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Edited Transcript of APRN.N earnings conference call or presentation 6-Aug-19 12:30pm GMT

Q2 2019 Blue Apron Holdings Inc Earnings Call

NEW YORK Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Blue Apron Holdings Inc earnings conference call or presentation Tuesday, August 6, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Linda Findley Kozlowski

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

* Louise Ward

Blue Apron Holdings, Inc. - Senior Director of Corporate Affairs & Corporate Communications

* Timothy Bensley

Blue Apron Holdings, Inc. - CFO & Treasurer

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Conference Call Participants

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* Sagar Vachhani

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Shweta R. Khajuria

RBC Capital Markets, LLC, Research Division - Assistant VP

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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 Second Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. A slide presentation has been created to accompany today's remarks and can be accessed on the Blue Apron Investor Relations website. Following the conclusion of today's call, the Blue Apron team will host a question-and-answer session and instructions will be given at that time.

With that, I'd like to turn the conference call over to Louise Ward, Senior Director of Corporate Affairs. Ms. Ward, please go ahead.

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Louise Ward, Blue Apron Holdings, Inc. - Senior Director of Corporate Affairs & Corporate Communications [2]

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Good morning, everyone, and thank you for joining us. On this morning's call, we have Linda Findley Kozlowski, Chief Executive Officer of Blue Apron; and Tim Bensley, Chief Financial Officer. We have created a slide presentation to accompany our remarks today. The presentation can be accessed through the webcast link on our Investor Relations website at investors.blueapron.com. Various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by those forward-looking statements as a result of very important risks and other factors, including those described in our earnings release and in 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 views as of any subsequent date. We specifically disclaim any obligation to update these statements.

During this call, we will be referring to non-GAAP measures, which are not prepared in accordance with generally accepted 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 & Presentations.

With that, I would now like to turn the call over to Linda Findley Kozlowski, Blue Apron's CEO. Linda?

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Linda Findley Kozlowski, Blue Apron Holdings, Inc. - President, CEO & Director [3]

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Thanks, Louise, and good morning, everyone. As I reflect on my past 4 months at Blue Apron, I remain excited by our position in this emerging category, the significant opportunities ahead of us and our potential to realize these opportunities through a new growth strategy.

First, I'll review our results for the second quarter of 2019. We continue to improve on the bottom line through operational improvements and cost optimization. We reduced our net loss 76% year-over-year to $7.7 million compared to a net loss of $32.8 million in the second quarter of 2018.

We improved adjusted EBITDA $22 million on a year-over-year basis to a profit of $4.5 million compared to an adjusted EBITDA loss of $17.5 million in the same period last year.

Net revenue was $119.2 million compared to $179.6 million in the prior year and $141.9 million first quarter of this year, reflecting our ongoing sharpened focus on higher performance channels and attracting and engaging on more profitable consumers.

This focus has resulted in continued progress in our key customer metrics, including average revenue per customer, orders per customer and average order value.

This sharpened approach to marketing led to a marketing expense at 8.2% of net revenue in the second quarter. As we've made improvements in marketing efficiency, we continue to see our expected average paybacks for new customers well within our goal of 12 months or less.

On the cost side, our cross-functional teams continue to leverage our improved operational capabilities, resulting in significant margin expansion on a year-over-year basis. Costs, excluding depreciation and amortization as a percentage of net revenue, improved by 470 basis points from the prior year to 60%.

Product, Technology and G&A, or PTG&A, for the quarter reflected our team's commitment to optimizing our operations and streamlining costs and were 31% lower year-over-year at $35.1 million and 10.3% lower on a quarter-over-quarter basis.

Our team has worked hard over the last several quarters to deliver against our previously stated goal of adjusted EBITDA profitability rooted in strong operational efficiencies and a more deliberate focus on marketing to high-affinity consumers. We're pleased to have achieved another quarter of adjusted EBITDA profitability, and we're encouraged by continued improvements in our key customer metrics as well as year-over-year improvements in our unit economics.

The adjusted EBITDA numbers are strong, but we must address revenue. As discussed at the end of 2018, getting revenue in the right direction will take time. What we are excited about today is Blue Apron's next phase: executing a strategy that we expect will return us to growth in 2020 by focusing on our customers and our core business. The plan -- this plan is what we'll focus on today's call.

