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Edited Transcript of APRN.N earnings conference call or presentation 31-Jan-19 1:30pm GMT

Q4 2018 Blue Apron Holdings Inc Earnings Call

NEW YORK Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Blue Apron Holdings Inc earnings conference call or presentation Thursday, January 31, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley J. Dickerson

Blue Apron Holdings, Inc. - CEO, President & Director

* Felise Glantz Kissell

Blue Apron Holdings, Inc. - SVP of Corporate Affairs & IR

* Timothy Bensley

Blue Apron Holdings, Inc. - CFO

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Conference Call Participants

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* Heath Patrick Terry

Goldman Sachs Group Inc., Research Division - MD

* John Colantuoni

Morgan Stanley, Research Division - Former Equity Analyst

* Mark Alan May

Citigroup Inc, Research Division - Director and Senior Analyst

* Mark Stephen F. Mahaney

RBC Capital Markets, LLC, Research Division - MD and Analyst

* Matthew A. Trusz

G. Research, LLC - Research Analyst

* Matthew James DiFrisco

Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst

* Michael Patrick Graham

Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst

* Rupesh Dhinoj Parikh

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Sagar Vachhani

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Sarah McCann

KeyBanc Capital Markets Inc., Research Division - Associate

* X. Lu

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings Fourth Quarter and Fiscal Year 2018 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's remarks, the Blue Apron team will be taking your questions.

With that, I'd now like to turn the call over to Felise Kissell, Senior Vice President of Corporate Affairs and Investor Relations. Ms. Kissell, please go ahead.

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Felise Glantz Kissell, Blue Apron Holdings, Inc. - SVP of Corporate Affairs & IR [2]

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Good morning, everyone, and thank you for joining us. As a reminder, late yesterday, we issued an 8-K filing related to transferring a substantial portion of Blue Apron's production volume from Arlington, Texas fulfillment center to our largest and most efficient facility in Linden, New Jersey. Additionally, at that time, we also released our fourth quarter and full year 2018 earnings results with this disclosure purposely accelerated so that you have all information readily at hand. Brad Dickerson, Chief Executive Officer of Blue Apron; and Tim Bensley, Chief Financial Officer, will now review these disclosures more in depth and be a resource for any questions you might have.

Various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important risks and other factors, including those described in our earnings release and the company's SEC filings.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our view as of any subsequent date. We specifically disclaim any obligation to update these statements.

During this call, we may be referencing non-GAAP financial measures which are not prepared in accordance with generally acceptable accounting principles. You are encouraged to refer to the earnings release and SEC filings where we have described these measures in more detail and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

In addition, reconciliations of certain forward-looking non-GAAP measures referred to during this call are on our Investor Relations website located at investors.blueapron.com under Events and Presentations.

With that, I would now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad?

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [3]

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Thank you, Felise, and good morning, everyone. On today's call, I will review the strategic actions underway across our direct-to-consumer business, where we are beginning to see positive customer trends as a result of our sharpened focus on attracting and engaging customers who represent high value to the business; continued focus on new channels, including expanding the scope of our strategic relationship with Jet; and strengthening operational capabilities, where we continue to gain significant efficiencies and have further optimized our network, primarily in our Linden fulfillment center.

Our progress on each of these actions has reaffirmed our confidence in achieving profitability on an adjusted EBITDA basis both in the first quarter of 2019 and for full year 2019.

I will discuss each of these strategic actions in more detail and then Tim will then provide insights into our fourth quarter and fiscal 2018 results as well as a view of 2019 before we both take your questions.

First, an update on our direct-to-consumer business. Last November, we shared our approach to more thoughtfully and strategically serve our customers by prioritizing segments that demonstrate behavioral attributes such as proven retention, brand affinity and high potential to increase engagement with our product offerings. This emphasis on further engaging our best -- base of best customers and growing this valuable segment is rooted in our understanding of consistent trends within the business.

Specifically, as we discussed in our last earnings call, the top 30% of our customers on a net revenue basis acquired in recent cohorts account for more than 80% of our net revenue from such cohorts in the year after acquisition. These customers have an average payback on our cost to acquire them of less than 6 months, and the average net revenue per customer for the top 30% of our customers was 10x greater in the year after acquisition than the average net revenue per customer of the remaining 70% of our customers.

Since we communicated this more focused and disciplined approach, we have deliberately reduced our marketing spend and strategically invested in attracting consumers who have high potential to be valuable to the business. While it is still early, we are seeing encouraging trends in our customer metrics, most notably, average net revenue per customer, which increased on a year-over-year basis, demonstrating the quality of our customer base is strengthening.

Continuous product innovation that serves diverse tastes, cooking and lifestyle preferences, strategic partnerships that enable us to efficiently align our platform with like-minded brands and differentiated brand messaging are and will continue to be strong drivers of our focus to attract and engage high-quality consumers.

As you know, in late December, we launched an exclusive national direct-to-consumer partnership with WW, formerly known as Weight Watchers. This partnership is a first of its kind for us both in customization of our digital platform and continuity as this dedicated menu offering is always on and available to health- and wellness-conscious consumers year round. While the results are still very early, this partnership has shown higher-than-expected demand to date, and we have been encouraged by the favorable response and interest in this offering demonstrated by both new and existing Blue Apron customers.

In the months ahead, our culinary team plans to iterate and improve upon our offering based on the preferences of this health- and wellness-focused consumer segment.

WW very recently promoted the partnership using tools such as dedicated promotional materials in WW Studios, including at recent open houses for current and prospective members and e-mail campaigns to its members across the country. We will continue collaborating with WW to elevate the partnership externally.

