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Why Blue Apron Could Have Turnaround Potential

- By Robert Stephens, CFA

An increasingly efficient business model could catalyze Blue Apron (APRN)'s stock price.

The company is reducing the size of its workforce, as well as adopting further automation processes in order to boost margins. New partnerships have the potential to introduce the company's products to a wider audience, and it expects to announce further partnerships during 2019, investing in product innovation to support their growth.


Although competitive threats and disappointing recent performance are potential risks, a refreshed strategy that focuses on its most profitable customers could strengthen the company's competitive position. After declining 50% in the last year versus a fall of 7% for the S&P 500, the stock could have recovery potential.

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Efficiency

A focus on efficiency could boost the company's financial performance. In the most recent quarter, its cost of goods sold excluding depreciation and amortization as a percentage of net revenue improved over 1,000 basis points from the previous year to reach 68%. Efficiency gains in food and labor costs from enhanced planning and process-driven strategies in its fulfilment centers were the catalysts behind its improved margin.

It expects PTG&A savings of $40 million in fiscal 2019 compared to the previous year. It will reduce 4% of its total workforce, including part of its management group. This is expected to result in savings on personnel expenses of $16 million per year. It has multiple initiatives in fulfilment processes, sourcing utilization and labor management. It will also adopt further automation technology to realize additional efficiencies following its most automated facility in New Jersey becoming its most efficient fulfilment center.

Partnerships

Blue Apron will create new products that are designed to meet the demands of a wider range of retail channels. Its partnership with WW (WTW) includes a weekly selection of recipes that will be exclusively available on its digital platform. The recipes are intended to align with the WW freestyle program. They are expected to introduce millions of WW's consumers to the company's recipes, which may lead to a rising customer base.

A partnership with Jet.com has also been launched to provide same-day or next-day on-demand delivery of a range of products to households across New York City. Blue Apron is the anchor product on Jet.com's Meal Solutions category on its new city grocery platform. It expects to expand its on-demand delivery capabilities to the West Coast, with further partnership agreements expected to be announced during the course of 2019. It will reallocate marketing spend and invest in further product innovation to support its range of partnerships.

Risks

The company's average customer placed 4.1 orders last quarter, which is down from 4.4 orders in the previous quarter. Its average order value declined 1%, while revenue per customer fell 8% in the most recent quarter. It remains exposed to competitive threats, with larger businesses such as Kroger (KR) or Amazon (AMZN)'s Whole Foods having the potential to enter the market. They would be likely to have lower costs, and may have a competitive advantage on price.

Blue Apron will focus resources on its top 30% of customers on a net-revenue basis. They account for over 80% of net revenue, and have an average payback period on acquisition costs of less than six months. It will aim to deepen engagement with its best customers through utilizing insights into their behavior in order to personalize its offerings and create an improved customer experience. This has boosted retention rates among test groups of customers.

It will also reduce overall acquisition spend, and intends to target potential customers that exhibit the attributes of its best customers. This could lead to a customer base that is more loyal, which may improve the company's competitive position.

Outlook

Blue Apron's planned workforce reduction and increasing use of automation could boost efficiency and margins. Its partnership agreements may introduce it to a wider range of potential new customers, with further such agreements expected to be announced during the course of 2019.

A focus on its most profitable customers may improve the company's competitive advantage. The use of customer insights to provide a more personalized experience could increase retention rates and boost loyalty. This may increase the size of its economic moat in an industry where barriers to entry may be relatively low.

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This article first appeared on GuruFocus.