Blue Apron Holdings, Inc. Class A

Good morning and welcome to the Blue Apron first quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Tip Fleming, Head of Investor Relations at Blue Apron. Please go ahead.

Thank you, Operator. Thank you, everyone, for joining us today. With me on the call is Linda Finley, President and Chief Executive Officer of Blue Apron, and Randy Grevin, Chief Financial Officer. Before I turn the call over to Linda, a few remarks about this call. This slide presentation that accompanies today's remarks can be accessed from our Investor Relations website. In addition, various statements that we make during today's call about our future expectations, plans, and prospects constitute forward-looking statements as defined in 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 replied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements. During this call, we will be referring to certain non-GAAP measures which are not prepared in accordance with generally accepted accounting principles. We encourage you to refer to the earnings release and SEC filings where we have defined these measures. interview that reconciliation is non-GAAP financial measures, the most directly comparable GAAP measures. I will point out that many of the comparisons we are making today will be comparing the first quarter of 2022 with the fourth quarter of 2021 or the first quarter of 2020. The company believes that using the first quarter of 2020 as a benchmark is an appropriate way to evaluate the company's first quarter 2022 performance. The company believes that its financial results, patterns, and customer behaviors in 1Q20, the results of which, despite a sharp increase in demand in the last few weeks of 1Q20, were not materially impacted by the effects of the pandemic. As such, the quarter reflects a higher correlation to more normalized periods versus the pandemic-impacted periods of 2Q20 through 1Q21. And lastly, please note that in order to help investors gain a better understanding of our business, we will be providing a substantial amount of color on our current operating metrics and longer-term targets at our investor day tomorrow. With that, I'd like to turn the call over to our CEO, Linda. Linda, please continue.

