Blue Apron Holdings Inc (APRN) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings Third Quarter 2018 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's remarks, the Blue Apron team will be taking your questions.

With that, I'd now like to turn the call over to Ms. Felise Kissell, Senior Vice President of Corporate Affairs and Investor Relations. Ms. Kissell, please go ahead.

Good morning, everyone, and thank you for joining us. As a reminder, yesterday afternoon, we issued 2 press releases. The first highlighted the strategic actions the company is undertaking to drive the business forward, and the second release was our third quarter earnings results with this disclosure purposely accelerated so that you have all information readily in hand.

On this morning's call, we have Brad Dickerson, Chief Executive Officer of Blue Apron; and Tim Bensley, Chief Financial Officer, who will now review these disclosures more in-depth and be a resource for any questions you might have.

Please note that various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important risks and other factors, including those described in earnings -- in our earnings release and the company's SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update these statements.

During the call, we will be referencing non-GAAP financial 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 described these measures in more detail and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, reconciliations of certain forward-looking non-GAAP measures referenced to during this call are on our Investor Relations website located at investors.blueapron.com under Events and Presentations.

I would now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad?

Thank you, Felise, and good morning, everyone. On today's call, I will focus on the actions we announced late yesterday that we expect to accelerate our path to profitability on an adjusted EBITDA basis in 2019. Tim will then provide a detailed review of our third quarter results and our financial outlook for the business before we take your questions.

In the third quarter, we were particularly pleased to outperform on the bottom line with a 61% year-over-year improvement in both net loss and adjusted EBITDA, as we continue to exert financial and operational discipline. Over the past year, we have recognized the need to strengthen our top line performance, which, we believe, is directly linked to a foundation that is profitable. With that said, I will spend most of my time today discussing initiatives designed to drive the results we expect, the deliberate emphasis on reaching adjusted EBITDA profitability next year.

Elaborating on our path forward, the ways in which consumers access meals for various occasions is evolving rapidly, creating multiple pathways for us to expand the reach of our established brand. We believe we are well positioned to take advantage of the opportunities ahead while maintaining an unwavering mindset of highly disciplined decision-making and financial responsibility.

Yesterday, we issued a press release that outlined our commitment to more thoughtfully and strategically serve consumers, drive increased efficiencies across the business and accelerate our path to profitability. I want to affirm that our strategic priorities to evolve and expand our product portfolio, enhance the overall customer experience and expand to new channels of distribution remain consistent. We are confident that a relentless focus in these areas will build our -- on our foundation as a trusted and respected brand that brings quality, discovery and accomplishment to the meal experience.

Where we are making a meaningful shift is in our approach to each of these 3 pillars, focusing specifically on customers we believe will have a lasting and sustainable positive impact on the business. We intend to apply greater discipline, including, to the product initiatives, marketing investments and customer experience enhancements we are pursuing to deliver value to our stakeholders.

With this in mind, the organization-wide actions we announced yesterday are to: one, sharpen focus on our direct-to-consumer business by prioritizing customer segments that exhibit certain attributes, including proven retention, strong affinity for the brand and a high potential to increase engagement with our product offerings; two, expand the reach of our brand methodically through retail channels and on-demand platforms, recognizing that many consumers seek to engage with Blue Apron beyond our direct-to-consumer business; three, streamline our personnel to create a more agile and focused organization; and four, optimize our fulfillment center network even further to build our momentum in operational efficiencies year-over-year.

First, in our direct-to-consumer business. We're making a notable shift on how we engage, attract and serve our customers. Throughout the year, we have spoken at length about our focus to make enhancements across our product portfolio and digital platform to increase conversion and improve the efficiency of our marketing spend. This work has led us to critically evaluate the broad spectrum of customers we currently serve through our direct-to-consumer business and identify where we have the most opportunity.

We know our direct-to-consumer product portfolio is trusted and consistently relied upon by a strong base of loyal customers. We believe these customers are a distinct competitive advantage for us and one we intend to focus our resources on. In fact, the top 30% of our customers on a net revenue basis acquired in recent cohorts account for more than 80% of our net revenue from such cohorts in the year after acquisition and had an average payback on the acquisition cost of less than 6 months. Additionally, the average net revenue per customer for this 30% customers was 10x greater in the year after acquisition than the average revenue per customer of the remaining 70%.

While we always closely studied our customers to inform and optimize our products and platform, over the past few months, we drilled deeper into our customer segmentation to refine our strategy based on the attitudes, behaviors and product interactions of our best customers. Looking ahead, we intend to prioritize our best customers who we define as customers with a payback period of 12 months or less in all strategic decisions related to our core experience.

I want to be especially clear that prioritizing our best customers extends far beyond the top 30% I referenced earlier. We intend to leverage our holistic understanding of this customer to guide our decisions, including new or adjacent product offerings, strategic partnerships and brand messaging toward growing this valuable segment. In other words, as we focus on attracting new consumers, our priority is to put the right message and the right products in front of the right people. We believe we have the opportunity to one, focus resources across the organization to attract new consumers who have these desirable attributes by leveraging extensive demographic and ethnographic data to ensure our investments are strategically targeted; two, deepen engagement with our existing best customers by creating more customized products and services that specifically address their needs; and three, avoid initiatives that generate short-term revenue opportunities at the expense of overall inefficient returns on our marketing spend. These actions are expected to shift the mix of customers toward those that have a shorter average payback period than we see today, which we expect to result in more efficient marketing spend and, ultimately, a profitable business going forward.

