Q2 2021 Blue Apron Holdings Inc Earnings Call

Were not prepared in accordance with generally accepted accounting principles.

And we're encouraged to refer to the earnings release, and SEC filings, where it has been 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 are included in our earnings release, which is available on the company's Investor Relations website located at investors day at Blue apron Dot com under events and presentations.

With that I would like to turn the call over to Linda Linda Findley, Kozlowski Blue apron CEO.

Thank you Betsy and good morning, everyone and thank you for joining us today.

Our second quarter results once again highlight the sustained effectiveness of our growth initiatives in particular, our focus on attracting and retaining high value customers through ongoing product innovation.

Adding variety and flexibility and choice has allowed us to offer more ways to bring blue apron indications each week.

This has resulted and consistent growth over a customer value as demonstrated by our key metrics, including the third consecutive quarter a record average order value.

In addition, second quarter adjusted EBITDA exceeded our guidance.

Net loss also exceeded guidance after adjusting for a noncash charge associated with a financing agreement amendment and May which Randy will discuss further.

Net revenue was in line with our expectations, even without the benefit of the approximately $2 million a recovered customer credits relating to a supplier recall on 2020.

Turning now to from second quarter highlights. The continued progress we have seen with our growth strategy is reflected in a sustained levels of heightened customer value. Even if more people are being vaccinated and travel is increasing.

Orders per customer were in line with a strong quarterly levels, we've been recently delivering and average order value increased both year over year and from Q1 to Q2, reaching a record level.

As a result average revenue per customer was above $310 for the fifth consecutive quarter, the only quarters and which we have achieved that milestone since 2015.

Given the return a seasonality we typically experience between Q1, and Q2, and a Q2.2020 debt.

If it had the most from the spike in demand due to the pandemic. We saw a total customers declined year over year and a quarterly sequential basis. However, this decline was at levels within our expectations.

Our solid second quarter results reflect a return to a more normalized environment.

Throughout the pandemic, we've tried to customer behavior by geographic region to understand the impact on our business as restrictions ease.

And with more of a country open and we continue to analyze the same geographic data points. The order rates are encouraging even in places that previously had more stringent restriction.

The internal data indicates that while the pandemic accelerated a heightened consumer awareness and interest and meal kits as well as cooking more at home. It's a trend we expect a carry on for some time on.

Our goal is to continue to implement initiatives that helped differentiate blue apron and from our peer set and grow the value we derive a lot of our targeted consumer groups.

This consumer segment places a lot a value on high quality unique ingredients and easy to Cook delicious recipes.

We are achieving this goal as illustrated by our average revenue per customer, which is up 25% or approximately $65 to $330 compared to the second quarter a 2019.

Our strategy to achieve this goal is founded on a consistent introduction of new products to create deeper connections with our customers compared to 2 years ago, we now offer significantly more choices and more variety.

Our menu has grown to a 43 weekly options compared to 17 and August of 2019.

As a result every time a customer orders from blue apron today, they have more variety to choose from including select a select customizable recipes that allow them to personalize their order to meet their lifestyle.

As we discussed this lease leads to average order value increases and average revenue per customer increases as well as customer retention and engagement.

For this and we saw a 26, 7% improvement and average revenue per customer for repeat customers compared to the second quarter a 2019.

As I highlighted our new product initiatives are directly correlated to the increases we are generating and average order value.

And Q1 these products in total drove a 14% improvement and a L V, which increased to 16% and Q2.

We expect this will continue to drive improvement to a O V and Q3 and again in Q4, even before the introduction of other new products currently on our 2020.1 roadmap.

The product that has and continues to drive the highest increase and a O V on a dollar basis as a premium offering it.

It contributed a blocks approximately 68% of a year over year improvement and a O V and Q2.

This offering feature a specialty proteins and fats culinary techniques and unique flavors, which helped drive repeat customers.

On average in Q2.78 per cent a premium orders each week, a repeat premium customers.

The next key driver of customer engagement retention and average order value is customization.