We look forward to building on the launch of WW and plan to pursue additional strategic partnerships that align to our brand as well as our focus on attracting and engaging more best customers.

Turning now to channel expansion as we broaden the reach of the Blue Apron brand beyond our direct-to-customer platform to more households across the country. We are proud to introduce Blue Apron Knick Knacks, our most flexible culinary innovation to date created for online and brick-and-mortar retail. Our Knick Knack product gives consumers the flexibility to pair store-bought protein and produce of their choice with Blue Apron Knick Knacks, a refrigerated product with an extended shelf life that includes specialty preproportioned sauces, grains and dairy ingredients from our premium suppliers, proprietary Blue Apron ingredients, including our line of custom spice blends and a step-by-step Blue Apron recipe, specially designed with customization in mind for protein and produce pairings to complete a meal for 2.

This new offering is a differentiated highly-scalable product with appealing benefits. Consumers can now elevate their everyday home cooking experience using their preferred protein and produce with a Knick Knack recipe that delivers the quality, flavors and culinary experience that Blue Apron is known for and trusted to deliver. This offering also gives retailers an extended shelf-life solution and the ability to cross-merchandise their own products, which we expect will increase our addressable market by reaching consumers in innovative ways through diverse channels.

We are proud to announce that Jet will be our first retail partner to sell Blue Apron Knick Knacks on their City Grocery platform beginning tomorrow, February 1.

As you likely recall, in late October, we began featuring a rotating selection of 2-serving Blue Apron recipes on Jet's online and mobile platforms available for same day or next day delivery to consumers across the New York City metropolitan area. To date, we've been pleased with the demand for our selection of products and have since added 2 additional recipe offerings to our rotation of meals as consumers enjoy the convenience of adding Blue Apron products to their online shopping cart as part of their grocery routine. We look forward to expanding the scope of our relationship with Jet by adding Knick Knacks to our branded experience on its City Grocery platform.

As we make progress in our channel expansion strategy, we continue to apply learnings from previous partnerships, including our Costco pilot last year. In fact, insights from these opportunities led us to expand our portfolio of products by creating new innovations like Knick Knacks that simultaneously solve for consumer flexibility while offering retailers tangible benefits.

We are in active discussions with additional prospective partners as we focus on expanding our selection of individualized 2- and 4-serving meals and our new Knick Knack offering in the retail environment. We are also pursuing additional strategies to expand same day or next day on-demand delivery of Blue Apron products to consumers in other parts of the country.

Now an update on operations as we continue to optimize our network with a focus on maximizing efficiencies. We have achieved tremendous progress toward operational optimization, particularly in the fourth quarter, where cost of goods sold as a percentage of net revenue improved to approximately 61%, representing the strongest cost of goods sold efficiency we have seen in any quarter, quarter-to-date. This performance was primarily driven by improvements in our Linden fulfillment center, which continues to be our largest and most efficient facility.

Following an assessment of our operational structure in light of these significant efficiency gains, we identified an opportunity to further optimize our fulfillment processes by transferring a substantial portion of the production volume from our Arlington, Texas facility to Linden and consolidating our Texas fulfillment operations. Under the leadership of our Chief Supply Chain Officer, Alan Blake, we are confident that this transition will be seamless, due in part to our close coordination between facilities.

Arlington will operate as a smaller facility and serve customers in the Eastern Rockies, lower Midwest and certain southern states. Our operational presence in Richmond, California will continue to serve customers in the Western states, including the Pacific Northwest.

Linden will continue to serve customers on the East Coast, Great Lakes, upper Midwest and southeastern U.S. regions. We believe this change will enable us to most effectively utilize our production capacity and automation capabilities in Linden, shorten transit times, decrease our shipping spend and reduce duplicative overhead cost across the business.

As a result of this strategy, while we will be hiring in Linden to meet the increased production volumes, our staffing needs in Arlington will change. Specifically, after a transition period, we will be revising production schedules in Arlington, resulting in a substantial decrease in the number of employees needed to meet the new volumes. Decisions that impact our employees are never taken lightly, but we are confident this approach will enable us to continue to optimize our operations as we work to build a strong, profitable business.

We are entering 2019 with confidence, given progress in our strategies, actions currently underway and opportunities that remain ahead for the business. Our focus this year is to implement the appropriate initiatives that will drive a sustainable revenue base and profitability on an adjusted EBITDA basis. I am proud of our team's commitment toward these goals as we build the foundation for future growth.

I will now turn the call over to Tim.

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [4]

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Thanks, Brad, and good morning, everyone. Turning to our financial performance. For the fourth quarter, we improved our net loss by 39% year-over-year to $23.7 million and reduced our adjusted EBITDA loss by 60% year-over-year to $7.8 million. For the full year 2018, net loss and adjusted EBITDA improved 42% and 56% year-over-year, respectively. The bottom line outperformance from the guidance provided on our November earnings call was driven by effective expense management, purposeful acquisition marketing strategies and ongoing gains in operational efficiencies across all of our fulfillment centers and, in particular, in our Linden New Jersey Center, our most efficient facility.

Net revenue in the fourth quarter was $141 million, slightly higher than our original outlook, compared to $188 million in the prior year and $151 million in the third quarter.

Fourth quarter marketing spend was 14.4% as a percentage of net revenue compared to 13.4% in the prior year and 15.4% in the previous quarter. Our revenue performance was the result of both typical fourth quarter seasonality and a transition to our more deliberate customer acquisition strategy focused on the most efficient acquisition channels.

This disciplined customer acquisition mindset also contributed to higher average net revenue per customer both sequentially and year-over-year. Going forward, we will continue to hone our strategies focused on attracting and engaging customers with proven affinity with our direct-to-customer platform to deliver paybacks on our customer acquisition spend of, on average, 12 months or less.