We know, for example, that personalizing our offerings to specific lifestyle preferences is directly linked to affinity and retention, both among our customers and new audiences. As part of the strategy, I'm proud to share our new partnership with WW, formerly known as Weight Watchers, a brand we greatly admire for its commitment to motivating millions of people to live healthy lives. WW recently launched an inspiring new brand and tagline, Wellness that Works, to reinforce its focus on overall health and wellness with science-based solutions. We are incredibly excited to launch this new partnership, partly because our mission to make incredible home cooking accessible aligns perfectly with WW's purpose to inspire healthy habits for real life.

As WW shared on its earnings call early this month, beginning in January 2019, we are launching a weekly selection of Blue Apron recipes that align with the WW Freestyle program. Our WW Freestyle-inspired recipes will be available exclusively on our digital platform as an extension of our core direct-to-consumer experience. We look forward to introducing consumers, including millions of WW members, to this new line of recipes created by our talented culinary team. We believe this partnership will serve as a gateway to engaging and attracting a committed base of health and wellness conscious consumers who have attributes that resemble our best customer.

Now on to channel expansion. Recognizing consumers seek to access our brand beyond our direct-to-consumer business, we continue our focus to expand into new retail and on-demand distribution channels. Aligning our brand and culinary offerings to strategic partners is a critical component of our methodical channel expansion strategy. Specifically, in late October, we launched a partnership with Jet.com, where we are offering a rotating selection of individual 2-serving meals on Jet's online and mobile platforms available for same-day or next-day delivery to millions of households across the New York City metropolitan area. We are proud to be the anchor brand for the meal solutions category on Jet's new City Grocery platform, featuring high-quality meals that can be accessed on-demand and prepared in 30 minutes or less, specifically designed for the Jet customer.

In the months ahead, we plan to continue expanding on our on-demand delivery of Blue Apron products to consumers on the West Coast. These offerings will be accessible through our digital platform with delivery from a third-party partner. More news to come on the weeks ahead on this.

Finally, a note about our national retail pilot at Costco, which was our first opportunity to gain learnings and build competencies in expanding our product into the retail environment. Among the most notable are regional insights, such as consumer taste preferences and effective demand planning. As the holiday period approaches, our presence in Costco locations has paused due to the seasonal cadence of their business. As we enter 2019, we are targeting to resume in Costco as well as expand into new retailers, leveraging lessons learned from our pilot and evolving our product offerings to complement this environment. Look for more discussions on this in the coming months, specifically around the expansion of partnership opportunities driven by product innovation.

Now to provide an update on the momentum we are building in our operations. We are continuing to optimize our fulfillment center network and create capabilities that, we believe, will enable us to innovate efficiently across multiple channels. The overall performance of our fulfillment and supply chain operations is strengthening, as we build capabilities that support our strategic priorities, including recent product expansion initiatives such as our partnership with WW and Jet. We continue to realize efficiencies throughout our fulfillment network driven by end-to-end process enhancements, labor management and sourcing utilization. We are exceptionally pleased that our largest and most automated facility in Linden, New Jersey has also become our most efficient fulfillment center, with our other facilities in Texas and California relatively close behind. This is a testament to the progress our teams have achieved over the past year, and we intend to build on this momentum, recognizing we have many efficiencies yet to be realized that will further support the success of our innovation pipeline.

As we have sharpened our focus on the highest impact areas of opportunity in the business, we recently made the strategic decision to streamline personnel to better align internal resources with our priorities, resulting in a reduction of approximately 4% of our total workforce. These reductions included certain members of management. I sincerely thank these employees, on behalf of the entire company, for their immeasurable contributions to the business. While it's not easy to part ways with valued colleagues, we believe this organizational transformation will enable us to more efficiently pursue opportunities ahead.

Additionally, we will be initiating a search for a Chief Revenue Officer, who will largely focus on product, innovation and brand marketing, complementing progress achieved in areas that contribute to our bottom line performance.

Before I turn the call over to Tim, I appreciate that you may have questions about the actions underway across the business. We look forward to communicating in more depth with our stakeholders as we embark on our path forward. We are challenging ourselves to think differently about the business, being tough-minded about where we are today and courageous on what needs to be done to realize the results we now have the potential -- we have potential to achieve, a highly differentiated brand that obsesses over the customer attributes I spoke extensively of today and a strong profitable business.

With that, I will now turn the call over to Tim.

Thanks, Brad, and good morning, everyone. Yesterday, we announced strategic actions that we are implementing to strengthen the business and create value for our stakeholders. I've now been with Blue Apron for nearly 6 months, and I'm confident that these actions will position us to deliver adjusted EBITDA profitability in 2019.

Turning to Blue Apron's third quarter performance, specifically. Our adjusted EBITDA loss of $18.8 million was ahead of the guidance range we provided on our last earnings call, an improvement of 61% compared to the prior year, largely driven by a more deliberate approach to acquisition marketing spend, our heightened focus on PTG&A expenses and continued progress in achieving operational efficiencies.

Net revenue in the third quarter was $151 million compared to $211 million in the prior year and $180 million in the second quarter, reflecting the seasonal cadence of the business and our deliberate shift in marketing focus towards our most efficient acquisition channels, primarily online. This resulted in a decrease in acquisition-related spend in the third quarter and lower overall marketing expense of 15.4% as a percentage of net revenue compared to 16.3% in the prior year and 19.3% in the previous quarter.

We continued to make strides in margin expansion with COGS, excluding depreciation and amortization as a percentage of net revenue, improving over 1,000 basis points from the prior year to 68%. This was largely due to efficiency gains in food and labor costs from enhanced planning and process-driven strategies in our fulfillment centers as we favorably -- as well as favorable pricing with suppliers. While all of our fulfillment centers improved our efficiency in the third quarter compared to prior year, our Linden facility for the first time was our most efficient center, an important milestone.

