In this segment from the Motley Fool Money podcast, host Chris Hill and senior Motley Fool analysts Jason Moser, Matt Argersinger, and Ron Gross serve up an unappetizing result from Blue Apron (NYSE: APRN). Its customer count keeps falling, and it's bleeding cash. Is there any hope for the business model as a stand-alone service?
Then they ponder the warning from Red Robin that its Q2 would not meet expectations, which led to a serious sell-off.
A full transcript follows the video.
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This video was recorded on Aug. 3, 2018.
Chris Hill: Shares of Blue Apron fell more than 30% this week after second quarter results were a disaster. Ron, Blue Apron is not just burning cash, they're losing customers, and that may be the even bigger problem.
Ron Gross: It's a really bad report. Loss of customers, down 24% from last year, down 9% from the end of March. We recall, they had a bit of a snafu with one of their facilities, and that hurt operations. They can't seem to get it right. It continues to spiral down.
The one good thing, and this is not a sustainable way to run your business, is that they were able to cut costs. They did a good job there. Gross margins were actually up, administrative costs down. I'll applaud them for that. But it's the business model here that's really keeping them from succeeding.
One interesting note is, they're trying to sell their kits into Costco right now. I think that's interesting. I'll be curious to see how that goes. But I don't think that's the savior for the business.
Hill: Does this industry work? It seems like we've talked about, whether it's Blue Apron or any of the competitors in the meal kit delivery space, whatever one thinks of the actual product -- Matty, I know we've talked before about HelloFresh. I've tried a couple of different ones. I like them. Not enough to keep it going. It makes me wonder if this works as a stand-alone business, or if the future of meal kit delivery is really as a loss leader for a larger business.
Matt Argersinger: I think there's a future. I just think, right now, there are too many players in the marketplace. You mentioned it, you've tried several of them, I have, too. I think that's the problem. People are trying this one, this one. There almost needs to be some consolidation. There needs to be one big player that can reach 10 million customers and eventually succeed. But it's hard to see right now.
Gross: Completely right.
Hill: This week, Red Robin Gourmet Burgers warned that second quarter profits will be lower than previously thought, and that was all investors needed to hear. Shares of Red Robin down more than 20%, and hitting their lowest point in five years, Jason.
Jason Moser: I mean, you cannot guide down the way they guided down and not expect a total market exodus, and that's what we got. These are cheeseburgers, at the end of the day. It's not rocket science. It's a very competitive industry to begin with. Management actually used the word hyper-competitive in the call, which I found interesting. They made the point that it's very difficult to grow sales in this hyper-competitive environment.
Most everybody else out there is focused on cutting prices, offering discounts and deals and whatnot. Red Robin is trying to take a little bit of a different tack here and maintain pricing, convincing consumers that they are getting something special by going there. Hey, bottomless steak fries, I can get on board with that. I just don't know how many people out there really care about it, at the end of the day.
It's not a small business. They do own most of their stores, so, that's encouraging. But, we also see with companies like Chipotle, that can be a sword that cuts both ways. It's not a bad business, but it's a very difficult market. Restaurants are tough to sustainably do well.
Hill: Restaurants are tough, and it's a competitive environment. We're also in a good economy. I was thinking that when Cheesecake Factory reported this week, similar type of results in terms of the stock. What happens to some of these restaurant chains when the economy invariably hits a recession at some point?
Moser: I think some of them have to disappear. The world just doesn't need some of those concepts out there. We always ask the rhetorical question about JCPenney -- does the world really need JCPenney? No, probably not. I think we'll see some of those restaurants fade away, as well.
Hill: Why do you think Shake Shack gets the benefit of the doubt? They're also in the burger business. I'm not saying that they're running their business exactly the same way. That's a $2 billion company. Red Robin is $500 million. Matty, if I offered you, you could own all of Red Robin or I'll give you a quarter of Shake Shack, which of those two are you taking?
Argersinger: Oh, gosh! I'm going Red Robin all the way. I don't have the right number in front of me, but I think at some point, the average Shack was valued at something like $20 million. I don't know if that still holds true today, but the valuation on Shake Shack just confounds me.
Gross: There's some sort of cult following in both the people who go eat there and the people who buy the stock that doesn't exist with a staider company like Red Robin.
Argersinger: It sounds like Tesla. You could have just said the same thing about Tesla.
Hill: Same question, Ron, I'm giving you all of Red Robin or a quarter of Shake Shack. Which one are you taking?
Gross: I think I'm going Red Robin.
Hill: Really? You're a New York guy!
Gross: We have a Shack being built right around the corner from my home. I've never been in one. I'll visit it and I'll get back to you.
Hill: You know what? You're going to change your tune.
Argersinger: And all the Amazon New HQ people are going to be moving into your neighborhood, and they'll love going there!
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. Jason Moser owns shares of Chipotle Mexican Grill. Matthew Argersinger owns shares of Amazon, Chipotle Mexican Grill, and Tesla. Ron Gross owns shares of Amazon and Costco Wholesale. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, and Tesla. The Motley Fool owns shares of Red Robin Gourmet Burgers and has the following options: short September 2018 $50 calls on Red Robin Gourmet Burgers. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.