Blue Apron - Q3 2022

Transcript

Operator (participant)

Good morning, and welcome to the Blue Apron Holdings Q3 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded today, Monday, 7 November 2022, 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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. On this morning's call, we have Linda Findley, President and Chief Executive Officer of Blue Apron, and Mitch Cohen, Interim Chief Financial Officer. Before handing the call over to the company, we will review the Safe Harbor statement.

Various statements that the company makes during today's call about its 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 risks and other factors, including those described in the company's earnings release issued this morning and the company's SEC filings. In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements. During this call, the company 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 it has defined these measures, and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I would now like to turn the call over to Linda Findley, Blue Apron's CEO. Linda?

Linda Findley (President and CEO)

Thank you, and good morning, everyone. We're pleased to have you here today for an update on the business. Joining me on the call is our interim CFO, Mitch Cohen, who joined us a few weeks ago. We are thrilled to have Mitch on board as we continue our search for a permanent CFO. Mitch comes to Blue Apron with significant experience in consumer-oriented companies, including Redbox and Cerence. I would like to welcome Mitch and appreciate his ongoing support. Before I jump into the quarter, I'd like to directly address our cash position. As many of you know, last month, we made the decision to tap the public markets to enhance short-term liquidity and maintain compliance with our minimum liquidity covenant. We completed an at-the-market offering in early October, resulting in approximately $14.1 million after fees and commissions.

We did so in light of not receiving the private placement and other funding that was expected from affiliates of Mr. Joe Sanberg, our largest shareholder, by the end of September. The proceeds of our ATM program enhanced our short-term liquidity and allowed us to remain in compliance with our financial covenants. We continue to remain in active discussions with Mr. Sanberg, and we entered into a pledge agreement with one of his affiliates. Under this agreement, Blue Apron was granted a security interest in certain securities of private companies with a value estimated to be significantly in excess of the $56.5 million owed. Mitch will speak a bit more on this. We are also taking actions to further stabilize our cash position. We are working closely with financial advisors to explore financing and other alternative avenues to manage our liquidity.

Over the summer, we began identifying and instituting several cost savings and margin initiatives, including beginning to find additional ways to manage our cost structure and improve margins. In the Q3, our variable margin was 32.2%, a reduction on both quarter-over-quarter and year-over-year basis. The decline was mostly attributable to higher costs across packaging and logistics. We plan to continue to identify other areas to further manage expenses moving forward. Additionally, we announced today that Chris Halkyard has joined our team as Chief Supply Chain Officer. This position replaces the role of Chief Operating Officer and is accountable for all fulfillment center operations, supply chain, and logistics, and procurement. Chris comes to Blue Apron with over 30 years of supply chain and operations experience, specializing in fulfillment center operations management.

His background centers on implementing processes to allow for more efficiency, better decision-making, and better cross-functional ways of working. We expect that this expertise will be invaluable to us as we focus our attention on improving our variable margin, increasing productivity, and enhancing quality. While we plan to provide a more comprehensive update on all efforts on our Q4 and full-year results conference call, another area where we took notable action this quarter is in marketing. During the Q3, we reduced our spend by 21% as compared to Q2 2022. We saw cost of marketing rise beyond sustainable levels, particularly in search marketing, and therefore, we are adjusting spend and tactics accordingly. We are focused on optimizing our programs to return to payback within one year.

Considering the importance of marketing on our business, we are constantly looking at ways to improve our strategy, balancing where we are today in broader market conditions. Over the past few weeks, we welcomed Amber Minson as our new Chief Marketing Officer. Amber comes to us with over two decades of data and growth-oriented marketing experience that we think will be invaluable to our business as we move forward. Over the past two years, we built a solid marketing foundation, including significantly strengthening our brand equity. In parallel, we have also invested in key tech improvements. These efforts will allow us to shift our marketing strategy efficiently to be more data and performance-driven. Looking ahead, we are taking measures to be disciplined in managing the business and cash. We remain focused on our goal of long-term profitable growth. In Q3, we continued to deliver consistent key customer metrics.

