Blue Apron Holdings, Inc. Class A

Good morning. Welcome to Blue Apron Holdings' fourth quarter 2020 earnings conference call and webcast. At this time, all participants are in listen-only mode. As a reminder, this call is being recorded Thursday, February 18, 2021, for replay purposes. A slide presentation has been created to accompany today's remarks and can be accessed at the Blue Apron Investor Relations website. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. On this morning's call, we have Linda Finley-Kaslowski, Chief Executive Officer of Blue Apron, and Randy Greben, Chief Financial Officer. Before handing the call over to the company, we will view the Safe Harbor Statement, various statements that the company makes during Today's call about its future expectation 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 risk and other factors, including those described in the company's earning release issued this morning in the company's SEC filing. In addition, any forward-looking statements represent the company's view only as of today, should not be relied upon as representing its views as any subsequent date. The company specially 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. Which are prepared in accordance with generally accepted accounting principles. We are encouraged to refer to the earnings release and SEC filings where it has defined these measures. And to review the reconciliation of these non-GAAP financial measures to the most directly comparable gap measures. In addition, reconciliations of certain forward-looking non-gap measures referred to during this call are included in the earnings release, which is available on the company's investor relations website located on investors.blueacrims.com. With that, I would like to turn the call over to Linda Finley-Kowalski, Blue Aprons CEO.

Linda? Thank you, Kate. Good morning, everyone, and thank you for joining us today. Since it's my first chance to speak with most of you this year, I'll start by wishing everyone a Happy New Year and express my hope that you're all staying safe and healthy. We're coming up on nearly a year of dealing with the tremendous challenges of the global pandemic that upended so much of our daily routines and experiences we likely took for granted. I am hopeful that progress towards a safer and healthier new normal will continue so that friends, families, colleagues, and investors can come together again and interact with each other in person around the dining table and at conferences and other meetings later this year. Before diving into our fourth quarter results, I'd like to introduce Randy Grevin, who joined us as Chief Financial Officer in early January. Randy brings more than 20 years of finance, e-commerce, direct consumer, and food industry experience, as well as a track record of implementing strategies to drive scale. Randy's skill set is aligned with our near and long-term objectives, and we couldn't be more excited to have him on board. You'll hear from him in just a few minutes, and I'm sure many of you will have a chance to speak with him at length soon. I'll also take this opportunity to highlight that Charlene Gmunder joined us as our Chief Operating Officer in late November. Her background and experience of more than 30 years in food operations, including food manufacturing and fulfillment, are an excellent compliment to Blue Apron's leadership and operations teams. She has a broad set of responsibilities, including oversight of our fulfillment, supply chain, logistics, food safety and quality assurance, physical operations, and customer experience teams. As with Randy, Charlene's knowledge and expertise aligns with our strategic goals, and she's focused on further improvements across our operations. We are thrilled to have such talented senior executives join the Blue Apron leadership team. Both Randy and Charlene have hit the ground running and are already making a positive impact on our business. Shifting now to what was a very active fourth quarter and full year. We saw a number of significant improvements across many of our key customer metrics over the last nine months of 2020. Throughout all of 2020, we executed against our growth strategy, quality standards, and the implementation of return-focused marketing programs. Together, these three initiatives represent the foundation of our strategies to better attract, engage, and retain customers. The pandemic's continued impact on consumer behavior also contributed to fourth quarter and full year improvements. We believe the progress achieved in 2020 lays the foundation for the continued execution of our growth strategy, and our team is working every day with a commitment to continue to become better in our focus, discipline, and execution. We continue to see strong demand for our meal kits with year-over-year revenue growth of 22% and quarterly sequential revenue growth in the fourth quarter. In addition, the fourth quarter represented the third consecutive quarter of quarterly sequential increases in year-over-year revenue growth, and it's notable that the acceleration in the second half of the year took place during what are historically our two seasonally slowest quarters, although seasonality was masked to some degree in 2020. The top-line year-over-year growth combined with our continued focus on cost optimization led to adjusted EBITDA loss and net loss coming in significantly better than our guidance targets. As previously discussed, we also strengthened our balance sheet in 2020 through a public offering of Class A common stock and a new senior secured term loan. The added financial flexibility afforded by these transactions provides us the flexibility to pursue additional opportunities to execute our growth initiatives. Turning now to some highlights from the