Blue Apron Will Eventually Plummet Following Secondary Offering

Alex Cho

Alex Cho

CEO l Research Director

[email protected]

Jason Chen

Jason Chen

COO l Research Editor

[email protected]

Shakeel Stewart

Shakeel Stewart

Columnist and Author

Two things have happened for Blue Apron (NYSE:APRN) recently. The first is that the company released Q2 earnings results in early August. The results themselves were mildly disappointing: a slight revenue miss and y/y declines in both revenue growth and margins. Yet the company also announced a $78 million capital raise in mid-September. The effective purchase price for these new shares of Blue Apron stock is $10/share. Usually, the reactions to secondary raises is very negative in the markets – yet somehow, Blue Apron stock skyrocketed toward the offering price instead, perhaps a signal that investors were desperate for fresh capital to keep this cash-strapped company afloat.

Regardless, shares of Blue Apron doubled in September, which now brings the stock to a ~30% year-to-date gain: far better now than the S&P 500, which is only up roughly 15% on the year.

The question for investors now is: is this the big recovery rally for Blue Apron, or is this what many would call a “dead cat bounce?”

In our view, it’s the latter, and we very much remain bearish on Blue Apron. Financial alchemy and an eleventh-hour capital raise at extraordinary above-market share prices won’t save this company – eventually fundamentals will catch up to it, and right now Blue Apron’s fundamentals are quite poor.

In particular, investors should be especially mindful of these key risks for Blue Apron moving ahead:

  • Demand risk: Just how popular will Blue Apron remain? The company got a kick from the pandemic and people staying home last year, but those habits are largely broken (Blue Apron’s revenue comps versus the pandemic are down).
  • Competition: More to the above, Blue Apron may have been the first meal kit company to gain widespread fame, but it’s now one in a sea of very similar competitors. Consolidation may be needed to keep these companies alive.
  • Declining gross margins: Rising food and logistics costs have eaten into the company’s gross margins, limiting Blue Apron’s ability to hit breakeven.
  • Rising wages: Blue Apron’s operations revolve around several key distribution centers. The company has cited one of the main uses of proceeds of its recent capital raise goes toward raising wages, which we think will largely flow to the low-wage labor that is such a big component of Blue Apron’s distribution costs. In other words, prepare for gross margins to keep falling.

Steer clear here: in our view, Blue Apron is far more trouble than it’s worth.

Q2 results

Let’s now discuss Blue Apron’s most recent quarterly results in greater detail to showcase the point that the company’s fundamentals leave a lot to be desired.

Starting with the company’s revenue trends:

Revenue trends

Blue Apron Q2 earnings presentation

As can be seen in the chart above, Blue Apron’s revenue in the second quarter clocked in at $124.0 million, declining -5% y/y and missing Wall Street’s expectations of $124.3 million (-4% y/y). Blue Apron wants to blame this revenue decline on a tough comp versus the pandemic last year. Yes, the pandemic brought in a lot of one-time customers that aren’t going to renew their meal-kit habits once they return to the school and office.

However, the sequential decline in both revenue and customers is worrying. Note that Blue Apron had 391k customers in the first quarter of 2021; by the second quarter, the company had suffered a -16k shrinkage to 375k. Is this downward sequential trend going to continue, as we continue to move past the post-pandemic era?

Gross margins

Blue Apron Q2 earnings presentation

Another key concern: gross margins are trailing. The chart above showcases that gross margins of 37.4% fell 320bps versus last year. Some of these downward drivers are well-known ones that the company has been citing for several quarters: rising food costs and heightened logistics/transportation costs. Yet there are potentially several other drivers behind the scenes here that may be at play.

For one, Blue Apron has been experimenting with greater customization of its offerings and meal types. In particular, the company now notes with pride that it averages ~42 weekly meal selections, versus ~17 at the time of the company’s launch. “Premium” offerings, usually featuring higher-end proteins like steaks or fish, have been successful in driving repeat activity and driving up average order values. Within certain individual meals, Blue Apron also offers select customization options.

But while this is music to a customer’s ears, it increases Blue Apron’s operational complexity. It also makes planning more difficult, and may lead to greater spoilage as the company has to spread its inventory over a wider count of SKUs.

In addition to this, as previously mentioned, Blue Apron has warned of rising labor costs. With distribution centers already such a fixture in the company’s cost structure, we only see downward pressure on margins going forward, especially as Blue Apron has not yet increased its pricing (due to a very competitive landscape) to absorb these higher costs.

Blue Apron net losses

Blue Apron Q2 earnings presentation

Net losses have widened, as shown in the chart above. The company suffered a -$19 million and -$4 million loss in GAAP net loss terms and adjusted EBITDA terms, respectively. On an operating cash flow basis, the company burned through -$11 million in OCF in the first six months of FY21.

In other words, Blue Apron’s capital raise may be a temporary solution, but it’s not the solution to the company’s problems. With Blue Apron continuing to shed customers and suffering from downside margin trends, it’s unclear if the company will ever be self-sufficient and hit breakeven.

Key takeaways

We remain highly skeptical of Blue Apron after the company’s ~2x rally over the past month. When we look at the company’s fundamental story, the declining revenue/customers and sliding margins don’t seem to jive with the upside action in the stock. Continue to avoid this sinking ship.

Disclosure: Cho Research was not compensated by BlueApron to publish “Blue Apron Will Eventually Plummet Following Secondary Offering” Though Cho Research does use the research dollars it
generates from other clients of our research service to fund market research
reports such as this. This document is not produced in conjunction with a
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