Blue Apron Holdings, Inc. (NYSE:APRN) Q3 2022 Earnings Conference Call November 7, 2022 8:30 AM ET
Company Participants
Linda Findley – President and CEO
Mitch Cohen – Interim-CFO
Conference Call Participants
Maria Ripps – Canaccord Maria
Dan Kurnos – Benchmark
Ryan Meyers – Lake Capital Markets
Mitra Ramgopal – Sidoti
Operator
Good morning, and welcome to the Blue Apron Holdings Third Quarter 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded today Monday, November 7, 2022 for replay purposes. [Operator Instructions]
On this morning’s call we have Linda Findley, President and Chief Executive Officer of Blue Apron; and Mitch Cohen, Interim Chief Financial Officer.
Before handing the call over to the company, we will review the safe harbor statements. Various statements that the company may experience 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 issued this morning and the company’s 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 with Generally Accepted Accounting Principles. You are encouraged to refer to the earnings release and SEC filings, where we have 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?
Linda Findley
Thank you, and good morning, everyone. We’re pleased to have you here today for an update on the business.
Joining me on the call is our Interim CFO, Mitch Cohen, who joined us a few weeks ago. We are thrilled to have Mitch on board as we continue our search for a permanent CFO. Mitch comes to Blue Apron with a significant experience in consumer-oriented companies, including Redbox and Cerence. I would like to welcome Mitch and appreciate his ongoing support.
Before I jump into the quarter, I’d like to directly address our cash position. As many of you know, last month we made the decision to tap the public markets to enhance short-term liquidity and maintain compliance with our minimum liquidity covenant. We completed net the market offering in early October, resulting in approximately $14.1 million after fees and commissions. We did so in light of not receiving the private placement and other funding that was expected from affiliates of Mr. Joe Sanberg, our largest shareholder by the end of September.
The proceeds of our ATM program enhanced our short-term liquidity and allowed us to remain in compliance with our financial covenants. We continue to remain in active discussions with Mr. Sanberg, and we entered into a pledge agreement with one of his affiliates. Under this agreement, Blue Apron was granted a security interest in certain securities of private companies with the value estimated to be significantly in excess of the $56.5 million owed. Mitch will speak a bit more on this.
We are also taking actions to further stabilize our cash position. We are working closely with financial advisers to explore financing and other alternative avenues to manage our liquidity. Over the summer, we began identifying and instituting several cost savings and margin initiatives, including beginning to find additional ways to manage our cost structure and improve margins.
In the third quarter, our variable margin was 32.2%, a reduction on both quarter-over-quarter and year-over-year basis. The decline was mostly attributable to higher costs across packaging and logistics. We plan to continue to identify other areas to further manage expenses moving forward.
Additionally, we announced today that Chris Halkyard has joined our team as Chief Supply Chain Officer. His position replaces the role of Chief Operating Officer and is accountable for all fulfillment center operations, supply chain and logistics and procurement. Chris comes to Blue Apron with over 30 years of supply chain and operations experience specializing in fulfillment center operations management. His background centers on implementing processes to allow for more efficiency, better decision-making and better cross-functional ways of working. We expect that this expertise will be invaluable to us as we focus our attention on improving our variable margin, increasing productivity and enhancing quality.
While we plan to provide a more comprehensive update on all efforts on our fourth quarter and full year results conference call, another area where we took notable action this quarter is in marketing. During the third quarter, we reduced our spend by 21% as compared to Q2 2022. We saw cost of marketing rise beyond sustainable levels, particularly in search marketing, and therefore, we are adjusting spend in tactics accordingly. We are focused on optimizing our programs to return to pay back within one year.
Considering the importance of marketing on our business, we are constantly looking at ways to improve our strategy, balancing where we are today in broader market conditions. Over the past few weeks, we welcomed Amber Minson as our new Chief Marketing Officer. Amber comes to us with over two decades of data and growth-oriented marketing experience that we think will be invaluable to our business as we move forward. Over the past two years, we built a solid marketing foundation, including significantly strengthening our brand equity. In parallel, we have also invested in key tech improvements. These efforts will allow us to shift our marketing strategy efficiently to be more data and performance driven.
