Blue Apron Holdings, Inc. (NYSE:APRN) Q4 2022 Earnings Call Transcript

Blue Apron Holdings, Inc. (NYSE:APRN) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good morning, and welcome to the Blue Apron Holdings Fourth Quarter and Full Year 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, Thursday, March 16, 2023, 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. 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 statements. 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 we have 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: Thank you, Drew. Good morning, everyone, and thank you for joining us for an update on the business. On the call with me today is Mitch Cohen, Blue Apron’s Interim CFO. To start, I will give you a brief overview of our fourth quarter and full year performance and then focus the rest of my remarks on improvements that we are already seeing in 2023. Mitch will then provide a deeper dive into our financials as well as the recent at-the-market offerings and our cash position. As many of you know, 2022 was a challenging year for our business. In the fourth quarter and year-to-date, we’ve made significant progress in addressing those challenges. We’re effectively managing our cost structure and working towards stabilizing our balance sheet, all while making progress against key customer metrics.

Most notably, in Q4 2022, we achieved our highest average order value of $73.15. When compared to Q3 2022, this was driven primarily by orders from our strong core customer base, who are responding well to our product offering. The added variety of our menu continues to deliver great value to our customers. In 2022, we shipped over 6.5 million orders. Our meals reduce food waste, eliminate meal planning stress, bring variety to people’s lives, connect families and help develop healthy and creative habits. We sit at the intersection of the most critical aspects of health, sustainability and community, and we also have the opportunity to provide jobs across multiple disciplines. Our customers rave about the quality of our meals and the unique flavors we bring to their table.

The value of our product is evident in our average orders per customer, which was up as compared to Q3 2022 at 4.9 and average revenue per customer, which climbed to $358, a new company record. Total customers over the 12 months ended December 31, 2022, was approximately 659,000, a slight decline of 3% from the equivalent period a year ago. For the fourth quarter of 2022, total customers were 298,000, down 7.6% sequentially and down 11.2% from the prior year. We believe a portion of the decline can be attributed to the reduction in marketing spend that we began to implement in Q4. We ramped down our brand investment and in preparation for Q1, focused our resources on performance marketing. We are already seeing improved marketing efficiency thus far in Q1, which I will discuss shortly.

Seasonal and macroeconomic pressures on consumer spending due to the inflationary environment also had an impact on Q4 performance. It’s important to consider the fourth quarter within the broader context of our strategy of achieving our goal of long-term profitability. This includes our efforts to manage our cash burn. Notably, as of the end of February 2023, we’ve seen a reduced cash burn of over 50% year-over-year as a result of ongoing expense reduction actions. I will discuss this in greater detail, along with how our work in Q4 is shaping 2023. We continue to execute against three strategic initiatives outlined during our last call that address the key fundamentals of the business. This means: one, taking a more targeted approach to acquiring and retaining more profitable customers, while reducing our marketing spend; two, driving margin improvements; and three, executing disciplined cost management in PTG&A.

Our focus on profitability is expected to put pressure on our top-line revenue and customer numbers in 2023. This is not to say that we are deprioritizing revenue and customer growth, but rather focusing our business objectives to support our path to profitability in the near-term. As part of our efforts, we worked with our lenders to amend our debt agreement to pay down our long-term debt on an accelerated schedule. Mitch will discuss this in detail. What I will share is that this reduces our covenants, and we believe it gives us more flexibility as we continue to pursue other opportunities. We are considering other options at our disposal to plan for the future success of the company. This includes potentially pursuing, evaluating and executing financing opportunities, a business combination or other strategic transactions.

As I have said before, when looking at the industry as a whole, it’s highly fragmented and one that we believe is open for more consolidation. Diving deeper into our three initiatives, starting with Marketing. We made significant strides over the past several months in positioning our marketing efforts towards profitability and scale. In the fourth quarter, we reduced marketing spend by 18% year-over-year to $17.1 million, in line with our commitment to a thoughtful and targeted approach to marketing. Throughout 2022, our efforts were geared towards building the foundational elements of brand equity and awareness. Today, we have approximately 81% brand awareness and close to a 99% weekly retention rate for customers who were with us consistently for more than 13 weeks, which is our sweet spot in terms of retention.