fourth quarter. Customers rose year over year, but declined sequentially from the third quarter as we managed our marketing spend to partially offset the labor constraints that impacted capacity in the quarter. However, the progress we've made against our growth plan can see in the year over year improvements across certain key customer metrics. These metrics include orders per customer, which were up 15% year over year, record average order value, and average revenue per customer, which was above $300 for the third quarter in a row, the only quarter since 2015 we've achieved these levels. Looking ahead from our fourth quarter and full year growth, our expectation is for strong year-over-year growth in the current quarter, which is expected to increase again on a quarterly sequential basis. This expected improvement reflects the success of our growth strategy to date against the backdrop of increased demand due in part to ongoing changes in consumer behavior. As a result of the pandemic, we saw that cooking habits increased in 2020, and both third-party and our internal research found that those habits are expected to continue into 2021. As a critical part of our growth strategy, we plan to lean into this trend to continue to provide product variety, flexibility, and choice. A recent third-party report shows that 75% of consumers surveyed indicated they are interested in improving their cooking skills, whether to get more enjoyment out of the process or can make their time in the kitchen more efficient. We believe meal kits are well positioned to meet these interests, and Blue Apron removes the burden of recipe planning, offers cuisine and high quality ingredient variety, and introduces consumers to new cooking techniques that help them sharpen their skills in the kitchen. We believe our culinary authority, combined with our product innovation, are key points of differentiation for Blue Apron. And in 2020, we introduced more products than in any prior year. While this was a success for us last year, I do want to highlight that as we entered 2020, our roadmap called for the introduction of even more new products before we shifted our focus to better serve our customers during the pandemic. We believe that the new products that were held back may be some of our most exciting introductions to date, including expansion into different meal applications. I'm happy to report that the initiatives we put into place in the fourth quarter to enhance fulfillment center efficiencies have helped open up sufficient capacity to a point where we have increased our menu variety and rolled out new product enhancements, including introducing recipe customizations and our meal prep plan nationally. Our decision to temporarily reopen the Arlington facility this quarter has also given us more capacity flexibility. We believe this positions Blue Apron to continue to introduce new products into 2021, including product enhancements that we held back last year. Staying focused on our 2020 product launches, I'd like to highlight the initial successes around some of our new products. In Q4, we launched Blue Apron Customize nationally, which offers our customers a bridge between our core menu and our premium offering, giving them the option to upgrade or swap certain aspects of their meal. This new feature allows the flexibility to satisfy a spectrum of dietary needs and preferences while minimizing the needs for compromise at the dinner table. This offering has been well received by our customers, and we are continuing to add more customization options this quarter. Another new offering launched nationally in the fourth quarter is our option to purchase multiple orders per cycle, which allows our meal kit customers to receive a second box for any given weekly cycle. Importantly, this offering provides added flexibility, giving the customer the option to send orders to different addresses, deliver the orders on different dates within the week, double up on recipes, or purchase special occasion or meal plan boxes in addition to a signature box. The multiple orders per cycle offering is also available to our wine customers, which allows for an additional wine box per monthly cycle. These two offerings have built on the continuing success we've had with our premium offering. Taken together, our product innovations contributed the record average order value we generated in the fourth quarter. We also recently announced our Wellness 360 program, which builds on the wellness initiatives we already had in place. Our Wellness 360 campaign showcases how home cooking can benefit holistic wellness, which includes physical, brain, relationship, mental, and financial health. It's our approach to helping customers better understand the benefits of cooking with Blue Apron and how that can have an impact on their wellness journey going beyond the food that ends up on their plate. The Wellness 360 campaign includes recipes designed by our in-house nutritionists that feature fresh produce, whole grains, high-quality proteins, and natural sweeteners. This program complements and expands our other offerings to provide more variety and flexibility. For example, we started to offer our home cooks recipes designed for quicker prep and easier cleanup, like sheet pan and one-pot dinners, so that they can focus on the things that keep them away from the kitchen but still enjoy a delicious meal without sacrificing on flavor. We also find that our customers continue to look to us to help them celebrate moments, big or small, with restaurant-quality meals. In 2020, we introduced our first-ever Thanksgiving box in partnership with Chef Eduardo Jordan, which generated stronger than anticipated demand. And this year, we teamed up with Stella Artois to create Stella Stadium Bites, which offered