Looking ahead, we are taking measures to be disciplined in managing the business and cash. We remain focused on our goal of long-term profitable growth. In Q3, we continued to deliver consistent key customer metrics. Average order value of $70.83 was the new company record as was average revenue per customer of $340. Order frequency held steady at 4.8%, down modestly from Q2 and in line with seasonal quarterly trends. The price increases implemented over the summer, along with our ability to continually provide greater menu options at additional variety drove our success with these metrics.
Total active customers over the 12 months ending September 30 was approximately $679,000. This was a decline of 1.3% from the equivalent period a year ago. As we mentioned last quarter, we believe our 12-month customer number represents a more complete view of the active customers in our business and smooth out seasonality.
For the quarter, total customers were $323,000, down 7.5% sequentially and 7.9% year-over-year. Similar to Q2, seasonal and macroeconomic pressures on purchasing due to the inflationary environment drove a portion of the decline. We found that our marketing efforts in Q3 were less efficient than in prior quarters, which equally impacted our customer count.
Our product pipeline also remains strong as we continue to innovate and provide our customers with new and unique ways to shop with us. As our latest offering, our new ready-to-cook recipes are resonating well with customers. These meals help meet their growing need for quick, convenient and delicious meal time options. Our culinary team executed a well-thought-out testing plan, allowing us to launch this products without introducing new ingredients into our pantry. So far, these meals are performing well and continue to receive high praise from our customers.
In addition, we expanded the subscription experience to be more customer-friendly. Now customers have the optionality to order as many recipes and add-ons as they want per week with no limitation. Our seasonal occasion-based boxes are also a big hit. Between now and the end of the year, we are helping our customers celebrate the holiday season. We introduced our biggest Thanksgiving offerings to date, followed by our new holiday [ROAS Fox] to extend this seasoning. These offerings are created to give customers the flexibility to tailor their orders to appeal to their party size, specific taste and dietary preferences.
Partnerships also remain a big focus for us. We continue to expand our e-commerce presence to a wider pool of potential customers beyond our core ecosystem, including our gift card sales. Customers can now purchase a Blue Apron digital gift card on costco.com. This allows us to bring a gift option to their customer base at a great value, especially as gift experiences are growing in popularity.
In addition, starting in October, a selection of our popular meal kits, along with our seasonal boxes are for sale online in the U.S. Amazon stores without a subscription. We are able to do so effectively by leveraging the process we established earlier this year when we introduced our product on another e-commerce platform. While the kits are sold on Amazon.com, the boxes are directly fulfilled by us taking advantage of our ability to ship boxes within one business day.
Furthermore, we continue to work with our current enterprise partners and look for additional opportunities to expand these efforts. We view our enterprise sales as a good way for us to further build brand awareness and drive revenue and customer growth. We also continue to focus on ESG and had several notable developments this quarter, including the launch of our inaugural ESG report, the Better Living road map. This report details Blue Apron’s ESG progress through 2021 and also highlights our first ever SASB report.
The ESG road map focuses on three key priorities: people, product and progress and details our actions along with key initiatives against each of these areas. We also signed a partnership with Planet FWD, a leading carbon management platform for consumer companies as we look to take proactive steps towards our net zero goals.
Lastly, we also joined the United Nations Global Compact initiative. As a participant, we have committed to elevating our role to show the different ways we can help support the outcomes of the United Nations’ 17 Sustainable Development Goals.
Before I turn the call over to Mitch, I want to reiterate that we continue to drive towards our goal of achieving long-term sustainable growth in the future. We are implementing initiatives designed to address key fundamentals, including margin levels, PTG&A and marketing.
With that, I would like to turn the call over to Mitch for a review of our financials. Mitch?
