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Sizing Up Blue Apron's Post-IPO Track Record

By Motley Fool Staff - Oct 29, 2017 at 8:08PM

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Investors quickly realized the meal kit industry leader would not be sailing smoothly out of the gate.

In this segment from Industry Focus: Consumer Goods, the cast revisits their coverage of  Blue Apron (APRN 6.32%). Before the IPO, they identified certain red flags that have ultimately taken their toll on the company's performance and stock price.

But for details on the challenges Blue Apron faces now, just click below.

A full transcript follows the video.

This video was recorded on Oct. 24, 2017.

Vincent Shen: Let's get to our main first topic for today, and that has to do with Blue Apron. This is our first update on the company since we talked about them in the summer when they had yet to actually price their IPO. They were getting geared up for the IPO process. At the time, Asit, you and I we're actually pretty bearish on the company when we discussed it then. Its IPO ended up starting with a price range of about $15 to $17 per share, which gave the company a valuation of about $3 billion. But they had insufficient demand during that whole roadshow process for their IPO. They had to lower their range to between $10 and $11, they priced at the bottom of that. So $10 per share, they had a $1.9 billion valuation that they started with, but they've been on a pretty consistent downward slide. Their shares are now at $5. The latest development for the company was the announcement of layoffs -- 6% of its workforce, about 300 people. Back in July, there was an internal management reorganization as well, with the co-founder and COO stepping down, new positions being established. Are you any more or less bearish since the last time we talked about this company?

Asit Sharma: First, I want to say that I went back and looked at the transcript of our conversation. We were careful to put in positives and what we called red flags. So if Blue Apron had done really well, today we'd be saying, "Yeah, we knew it was going to do well, but we did put in these caution notes for investors." Actually, we were sort of negative on the company. I think what really leaps out at me is the problems we had identified before the company went public, one of those was negative working capital. That means the efficiency of assets on hand to pay current obligations. And that followed Blue Apron through this IPO process. They went public on the 5th of July and received a cash infusion. It was only $278 million, the entire IPO raise. As you point out, Vince, much smaller than their initial ambitions. And I wanted to read a couple of figures from the reporting they've done since then. They have issued a quarterly report. Again, this was before the IPO. But in the first six months of this year, the company has generated $483 million in revenue, it's had an $84 million loss, and it's had a cash burn of $71 million. Last quarter, second quarter of this year, revenue rose 18%. But that's a slower pace than even the quarter before that, which showed 42% year over year of growth.

One of the things we talked about, and Vince, you really dived into, was the problem that Blue Apron has with its customers, that it spends a lot to try to keep its customers, a lot of marketing on that, and it seems to churn through its customer base very quickly. I was curious after that conversation, what are your thoughts on Blue Apron vis-à-vis how it has to spend all this money for customers, and it always seems to be treading water just to keep an active customer subscription base.

Shen: My concern, and I went through their second quarter earnings call, and you could tell that management was under a lot of pressure. They ran into operational issues, they were very cagey about certain key metrics and numbers that they've alluded to as important but didn't really want to share the actual numbers themselves. There was certainly a case of bad timing as well in terms of the Amazon-Whole Foods deal being announced right around the time of their IPO, which I think made a lot of investors jittery about how they would compete against such a bigger player and somebody who's so good at disrupting various industries. One issue that they mentioned over and over and over again during that earnings call as having been a headwind for them, something that really hurt their momentum and hobbled them in the back half of the year, was this new Linden facility that they've spent millions of dollars developing. At the time, for the second quarter, it made up just a small, single-digit percentage of their national meal kit volume. And that's after some delays, after some cost increases.

So eventually, I think there's a point during the conference call, at that time, it was in early August, they were hitting about 20% to 25% volume at the facility, and management was very hopeful about reaching scale at Linden at increasing that utilization for that investment, ultimately with a long-term goal for Linden to make up over 50% of their volume. The thing is, in that time, with the challenges they've encountered at the facility, they're talking about how it's going to hurt their margins going forward, at least temporarily, and that's on the path, of course, long-term, to Linden having tons of automation and ultimately being their most efficient facility. But when it comes down to it, they mentioned how those challenges are tied into challenges in terms of their fulfillment process with this metric they called OTIF -- on time in full. Basically, it's a measure of customers getting their complete and correct orders on time, and how a worsening OTIF also impacts their customer retention. For new customers with not a pleasant experience in terms of their first meal kit deliveries, they're maybe not as loyal, decreasing that lifetime customer value and that average revenue per customer. And then, that gets a double whammy, because management also spoke significantly to how they're trying to decrease their marketing spend.

In that prior episode, in that primer, in terms of this Blue Apron business, one of the things we talked about, and I think you mentioned this not long ago, was the amount of money they have to spend to acquire customers, and whether or not that investment in each new account is really sustainable. But the company is trying to address these challenges and make its service more sticky and attractive by expanding some of its offering lineup with fast prep meals, it's trying to offer more dietary options, more day parts specific menu items. These are all things they're considering. I'd say, taken together, it was a very rough launch out of the gate for them considering the challenges they saw during the IPO process itself. It didn't inspire a lot of confidence in investors, and it certainly explains the negative trading that they've seen so far.

Sharma: Yeah. I go back to this idea of attracting customers. If you look at the facility in Linden, it's supposed to be a fully automated facility at some point in time and really save on margin for Blue Apron. But this is a classic top line, bottom line squeeze. Right now, the company doesn't have cash to both invest in this facility and increase marketing, which it desperately needs to gain that market share and fend off competition. In the last quarter, the company reduced its marketing by $26 million, and as a result of that, its customer base declined 9% to 943,000 customers. So the customer base went under a million, because they had to pull back on marketing. But at the same time, without this automation fully in place, it won't achieve the margins that's supposed to generate more cash to then go out and get more customers. So the company is going to have to, at some point, either do a follow-up offering and try to go to the market again, which, there's no appetite for those types of shares yet for a secondary offering. Or it could increase its debt load to pump money into marketing, finish its fulfillment center, and try to compete with the likes of Plated, which was a competitor that was independent also but was recently acquired by Albertson's for about $200 million.

Shen: Yeah. What it comes down to is, you can see management is trying to juggle all these different pieces here. They have this Linden roll out, and trying to make sure that they avoid any more hiccups there. Then, they have to balance their marketing spend, which you mentioned in terms of their cash flow, the squeeze in the top and bottom lines. They have new competition coming in, and what that might look like with a Plated acquisition, for example.

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