Product technology and G&A, or PTG&A cost decreased 26% year-over-year to $48 million and were 5% lower quarter-over-quarter, reflecting our ongoing commitment to tightly manage costs, further evidenced by the announcement yesterday that included streamlining our workforce. In a moment, I will share more details on the impact of the expected cost savings to our financial outlook.

Our cash flow profile continued to strengthen in the third quarter. As I previously stated, we significantly improved our adjusted EBITDA performance year-over-year, in addition to meaningfully lowering our capital expenditure needs for the foreseeable future with CapEx spending of $3 million in the third quarter.

We also refinanced our revolving credit facility with our existing lender syndicate and extended the maturity date to February 2021. As part of the refinancing, we reduced the aggregate lender commitment to $85 million, which, we believe, is sufficient at this time, allowing us to improve our financial profile and address any near-term liquidity concerns. While the applicable interest rate spread will be 200 basis points higher, our overall interest expense under the facility is expected to remain relatively unchanged as a result of our pay down of outstanding debt in connection with the refinancing.

Yesterday's press release and the strategic points Brad just reviewed define the way we are thinking about the business that results in our expectation of profitability on an adjusted EBITDA basis in 2019. We have undertaken a full reassessment of the organization and are highly optimistic about our future. We expect our efforts in new product development and strategic partnerships, highlighted by WW and Jet, will reinforce our culinary authority and differentiate Blue Apron in a dynamic marketplace.

Simultaneously, we will focus our direct-to-consumer marketing efforts, primarily on customer opportunities that exhibit proven retention, strong brand affinity and high engagement potential with a complementary emphasis on directing appropriate consumers to our on-demand product solutions.

As we focus on building a healthy and sustainable business, we do anticipate unproductive revenue to be a casualty, resulting in lower overall net revenue and customer count in 2019. This approach to drive profitable revenue in 2019 is a critical step and, in combination with the strategic growth priorities that Brad spoke of earlier, will strengthen our customer base and put us on a path for future growth and profitability.

To share additional context on the slides we published this morning on our Investor Relations site, the cumulative net revenue per customer for recent acquisition cohorts has been relatively stable. This consideration, coupled with consistent improvements in margins, has led to net contribution per customer on average to improve in 2018 acquisition cohorts as compared to 2017. Despite this improvement in net contribution, the payback period for new customers has been extending, largely due to the acquisition cost per customer increasing to a level that has more than offset the net contribution gain.

A number of factors have contributed to these increased acquisition costs, including expanded consumer choice and the rapidly evolving industry. We believe we are well positioned to take advantage of the opportunities ahead while maintaining an unwavering mindset of highly disciplined decision-making and financial responsibility.

As we mentioned, the top 30% of Blue Apron customers on a net revenue basis acquired in the recent cohorts account for more than 80% of our net revenue from such cohorts in the year after acquisition and have an average payback on the acquisition cost of less than 6 months. Moving into 2019, we will deliberately lower acquisition spend and focus this investment on our most efficient channels while targeting customers that exhibit the attributes of our best customers. As a result, we expect the average payback period for new customers acquired during 2019 to be less than a year. And combined with our actions to streamline PTG&A as well as ongoing operational optimization, we expect to realize profitability on an adjusted EBITDA basis next year.

As we strategically deploy our marketing spend in areas that represent the greatest opportunity, we expect to spend less in overall marketing next year, both in dollars and as a percentage of net revenue. We'll be utilizing strategies, tools and methods that, we believe, will create greater capabilities and precision in customer acquisition for our core direct-to-consumer business. At the same time, we will be investing to drive success of our new strategic partnerships and channel expansion initiatives.

We expect COGS efficiencies to continue to improve in 2019 and propel the business forward with initiatives currently underway in enhancing fulfillment processes, labor management and sourcing utilization. We'll be entering 2019 with a leaner and more agile organization that is better aligned with our strategic priorities. As a result of the headcount reductions announced yesterday, we expect to incur employee severance costs of approximately $1.6 million in the fourth quarter and realize savings of approximately $16 million annually in personnel expenses. As a result of yesterday's actions and other cost reduction initiatives, we expect PTG&A savings of approximately $40 million in 2019 compared to 2018. To reiterate, we anticipate the strategy I just outlined will lead us to profitability on an adjusted EBITDA basis in 2019, a significant achievement for Blue Apron.

Turning to our expected performance for the balance of this year. We remain confident in our previously stated guidance of delivering full year net loss of $135 million to $140 million and adjusted EBITDA loss of $65 million to $70 million, an improvement of approximately 50% from the previous year. As a result of stronger bottom line performance in the third quarter, a deliberate approach to marketing spend and an expectation of continued operational efficiencies, we now expect our full year bottom line performance to be in the favorable end of these ranges.

On the revenue side for the fourth quarter, we do expect year-over-year net revenue performance similar to the third quarter, as we also approach the typical seasonal cadence of the business and appropriately position the business for 2019.

In summary, today, we have taken a significant step forward, driving decisive strategies to optimize the business and position the company for future success.

With that, Brad and I will now take your questions.

(Operator Instructions) The first question comes from Edward Yruma with KeyBanc Capital Markets.

I guess, first, as you continue to lean into the on-demand model, could you give us some color as to how the economics of the P&L changed? I'm assuming it's a lower gross margin, but kind of how you envision the P&L shifting as this kind of ramps in penetration. And maybe contextualize a little bit more on the WW opportunity, obviously, a very well-known brand. Kind of how big could this business be next year? And how do we think about maybe overlap with the existing customers?

