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spk01: Good morning and welcome to the Blue Apron Holdings Third Quarter 2021 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, Tuesday, November 9th, 2021, for replay purposes. A slide presentation has been created to accompany today's remarks and can be accessed on 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 Findley, President and Chief Executive Officer of Blue Apron, and Randy Grevin, Chief Financial Officer. Before handing the call over to the company, we will review the Safe Harbor Statement. Various statements that the company makes during today's call about its future expectations, plans, and prospects constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these 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 released on SEC filings where it has defined these measures and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, reconciliations of certain forward-looking non-GAAP measures referred to during this call are included in our earnings release, which is available on the company's investor relations website located at investors.blueapron.com under Events and Presentations. With that, I would now like to turn the call over to Linda Findley, Blue Apron CEO. Linda?
spk00: Thank you, Riley. Good morning, everyone, and thank you for joining us today. Our third quarter results highlight the continued success of our growth initiatives that we began implementing in 2019, including our ability to drive growth in customer value. We continue to see strength in our key customer metrics, driven by the value and engagement derived from our product initiatives, and we see this value and engagement remain in post-pandemic behavior. This is demonstrated by continued elevated levels of orders per customer, average order value, and average revenue per customer compared to our pre-pandemic levels and others in the industry. As we discuss our results today, in addition to looking at last year's third quarter, we will generally use the pre-pandemic third quarter of 2019 as a benchmark as we believe that it is the appropriate way to evaluate the long-term evolution of our key customer metrics. The patterns and customer behaviors in the third quarter of 2021 reflect a higher correlation to those normalized periods versus the pandemic impacted periods in 2020. In fact, even with the Delta variant, we have already seen a return to relatively normal behaviors in Q2 and Q3 from a customer perspective. As anticipated, we also see, and expect to see going forward, continued levels of changed core consumer behavior as more people eat and cook at home than prior to the pandemic. This behavior is reflected in our key customer metrics, and we believe it is a positive indicator for our near and long-term business outlook. The research also reflects that consumers are looking for convenience and high-quality ingredients when cooking, which Blue Apron features in each of our meal kits. These changes in consumer habits, complemented with a meal kit industry that is still less than 10 years old in the United States, and our new financial flexibility give us an opportunity to attract even more customers to Blue Apron. In fact, based on the most recent census data, we estimate there are approximately 55 million U.S. homes that meet our target household income and family lifestyle criteria. One of our primary growth initiatives is focused on adding variety, flexibility, and choice to our product offerings, giving our customers more options to bring Blue Apron into their kitchens each week. Our successful execution on this strategy continues to drive consistent customer value growth as demonstrated by near record level average order value in the third quarter. In addition, orders per customer remain at very high levels with customers ordering an average of five times in Q3. Orders per customer were up 11% in the third quarter compared to Q3 of 2019 and average order value rose more than 8% over the comparable quarter of 2019. resulting in an average revenue per customer exceeding $310 for the sixth consecutive quarter. We achieved this despite the backdrop of high travel levels due to the end-of-summer pent-up demand as evidenced by travel being cited by customers as the greatest driver of cycle skips in the third quarter and at the highest level we've seen since we started tracking the data. Each of these metrics highlight our growing value per customer and reflect the strength of our business model. which is focused on increasing the value of each box that is ordered. Our customers now order more than 20 times a year on average. By providing product variety and flexibility each week, we are confident that we can drive customer value and top line growth. Over the last year and a half, we've highlighted several of our product introductions, including on our earnings calls, including our premium recipes, meal prep, add-ons, and customization. In the third quarter, these product innovations provided a nearly 19% year-over-year lift in AOV before promotions, credits, and refunds. For the fourth quarter, we also expect a lift from these products, which now include the recent introduction of Heat & Eat, our first-ever single-serving meal offering. The early response to the initial launch of Heat & Eat provides additional evidence that our strategy to provide customers with more options for their boxes is helping to drive sustainable growth in customer value. Expanding on the discussion of AOV, We've implemented our pricing changes throughout Q3, which added shipping charges to all orders while balancing our base plan price to be consistent across all plans and in line with our competitors. Importantly, with the pricing rollout, we continue to see strong engagement from customers and a negligible impact on churn. While the pricing