First, I want to explain why we believe that there are significant opportunities ahead for Blue Apron. Americans are cooking. 82% of meals are sourced from the home, which is up from a decade ago. Since joining Blue Apron 4 months ago, I have spent time with our customers to hear about why they cook with us. The specific reasons vary from health to convenience to interest in learning a new skill to a love of creating, but there is a common thread throughout most of these conversations.

Cooking Blue Apron is a valued experience and important time for connection with friends and family. We believe that few companies have as deep a connection with their customers as we do. Week after week, our customers invite them into the most intimate spaces in their homes, their kitchens, and they trust us to help them cook delicious meals for themselves and their loved ones.

As we move forward, the heart and soul of our business will remain in the deep connections that make it easier for our customers to have incredible home-cooking experiences even on those nights when they are tried, rushed and stressed.

We haven't discussed the total addressable market for Blue Apron since the IPO. However, today, we are updating that TAM, and it's meaningful. With adjustments made for household income and family size, we believe our core product, a meal kit, can serve approximately 50 million households today in the United States. If you look at the publicly available frequency with which customers order meal kits and the strong average order value, this results in a current total meal kit opportunity between $40 billion and $45 billion.

While meal kits offer a broader, richer experience than just convenience, we think the best proxy for a serviceable portion of the market is online grocery purchases. Based on the current percentage of the households in America that are buying food online, we believe our serviceable market is approaching $9 billion.

However, this number is rapidly increasing and is estimated to grow 35% between 2018 and 2020. We see further upsides and key demographic shifts in consumer trends, such as growing consumer interest in fresh versus highly processed food, time-pressured consumers seeking convenience and Americans spending more time at home.

We're in a dynamic category and sit at the intersection of several trends that play to our strengths. As we reevaluated our addressable market, we also conducted a rigorous evaluation over the past 4 months of our core business and our multi-channel expansion initiatives. Here are some of my observations. We have not kept up with the ever-evolving needs and preferences of our customers over the past couple of years and we are behind. Some of that is due to the operational challenges the business was confronted with in the back half of 2017, and some of it is because we redirected attention away from innovating in our core offering as we tested alternative distribution channels for the past 1.5 years.

Given these insights, it's become clear that the more attractive opportunity for Blue Apron right now is in our core direct-to-consumer business. The unit economics are strong in a direct-to-consumer model, avoiding many of the challenges of inventory management and shrinkage.

We'll be wrapping up with our pilot with Jet.com in the coming few weeks. As we said before, Jet has been a great partnership through which we built valuable on-demand competencies, many of which we are now applying to future considerations for our model. Right now, however, we need to focus our efforts on our core business, engaging with our customers week-in and week-out on our platforms through our direct-to-consumer service. We believe our core business offers a number of unrealized opportunities for growth and is the most attractive place to invest our time and resources right now.

Although there have been changes with the execution of our core business, we believe that the strategic plan we are discussing today will support a strong, sustainable business going forward. To realize the opportunity we see in our core business, we've developed a strategy that has 3 key objectives: one, engage more consumers that have our best customer characteristics; two, better integrate into our customer's lives by offering more menu choices and flexibility in our products and services; and three, scale our marketing efficiently through stronger customer relationships and new partnerships.

I will walk you through each key objective. For our first key objective, we will aim to reach and engage a larger audience of customers that share our best customer characteristics by pursuing areas of previously under-tapped opportunity. We plan to deploy 2 new initiatives to meet this first objective. First, we will better meet the individual needs and preferences of contemporary American households through existing products as well as future flexibility. Our customers include the traditional couple and family households that most companies are serving, but what we've also observed is that 2 of the fastest-growing segments of the population, single-person households and empty nesters, are also among our best customers, yet we aren't engaging these groups to the extent we could be.

Second, we'll seek to do a better job at tapping into the growing segment of people who are interested in healthy habits and lifestyles but not necessarily a rigid diet. The research is clear that cooking fresh food at home is healthier than take-out or restaurant dining. And many consumers who want to be healthy are not willing to sacrifice on taste or quality to do so and they shouldn't have to. Our partnership with WW has proven to us just how hungry Blue Apron customers and, specifically, our best and most profitable customers are for this type of solution.