Yes. This is Tim. Let me just jump in on the first question and generally the shape of the P&L as we move into our now stated objective of hitting EBITDA profitability -- or profitability on an adjusted EBITDA basis in 2019. So as we said, we do expect revenue to come down, but we expect to -- that basically to be based on shedding some of this unprofitable revenue that we haven't been achieving a quick payback on. So the way it'll work is on somewhat lower revenue, we will also then have somewhat lower marketing spend on both a dollar amount and a percent of net revenue, that thing essentially going to -- but that, in combination with the fact that we also improve another year in 2019 or year-over-year improved COGS efficiency, and then lastly, coupled with the fact that we've taken -- we're now saying it's going to be about $40 million of year-over-year PTG&A total savings. Those 3 elements will, essentially, on that lower revenue, push us to delivering overall profitability on an adjusted EBITDA basis. So all 3 of those components basically will come through.

Yes. Ed, this is Brad on the WW question. This aligns to our conversations that we've had during the course of the year on leveraging the strength of our brand, leveraging the great capabilities that we've built over the years on the culinary side and especially on the operational side lately, as we've really increased our operational efficiencies, so taking advantage of those capabilities and partnering with other folks who have broad reach and platforms. So Jet is an example of that from an on-demand perspective. WW is absolutely an example of that from a core DTC business. We love what Mindy and the team are doing over at WW right now, especially their broader view of wellness and health in general. That really aligns with our stated strategy that we've talked about earlier of expanding our culinary offerings to health and dietary preferences, in general. Our research shows that consumers that follow specific dietary preferences tend to retain and engage much better than the average consumer in our type of product. So this aligns also very, very well with our strategy of focusing on best customers and so forth. So the exciting thing for us is, literally overnight in early January, enabling millions of WW customers to access our brand -- potentially access our brand starting in early January '19. It's a very exciting opportunity for us. So they have a very, very broad reach, a deep customer base. And beginning in January, the ability for us to access all those customers through our offerings is really exciting. So we look forward to launching this product early next year, supporting WW in their brand campaigns around wellness, in general, and, obviously, look forward to deepening the relationship with them going forward. But to your point, we want to be cautious about the expectation we have early on, but we're very optimistic that there's a lot of customers on that WW platform. And we have a great culinary offering that can match up with them. So we're very, very optimistic in our ability to have this meaningful relationship going forward.

The next question comes from Matthew DiFrisco with Guggenheim Securities.

I was just -- actually, a little follow-up on that, and then I also had a question. So I -- it sounds like the guidance for contracting revenue again in '19 is conservative, does not assume a contribution sort of from WW. Or have you modeled WW into that assumption also of contraction?

Yes. We have modeled WW into the overall look, and just really, for next year, our focus is going to be on profitable revenue versus driving essentially revenue at all cost. So there is definitely a WW component. And then I think about WW, as Brad just talked about it, is it'll start contributing immediately beginning of the year. But yes, it is factored in there and we still anticipate further to be some contraction in revenue next year.

Yes. And I will just say and on to that, Matt, that, obviously, we're being very reasonable in our expectations of the amount of revenue that WW can -- what that could mean for us. Again, there's a lot of customers on their platform, but we want to, obviously, be reasonable in our expectation. So obviously, it's a new partnership for us. It's a relatively new kind of relationship for us. We want to see how this launches in -- early in the year, and we'll learn a lot as we get through January and February on this partnership. And the second thing is on the revenue piece, too, is our strategy around focusing on best customer, although some of those initiatives are already underway, there's many more initiatives that we are going to be putting in place as we work our way through the rest of this year into next year. And we also want to be careful in our expectation of how those initiatives land and what they mean to our overall results. So I think what we've done here is be very kind of cautious in our expectations of both what does WW partnership mean for us in the very early goings; and two, how does best customer initiatives, especially in the early goings, what does that mean to the impact of our business. Those are 2 things that are going to be kind of big things as we work our way through 2019 to keep an eye on.

So I guess, what internally in your model do you have sort of assumed for the core business today, that 30% of your targeted customer base that you're looking to retain and strengthen? When does that sort of floor or hit a plateau? And do you expect to be able to grow that base? I guess, in the context of the industry right now is only getting bigger players involved with more marketing dollars. And it sounds like you're trying to focus on the profitable side and retrenching a little bit. But how do you do that and retain that 30% and get them to grow again as far as that cohort if your competition is only going to be spending more and more and trying to get some of their spending power as well?

Yes. That's a great question, and we absolutely feel like we've got an incredibly strong brand, we've got a strong offering and we've got a very strong base of consumers that are in this top 30% that we define as our best customers that are going to be giving us an ability to build on. As Brad talked about, we're being fairly cautious about our projections about how revenue posts here next year. And we're not, at this point, putting a date on exactly when that stabilizes and returns to growth. But interestingly, again, our focus is going to be on the profitable growth. But just to build on what Brad was saying earlier, as well, as we focus on that kind of best customer mentality, we are going to be looking at metrics that we expect to improve, as our -- Brad said that our -- and as we said during our prepared remarks, those top 30% of our customers in a most recent cohort have net revenue like 10x the other 70%. So one of the things that we expect to happen as we move forward next year is that our average revenue per customer will start to build as we start to expand our offering and provide more potential flexibility and offerings to that best customer base. We also expect that our average order rates will start to build. So we're going to be looking at ways to grow revenue beyond just customer count. But right now, we've got a lot of levers to pull next year. We're going to be looking at pulling those levers literally on a week-to-week, month-to-month and quarter-to-quarter basis. And as we see success across both the core initiatives that Brad talked about and strategic partners like WW, we'll pull those levers harder or less depending on how they're spitting out that profitable revenue. And our success in those will determine, ultimately, to answer your question, which is then when do we kind of get to that very solid, strong, profitable sustainable base that we are then bouncing off of and growing off of.

