Blue Apron: Fundamental Performance Continues To Deteriorate

There are plenty of companies I love as a consumer that I wouldn’t touch with a ten-foot pole as an investor, and Blue Apron (NYSE:APRN) is one of them (another one, in case you were curious, is Redfin (RDFN)). Blue Apron, the original meal-kit vendor, saw a brief respite during the pandemic when lockdowns and restaurant closures temporarily caused meal-kit orders to surge. But now, amid the return to school/office landscape and with a massively inflationary environment that has pumped up all of Blue Apron’s costs, the company is grasping to stay afloat.

Year to date, Blue Apron has shed nearly half of its value. As drastic as that YTD loss already is, I think the company still has more downward momentum to go:

Right now, Blue Apron is barely sitting at over a $100 million market cap. Before we get into all the details, here are the key reasons to be concerned about this company:

• Blue Apron is bleeding customers. Revenue declines are worsening quarter over quarter, and each quarter also sees a fresh bleed-out of customers as overall demand in the meal-kit category is dwindling.
• The company is struggling in an inflationary environment. Raw food prices are skyrocketing, as are wages for the company’s heavy headcount in logistics and distribution. Due to the intense competition in the meal-kit space, Blue Apron doesn’t have much room to pass on these increases to customers; hence, gross margins are taking a heavy hit.
• Limited liquidity. Blue Apron’s $82 million of balance sheet cash as of its most recent quarter puts the company in a rather precarious position.
• Recent “Hail Mary” strategies to resurrect demand may backfire. Blue Apron recently stepped up marketing spend in an attempt to win back customers, as well as unveiling a new Breakfast menu. These strategies may drive unfruitful spend/unnecessary menu complexity that put Blue Apron further in the hole.

As an occasional and appreciative customer of Blue Apron, I’d be terribly disappointed if the company went under – unfortunately, the company’s recent financials suggest that is the most likely course. Unless the meal-kit industry consolidates, I find it very unlikely that Blue Apron can survive standalone. The bottom line here: continue to stay on the sidelines as Blue Apron continues to find a new bottom.

Q4 download

Let’s now go through the details of Blue Apron’s most recent quarterly results and highlight exactly where the numbers are telling a dire story.

Starting with the company’s revenue trends in the chart below:

In Q4, Blue Apron’s revenue sank -7% y/y to $107.0 million, decelerating five points/contracting further than -2% y/y in Q3. Perhaps even worse, as can be seen in the orange line above, the company shed 14k active customers in the quarter to end at 336k customers.

This is in spite of the fact that Blue Apron’s marketing spend in Q4 hit 19.6% of revenue and notched a multi-year high of $21 million, higher in both absolute and percentage terms versus $12 million/10.8% in the year-ago Q4. Blue Apron says this promotional kickoff happened in December and should benefit FY22 demand, but I’m cautious to accept positive news at face value before it has materialized.

Even Blue Apron’s usual good-news story, which is higher-value/higher-frequency customers despite a reduced customer base, is dwindling. Orders per customer are down -6% y/y, suggesting that the Blue Apron habit is no longer as compelling as during the pandemic year.

Adding insult to injury: as shown in the chart below, Blue Apron’s gross margin fell 410bps to 35.3% in the quarter, deeply impacted by inflationary pressures on both material costs, logistics costs, and wages:

Here’s some further color on cost inflation from CFO Randy Greben’s prepared remarks on the Q4 earnings call:

Higher logistics costs were a significant driver impacting variable margin in Q4. These come primary from the first and middle mile, as we’ve been successful in managing expenses tied to the last mile of delivery. We had anticipated that logistics costs would pressure fourth quarter results; however, the impact was more significant than we anticipated back when we introduced our shipping charges in Q3. We continue to work with our carriers to maximize the efficiency of our logistics network and are in the process of evaluating new partners to add to our network to streamline the customer experience and contain costs.

Variable margin was also impacted by inflationary pressures on food costs, consistent with macroeconomic trends across multiple industries. That said, we believe we are partially insulated from food cost inflation due to the nature of our direct sourcing model, where almost 80% of our supplier relationships are direct to farmer, rancher or manufacturer. We hold all of our suppliers to high quality and ethical standards. Our product mix today is also heavily weighted towards seafood and other premium proteins. This is in direct response to customer preferences for an elevated cooking experience with top quality ingredients.”

As a result of both the revenue decline and the steep margin hit, Blue Apron’s adjusted EBITDA in the fourth quarter clocked in at a -$17.9 million loss (a -17% adjusted EBITDA margin), versus nearly breakeven in the year-ago quarter:

Free cash flow for the full year FY21 was also negative -$53.9 million: at this pace (and not even accounting for the fact that Blue Apron is planning on upping marketing spend in FY22 in an attempt to resurrect demand), the company’s $82 million of balance sheet cash won’t stretch on for too much longer.

Key takeaways

In my view, Blue Apron is on its last legs. The company already completed an emergency capital raise last November, but its balance sheet is unlikely to hold much longer than one additional year at its current burn rate. With meal-kit demand dwindling and margins sinking, there’s no reason to stay invested here.