We offer the option to swap add or upgrade and ingredient and for like to enforce serving recipes.

In addition to paying more per box customers who've tried these recipes tend to order at a higher frequency and churn at a lower rate compared to similar ones who've not tried this option.

We also continue to add more personalization and the menu and anticipate that in Q3, a this year, 50% of a signature menu will be customizable.

And the second quarter, we introduced 2 new products that are also helping drive a or b add ons and craft broker both for created in part and response to feedback and as we continue to look for ways to delight customers and meet their needs and kitchen.

Add ons, which are available on our 2 and for serving menus are a simple way to add an appetizer aside dish and or a dessert to a box each week.

This offering allows customers to add more blue apron to their table or it can be used for different meal occasions like a weekday lunch.

Add ons is off to a strong start almost 7% of our active customers have tried the offering at least once since it was launched in mid may.

We believe interest and this offering will continue to grow, especially as we look for ways to expand and promote it overtime.

Building on the success, we've had with a premium offering our culinary team is taking menu items that we know our customers love and elevating the mail experience.

Ross Burger is the first product we introduced under this new menu option and it has been proven to be popular so far.

Since we started shipping it to customers' homes and mid June craft Burger has received high ratings and is already a responsible for 2% of the total Q2, a O V improvement even though it was only available for the last 2 weeks for the quarter.

I'd also like to highlight the different ways, we're expanding variety on our menu as a whole. We recently introduced increased our 2 serving menu to include 16 recipes and a 4 serving menu to include 8 recipes.

We also introduced the option to double the amount of a serving size on select 2 serving recipes, which allows customers to have both 2 and for serving recipes and a same box for a different needs during a week or 2 enjoy leftovers.

We expect both of these initiatives will help drive order frequency going forward.

Lastly, we are also working to grow blue apron wine as the only meal kit company and the U S that offers a monthly wine subscription expanding this offering will allow us to continue to give our customers more ways to bring blue apron into their homes.

Under the leadership of our in house wine team and we are continuing to expand and enhance our accustomed blue apron wine program.

We are now offering select 750 million or bottles on our online market. In addition to the 500 milliliter bottles. We currently offer as part of a monthly subscription.

These are just some of the product innovations, we've introduced which are helping to drive higher average order value on a consistent basis.

Similar to many successful e-commerce companies across our industries. Our objective is to provide our customers with a wide variety of products. They can add to their existing box.

We are planning for a more coming down the pipeline as part of our 2020, 1 product roadmap and believe these new additions will help drive further improvement and key customer metrics.

Shifting now to our marketing efforts, we continue to lean into partnerships with a well respected and recognized brands as a driver of customer engagement retention and value.

2 weeks ago, we announced a collaboration with partnership for a healthier America to create pass the love boxes. These.

And these boxes were developed by our in house culinary and nutrition experts, along with former White House, senior and nutrition policy adviser and chef and cash.

Inspired by a episodes of the Netflix show Waffles and mochi.

Each box includes 3 easily replicate recipes designed to get a whole family cooking together.

These boxes are on most affordable yet at $6 per survey and will be available for a limited time.

We are very excited a partner with PHA to highlight the benefits a home cooked nutritious meals.

A partnership with chefs and cash will continue into the coming months.

He also developed special recipes that will be available on our menu starting August 9th.

In addition, we recently announced new sustainable packaging goals by.

By the end of 2025, we expect to have the packaging and a meal kit to be 100% recyclable reusable or compostable, and we have 75% consumer post consumer recycled content by weight.

The past a lot of boxes and a new packaging sustainability goals are part of our aprons for all initiatives through aprons for all we're dedicated to managing the environmental and social impacts a bar business to support and ethical resilient and food system.

In summary, we continue to make consistent progress across our business to build on blue apron, and strong foundation and generate sustainable topline growth and achieve positive adjusted EBITDA on an annual basis, starting next year.

We are proud of the success of our revenue and building and product initiatives and partnerships and marketing efforts all of which are contributing to growth and our key customer metrics.