Mitch Cohen
Thank you, Linda, and good morning, everyone. Great to chat with you today.
To start, as Linda discussed, we completed an aftermarket offering, offering in early October and after not receiving funding from this December as affiliates as expected by September 30. The offering helped to enhance short-term liquidity and keep us in compliance with our financial covenants.
As part of the offering, we sold approximately 4.6 million Class A common shares at a sales average sales price of $3.25 for approximately $41 million after fees and commissions. I’ll speak more on our current cash position towards the end of my remarks.
With the execution of the aftermarket offerings, we exhausted our prior shelf registration statement. Today, we filed the universal shelf registration statement with a registration of $100 million with shares of Class A Common stock, senior subordinated debt securities, preferred stock and/or warrants.
With this backdrop, let me run through our quarter performance and touch on some of the cost-saving initiatives we implemented. Starting with the top line, third quarter net revenue was $109.7 million, down 4% sequentially and roughly flat with the prior year. The sequential decline was primarily tied to seasonality and the presence of a bulk sale to an enterprise customer in the second quarter.
As Linda highlighted, average order value hit another all-time high of $70.83, while average revenue per customer also a new record at $340. Price increases introduced over the summer, along with added variety and customization of our menu drove the strong performance.
Average orders per customer slightly declined sequentially from 4.9% to 4.8% due to the seasonal uptick in travel in the quarter. [indiscernible] also drove a decline in total customers to $323,000. Customers paring back their spending over inflationary concerns also impacted our customer count in the quarter.
Turning to expenses. Variable margin was 32.2%, representing a decline of 250 basis points quarter-over-quarter and 90 basis points year-over-year. The decline was due primarily to increased packaging and shipping costs alongside a reduction in total customers in the quarter. In the past summer, we experienced warmer than usual temperatures across the nation, requiring us to add additional packaging to keep food fresh.
We also experienced a supplier issue on one ingredient and a logistics issue, and we are working to recover the associated costs. In the third quarter, PTG&A costs totaled $37 million compared to $35.2 million in the same quarter last year, mainly driven by an increase in consulting spend to support our strategic priorities.
Moving forward, we believe that we will achieve savings through the cost management initiatives we have we have begun identifying and implementing and remain focused on optimizing our cost structure and improving margins. In addition, we pared back marketing spend in the quarter and Q3 marketing spend was declined 21% to $17.3 million. In Q4, we expect marketing expense to be relatively flat versus Q4 2021 levels as we look at the managed spend and invest in areas with better ROI.
Looking at our bottom line, we reported a net loss of $25.8 million and adjusted EBITDA loss of $17.5 million. Operating cash flow was a negative $20.7 million. At the end of Q3, we had cash and cash equivalents of $31 million, which excludes the approximately $14.1 million after fees and commissions that we received from the completion of our ATM shortly after quarter end.
As Linda discussed earlier, we remain active in discussions with Mr. regarding his funding. On November 6, we entered into a pledge agreement under which an affiliate of his granted us a security interest in certain assets of private companies with the value estimated to be significantly in excess of the $56.5 million owed to us under the RJB private placement agreement.
Additionally, we’re working on a number of cost savings initiatives and in discussions with financial advisers to evaluate financing and other alternatives. We also are in discussions with our lenders as assuming we receive no funding from Mr. Sanberg or other sources, we expect to be in breach of our minimum liquidity requirement of the covenant as early as later this month.
We believe the pledge for Me. Sanberg affiliates gives us an alternative path to secure the funding and demonstrates to our lenders, we are taking necessary steps necessary actions to secure liquidity.
Finally, before I turn over to Q&A, let me touch on briefly on the outlook. Because we have not yet received the anticipated funds from Mr. Sanberg’s affiliates, we are withdrawing our previously announced revenue growth target of 7% to 13% for full year 2022.
Moving forward, we will remain focused on achieving adjusted EBITDA profitability in the future and will evaluate providing updated targets once we have more clarity on our liquidity position.