Yes. And Matt, I think this is -- I want to expand that a little bit because it's a really good question you're asking here right now. So yes, I think it's important to note that your comments around the competitive environment, obviously, factual comments around that, there's a lot more competition. And the reality, we believe, is that that's what's creating this -- the 70% who are not best customers for us, that competitive nature is making it actually even more difficult for us to attract and engage them and engage them on an ongoing basis and retain them. So the high -- the best customers, our high-affinity customers, come into our platform with high intent. They want to be part of our platform. They're very highly engaged. They're very loyal. So the competitive nature out there in the landscape isn't impacting them as much as it's making it much more difficult to get those other customers who maybe aren't coming in as high intent and/or even if they do come in, they have many opportunities to go somewhere else along the way because of all the competitive products that are out there. So as Tim has stated, our focus really is let's keep our top customers engaged. Let's offer more products for them. The result should be, hopefully, that increases revenue per customer with our existing customers and, just as importantly, how do we go out and attract customers that look just like them. Because our approach historically has been -- when there was less competition out in the marketplace, our approach historically has been to spend a lot of marketing dollars at the top of the funnel, bring people in and, hopefully, that we have a product that makes them stick and retain and engage. Going forward, with much more competition, we want to make sure that we're focusing our dollars on people who look more like those best customers of ours and getting them into the top of the funnel. A partnership with WW is a great example of, we believe, those are more high-affinity customers who have certain dietary preference. And just as importantly, in this highly competitive environment, we want to avoid spending a lot of money on customers who are likely not to be highly engaged and maybe come in and come out pretty quickly because, we believe, first of all, that's not a great business, a sustainable business going forward. Second of all, with our expansion into non-subscription-type products, we are now giving customers an ability to get to our brand in other ways. So I just want to make sure we clarify that.

The next question comes from Rupesh Parikh with Oppenheimer.

So on your pilot test with Costco, is there anything you can share in terms of some of the positives and negatives you're seeing, thus far?

Yes. Sure. So the good thing here is this kicked off in May, so we're going to hit pause here in the holidays, which, from their perspective, they have certain holiday offerings and they need shelf space for their holiday offerings. And obviously, our type of product tends to -- historically, there's a little bit lower engagement in our type of product during the holidays, anyway, so that makes complete sense. But in the 5 or 6 months of the pilot, we learned a lot of things. And some of the interesting things we learned is that regional taste preferences vary pretty widely across the country. So we saw some great successes in certain regions. And with the same recipes, maybe not as great successes in other regions. So the ability to be more tailored and specific on a regional taste preference is something that we need to keep looking at going forward. I would also say that the changing of recipes from one recipe to the other, that transition period is something that we have to be really very, very strategic about and very deliberate about how you switch from one recipe to another. That's just -- is a logistical thing that we have to work through. And the other thing I'd say is, like, not unlike other items in kind of the grocery brick-and-mortar channel, shelf life and shrink and waste are something that we have to keep focusing on. And where we saw our ability to be very successful with certain recipes in certain regions versus where we had more challenges maybe in certain regions and certain recipes, we saw some more challenges in shrink and waste, and that's more of a business model issue for us going forward on the brick-and-mortar side of retail. So what we're looking forward going forward is to continue to test our core product. We're talking to some other folks also, in addition to Costco, because we still think there's a lot to learn with that. But I think, coming out of this pilot, probably the most important thing that we've recognized is we believe there needs to be some pretty decent product innovation specifically focused on how can we put products out there to leverage the strength of our brand that have a better way to manage shelf life and shrink and waste going forward, and we are in the process of working through some of those types of product innovations. We don't want to talk in too much detail about them right now, but more to come on that as we're ready to launch those in the near future.

And then as you look at all these efforts, whether it's jet.com, the Costco and some of the other partnerships, how do you think about the profitability profile of this business versus your historical core business?

Yes. The profitability of the WW business fits very well into our core portfolio. So we're -- and as Brad was saying, it's something that -- it's not a pilot. We're fully engaged with WW. We'll kick off officially here at the end of year moving into January, and very happy with the profit profile of that compared to our core business, so that should be a very nice part of our mix. As far as the other on-demand pilots that are out there, like Jet, they're still pretty small, as Brad was talking about. We're going to continue to grow them as we see, but they're not really, right now, a significant part of our overall profile this year or going into 2019. Ultimately, certainly, we have line of sight to them being a good profitable contributor. But for 2019, we haven't built any plans out to say that they're going to be a significant part of our business.

Some of the challenges we saw on Costco can be alleviated a little bit in the model with Jet, like, shrink and waste, too, are things that -- the online on-demand model is a little bit easier to manage some of those things. So we're excited about this opportunity with Jet. It is, to Tim's point, very, very small right now to start with, we're only 3 weeks into it. And it's focused on one specific geographic region, but the ability -- Jet obviously, has very, very broad reach in New York City into the whole metropolitan area. And obviously, I would assume that in the future, Jet would look to expand their retail, so -- and we'd be, obviously, very excited about working with them on that.

Okay. My last question, is there any more clarity in terms of the magnitude of the revenue decline next year? Or is that something we have to wait for?

We're not really in a position to guide on this specifically right now. But I will tell you that as we go into next year, when you look at the sum total of the impact of everything we're talking about, the improvements that we're making, continuing to make to the core business in terms of expanding the offering, continuing to improve the digital e-commerce experience, the strategic initiatives that are aligned that we have now with people like WW and Jet. But then, in addition, the way we manage the business is then on a literally week-to-week basis, we have decisions that we can make around that -- things like that acquisition marketing spend, how much we're spending in which channels, what the overall mix of the channel spending is, what the timing of that spend is. And as -- and we literally look at -- on a week-to-week basis, we're looking at those dashboards and making those decisions. To the extent that those things are working better or not as well in terms of delivering profitable revenue will determine how big that revenue is when it comes in. So as we get closer and closer into the year and we're starting to see those results with the overall priority and our commitment to deliver EBITDA profitability on an adjusted EBITDA basis next year, we'll be able to give more specific guidance on what the revenue specific component of that will be. But certainly, as we model it right now, as Brad talked about, we're being pretty conservative in terms of the idea that it -- we are going to get that adjusted EBITDA profitability on lower revenue in 2019.