changes started in Q3, the revenue and margin benefit will be fully reflected in Q4. I would like to speak about how we plan to build customer growth on top of this foundation of customer value starting in 2022. Our recent capital raise, which we completed last week, includes a plan to fund our aggressive growth initiatives. The $78 million capital raise allows us to lean into scalable growth predominantly through new and expanded marketing initiatives. We expect these initiatives to help drive new customer growth while also building on our strong customer KPIs through new levels of engagement and retention. As we close out 2021, building upon the progress we have made over the last two years, we plan to accelerate investments in rebuilding our marketing technology capabilities and lean into additional promotional spend. This investment is deliberate and intended to position us for significant top line and customer growth starting in 2022. These initiatives combined with our strength in capital position and liquidity enable us to responsibly increase our marketing efforts. Looking ahead, our marketing spend for 2022 is expected to be substantially higher both in dollars and as a percent of revenue than it has been since we deliberately cut back marketing expenditures in 2018. We will lean further into initiatives already underway and efficiently invest in customer acquisition channels Blue Apron has not focused on for the last several years. We plan to continue our technology and marketing tech investments that are designed to improve site speeds and conversion including in SEO and organic channel tools designed to acquire more high-intent traffic at lower costs. We expect all of these initiatives to include new processes and procedures that will increase creative agility for both ads and landing pages. In addition, we plan to expand new and existing marketing channels, including direct mail, inserts, video ads, and other proven and new channels that benefit from scale. We plan to focus our investments in key upper funnel tactics and expand into other media to drive awareness and help convert consumers in our key demographics into new, engaged customers. We are confident in this strategy as we see consistent, healthy cohort behaviors from the customers we are already acquiring as we lean further into marketing investment. In 2022, we are also planning to double our number of partnerships. while investing in marketing support for possible licensing opportunities and other new potential lines of distribution. We intend to continue to invest in current brand and acquisition partners such as WW, Calm, Disney Studios Content, along with our work with Amazon Alexa. We plan to significantly increase our 2021 investment in programmatic and traditional direct mail, as well as scale spending on online video, premium over-the-top video, out of home, inbound, and outbox inserts to gain reach and tap into new audiences. We believe these core channels are extremely effective for driving awareness of Blue Apron and consideration for our product offerings. Importantly, as we invest in these upper funnel channels, we are working with our agencies and our analytics team to be proactive in evaluating and adjusting real-time our media mix with the right attribution tactics. At the same time, we plan to continue to expand and test new paid social channels such as TikTok and Pinterest. Finally, we're planning a substantial investment in reactivations across all paid channels. Before turning the call over to Randy, I want to finish by highlighting the other commitments we've made to further build out our ESG initiatives over time. On the environmental side, we plan to become carbon neutral by the end of Q1 2022, initially through the purchase of carbon offsets, which we then plan to supplement with systematic reductions. This commitment builds on our previously announced packaging and food waste sustainability initiatives with additional efforts to be developed around logistics, sourcing, and production. On the social side, we will continue to build on the benefits offered to our employees. This includes, but is not limited to, reshaping plans for career growth for employees in our fulfillment centers. For full-time hourly employees, we have also committed to increasing benefits, training, and wages, which now start at a minimum of $18 per hour. On the governance side, in September, all of the outstanding Class B high vote common shares were converted into shares of Class A common stock, meaning that all shares now have one vote per share. This resulted in us no longer being a controlled company under New York Stock Exchange rules. In addition, all of our outside directors are now independent, and we are committed to our board being composed of at least 50% women, which we currently exceed. and be at least 50% racially diverse following the 2022 annual stockholder meeting. We view these changes as well as other governance reforms we have made and are committed to make as important to our continuing evolution as a public company and believe that this new level of board independence and diversity will allow us to quickly implement initiatives that are critical to driving sustainable growth. Ultimately, we remain committed to our communities and to strong corporate governance and we are excited to implement these initiatives in the near term. In closing, this new funding provides Blue Apron with a strengthened balance sheet, and we are prepared to accelerate our growth strategies. We are proud of the revenue building and product initiatives we've put in place and believe our ability to further lean into those programs will help us grow our competitive position and lead to the creation of new value for our stockholders. I will now turn it over to Randy to talk about our financials in more detail.
