Let me tell you a secret about equity analysts: They are, the last time I checked, human. As a result, their forecasts and recommendations are often colored by biases. Two key biases are the halo effect, which is the tendency for a pre-existing impression in one area to influence perception in another, and recency bias, which is using recent returns to forecast future performance.
The combination of these two biases often lends analysts to assume companies with strong records of performance will continue their success even if economic conditions differ. For example, Amazon.com's entry into grocery and nascent plans for healthcare were widely covered as industry-disruptive, perhaps prematurely, on account of its success in traditional retail.
Blue Apron (NYSE:APRN) appears to be on the opposite end of these biases, with many analysts relegating its new business to failure before its rollout. However, I think its new business is a smart move for the company.
Blue Apron has to adapt
Blue Apron took a brief respite from its poor stock performance last month, rising nearly 10% in the days following its fourth-quarter earnings report. The company posted better-than-expected results: $187.7 million in revenue and an adjusted loss of $0.20 per share versus expectations of $185.1 million in revenue and an EPS loss of $0.27.
To call this a turnaround right now would be a folly. In that fourth-quarter report, Blue Apron's revenue fell 13% from the year-ago quarter amid a decrease in customers and orders. As of this writing, shares are approximately 80% below last-year's IPO price.
Let me be clear: I don't have high expectations for Blue Apron as an investment. Overall, the meal kit business has no moat and virtually no barriers to entry. Additionally, deep-pocketed competitors like Amazon, Walmart, and now Weight Watchers have decided to enter this industry and will most-likely win due to deeper pockets and/or a more durable brand. The company needs to adapt and do so quickly.
This is a true business-model change
In addition to its current subscription-based meal kit delivery model, Blue Apron is looking to sell its meals in grocery stores, essentially adding a wholesale component. It's a good idea for the company to seek out new business models, like this one, in order to increase its top and bottom lines. Traditionally, selling goods through a wholesale channel negatively impacts margins on a cost-of-goods-sold (COGS) basis, but may work in Blue Apron's favor.
Blue Apron includes fulfillment costs in COGS, which is significant when shipping millions of orders to different addresses rather than large shipments to a central location. Additionally, Blue Apron's biggest concern is its inability to acquire and keep customers via its subscription delivery model. Customer acquisition costs should be lowered due to the ease of purchase from being on a store shelf.
The company has shown that in the meal kit business it's tough to acquire and keep long-term subscribers, so perhaps brand recognition and going to a wholesale model will allow it to turn its poor stock performance higher. There's no guarantee the company will succeed in this new business model, but it's better than all-but-assured failure from its current business model. Turnaround-oriented investors should watch its new efforts closely, waiting to see if wholesaling gains any traction.