No, Blue Apron Stock Is Not a Value Play

How have IPOs in the consumer and retail sector performed?

In this Industry Focus discussion, Vincent Shen and senior Motley Fool contributor Asit Sharma look at one of the biggest misses in recent memory: meal kit pioneer Blue Apron Holdings (NYSE: APRN). The pair break down the subscription company’s stumbles, and why its rock bottom valuation still doesn’t make the stock a buy.

A full transcript follows the video.

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This video was recorded on June 5, 2018.

Vincent Shen: Our next update is for Blue Apron, which priced its IPO in June. This has been a pretty tough story to follow, because Blue Apron, at a time, was the vanguard of meal kit delivery companies. It was a member of the very coveted unicorn list, so it was a private entity worth over a billion dollars. But the stock has seriously underperformed in the past year. Shares priced at $10, and they’re currently trading at about $3.30 per share. That’s actually an improvement from where they were trading when they were under $2 earlier this year.

We did a deep dive on Blue Apron before the company officially went public. That episode was actually aired exactly one year ago to the day. But even looking at that early deal prospectus, we mentioned some of the red flags, in terms of their ballooning expenses, lack of pricing power, low barriers to entry. At the time, Blue Apron was the premier name in meal kit services. But if you look at this from a food and grocery perspective, it’s tiny compared to the really big competitors out there. I think it makes the company a bit of an easy target as a result of that.

With all of that, Asit, I’m curious to hear what has jumped out to you in terms of recent developments and the outlook for this company.

Asit Sharma: Those who follow this company closely will remember that about two quarters ago, CEO Brad Dickerson said, “We’re going to cut back on our marketing spend, because we’re churning through cash, and we need to stabilize our profit margins.” Vince, you had telegraphed this when we first spoke about Blue Apron, in that they have to spend a tremendous amount per customer. In this last quarter, which was just reported on, this is quarter one of 2018, they reupped their marketing spend and were able to increase revenue 5% on a sequential basis, so they had to compare it to the prior quarter. Re-upping that marketing spend, they still finished with a decline of 20% in revenue to $197 million. That generated a loss of $31 million. I want to point out to listeners that quarter in and quarter out, Blue Apron has a quarterly cash burn of about $20 million.

There’s a fundamental problem with the economics here of the company. Even though it’s cut back on its expenses, and even if you cut the company some slack for having some hiccups in their distribution facilities, customers have decreased year over year from just over a million customers to 786,000 customers. The company has had to sacrifice some of its base while it pulled back on marketing. In the meantime, it’s faced with a lot of competition. Its cheap rival, HelloFresh, just raised their annual revenue estimates for 30% to 35% growth, so they’re going in a total different direction. We also have Kroger buying a company called Home Chef, another competitor, for a range of $200 to $700 million. And of course, last year, Albertsons bought Plated, another rival. I feel that the overarching story on this business is one of poor economics and very stiff competition for market share. What are your thoughts, Vince?

Shen: I was looking at the company’s first quarter results. All you have to do is just take a glance at it, and you get a pretty clear picture of some of the challenges that this company is facing. You mentioned revenue being down 20% year over year. Both customers and orders are declining. This comes as the company has tried to rein in some of its marketing spend to help reduce losses. Just an example here, that line item, in terms of the marketing spend, decreased from $60 million, I believe, to $40 million in the quarter. There’s a very clear effect on the business with almost a quarter of Blue Apron customers leaving the service. You mentioned from a little over one million to less than 800,000. That’s a huge shift, and a very highly, highly correlated effect there.

You have to wonder what kind of situation is out there where this company can rally long-term. It’s not like the meal kit space is becoming less competitive. You have new companies jumping into it, you have established big names in grocery snatching up companies, going through their own acquisitions, as you mentioned. For a company this young, I think a lot of investors can forgive even quarter after quarter of losses. But when there’s no top line growth to offset that, I think it’s easy to see why the stock has had such a hard time. In 2016, revenue was about $800 million, and that was 130% growth over the prior year. Then, in 2017, investors saw that momentum almost stop in its tracks, which revenue up just 10%. With all that said, though, the stock did rally after earnings last month, basically because Wall Street was expecting even worse losses than what the company ultimately reported.

Asit, I think you and I are on the same page when I say that investors should ultimately remain pretty wary of this business. When you have a declining customer count, you have revenue per customer pretty much stagnant, and the fact that Blue Apron has to spend, I think, over $150 or more to just acquire a new customer, I really don’t see a light at the end of the tunnel here barring some type of acquisition or major influence from outside the company. What do you think?

Sharma: Yeah, acquisition may be the best bet for Blue Apron. I know there’s probably a listener out there asking the question, “What about Costco?” We did hear that Costco is doing a pilot in a limited number of stores with Blue Apron’s meal kits. And to that, I say, we’ll have to wait and see. It’s not an exclusive relationship. Costco has other meal kits that are available. And it doesn’t preclude Costco from going with competitors. This is simply a test. Although, if Blue Apron can gain wider distribution within Costco, that could help with some of these cash burn issues that we talked about.

Shen: Yes.

Sharma: In the future, maybe Costco is a likely acquirer of Blue Apron. But I would be careful here, for those who aren’t invested in the stock and maybe want to get in, seeing it as a value play. Your likely only exit in that case is an acquisition. Even at these levels, I still feel, as you do, Vince, there’s risk in the stock. And sometimes that’s the unfortunate penalty that pioneers pay in an industry. They are the most susceptible to competitors coming in and taking market share. They’re also ones that are leaping to their IPO with a lot of fatigue, just trying to get over that hump and get a little more funding to keep going, not always enough.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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