The next question comes from Michael Graham with Canaccord.

Just 2 on that last point. I know it may be difficult to say, but just wondering, if you look at the comps for this year, they get a lot easier as we get to the end of the year. And I'm just wondering if you could comment on what might need to go right -- in the context of declining revenue next year, what might need to go right to get you to the point where you're achieving year-over-year growth as you exit next year. It would be interesting to hear your thoughts on that. And then I'm also just wondering, on your marketing strategy here as we sort of get a mix shift more to retail and also to higher-value customers, does it imply that your marketing spend is going to be more brand-oriented, which, I think, would mesh nicely with both the retail strategy and the shift to sort of higher-affinity customers?

You want on first question -- was the first question specifically about I think what has to work right next year for us to essentially eventually be able to grow off this new kind of profitable base that we built is the way I understand you.

Yes, yes. That's right. Just -- because it seems like the growth comps get really sort of a lot easier at the end of this year, so exiting next year on growth might be easier.

Yes. Well, the things that have to go right are the things that we've outlined just in the strategy, to tell you the truth. It's -- we've got to be very successful with having the right evolution of our product offering and our e-commerce experience to really both attract new customers and appeal to the customers -- I guess, appeal to our current best customer base, that top 30%, as well as attract new customers that look like that, so to the extent that we're successful in doing that. And the second part of that, obviously, is the messaging that we have and the way that we use our acquisition dollars, but also the way that we use our marketing dollars, to your point, kind of what we would call down the funnel a bit, how do we use marketing to folks once they're already in the funnel to make sure that we retain them and that we do things like get them to increase their order rate and continue to buy more things from us. So -- but I think the strategies that we laid out of, we're continuing to evolve the offering, we're continuing to review the e-commerce experience and we're continuing to try to attract and retain people that have an affinity for our model and our brand. If we're successful in doing those things, then that ought to get us to this more sustainable base that we can grow off of as we move out to 2019. I don't think there's anything really more specific than really just being successful in those strategies that we've already outlined.

On the marketing side, Michael, also, just make sure you note that in our partnerships with people like Jet and WW, we're obviously able to leverage off some of their marketing and some of their voice, which is also really important to note. So Jet is especially out of the gate, has been heavy in marketing our product. WW will be doing the same thing. So working in conjunction with our partnerships, we can leverage some of their voice and some of their reach from a marketing perspective too, which, obviously, adds to our efficiency and acquisition customers. I don't think that the shift in channel spend, I think will be more towards if we look at our core DTC platform, really looking at those channels that are easy for us to have attributes of our best customer and making sure that we can focus on best customer. So your comment around brand, although we're always looking to do brand type of things and keep stressing our culinary authority, we'll probably do a lot of that brand messaging in certain strategic kind of direct channels that we can focus on customers who kind of have -- share the attributes of our best customer. Instead of kind of being more broad, we'd probably be a little more strategically focused on going after those attributes. So I think we're going to kind of combine our brand messaging with kind of more direct acquisition channels in 2019. You'll see more of that.

The next question comes from Heath Terry with Goldman Sachs.

Just a couple of things I wanted to get a little bit understanding for. As you focus on those higher-tier or sort of higher-value customers, if you look back at that customer group and maybe your broader customer group, how much migration between those cohorts do you see? How frequently do those higher-value customers become lower-value customers and then maybe even move back into the higher tier and vice versa? So just trying to understand how much mobility there tends to be in that base over time or in those cohorts over time. And then as you look at sort of allowing revenue to shrink next year as you focus on profitability, you guys obviously have a pretty significant fixed cost base in the distribution centers and fulfillment centers that you run and operate. How do you -- or how should we think about the sort of marginal revenue or marginal costs associated with taking down revenue versus those expenses?

Heath, I'll take the first question on the high-affinity customers and the migration. So in general, what we've seen is these best customers, obviously, these are behavior cohorts, not cohort time frames on when they come in, right? These are customers that tend to have high engagement with us, regardless of the time frame they come in. I think the only migration we really see might be more temporary seasonal migrations. So obviously, historically, we've talked about summer months and holiday months are -- tend to be lower engagement time frames. It's not that different with this higher-affinity customer. They tend to lower their engagement a little bit in short time frames and then kind of reengage again in those higher time frames of kind of back-to-school time frame and beginning of the year. So we do see some temporary migration, but it's more consistent with seasonal patterns. I will say that I think that losing a high-affinity customer, which again these folks retain much, much better than our average customer, but losing a customer usually would mean that we've done something wrong on our side. Whether it be we didn't give them the types of products or the offering that they desired or whether it's a service issue or something like that, usually, those are the things that would come into play where that highly engaged, high-affinity customer at some point would leave us, who would be probably more something that we need to focus on in our product offering going forward or giving them more from product offering or making sure that we're servicing them. So a lot of things that we're looking at doing going forward is expanding our ability to spend more promotional dollars further down the life cycle funnel and not just spending them at the very top of the funnel and looking at loyalty programs, looking at way to engage our customers and higher engagement and, obviously, retain them much longer, also looking at the types of products that these customers are looking for and surveying them and asking them what types of products might work for them, in addition to what their high order rates are ready and what types of products might work for them in these lower engagement time frames, like summer months and holidays and so forth. So I think our job now, as we start to narrow our focus on the attributes of this customer is, what are those pain points for them and what are those things that are highly valued, how can we give them more of what they want and, and even more importantly, to your point, how can we avoid that migration by giving them product solutions in those migration periods to keep them engaged longer term. That will be our focus. And I'll let Tim take the second question.