Average order value of $70.83 was a new company record, as was average revenue per customer of $340. Order frequency held steady at 4.8, down modestly from Q2 and in line with seasonal quarterly trends. The price increases implemented over the summer, along with our ability to continually provide greater menu options and additional variety, drove our success with these metrics. Total active customers over the 12 months ending 30 September 2022 was approximately 679,000. This was a decline of 1.3% from the equivalent period a year ago. As we mentioned last quarter, we believe our 12-month customer number represents a more complete view of the active customers in our business and smooths out seasonality.

For the quarter, total customers were 323,000, down 7.5% sequentially and 7.9% year over year. Similar to Q2, seasonal and macroeconomic pressures on purchasing due to the inflationary environment drove a portion of the decline. We found that our marketing efforts in Q3 were less efficient than in prior quarters, which equally impacted our customer count. Our product pipeline also remains strong as we continue to innovate and provide our customers with new and unique ways to shop with us. As our latest offering, our new Ready-to-Cook recipes are resonating well with customers. These meals help meet their growing need for quick, convenient, and delicious mealtime options. Our culinary team executed a well-thought-out testing plan, allowing us to launch this product without introducing new ingredients into our pantry.

So far, these meals are performing well and continue to receive high praise from our customers. In addition, we expanded the subscription experience to be more customer-friendly. Now, customers have the optionality to order as many recipes and add-ons as they want per week with no limitations. Our seasonal occasion-based boxes are also a big hit. Between now and the end of the year, we are helping our customers celebrate the holiday season. We introduced our biggest Thanksgiving offerings to date, followed by our new holiday roast box to extend the seasoning. These offerings are created to give customers the flexibility to tailor their orders to appeal to their party size, specific tastes, and dietary preferences. Partnerships also remain a big focus for us. We continue to expand our e-commerce presence to a wider pool of potential customers beyond our core ecosystem, including our gift card sales.

Customers can now purchase a Blue Apron digital gift card on Costco.com. This allows us to bring a gift option to their customer base at a great value, especially as gift experiences are growing in popularity. In addition, starting in October, a selection of our popular meal kits along with our seasonal boxes are for sale online in the U.S. Amazon stores without a subscription. We are able to do so effectively by leveraging the process we established earlier this year when we introduced our product on another e-commerce platform. While the kits are sold on Amazon.com, the boxes are directly fulfilled by us, taking advantage of our ability to ship boxes within one business day. Furthermore, we continue to work with our current enterprise partners and look for additional opportunities to expand these efforts.

We view our enterprise sales as a good way for us to further build brand awareness and drive revenue and customer growth. We also continue to focus on ESG and had several notable developments this quarter, including the launch of our inaugural ESG report, The Better Living Roadmap. This report details Blue Apron's ESG progress through 2021 and also highlights our first ever SASB report. The ESG roadmap focuses on three key priorities, people, product, and progress, and details our actions along with key initiatives against each of these areas. We also signed a partnership with Planet FWD, the leading carbon management platform for consumer companies, as we look to take proactive steps towards our net zero goals. Lastly, we also joined the United Nations Global Compact Initiative.

As a participant, we have committed to elevating our role to show the different ways we can help support the outcomes of the United Nations' 17 Sustainable Development Goals. Before I turn the call over to Mitch, I want to reiterate that we continue to drive towards our goal of achieving long-term sustainable growth in the future. We are implementing initiatives designed to address key fundamentals, including margin levels, PTG&A, and marketing. With that, I would like to turn the call over to Mitch for a review of our financials. Mitch?

Mitchell Cohen (Interim CFO)

Thank you, Linda, and good morning, everyone. Great to chat with you today. To start, as Linda discussed, we completed an at-the-market offering in early October after not receiving funding from Mr. Sanberg's affiliates as expected by 30 September 2022. The offering helped to enhance short-term liquidity and keep us in compliance with our financial covenants. As part of the offering, we sold approximately 4.6 million Class A common shares at an average sales price of $3.25 for approximately $14.1 million after fees and commissions. I'll speak more on our current cash position towards the end of my remarks. With the execution of the at-the-market offering, we exhausted our prior shelf registration statement.