We continue to build and leverage our operational capabilities resulting in significant COGS efficiencies within the quarter. COGS, excluding depreciation and amortization, was 60.8% as a percentage of net revenue, improving 930 basis points from the prior year and 720 basis points quarter-over-quarter. We made great strides in labor and food costs as a result of enhanced planning and process-driven strategies.

Given the significant operational progress, as announced, we will be transferring substantial production volume to Linden from our Arlington fulfillment center and consolidating our Texas fulfillment operations in the Arlington facility. I'll discuss the impact of the transition in more detail in a moment.

Product, technology and G&A or PTG&A costs decreased 15% year-over-year to $45 million and were 6% lower quarter-over-quarter as we continue to tightly manage costs and specifically as a result of the actions taken in mid-November to streamline our workforce. We incurred employee severance and other costs of $2.2 million in the fourth quarter related to these actions and we remain committed to our ongoing cost savings initiatives as a key part of our plans to achieve profitability on an adjusted EBITDA basis in 2019.

Our cash flow profile was strong in the fourth quarter, driven by improved adjusted EBITDA performance and lower capital expenditure needs with cash and cash equivalents of $96 million at year-end. CapEx spending in the fourth quarter was minimal at $2 million with limited capital expenditure needs expected in the foreseeable future.

Entering 2019, I am confident that we are taking the right steps to optimize the business, including allocating marketing investment to attract and engage consumers with high affinity attributes, initiating strategic partnerships that advance our product and platform innovations, managing resource allocation and expenses with rigorous discipline and implementing ongoing operational efficiency gains across our fulfillment centers, including leveraging Linden at greater scale.

Specifically, in regard to that last point, I'd like to speak to the financial implications of actions we announced late yesterday related to our Arlington facility. We expect to incur approximately $1 million in restructuring costs over the first and second quarters of 2019, including severance of $0.3 million and other exit costs of $0.7 million. We expect to generate annual savings of $7 million beginning in the third quarter of 2019, including $4 million in COGS and $3 million in PTG&A. As Brad mentioned, our Arlington facility will remain in operation but will service a smaller geographic footprint. Overall, we continue to expect a reduction in PTG&A expenses of $40 million in 2019 compared to 2018.

Now turning to our outlook for the first quarter. Given the improving financial performance of the business, we expect to achieve significant bottom line improvements with net loss in the range of $11 million to $14 million in the first quarter of 2019 compared to a net loss of $32 million in the same year-ago period.

We expect to achieve profitability on an adjusted EBITDA basis in the range of positive $2 million to $5 million in the first quarter of 2019 compared to an adjusted EBITDA loss of $17 million in the first quarter of the prior year as we build upon sequential quarterly improvement in net revenue, variable margin and PTG&A expenses. For easy reference, we have posted a reconciliation chart from net loss to adjusted EBITDA on Blue Apron's Investor Relations website.

For full year 2019, we expect that our net loss will significantly improve from 2018, and we remain confident in achieving profitability on an adjusted EBITDA basis for the year. We are building the foundation for a strong, profitable business by cultivating a high-quality and loyal customer base that we believe will ultimately put us on a path for top line growth.

As I mentioned on our last earnings call, we are deliberately not pursuing unproductive revenue. While we expect this to result in a lower overall net revenue and customer count in 2019, we anticipate average net revenue per customer and orders per customer, leading indicators of a strengthening customer base, to notably improve during the year, while reflecting typical seasonal trends in the business. We believe that our new product and platform innovations and strategic partnership opportunities could accelerate our anticipated growth. We will certainly keep you updated on this progress.

In summary, we continue to emphasize focused execution, working cross-functionally across the organization to propel improved performance and actively pursuing the appropriate strategic initiatives to create value for our stakeholders.

Brad and I will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Edward Yruma of KeyBanc Capital Markets.

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Sarah McCann, KeyBanc Capital Markets Inc., Research Division - Associate [2]

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This is Sarah on for Ed. It's nice to see that the WW partnership is off to a good start. Can you give us a bit more detail on the behavior of those customers you've brought in through that and how big this business could be for you this year? And do you expect to offer WW meals or anything WW-related when you roll out to brick-and-mortar?

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [3]

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Sure. So I think it's important to note that, and again, this really ties specifically to our best customer strategy and going after high affinity customers with the thought being that partnerships like WW is a great opportunity for us to attract and acquire customers kind of in group stages versus individual consumers one at a time. So we love this idea around partnerships and partnering with folks that have large subscriber bases that we can speak to and talk to in relation to our offerings. So obviously, it just kicked off at the end of December, early January, but it's still very early, obviously. This is a unique relationship for us. It's our first kind of all year-round offering. So we are in this for the long game by all means, and it is still very early and we're working very closely in collaborating with WW and making sure that we launch this in the correct manner and a great consumer experience. And in doing that, we wanted to be careful knowing that January typically is a high demand month anyway for our type of product and also for WW. We wanted to be careful that we capped kind of the capacity of this product in January to begin with just to make sure that we could match supply and demand and have a great consumer experience. And out of the gate, what we recognized was that there is a pretty high demand from our customer base, both new customers coming in that were interested in the WW offering and also our existing customer base, and that did create some challenges with just meeting that capacity cap we put in place to make sure we had a great customer experience. And in collaborating with WW, again, in the spirit of a long game here, we wanted to make sure that we didn't stress and challenge that capacity any more than we needed to early on. And what you've seen is WW has kind of been a little bit -- pulled back a little bit more on the messaging of the Blue Apron product in January. They are also going through a rebranding effort and focused a lot on messaging their rebranding and so forth. So we've kind of been careful here in the early stages not to really challenge our ability to meet supply and demand. Now that we have about 1 month under our belts, we've got a better feeling on demand. What you're going to start to see, again, us collaborating with WW, is you're going to start to see them message some more going forward on their platform on our product offering which should increase, hopefully. The idea being that it should increase the demand coming from their platform to match with the demand we've been seeing on our platform and continue to expand this offering going forward. So in summary, we're really pleased with the interest in the product, and that really has been without any significant WW messaging and push to date, which will start to change in February. So we're really excited about that. And again, still early here. It's a year-round effort, so this is going to be a consistent collaboration with WW going forward. We love the idea of partnerships like this going forward to attract larger consumer bases to our product offering and it also matches up, obviously, very nicely with our ability to have product offerings in the health and wellness category, which is important for us, too. As far as the retail offering, we are the exclusive provider for them on a direct-to-customer basis. We just kicked off this relationship. We're very focused on that right now. We want to be successful on that, but obviously, the partnership is off to a great start. We are collaborating in a great level of detail with them right now and we would be happy to continue to expand those conversations and product offerings down the road. But at first, we've got to be successful with the thing that we just kicked off right now, which is the direct-to-customer offering.

