Blue Apron Holdings, Inc. Price & Performance (APRN)

The company specifically disclaims any obligation to update these statements. During this call, the company will be referring to non GAAP measures, which are not prepared in accordance with Generally Accepted Accounting Principles. You are encouraged to refer to the earnings release and SEC filings where it has defined these measures and to review the reconciliation of these non GAAP financial measures to the most directly comparable GAAP Measures. With that, I would now like to turn the call over to Linda Findley, Blue Apron's CEO. Linda?

Good morning, everyone, and thank you for joining us. On the call with me today is Mitch Cohen, Blue Apron's Interim CFO. We had a very busy Q2, and I'm excited to walk you through our work and more importantly, what it means for Blue Apron going forward. Let me open with 2 important comments. First, profitability. We have established a clear path to achieve adjusted EBITDA profitability, which we expect to reach starting in the Q2 of 2024. This follows several strategic actions taken to reduce costs, increase marketing efficiency and position the business for long term 2nd, liquidity. Our internal model reflects sufficient capital from our operations to achieve our adjusted EBITDA profitability goal to continue to move the business forward. This is based on aggressive cost reductions and the shift to an asset light model. Now let me dive into our Q2 2023 results. We delivered a strong quarter. To set the stage, While the Fresh Realm transaction closed in the last month of the quarter, the improvements I will share were before the benefits of the transaction. Let me start with the cash burn reduction. This quarter, we implemented additional efficiencies continuing the work we accomplished in the Q1.

As of June 30, our quarterly cash burn in operating activities improved by approximately $13,200,000 compared to the Q2 of 2022, reflecting a 72% year over year improvement. This follows the 67% year over year quarterly improvement recorded as of March 31. The timeframe to reduce cash burn is exceptional, and I want to recognize the team's incredible efforts to deliver these impressive results. While we plan to continue to aggressively manage our cash burn in the second half of the year, we anticipate it will increase slightly in the 3rd 4th quarters in line with typical seasonality. Even with this seasonality, the actions we are taking are expected to get us to adjusted EBITDA profitability in Q2 of next year. We do plan to invest slightly in more marketing now that we are seeing payback periods well below a year and at the lowest level in 8 quarters. I will touch on this more in a bit. Staying with the balance sheet, we are now a debt free company. With a portion of the proceeds of the transaction, we repaid our remaining senior secured notes in full. This provides us greater flexibility as we are no longer subject to a minimum liquidity covenant.

We now have unrestricted access to all of our cash and have eliminated all the costs associated with the debt. Moving to our goal of adjusted EBITDA profitability, we are ahead of plan. This quarter, we significantly reduced our EBITDA loss by 84% year over year and 70% sequentially to a loss of $2,600,000 Our increases in efficiency across the business also drove strong margin improvement. Variable margin was 37.9% in Q2, our strongest margin performance since 20 and a notable increase from 35.8 percent in Q1 2023 and 34.7% in Q2 2022. The strong performance was driven by rigorous cost management and productivity improvements implemented prior to the transfer of our operations to Fresh Realm. Mitch will discuss how we plan to look at margins moving forward in a bit. In parallel with financial and operational management initiatives, We continue to see record customer engagement metrics. Average order value hit another high at over $75 up approximately 8% versus Q1. Average revenue per customer improved significantly to $3.97 another record high. Key drivers were a price increase that we implemented in May of 2023, optimization of promotional and marketing spend, and more importantly, strong engagement from our repeat and tenured customers.

The value we provide our customers is evidenced by consistent orders per customer, which was $5,300,000 for the quarter. As I have shared before, the longer a customer is with us, the more they tend to spend over their tenure. Total customers in the 12 months ended June 30, 2023, was 679,000 compared to 687,000 in the equivalent prior year period. Total customers in the Q2 was 267,000 compared to 326,000 in the Q1 of 2023 349,000 in the Q2 of 2022. We anticipated this decline in customers as we deliberately reduced our overall marketing spend. In the Q2, marketing spend was $9,400,000 a reduction of 36% sequentially and 57% year over year. At the start of the year, under the leadership of our new Chief Revenue Officer, we implemented an improved testing program. The goal is that every marketing dollar we invest delivers on our targeted payback period, while also attracting the right customer. With over 6 months of testing under our belt, we have identified what we believe is the right formula to move to more effectively target the next dollar. And all of this is paying off. In Q2, we saw significant improvement in payback periods at levels far less than our 1 year target and efficiencies better than Q1.