We initially launched our growth strategy 2 years ago, and we're thrilled to see the results they continue delivering.

As always we appreciate a longstanding customers as well as those who have recently turned a blue apron and we take seriously our commitment to provide every customer that invites us into their homes with a quality meal experience and world class service.

Looking at the growth of our key customer metrics, it's clear that those who invited us into their kitchens and see the value a blue apron, and and what we offer and continue to order from us.

We're striving each and every day to further improve so that we can retain our current customers and grow the value, we derive from them and attract new ones.

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

Thank you Linda and good morning, everyone.

Delighted and this morning's release, our second quarter revenue a $124 million.

And in line with a guidance we provided in May.

Net loss when adjusting for a onetime non cash charge of $4.1 million associated with the amendment of our financing agreement with also well ahead of guidance as well as adjusted EBITDA.

Net revenue net loss and adjusted EBITDA. All included the recognition on the recovery of approximately $2 million.

A customer credits that we issued and the 2023rd quarter related to a voluntary recall of on me.

Second quarter keep the outperformance was again driven by a more extensive menu offerings and the continuation of our successful partnerships and the rollout of new products, such as add ons and craft Burger.

Product innovation continues to deliver as a critical component of our growth strategy and we expect to launch additional new products over the balance of this year to provide additional options for our customers to add to their meal kits, resulting in higher average order value and average revenue per customer.

As previously stated we plan to support these expansions with higher marketing spend compared to last year.

Second quarter marketing spend was $16.3 million or 13, 2%, a net revenue compared to $11.6 million or 8.8%, a net revenue and a second quarter a 2020.

Q2, 2020 had low marketing investment as we focused on meeting the heightened demand brought on by the pandemic.

Marketing investment and the first half of 2020..1 was approximately 14, 3% of total net revenue and we expect to continue to spend above last year's levels and the second half of 2021.

Yeah.

Turning now to a review of our key customer metrics, which continue to reflect the benefit from a focus on customer engagement and retention.

We had a 375000 customers and the second quarter of 2021, reflecting a return to normal seasonality down from 396000 and last year's second quarter at the height of the pandemic.

Orders for customer a 5.3 continues to track right around our highest levels reported average order value was a record $63 and average revenue per customer was $330. It's notable that average revenue per customer was more than $310 for the fifth consecutive quarter, the only quarters, and which we have achieved that milestone and prior to 2015.

For you.

On the cost side cost of goods sold excluding depreciation and amortization as a percentage of net revenue increased year over year by 320 basis points to 62, 6%.

The increase was primarily due to increases and inbound freight outbound logistics costs as well as increases in food cost.

Increases in food costs are primarily attributable to investments made and premium ingredients and seasonal fruits, which are components of the enhanced menu and enhanced product offerings choice and variety that we are providing to our customers.

A variable margin of 37, 4% was below what we typically target largely due to the impact of higher logistics costs, which have been well publicized over the last several months and was also impacted by inflationary pressure on a food costs. We continue to look for ways to address these issues, including working closely with our vendors to negotiate better rates we expect.

Variable margin will normalize towards historical levels through the back half of a year as we implement strategies to offset the higher logistics and food costs.

We continued to make progress with our initiatives to streamline operations.

Since we began to implement these initiatives almost a year ago, we have generated improved efficiencies and several areas, including improvements in productivity and increased asset utilization, which has allowed us to absorb the added complexity associated with our new product launches without compromising on ingredient quality.

In addition, we're working closely with our vendors to reduce onsite inventories and we continue to find mutually beneficial opportunities to reduce operating costs without creating supply chain risks a.

Along those lines as we've managed capacity issues. We believe we are able to address current and expected demand from our 2 fulfillment centers and New Jersey and California.

We recently published our Arlington, Texas facility, resulting in a quarterly cost savings for approximately $200000.

Product and technology general and administrative costs for $36.8 million and a second quarter, a 2021 and included higher professional fees and investments made to support the company's growth plan and execution on key business initiatives.

