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Blue Apron: Continuing To Bleed Customers

About: Blue Apron Holdings, Inc. (APRN)
by: Gary Alexander

Blue Apron shares rocketed more than 16% after the company reported third-quarter results.

The company pointed to increases in average order frequency and average revenue per customer as a sign that its slimmed-down marketing strategy is working.

However, total customers and total orders continue to see jarring declines from the prior year.

While Blue Apron has meaningfully slowed down its cash burn, its current cash balance of $85.6 million (plus $154.6 million of debt) is too close for comfort.

With more debt on its books than current market value, this is a company that is likely to get taken over by creditors in the near-to-medium term.

The market thinks Blue Apron (APRN) is turning the ship around. I'm failing to see it. The pioneer of the direct-to-door food industry, Blue Apron has struggled over the past several years with the rise of virtually homogeneous competitors (such as Plated, HelloFresh, and Freshly) while also dealing with the increasing popularity of food delivery services like Grubhub (GRUB) as a convenient alternative to at-home cooking. The company's new CEO, Linda Findley Kozlowski, who replaced prior CEO Brad Dickerson after the latter had only one year on the job, is trying to paint a picture of Blue Apron as a smaller, more focused and more profitable company. And while she has succeeded at slimming down Blue Apron's losses, it's still unclear how Blue Apron can achieve a viable business model when so much in the industry relies on critical mass and scale.

Following Blue Apron's third-quarter results, investors cheered the company's slimming losses and sent shares up more than 16%:

Chart Data by YCharts

I'm skeptical on this recovery. I continue to see many red flags in Blue Apron's latest results, despite management's positive spin on the company's customer metrics. In my view, with Blue Apron still struggling under a heavy load of debt and a market value that has virtually evaporated from its private days (when it was worth ~$2 billion), the company is still crawling slowly toward bankruptcy. Continue to watch this one from the sidelines.

The customer metrics: what management sees, versus reality

In Blue Apron's third-quarter results, management boasted that the company is seeing a recovery in customer metrics. Here are the results that Blue Apron wants investors to focus on:

Figure 1. Blue Apron customer metrics

Source: Blue Apron Q3 management presentation

Yes, these are positive numbers. Blue Apron has managed to raise its average frequency of orders per customer by 10% y/y; similarly, the average revenue per customer has also gone up by 11% y/y.

Here's how CEO Linda Findley Kozlowski positioned these results on the Q3 earnings call:

"We believe that this strengthening of our customer base validates our more deliberate marketing approach and is foundational as we continue to execute on our growth strategy.

As we’ve refocused our marketing over the past year, we’ve become more efficient in how we attract and engage consumers and we are encouraged by the results.

Heading into 2020, we plan to build on this approach to lean back into marketing investment, as we make improvements to the product and customer experience. We’ll continue to avoid initiatives that would generate short-term revenue at the expense of inefficient returns on our marketing spend, and take the time to build the right product and marketing mix for sustainable growth."

But perspective matters: focusing on only these metrics obscures the truth. How much of Blue Apron's increase in average revenue per customer is due to the fact that the total customer count is, in fact, falling? Management glossed over the fact that total customers and total orders are still in free fall:

Figure 2. Blue Apron order count and customer count

Source: Blue Apron Q3 earnings release

Blue Apron's number of active customers fell -40% y/y to 386k (and perhaps even worse, -14% sequentially), while total orders fell -35% y/y to 1.72 million. Note that these y/y declines are even steeper than last quarter's, when active customers and total orders fell -38% y/y and -34% y/y, sequentially.

Revenue, too, crumbled substantially. Here's a look at the company's full Q3 financials - revenue declined -34% y/y to $99.5 million, missing Wall Street's mark of $106.9 million (-27% y/y) by a wide mile.

Figure 3. Blue Apron Q3 financials

Source: Blue Apron Q3 earnings release

Blue Apron is trying to paint the picture that by cutting down its marketing spend, the company is retaining only its most loyal (and hence, most profitable) customers - thus why its average order counts and average revenue per customer is shooting higher. But I've always maintained that Blue Apron is a business that relies on economies of scale.

The company's gross margin remained frozen at 33.2% (on a GAAP basis) this quarter. Blue Apron can only cut marketing expenses so far (12% of revenues this quarter, versus 15% in the year-ago quarter), but in order to really turn a profit, the company needs to acquire larger scale to boost its gross margins.

The liquidity picture

Here's the good news on Blue Apron's liquidity: the company isn't in any immediate danger of bankruptcy. Tim Bensley, Blue Apron's CFO, noted that the company managed to refinance its credit facilities to extend its runway:

"From a liquidity standpoint, we are pleased to have recently completed the refinancing of our revolving credit facility with our existing lender syndicate. In connection with the refinancing, we extended the maturity date to August 2021, and paid down approximately $30 million of the remaining balance, reducing the aggregate lender commitments to $55 million. This refinancing also aligns our financial covenants to our growth strategy, providing additional access to our liquidity which we believe will provide increased flexibility for us to invest as we drive towards growth in 2020."

The other bright spot: Blue Apron has truly managed to pare down its cash flow losses. Year-to-date, Blue Apron has only burned through -$9.2 million in cash, versus -$66.9 million in the year-ago period.

Figure 4. Blue Apron FCF trends

Source: Blue Apron Q3 earnings release

Perhaps it's the appearance of not being in any immediate bankruptcy risk that has investors rejoicing over Blue Apron's latest results. I do think, however, that Blue Apron's balance sheet remains precarious - with only $85.6 million in cash alongside $154.6 million of debt. Sure, management may have managed to extend the debt's maturity, but the company still hasn't figured out to turn a profit yet. And without growing customers and orders again, I'm not sure how Blue Apron intends to achieve this.

Key takeaways

While acknowledging that Blue Apron has taken important steps in extending its shelf life and preventing near-term bankruptcy, it's unclear that the company's marketing cuts aren't harmful to Blue Apron's long-term future. For the past several quarters, Blue Apron's decay in customer and order counts, as well as revenues, have continued to pick up pace. In my view, Blue Apron can't survive with a customer base much smaller than this - a ~10% increase in average orders per customer simply can't cover a 40% decline in total customer counts, which is effectively what management is trying to convince investors of this quarter.

Continue to avoid this stock and invest elsewhere.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.