Chef-curated fan-favorite menu items to enjoy during the big football game. In addition to the new occasion-based offerings we plan to introduce this year, we have an exciting product roadmap that will build on the innovations introduced last year, The new products planned for this year are an important initiative in further differentiating Blue Apron from peer offerings, which we believe will help drive additional engagement, order value, and retention. Turning now to operations. We continue to make progress with our operating efficiencies first introduced in the fourth quarter. These efficiencies leverage the facilities and infrastructure we already have in place that are capable of addressing higher demand as we continue to work to overcome labor availability challenges we've experienced. These new initiatives have helped increase line speed, overall labor utilization and equipment optimization, and effectively decrease the labor required per pack line and labor minutes per box. With improved operational efficiency and the temporary reopening of our Arlington facility this quarter, we believe that we are positioned to address forecasted demand. We plan to drive additional demand by stepping up our marketing and to continue that higher investment throughout the year while still positioning the company to drive higher variable margin, as we expect to continue to benefit from our new operating efficiencies. Our work to become more efficient in our marketing spend continues, and we've been seeing faster payback periods. With regard to our supply chain availability and safety, we have not experienced any significant disruption as a result of the pandemic. In fact, we've been able to continue to leverage our robust supply chain and strong supplier network to expand the diversity of ingredients available to create our weekly menus and to support our new customization and premium options. As highlighted by the first quarter guidance we provided this morning, we're expecting a strong start to the year as we continue to execute on our growth strategy and as our operating momentum continues in 2021. We've taken the time over the last several years to improve our operations, including from how we connect and engage with our customers to how we've enhanced our menu variety and fulfillment center practices and so much more. As a result, I believe that the growth that we achieved in 2020 is just the launching point for Blue Apron. We expect that the ongoing changes in consumer behavior as a result of the pandemic will continue to some extent, even after the direct impact of the pandemic ends, and that we have the right operating strategies in place to drive and meet consistent increased demand. I believe that we are more competitively positioned to attract, retain, and engage more customers than at any time since I joined Blue Apron almost two years ago. I also believe that we will be able to continue to demonstrate how much we've improved across the business and how much more we will be able to achieve going forward. As always, we appreciate our longstanding customers, as well as those who have recently turned to Blue Apron. We take seriously our commitment to provide every customer that invites us into their homes with a quality meal experience and world-class service. Every day, we seek to improve so that we can retain our customers and attract new ones. Finally, I want to acknowledge the ongoing impact the pandemic has had on the daily life and health of our employees, customers, and the communities where we operate. I'd also like to send my thoughts to those who are impacted by the recent winter storms across the country. Our employees' safety remains our top priority, and their service to Blue Apron and our customers has been exemplary. I will now turn it over to Randy to talk about our financials in more detail.

Thank you, and good morning, everyone. It's great to be speaking with you for the first time since joining Blue Apron in January. As highlighted in this morning's release, our fourth quarter results were ahead of the guidance we provided. When you look at the year over year comparison, it is clear our return to growth strategy is continuing to move the ball forward. Net revenue in the fourth quarter of 2020 rose more than 22% year over year to $115.5 million, which was ahead of the upper end of our guidance range of $112 million and represented our third consecutive quarter of double-digit year-over-year debt revenue growth. As stated in our third quarter earnings call, our fourth quarter guidance had assumed that we would recover up to $2 million related to credits issued in connection with a voluntary supplier recall of onions from the third quarter. Had we recovered that in the fourth quarter, it would have had up to $2 million of additional positive impact on both the top and bottom line. Fourth quarter meal kit demand was driven by our more expansive menu offerings, the continuation of our celebrity chef partnerships, including a successful program with Chef Eduardo Jordan, and the continued rollout of new products, such as our customization initiative. As Linda noted, product innovation is a key priority for Blue Apron. And even as we rolled out more new product innovations in 2020 than ever before, we expect to launch additional new products in 2021, which will be supported with significantly higher marketing spend. we believe these efforts will drive future demand. When Blue Apron reported third quarter results, management highlighted some anticipated impacts to the fourth quarter demand as a result of ongoing labor availability challenges. As a result, we did not lean as heavily into marketing as we otherwise would have. That said, we modestly stepped up our marketing investment with fourth quarter spend of $12.5 million, or 10.8% of