Blue Apron Holdings Inc (APRN) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Blue Apron Holdings Second Quarter 2020 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this call is being recorded today, Wednesday, July 29, 2020 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)

On this morning's call, we have Linda Kozlowski, Chief Executive Officer of Blue Apron; and Tim Bensley, Chief Financial Officer.

Before handing the call over to the company, we will review the safe harbor statement. Various statements that the company makes during today's call about its future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of risks and other factors, including those described in the company's earnings release and SEC filings.

In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements.

During this call, the company will be referring to non-GAAP measures, which are not prepared in accordance to generally accepted accounting principles. You are encouraged to refer to the earnings release and SEC filings where it has defined these measures, and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

In addition, reconciliations of certain forward-looking non-GAAP measures referred to during this call is included in our earnings release, which is available on the company's 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 Kozlowski, Blue Apron's CEO.

Thank you, Jamie. Good morning, everyone, and thank you for joining us today. Blue Apron's second quarter 2020 operating results reflect quarterly, sequential and year-over-year double-digit net revenue growth, and also mark our return to top line growth sooner than expected.

Net revenue was up 10% year-over-year and by 29% from the first quarter. This strong top line growth, in concert with our cost and cash management discipline put in place over the last 2 years, resulted in positive adjusted EBITDA and net income profitability as well as positive operating and free cash flow.

I'm also extremely proud of our team for delivering variable margin results of 40.6%, improved from both Q1 2020 and the second quarter of 2019, even with the operational complexities and wage increases for our fulfillment center workforce created as a result of the COVID-19 pandemic.

Beyond the increase in net revenue, as a result of changes in consumer behavior from the COVID-19 pandemic, our second quarter performance also reflects continued progress on our 3-part return-to-growth plan announced last August. This plan is focused on 3 key priorities: engaging more consumers that have our best customer characteristics, increased choice and flexibility to better integrate into our customers' lives, and scale our marketing spend efficiently.

Both the positive impact of recent increased interest in cooking at home, and the progress made against our growth plan, are reflected in the quarterly, sequential and year-over-year improvements in our key customer metrics, including orders per customer, average order value and average revenue per customer, all of which reached levels that we haven't seen since prior to 2015.

Additionally, after increasing customers by approximately 25,000 in the first quarter, we added another 20,000 customers in the second quarter, reaching 396,000 quarterly customers, our highest level since the second quarter of late last year. The customer additions in the second quarter came despite our deliberate decision to scale back marketing and promotional programs early in the quarter, as we focused on building capacity in our fulfillment centers to address increased demand.

We believe our growth strategy, coupled with our focus on cost and cash management discipline, is establishing a foundation for Blue Apron to achieve consistent revenue growth apart from the pandemic-driven increases in demand that we have seen.

Tim will review our outlook for the third quarter in detail shortly. But I want to highlight that while our growth expectations for the current quarter reflect continued higher levels of demand from the same periods in 2019 as a result of COVID-19, built into these expectations is the knowledge that we are doing a better job with regard to customer engagement and customer retention. As such, we're confident in our ability to continue to execute on our previously announced growth plan, even if consumer behavior may shift.

As we continue to see this demand, we plan to continue to leverage our brand. According to the April 2020 third-party brand survey we commission biannually, Blue Apron continues to lead the meal kit category in brand awareness and incent to try. As near-term trends for cooking at home have improved, and the longer-term outlook for cooking at home similarly have been gathering momentum, we believe we have the right strategies in place to capitalize on this growing interest to deliver net revenue growth in future periods. One recent study indicates that nearly a third of those surveyed plan to cook at home, even as -- even more now than they -- excuse me -- even more now than they are once the stay-at-home recommendations have been lifted.

As people spend more time in the kitchen, we believe we are well positioned to offer a product that caters to a range of experience levels and balances customer preferences for both health conscious and more indulgent recipes.

The improvements in our key customer metrics reflect increased demand from existing customers and new demand from new and reactivated customers seeking a variety of quality meal options delivered into their homes. We also continue to see heightened interest in our product innovation, such as our Premium recipes that deliver an elevated restaurant-like experience at home for both our 2-person plan and our 4-person plan customers.