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Operator [4]

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Our next question comes from Rupesh Parikh of Oppenheimer.

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Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [5]

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So on the product innovation, the Knick Knack product line that you were discussing, I was curious if you've tested the product, thoughts on the margin profile, and then what you plan to do for marketing effort for some of these new products?

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [6]

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Yes. So the Knick Knack product, again, came out of our learnings from the Costco pilot last year, and some of the challenges that we talked about in the November earnings call was around shelf life and shrink and so forth in that business model. And the great thing about Knick Knacks is it gives us a much more shelf-stable product, a longer shelf life, and it really focuses on what I'd call the backbone of the recipe. It's the taste profile of the recipe. It's the sauces. It's the grains. It's the spices, and obviously, the most important thing, it's the recipe itself and the step-by-step recipe. So this was really kind of -- this innovation came from the idea of can we have a more flexible offering for our consumer where they can match up some of their preferences and be more flexible around which type of protein or which type of produce they might want to match up with the taste profile. So it was a combination of lessons learned on the challenges of the retail environment along with the view of how can we have a more flexible offering to the consumer. So this product has been tested a little bit with consumers, obviously, and historically, we've done some testing with this. The great part about this right now is -- with the Jet relationship is, we've been speaking with them and we are going to launch this in collaboration with Jet, and you'll see much more from us around the launching of this from a media perspective and a PR perspective next week. That is the plan of getting collaboration with Jet. So we'll be really excited to do that, kick that off next week with them. The idea with this product, though, obviously is that it can go beyond the platform of online retail and could be, obviously, an interesting take into brick-and-mortar retail and in other areas and other channels going forward also. From a margin profile perspective, obviously, we're looking to kind of match our current margin profile. This product will be priced -- the pricing of this product may change a little bit based on recipe. But in general, the product pricing right now is $7.99, which again is for a 2-serving product that the customer would go match protein and produce up with. And then the margin profile, in general, should be similar to our core product margin profile.

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Operator [7]

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Our next question comes from Michael Graham of Canaccord.

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Michael Patrick Graham, Canaccord Genuity Limited, Research Division - MD & Senior Equity Analyst [8]

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I just really wanted to ask about sort of the cadence for next year on the customer front -- or this year, rather, on the customer front. You've talked in the past about Q1 being a heavier marketing quarter. And just wondering how that flipped relative to your outlook for a lower number of customers. And I'm wondering if you can make a comment on whether you feel like there's a chance that, as we exit 2019, you might be sequentially sort of adding the -- adding to the customer count by then or just any thoughts you can give us on that.

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [9]

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Yes. Absolutely. I'll give Brad a break and take a shot at that one, and then Brad can jump in with any color at the end of it. But as I kind of said in my script, Q1, we do expect to see some sequential improvement in revenue as we normally do because of the seasonality of the business. But overall, as we move through the year, based on our more deliberate marketing spend, and as we said at the end of the third quarter and said so far on the call today, that does mean a reducing in marketing spend both in absolute dollars and as a percentage of net revenue. As we move through the year, we would expect, in the first phase of this strategy, for us to see overall net revenue decline and customer count decline kind of on the seasonal basis, the way that you would expect from previous years. We are committed to growth certainly in the long term, and that path to growth or the first step of it is this idea of building or landing on a sustainable profitable customer base. And then the strategy that we've got in place, hopefully, should be building on that, the exact timing of when we return to that growth both in customer count and revenue. In fact, I probably should point out that -- going back to my prepared comments, that we would expect probably to hit return to revenue growth before customer count growth as you should see the key metrics of customer per -- revenue per customer and orders per customer increasing as we move through the year and we get a higher mix of kind of this best customer into our base. But then the precise timing of when this thing turns around and back to growth is going to really depend on how well we do and the timing of how well we do against our key 3 strategies that Brad's really gone through already, how well do we execute this best customer strategy and the part of it where we're actually out there starting to acquire a higher mix of people that we expect to act more like our best customers, post acquisition, and do it more efficiently as well by getting to that better than 1-year payback. The second thing is just the results of the things like the WW partnership. I mean that's, obviously, a big deal to us now. As Brad said, we're in it for the long term, but we also are looking for -- continue to look for and explore other partnerships that we think will be right on point for us to be able to have access to a partner that's got a customer base that we can bring on board efficiently and quickly as well. So to the extent that we can find more partners like WW will be important to where that inflection point comes as well. And of course, the last thing is our channel expansion initiatives, how quickly they ramp up. We're pretty excited about this Knick Knacks product and that being sort of a breakthrough in the category. But obviously, it's early days with us just getting out there now with our first retailer with jet.com, so we'll see how that goes. But how those 3 strategies basically progress over time and how quickly we're successful in them is really going to determine where that inflection back to growth happens.