Yes. Even on the lower revenue, so if you -- let's think about our cost structure and the 2 different components and the way we lay it out in the P&L and report it. The first part that we talked about earlier as well was either COGS or the 1 minus COGS variable margins, the way we talk about it. And even on a lower revenue next year, we expect, both actually in Q4 and next year to have -- continue to -- continued improvement certainly on the variable side. So our COGS as a percentage of net revenue will continue to decrease or our variable margin as a percentage of net revenue is going to increase, again both from the fourth quarter next year and increase a fairly good chunk even on the lower revenue. Fixed costs then are primarily in our PTG&A number and the actions that we announced yesterday as well as some additional actions that we quantified in the release and in today's call, that, say, $40 million -- approximately $40 million of fixed cost reduction out of PTG&A are, obviously, a big help then of offsetting any of that deleverage that we have in 2019 from the revenue downside that will help us stay on that track to EBITDA profitability even on the lower revenue. So you can kind of think of that $40 million of savings as being the offset to any of that revenue deleverage on the fixed cost side.

The next question comes from Ross Sandler with Barclays.

You called out that Linden is now your most efficient fulfillment center. And I think, in the letter, food and labor costs were a big driver of COGS. So just any additional color on the pace of improvement that we should see in gross margin in '19 and kind of going forward. Is all the uptick from getting Linden to where it is, like, kind of in the numbers? Or is there more efficiency next year? And then just back to the marketing customer acquisition dynamic. So as you go after this high-value 30%, is the customer acquisition cost on this 30% about the same as your average from back in the day and that these customers are going to have higher frequency and higher overall value? Or is it that you're going pay more per customer? Like, how do we think about the relationship between your marketing reduction and customer reduction next year?

Yes. Absolutely. On the first question, in terms of the amount of COGS improvement, first of all, yes, we're obviously very excited that after all the effort that's been put into Linden and all the focus and the great team out there that they are now our most efficient center. Obviously, they're also our largest center. Most of our revenue goes through there, so it's really important to us that they're most efficient. The other 2 are also improved this year and close on the heels. All our efficiencies or our variable margin or COGS percentage in all 3 facilities will improve in the fourth quarter and next year. So there's still plenty of room for us to continue to show improvement on those variable COGS costs going into next year. As we get closer into the year, and yes -- get closer to the actual year next year, we can get more specific about that guidance. For now, our improvement in variable margin next year across all 3 facilities is a big part of our getting to adjusted EBITDA profitability. On the second question, let me start -- let me just start and then I'll let Brad jump in. Yes, you can think of our customer acquisition costs -- or the way to think about it for next year is it will absolutely improve versus the average that we have from this year. So on the reduced spending in more focused, more efficient channels with a focus on trying to get more customers to look more like our best customers will result in a lower customer acquisition cost versus the rates that we've been running in 2018. And this is how we get to that objective that we've given you of saying that our marketing spend, we want to basically put marketing spend out there in 2019, that's going to have a payback of 1 year or less. So yes, absolutely, that will come from lower customer acquisition costs versus our most recent run rate.

Yes. And I'd say, just to add to that, that, again, it's partly more efficient in the focus of best customer, but the efficiency also comes from avoiding going after customers who don't look like the attributes of our best customers. So I think, again, in this -- to the earlier question we have in this competitive environment, going after that near-term growth of a non-high-affinity customer, to some degree, is getting more and more expensive because they have a lot more choices out there, to begin with. So what we're trying to of avoid here and eliminate is just go after near-term growth at a very costly efficiency and marketing for those customers who are likely not to engage highly or stay with us very long because they aren't high-affinity customers, is what we're trying to avoid. So I think it's a combination of both of removing that inefficient cost and chasing that customer who doesn't necessarily pay back in a reasonable period of time, along with the fact in doing that, you're going to focus your dollars on higher-intent customers and in channels that tend to be more efficient. So it's the balance of both of those that kind of work in the favor of the efficiency and the marketing of those.

And again, to reiterate, that's one of the reasons why we're picking strategic partnerships with people like WW that have very competitive customer acquisition costs to us as well as can bring us new customers that probably look more like our best customer and have a higher affinity for our model and, hopefully, a higher opportunity to be retained.

The next question comes from Matt Trusz with Gabelli.

So I know we're sort of early days on this, but can you speak to how the GrubHub pilot is performing? And then with GrubHub or Jet, where they're starting in Manhattan, do you see this as broadly portable if they -- like if they work geographically? Or are they really only best for large cities close to one of your facilities?