Our second key objective is to better integrate into our customers' lives by offering more menu choices and flexibility in our products and services. We plan to deploy 4 new initiatives to meet this second objective. First, to ensure that we have something that is -- not just appeals to but excites every customer. Every week, our menus will offer a variety of proteins, produce and carbs for a broad array of consumer interests and preferences. That will mean adding recipes to our lineup as we did recently by adding an additional weekly menu spot to our four-serving plan.

We'll also add the healthier options we know our customers are looking for. This fall, we plan to pilot new changes to our signature menu to offer more recipes and communicate more health choices for those seeking a balanced meal solution. Exciting our customers every week also means that we'll double down on our commitment to evoke a sense of culinary discovery with every recipe. For example, we know that a majority of our best customers are interested in plant-based meat as an option on our menus. Based on that insight, we introduced plant-based proteins from Beyond Meat in our recipes beginning this month with the Beyond Burger on our signature menu. After announcing our new Beyond Burger recipes, we saw strong interest from customers even weeks out from shipping.

The Beyond Meat launch was simply the start of reintroducing the unique ingredients that are a key part of our value proposition for our best customers. Starting in early September, we'll reintroduce several unique fruits and vegetables into our boxes, such as Chinese broccoli, nectarines, shishito peppers and yu choy.

Second, as another way to better integrate into our customers' lives in the future, we tend to give customers more freedom to tailor our product and service to the needs and preferences of their households. For example, if a customer wants to double the protein in a recipe or swap out the carbs for extra vegetables, we will work to enable that flexibility for them.

Third, we will evolve our products for new eating occasions and offer a thoughtful variety of add-on items. Many of our best customers tell us they want to buy more from us. It's time that we give them a chance to do just that.

Finally, in addition to offering a more flexible product, we'll enhance our e-commerce platform to provide a more flexible service experience, making it easier for our consumers to discover Blue Apron and engage with us in a way that best fits their lifestyle. Our technology team, under the leadership of our new CTO, Irina Krechmer, will be integral into this work to make all of our customer touchpoints more convenient, intuitive and flexible.

Now onto our third key objective. We aim to scale marketing efficiently through stronger customer relationships and new partnerships. So many of our customers love our product and our brand, and we have the opportunity to engage them more deeply every time they interact with us. We plan to continue building brand capital that we can leverage in numerous ways. We have already demonstrated increased efficiency in our marketing over the past 2 quarters, but there's always more to do, however, and we always see a bigger opportunity in leveraging partnerships.

Our focus going forward is on partnerships that can expose us to large, highly engaged communities whose interest and values overlap with those of our best customers and who will be best served by the products we already offer, bringing us faster and more efficient scale of customer growth.

As mentioned earlier, while we pursue this new growth strategy, we will continuously work to strengthen our foundation of operational optimization, fiscal discipline and meaningful brand differentiation. We've talked a lot in the last few quarters about our notable progress in operational optimization and fiscal discipline. Our talented employees across the country have a lot to be proud of there.

I also want to underscore a meaningful brand recognition because I believe it to be an important contributor to our ability to implement the strategy we are outlining today. We continue to have the strongest brand in the category with 61% unaided awareness and 85% aided awareness. Consumers recognize our brand within the category, which is a testament to our employees who have been careful stewards of our brand through a significant time of change.

We believe that our strong foundation in operational optimization, fiscal discipline and brand differentiation puts us at a competitive advantage as we pursue growth. The successful execution of this new three-pronged strategy, serving a larger audience of customers, offering more choice and flexibility and scaling marketing through stronger customer relationships and new partnerships, is fundamental to our ability to grow the business in 2020. I believe it's the right strategy to realize the significant opportunity I see ahead for this company.

I'll now turn it over to Tim to discuss our financial outlook, and after that we'll take your questions.

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

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Thanks, Linda. We're proud of the strong financial and operational foundation we've worked so hard to build over the last year that has now put us in a position to be able to pursue growth and, specifically, profitable revenue growth. I'm going to now turn to our financial outlook as we implement our growth strategy, but I'll stay relatively brief today to allow time for questions on our strategy.