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Operator [10]

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Our next question comes from Ross Sandler of Barclays.

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X. Lu, Barclays Bank PLC, Research Division - Research Analyst [11]

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This is Mario Lu on for Ross. I have a question on the volume shift to Linden and a follow-up after. First, can you give us little more detail into what you guys saw differently this time around? When you do your assessment of your operational structure on prior -- as on prior quarters, you mentioned that the fulfillment center in Texas and California was relatively close behind Linden. What changed this time around?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [12]

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Yes. No. Absolutely. Let me jump in on this first, and then again, I'll pass it off to Brad for a little more color. So as you know, last year, as we were getting Linden kind of up and improving their operational efficiency, it actually made sense for us to put more volume into Arlington because Arlington was a significantly more efficient facility back then. There was a pretty big geographical overlap that Arlington or Linden could handle in terms of how we can get fresh and good product to our customers, but what we're doing now basically is saying, hey, based on just geographic proximity and the fact that Linden is now overall more efficient, there's a bigger geography that Linden can handle at a better variable margin or lower overall COGS than Arlington can. It's still really important that we have Arlington. In fact, Texas, itself, as it turns out, is one of our largest market. So it's important that we keep a base of operation in that part of the country to both efficiently and, from a quality standpoint, get great product to our customers. But really as Linden became overall more efficient from an operating standpoint, it just expands the geography that we can serve from Linden at a better overall cost than Arlington, and that's essentially what's happening now with the move of volume -- transfer of volume from Arlington into Linden.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [13]

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And just to add on to that, obviously, Linden is now performing what it was built to do. It was built to be our largest, most efficient center. And to Tim's point, we wanted to be careful in that. We just -- Linden just crossed the efficiency threshold of the other 2 centers over the last couple quarters. So we wanted to make sure that it was a sustainable efficiency gain and we still see the path to even increase efficiency going forward in Linden. So the timing of this really was more around the confidence we have in the Linden facility going forward now based off of a couple of quarters of results. And now that we feel good with that, that just made sense. So from a geographic perspective, literally, Arlington was shipping to geographic regions that probably Linden should have been shipping to, but we had to wait for Linden to kind of a consistent efficiency, which it now is at. And that's why this was the timing and the shift in timing as we go forward.

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [14]

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And I guess just to tack on one last thing on the point you brought up, it is still true that all 3 of our fulfillment centers improved their efficiency, improved their overall variable margin last year. And obviously, we expect to work with all 3 of them to continue on those kind of trends in 2019. But yes, it really is, with Linden being our most efficient and having some pretty good geographic reach in the eastern side -- eastern half of the country, this really makes sense at this point.

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X. Lu, Barclays Bank PLC, Research Division - Research Analyst [15]

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Great. Just a quick follow-up, if I could. So the volume shift to Linden should see a lot of benefits in the long term, but do you guys expect any short-term gross margins drag from the volume shift as you did in the past when you shifted volumes from Jersey City to Linden?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [16]

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No. Not at all, and Linden is really operating very well. Like Brad said, it's doing basically what it was designed to do. It's our most efficient and most automated facility and we've really made tremendous progress there, especially in the second half of 2018. So it's basically up and running and ready to take on more volume.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [17]

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Yes. I mean, remember, historically, we were shifting volume into Linden when it was a new center. It is now, to Tim's point, an up and running and efficient center. So this is a much different circumstance.

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Operator [18]

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Our next question comes from Matt Trusz of Gabelli Research.

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Matthew A. Trusz, G. Research, LLC - Research Analyst [19]

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I'm just wondering out of the 557,000 customers you have today, how many would you characterize, in rough numbers, are 30% type of customers? How much more do we have to go and talk anything about what churn or retention looks like and how that's evolved?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [20]

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Yes. Without quoting a specific number, I'd tell you that the customers that we have on hand today, obviously, make up multiple cohorts all the way back to the beginning of people that were really here from the first day that we started the company. So the older cohorts have a much higher percentage of best customers because those are the people that have retained and stayed on. And one of the definitions of our best customers are people that have high retention and high order rate. So there's a higher percentage certainly than 30% of that number that we consider to be best customers. The most recent cohort that we brought on or each New Year, about 30% of the people coming on fall into that category of best and near-best customer. So clearly, from our acquisition strategy in the last couple of years, there's still some people that will continue to fall off that aren't in that category. That idea, though, is, as we bring these new cohorts on, for instance, now starting in 2019, that just a higher percentage of those people come in from day 1 being in that category of people that can progress to be retained, higher order rate and best customers moving forward. So certainly higher than 30% of that base, but still a number of people that -- from the most recent acquisition cohorts that are not in that group.

