Blue Apron Holdings Inc (APRN) 2019 Q3 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this call is being recorded 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. (Operator Instructions) Following the conclusion of today's call, the Blue Apron team will host a question-and-answer session and instructions will be given at that time.

With that, I'd now like to turn the call over to Louise Ward, Senior Director of Corporate Affairs. Ms. Ward, please go ahead.

Good morning, everyone, and thank you for joining us. On this morning's call, we have Linda Findley Kozlowski, Chief Executive Officer of Blue Apron; and Tim Bensley, Chief Financial Officer. We have created a slide presentation to accompany our remarks today. The presentation can be accessed through the webcast link on our Investor Relations website at investors.blueapron.com.

Various remarks that we make during this call about the company's 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 very important risks and other factors, including those described in our earnings release and in 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 this call, we 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 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 referred to during this call are on our Investor Relations website located at investors.blueapron.com under Events and Presentations.

With that, I would now like to turn the call over to Linda Findley Kozlowski, Blue Apron's CEO. Linda?

Thank you, Louise, and good morning, everyone. Our third quarter results came in -- came within our guidance range provided on the last earnings call. The results also reflect what we've consistently said about 2019, a year focused on building a healthy and sustainable business to put us on a path for future profitable growth.

As anticipated, we saw declines in revenue and customer count in the third quarter, consistent with what we expected with this approach. However, we continue to see year-over-year improvement in the metrics that we believe are key indicators of a strengthening customer base as we pursue our growth strategy.

Average revenue per customer and orders per customer. In fact, in the third quarter, these improvements were significant, with average revenue per customer up 11% year-over-year and orders per customer up 10% year-over-year. We believe that this strengthening of our customer base validates our more deliberate marketing approach and is foundational as we continue to execute on our growth strategy.

As we've refocused our marketing over the past year, we've become more efficient in how we attract and engage consumers and we're encouraged by the results. Heading into 2020, we plan to build on this approach to lean back into marketing investments as we make improvements to the products and customer experience. We'll continue to avoid initiatives that would generate short-term revenue at the expense of inefficient returns on our marketing expense and take the time to build the right product and marketing mix for sustainable growth.

We are also pleased to have recently completed the refinancing of our revolving debt credit facility with our existing lender syndicate. We believe the amended facility gives us an additional access to our liquidity as we drive towards growth in 2020.

We continue to believe that with the execution of our strategy, we'll achieve our previously articulated goals of quarter-over-quarter net revenue and customer growth in our seasonally high period of Q1 2020 and year-over-year quarterly net revenue and customer growth in the back half of 2020.

In a few minutes, Tim will provide a more detailed look at our third quarter financial performance and outlook. Now I'll provide an update on the work we're doing to build for the future, including how we progressed against our new growth strategy to date. As you know, in August, we launched a new strategy that we believe will enable our core business to reach its potential and return Blue Apron to growth in 2020.

Our strategy centers on 3 initiatives: one, focused expansions to new customer segments; two, better integration to our customers' lives through more menu choices and flexibility; and three, efficient scaling of marketing through stronger customer relationships and new partnerships. As we progress through this strategy, we are deliberately prioritizing better serving our customers with choice and flexibility in our products. We believe that the sequencing here is important as improving our products and customer experience lays the groundwork for us to successfully execute the other 2 parts of our strategy, attracting, engaging and retaining new customer segments and efficient scaling of marketing alongside new partnerships.

As we pursue these improvements, we remain committed to the strengthening of our foundation through ongoing optimization of our operations, fiscal discipline and our meaningful brand differentiation. We believe that this foundation, which our team has worked very hard to create and put into the competitive advantage as we pursue growth.

Now I'll walk through a few highlights from the third quarter as well as preview some initiatives ahead. We know that our customers want more recipes to choose from week in and week out. They want health-conscious choices and they want the ability to select the mix of health-conscious and signature options in any given week. In mid-September, we launched the first phase of our new menu expansion, which gives customers full flexibility to combine our 2-person signature and health-conscious offerings, including WW recipes. This expansion increases the amount of available 2-person recipes each week from 8 to 11.