As I mentioned in the last earnings call, we launched more products in the first quarter of 2020 than in any prior quarter. In Q2, we saw strong performance for these new products. In particular, our Premium offering, with advanced cooking techniques and more ingredient variety, has been performing extremely well. Customers ordering these Premium price point opt-in-only recipes contributed over 1/3 of the 5% year-over-year increase in average order value realized in Q2. Among customers surveyed in mid-April who ordered Premium meals, intent to purchase was strong -- or intent to purchase again was strong at 88%.

Further reflecting the expansion of our offerings, our customers both pre-and-during the pandemic have been requesting the ability to receive more meals per week in their box. To meet this need, in June, we began rolling out a 2-person plan that customers -- for customers in our Richmond facility, that allows them to add a 4th recipe to their order. This expansion has been performing strongly, and we plan to roll it out to all Richmond customers soon, and then national customers in the third quarter.

Additional contributors to our growth in key customer metrics include engagement programs, such as our chef collaboration. We recently concluded a 4-week partnership with award-winning chef and restaurateur Tim Hollingsworth, with a focus on comfort food for the summer. We continue to see strong customer engagement with our chef partnerships. We will be continuing this program to the Fall, with a collaboration with chef and TV personality Amanda Freitag. These recipes will be designed to help reinvigorate our home chefs to kick off the Fall season with us, as we lean into easy but delicious recipes for our increasingly busy customers.

As we noted on our first quarter call, our ability to meet the initial heightened demand early in the second quarter was constrained to some extent, as we ramped up labor capacity. Importantly, we have the equipment, facilities, food safety standards and supply chain to support the higher demand. Our biggest challenge, as it has been for many, has been securing an adequate labor supply while maintaining a safe work environment for our team.

Throughout Q2, we were able to deploy multiple interim actions to quickly address the surge in demand, including canceling or delaying some orders, closing some weekly offering cycles early, discontinuing a subset of menu offerings, reducing promotional and marketing activity and delaying the inception of some of our new product initiatives.

While labor availability remains challenged by, among other things, reduced public transportation and logistics around child care, we believe the labor pool in our Linden, New Jersey, and Richmond, California, fulfillment centers will be sufficient to meet our projections.

As we were able to ramp up capacity during the second quarter, I'm happy to note beginning in June, we began to re-introduce additional variety back into our menu offerings. We were also able to capitalize on a favorable marketing environment with higher levels of promotions and increased marketing activity. We will continue to monitor demand versus capacity closely, and plan to manage these operational levers as needed going forward.

As we discussed on our first quarter call, the safety and wellbeing of our team members, particularly inside our fulfillment centers, remains our top priority. During this time, we have enhanced our existing comprehensive personal hygiene, employee safety and sanitation standards, and have instituted other measures to help prevent the spread of COVID-19. As an FDA-regulated operation, our personnel have always been required to wear appropriate protective equipment at all times on the production floor, including nitrile gloves, smocks, hair and beard nets and safety glasses. We also hold an additional food safety certification from Safe Quality Food Institute, which is widely considered to be one of the most rigorous and comprehensive food safety standards in the world.

With regard to our supply chain availability and safety, to date, we have not yet experienced any significant disruptions in our supply chain. We manage our supply chain very closely, and we work with suppliers who hold and value the same high safety and sanitation standards that we do. Because we operate on a just-in-time sourcing model and have a strong network of suppliers, we are able to make adjustments in real-time based on our needs and those of our suppliers. Our deep library of recipes and strong culinary procurement teams allow us to also adapt recipes as needed based on availability and timing of our high-quality fresh ingredients.

We believe our strong second quarter results were largely driven by the increased desire for consumers to have great-tasting cook-at-home meal options delivered directly to their homes during the pandemic. Therefore, our focus is on continuing to build products to meet the ongoing medium-term demand of our existing and new customers. At the same time, we are taking steps to sustain this demand with a high level of service, menu variety and quality in order to drive conversion of medium-term interest into longer-term consistency. As such, we remain focused on our previously-announced growth strategy.

I want to be clear that the heightened demand that we've experienced since late March is separate from our long-term strategy, which I highlighted earlier in my comments. Even before the beginning of the pandemic, the growth plan was taking hold and had begun to drive improved performance across the business. With the results achieved thus far, we continue to believe our growth strategy remains the right course of action for Blue Apron.

As always, we appreciate our longstanding customers as well as those who have recently turned to Blue Apron on our new (inaudible) service. We take our commitment to provide every customer that invites us into their homes with a quality meal experience and world-class service very seriously. And every day, we seek to improve so that we can retain our customers and attract new ones.