spk03: Thank you and good morning, everyone. I'd like to start this morning by framing out the primary puts and takes of the third quarter at a higher level before reviewing the main themes in detail. As highlighted by Linda, our third quarter results clearly demonstrate continued progress against our growth strategies. To that end, we delivered a 10.2% improvement in net revenue when compared to the non-pandemic impacted third quarter of 2019. We also saw that the customers we acquired in Q3 have the highest order rates of any new customer cohort acquired in the last three years other than those that were acquired last year during the height of the pandemic. We believe this is an important metric by which to gauge the quality of our newest customers and the value we expect to see from them going forward. Another theme that influenced the third quarter results was the impact of higher costs that we highlighted on our second quarter call in August, including food costs, logistics, and labor. We are actively managing these costs, and while they impacted variable margin in Q3, We are confident that our work to mitigate them, including the implementation of new customer shipping fees, primarily in the last few weeks of the quarter, which have not yet fully benefited the P&L, will result in variable margin returning to normalized levels by the end of this year. To remind everyone, the seasonality in our business generally makes the first quarter our highest revenue quarter, followed by the fourth, second, and third quarters in that order. The cost side of our business is inverse to this trend. with the third quarter generally having our highest costs, primarily driven by higher packaging and shipping costs due to warmer temperatures. During the summer months, we tend to use larger boxes, thicker liners, and more gel packs per box, which is designed to ensure that our customers' food arrives fresh and safe at their doors. The added weight then results in higher shipping costs. In addition, the normalization of customer behavior we began to see in the second quarter of this year where consumers have been returning to historical patterns of travel, became even more evident during the third quarter. Given this behavioral shift, which, as you know, was a lot more broad-based across the U.S. population than just our customers, we see the two-year stack back to 2019 as the appropriate comp to accurately gauge our progress. As such, I'll primarily highlight comparisons to the 2019 third quarter results and key customer metrics during my commentary this morning. I believe this comparison is all the more relevant given that our customers cited traveling as a reason to skip an order at the highest percentage we've seen since we began tracking the metric. Higher than both Q3 2020 and even Q3 2019. Even still, orders per customer were at five, which is up from 4.5 orders per customer in Q3 2019. Another high level item from the order I want to highlight is our cash usage. The $15.7 million of cash we consumed in the quarter is largely in line with what we projected on the second quarter call. On our Q2 call, we noted that we expected cash usage in the second half of this year to approximate the cash usage from the first half of the year, with the second half weighted towards the third quarter. While that was certainly true, the accelerated growth initiatives I'll cover in just a minute changed that equation. Now I'll turn towards the details resulting from the influences I just discussed. Compared to Q3 2019, our KPI growth was driven by our more expansive menu offerings, the continuation of our successful partnerships, and the rollout of new products, such as add-ons and Kraft burgers. In fact, the benefit to AOV from some of our more recently introduced menu offerings accelerated when compared to Q2 of this year. Product innovation continues to deliver as a critical component of our growth strategy, and it provides more options for our customers to add to their meal kits resulting in higher average order value and revenue per customer. While the 350,000 customers in the third quarter of 2021 was down from 386,000 in Q3 2019, the revenue growth over the two-year comp demonstrates that we have been successful in transitioning the business to higher value customers. I already highlighted orders per customer, which was up more than 11% compared to Q3 2019, and that average order value of $62.30 was our highest third quarter level. up more than 8% from Q3 2019. Average revenue per customer, which was $313 for Q3, was more than $310 for the sixth consecutive quarter and was up 21.5% from Q3 2019. Third quarter marketing spend was $14.9 million, or 13.5% of net revenue, compared to $12.1 million or 12.2% of net revenue in the third quarter of 2019 and $10.9 million or 9.7% of net revenue last year. On the cost side, cost of goods sold excluding depreciation and amortization as a percentage of net revenue was 66.9%. Cost of goods sold were impacted by increased inbound freight and outbound logistics costs, as well as increased food costs as highlighted on our Q2 call. The increase in food costs was primarily attributable to investments in premium ingredients and seasonal produce, which are components of the enhanced product offerings, choice, and variety that we provide to our customers. Our variable margin of 33.1% was below what we typically target, largely due to the impact of well-publicized, higher logistics costs. These costs come from the first and middle mile, as we continue to do a good job managing the last mile delivery component. Variable margin was also impacted by inflationary pressure on our food costs. As I noted earlier, we expect variable margin will normalize towards historical levels by the end of the year as we implement strategies to offset higher logistics and food costs. One of our proactive measures was the addition of a shipping cost for all customers instead of just our smaller order value customers. Since this was rolled out throughout Q3, the main benefit to variable margin will come in Q4 and beyond. We continue to execute on our initiatives to streamline operations in our New Jersey and California fulfillment centers. Since