Yes. So I think it's important to note the distinction between a GrubHub and a Jet. So obviously, both are in New York City, both in the early stages. And we really look at this as a different customer occasion between the 2 of them. So if you think about GrubHub and the GrubHub customer really focused on ordering more closer to the event of the meal they're going to have. Now that being the case, what we -- what GrubHub is seeing with our product is an unusual occurrence with them where of our customers tend to schedule the delivery a little bit further out than the immediate delivery of I want to have hot food right now. So there is a little bit of a different dynamic that they're seeing with our customer and that's this customer, although they want it within a -- within the same day, are tending to order it earlier in the day and schedule it for delivery a little bit later, which is something unique to the GrubHub platform. But that being the case, it's much closer to the event, where the Jet customer is, although there is some same-day aspects to Jet, it's probably more of your grocery shopping-type mentality of maybe same-day, next-day, next few days needs and that the cutoff time frames in the Jet platform are a lot earlier in the day for same-day delivery. So what we're seeing in the early stages here is a customer who's on the Jet platform is shopping for groceries, in general, and tends to schedule this out and realizes that this is a product they need for the next few days. So I want to make sure it's clear. There's a little bit of a different customer dynamic and customer occasion. Now obviously, as we look at, going forward, the GrubHub pilot is 5 ZIP Codes on the Upper East Side of Manhattan. And the Jet platform is 315 ZIP Codes across the New York metropolitan area. So there's a lot difference in reach here, too. A lot to learn here. They're both in the early stages. But the idea would be, yes, as we look across the country, I think that there's 3 different opportunities for us. One is to work with folks like GrubHub, who can service a customer in a very close time frame to the actual meal event itself. Two, someone like Jet, who is a little bit of a different occasion in shopping in that it's more of a grocery shop than it is a meal shop with Jet. However, they also have much, much broader reach when they get to metropolitan areas. So their platform will be a much broader platform, a broader reach in that aspect. And then three, the ability for us to also do this ourselves and our platform where the consumer can go on the Blue Apron platform and order same-day or next-day delivery. That is something you will also see us do with our delivery-type partners as we look to test this and expand this across the country. So very early stages of this. But again, as we said before, we believe that there's very large reach on the on-demand side that we're really just getting started with.

The next question comes from Brian Nowak with Morgan Stanley.

This is John Colantuoni for Brian Nowak. Can you talk about your expectations for the cadence of earnings in 2019? In particular, when do you expect to reach profitability? And also has your outlook for long-term margins changed at all since the IPO?

Since the IPO, I'm going to hold that question until the end. But -- or maybe I'll pass that one over to Brad since he was actually here at the IPO. But yes, I mean, clearly, we've made it pretty clear that our overall expectation for next year is to get to profitability on an adjusted EBITDA basis. The first quarter is a very strong quarter for us from a lot of perspectives. It's when we do the best job of bringing people into the category. We're kicking off the strategic partnership with Weight Watchers. We're moving into the quarter with very strong performance we believe -- or we'll move into the quarter on very strong performance from an operating margin standpoint. We will be getting the full advantage of the PTG&A savings that we just talked about. So based on all that, we are absolutely confident that we will also be delivering EBITDA positive -- or profitability on an adjusted EBITDA basis in Q1 specifically as well as for the full year now. As we move through the year, obviously, the seasonal cadence of the quarter is when we get into things like summer packaging in Q2 and Q3 and every -- and whatnot will have impact on the profitability quarter to quarter. But we have a high level of confidence that all the factors that I just laid out will put us in a position to deliver profitability on an adjusted EBITDA basis in Q1 as well as for full year 2019.

Yes. And then the longer-term margin, no, we are not backing off those. With Alan Blake coming on board, we've got -- obviously, gained a lot of competency from a leadership perspective on the operational side of our business. Seeing great strides for Linden has improved significantly. And we've done some great work, both on the food side and the packaging and shipping side. So there's still plenty of room in all the categories of cost of goods sold for some efficiencies. So as Tim stated before, we made tremendous progress this year year-over-year. We intend to make progress next year. And we don't, by any means, think that it's going to be a 2019 event. We continue to see opportunities in operational efficiencies to build longer term. So we do believe that our longer-term targets of operational efficiencies are intact that we stated on our IPO.

The next question comes from Mark May with Citi.

I think most of mine have been taken, but maybe just a couple, maybe slightly repetitive. But it sounds like one of the strategies is to focus in on marketing channels and customer cohorts that are viewed as higher value, quicker paybacks, et cetera. I assume that you guys have been sort of refining your media mix for a while now. What -- how much more efficiency is there do you think for you to be even more surgical in your customer acquisition activities than you already have done? And then secondly, I think, historically, you guys have seen seasonality -- positive seasonality in Q1. I'm wondering, are you expecting this Q1 to see customers grow sequentially? Or are there other things that you're doing in terms of refining the media mix and marketing spend where we might not see that this year?

Yes. On the marketing channels, Mark, again, focusing on high affinity-type customers, you will see us focus on those channels that tend to point towards those types of customers that we've historically seen. So we're also focusing very much on channels that are easy to attribute to those kind of high-profile type or high affinity-type customers that we like. So from the marketing channel strategy mix, you'll see us definitely lean towards more efficient channels. And we've been -- kind of as we worked our way through the back half of the year, we've been kind of starting to develop some of these strategies already. But I think, other things that you should look for relative to the acquisition side of our business is even the promotional side of what we do beyond just marketing channels and looking at these best customers tend -- that the 70% non-best customer tend to come in more heavily on the promo side of the acquisitions than our best customers. It's not to say that best customers don't commit promos also. But we want to be very careful on a promotional strategy at the top of the funnel also. So you'll see us make some changes there relatively as we work right through the year, being more consistent and disciplined in promotional strategy to make sure that we're bringing high-affinity customers in. I think also, at the top of the funnel, things like reactivations, too, being very more thoughtful and strategic of reactivating customers who have shown high affinity and high engagement historically versus just going after all potential x customers and also as we put -- add offerings and add different types of products or services that might align to the reasons why certain customers left, reactivating through those mechanisms, too. So we believe that being more strategic in reactivations will also be helpful on the customer acquisition side.

There appears to be no further questions. I will now turn the call back over to Mr. Brad Dickerson.

So thanks, again, everybody. Obviously, a lot of messaging today. And we're happy to talk to you about our strategic process and path forward. We're really excited about the focus on EBITDA profitability. And we're focused -- and, obviously, very, very excited about continued execution on best customer initiatives as we get into 2019. And needless to say, very, very excited about our new partnerships with jet.com and WW. So more to come on all of those. We look forward to talking to you in the next few months.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.