Cost per acquisition also improved by 30%, while conversion rates improved by 25% year over year during the Q2. In addition, our average weekly retention is the strongest it's been in 5 quarters even with the recently implemented price increase. We were able to make consistent and repeatable improvements while continuing to leverage our strong brand. Given our success so far And as we capitalize on our new asset light model, we are increasing marketing slightly in the second half of the year. We plan to stay within our targeted 1 year payback period and expect our investments to come to fruition in 2024. To summarize the Q2, we now have a stronger balance sheet, no debt And significantly lower cash burn that positions us to meet our goal of adjusted EBITDA profitability in the Q2 of 2024. Now I want to take a moment to discuss our strategic path forward. During our 2022 Investor Day, we laid out our 3 year The Next Course strategy aimed at achieving long term sustainable growth and reaching profitability. A key component of this strategy focuses on building an Ecosystem of partners and relationships that furthers our vision of better living through better food, which now includes Fresh Realm as our fulfillment partner.

Transferring our operational infrastructure to execute our asset light strategy allows for efficiency to enhance shareholder value while balancing growth. We retained our full direct to consumer business, including all aspects of creating and marketing our delicious recipes along with the data and technology to support that work. Under our asset light model, we removed our direct role in fulfillment of our meal kits, allowing us to be more agile and focused on new product innovation. The benefits of this shift are clear. 1st, this model has a significant impact on both fixed and variable costs to drive further efficiency. In selling our production and fulfillment infrastructure, we unburden our fixed cost base within PTG and A. Under the new partnership, we are taking on a fixed PTG and A fee. This fee is lower than our current run rate costs and will decrease further at the beginning of 2024. As we continue to scale our business, we expect to see this structure be more efficient, especially with the removal of a large portion of direct fulfillment overhead costs, such as personnel costs or depreciation and amortization associated with growth. Last month, We also executed our previously announced reductions in corporate headcount to streamline our business to match our asset light model, resulting in an approximately 20% reduction of position.

These actions will drive approximately $7,000,000 in additional annualized savings. In addition to the other transaction work we've done, We believe that we are on track to achieve the financial and cost savings milestones to receive an additional $4,000,000 in funding from Fresh Realm payable to us starting in the Q4. Looking at variable costs, we anticipate improvements as a result of the asset light model. While Blue Apron retains control of the quality and supplier standards, we believe we can leverage Fresh Realm's scale in labor, food, packaging and logistics. This should drive variable cost efficiencies in the longer term. 2nd, through this partnership, we have the ability to introduce new products quickly and efficiently without compromising on quality. Blue Apron was previously Without compromising on quality. Blue Apron was previously limited to the capabilities of its own fulfillment centers. Now we are able to leverage FreshRome's Starting in the first half of twenty twenty four, we are introducing even more convenient meals on the menu. These new no prep options will enhance our current offerings, while also allowing us to target a new set of time starved health conscious consumers. 3rd, as we continue to focus on our products, we now have the capacity to identify new revenue enhancing opportunities.

We plan to do so by leveraging the strength of our brand, Our culinary authority, while taking advantage of their economies of scale. We will share more details as the work progresses. In summary, the team's ability to realize significant cost savings, improving marketing efficiency and close a complex and strategic deal to Transition Blue Apron to an asset light business model is poised to the future, in my view, remarkable. As I have stated before, it is my belief that the industry is fragmented and is ripe for consolidation. And as an asset light business, we can be more opportunistic. As such, we plan to continue to look at strategic opportunities that make sense for the company and its shareholders. I am energized and optimistic. The work we have done over the past 2 quarters to stabilize the business, including the Fresh Realm transaction and position it for growth allows us to reissue guidance for the first time since the second of 2022, which Mitch will touch on shortly. We look forward to speaking with many of you at upcoming conferences this fall. With that, let me turn things over to Mitch to run through our financials.