I'll conclude with a heartfelt thank you and the deepest appreciation for our dedicated employees who, during this protracted challenging time, have stepped up to help get more food to more people.

I will now turn it over to Tim to talk to our financials in more detail.

Thank you, and Good morning, everyone. Echoing Linda, I would also like to thank our entire team for their commitment over the last 4-plus months to work safely and with tremendous focus and dedication in what have been truly unique conditions in responding to the impact of the pandemic, enabling us to deliver as many Blue Apron meals to our customers as we possibly can.

Turning now to Blue Apron's second quarter performance, as you saw in this morning's release, we delivered strong second quarter results. For the second successive quarter, we grew our customer base sequentially quarter-over-quarter with all other key customer metrics including to the highest levels that we've achieved since prior to 2015. These improvements demonstrate the progress we have made over the last 3-plus quarters on our long-term growth initiatives as well as the benefit we have seen from the increased demand resulting from pandemic-related changes in consumer behavior.

Net revenue in the second quarter of 2020 rose 10% year-over-year to $131 million compared to $119.2 million in the prior year, and by 29% compared to the $101.9 million in the first quarter of 2020. On our first quarter conference call, we noted that we had leaned back into our marketing efforts with a plan to help us attract and engage customers efficiently. At the same time, we wanted to make sure our marketing efforts levered the continued improvements we are making in our product experience and our customer service.

Given the initial spike in demand in late March that continued throughout the second quarter, we pulled back on our marketing and promotion efforts, as did our peers in the industry, for most of the second quarter while focusing on customer engagement and retention strategies. These strategies, together with the increased demand, helped drive the year-over-year and quarter-over-quarter revenue growth as well as ongoing growth in our key customer metrics.

Maintaining our disciplined customer acquisition mindset continue to be a priority, as we continue to be successful with these efforts. While marketing spend in the second quarter of 2020 was down in both absolute dollars and as a percentage of net revenue on a quarter-over-quarter basis, both metrics did increase on a year-over-year basis to $11.6 million or 8.8% of net revenue, respectively.

Our marketing efforts contributed to our ability to increase our customer count by approximately 20,000 customers quarter-over-quarter to 396,000.

As I just mentioned, we also saw improvement in key customer metrics that point to a continued strengthening of our customer base. Orders per customer increased to 5.4, the highest level since prior to 2015, a 17% increase year-over-year and a 15% increase on a quarterly sequential basis.

Average order value increased nearly $61, an approximate 6% increase on a quarterly sequential basis and 5% year-over-year. As a result, average revenue per customer was more than $300 for the first time ever, driving nearly 25% year-over-year and more than 22% on a quarterly sequential basis to $331.

On the cost side, COGS, excluding depreciation and amortization, as a percentage of net revenue improved to 59.4%, a 10-basis point improvement quarter-over-quarter, and a 60-basis point improvement year-over-year. The improvement in COGS largely reflects our continued focus on cost efficiencies, which more than offset front line wage and attendance bonus investment made in our fulfillment centers during the pandemic.

Product technology and G&A, or PTG&A, costs declined 7.5% year-over-year to $32.5 million and 470 basis points to 24.8% as a percent of net revenue, reflecting our ongoing commitment to cost discipline as well as a benefit in the latter part of the quarter from the closing of the Arlington, Texas facility in May. PTG&A costs declined 5% quarter-over-quarter and 880 basis points sequential improvement as a percent of net revenue.

On the bottom line, we reported net income of $1.1 million compared to a net loss in the first quarter of 2020 of $20.1 million and a net loss of $7.7 million in the second quarter of 2019. Adjusted EBITDA for the second quarter was $11.1 million, representing a nearly $17 million improvement quarter-over-quarter, driven primarily by higher net revenue, efficiency we are achieving in our fulfillment center network and our continued focus on cost optimization.

Finally, we generated operating cash flow in the quarter of $15.7 million and free cash flow of $14.4 million, which drove a significant improvement in our quarter-end liquidity as we exited the quarter with $45.4 million of cash and cash equivalent.

Now turning to our financial outlook. Let me preface our Q3 guidance by sharing some assumptions. Given our efforts on customer retention, we continue to believe that a portion of the demand increase we have experienced over the last few months, driven by the consumer response to COVID-19, can be sustained both through the end of this quarter into the fourth quarter, and potentially, beyond.

