Almost Willing To Wear A Blue Apron (NYSE:APRN)


About a month ago, I wrote an article about Blue Apron (NYSE:APRN) taking a few steps in the right direction. In that article, I outlined the following points.

  1. Meal-kits have demand because we know that homecooked meals are typically better for us than eating out at a restaurant. Meal-kits appeal to our need to optimize our time through “hacks,” which is why we see thousands of YouTube videos with the word “hack this” in them.
  2. APRN customers are a very niche group within a niche group. Meal-kit customers are those who want to cook after getting home from work and have decently predictable work schedules. Blue Apron’s customers are the ones from the above group who are willing and able to pay ten dollars for an uncooked meal and are also ready to be locked in a subscription program.
  3. Blue Apron should focus on customers located in the six states of the eight states found in figure 1. I believe that the company is, which is why it closed down its Arlington facility that was built to attend the projected future demand of customers located in the center of the United States. By focusing on states located close to its facilities, the company can accomplish the following.
    1. They can decrease COGS by decreasing their logistics expenses.
    2. They can decrease their marketing expenses by focusing their marketing on only those locations. At the same time, marketing will be more efficient.
    3. They can decrease their administrative expenses as their logistics will be less complicated.
    4. They will be able to deliver their product to the customer within a day if the customer is close enough to the facility.

Figure 1 – Average Menu Price For On-Premise Dining

Top 8 Most Expensive States According to Average Price
13.00 12.82 12.00 11.99 11.23 11.18 11.10 11.03
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Source: Business Insider

Changes Due To COVID-19

ChartData by YCharts

The stay-at-home order renewed investors’ optimism towards Blue Apron, and the company took advantage of this optimism to strengthen its balance sheet. The issue is, does a temporary increase in demand due to a black swan event justify the stock price quadrupling in a matter of days? Yes and no. Yes, if this black swan event was able to change consumer habits permanently. If the demand for APRN’s products is the result of necessity, then the answer is no. Once a vaccine for the coronavirus is available to the public, people will have the option to eat out or at home.

Consumer habits are a hard thing to predict, and to bet that COVID-19 permanently changed these habits is just speculation at this point. In a couple of years, the majority of us will forget about the precautions we took to prevent ourselves from catching a deadly virus. Remember, MBSs comprised of subprime mortgages received most of the blame for the last economic crisis, and today, you can invest in an ETF that 20% of its holdings are subprime loans (FFIU).

Operational Efficiencies

Operational efficiencies or the expectations of improved operational efficiencies, not black swan events, should be one of the main reasons we decide to invest in a company.

More efficient marketing campaigns

Prior to my time, there was not as much capital available to invest in marketing

When I read the above quote from Linda Kozlowski, Blue Apron’s CEO, I had a flashback from 2017. I remember the company stressing the importance of investing in marketing and the Arlington facility. Three years later, the only result of both of these investments was cash burn. As of 1Q20, the company has lost 64% of the customers that it had at its peak in 1Q17, and the company has closed the Arlington facility.

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I needed to understand if her strategy was different than the 2017 strategy, and I believe it is. To summarize my findings, the company’s 2017 market strategy was like using a shotgun, and today, they are using a rifle. In this CNBC interview, she said that they would have more targeted marketing campaigns. I feel that if the company can target the right audience, then they will be able to decrease its customer marketing expenses and, at the same time, grow its customer base. There is no use to give every random customer a free trial if there is a low probability that the customer is going to continue using the service.

Positive Trend In COGS And Product, Technology, General, and Administrative (PTG&A) Expenses

Figure 2 – Operational Efficiency

Source: Company financial and own estimates for 2Q20

COGS has a clearly defined downward trend, which increases the likelihood that the company’s operations will become cash flow positive. For the past four quarters, the company’s PTG&A expenses have remained steady at $34 million. If the company’s sales increase and PTG&A expenses stay at current levels, PTG&A as a percent of revenue will decrease, creating an inflection point in this trend.

The company has clearly stated that it plans to increase its marketing expenses. In my opinion, in the short term, both marketing expenses and marketing as a percent of revenue will increase. If the company’s strategy to have a more precise marketing campaign produces positive results, then the marketing cost as a percent of revenue will decrease.

Increase In Orders Per Customer

Figure 3 – Orders Per Customer

Source: Company financial and own estimates for 2Q20

As seen in figure 3, over the past two quarters, the orders per customer have set new records. When the orders per customer increase, this means that the company receives more return on its costs to acquire or retain the customer. As this trend continues, the company will be able to increase orders without investing in growing its customer base, which should allow them to reduce their marketing expenses.

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  • The effects of the Stay-At-Home order may have been a lifeline for Blue Apron, but it is illogical to believe it will permanently change consumer habits in the long term. As most of us have already forgotten that MBSs made of subprime loans destroyed most of us financially in 2008 and 2009, so shall we forget about this deadly virus and how to reduce our chances of getting such a virus.
  • APRN is improving its operational efficiencies, as seen in Figure 2. If it can continue on this path, the company should have a positive low single-digit EBIT margin for the fiscal year of 2020.
  • Current customers are increasing their orders, as seen in Figure 3. As this increases, the need to invest in marketing decreases.

I am neutral on Blue Apron. The company has a disappointing track record that will take time to make a believer out of me. That being said, I am exploring the possibilities of using a bull spread option strategy to invest in APRN.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.