In order to realize the full benefits of our growth strategy, we plan to invest behind some of its key initiatives. We plan on increasing marketing spend over the next several quarters as a percentage of net revenue relative to our first half 2019 run rate. We also expect to have some additional capital expenditures over the coming quarters to enhance some of our e-commerce platform and fulfillment-center capabilities. We believe these upgrades will enable us to transform the Blue Apron customer experience by unlocking the additional choice, flexibility and adaptability of our product that our customers are asking for, as Linda spoke about earlier.

We expect that these investments, along with the execution of our growth strategy, will lead to healthy quarter-over-quarter net revenue and customer growth in our seasonally high period of Q1 2020 and will lead to year-over-year quarterly net revenue and customer growth in the back half of 2020.

In the shorter term, as we progress through our strategy, for the back half of this year, we expect similar year-over-year net revenue performance, as we saw in the first half of 2019, while continuing to strengthen our customer base to set us up for meaningful execution in 2020.

On the bottom line, we expect net loss in the third quarter of 2019 of $26 million to $29 million and adjusted EBITDA loss of $12 million to $15 million, reflecting seasonally higher COGS as a percentage of net revenue and these increased investments as we move the business forward. For full year 2019, we expect net loss of $55 million to $62 million and adjusted EBITDA of breakeven to a loss of $7 million.

As Linda said, we have demonstrated our ability to prudently manage costs throughout the organization and continuously drive efficiencies in our fulfillment center network. Financial discipline, including key marketing efficiencies as well as operational optimization, will continue to be foundational to our business as we enter our next phase of growth.

We are confident that upon the successful execution of our strategy, we'll achieve the growth expectations that we've outlined today. We look forward to updating you on this progress. For easy reference, we have posted a reconciliation chart from our net loss to adjusted EBITDA outlook on Blue Apron's Investor Relations website.

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Louise Ward, Blue Apron Holdings, Inc. - Senior Director of Corporate Affairs & Corporate Communications [5]

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Thanks, Tim. We 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 comes from Shweta Khajuria from RBC.

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Shweta R. Khajuria, RBC Capital Markets, LLC, Research Division - Assistant VP [2]

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Great. Two questions, please. On -- Linda, on your third strategy in scaling marketing through customer relationships and partnerships, it'd be great to hear what your thoughts are in potential types of partners that you think about to strategically partner with. Weight Watchers and Beyond Meat are great. What are some of the things that the company thinks about in terms of engaging and creating new partners? And second, on integrating into lives of your consumers by better dealing your menu options or expanding your menu and making it more flexible, could you talk about what type of additional costs that could -- that you could incur given the greater menu optionality and the ability to offer substitutes even on an on-demand basis?

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Linda Findley Kozlowski, Blue Apron Holdings, Inc. - President, CEO & Director [3]

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Sure. First, thanks so much for your questions. First, on the partnership question, there is a variety of partners available to us. So again, we continue to enjoy our partnership with WW, and we're very excited that this fall we're launching a pilot program on the West Coast that actually will allow us to integrate some of our healthier options from WW with our core signature menu to offer 11 different choices to our customers across a variety of options that let them tailor their diet to their preference and mix and match between all of our different menus. So that's a pilot that we're going to be launching in the fall that does include our WW partnership. But I think, for us, we think about partnerships not just when it comes to potential ingredients we can have in the box or healthy options, we think there is a lot more within the healthy options space between a variety of both health- and fitness-oriented organizations, but we also think that there is additional distribution and acquisition partnerships that really increase in scale over what we've seen in the past that not only focus on bringing people in for healthier options, for better lifestyle, for better connection, all within the idea of flavor and enjoyment, but also, frankly, scale on our core business. I think some of our partnerships in the past have required significant lift in creating new products options, but what we've actually found is that within our core offering we have great opportunity to expand and really drive more customers into that option to get significant scale.

So that's really what we're focused on, and they can be in a variety of types of partners across health, across entertainment, across travel and across more. So that's really on the partnership side. On the product side, this actually goes hand-in-hand. What we see from our customers is that they really, really love the idea of flexibility, but flexibly on their terms. And so what we're trying to do both with this pilot that you're seeing coming in the West Coast in the fall, but also longer-term development, is how can we put choice in the hands of our customer and really let them choose across a variety of different menus -- or, a variety of different recipes in one menu to allow them the ultimate control and flexibility over what they serve themselves and their families.