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Matthew A. Trusz, G. Research, LLC - Research Analyst [21]

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And just related to that, as far as your ability to bring people on, and as you're studying your brand in the marketplace, have you seen brand perception evolve at all? I wonder about, on the positive side, the effect of these partnerships and what that has and then, on the negative side or potentially negative the effect of losing scale and marketing less on a relative basis.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [22]

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Yes. I mean, in general, we haven't seen a significant change relative to the brand piece of it. The idea on the partnership side is just what you're saying, it's to elevate our brand and highlight our capabilities. So partnerships like WW and introducing our brand and our culinary expertise to different consumer bases, especially in the health and wellness area that WW participates in, is something that we think is an elevation of our brand and our culinary team and expertise, for sure. Partnerships like our partnership with Jet gives us the ability to show capability in a non-subscription on-demand manner which we think is important and can obviously increase addressable market for us pretty substantially outside of the subscription business. So those things are important for us from a brand perspective and I'd say equally as important from a capability perspective as we build those competencies going forward, especially in the on-demand area. I think, from pulling back on marketing and so forth, I think this gets back to us being very strategic about where we place our messaging and where we place our dollars. And I think we don't want to get into too much detail on all the attributes of best customer because that's a very obviously competitive sensitive thing for us to be sharing, but we have some external help in these matters, too, around not just what are the attributes of the best customer but what is the best way to reach them and the best messaging and way to talk to them. So I think that, even though we're pulling back on marketing dollars, I think we're focusing that messaging on the right messages to get to the right customers. And therefore, I think the positive offset of the pullback on dollars is better, more consistent, more focused messaging that offsets those less dollars.

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Operator [23]

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Our next question comes from Heath Terry of Goldman Sachs.

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Heath Patrick Terry, Goldman Sachs Group Inc., Research Division - MD [24]

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Just to get back to Linden and the operational side of things a bit. Can you give us a sense of sort of, with this move of some of the volume to -- from Arlington to Linden, where will Linden be from sort of a capacity utilization standpoint? How much headroom will you have in that facility? And then if you could also give us a sense -- I guess, sort of unrelated, of what you're seeing in shipping costs generally? Obviously, a lot of press around shipping costs broadly across e-commerce going higher. Is that something you guys are experiencing? And to the extent that that's going to be or some mitigation of that is going to be a benefit of shifting volume to Linden, is that something we should be taking into account as well?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [25]

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Yes. No, thanks, Heath. Let me address both those things. First of all, in terms of capacity, and naturally, of course, with our overall revenue coming down in 2018 and planned to be down a bit more in 2019, we have ample capacity across our fulfillment center network for growth. So we don't have -- we don't expect to have to put any significant amount of -- or really any growth capital into Linden, Arlington or Richmond, California over the coming year to be able to -- or over the coming number of years to be able to handle the capacity that we foresee. So yes, there is no issue. We have plenty of capacity in Linden to bring this on and then, when we hit an inflection point, to grow beyond that. So no issues there. As far as shipping costs go, actually, over the last couple of quarters, we've actually improved our shipping costs. It's not improved as much as the labor and food components of COGS, but shipping continues to be an area that we're improving. We've got great contract we entered into last year with FedEx as well as a lot of great sort of last-mile local carriers. We've done a good job in kind of optimizing the mix of those carriers as well as just optimizing the mix of overall shipping routes. So, so far, the productivity that we've seen with more optimal shipping routes, the new contracts that we have, have actually done a good job of allowing us to keep our shipping costs low and, in fact, actually improved year-over-year in 2018. Yes. So, so far, good shape. The actual movement from Arlington to Linden has an impact of -- has a positive impact on shipping costs because, when we moved things from Linden into Arlington during 2017, we're actually taking a shipping penalty. And at that time that made sense because Arlington was more -- significantly more efficient from a COGS standpoint. Moving back to Linden actually gives us some shipping cost upside. So we feel pretty good going into next year that we're not going to see a bunch of pressure on shipping as an overall cost to our COGS line.

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Operator [26]

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Our next question comes from Matthew Kirschner of Guggenheim Securities.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [27]

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It's actually Matt DiFrisco also with Matt Kirschner. A quick question. I guess on the 25%-or-so customers, if you look on a year-over-year basis, that you've lost or taken the opportunity to sort of not to go after, is there a certain region that they've skewed to or age bracket? Can you give us somewhat of the demographic that you've lost? And then I'm curious about sort of the snowbird effect, later Easter and everything. Is there a benefit there also and that sometimes a later Easter keeps the snowbirds down in Florida a little longer? I know that's been historically somewhat of a thing where you've seen people turn off the subscription when they come back north.

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [28]

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I'll take the first part of that, and I'll let Brad handle the snowbird question. But I think, on the first part of the question, which was...

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [29]

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25% loss from a certain region or a demographic...

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [30]

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Absolutely not. It's kind of interesting. We have -- our customer base is very geographically dispersed. We actually -- we do skew, obviously, a little bit young and a little bit higher income in overall demographics, but we have a pretty broad customer base generally. And as the -- as we've kind of lost customers during the year, generally speaking, the loss has been kind of mixed across our customer demographics, both geographically and by all other metrics. So it's not -- we haven't lost a big percentage -- a disproportionately big percentage in any one geography versus another.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [31]

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What about demographic, though? Wouldn't the -- would the demographic, though, wouldn't that be counterintuitive to trying to target your 30%?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [32]

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Yes. It's -- but when you think about that, it's really -- especially in the newest cohort that your -- it's 70% of your mix that is -- that's in that kind of other not best or near-best customers, and that's a pretty big percentage. So I think it kind of washes out the overall demographic impact. So the overall number of people that we're losing kind of looked like the average customer that we have.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [33]