Having established a solid baseline, we’re now focused on achieving a balanced marketing mix that is designed to propel efficient and sustainable growth. To do so, we’re focused on leveraging the channels we know are efficient and investing in our dollars strategically to ensure we get the highest return. Starting in the third quarter of 2022, we began reducing our spend on upper-funnel channels with a shift away from TV and out-of-home. We reallocated some of that spend towards performance-based and digital channels with a focus on delivering a strong cost per acquisition. We’re seeing positive progress in the first quarter of 2023. And as of the end of February, we cut our cost per acquisition by half, and increased our conversion rate by more than 25% sequentially.

In the first quarter of 2023, we anticipate customer count will be up sequentially in line with seasonality. We do expect a decline year-over-year in-part due to our progress as we continue to make marketing more efficient throughout 2023 towards profitability. We continue to leverage partnerships to further unlock efficiencies in our marketing efforts. This week, we announced a partnership with Verizon on its new +play hub, which allows consumers to manage their subscriptions all in one place. As part of the platform, we are launching Blue Apron PLUS, a new savings program that unlocks exclusive deals. In addition, we continue to work with DoorDash via their DashMart storefront and have expanded the availability of our Heat & Eat microwavable product to 11 markets in the Northeast, including New York City.

Turning to our second priority, in the fourth quarter, our variable margin was 34.9%, a 2.7% improvement sequentially and roughly flat with the prior year. Variable margin was driven in-part by the receipt of a $1.2 million credit related to a previous ingredient quality issue. Another key factor in the margin improvement is our ability to upsell customers on higher-value products like Premium Recipes, Customization Options and Add-ons. For the full year, variable margin was 33.6% as compared to 35.8% in the prior year. We were able to keep margin levels relatively stable in 2022, despite the ongoing inflationary environment and approximately 40% increase in customer menu options. As mentioned on prior calls, we increased menu options by leveraging our existing ingredient pantry and adding only incremental items that we believe are of value to our customers.

To drive margin improvements in 2023, we are pairing the efficiency learnings and operations from 2022 with the rollout of a new organizational structure in our facilities. This new structure establishes accountability across the entire supply chain to deliver on improved efficiency and quality. It also provides a clearer path for our teams. The initial results are promising. Productivity metrics quarter-to-date are hitting levels we have not seen in the past eight quarters, even with an approximately 170% increase in product variety over the same time period. We plan to build on this momentum and provide you with updates on our progress in the coming months. We are also enhancing and expanding our product offerings with an eye towards profitability.

Our menu now features 84 options that address different meal moments. Notably, our seasonal boxes continue to be a hit. These boxes are created to help our customers bring to life memorable experiences with family and friends. In particular, our holiday boxes performed exceptionally well, with 2022 gross revenue more than double compared to our 2021 offering. This was in-part driven by the optionality to purchase holiday theme to Add-ons. Last week, we added our newest seasonal box, a brunch offering to the menu available through Mother’s Day. Our third and final commitment is focused on cost management with an eye towards rightsizing PTG&A. In the fourth quarter, we took action to streamline our cost structure through expense management, with reductions in recruiting fees and consulting spends.

We also absorbed expenses related to severance charges associated with the December 2022 corporate headcount reduction. These initiatives, together with the reductions in marketing spend, are expected to drive up to $50 million in annualized cost savings, resulting in over 50% year-over-year reduction in our cash burn as of the end of February 2023. In all, we continue to manage our operations to set the business on a path to profitability. Additionally, earlier this month, we announced that the New York Stock Exchange has accepted our plan to regain compliance within 18 months with the global market capitalization listing standards. We are committed to maintaining our New York Stock Exchange listing and being in compliance across all listing standards.