Today, we filed the universal shelf registration statement for the registration of $100 million with shares of Class A common stock, senior or subordinated debt securities, preferred stock, and/or warrants. With this backdrop, let me run through our quarter performance and touch on some of the cost-saving initiatives we implemented. Starting with the top line, Q3 net revenue was $109.7 million, down 4% sequentially and roughly flat with the prior year. The sequential decline was primarily tied to seasonality and the presence of a bulk sale to an enterprise customer in the Q2. As Linda highlighted, average order value hit another all-time high of $70.83, while average revenue per customer also a new record at $340.

Price increases introduced over the summer, along with added variety and customization of our menu, drove the strong performance. Average orders per customer slightly declined sequentially from 4.9 to 4.8 due to the seasonal uptick in travel in the quarter. Travel also drove a decline in total customers to 323,000. Customers paring back their spending over inflationary concerns also impacted our customer count in the quarter. Turning to expenses, variable margin was 32.2%, representing a decline of 250 basis points quarter-over-quarter and 90 basis points year-over-year. The decline was due primarily to increased packaging and shipping costs alongside a reduction in total customers in the quarter. The past summer, we experienced warmer than usual temperatures across the nation, requiring us to add additional packaging to keep food fresh.

We also experienced a supplier issue on one ingredient and a logistics issue, and we are working to recover the associated costs. In the Q3, PTG&A costs totaled $37 million, compared to $35.2 million in the same quarter last year, mainly driven by an increase in consulting spend to support our strategic priorities. Moving forward, we believe that we will achieve savings through the cost management initiatives we have begun identifying and implementing and remain focused on optimizing our cost structure and improving margins. In addition, we pared back marketing spend in the quarter. In Q3, marketing spend was declined 21% to $17.3 million. In Q4, we expect marketing spend to be relatively flat versus Q4 2021 levels as we look at the managed spend and invest in areas with better ROI.

Looking at our bottom line, we reported a net loss of $25.8 million and Adjusted EBITDA loss of $17.5 million. Operating cash flow was a negative $20.7 million. At the end of Q3, we had cash and cash equivalents of $31 million, which excludes the approximately $14.1 million after fees and commissions that we received from the completion of our ATM shortly after quarter end. As Linda discussed earlier, we remain active in discussions with Mr. Sanberg regarding his funding. On 6 November 2022, we entered into a pledge agreement under which an affiliate of his granted us a security interest in certain assets of private companies, with a value estimated to be significantly in excess of the $56.5 million owed to us under the RJB private placement agreement.

Additionally, we're working on a number of cost savings initiatives and in discussions with financial advisors to evaluate financing and other alternatives. We also are in discussions with our lenders, assuming we receive no funding from Mr. Sanberg or other sources, we expect to be in breach of our minimum liquidity covenant as early as later this month. We believe the pledge from Mr. Sanberg's affiliates gives us an alternative path to secure the funding and demonstrates to our lenders we are taking necessary steps, necessary actions to secure liquidity. Finally, before I turn over to Q&A, let me touch briefly on the outlook. Because we have not yet received the anticipated funds from Mr. Sanberg's affiliates, we are withdrawing our previously announced revenue growth target of 7%-13% for full year 2022.

Moving forward, we will remain focused on achieving Adjusted EBITDA profitability in the future and will evaluate providing updated targets once we have more clarity on our liquidity position. With that, let us open up the call to your questions. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Maria Ripps at Canaccord. Please go ahead.

Maria Ripps (Managing Director and Senior Research Analyst)

Great. Good morning. Thanks for taking my questions. Linda, you've done a great job sort of diversifying your menu and you have been investing in incremental marketing. I think if we look at year-over-year trends, but I think you did mention a little bit less efficient spend here in Q3. Maybe more broadly, can you talk about some of the factors influencing sort of your ability to grow subscribers at this point?