Thank you, Linda, and good morning, everyone. I'll first begin with an update on our balance sheet and liquidity position before diving into the quarter's performance. Our cash balance at the end of the second quarter was approximately $30,000,000 as compared to $31,600,000 at the end Q1 2023, and we are now a debt free company. This reflects a number of factors. First, it's inclusive of $23,600,000 upfront net cash proceeds as received from part of the transaction. 2nd, it reflects the repayment of our Remaining senior secured notes in full, dollars 22,500,000 of which were postpaid in the 2nd quarter. This is beneficial for two reasons. 1, it removes the restricted covenants previously in place, which allows us to be more flexible with our cash balance moving forward and 2, It eliminates the over $2,500,000 of annual interest expense. Our cash balance was not materially impacted by the aftermarket offering launched in February of 2023. We sold a minimal number of shares at the beginning of Q2 with almost 66,000,000 of the 70,000,000 still available as of June 30. However, as Linda noted, Our plan has us reaching adjusted EBITDA profitability in Q2 2024 without the need to access the APM.

In addition to the cash proceeds from the transaction and the accelerated debt pay down, you'll notice the following changes to our balance sheet as a part of the transaction. 1st, at the closing of the transaction, we sold and transferred to Fresh Realm all inventory related to our meal kits. The remaining $2,300,000 in inventories reflect Blue Apron wine and marketplace items. 2nd, we have a $3,500,000 seller's note receivable, Net of discount issued to us by Fresh Realm. That reflected in our balance sheet is the up to $4,000,000 in cash consideration payable to us by FreshRealm starting in the Q4, if we achieve the cost savings and financial milestones. As Linda mentioned, we have made significant Progress towards meeting these financial goals to reach the milestones. Also not reflected in the Q2 balance sheet are the expected annualized cost savings of approximately $7,000,000 resulting from the July corporate workforce reduction. Our plan reflects significant capital from operations to Sufficient capital from operations to achieve our adjusted EBITDA profitability goal and a continuing revolver of business. However, We also believe it's important to maintain optionality in our access to capital at all times. In reference to Mr. Sandberg and his obligation, With the removal of our debt and the closing of the Freshman Home transaction now behind us, we are able to operate the business independent of those funds to achieve our near term plans.

However, Mr. Sandberg remains obligated to fund the $68,200,000 and we are refocused on monetizing some or all of the pledged collateral in an intentional manner to Optimize value. We continue to pursue all options available to us to receive the amount of. Recall that these are private company shares And therefore, the time line to monetize them might take longer than it would with similar public company shares. Turning to the 2nd quarter results. Net revenue was 106 point was driven primarily by the one time $10,000,000 bulk sale we fulfilled in the Q2 of 2022 as well as the deliberate reduction in marketing spend that led to Customer count and order volume. Our customer engagement metrics continue to strengthen and average order value reached a historic high of 75.66 up 7.7% sequentially and 12.7% year over year due in part to a price increase along with a meaningful reduction in credits and promotional spend. Average revenue per customer climbed to $3.97 while orders per customer was 5.3, our highest level since Q2 2021. Turning to expenses, variable margin was 37.9% in the 2nd quarter, a 2 10 basis sequential increase over Q1 And a year over year increase of 320 basis points.

The improvement in variable margin was driven by our ongoing efforts to drive operational efficiencies through continued cost management and productivity improvements. In the Q2, PTG and A costs were 34 point $1,000,000 a 3.6% decrease sequentially and 12.1% decrease over the prior period. As part of the recent corporate workforce reduction, we recorded $400,000 in one time employee related expenses, primarily consisting of severance payments in the Q2. We expect to incur $1,300,000 similar one time expenses in the Q3 of 2023. Substantially, all of these Expenses will result in cash expenditures. As a result, we expect these headcount reductions to result in additional annualized cost savings of approximately 7,000,000 Free cash flow was a negative $6,100,000 an improvement of 69% year over year. Factoring the funds received from the transaction and the repayment of the our outstanding senior secured loans, our sequential net balance decreased approximately $1,500,000 in the second quarter. Looking to the bottom line, we reported a net loss of $61,900,000 for the 2nd quarter compared $23,300,000 in Q2 2022 $17,000,000 in Q1 of 2023. Excluding the one time impact of the transaction's Non cash loss of $48,600,000 net loss for the quarter was $13,300,000 In the second quarter, adjusted EBITDA was a loss of $2,600,000 compared to $16,200,000 loss in the Q2 of 2022, an $8,700,000 loss in the Q1 of 2023.