With that, let us open up the call to your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Today’s first question comes from Maria Ripps at Canaccord Maria. Please go ahead.
Maria Ripps
Great. Good morning. Thanks for taking my questions Linda you’ve done a great job sort of diversifying your menu and you have been investing in incremental marketing. I think if we look at year-over-year trends. But I think you did mention a little bit less efficient spend here in Q3. But maybe more broadly, can you talk about some of the factors influencing sort of your ability to grow subscribers at this point?
Linda Findley
Yes, absolutely. So I think that — thank you very much for the question, by the way, Maria. I think that there are several factors that we’re looking at when we think about balancing, managing our cost structure and also looking at growing marketing. So what we’ve actually seen is the infrastructure that we put in place on the marketing side will pay off as we take to a more performance and data-driven approach in our marketing going forward.
So we’ve already started making some changes to increase efficiency in our marketing spend and redirect dollars towards the places where they’re going to have the highest ROI. So we see several opportunities to make changes when it comes to digital marketing spend that can be a lot more efficient.
Also secondly, we did make some significant brand investments, which, as you know, are part of the additional costs that we saw in Q1 through Q3. While we plan to curtail some of those brand investments, we have made great progress in establishing long-term audience pools with those actions, and that’s been very positive for what we see on marketing going forward.
And then finally, we do continue to use some of these other nontraditional sales such as enterprise and bulk sales to expand our reach to new customers. Again, some of those get counted in our customer count and some of them don’t because of the nature of the — of how we count our customers. So we’re looking at ways that we can take some of those additional channels that we’re using, including the Amazon announcement and our new Costco gift card sales channel to increase our customer numbers going forward by converting them into subscribers and/or continuing to expand the nonsubscription business.
So I do think what you’re going to see is, while we’ll still have significant marketing spend, a lot of that is going to be directed very closely towards performance and data-driven channels rather than spread across some of the brand channels that we were doing before, which will increase efficiency.
Maria Ripps
Got it. That’s very helpful. And then secondly, now that you are in sort of a new retail channels like Amazon, do you expect to see different seasonal impact in Q4, given sort of your broader presence?
Linda Findley
It’s a good question, and I actually don’t know that we’re going to see different seasonal impact from those additional channels at this stage. It’s still very early in the development of these new distribution channels, and we continue to explore more. I do think that you’re going to see a bit of a difference in seasonal impact, partially because we are seeing shifts in travel trends, but also partially because we have introduced more of these seasonal and special occasion boxes, which have driven a lot of our seasonal growth in the past, and we now have new offerings that we didn’t have in previous years.
And so that’s probably where you’re going to see a slight shift in seasonal trends compared to, say, the additional channels, if that makes sense.
Maria Ripps
Got it. Thank you very much for the color.
Linda Findley
Thank you.
Operator
And our next question today comes from Dan Kurnos at Benchmark. Please go ahead.
Dan Kurnos
Yes, thanks. Good morning. Linda, just to kind of follow up on sort of that line of questioning. Just maybe around messaging here. I know you guys made some prepared remarks around a little bit of curtailed spend from the consumer. We’ve had this sort of philosophical debate as to why the consumer isn’t necessarily recognizing that Blue Apron is a better value than grocery at this point given ongoing elevated prices at grocery. And as the consumer continues to kind of reevaluate spend, even though apparently travel seems to be immune to that. How do you think about sort of your own go-to-market and trying to reinforce that messaging and not sort of fall prey to just a broader economic pullback?
Linda Findley
It’s a great question, Dan, and I actually think that there’s a couple of key aspects there. So in the way that we’re approaching our marketing spend, by reducing them into the performance channels, we’re able to — sorry, by reducing some of the upper funnel brand spend because we’ve been able to build such a strong audience and we’ve been able to elevate the brand equity during the last three quarters. What we are actually able to do is test more and more broad messaging around cost and a cost benefit.