But that's only one part of it. I think going above and beyond that, as we referenced in our comments, we really have the opportunity to help people think about how can they expand and maybe swap out ingredients, how can they add proteins or upgrade proteins if they want to and then how do we think about the subscription model going forward to give people more flexibility in their choices. So those are all possibilities that we have in front of us.

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

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And I think on the cost side of it. Yes, I'm just going to jump in on the question about the cost side with a couple of comments. First of all, this year we were able to significantly increase our menu offering with the WW program. We actually put out 6 new items that are all in that kind of healthy space that Linda referred to and we were able to do that with a significant improvement in our variable margin. And year-to-date, our variable margin is approaching 41%. We were about 35% in the same time period last year. So -- and we're pretty confident in our ability to do that. The second thing I mentioned during my comments that we are going to make a very manageable capital investment to allow us to have some of this flexibility over the coming number of quarters, and we think that, that investment in our capabilities will also give us the ability to handle any additional complexity efficiently. Probably the last thing to say is, we have made significant improvements in our operational efficiencies this year, but we don't believe that's the end of the upside to our operational efficiencies. This is really the first year that we've been able to make that kind of a move, and we think next year as we continue to focus on continuous improvement in operations, any additional improvements will certainly be able to offset any complexity from the increased menu offerings. Not to mention the fact that as we return to revenue growth in the second half of next year, that revenue growth will give us some leverage in our ability to continue to hold costs down as well. So we think with that whole package, we're in pretty good shape for cost next year even as we go to the expanded consumer offerings that Linda referred to.

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Operator [5]

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(Operator Instructions) Our next question comes from Youssef Squali from SunTrust.

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Sagar Vachhani, SunTrust Robinson Humphrey, Inc., Research Division - Associate [6]

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This is Sagar on for Youssef. I just want to ask, after 2 quarters of adjusted EBITDA profitability, why don't you expand more on the commentary given in the prepared remarks on the sustainability and cadence of it, especially as you start going down the road of achieving customer and revenue growth through the execution of the strategy you outlined, which, we assume, comes with reacceleration of sales and marketing among other costs?

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Timothy Bensley, Blue Apron Holdings, Inc. - CFO & Treasurer [7]

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Yes. No. This is Tim, absolutely,. One of the things that I talked about in my comments is in the second half of the year we do expect to basically go a bit in the other direction in terms of EBITDA profitability. Year-to-date, obviously, we're quite positive in the second half of the year both because of the -- just the seasonal nature of our costs in Q3 as well as leaning into some of this marketing investment, at least leaning in, in terms of higher marketing spend in the second half of the year and in the coming quarters as a percentage of net revenue versus what we spent in the first half of the year. We expect that to basically take us in the second half to somewhere between a full year breakeven EBITDA and a $7 million EBITDA loss. So that basically -- that's where we expect those initiatives to basically take us. We're still on the specific planning phases for how all this will impact 2020. We'll come back and talk to you more specifically in the coming quarters. As we get closer and closer, we'll be able to talk about those numbers. The other thing I would say is as we move forward, particularly with the marketing impact on our -- both growth and EBITDA performance, we still intend to invest marketing in a way that has a very strong ROI and still try to meet our goals of within a 1-year payback. And the nice thing is we've developed the capability to be relatively agile as we move forward. We'll continue to make investments on a week-over-week, month-over-month and quarter-over-quarter basis and adjust as necessary as we see those results as we move forward.

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Linda Findley Kozlowski, Blue Apron Holdings, Inc. - President, CEO & Director [8]

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One of the exciting things that we see out of this, if you note, is we have constantly talked about the increasing quality of our customer, and you can see very clearly that our average order value, orders per customer and average revenue per customer all continue to be strong and healthy and developed as we get better and better at bringing in these really great customers into the platform and continuing to nurture them.

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Operator [9]

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And, ladies and gentlemen, this will conclude today's question-and-answer session. As we approach the conclusion of the call, I'd like to turn the conference call back over to Ms. Kozlowski for any closing comments.

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Linda Findley Kozlowski, Blue Apron Holdings, Inc. - President, CEO & Director [10]

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Thank you very much, everybody, for your time today. We're excited about what's in store for Blue Apron, and we're looking forward to updating you on our growth strategy in future dialogues. Please have a great day.

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Operator [11]

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And with that, we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.