Our continued focus on driving operational efficiencies to streamline the cost structure has helped drive 3 consecutive quarters of reductions in adjusted EBITDA loss. The move to an asset light model will help decrease in costs and improve our overall margin profile from a variable and fixed cost perspective. Let me briefly touch on some of the changes to our P and L that you will see going forward. For variable costs, with FreshCoM assuming the production fulfillment of the majority of our products And cost of goods sold will include the following components: recipe ingredients costs, which will be a per meal cost charged to us by FreshCoam based on the inputs and contents of an inclusive of labor. New product initiative product costs, fulfillment costs, which will include fulfillment packaging and shipping costs and inclusive of fulfillment labor, The margin fee charged by Fresh Realm and other, which will include some of the production fulfillment items we retain, such as wine and market items. We believe we will directly benefit from Fresh Realm's economies of scale and sourcing and labor costs to drive improved variable margin going forward. As part of the transaction, Blue Apron is eligible to receive up to $17,500,000 of volume based rebates from Fresh Realm in 2024 2025 based on future meal kit volumes, certain new product initiatives and achievement of financial targets by us.

If earned, These rebates could contribute to the reduction in COGS and an improvement in variable margin beginning in 2024. Moving to our fixed costs. We will maintain most of our previous line items with material changes in 2 specific areas. 1, We will incur an annual baseline PPG and A fee subject to adjustments representing the operating overhead costs passed out to us from Fresh Realm. Starting in 2024, the fixed fee will be approximately $10,000,000 sizable reduction to previous run rates of our by operating of our own facilities. 2, depreciation and amortization will be minimal going forward as we will no longer own heavy assets and instead would be primarily expense to internally developed software. Blue Apron now has a lean fixed cost that can support foreseeable growth and allow us to drive operating leverage. Our plan assumes minimal capital investments going forward. We believe that our shift to an asset life model will yield significant benefits to our business and will continue to focus on optimizing our cost structure. The sale of our product and production fulfillment center, Operational infrastructure to Fresh Realm will positively impact the PTG and A line. And as Linda mentioned, we executed a planned corporate workforce reduction to accommodate our new model.

With the closing of the transaction, together with an additional planned streamlining efforts we previously identified and will continue to implement, are now in a position to provide financial guidance for the first time since the Q2 of 2022. Our guidance and targets reflect assumptions about our business, including anticipated benefit of the shift to an asset light model, as well as the expected benefits of our expense management initiatives, our ability to create new product initiatives, The ability to generate the volume needed to earn the $17,500,000 in rebates, the achievement of certain financial and cost saving Milestones to earn up to $4,000,000 of additional cash consideration for Fresh Realm, the realizing of the benefit of the $3,500,000 seller note, Fresh Realm's ability to cost effectively price the production and fulfillment of our meal kits and other products and that we will not experience any unforeseen impacts Increased impact from macroeconomic trends. By year end 2023, we expect our net revenue and customer count to be lower year over year due to the deliberate actions we have taken to manage marketing spend and efficiency. Specifically, we expect net revenue for the year to be in the range of $410,000,000 to 415,000,000 Adjusted EBITDA loss in the range of $27,000,000 to $23,000,000 Looking ahead as we announced in June, Blue Apron expects Adjusted EBITDA profitability in the Q2 of 2024.

We expect the year end 2024 to be adjusted EBITDA profitable and Thank you. We will now begin the question and answer session. Our first question comes from Dan Kurnos with Benchmark. Please go ahead.

Great. Thanks. Good morning. Nice to hear the progress. Linda, can we just talk a little bit in the first just in the shorter term on your comments around marketing spend. I know we've talked about Kind of the toggle between sort of AOV and promotional spend versus customer acquisition. And I'm assuming there was probably some noise The second quarter just due to all of the things that you had going on, the strategic changes that you are making. But you've talked about kind of leaning in little bit into Q3. So I just want to understand, are we trying to target again sort of a smaller core base that spends more or At least for now, some of the new initiatives get ramped or just how should we think about kind of that balance of AOV versus kind of Adding new customer adds.

Yes. Thanks so much, Dan, for the question. So you're absolutely right. We are planning on continuing To focus on profitability and that means focusing on the customers who are going to be The best customers for us going forward, making sure that we're creating value for those customers and driving the right balance of promotion versus marketing spend. We are encouraged by the fact that we continue to see those improvements in our marketing spend, which is why we feel confident in a slight lean in, in marketing At the end of the year to basically prepare us for 2024. As you know, it takes a while for some of those to come to fruition. But we've actually evened out on a pretty reasonable promotional level. So that's been positive while still being able to drive return on the business from a customer perspective. So, we are that's part of the reason we wanted to make sure that we guided going forward because as we've said all along, we're going to be focused on customers or we're going to be focused on profitability And making sure that we do that through the highest value customers, not necessarily focusing on large acquisition pushes, But we can lean in with significant efficiency in our marketing based on the testing and learning that we've done over the last 6 months.