Before turning the call over to Mitch, I want to take a moment to thank every Blue Apron employee. From the fulfillment centers to our corporate office, they play a key role in our success, and I’m proud to call them my colleagues. Thank you. With that, let me turn things over to Mitch to walk through our financials. Mitch?

Mitch Cohen: Thank you, Linda, and good morning, everyone. I’ll begin with an update on our liquidity position before getting into the fourth quarter and full year results for the year ended December 31, 2022. Our cash balance as of December 31, 2022, was $33.5 million. In January 2023, we completed a $30 million at-the-market offering that launched in November 2022, selling approximately 29 million shares at an average sales price of $1 per share. With the completion of this at-the-market offering, our cash balance at January 31, 2023, was $46.8 million. In February, we launched a new at-the-market offering, giving us the option to sell up to $70 million in new shares to provide us with greater flexibility to access liquidity resources.

The proceeds from this offering will be used for general corporate purposes, including paying down some or all of our debt and providing us with greater flexibility to pursue, evaluate or execute on other potential financing or strategic opportunities. Substantially all of the $70 million remains available. As of the end of February, our cash balance was $46.3 million. In addition, on March 15, we amended our note purchase receivable in a move that we believe can provide us with further financial flexibility. The amendment accelerates the pay down of our $30 million senior secured notes as well as accrued and unpaid interest into four monthly installments of $7.5 million. The first installment was paid in connection with the signing of the amendment.

The amendment also reduces minimum liquidity covenant on a dollar per dollar basis corresponding to our payments up to $10 million until the full payment of the debt. We expect to fully pay down this obligation to be free of covenants by the end of the second quarter. We view this as an effective use of our cash at this time as it reduces or removed covenants that previously restricted our ability to access the full amount of our cash on our balance sheet. Finally, we continue to have discussions with Joseph — Mr. Sandberg and it’s affiliates regarding the outstanding $56.5 million private placement — of which we received $1 million in December of 2022 and the $12.7 million gift card fundings owed to us. As you recall, in November 2022, we entered into a pledge agreement with an affiliate of Mr. Sandberg, which provides us with securities of privately held companies as collateral to secure the equity funding obligation.

These efforts reflect our commitment to diversifying our potential sources of liquidity and removing our debt as we work to resolve the Sandberg funding delays. Our ultimate goal is to get on a path to a stabilized balance sheet and long-term profitability. Turning to the fourth quarter. Net revenue was $106.8 and roughly flat year-over-year. The sequential decline was driven by a reduction in our customer base and a reduction in total orders, partially offset by an improvement in AOV. As Linda mentioned, average order value was $73.15, and orders per customer increased to 4.9. Price increases introduced in 2022 as well as ongoing efforts to add variety and customization to our menu drove the solid performance in key customer metrics. These efforts have served to improve the stickiness of our product with our customers while also preserving the value of our product relative to out-the-food options.

Turning to expenses. Variable margin was 34.9% in the fourth quarter. This is a 2.7 percentage point increase sequentially and a 0.4 percentage point decline over the prior year period. The sequential improvement was in part a $1.2 million supply of credit. In the fourth quarter, PTG&A costs were $34.3 million, an 8.8% sequential decrease and a 6.9% decrease year-over-year. For the full year, PTG&A costs were $155.1 million, a 7% increase from the prior year. The fourth quarter decline year-over-year was primarily driven by a reduction in the accrual for corporate bonuses to be paid in the first quarter of 2023. The sequential decline was in part the result of corporate head count reductions in 2022. As part of our other management initiatives, we implemented a reduction in corporate overhead and administrative expenses, such as consulting and recruiting fees and travel and entertainment expenses.

We continue to look for further efficiencies and are making a portion of our Linden, New Jersey, and Austin, Texas, spaces to sublease out unused square footage. Other expense for the fourth quarter was 1.5%, representing severance-related expenses associated with the corporate workforce reduction announced in December of 2022. Looking at the bottom line, we reported a net loss of $21.8 million for the fourth quarter compared to $26.4 million in the same quarter last year. In the fourth quarter, adjusted EBITDA was a loss of $13.5 million in the fourth quarter versus a loss of $17.9 million in the same quarter last year. For the full year, we reported a net loss of $109.7 million compared to $88.4 million for the fiscal 2021. Our full year adjusted EBITDA loss was $79.3 million compared to $39.2 million in the prior year.