net revenue, compared to $10.9 million, or 9.7% of net revenue in the third quarter of 2020. We believe we are well positioned with the right equipment, facilities, supply chain, and food safety protocols in place to support higher demand. And in the fourth quarter, we continue to execute operational efficiency products and other initiatives, such as supplier prepackaging of certain ingredients, which ultimately led to reducing labor hours and improved capacity. In addition, we temporarily reopened our Arlington, Texas facility this quarter to enable us to leverage existing assets while we continue to identify and implement other operating efficiencies. We expect our progress with efficiency and capacity initiatives will allow us to meet forecasted demand in the first quarter and full year, even if some of the pandemic-driven challenges persist. We believe we are positioned to execute on the critical parts of our growth initiatives focused squarely on driving demand, including the increased investment in product innovation and increased investment in marketing, as I noted earlier. Turning now to a review of our key customer metrics, which continue to reflect the benefit from our focus on customer engagement and retention. We had 353,000 customers in the fourth quarter of 2020, up from 351,000 in last year's fourth quarter and down slightly from the third quarter, largely reflecting our decision to manage demand given the capacity constraints we've discussed. Orders per customer of 5.3 remained at improved levels and were up more than 15% year over year. Orders per customer continued to track around our highest levels over the last five years. Average order value was a record $61 compared to $58 in the fourth quarter of 2019. Average revenue per customer was more than $300 for the third consecutive quarter, rising 22% year over year for the second consecutive quarter to $327, and marking our second highest quarter ever. Reflecting our operating momentum, the last three quarters have been the only time Blue Apron has recorded an average revenue per customer of more than $300 since prior to 2015. On the cost side, cost of goods sold excluding depreciation and amortization as a percentage of net revenue improved year over year by 40 basis points to 60.6%. Our variable margin was 39.4% in the fourth quarter of 2020, compared to 39% even in the fourth quarter of 2019. The improvement in COGS and variable margin as a percentage of net revenue largely reflects our continued focus on cost efficiency, which more than offset the frontline wage and bonus investments we've made in our fulfillment centers since the beginning of the pandemic. Our focus on cost discipline is also evident in product technology and G&A costs. with PTG&A as a percentage of net revenue declining 550 basis points to 31.9%. On the bottom line, we reported a net loss of $11.9 million, which compares favorably to our guidance for a net loss of no more than $15 million. Adjusted EBITDA loss was $1.7 million, a favorable comparison to our guidance for adjusted EBITDA loss of $5 million and an 80% year-over-year improvement. For the full year 2020, net loss and adjusted EBITDA improved 24% and 88% to losses of $46.2 million and $1 million respectively, demonstrating our ability to manage costs throughout the organization and maintain efficiencies in our fulfillment center network. We recorded negative operating cash flow and free cash flow of $1.3 million and $2.5 million respectively. These metrics demonstrate significant improvements of roughly $10 million each compared to last year's fourth quarter. As detailed on our third quarter conference call, we strengthened our balance sheet and improved our financial flexibility in 2020. At December 31st, 2020, we had cash and cash equivalents of $44.1 million and $34.1 million in total outstanding borrowings under the senior secured term loan of which $30.6 million was classified as long-term debt and $3.5 million was classified as the current portion of long-term debt. As such, we remain confident that we have positioned Blue Apron to better compete in the marketplace, and we continue to believe we have the necessary capital resources to drive the profitable growth. Turning to our financial outlook for the first quarter, let me first share some assumptions. Our guidance assumes both the consistent benefit to our business from the execution of our strategic growth initiatives and ongoing operational improvements, as well as continued higher levels of demand as a result of changes in consumer behavior and our planned increases in marketing initiatives and spending. Further, our guidance assumes that we will not experience any unforeseen significant disruptions in our fulfillment center operations or supply chain as a result of the pandemic or otherwise. In addition, because the timing of the onion recall recovery remains uncertain, we are not assuming recovery of the up to $2 million of credits in our first quarter outlook. Reflecting these factors and assumptions, we expect first quarter net revenue will increase year-over-year by approximately 23% to 27% to approximately $125 million to $129 million, which would be our fourth consecutive quarter of double-digit year-over-year revenue growth. This growth is expected to reflect year over year and quarterly sequential increase in customers, driven in part by the significant increase in marketing investment we have planned for the first quarter. We expect to incur a net loss of no more than $16 million in the first quarter and an adjusted EBITDA loss of no more than $6 million. Looking forward to the full year 2021, we expect to achieve double-digit net revenue growth. 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's Investor Relations website. Linda and I will now take your questions.