So you are correct that we are still able to source below the PPI, and we are still able to manage our pricing to consumers to be below what they might see in the grocery store, depending on the recipes, et cetera. And so getting that message out in a performance marketing channel is actually a big part of our strategy going forward.
The other thing that’s also a big part of the strategy going forward is people think about value. They’re really balancing this concept of quality compared to price. And that’s one of the other advantages we have because of our direct supply chain and the quality of our ingredients, we are able to really hone our message and demonstrate that value not only through being a better value from a cost perspective, but also getting higher quality ingredients.
So by redirecting a lot of that marketing spend into the performance channel, we’re able to put more messages into the performance channels that tend to be in a more targeted way and really reach out to audiences directly, but it is a critical part of our strategy going forward.
Dan Kurnos
Got it. That’s helpful. And then I guess I’ll try to ask this question a little bit delicately. We talked before about partnership and enterprise solution from here. How much does the funding issue weigh on those conversations right now, frankly. And if you were to resolve that, I would have thought we might have had an announcement by now or it felt like you guys were building momentum. So just is that a contemplation on that side of the equation at the moment?
Linda Findley
Well, I mean, I think it’s fair to say that, of course, the funding conversations weigh on all discussions, not just on sort of the enterprise and bulk sales, but we continue to support our existing enterprise customers. We continue to be in discussions with new enterprise customers that just didn’t close in Q3. And we also do continue to launch new channels like Amazon and Costco in this process. So we are continuing the momentum on it. But clearly, our biggest focus is making sure that we are able to secure funding into the business and continue our focus very directly.
Dan Kurnos
And to that point, Linda, just on marketplace expansion, how much — I know you have to get this probably resolved, but that doesn’t take away from sort of the underlying work in terms of some of the marketplace expansion you were discussing before?
Linda Findley
Correct. Yes. No, we’re full steam ahead on all of the marketplace expansion work that we’re doing — that is, we think, a great opportunity not only to extend the sale of the products that extend the brand. And again, as we’ve said in previous quarters, some of the most exciting things that we’re doing on those e-commerce partnerships are really about the technology that we built in order to support it that allows us to ship within one day and increase our distribution channels further.
Dan Kurnos
Got it. Super helpful. Thanks for the color. I appreciate it.
Linda Findley
Thanks so much Dan.
Operator
And our next question today comes from Ryan Meyers at Lake Capital Markets. Please go ahead.
Ryan Meyers
Hi, good morning, guys. Thanks for taking my questions. You called out in the prepared remarks, you’re implementing some cost reduction initiatives. Just sort of wondering if you can provide some more specifics on what exactly you guys are doing, sort of walk us through kind of what levers you can pull? I know marketing is a big one there. But what sort of detriment will that have on revenue growth? Just kind of understanding some of those initiatives would be helpful.
Mitch Cohen
Well, high level, we’re looking at, again, marketing, consultants, professional fees. We’re really taking a hard look at PTG&A here. As the new guy here, we — I have the fresh look, the ability of a fresh look and — there are places we have identified and we have to go forward and execute on our plan.
Linda Findley
Yes. I think what we’ve been able to do so far is really look at opportunities to optimize the marketing spend where we hope to actually gain efficiency through some of those reductions. And I think the similar concept applies when we think about real estate, when we think about human capital where right now, we’re at the space where we’re able to actually optimize the efficiency of the organization in a way that helps propel growth rather than necessarily being a hindrance on the business.
So we’re always looking at across the board different opportunities to save money. But an important aspect of this, too, is what we talked about of really addressing our variable margin and really addressing the efficiency of the marketing spend because that’s where you’re going to see the biggest opportunity from an ability to make cash go longer.
Ryan Meyers
Got it. That makes sense. And then I know last couple of questions you sort of talked about it a little bit, but I’m wondering what you can give us as far as demand from the Amazon and Walmart.com partnerships. Have you guys seen quite a bit of orders from there. And I’m not sure if you’re disclosing kind of how much revenue during the quarter that was, but I think any sort of specifics around that would be helpful as well.