This menu expansion, currently available to all customers serviced out of our Richmond, California facility, is phase 1 of our rollout, which is designed to ensure that we can deliver the new flexibility to customers while meeting our margin and product quality goals. We plan to apply learnings from this first phase as we seek to scale it nationally.

This menu expansion also encapsulates how we view health here at Blue Apron, a view which we intend to inform all future health-conscious initiatives. At Blue Apron, we believe that a healthy lifestyle isn't a rigid diet but a clear set of choices based on personal needs and preferences. We believe that when you're cooking from scratch, you're already making a better choice both physically and mentally for you and the people you cook with and for. Our goal is to offer diverse and delicious menus that can suit a wide variety of range of lifestyles and health preferences without sacrificing flavor. These are health-conscious options you truly want to eat. The changes we're making will build on that while equipping our customers with the flexibility and ease to make those menus fit their lifestyle.

Also, in the third quarter, we recommitted that quality and evoking a sense of discovery in every recipe will always be central to Blue Apron experience, starting with the ingredients we source. As part of this recommitment, we brought more interesting ingredients into our customers' kitchens, such as our Beyond Meat recipes, which began shipping in mid-August.

When comparing the customers who ordered recipes featuring Beyond Meat to look like control group, we saw improved retention and an increase in order rates for those who ordered the Beyond Meat recipes. As interest from our customers and plant-forward eating is showing staying power, we will continue to offer Beyond Meat as well as routinely integrate interesting produce onto our menus.

In early 2020, we'll also be keeping in line with our commitment to ingredient variety by introducing new items into our pantry for regular recipe rotation like tofu, chickpea pasta and date syrup. Unlike a traditional subscription service, our customers choose whether or not to order from us on a week-by-week basis, so keeping our offerings fresh and exciting is key to our ability to keep them engaged. To that end, this Thanksgiving, we'll be offering dessert kits for the first time as a way to stay connected to our customers during a week when many of them opt out of a full dinner with Blue Apron in favor of established culinary traditions.

In addition to driving consumer interest with a regular rotation of new and interesting offerings, culinary partnerships provide opportunities to engage customers with compelling stories and personalities behind our recipes. Earlier this month, we were excited to launch a partnership with award-winning chef and television personality, Christian Petroni to bring 4 weeks of Italian-American home style recipes to our 2-serving and 4-serving menus.

Another lever for us to improve key customer metrics like order rate and average revenue per customer is by leveraging our brand and culinary authority to offer more products to help our customers cook and entertain at home with ease. The Blue Apron Market, our e-commerce marketplace, continues to be an important direct-to-consumer platform for us to launch and showcase these offerings, including Blue Apron wine, our proprietary spice blend collaborations with partners like Murray's Cheese and a variety of culinary tools personally recommended by our test kitchen of professional chefs.

As we outlined on our last call, the other work stream within our initiative to better integrate into our customers' lives is providing a more flexible service experience, making it easier for consumers to engage with us in a way that best fits their lifestyle. As we plan for how we'll better meet customers on their terms going forward, we'll be applying learnings from the on-demand pilot we conducted on the West Coast. This 5-month pilot ended in September, and we plan to integrate learnings from this into our long-term product planning around subscription and non-subscription models.

In the third quarter, we also realigned parts of the business and added new resources to equip our organization with the right structure and muscle to move ahead aggressively with execution of our strategy. This included adding new engineering resources, a new head of brand and new head of consumer digital products and more fully integrating our product, marketing and culinary teams under central leadership to work holistically across each stage of the customer journey.

Finally, we gained new expertise and perspectives on our management team with the addition of our General Counsel, Meredith Deutsch and Chief Human Resources Officer, Julie Betancur. It's been great to see our team fully engaged in and taking ownership of our growth strategy.

We believe the potential for the business remains significant and that we are well positioned to capture the opportunities ahead, helped by undeniable consumer trends that we believe will work with tailwinds. Our commitment to sustainable profitable growth has not wavered.