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Remember that the most important part of the attributes here we're talking about the best customers is more behavioral. It's less demographic as far as regional and so forth. It's more are they interested in cooking, do they have a lifestyle that matches up with our type of product. That is more the match of what we're seeing with best customer, the 30% versus the 70% instead of things like where they live and things like that. So just remember that's something we also talked about back in November, too. On the planning piece that you talked about on -- what you're talking about is something we call seasonal planning basically. It's looking at our seasons, and there's obviously definitive seasons in our business. This is -- we're in the middle of our busiest season relative to New Year, New Year's resolutions, people want to eat healthy, people want to cook more during this time of the year. And then, obviously, we've talked a lot at length historically about our different seasonal patterns around the strong ones being January then back to school in September, the weaker ones being more in the holidays when people are either traveling or having larger type of family meals or busy doing other things, in the summer, when people are traveling also and outdoors. So how we're approaching this going forward is we're planning our business on a seasonal basis, and this is something we started to put in place towards the end of last year. So every season, we are taking into account the timing of holidays and what our consumers and our best customers, what's important to them during those parts of the season or not important to them. So the thing that you're talking about would be something like in the spring, taking into account when holidays fall and how that looks during that season and also what are our best customers doing. This goes back to the behavioral attributes. And we've had a lot of help from third parties on this of what do our best customers do outside of cooking with Blue Apron. So that kind of gives us an idea of how we can better serve their needs going forward. Those are the types of things we're kicking through. So the timing of holidays does impact demand a little bit. Easter is a unique one because it falls in kind of various time frames during the course of the spring, but that is something that we take into account in our new kind of seasonal planning efforts going -- that we started at the end of last year and we'll be doing going forward.

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [34]

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It's probably worth mentioning because you're bringing up the issue specifically also of migration of people, back north for snowbirds, et cetera, that one of the -- some of the things that we were doing last year to improve or reduce the points of friction in our e-commerce model made it way easier for subscribers or for our customers to switch the delivery location. It used to be a little bit more difficult. Now it's basically a click of a button. Hey, I'm going to be on vacation somewhere or I'm going to be at my vacation home in Florida, click it, have my box sent there instead. And we've done a pretty good job of communicating that new capability to our customers. So hopefully, that's helpful in overcoming some of those issues as well.

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Operator [35]

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Our next question comes from Mark May of Citi.

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Mark Alan May, Citigroup Inc, Research Division - Director and Senior Analyst [36]

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Just a couple of questions. Wondering if you could speak to the retention rate for some of the more recently acquired cohorts in terms of what retention looks like in month 2, 3, et cetera, and if that's changed much for some of the more recent cohorts. And then in terms of marketing, just wondering if there's anything that the company is doing new or different with your marketing campaigns that you think is enabling you or will enable you to better target and identify this 30%.

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [37]

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Yes. I'll take the first part of that. On retention rates, we're kind of early into this best customer strategy. So our most recent cohort, acquired through 2018, retention rates look relatively similar on the same kind of retention trends that we've seen evolving over time. Of course, the whole idea is, as we get into this best customer thing, that our retention -- our average retention rates should pick up as we get a higher mix of best customers. And so we'll kind of see how that goes. But for now it's -- and by the way, we also hope that some of these partnerships like WW will bring on -- give us customers that have kind of a higher affinity both for the health and wellness offerings that we're putting out there as well as just for the overall idea of our subscription model. And so hopefully, that will help us with our mix of customers and hopefully higher retention and order rates. But for now, we're kind of early days of this new strategy. So our most recent cohorts, our retention rates are kind of, like I said, performing on similar trends that we've seen historically.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [38]

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And on the marketing side, Mark. Typical, as we talk about our strategy, if you think about trying to get more tailored and targeted to get to best customers, what you would expect from us and the change in that is, going to media, that it's easier to do that. So in the past, when you're looking to acquire as many customers as possible, you tend to use avenues that can tend to be very broad and not very specific in the target audience, things like kind of offline like TV-type media and radio and so forth, where you're trying to reach a broad audience, and not necessarily specific types of audience, where, on the online facet, you can obviously be much more targeted messaging and much more targeted in the people you're going after based off of data and information and so forth. So not surprising you'll see our shift to be more online-type advertising and marketing and less offline than maybe you've seen from us historically because we want to make sure that we are targeting more best customers. This is not a perfect science by any means, but it's -- that online avenue gives us the ability to target much better. Type of messaging important, too. I mentioned that earlier. So we've had a lot of help from some outside agencies to understand the attributes of what our best customers are, trying to understand how we think they would best want to be spoken to and we're making sure that we're messaging them in the right way. An example of that might be something like, although promotions still play a part in our business, we're being very careful on how much promotions we put out there but maybe not as much leading with the promotion messaging overall as making sure we're also messaging the attributes of our brand, the benefits of our brand, our culinary expertise and so forth because it shows that our best customers are very interested in those types of things beyond just a promotional aspect to get them in the door, too. So you'll see some of that change with us also.

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Operator [39]

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Our next question comes from Mark Mahaney of RBC Capital Markets.

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Mark Stephen F. Mahaney, RBC Capital Markets, LLC, Research Division - MD and Analyst [40]

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Hey, I just want to go back to the challenge of when -- or how you get visibility into when the active customer base can stabilize. And so could you just again talk through that, the level of visibility you happen to -- what number, what percentage of those active customers you have now you're pretty certain are with you for the foreseeable future for the next couple of years? And then what that level is and then is it that active customers start growing because you whittle down to that level, then it stabilizes? Or do you think it's going to be a mixture of that and new initiatives that actually get a new type of customer to come in different demographically or economically or attitudinally than what you've had in the past? I know it's a broad question. I'm just trying to get at when -- what's the visibility into when active customer base can stabilize and then start growing again? I know it's a broad question.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [41]