And just to kind of it's helpful. And just to kind of piggyback off of the way that Mitch just closed that for next year, I mean, just Revenue growth like you've got new initiatives. How do we think about kind of the balance of the growth From here, like what's kind of the base do we bottom in 'twenty three in terms of customer count And it grows from here? Does AOV grow? Is it new revenue lines? Like can you just kind of talk through the puts and takes as we think about the setup for 2024?

Yes, you are correct. It does bottom out in 2023, and that is that's the intent and that's what we're planning to do all along to make sure that we drive toward Profitability as we think that is the most important goal is to reach adjusted EBITDA profitability starting in Q2 and full year adjusted EBITDA Profitability and revenue growth in 2024. So that is really our primary focus. So you'll see it kind of again continue Stay muted this year as our guidance indicates, while we gear up for new product launches next year that will combine with our existing product Strength and marketing efficiency that we've actually gained to be able to lean into profitable growth in 2024.

And just maybe a housekeeping point on that, like as you launch new product initiatives, given that you can leverage FreshCo's Capabilities, like how do we think about either the margin profile or your ability to kind of lean in and support New product launches next year.

Absolutely. I mean, as you can tell from the comments that we've made and the progress we've made when look at last year compared to this year, the reduction in cash burn and the significant improvement year over year in adjusted EBITDA profitability, You can tell that we are laser focused on margin and that will include the new products that we launched, making sure that those that they meet our margin profile And continue to drive the ability to leverage the Fresh Realm infrastructure that is significant and has the ability to produce more types of products than we were able Our next question comes from Maria Ripps with Canaccord. Please go ahead.

Hi, good morning. This is Matt on for Maria. Thanks for taking my questions. So Q2 revenue was understandably soft given the heavier quarter for travel activity, lower marketing spend and the one time bulk comp. But could you maybe just provide some color on what you're seeing in terms of the macro impact on consumer demand for meal kits? And then I just have a quick follow-up.

Yes. So, I mean, we are still seeing some cautiousness in the macro environment, but it's interesting because as we look at our business and the progress we've made in our marketing Efficiencies, we're actually seeing very strong repeat purchases. So that 5.3 orders per customer per quarter It's quite strong, particularly for Q2, where you start to normally see a bit of a seasonal dip and especially, in concert with the pricing change. So we're really actually happy with the fact that even though you are seeing overall still a little bit of muted acquisition, when it comes to consumer spending, At least what we're seeing in our business based on some of the changes we've made is very high, average order Orders per customer per quarter, which is at 5.3 percent great AOV, so willingness to purchase and seeing the value within the business. And we are seeing increased retention. So those are all really positive for us and we see those as positive indicators of the future, Even though we are still seeing a little bit of a macro muting when it comes to overall acquisition. All that being said, we did also comment that we are seeing conversions approved by 25% year over year.

So that is also quite positive for us as well.

Got it. Thanks. That's very helpful and kind of answered my second question, which I was just curious about the consumer the customer reaction to recent price increases, but sounds like it wasn't you didn't see A major uptick in churn or anything, but could you maybe just also just talk about your capacity for future price increases and how you feel the offering is Price relative to the industry at this point?

So absolutely, we're still priced the same or lower than our competitors in the industry with extremely high Quality products, we've maintained our stance on quality, food quality and also recipe quality. So we're very happy with that. What we did see with the pricing change is better than expected retention after the pricing change. And again, we are still seeing a little bit of softness in But we did see that 25% increase in conversion year over year. So that is a positive indicator. We tend to think about future We want to make sure that we're always staying priced within the correct, point for Value for the customer, we want to make sure that they feel value from that product going forward. And so we'll keep an eye on any Pricing changes that might make sense either based on inflationary pressures or not, but our biggest focus is making sure we drive value for And given the fact that we are priced in line or lower than our competitors, we feel that we do that quite well.

As we have no further questions, ladies and gentlemen, this will conclude today's question and answer session. I'd like to turn the conference call back over to Linda for any closing comments.

Thank you, everyone, for your time today. We really look forward to providing an update on all of our efforts soon. And in the meantime, if you have any additional questions, please don't hesitate to reach out to us directly. Thank you.