Linda Findley (President and CEO)

Yeah, absolutely. I think that, thank you very much for the question, by the way, Maria. I think that there's several factors that we're looking at when we think about balancing, managing our cost structure and also looking at growing marketing. What we've actually seen is the infrastructure that we've put in place on the marketing side will pay off as we take a more performance and data-driven approach, in our marketing going forward. We've already started making some changes to increase efficiency in our marketing spend and redirect dollars towards the places where they're gonna have the highest ROI. We see several opportunities to make changes when it comes to digital marketing spend that can be a lot more efficient.

Also, secondly, we did make some significant brand investments, which as you know, are part of the additional costs that we saw in Q1 through Q3. While we plan to curtail some of those brand investments, we have made great progress in establishing long-term audience pools with those actions, and that's been very positive for what we see on marketing going forward. Finally, we do continue to use some of these other non-traditional sales such as enterprise and bulk sales to expand our reach to new customers. Again, some of those get counted in our customer count and some of them don't because of the nature of the, of how we count our customers.

We're looking at ways that we can take some of those additional channels that we're using, including the Amazon announcement and our new Costco gift card sales channel, to increase our customer numbers going forward by converting them into subscribers and/or continuing to expand the non-subscription business. I do think what you're gonna see is while we'll still have significant marketing spend, a lot of that is gonna be directed very closely towards performance and data-driven channels, rather than spread across some of the brand channels that we were doing before, which will increase efficiency.

Maria Ripps (Managing Director and Senior Research Analyst)

Got it. That's very helpful. Secondly, now that you are in sort of newer retail channels like Amazon, do you expect to see different seasonal impact in Q4 given sort of your broader presence?

Linda Findley (President and CEO)

It's a good question, and I actually don't know that we're gonna see different seasonal impact from those additional channels at this stage. It's still very early in the development of those new distribution channels, and we continue to explore more. I do think that you're gonna see a bit of a difference in seasonal impact, partially because we are seeing shifts in travel trends, but also partially because we have introduced more of these seasonal and special occasion boxes, which have driven a lot of our seasonal growth in the past, and we now have new offerings that we didn't have in previous years. That's probably where you're gonna see a slight shift in seasonal trends compared to, say, the additional channels, if that makes sense.

Maria Ripps (Managing Director and Senior Research Analyst)

Got it. Thank you very much for the call.

Linda Findley (President and CEO)

Thank you.

Operator (participant)

Our next question today comes from Dan Kurnos at Benchmark. Please go ahead.

Daniel Kurnos (Managing Director of Internet and Media Equity Research)

Yeah, thanks. Good morning. Linda, just to kind of follow up on sort of that line of questioning, just maybe around messaging here. I know you guys made some prepared remarks around a little bit of curtailed spend from the consumer. You know, we've had this sort of you know, philosophical debate as to why the consumer isn't necessarily recognizing that you know, Blue Apron is a better value than grocery at this point, given ongoing elevated prices at grocery. As the consumer continues to kind of reevaluate spend, even though apparently travel seems to be immune to that, how do you think about sort of your own go-to-market in trying to reinforce that messaging and not sort of fall prey to just the broader economic pullback?

Linda Findley (President and CEO)

It's a great question, Dan, and I actually think that there's a couple of key aspects there. In the way that we're approaching our marketing spend, by reducing some of the upper funnel brand spend because we've been able to build such a strong audience and we've been able to elevate the brand equity during the last three quarters. What we are actually able to do is test more and more broad messaging around cost and a cost-benefit. You are correct that we are still able to source below the PPI, and we are still able to manage our pricing to consumers to be below what they might see in the grocery store, depending on the recipes, et cetera.

Getting that message out in a performance marketing channel is actually a big part of our strategy going forward. The other thing that's also a big part of the strategy going forward is people think about value. They're really balancing this concept of quality compared to price. That's one of the other advantages we have. Because of our direct supply chain and the quality of our ingredients, we are able to really hone our message and demonstrate that value not only through being a better value from a cost perspective, but also getting higher quality ingredients.