I want to reiterate that we are pursuing what we believe to be an incredibly worthy mission. The holiday season approaching is a reminder of the power of home cooking and providing health, comfort, connection and community. Our team is extremely proud to be positively influencing individuals and households across America week after week by empowering them to create incredible meals at home.

I'll now turn it over to Tim to talk through our financials in more detail. And after that, we'll take your questions.

Thank you, Linda. Good morning, everyone. On this morning's call, I'll walk through our third quarter financial results, discuss the recent refinancing of our debt facility and review our financial outlook.

As Linda stated, we delivered third quarter results within our guidance range provided on our last earnings call. The third and fourth quarters reflect our priority to build for the future by continuing to pursue our growth strategy and strengthening our customer base to position the company for quarterly customer and revenue growth in 2020.

Turning more specifically to the P&L. Net revenue in the third quarter was $99.5 million compared to $150.6 million in the prior year and $119.2 million in the second quarter of this year, reflecting our continued focus on efficiency in our marketing investments as well as the typical seasonal impact of our summer months. While we previously discussed at length that this transition will result in lower revenue throughout 2019, we continue to believe that strengthening our customer base is a foundational step for executing our growth strategy and building a healthy long-term sustainable business.

As Linda mentioned, we are pleased that we continue to make progress on this front, evidenced by significant year-over-year improvement in our key customer metrics of average revenue per customer and orders per customer in the third quarter.

Marketing spend as a percentage of net revenue was 12.2%, down 320 basis points year-over-year from 15.4% while we remain focused on efficiency and increased quarter-over-quarter from 8.2% in the second quarter, reflecting our seasonal trends.

On the cost side, margins improved slightly on a year-over-year basis as COGS, excluding depreciation and amortization, improved 30 basis points from the prior year to 67.7%. This improvement in COGS was largely driven by efficiencies in food costs through our improved processes but partially offset by increased costs associated with testing more sustainable, environmentally-friendly packaging and our work in the third quarter to build and invest for the future, which included the first phase launch of our menu expansion. While these investments within the quarter resulted in increased costs, they helped to address customer pain points as evidenced by reduced refunds and credits during the quarter. On a quarter-over-quarter basis, COGS as a percentage of net revenue increased by 780 basis points from expected seasonal increases in costs and the investments in packaging.

Product, technology and G&A or PTG&A was 27% lower year-over-year at $35.3 million, reflecting our team's ongoing commitment to streamlining costs. On the bottom line, net loss for the third quarter improved 23% on a year-over-year basis, coming in within our guidance range at $26.2 million. Adjusted EBITDA was also within our guidance range with a loss of $13.2 million, representing a 30% improvement year-over-year compared to a loss of $18.8 million in the same period last year, driven by continued focus on cost optimization and a slight improvement in variable margin.

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

Now turning to our financial outlook. As we previously noted, in order to realize the benefits of our growth strategy, we plan to invest behind some of its key initiatives in the coming quarters to continue moving the business forward. We continue to expect that these investments, along with the execution of our growth strategy, will lead to healthy quarter-over-quarter net revenue and customer growth in our seasonally high period of Q1 2020 and will lead to year-over-year quarterly net revenue and customer growth in the back half of 2020.

In the shorter term, as we progress through our strategy and specifically for the fourth quarter of this year, we expect similar year-over-year quarterly net revenue performance as we saw in the first 3 quarters of 2019 while we continue to strengthen our customer base to set us up for meaningful execution in 2020.

On the bottom line, we expect net loss in the fourth quarter of 2019 of $21 million to $24 million and adjusted EBITDA loss of $7 million to $10 million, continuing to reflect the impact of our deliberate pullback in marketing and the increased investments as we execute on our growth strategy.

For full year 2019, we expect net loss of $60 million to $63 million and adjusted EBITDA loss of $7 million to $10 million. Our outlook reflects the deliberate prioritization of the phases of our strategy that Linda just discussed. We are focusing, first and foremost, on investing in our product and customer experience as we believe these improvements will lay the groundwork for successful execution of the rest of our strategy and ultimately pave the way for future growth. The sequencing is also important as we expect that a better product and customer experience will lead to more effective marketing. To that end, headed into 2020, we believe to be in a position to lean further into our marketing spend with expected increases in marketing on a year-over-year basis, both in absolute dollars and as a percentage of net revenue.