As Linda mentioned, our Q1 results to-date are an early indication that our efforts are showing solid progress. We expect customer count to be sequentially — up sequentially following seasonal patterns and efforts to drive efficiency and improve our cost structure have already allowed us to realize more than 50% annualized reduction in cash burn by the end of February or through the end of February. Our productivity metrics are also hitting their highest levels in the past eight quarters, and we have substantially lowered our cost per acquisition. Before I turn it over to Q&A, I’d like to quickly discuss our outlook. In line with our comments last quarter, we are not providing any forward guidance at this time. As a business, we remain focused on achieving EBITDA profitability and stabilizing our overall balance sheet and liquidity position.

With that, let me turn the call over back to the operator to take your questions. Operator?

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Q&A Session

Operator: We will now begin the question-and-answer session. The first question comes from Maria Ripps with Canaccord. Please go ahead.

Maria Ripps: Good morning, and thanks so much for taking my question. First, understanding that you’re not providing forward guidance, but can you maybe discuss what you expect — whether you’re expecting to see a typical seasonality in Q1? So you did mention sequential customer additions, but do you expect to see sort of increase in revenue compared to Q4? And could you share any insights on what you’ve observed so far in the quarter?

Linda Findley: Sure. I can start and then Mitch can jump in with anything else. Thank you so much for the question, Maria. We do expect to see some seasonality, except normal seasonality with Q1. It’s where we dedicated a lot of our resources in Q4 that we sort of moved away from acquisition into focusing that acquisition on Q1, but still with much reduced and more efficient marketing spend. So we will see some seasonality. But again, maybe more muted than in past years as far as the change between Q4 and Q1 as we continue to rationalize marketing spend. What we are particularly proud of, and I think is an incredible accomplishment is the fact that we are able to more efficiently acquire our customers with that lower marketing spend.

And we’re playing more with the balance between promotions and our marketing spend, which we’ll have a little bit of an impact on Q1 revenue just because of the contra revenue aspect of our promotions. But that’s been very effective for us, and it has helped us significantly decrease our cost of acquisition by about 50% and dramatically increased conversion. So that is playing well for Q1. But yes, we will see some of that seasonality come through while we continue to gain efficiency. I think the other aspect that both Mitch and I mentioned is pretty interesting is we are seeing levels of productivity we haven’t seen in two years, and then productivity was quite high, but with significantly more complexity with about 170% increase in complexity in our menu during that time.

So we’re seeing both good seasonality, normal on the top-line and then also some improvements in bottom-line as well.

Maria Ripps: Thank you, Linda. That’s very helpful. And then, my second around your partnerships. So how have your partnerships with Walmart and Amazon have been performing since you launched them last year? And is there any material sort of contribution to revenue? And what are your expectations for these channels in 2023?

Linda Findley: Yes. So we don’t reveal specifically what those partnerships are doing. What I can say is, it is not material to our revenue. We’re still focused mostly on the core products. But they are doing well when it comes to really enhancing our technology and our ability to take a same-day order and deliver it immediately. That’s actually something that’s quite powerful for us, and we continue to see that opportunity expand for other potential uses in the future. So they’re good channels for us, but not necessarily material.

Mitch Cohen: I’d like to say not yet material. Hopefully, in the future, yes.

Maria Ripps: Got it. And maybe one more, if I could. Could you maybe provide us with an update on your product portfolio given your focus on liquidity and, sort of, cost reductions? Are there any, sort of, recipes or meals that you are maybe deemphasizing or advocating more to customers given, sort of, maybe different variable cost structures?