The company recorded a onetime non cash loss of extinguishment of debt of approximately $4.1 million and a second quarter, a 2021, resulting from the amendment of the company's financing agreement and May 'twenty 'twenty 1.

This transaction was concluded to be and extinguishment of the existing debt with the amended debt instrument than initially recorded at fair value and accordance with generally accepted accounting principles.

Other income and the second quarter of approximately $500000 represented a noncash fair value adjustment. This resulted from our obligation to issue warrants to our lenders as long as a debt remains outstanding for.

The warrants obligation as a re measured at fair value at each balance sheet date with changes in fair value recorded in other income or expense.

On the bottom line, we reported a net loss of $18.6 million and and adjusted EBITDA loss of $3.5 million, which as mentioned when adjusting for the onetime charge related to a financing agreement were both better than our guidance importantly.

And importantly, operating cash flow and free cash flow and the quarter when youre, a breakeven levels with both improving substantially as expected from a first quarter a this year.

The improvement and cash utilization was driven by leveraging investments made earlier and the year related to the pre positioning of inventory and other assets that we plan for used to drive our business through the balance of the year. In addition to the normalization of working capital timing.

We expect to see and increase in cash used from operations from the third quarter, which historically is a seasonally cash intensive period, primarily related to fulfilling and a warmer summer months, coupled with a lower seasonal revenue.

Zooming back out cash utilization over the second half of 2021 should be relatively consistent with cash used in the first half with a typical seasonality and our business, resulting and most of this cash burn and occurring and the third quarter for.

Easy reference a reconciliation table from net loss to adjusted EBITDA is included in our earnings release, which has been posted on Blue apron Investor Relations website.

Following our equity offering in mid June, which added approximately $21.1 million a cash to our balance sheet. A June 32021, we had net cash of $18.6 million. This includes cash and cash equivalents, a $51 million and $32.4 million and total outstanding borrowings under the financing agreement.

Of which $28.9 million was classified as a long term debt and $3.5 million was classified as current portion of long term debt.

We continue to evaluate opportunities to further strengthen our balance sheet.

Our guidance reflects certain assumptions regarding our business, including the execution of our strategic growth initiatives planned investment increases and marketing initiatives and ongoing operational improvements. The guidance also assumes that the company will not experience any unforeseen significant disruption and fulfillment operations for supply chain.

With respect to our financial outlook, we remain on track to achieve a high single digit to low double digit net revenue growth. This year compared to 2020 with the expectation that the second half of 2021 will return to growth over last year's second half after the narrow declines and Q2.

And looking further ahead, we continue to expect to generate our first full year a positive annual adjusted EBITDA, beginning with a full year 2020.2.

This expectation reflects our confidence and our readiness to achieve further improvements and a key customer metrics, which we expect to drive topline growth while the business returns to what to what we believe should approximate our historical pre pandemic seasonality and variable margin trends.

With forecasted improving topline, we expect sales and operating leverage as well as continued marketing efficiencies and further cost containment progress and PT G&A expenses.

In summary, we continued to execute well against our growth strategy and strengthen our relationships with our most valuable customers as we look towards achieving positive annual adjusted EBITDA next year Linda.

And Linda and I will now take your questions.

We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

And if at any time. Your question has been interest and you would like to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble a roster.

And the first question comes from Maria reps with Canaccord. Please go ahead.

A good morning, and thanks for taking my questions first and Oh, and then you touched on this a little bit in your prepared remarks, but I just wanted to ask you about what you're seeing and consumer behavior and sort of things for opening up and I are you seeing any changes in terms of how consumers are engaging with your platforms for life.

With a plot from relative to your expectations a maybe.

And maybe are they in terms of types of waters or a frequency.

Sure. So I can I can touch a little bit on that and thanks. So much for joining the call. This morning Maria.

What we're actually seeing is we're seeing continued elevated and engagement with a lot of these value added products that we continue to build into the business.