Having said that, we want to remind you the normal seasonality in our business without the impact of the pandemic, whereby demand in the third quarter of the year has historically been below levels in the first half of the year. And we also typically have some higher costs associated with shipping boxes in the summer months due to warmer temperatures.

In addition, as Linda mentioned, we recently began re-introducing some marketing and promotional programs on our business as we strategically focus on further customer attraction and retention at a time when we believe that interest in cooking at home continues to be on the upswing.

Our guidance also assumes both a consistent benefit to our business from our execution of our strategic growth initiatives as well as continued higher levels of demand, to some extent, from COVID-19-related changes in consumer behavior.

Further, our guidance assumes that we will not experience any significant disruptions in our fulfillment center operations or supply chain as a result of the pandemic.

Reflecting these factors and assumptions, we are expecting net revenue in Q3 to be approximately $112 million or approximately 13% greater compared to Q3 2019.

We expect to incur a net loss of no more than $18 million in the third quarter and adjusted EBITDA loss of no more than $8 million.

As we announced in February, the company's Board of Directors continues to evaluate a broad range of strategic alternatives to maximize shareholder value, including to support the execution of the company's growth strategy.

For easy reference, a reconciliation table from our net loss to adjusted EBITDA is included in our earnings release, which has been posted on Blue Apron's Investor Relations website.

Linda and I will now take your questions. Jamie?

Sorry, everyone, just give us a minute while we get our operator to queue up questions.

And ladies and gentlemen, this is the conference operator. Are you able to hear me now?

Yes, we are.

Yes.

(Operator Instructions) Our first question today comes from Maria Ripps from Canaccord.

Good morning, and congrats on a strong set of numbers.

Thanks, Maria.

Thank you, Maria.

Is there any way to break out how much of this strength in the quarter was due to COVID versus your product and marketing efforts? And I know it may be a difficult question to answer, but is there anything in the marketing funnel that sort of gives you any clues? And do you know the comment on whether reduced churn had a significant impact on customer growth, or was it mostly about gross adds?

Tim, do you want to start and then I can follow up?

Yes, absolutely. There's no doubt that a decent portion of the net revenue growth in the quarter was driven by the consumer behaviors resulting from the pandemic. But we're also pretty confident that a good part of it was due to our growth plan. And for a couple of examples, in Q1, we were already seeing really good improvement in our customer metrics, and saw that sequential quarter-over-quarter revenue growth. So we're already kind of headed in a good direction. Obviously, that got accelerated and we got back to year-over-year growth sooner than expected in Q2 with some help from the change in consumer behavior. But we're also still fairly confident that some portion of that was driven -- or a good portion of that was driven by our growth initiatives.

A good example is -- and one of the things that Linda talked about -- was we had a very successful piece of innovation in the first quarter called Premium, where we offer this product that has an enhanced kind of experience at a higher price point. And that alone continued over -- contributed over a third of the 5% year-over-year increase in average order value. So we know that things like Premium are actually helping to drive the metrics that are driving the overall revenue. Beyond that, to try to sort of parse out exactly how much of it was driven by changes in consumer behavior from the pandemic versus the other things that we're doing, it's hard to say.

But probably the other part -- and this is also something that Linda and I both talked about -- is even as we see changes in consumer behavior that we assume are partly being driven by the COVID pandemic, we also see indications that some of those consumer behaviors are going to be sticky. And so as we move forward, we're pretty confident that the growth initiatives and the strategy that Linda laid out, and that we've been executing since late Q4 of last year, will be what we need to basically support the consumer demand and drive growth going forward.

Yes, just to follow on with that, we don’t specifically talk about our churn numbers publicly. But what we can say is that a lot of what we've seen from the traction is both re-engagement of existing customers as well as new customers coming into the pipeline.

And a big part of what we're looking at, when we think about the combination of the strategy along with the increased demand, are things like AOV and some of our orders per customers numbers, which were extremely stronger in the quarter. And that really is an indication of how people are engaging with these new products, and in particular again, Premium that Tim mentioned before. And that stayed fairly steady, along with some of the other engagement programs that we're doing to retain customers in the long term as things continue to ebb and flow externally.

Great, thank you. And maybe one more question if I could. So you guided for year-over-year revenue growth in Q3, which is great. Any thoughts you can maybe provide on the building blocks for the growth in the context of customer growth, orders per customer and AOV? And do you think the profile looks similar to what sort of we saw here in Q2?