Linda Findley
Yes. Happy to sort of touch on that, but it is still very early in the relationship. It has not become a significant portion of revenue yet. But I will say that we are seeing continued uptick, particularly with our new Amazon storefront. And so we continue to develop that as we look towards future quarters. But right now, it’s not large enough that we would necessarily break it out.
A majority of what you’re seeing in the ability to create revenue strength in the quarter compared to year-over-year, meaning, in other words, compared to the customer number and also year-over-year comes from the additional product offerings and continued pricing initiatives.
Ryan Meyers
Got it. That makes sense. Thanks guys.
Operator
[Operator Instructions] Our next question comes from Mitra Ramgopal with Sidoti. Please go ahead.
Mitra Ramgopal
Yes, Good morning, Linda. Thanks for taking the questions. First, I just wanted to follow up on the Walmart, Amazon relationships. Obviously, it’s still very new. But just curious if you’re seeing any conversion to subscriptions yet.
Linda Findley
So we’re actually — we are seeing some conversion to subscriptions. But again, it is still new enough that we wouldn’t necessarily reveal those numbers. Part of what we are seeing is some people do continue to want to buy nonsubscription even if they’re buying every week, that’s just something that they prefer to do rather than committing to a subscription. And then others are seeing the value of the subscription and potentially converting into it. But it is still very early.
Mitra Ramgopal
Okay, thanks. And we are almost midway through the fourth quarter. Are you still seeing a lot of pressure in terms of higher shipping, packaging costs, et cetera? Or is that starting to stabilize?
Mitch Cohen
There has been some stabilization. Shipping remains an issue. FedEx and [indiscernible] have the ability to just raise prices on us. Food prices are up only slightly, I believe. Labor cost has gone down a little bit.
Linda Findley
In packaging, yes, we have seen some stabilization in packaging because of course, the other thing to remember is Q3 is always our most difficult margin quarter because of the seasonality, and we had a particularly hot summer.
So you’re always going to see increases in packaging, in particular, in order to keep the food safe as it transports. So we do — they’re not evidenced by the weather in New York today, have a bit of a reprieve when it comes to the heat on packaging.
Mitra Ramgopal
Right, right. Okay. No. Thanks. And then I know it’s delicate in terms of trying to implement price increases and keep customers. If you can maybe give us some more color on that front in terms of as you implement the increase, it’s more about trying to recapture the food cost? Or is it also just everything else in terms of, as you mentioned, the shipping, packaging, fuel, et cetera. If that’s an impact in terms of the cost churn.
Linda Findley
Yes. Sure. So just as a reminder, we’ve done two price increases over the last 1.5 years or so. The first price increase was specifically to adjust for logistics and shipping. And then the second one was much more directed towards food costs as far as coverage. What we have seen from the customer is, again, we’re seeing normal consumer behavior when you see economic conditions like this. But what you aren’t seeing is necessarily people resisting the price changes given the fact that we do continue to position as a better value than going to the grocery store in many instances.
So I think that part has been an advantage to us, and that’s part of what you’re seeing the evidence in the continued record AOV and revenue per customer that we were able to achieve this quarter of people are understanding about the price increases, and we were very careful to make sure that we were remaining in line with competitors, but also a good value for the quality of ingredients in the box.
Mitra Ramgopal
Okay. Thanks for taking the questions.
Linda Findley
Thanks so much, Mitra.
Operator
Thank you. And ladies and gentlemen, this will conclude today’s question-and-answer session. I’d like to turn the conference back over to Linda Findley for any closing remarks.
Linda Findley
Thank you so much. Thank you for your time today. We look forward to providing an update when we report on our fourth quarter and full year results early next year. In the meantime, if you have any additional questions, please don’t hesitate to reach out to us directly.
Operator
Thank you, ma’am. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.
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