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Are These the Biggest Red Flags for a Blue Apron IPO?

By Motley Fool Staff – Jun 14, 2017 at 8:47PM

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Drilling down into the metrics the company uses to judge its performance reveals some worrying trends.

In the past few weeks, investors have been diving into the financial history and operating details for Blue Apron as the company kicks off its multi-month IPO process.

And in this segment from Industry Focus: Consumer Goods, the team shares some of their key takeaways after poring through its IPO filing, including challenges that should raise an eyebrow for potential investors.

But the news isn't all bad.

A full transcript follows the video.

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This video was recorded on June 6, 2017.

Vincent Shen: A few other things that I want to touch on that you mentioned is this idea for a subscription model, how important it is to consistently grow your customer base. I think that bears out in terms of their marketing expense. That's a very significant line item for the company. They're burning through quite a bit of money in both acquiring and retaining their customers, like many start-ups. So the company is going to put its pedal to the metal to drive that high growth, help boost its valuation as well. Just to give you an idea of what we're looking at here, the marketing expenses in 2016 were about $144 million. That's about 18% of revenue for that year. And if you look at the most recent quarter, the first quarter of 2017, that was up to 25% of revenue for the first quarter. So actually going up as a percentage of the top line. And management has noted that because this first quarter is the period of highest customer engagement, they expect marketing expenses to decline throughout the rest of the year. 

But even if you take the marketing spend from the first quarter of 2015 and 2016, it's about 17% of the annual total spend, and you apply that to 2017 for an annual run rate, we're looking at almost $360 million for the full year, which is massive. I think with the company marketing through not only online and traditional media, they also have its referral program, where basically, existing members spread the word on Blue Apron, introduce new users with a free meal to try and hook them into the system. Referrals also account for over 30% of their new customer acquisitions. But what it comes down to is, if you take their marketing spend, divide that by the number of customer acquisitions that they saw, Blue Apron is spending about $94 acquiring each customer. The way that has trended upwards for the first quarter, we also saw that in terms of cost of goods sold that you mentioned, Asit, gross margin has definitely expanded significantly. But we saw a little bit of a reversal for the first quarter.

And another big line item for them is their product, technology, general, and administrative expenses were up from about 21% of revenue in 2016 to over 25% of the top line for the most recent period. I think that's from the company ramping up the investments they make in the infrastructure to support its very rapid expansion. We usually hope to see these young companies get closer to profitability as they grow more mature. It seems like Blue Apron is taking the steps toward that. But at the same time, some of these expenses are blowing up for them in their first quarter, their busiest quarter. 

There are some red flags there for me. Beyond some of the line items that we covered so far, you also brought up the repeat customers, and how they count those based on if they've ever placed an order in the past. Some other metrics that the company looks at that were interesting, they also have their average order value. In the first quarter of 2016, the average order value was at $59.28. That's declined slightly for the most recent period to $57.23. Another bit of a red flag is also, their orders per customer went from 4.5 in that prior-year period to 4.1 for this period, and the average revenue per customer going from $265 to $236. So I guess I'm seeing a lot of numbers here, despite the growth that they're enjoying, trending in the wrong direction. 

But when it comes down to it, I think there are a lot of other bigger picture things to like about this kind of business. I want to cover some things that we're bullish on. Blue Apron is the biggest name in the meal delivery world. I think it's curated a pretty compelling brand and image. That comes through in certain qualitative ways such as, you see the way that customers interact and share their cooking experiences on social media, but also in quantitative ways in that 90% of the revenue is coming from repeat orders. That seems to be a strong indicator of a sticky product, and bodes well if it can continue to expand its customer base. The power of some of the additional growth it hopes to see, the company will also be expanding the number of plan options it offers, not only how many meals customers can receive per week but also the number of recipes available to choose from, which could increase its appeal to more people. Asit, what else do you like, in general, about this kind of business or this industry, or some of the financials?

Asit Sharma: I love that the product itself appeals to millennials, who have shown a disinclination to eat in casual restaurants. That industry is getting burned up by millennials' preference to stay at home and cook. So there's a market there. I think almost 40% of Blue Apron's customers right now can be classified as millennials. So they have a strong base that loves to learn. And Blue Apron sees itself as a company that learns with its customers. They have a new menu every week. They solicit feedback from customers and they try to keep it interesting to keep that space engaged, as we said. What I like about their balance sheet is that, really, management has been very savvy in funding this company, keeping it going as they reach this stage where they can go public and get public investment.

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