we began almost a year ago, we have generated improved efficiencies in several areas, including improvements in productivity and increased asset utilization. This has allowed us to absorb the added complexity associated with our product launches without compromising on ingredient quality. In addition, we are working closely with our vendors to reduce onsite inventory and we continue to find opportunities to reduce operating costs without creating any significant supply chain risks. We continue to actively manage capacity and believe we are generally prepared to address current volume as well as any significant increases in future demand. Product, technology, general and administrative costs were $35.2 million in the third quarter of 2021 and included lower professional fees and facility investments compared to Q2 2021. Other expense in Q3 of approximately $6.4 million was all non-cash. This is related to an increase in the fair value of the warrant obligation requiring us to issue warrants to our lenders on a quarterly basis so long as the debt remains outstanding. The warrant obligation is remeasured to fair value at each balance sheet date with changes in fair value recorded in other income or expense net. On the bottom line, we reported a net loss of $27.6 million, which includes the $6.4 million non-cash impact from the fair value remeasurement of the warrant obligation to our lender. Adjusted EBITDA loss in Q3 was $11.7 million. As expected, we saw an increase in cash use from operations in the historically cash-intensive third quarter, primarily related to the revenue and cost seasonality I highlighted earlier. Operating cash flow was a negative $16.5 million, and free cash flow was negative $17.6 million. During the third quarter, we received $1.5 million in cash from insurance and supplier proceeds related to the onion recall that dates back to Q3 of last year. In September, we also received $2.8 million in cash from the net proceeds of the private placement with our former chairman and co-founder, Matthew Salzberg, in connection with a capital raise. At the end of Q3, Blue Apron had cash and cash equivalents of $35.3 million. The company has total outstanding borrowings of $31.5 million under the senior secured term loan, of which $28 million is classified as long-term debt and $3.5 million is classified as the current portion of long-term debt. Upon the completion of the capital raise on November 4th, we had cash and cash equivalents in excess of $100 million. Turning to our financial outlook, for the factors I've noted in my commentary this morning, we believe the 2019 fourth quarter period is the most relevant comp for our 2021 fourth quarter outlook. Now, let me first share some assumptions. Our guidance assumes both the consistent benefit to our business from the acceleration and execution of our strategic growth initiatives and the impact of the planned use of proceeds from the capital raise, including making marketing technology investments to prepare us for an acceleration in our marketing programs next year. as well as making continued operational improvements. Lastly, the guidance assumes that we will not experience any unforeseen significant disruptions in our fulfillment center operations or supply chain. With the benefit of the recently completed capital raise, we intend to accelerate our marketing and marketing technology investments in the fourth quarter of 2021 and plan to support these higher investments with additional promotional discounts for new customer acquisition and reactivation programs. As a result, we now expect that our revenue growth for the full year 2021 will be in the single digits compared to full year 2020 as these new investments are intended to impact growth starting in 2022. I'd now like to turn towards some high-level comments on the outlook for full year 2022. You've heard this morning from Linda and me about our plans to significantly ramp up our marketing efforts next year to generate higher levels of top-line growth than achieved in recent years. Our marketing spend next year is expected to be significantly higher than it has been since we deliberately cut marketing spend in 2018. We expect marketing expenditures to be around double what we spent in 2019, which we plan to augment with an acceleration of customer acquisition promotional spending at higher levels than in any of the past three years. As a result, we expect to drive top line revenue growth in at least the mid-teens percentage range in full year 2022 compared to full year 2021 and more than 20 percentage points higher than the pre-pandemic full year 2019. As a result of the significantly higher planned growth investments and some higher costs related to our commitment to being carbon neutral by the end of Q1 2022, as well as with the increases in hourly wage rates, we no longer expect to generate full year positive adjusted EBITDA next year. While that metric does remain an important midterm goal, our nearer term objective is to deploy our new capital to grow our market share. Finally, Before we turn to Q&A, I want to reiterate that Linda and I are as committed as ever to being investor-friendly. We actively speak to many of you on the call today and with many current stockholders and prospective stockholders throughout each quarter, and we are committed to maintaining this practice. Along those lines, we are in the early stages of planning for an investor day next year. Stand by for additional details on the timing and scope of that event that we expect will help the investment community better understand, appreciate, and value Blue Apron. With that, Linda and I will now take your questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star, then one. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Maria Ripps with Canaccord.
spk02: Good morning, Anna. Thanks for taking my questions. Can you just maybe spend a minute talking about what were some sort of key reasons for what seems to be higher customer losses in the quarter, especially now that you've expanded your menu so nicely over the past several quarters? I guess, is it largely sort of travel recovery, or are you seeing any other reasons driving that?
