In this segment of the MarketFoolery podcast, host Chris Hill and special guest Scott Phillips of Share Adviser and Million Dollar Portfolio Australia discuss the latest bad news from meal-kit company and ongoing disaster Blue Apron (NYSE:APRN).
The company said costs for its new fulfillment center are unexpectedly high, cutting into profits and margins. With the shares down about two-thirds from their IPO price, and the business plagued both by execution issues and looming competition, does it stand a chance of surviving as a public company? They also discuss the e-commerce king Amazon.com (NASDAQ:AMZN) and its upcoming entry into the Australian market.
A full transcript follows the video.
This video was recorded on Nov. 7, 2017.
Chris Hill: Another bad day for Blue Apron. Shares of Blue Apron down 15% after the CEO came out and said, "Hey, that new fulfillment center we have a New Jersey? Boy, does that thing cost a lot of money." And that combined with layoffs combined with ... we were talking about this before we started taping, back in July, I asked the question, what's the shortest amount of time a company has gone from their IPO to being taken private, and I wasn't being 100% snarky in asking that question, I'm genuinely curious about that because I really do think Blue Apron might be the most woefully unprepared public company, certainly in the last decade.
Scott Phillips: This has been awful, right, Chris? Your listeners know, I know you guys cover this regularly, it's fallen about two-thirds since listing, and that is just an absolutely awful performance for a company that should have had so much promise. What the company does, think about the home meal replacement stuff, think about the food delivery stuff, this is supposed to be the sweet spot of the new economy. And Blue Apron just keeps falling over itself time after time after time.
Hill: And back in July, Blue Apron had one of those days, they're not alone in this regard, but Blue Apron had a sudden drop in mid-July when the news came out that Amazon had registered a trademark for their own meal kit. And Blue Apron is not the first nor the last company that will suffer a sudden drop just based on Amazon delving into their news. But, I didn't realize that Amazon essentially doesn't operate in Australia, although it is coming soon, right?
Phillips: Right, not yet. It has a website for Kindle books and Audible, but the physical distribution center, the physical products -- Australians use Amazon a lot, but we all order it from Amazon U.S. or U.K. It's coming to Australia probably by Christmas, and retail stocks have absolutely been hammered this year, because investors are just clearing the decks trying to get out of the way, a la Blue Apron, a la everything else. The carnage that Amazon has caused in the U.S. and around the world is coming to Australia, and it's coming pretty soon. And investors are notably, and frankly, realistically, worried.
Hill: Is there any sort of significant e-commerce player in Australia, home grown, right now?
Phillips: There's one called Kogan. It's an entrepreneur who basically took the model and said, "I can do this myself." He started from selling TVs that he got made for him under the Kogan brand in China. He got them made for him, brought over here, cut out the middleman, that kind of model. So, think about Amazon Basics, for example. It's kind of that broad idea. But, he's built an e-commerce platform business that's now worth over $300-400 million, which is not much in U.S. terms but pretty big in Australia. He's doing a really good job of taking share from the incumbents. I think he'll be OK. It's the incumbents I'm really worried about. So, the likes of our versions of Circuit City and Best Buy, JB Hi-Fi and Harvey Norman, those are two businesses that own the market. So, if you own the market and someone else comes along and says, "I'll have a slice of that, thank you very much," they're the ones who are most likely to lose. And as we know, operating leverage when it comes to investing is a really powerful force when it's growing. When it's going backwards, it can be really painful. So, if you have a lot of stores, if you have a lot of products, if you have a lot of costs, à la, as I said, Circuit City and Best Buy, to a lesser extent, you're really in the [...] They're the two businesses people are most worried about. But, everything from auto parts through to groceries, anything Amazon could touch investors are panicked about, saying, "We're getting out of this and waiting to see what happens, waiting to see how bad the carnage is before diving back in."
Hill: So, let's go back to Blue Apron for a second. Your day job is working on services -- Share Adviser, Million Dollar Portfolio. We'll use Blue Apron as an example here. When you, as an investor, see a company getting hit like this, what has to happen in your mind to make you say, "I'm going to buy this thing?" Because, absolutely, tomorrow, when the market opens, there will be people buying shares of Blue Apron, thinking to themselves, among other things, "There's no way this thing can go even lower," or, "Come on, this is being oversold," and various things like that. What makes you pulled buy lever on a stock that has fallen 50%, or in this case, upwards of 70%?
Phillips: There's two types of people who see these things. Half of them say, "This price has fallen, it's a bargain." The other half say, "The price has fallen, I'm not going anywhere near it." And that's, as you say, the eternal question. Warren Buffett talks about buying great businesses on the operating table, and I think the clue is in the first half of that phrase. It's great businesses. And I don't think Blue Apron has proven that it's one of those businesses. It has a fantastic tailwind in terms of how consumers are shopping, how we're eating. But frankly, we're all time poor. The ability to get something delivered at home that tastes good, it's fresh, it's easy to eat, you want that, conceptually. But you've got that, and you still can't make this work? As an outsider, looking at this, I'm thinking, you want to see some sense that this is working. I mean, the sales are up a little bit, but the costs are up even more. The distribution center isn't working, cost of goods were up, it feels like an idea without a functional business model just yet, or at least not one I feel like going there. So, I want to see either a really strong brand that can survive this, and I don't think Blue Apron has that, or I want to see an operational business that seems to have some benefit of growth that's falling to the bottom line. The top line isn't going anywhere near fast enough, and the bottom line is going backwards. Unless you believe in the story and you're happy to buy this as a story stock kind of idea, which is really rarely a great idea unless you believe there's a market it can capture -- so, if you're buying the story, you want a great quality business, or you want something that's actually delivering, even if the quality isn't great. And it's neither of those two things. Maybe Blue Apron goes well from here, but if it does, it'll be despite itself, not because of anything you can see on the numbers or the operating business just yet.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Scott Phillips owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.