As Linda noted, the work we are doing now to reset the business is a critical step as we build for the future. Our commitment to sustainable, profitable growth has not wavered, and we are pleased to have the increased flexibility provided by our recently completed debt refinancing as we pursue our 2020 growth targets. We look forward to updating you on our progress.

For easy reference, we have posted a reconciliation chart from our net loss to adjusted EBITDA outlook on Blue Apron's Investor Relations website. Linda and I will now take your questions.

(Operator Instructions) The first question today will come from Shweta Khajuria with RBC Capital Markets.

Two questions, please. First, on the year-over-year growth in the back half of 2020, could you talk a little bit about -- of the initiatives that you're investing in, in product or partnerships, which ones do you think are key to driving this growth in the back half of 2020? Which gives you most conviction to drive this growth -- that will drive this growth?

And then the second on product front, could you please talk about how the same-day delivery in California that you launched earlier in the year, how that is trending, and also the fall rollout that you talked about and the menu expansion, how that has been trending? I know it's early for that product, but it would be good to hear how customers are reacting -- responding to that.

Sure. So touching on a couple of those. The initiatives that we think about for 2020, particularly in the second half, it's actually going to be a combination of things. And part of the reason we've looked at this for the second half is it's really about the compounding effect of both more efficient marketing on top of the product initiatives that we're putting into place right now. So as we've discussed, we really want to enhance the choice and flexibility of what we're offering our customers and continue to expand that into healthy options so they can choose alongside our signature menu as well as being able to think about how we can make the model itself a bit more flexible.

So we think that will also not only attract new customers to the products but increase retention for our existing customers. And then compounding that with some of our more efficient marketing initiatives should continue to accelerate throughout the year. As you know, we are a physical product business, so we are working our way into the process of building out what we need in order to deliver this more flexibility and choice and continue to roll it out in a way that will ensure that we don't lose any quality in the process from our fulfillment centers and be very systematic about making sure that we're staying with sustainable growth in our marketing initiatives.

On -- as far as things around same-day and the menu expansion, so as we outlined in August, one of our work streams related to better integrating into customers' lives is thinking about the service experience itself in addition to the product. And in doing that, we're actually testing different ways that we can think about subscription and nonsubscription services. So that, we learned a lot from that initiative that we launched and just recently ended, and that we're actually going to be integrating into some of those initiatives going into the second half of the year to think about what's possible.

As for the menu that we're launching in California, that is still very early. It's only been in the market for a few weeks. So we can't say definitively how that's performing yet at this point because it's just too early, but we are hearing positive things from our customers.

The next question comes from Youssef Squali with SunTrust.

This is Sagar on for Youssef. First, with this refinancing, can you please quantify and help me better understand how much financial flexibility this has unlocked? And second, the last couple of years of cost-cutting -- with the last couple of years of cost-cutting and making your operations more efficient, as you look to get back into growth mode next year, what gives you confidence given the competitive landscape has also been shifting in that time?

Yes, this is Tim. Let me take that first part and start the second part of the answer, and then Linda can weigh in on the second part. In terms of the refinancing -- and we filed the agreement along with our other Q3 filing, so you'll be able to get a look at the details of it. As I talked about in my script, we lowered the overall size of the facility to $55 million, and we have a minimum liquidity covenant of $20 million. So we think that, that spread gives us -- along with the realignment of the other financial covenants with our growth strategy, gives us adequate liquidity and flexibility to go execute that growth -- our growth strategy.

On the second question, on the cost side, we have obviously made tremendous improvements in our variable margin this year. And we've done it pretty much across the board in all the components of variable margin, but it really was the first year of improvement. As we go into next year, we still see room for improvement in those areas. I'm not sure that the competitive situation has a big impact on our ability to do that. Our own strategy, obviously, has an impact on what we'll do with cost, but we're still moving towards continued improvements in our overall cost structure as we move into next year.

I think just building on that -- sorry.