By redirecting a lot of that marketing spend into the performance channel, we're able to put more messages into the performance channel that tend to be in a more targeted way and really reach out to audiences directly. It is a critical part of our strategy going forward.

Daniel Kurnos (Managing Director of Internet and Media Equity Research)

Got it. That's helpful. I guess I'll try to ask this question a little bit delicately. How, you know, we talked before about, you know, partnership and enterprise.

Linda Findley (President and CEO)

Yep.

Daniel Kurnos (Managing Director of Internet and Media Equity Research)

Evolution from here. How much does the funding issue weigh on those conversations right now, frankly? If you were to resolve that, you know, I would have thought we might have had an announcement by now or, you know, it felt like you guys were building momentum. Just, you know, is that a contemplation on that side of the equation at the moment?

Linda Findley (President and CEO)

Well, I mean, I think it's fair to say that, of course, the funding conversations weigh on all discussions, not just on sort of the enterprise and bulk sales. We continue to support our existing enterprise customers. We continue to be in discussions with new enterprise customers that just didn't close in Q3. We also do continue to launch new channels like Amazon and Costco in this process. We are continuing the momentum on it. Clearly, you know, our biggest focus is making sure that we are able to secure funding into the business and continue our focus very directly.

Daniel Kurnos (Managing Director of Internet and Media Equity Research)

To that point, Linda, just on marketplace expansion, you know, how much. You know, I know you have to get this probably resolved, but that doesn't take away from sort of the underlying work in terms of some of the, you know, marketplace expansion you were discussing before.

Linda Findley (President and CEO)

Correct. Yeah, no, we're full steam ahead on all of the marketplace expansion work that we're doing. That is, we think a great opportunity not only to extend the sale of the products that extend the brand. Again, as we've said in previous quarters, some of the most exciting things that we're doing on those e-commerce partnerships are really about the technology that we built in order to support it that allows us to ship within one day and increase our distribution channels further.

Daniel Kurnos (Managing Director of Internet and Media Equity Research)

Got it. Super helpful. Thanks for the color. I appreciate it.

Linda Findley (President and CEO)

Thanks so much, Dan.

Operator (participant)

Our next question today comes from Ryan Meyers at Lake Street Capital Markets. Please go ahead.

Ryan Meyers (Senior Research Analyst)

Hey, good morning, guys. Thanks for taking my questions. You called out in the prepared remarks you're implementing some cost reduction initiatives. Just sort of wondering if you can provide some more specifics on, you know, what exactly you guys are doing, sort of walk us through kind of what leverage you can pull. I know marketing is a big one there, but, you know, what sort of detriment will that have on revenue growth? Just kinda understanding some of those initiatives would be helpful.

Mitchell Cohen (Interim CFO)

Well, high level, we're looking at, you know, again, marketing consultants, professional fees. You know, we're really taking a hard look at PTG&A here. As the new guy here, I have the fresh look, the ability of a fresh look, and there are places we have identified and we have to go forward and execute on our plan.

Linda Findley (President and CEO)

Yeah. I think what we've been able to do so far is really look at opportunities to optimize the marketing spend, where we hope to actually gain efficiency through some of those reductions. I think a similar concept applies when we think about real estate, when we think about human capital, where right now we're at the space where we're able to actually optimize the efficiency of the organization in a way that it helps propel growth rather than necessarily being a hindrance on the business. We're always looking at, across the board, different opportunities to save money. An important aspect of this too is what we talked about, of really addressing our variable margin and really addressing the efficiency of the marketing spend, because that's where you're gonna see the biggest opportunity from an ability to make cash go longer.

Ryan Meyers (Senior Research Analyst)

Got it. That makes sense. I know the last couple questions you sort of talked about it a little bit, but wondering what you can give us as far as demand from, you know, the Amazon and Walmart.com partnerships. Have you guys seen quite a bit of orders from there? I'm not sure if you're disclosing kinda how much revenue during the quarter that was, but I think any sorta specifics around that would be helpful as well.

