per new subscriber to the service, and the average revenue per subscriber right now is about $250, so you're losing a lot of money. With all those different headwinds, shifting their strategy, that's not a strong entrance to the public markets when this is your very first quarter.

So a lot of things here. They're also guiding for revenue to stagnate and drop later this year. So as a result of pulling back on that marketing spending, they're expecting revenue to essentially flat-line. Revenue grew over 40% in the first quarter, it grew 18% this quarter, and we'll probably see it flatten and drop the next couple quarters this year. So not a good entrance as a newly public company.

Ron Gross: Yeah, completely agree. I think that hit the nail on the head. To me, you could boil it down to they have a business-model problem, both in terms of competition and what it costs to acquire a customer and keep a customer, and then you pile on top of that an operational problem now with the New Jersey facility. Those are two things that never go well together. It'd probably be enough to have just a business-model problem, and as an investor you would say, "I'm going to stay away. Why would I want to invest in a company with a business-model problem?" Layer on top of that, now, operational difficulties, and you can see it in the stock. The market in this case seems perfectly efficient to me. Investors really don't want anything to do with the stock until, perhaps, maybe, they can get their act together. But it's going to be tough.

Kretzmann: And that business-model shift is the recognition on management's part that people are not treating Blue Apron like a subscription service. They're treating it more like any other e-commerce purchase that they make. So I'll sign up, I'll get a few meals this month, and you can choose when you want to use the service. Mac, I think you've used it. Is that in line with your experience?

Greer: Yeah. We were talking about this before the show. We used it for a month or so. The recipes are incredible, and I should say that, but you also feel this pressure, because sometimes you get home and you're like, "You know, I don't want to cook tonight," or you want to go out or you want to do something on the fly, and you have all these Blue Apron fresh ingredients.

Gross: A piece of salmon in the fridge.

Greer: Just waiting for you, yeah, and you just feel all this pressure. But when you cook it, it's absolutely incredible. The other big issue I had with them -- we don't use it anymore -- is the packaging. Everything is wrapped, and you get tired of all this packaging. And that's why I think, like an Amazon-Whole Foods, if they can solve that, if you've got a cooler on your front door and you've got fresh produce that they can deliver and there's no packaging, that to me feels like an even bigger problem for Blue Apron. Now, I really loved the recipes. But we don't use it anymore, at the end of the day.

Ron, you're a great cook. I come to you for advice all the time. Is Blue Apron ultimately after the aspiring gourmet foodie? Or are they after someone who just wants convenience? Because if that's the market, they're not quite convenient enough.

Gross: I think it's convenience with also a person who enjoys the process of cooking. Now, I enjoy it so much that I actually enjoy the process of shopping for the produce or the fish or the protein or whatever it is. So that isn't really something that would interest me. I don't want someone to do that for me. But I certainly understand that there are plenty of folks who do want it done for them.

Kretzmann: Mac, speaking to your experience, that is something Blue Apron is focusing on. That's what they're shifting their strategy toward. They're shifting away from trying to acquire new customers, which they've been doing guns blazing over the past few years, and instead they're going to try to focus on customer retention, so, keeping the people in their ecosystem once they have them in. But that's obviously a pretty big shift. And especially, as soon as you go public, you're announcing this shift, that isn't exactly a strong show of confidence on the part of management's talent. This is something you should have mentioned before you went public, and you should have had some idea that these headwinds were arising.

So to drop this on the public markets within a couple months of going public, this is really just a case study for what not to do in an IPO. Because when you go public, you want to make sure you have a good idea of what the business is going to do. You want to go public at a strong time. You want to gain that investor confidence and build that confidence. But in this case, it's hard for me to take management at its word now, because these are all substantial issues that they should have known about a couple of months ago before going public.

Gross: And if you ever see a pre-IPO price come down -- I believe in this case, priced lower than the range or at the low end of the range -- big, big red flag. That means there's not the proper demand. The investment bankers are going out looking for the institutional demand to sell the stock into the marketplace, and if that demand isn't there, they have to bring the price down to a point where the demand is there, and there's equilibrium between the supply of the stock and the demand for the stock. Big, big red flag.

Kretzmann: Yeah, and looking at the high-profile IPOs this year, it hasn't been a great here in that sense. If I'm a private company now, I'm taking note of what happened to Snap and Blue Apron, companies that have been struggling pretty much right out of the gate. The public markets are different than the private markets. It's a different ball game. I think Redfin is a recent IPO that, I think they have their act together a little bit more. The stock has actually been doing well since going public a couple of weeks ago. But yeah, if I'm a private company, you have to make sure you have your act together before you go public, or you're going to get whacked like Blue Apron and Snap.