Yes, we're not guiding on the specific metrics. And part of that is there's still a lot for us to learn about what the impact of and the combination -- just like that last question we answered -- the combination of changes in consumer behavior are interacting with our continued focus on our growth strategies. But for us to continue to grow, we're going to continue to need to see improvement in those consumer metrics. So hopefully, the combination of those 2 things continues to drive growth across those metrics. But we're not really, at this point, going to guide specifically. But yes, as we move forward, I need to see improvement in those consumer metrics to drive that growth.

I will just add on to that as well, noting that we had previously mentioned that we were looking to see year-over-year growth -- this is last year when we were talking about our strategy -- looking to see year-over-year growth in the second half of the quarter. And as we noted in our comments -- or sorry, second half of the year. And as we noted in our comments, we didn’t see that accelerated, but we were anticipating strength based on the strategic initiatives that we were putting into place in the business to see year-over-year growth in Q3.

Got it. Well, thank you very much. Appreciate the color.

(Operator Instructions) And our next question comes from [Ari Cole] from Cole Capital. Please go ahead with your question.

I'm glad to hear that everyone is well, and thank you for doing this call. First question, Linda, is regarding customers who you surveyed about interest in ordering a 4th meal per week on a 2-meal plan, can you give me a sense of what percentage of customers in actuality in Richmond and in these surveys indicated an interest in ordering a fourth meal a week in Signature [too] if it was offered?

Yes, we're not actually talking about specific numbers on that. But I can tell you that demand and interest were strong enough that we accelerated the rollout to all Richmond customers as quickly as possible based on what we were seeing from the demand. And we're working, of course, to get that nationally as quickly as possible. It's important to note that we had been doing surveys on this for quite some time even pre-COVID. And this was something that was requested by our customers even before COVID started.

So there was already a strong base and indication that long term, having more meals in the box would be an interesting option for people on the 2P plan, given the 4P plan already has that ability. And so we've seen that come through in the pull-through that we've seen on the Richmond Program. So we can't reveal specific numbers, but it has been a positive impact.

Got it. And then a year ago, at the Canaccord Conference, you'd mentioned that you were going to provide more offerings and customization to customers approximately by the summer of 2020. Can you kind of give us an update on how those expected changes are -- the time line for those being offered to customers?

So as we mentioned in some of the comments even last quarter, we are staying very focused on the strategic initiatives that we wanted to roll out, as we think that they are an asset in both again, non-COVID times, but also as we want to engage and retain customers that have come in during COVID as well. And so a lot of that work is still in progress. We did have to push some of it back slightly in order to accommodate the additional demand that was coming in over the early part of Q2 and, of course, into a little bit later Q2 as well, but not significantly.

So we are continuing to work on it, but not giving specific timelines. And we are full steam ahead on our strategic priorities when it comes to those 3 things that I mentioned earlier, and things like choice and variety. We just wanted to make sure that we were doing everything we could to meet demand and also keep our employees safe during this sort of unusual time that came in in the middle. But it hasn’t changed our trajectory when it comes to our strategic rollout.

Okay. And just a last question about partnerships. I know you'd announced one 6 months or so ago. But what's the situation with trying to arrange and launch and get traction on partnerships with other entities to try to kind of drive subscriber additions, such as related to people, let's say, who have diabetes, etc.

Sure. So we are still very engaged with the American Diabetes Association and also with our WW partnerships; those are still ongoing. We have added some additional work with places like HBO and also AAA, and we continue to build out those partnerships throughout the year as we move forward. And so I can't really comment on what's coming up, but we do continue to look at partnerships as one of our strongest strategic levers that we can pull when it comes to driving new customer growth.

All right. Okay. Well, listen, best of luck and thank you.

Just checking in on the operator again. If you're able to -- we can't hear you currently.

And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the conference call over to Ms. Kozlowski for any closing remarks.

Thank you very much, Jamie, appreciate it. And so thank you very much for everyone for joining the call. On behalf of everyone at Blue Apron, we want to wish you, your families, colleagues and friends, well in these unsettling times. I'll let you know that our teams are working very diligently and effectively to bring incredible home cooking into people's homes. And we look forward to providing an update when we report our third quarter results in the Fall.

Ladies and gentlemen, we thank you for joining today's presentation. The call has now concluded. You may now disconnect your lines.