spk00: Hi, Maria. Thanks so much for the question. As we've mentioned before, on customer numbers, we report those quarter by quarter as far as active buyers in the quarter. So it isn't necessarily a loss that could be a dormant customer that would return in the next quarter. What we did see was a significant travel impact, which is where we see most of that impact in our customer number, which are customers that are coming back to the business as well after they return from travel. So that was primarily the reason. The other aspect is we did, again, lean into some of our specific investments driven to look to 2022 in growth. And so we did pull back a little bit on some of those investments in customer growth in order to think longer term.
spk02: Got it. That's helpful. And then, so thanks for the call on marketing. Can you maybe just expand a little bit on what's needed from a marketing investment standpoint? To what extent is it investing in marketing infrastructure, as you sort of pointed out, versus opening up new marketing channels and sort of high spend on customer acquisitions? And then you also mentioned doubling the number of partnerships. Are there any changes in your strategy there, and how do partnerships sort of feed into your customer acquisition strategy going forward?
spk00: Sure. So I'll start with that, and then Randy can pick up if I missed anything. First, talking about kind of investment into marketing technology versus spend. So we've already been leaning into some investment to rebuild the marketing technology, but we do have a bit more to go through the end of this year, beginning of next year to continue to scale. Where we see a bit of an advantage is we're able to actually tailor that marketing technology pretty efficiently to the new cookie list environment, which we think is helpful in helping us advance into 2022. Because of the fact that we're already doing some of this rebuild, we're able to integrate some of those changes into our marketing technology stack. But it is a much smaller part of the investment when you look at the overall contribution. A lot of it is going to be much more focused on actual marketing spend and media buys and continuing to push efficiency in those channels. The second part of your question on partnerships, a big part of what we're looking to do is use some of that marketing technology that we talked about to be able to scale those partnerships much more quickly. using more deep integrations, APIs, et cetera, to be able to enable faster and more flexible partnerships in the future.
spk03: And then what I'd add, Maria, with respect to your question on investment, as Linda mentioned, the lion's share of the investment will be in branding, marketing, performance channels, et cetera. But we do require some investment to build our marketing technology infrastructure. That investment will be in the single digits of millions of dollars. So it's a real number, but by and large, most of our expenditures will be towards driving top-line growth. And you asked about strategy. What I'll share is that there's nothing about our strategy that has changed. What the capital raise allows us to do is accelerate many of the things that were already on our roadmap that we intended to do throughout the next year. We're now able to address many of those sooner than we otherwise would have been.
spk00: Yeah, and I don't mean to answer even further, but I'll just add one more piece, which is We do feel strongly that today's consumer looks at some of the initiatives we're doing around sustainability, carbon neutrality, et cetera, as extremely important to their buying decisions as customers get much more aware of where their food comes from and how their food is sourced. So we're excited to be able to dovetail our framework that we're building around ESG and our sustainability initiatives to really help drive deeper consumer engagement alongside that marketing.
spk02: Got it. That's very helpful. And maybe one more question, if I could. I think you mentioned that you've identified 55 million households as your addressable market. Can you just talk about sort of what's required from an investment and execution standpoint to reach even maybe a low single-digit share of that type of demographics?
spk00: Obviously, I think we can't give specific numbers on that, but one of the advantages we do have given, we were – first in the US is we do have an extensive database and first party data sets of our customers and an extensive understanding of the segments and the behaviors that we can continue to drive through the product and innovations that we've been putting into play. So from an investment standpoint, again, I can't get into specific numbers about what it would take to get there, but we do see that we're holding strong on those key customer metrics coming through the pandemic. and our intent is to build customer acquisition on top of this with the newfound liquidity that we have to be able to scale that strong customer value that we've built.
spk03: I'd love to add, if I can, that we're very proud of the fact that Blue Apron is an extremely data-driven company. We have very rich data from a long history of interaction with our customers. Our customers have told us why they've left the brand temporarily, why they've come back, what they like about our business, what they wish that we would do differently. That data has informed a large part of our product strategy, but it also gives us great cues on the ways in which we can deploy our marketing dollars, meaning that our customers have given us indications in terms of how we can reach them as effectively. And that's something that we intend to leverage as we go forward and prosecute our growth agenda.
spk02: Got it. Well, thanks so much for the call.
spk03: Thank you, Maria.
spk01: And again, if you have a question, please press star then one to join our queue. Seeing no further questions, I'd like to turn the call back over to Linda Findley for some closing comments.
spk00: Thank you very much, and thank you everyone for joining the call today. We absolutely appreciate your time. On behalf of everyone at Blue Apron, we want to wish you, your families, and colleagues, friends well, and let you know that our teams are working diligently and effectively to bring incredible home cooking into people's homes. We look forward to providing you an update when we report our fourth quarter and fill your results early next year.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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