So we're seeing strength and people looking at some on the premium recipes and add on from the customization pieces and continuing to order those at very elevated levels and enjoy those and using them for more special occasions and we.

We are seeing a bit of a return to health and people are getting very very excited about.

Sort of kind of focusing on their health and focusing on that dynamic and so as we mentioned and our previous earnings call. We continue to see our wellness customers get stronger and stronger when it comes to their overall values for the business and that can that menu continues to engage people extremely well.

And as far as opening up and we're not seeing a huge number of changes and in order behavior again, we're still seeing a lot of those a very high value customers ordering or doing a lot of the premium and other recipes, we are seeing a little bit of a fluctuation and travel, but we're seeing that sort of ebb and flow, particularly as you start to see.

A new things happening around a delta variant.

And changes and restrictions. So we are definitely seeing patterns, where people are continuing to want to cook at home and being very interested and meal kits as a solution to do that.

And as far as the most exciting and sort of evolution. We've seen frankly is what I was talking about with a craft Burger and some of our premium recipe and people are continuing to lean into that as a special moments for their family and looking for a elevating their techniques and trying new things and so that's actually been a really exciting development for us as well.

Overall, I think we've been very encouraged again by the numbers, we're seeing and a L. D. Because that represents not only continued engagement with these higher value products, but also continued and retention and engagement of our customers long term.

A great. That's helpful. And then my other question is around gross margins and so you sort of highlighted a few moving parts for a cost of goods sold can you, maybe just talk about which cost components. There I'm on sustainable like increased use a premium ingredients for example, and which could be sort of a more transitory.

Maybe just more broadly talk about how we should think about it a various puts and takes impacting gross margins going forward and and Mindy can you maybe touch on sort of some of the strategies to mitigate some of these high expenses here in the near term.

Absolutely Maria I'll start and then hand, it back over to Linda a what.

I'd say first and foremost as we're addressing the issue on multiple fronts.

There are elements of a product offering specifically around elevated ingredients and premium products that will persist through the brand as we continue to make good on our product roadmap, we have a fantastic relationships with our suppliers, 70% of whom are directed blue apron and so we believe that we're very well positioned to continue to work with our suppliers to make.

Sure that the amount of value that they're providing for us is consistent with a value that we pass on to our customers. The area. That's provided more challenged and specifically been ingredients had been logistics.

And we work with a large logistics providers and the country and we've seen this consistent with other direct to consumer companies as well. We're also feeling the pressure we maintain an active dialogue with our suppliers and this is 1 where we expect that through partnership we will be able to bring rates down to something that looks like more historical levels again, its a multifaceted approach.

And because we think that there are many ways in which we can positively impact our gross margin.

It's something that we expect will normalize through the balance of the year and return to more traditional levels that we'd seen a historically Linda do you have anything that you'd like to add.

Yeah, the only thing that I would add and and we've mentioned this before but we were very very focused on make sure making sure as we introduce new products that we're maintaining strong margins with those products that we take some of that pricing.

Into account when we're thinking about some of the premium ingredients and premium products. So in addition to you're trying to drive some of those efficiencies within the supply chain and also continue to attempts to drive efficiencies and logistics, we are making sure that we're continuing to to look at the ingredients that we bring and make sure that we're keeping the same quality that we have.

Before and pricing those new offerings and according accordingly, and we are continuing to always test some of those different options of how we can think about making sure that we're providing the right value on a customer and also making sure that we're doing what's best for the business and that's going quite well.

Got it that's very helpful. Thank you both.

Mhm thank.

Thank you Laura.

As a reminder, if you have a question. Please press star then 1 to be joined into the queue.

At this time, we have no further questions from our listening audience. It is my pleasure to turn the floor back over to you Linda for any additional or closing remarks that you may have.

Thank you very much and thank you everybody for your time today on behalf of everyone at Blue apron, and we went on with you your families. Your colleagues and friends well, we look forward to providing an update when we reported our third quarter results. This fall.

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