Linda Findley: Thank you. It’s actually a really interesting question and an important aspect. We do continue to believe that adding variety is important both for growth of the company, but also getting to profitability because obviously, with more variety, you tend to get these higher engagement numbers. So all these customer KPIs, including AOV are very related to the added variety. Some of the AOV may — you might see that fluctuate going forward simply because of the promotional aspects and that comes out of AOV. So we might play with that as we think about adding more variety. So it’s important to note. But that doesn’t necessarily mean a negative impact on the overall business because it’s the mix that actually matters.

So that variety is part of why you see this record average revenue per customer continuing to go up and so it is an important part of our strategy. We’ve been able to refine a lot of our sourcing as well into Q1 of this year, being more efficient with how we think about buying proteins in particular, which tend to be one of the bigger aspects of margin play. And so we’ve been able to make that efficient as we’ve actually been working on the marketing and the overall productivity in the organization as well. So we haven’t necessarily had to deemphasize anything. In fact, the seasonal boxes that I was talking about tend to be very good margin for us and good attractiveness for bringing in customers. So the mix is actually quite healthy, and we plan on continuing to expand it, but maybe at a slightly slower rate of expanding variety than we have in the past, while we focus on profitability.

Mitch Cohen: And our customer metrics are up.

Linda Findley: Yeah. All of our customer metrics reflect that with the increased numbers, sorry. Yeah.

Maria Ripps: Thank you. That’s very helpful. Thank you very much for the color.

Linda Findley: Absolutely. Thank you, Maria.

Operator: The next question comes from Ryan Meyers with Lake Street Capital Markets. Please go ahead.

Ryan Meyers: Hi. Good morning guys. Thanks for taking my questions. This is kind of a follow-up on the last question, but obviously, you saw another strong quarter of AOV growth. Just kind of wondering if you can unpack that a little bit more, how much of that came from price versus how much of that just came from customers spending more on the platform, adding more into the boxes? Just — it would be helpful to kind of understand what’s going on there.

Linda Findley: Sure. It was about a 50-50 mix, Ryan. About — so about half of it came from product expansion and continued growth of people adding more to the box. And then the other half came from the continued impact of our price changes, which we did pretty strategically to still stay within a good value within the market and against competitors. So it’s about a 50% split.

Ryan Meyers: Okay. That’s helpful. And then, throughout the year, obviously, we’ve seen kind of a continued decline in the number of customers and order count. But I know looking back on Q1 and Q2, there was some pretty significant investments being made in the marketing. Are we just not seeing some of that flow through quite yet? Or we didn’t see that flow through in 2022 and now we’re starting to kind of see some of that here in Q1? I know you guys gave the commentary about the acquisition cost being down, but the flow through being even more positive. Or is there anything from like a customer demand perspective that we should be aware of?

Linda Findley: We did see some of the impact of inflationary macro trends on Q4, but a lot of it was also just the pullback on marketing spend as we started to focus on more performance channels. And frankly, we pulled back on things that would impact Q4 in order to support Q1. So we are seeing much more efficiency in our marketing channels. And again, we’re continuing to play with the mix between promotion and marketing spend because that’s actually an interesting lever for us going forward. But yes, the decline that you saw was actually due to both a combination of, yes, some macroeconomic trends, while our core customer base remain very strong and spending more. And then we also did intentionally move some marketing dollars and reduce some marketing dollars in order to focus on Q1.

But a lot of the, spend that we made earlier in 2022, really focused on building that upper pool of customers. So that brand awareness of the 81% that I was talking about earlier. And that will serve us well in 2023 as we apply performance marketing to those on driving the customer base. But our focus right now is making sure that we’re getting significant return on investment on our customers, because it’s all about getting adjusted EBITDA lower throughout the year, and that’s really where we’re going to be spending our time. So you will see some, what I would call quieter numbers in customer numbers, and that’s intentional as we drive towards profitability.

Ryan Meyers: Got it. Thanks for taking my questions.

Linda Findley: Thank you.

Operator: The next question comes from Dan Kurnos with The Benchmark Company. Please go ahead.