The Blue Apron IPO: Understanding Growth, Costs, and Subscribers

Blue Apron, the rapidly expanding meal kit delivery service, belongs to a unique group of companies known as "unicorns" -- privately held start-ups valued at $1 billion or more.

In the following segment from Industry Focus: Consumer Goods, Vincent Shen and Asit Sharma dive into important financial details from the company's IPO registration filing. Thinking of investing in this industry pioneer? Tune in to learn more.

A full transcript follows the video.

This video was recorded on June 6, 2017.

Vincent Shen: The first thing I want to touch on is, how has some of this impressive growth that you mentioned, about 160 million meals delivered since inception, their run rate back in late 2014 was about a million meals per month and they're now at 8 million meals per month, how has that growth panned out in terms of the top line?

Asit Sharma: Growth has been very interesting, amazing, actually. I was looking at their revenue figures. 2014 to 2015, the company did about $341 million in revenue, and that was a 338% year over year gain. Accompanying that, it had a loss of $46.9 million. Listeners who are experienced in investing in growth companies have seen this narrative before -- a fast-growing company that's more focused on grabbing market share than anything else. From 2015 to 2016, the company did almost $800 million in business. Growth slowed to a paltry 133% year over year. Interestingly, that year, 2015 to 2016, the company lost $55 million. Now remember, I said on basically half the revenue of the year before, it lost about $47 million. So, within that year, the company was able to put systems into place to lower its cost of goods sold. As I said earlier, they work with a number of small farmers and are building out a supply chain which is very technologically advanced, trying to build a framework to fend off future entrants into this space. In their most recent quarter, which again, is from January 1st to March 31st, the company grew 44% year over year, versus that first quarter in 2016. And turned a small profit of $3 million. So, you can see the trend lines. Growth is exceedingly rapid, but the company is learning as it evolves how to make money with the service. Not a lot. Just now, we see them on pace to do maybe $1 billion of business this year, may still end up with a slight loss. But maybe what differentiates this company from other growth companies you'll see is, they're on path to profitability. That's very interesting, to keep your eye on as a potential investor, seeing its S-1 statement, they may make money and be profitable in the next two or three years.

Shen: Thanks, Asit. I will add that 99% of this company's revenue is generated from this meal delivery business, but the company has expanded into some other complementary areas, including a wine service, and also some kitchen tools and accessories that are sold through their e-commerce platform. So obviously it's clear, the 338% growth and 133% growth in 2016, really a lot of progress for Blue Apron as they scale up this business. The company says outright that there's some seasonality that they face. The first part of the year is generally their strongest for engagement, but then as the summer season creeps in and the holiday months come about, their customers see more irregular schedules and thus often reduce order activity. Let's turn to the bottom line, and some of their expenses. In this kind of business, it seems that their increased scale should be a major tailwind for the company. But, how is their actual profitability, not just in terms of some of the numbers you mentioned, but, what are some of the main things they're looking at in terms of their cost structure?

Sharma: The cost structure depends on efficiency with handling materials. You can think about this company, they're in the business of moving raw materials. And some of these are truly raw. Vince, you've used this service. There's raw vegetables. But, at the same time, Blue Apron ships proteins. It's refrigerated. So they have tacked on some additional costs in basically forming a product which hasn't been on the market before. You can get a complete meal, cook it from scratch with the ingredients in the box, and don't have to supply your own proteins. There have been versions of this type of service before but not so comprehensive. I think Blue Apron is a pioneer along with these smaller competitors at completing the whole system. The cost that it looks at, the product cost that it has to move, it also has third party delivery costs, which hit its bottom line. It has to have the meals delivered.

Now, on the revenue side, it's a subscription-based service. This means that you subscribe for a certain number of meals, and like any other company, many of our listeners invest in tech companies, you have to worry about your subscriber churn. You are familiar with this model if you invested in companies which rely on subscription. Intuit is a great one with QuickBooks Online. They always have to worry about adding new customers and keeping existing customers from leaving. So far, they seem to be doing a pretty decent job with reducing churn. But I will say, in the S-1, one thing that stood out to me is that Blue Apron actually measures its active customers by people who have ordered with them at any time in the past. If you have ordered from Blue Apron, let's say two years ago, and then order again today, you are considered an active customer, whereas in the tech industry, which is one of the only things we have to compare this to, usually people have to have a couple transactions in a single year. So this might affect the visibility of those churn numbers. But to wrap this up, in terms of their bottom line, their cost of goods sold, which is basically, they exclude some non-cash items like depreciation and amortization, they were able to decrease that from 93% in 2014 when the company was first getting off the ground to 67% last year. That's why, I was talking earlier about the profitability, you saw some profit in the first quarter, they're getting better at handling their basic materials.