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No. That's a good question, Mark. Let me take the beginning of it and I'll let Tim kind of add on to it. But the overall goal for us in this strategy is to get a bigger mix of what we call best customers. So today when the metric we're talking about is 30% of our customers we're saying are best customers. And we're defining that more from a financial metric of how quickly they pay back when we bring them on board compared to, obviously, the spend we have to get them on board. And so that -- we basically looked at our current cohorts historically and said, you know what, 30% of them pay back in a time frame which we think is healthy from a business -- a sustainable business model going forward. So therefore, our goal in all of this is to increase that 30% that pay back in a healthy time frame to a higher percentage. Whether it's 40%, 45%, 50%, 60%, this is going to take some time. It's not going to happen overnight, obviously. But our ability to understand the attributes of best customer, target them at the top of the funnel, get them in, onboard them, keep them, retain them, give them the products and the tools that engage them and retain them in our subscription business is going to be really important for us going forward. So that's the overall goal here, is how quickly can we keep moving that mix of customers to a best customer. And the ability for us to do that is obviously going to turn the ability for us. And to Tim's point earlier around you're going to have the revenue per customer kind of lead the way before the customer count because you're getting a better mix of good customers, and therefore, we should see the ability for us to get to a stabilization and growth of revenue overall before a customer base because of that mix shift that we're kind of targeting and going for. So that's the overall goal and metric that we're trying to achieve. As far as the timing of specifically when we're going to see that, I think Tim answered that question before, but maybe you can articulate that again just...

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [42]

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Yes. I mean it really depends on how quickly our strategies ramp up and how successful they are across our 3 -- particularly our 2 core strategies on the DTC side of how well we're able to do, what Brad just said, how well are we able to go out there and do a better job of targeting new customers coming in being ones that will act more like our best customers, which means they'll have a higher retention rate as well as a higher order rate. And then of course, we really think that this idea of partnerships, out of the gates with WW, is another great way for us to access customers both efficiently as well as ones that should have a higher affinity to our model. But I think your -- the premise that you put at the beginning of your question, which is, yes, we are going to still shed some customer -- shed some net customers as we move through this journey in 2019 before we hit that point of inflection where we start growing again off of a smaller customer base is exactly the way we expect it to work. And then as Brad said, and I said earlier, probably likely to expect that we would return back to revenue growth a little bit before we return back to customer growth just because of the value as defined by revenue per customer of those average customers should go up as we execute these strategies.

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Operator [43]

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Our next question comes from Brian Nowak of Morgan Stanley.

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John Colantuoni, Morgan Stanley, Research Division - Former Equity Analyst [44]

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This is John Colantuoni for Brian Nowak. Some of your largest competitors in the meal kit space remain committed to spending behind growth and customer acquisition. Can you talk about the strategic rationale for letting up on marketing at a time when competition is still high? And related to this, are you concerned that reducing marketing might result in some of your highest value customers switching to one of your competitors' offerings or hurt your ability to acquire new customers?

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [45]

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Yes. Consistent with our messaging from last earnings call, we are focused on building a sustainable, profitable business going forward and that is our focus, period. So we believe there is a good model here, business model and financial model, that is here and it is sustainable and can be profitable going forward, and that's our focus to achieve that. That being the case, that, understanding that historically in our business and industry, the method has been to throw a lot of dollars at the top of the funnel and to see what sticks. In a high-growth time frame, that might be a good strategy for us right now. We are really focused on getting to that sustainable great foundation, strong foundation to grow off going forward. So we are less concerned about what our competition is doing relative to their financial model and more concerned about how we are performing to get to that strong sustainable model going forward. That being the case, if pulling back on marketing does impact our ability to maybe get to some of the customers we want, so be it. Our strategy and focus on getting to best customers, we think, is going to enable us to increase the mix of our best customers going forward. It also, I think, goes back to new product initiatives, new channel expansion initiatives. These are things that, with what we're doing, we feel are unique in the marketplace that are also important avenues and ways to attract customers beyond just spending money at the top of the funnel.

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Operator [46]

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Our next question comes from Youssef Squali of SunTrust.

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Sagar Vachhani, SunTrust Robinson Humphrey, Inc., Research Division - Associate [47]

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This is Sagar on for Youssef. A couple of follow-ups on Linden. With it now becoming the most efficient facility and the other 2 continuing to improve, directionally, how much more leverage can we expect on the operational side? And also from a mix perspective, before New Jersey was handling about 50% of order volume, I believe, where should we expect that to be by the end of the year with the new orders moving over there?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO [48]

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Yes. Absolutely. And you're exactly right. We do still have room to improve overall efficiency. And clearly, as efficiency improves in the back half, as we move into the first half, we've still got big opportunity in the first half of the year, particularly in 2019. I'd say that we're very, very pleased with the overall variable margin that we put up at 39.2% in Q4, and I think that's a pretty good benchmark for the kind of performance you can see going forward. For that matter, Q3's significant improvement. Obviously, Q3 is seasonally going to be a little bit lower variable margin for us with having to have incremental packaging and ice during the hottest part of the year. But I think Q3 and Q4 are a good indication of what our COGS/variable margin performance can look like going forward which would imply pretty big improvement, obviously, in 2019, particularly in the first half of the year. As far as Linden, yes, it is now growing to more than 50% of our overall box count or our overall revenue going forward. And as things evolve and we see where our overall customer count and revenue goes, we'll make the right decisions about where to source that revenue from, from a fulfillment center. But yes, as we move through the year now, obviously, Linden is -- the mix of our overall revenue is picking up.

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Operator [49]

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As we approach the conclusion of our call, I will now turn it back over to Mr. Dickerson.

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Bradley J. Dickerson, Blue Apron Holdings, Inc. - CEO, President & Director [50]

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Thank you, everybody, for your time today. A lot of interesting and exciting things going on in our company and our brand. A lot of hard work going on with our teammates across all of our company. We look forward to updating you in future conference calls around -- our strategies around best customer, around partnerships, specifically, our WW relationship and our Jet relationship and, obviously, the expansion into other channels and new products. So I thank you again, and we'll talk to you later.

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Operator [51]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.