Linda Findley (President and CEO)

Yeah. Happy to sort of touch on that. It is still very early in the relationship. It has not become a significant portion of revenue yet. I will say that we are seeing continued uptick, particularly with our new Amazon storefront. We continue to develop that as we look towards future quarters. Right now, it's not large enough that we would necessarily break it out. A majority of what you're seeing in the ability to create revenue strength in the quarter compared to year-over-year, meaning in other words, compared to the customer number and also year-over-year, comes from the additional product offerings and continued pricing initiatives.

Ryan Meyers (Senior Research Analyst)

Got it. That makes sense. Thanks, guys.

Operator (participant)

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then one. Our next question comes from Mitra Ramgopal with Sidoti. Please go ahead.

Mitra Ramgopal (Senior Equity Analyst)

Yes, good morning, and thanks for taking the questions. First just wanted to follow up on the Walmart, Amazon relationships. Obviously it's still very new, but just curious if you're seeing any conversion to subscriptions yet.

Linda Findley (President and CEO)

We are seeing some conversion to subscriptions, but again, it is still new enough that we wouldn't necessarily reveal those numbers. Part of what we are seeing is some people do continue to wanna buy non-subscription, even if they're buying every week. That's just something that they prefer to do, rather than committing to a subscription. Others are seeing the value of the subscription and eventually converting into it. It is still very early.

Mitra Ramgopal (Senior Equity Analyst)

Okay, thanks. We are almost midway through the Q4. Are you still seeing a lot of pressure in terms of higher shipping, packaging costs, et cetera? Or is that starting to stabilize?

Mitchell Cohen (Interim CFO)

There has been some stabilization. Shipping remains an issue. FedEx and the likes have, you know, the ability to just raise prices on us. Food prices are up only slightly, I believe. Our labor costs have gone down a little bit.

Linda Findley (President and CEO)

Packaging, yeah, we have seen some stabilization in packaging because of course, the other thing to remember is Q3 is always our most difficult margin quarter because of the seasonality, and we had a particularly hot summer. You're always gonna see increases in packaging in particular, in order to keep the food safe, as it transports. We do, though not evidenced by the weather in New York today, have a bit of a reprieve when it comes to the heat on packaging.

Mitra Ramgopal (Senior Equity Analyst)

Right. Okay. No, thanks. I know it's delicate in terms of trying to implement price increases and keep customers. If you can maybe give us some more color on that front in terms of as you implement the increases, it's more about trying to recapture the food costs, or is it also just everything else in terms of, as you mentioned, the shipping, packaging, fuel, et cetera? If that's [crosstalk]

Linda Findley (President and CEO)

Yeah.

Mitra Ramgopal (Senior Equity Analyst)

Having an impact in terms of the customer churn.

Linda Findley (President and CEO)

Yeah, sure. Just as a reminder, we've done two price increases over the last year and a half or so. The first price increase was specifically to adjust for logistics and shipping. Then the second one was much more directed towards food costs as far as coverage. What we have seen from the customer is, again, we're seeing normal consumer behavior when you see economic conditions like this. What you aren't seeing is necessarily people resisting the price changes, given the fact that we do continue to position as a better value than going to the grocery store in many instances.

I think that part has been an advantage to us, and that's part of what you're seeing the evidence in the continued record AOV and revenue per customer that we were able to achieve this quarter. People are understanding about the price increases, and we were very careful to make sure that we were remaining in line with competitors, but also a good value for the quality of ingredients in the box.

Mitra Ramgopal (Senior Equity Analyst)

Okay. Thanks for taking the questions.

Linda Findley (President and CEO)

Thanks so much, Mitra.

Operator (participant)

Thank you. Ladies and gentlemen, this will conclude today's question and answer session. I'd like to turn the conference back over to Linda Findley for any closing remarks.

Linda Findley (President and CEO)

Thank you so much. Thank you for your time today. We look forward to providing an update when we report on our Q4 and full year results early next year. In the meantime, if you have any additional questions, please don't hesitate to reach out to us directly.

Operator (participant)

Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.