Sorry, I was just going to say, it's more about like what gives you the confidence as you're looking to start investing in growth, which you guys haven't done in a year or 2.

Yes. Yes, I know. Yes, absolutely.

Yes. And I think on that front, when we think about the competitive space, first of all, we do believe that this is not a winner-take-all market. We think there's actually a lot of room. It's still very early in the market in general, and so there's room for multiple players in the market. We are very confident with what we've seen, our customer metrics that we talked about, our revenue per customer being up 11% year-over-year and orders per customer being up 10% year-over-year. We know that we have a strong and engaged base that really appreciates the culinary authority, discovery differentiation that Blue Apron provides. And so that's part of what gives us confidence that leaning into this will actually be very productive in 2020.

I will also add to what Tim was saying about the efficiencies that we've gained over this year, which was hard-won by the team to get some of these cost efficiencies in place. We see a path where growth only increases those efficiencies, and that's what we're driving towards.

Yes, we -- I think the good news is we've been able to see significant cost efficiencies while we are executing the strategy that resulted in declining revenue. So as we get into next year and start to stabilize revenue and then grow it, that even puts us in a better position to get our cost efficiencies to continue to increase and actually gives us the room to be able to invest in some of the product and customer growth strategies that Linda was talking about.

The next question comes from Heath Terry with Goldman Sachs.

I was wondering if you could just give us a little bit more behind the strategy to return to growth in 2020. If you could just sort of disaggregate for us sort of how much of that is a function of new product innovation, operating efficiencies impacting churn, stabilizing customer retention or acquisition strategy. I know you talked about sort of marketing being up on a year-over-year basis. How much of that is going to be driving it and sort of what marketing efficiencies you expect to see or implied by that return to growth?

Well, I'll just start on that and then have Tim jump in, but -- and thank you, Heath. Nice to talk to you. So first, I think it's a few layers. So it's really starting with the new product innovation. We're in a position right now where all of the changes that we're making to the product will not only attract new customers but also increase retention because the initiatives that we're putting into place are directly related to feedback that we've heard from customers, research that we've done with our customers, research that we've done with prospects and understanding what they want to see from a Blue Apron product.

So I think the primary driver that you'll see in the early stages will be around product innovation of which we're able to do with a lot of the existing infrastructure that we built in our facilities to date with some just minor changes in order to enhance that product capability to meet the needs, particularly around things like health and choice and variety and flexibility. So that's probably the first lever.

Then the second most important lever is the efficiencies that we're seeing in marketing, which is partially built off of what we've already done from a marketing spend efficiency standpoint but then also layered on top of those product initiatives as well as some digital product initiatives that help make for a better customer experience in both converting as a new customer and choosing their meals on an ongoing basis.

That really has 2 parts to it: one is continuing to see more efficiencies in the paid marketing that we're already putting forward, and the second one is really about introducing new partnerships that give us access to similar customers that we haven't reached yet, to our best customers, that will also help increase both retention and conversion into engagement.

And I think underlying all of that, there's always a focus on how do we continue to make the cost of the business more efficient, how do we continue to sort of not lose sight of the sustainable growth that we want to put into play and not necessarily fall into the trap of growth at all costs. And that's something that's very critical to us as we think about the cost control going forward.

Yes, and I think the way Linda just explained that also demonstrates that the plan for next year really is fairly balanced. If you look at the 2 sides of the equation that you're pointing out, either customer acquisition and the marketing spend behind that or customer engagement, as Linda said, most of the initiatives that we're doing actually have a positive impact on both. And the fact that we've put a lot of work into understanding how to be as efficient as possible on marketing this year helps us going into next year as well.

So we have, I think, what I would describe as a relatively balanced plan across both the acquisition, engagement and retention metrics in the business.

Ladies and gentlemen, this will conclude our question-and-answer session. As we approach the conclusion of our call, I will now turn the call back over to Ms. Kozlowski for closing remarks.

Thank you very much. In closing today, I want to thank all of you for your interest in Blue Apron. I also want to thank our employees across the country who are working so hard to progress through our strategy and build for our future sustainable growth. Thanks so much, and have a great day.

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