Not even the allure of easy home-meal delivery during a nationwide pandemic was enough to make a significant difference for Blue Apron (NYSE:APRN).

Although the meal kit company did report sequential growth in new members and orders in the first quarter, they were relatively small gains, and the results were still much worse than the year-ago period. Revenue also fell short of analysts' expectations.

A Blue Apron meal of steak and squash kebabs with potato salad on a cutting board

Image source: Blue Apron

An underwhelming performance

Blue Apron should have done much better. A few businesses were perfectly positioned to capitalize on a country in lockdown with the competition hamstrung by social-distancing restrictions, but it does not seem to have paid off for the meal kit delivery company yet.

The number of customers on its service grew to 376,000, up 7% from the 351,000 it reported at the end of 2019 but still down 32% year over year from 550,000.

Similarly, the company reported those customers placed 1.76 million meal kit orders, almost 9% higher sequentially but 28% fewer than the prior-year period.

 

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Customers

550,000

449,000

386,000

351,000

376,000

Orders

2,482,000

2,048,000

1,726,000

1,622,000

1,763,000

Average order value

$57.15

$58.16

$57.60

$58.14

$57.68

Orders per customer

4.5

4.6

4.5

4.6

4.7

Average revenue per customer

$258

$265

$258

$269

$271

Data source: Blue Apron quarterly SEC filings. Table by author.

The hungry gap

The market expected more from the latest report, as the stock had surged 500% from year-to-date lows as the stay-at-home orders rolled out across the U.S., and restaurants were forced to close unless they offered takeout or delivery.

Such measures should have served as a strong tailwind for Blue Apron, which management also thought would be the case. The company increased its marketing spend during the quarter to $15 million, or 14.8% of net revenue, compared to $14.2 million, or just 10% of net revenue, in the year-ago period.

Blue Apron is able to attract a lot of customers when it advertises its service, but the acquisition costs are expensive and unsustainable. Customer churn is high and whenever it reduces marketing, subscriber counts fall.

The company has purposely reduced the amount of money it spends on marketing, having made the conscious decision to operate at a smaller scale that served its loyal customers who spend the most with the company rather than trying to grow. However, the pandemic gives Blue Apron a unique opportunity to attract new diners that might stay with the service once the crisis passes.

CEO Linda Findley Kozlowski says the quarter's results still represent a jumping-off point for growth. Blue Apron is now building out its costs again, increasing capacity, hiring more staff, and narrowing menu selection even further to streamline fulfillment.

Management is guiding for the second quarter to deliver year-over-year sales growth in the high single-digit range, or approximately $130 million of revenue. That is a stark reversal from recent trends, and net losses should come in at no more than $6 million, down from the $7.7 million loss reported last year. Blue Apron also expects adjusted EBITDA and operating cash flow to be positive at approximately $5 million and $10 million, respectively.

Working with blinders on

The problem is that management believes this reversal is sustainable. I previously wrote that investors should see whether management acknowledged this would be a one-off event, and Kozlowski's comments seem to indicate she does not.

Pointing to the increase in business Blue Apron has seen so far, she said: "[W]e expect that this uptick in demand can be maintained beyond the period of direct impact of COVID-19, even as restrictions begin to be lifted."

Her confidence is based on consumers maintaining their new eating habits after the crisis passes, that they will become "new economic and social norms." She also believes dining out at restaurants may be forever changed, and those establishments may no longer be able to operate how they did before, which will benefit Blue Apron. 

The real return to norms

Unfortunately for shareholders, this hope is likely misplaced. Consumer surveys suggest one of the first things many people want to do when social-distancing restrictions ease is go out to patronize local businesses, including restaurants. But more importantly, meal kit delivery remains a very inefficient way to supply customers with regular meals.

Such selective offerings will continue to struggle to compete with supermarkets, including those that offer their own meal kits, like Walmart, which has seen massive growth both in-store -- despite various restrictive measures imposed -- and online. 

There is no reason to suspect customers will want to remain with Blue Apron after trying the service any more than they did before the pandemic. Food selection is still on the meal kit company's terms, and as a high-cost offering relative to the grocery store (where consumers still have to shop regardless), it's not a daily option for most consumers.

Blue Apron stock is down 47% since the release of its earnings report, but shares are still 220% above the low point they reached before the coronavirus outbreak hit in earnest.

Investors should have every expectation that once this crisis is behind us, rather than sustaining its upward trajectory, Blue Apron will revert to the mean, and its stock will return to those lows once again.