Thank you, and good morning, everyone. We're happy to be with you today and look forward to providing a review of our Q1 performance and operational highlights. More importantly, I'm thrilled to have this opportunity to see many of you at our investor day tomorrow. A number of Blue Apron senior leaders will join me as we unveil our strategy for the next three years. We'll also provide an in-depth look at the business and our outlook for the future, including our strategic priorities and our path to adjusted EBITDA profitability in 2023. Until then, let me dive into our Q1 results and provide a look at where the business stands today. During the quarter, we continue to build on, execute and make progress against the foundational work we accelerated in the fourth quarter of last year. As we emphasized on our Q4 call, our focus in 2022 is on scaling the business and driving customer growth. This, of course, comes on top of the work we have done over the last few years that has helped to drive strong improvements in our customer engagement metrics. We are seeing the results of our efforts show up clearly in our strategic KPIs. Notably, customers grew 9.2% from the fourth quarter of last year to 367,000. Beyond seasonality, the sequential growth was also driven by greater brand awareness as a result of our new marketing initiatives. Strong customer engagement also helped drive top-line revenue growth of 10% from the prior quarter. Average order value continued to be seasonally strong at $63, even during a period of high acquisition. Orders per customer improved to 5.1 from 5 in Q4, and our average revenue per customer rose to $321 from $319 last quarter. This marks the eighth straight quarter that we have recorded orders per customer above 5 and average revenue per customer above 310. While Randy will provide greater detail, we also successfully completed a refinancing of our debt last week. We view this as a smart, strategic move during a time of rising interest rates. The refinancing with Allianz replaces Blue Apron's prior debt. This new debt comes with lower overall debt service obligations, including interest-only payments in the first three years and no warrant coverage, and also contains an ESG covenant that aligns with our strategy and brand. We also announced another round of equity private placements. I'm particularly pleased to have personally invested in this deal because I believe our company has such great potential both from a strategic and purpose-driven perspective. I'll let Randy comment on these transactions in more detail, but we see both balance sheet moves as further evidence of our long-term strategies taking root. In all, it has been a busy few months, and I'm excited by the team's execution. While we've been delivering on our progress, we did experience margin pressure as the first quarter unfolded, due in part to continued inflation. Before moving on, I do want to address rising food costs specifically. As we've said before, we are somewhat insulated from rising food costs due to the unique nature of our supply chain, as almost 80% of our supplier relationships are direct to the producer. However, we are not entirely immune. For this reason, earlier this month, we recently started rolling out a small per serving price increase for our meal kit and wine products. As the entire industry is seeing these pressures, this price increase now puts us in line with our main competitors while continuing to allow us to maintain a high bar of quality, value, and service for our customers. Moreover, even with this pricing increase, we believe that there is a real and growing argument to be made that meal kits can be a more economically viable option than grocery shopping. Taking into account our new pricing, we compared the price of one of our recent recipes with a selection of other retailers and found that trying to recreate that recipe at a grocery store would often cost much more if you chose a similar quality of ingredient. The cost increases even more if you decide to shop online and have the food delivered. The savings are even greater when we consider the per-serving price for our four-serving offering. We'll go into this further in detail at tomorrow's Investor Day. Overall, we're committed to proactively managing the impact of inflation and leveraging data to stay close to changes in consumer sentiment and purchasing power, all while maintaining the quality and value of our products. Randy will share more details about the impact on Q1 margins. We are also seeing improvements at our fulfillment centers. Since raising our minimum wage to $18 per hour in Q4 and implementing a number of other initiatives to improve our employee experience, we have seen retention and attendance improve significantly, and our reliance on temporary workers decline substantially. We look forward to seeing these improvements pass through to a greater efficiency moving forward. Our investments in both marketing and product innovation are making progress. While Q1 is always a seasonally strong quarter in our industry, In previous years, we have often started to see a seasonal drop in active customers by the end of the first quarter and into the start of the second. However, this year is definitely different. Today, our customer numbers are higher than they were at the end of Q1, and we continue to see growth in customer engagement. At this point, we expect to grow our customer base sequentially in the second quarter, bucking the typical seasonal trends of our business. We are also seeing customers return to our brand after trying other offerings. According to our data, we believe a little more than 5% of customers who reactivated their accounts in the fourth quarter of 2021 and first quarter of 2022 actually left Blue Apron to try another meal kit and then decided to come back to us. We believe this is a clear sign of the improvements we've made to meet customer needs over the past few years. We also feel that the improvements we are making to our marketing infrastructure will help us build on this momentum. As we anticipated, marketing spend was up 40% year-over-year in Q1. This spend was mainly due to our efforts to drive brand awareness on a larger scale. While there are fairly high initial upfront costs to attract new customers to our business, our internal data shows that our payback period over time is well under a year from a contribution margin perspective, and we have plans to continue to accelerate paybacks. More importantly, we have found that their spending with us increases the longer they are our customer. We'll take you through this in more detail at our investor day tomorrow. Based on the same data, We see that the new customers we acquired in Q1 are already tracking well with respect to order frequency and average order value versus the prior quarter and prior year. Similar to others in the industry, our cost per acquisition has increased over the past few months. However, we are already starting to see improvements, and we believe it will continue to come down in the coming quarters. This dynamic did impact our cash usage as expected during the quarter, and Randy will offer more insights on this in a moment. As you will hear more about during our investor day tomorrow, our marketing team is focused on rebuilding our marketing infrastructure with the aim of building a modern and robust foundation for long-term and sustainable growth. We are also committed to a holistic approach to our marketing that balances spending through the entire customer journey. During the quarter, we began implementing parts of our marketing strategy and selecting vendors that will help us execute our goals. For example, we're enhancing our existing customer data platform to more efficiently track every customer touchpoint to help improve conversion. We are also implementing a content management system to better manage our marketing content across multiple platforms for both organic traffic and conversion improvement. We plan to continue work on a number of initiatives related to this in the second quarter. We also brought all of our paid social media programs in-house and are implementing additional technology to allow us to simplify integration with a larger number of partners at scale. Our Chief Marketing Officer, Danny Simpson, will provide greater detail on our partnerships tomorrow at our Investor Day. We are particularly excited about a new national brand campaign that we launched in April. The campaign is aimed at building our brand and raising broader awareness for the meal kit category. The brand videos highlight the benefits of cooking with Blue Apron from creating incredible recipes with high quality ingredients to easing the burden of menu and recipe planning. This is an exciting moment for us as this is our first major national brand campaign since 2018. These advertisements kicked off our 2022 marketing strategy, where we are focused on creating a holistic and fully connected experience for our customers, from the first marketing touchpoint through sign-up and recipe selection. We're seeing positive initial results from our campaign, and Danny will dive into more details tomorrow. To complement our marketing efforts, we continue to meaningfully enhance our menu selection to offer more innovative recipes, as well as add even more choice and variety. Late in the first quarter, we launched a new breakfast offering. All of the recipes are designed to be ready in 15 minutes or less and feature classic breakfast ingredients with an elevated twist. This is just the start. Our culinary team plans to continue to iterate and expand on the options based on customer feedback. So far, the early feedback is extremely positive, and our breakfast options have been our most popular add-ons since we introduced them in April. Beyond breakfast, we plan to roll out new add-ons and increase the weekly selection from three to nine for families. Excuse me, three to nine for families. We expect our four serving plan to go to 12 recipes per week, available starting in June. We believe one of the keys to unlocking greater efficiencies when it comes to acquiring new customers and driving engagement with existing customers is through strategic partnerships and collaborations. We continue to build on the success of our existing work by partnering and collaborating with world-class companies such as Disney Studios Content, Amazon Alexa, WW, and American Express. For example, following a successful collaboration last year with Disney and Pixar on the release of Luca and Soul, we are again teaming up to celebrate their all-new movie, Lightyear, with a specially designed menu. We are also expanding to new channels through distribution partnerships while maintaining the efficiencies of the D2C model. We continue to work with Amazon Alexa, and today I'm very excited to announce that we will be launching a storefront on walmart.com later this month. Consumers will be able to buy Blue Apron boxes without a subscription. This direct-to-consumer offering is an excellent way for us to introduce Blue Apron to new groups of customers who may not have considered a meal kit before. We are excited for this initiative to get off the ground and look forward to adding similar partnerships in the coming months. In order to provide customers with a seamless delivery experience with the best service, we recently signed an agreement with Veho to support last-mile delivery in select markets. With the volatility of global supply chains, rising gas prices, and labor and truck shortages, We continue to regionally diversify and optimize our mix of last mile delivery partners to get the best service and value possible for our customers. Veho is servicing Blue Apron in select mid-Atlantic markets to start, and then we'll provide customers with real-time delivery messaging, as well as the ability to rate their driver and the overall service. We are looking to offer similar features nationwide in the future as we constantly search for and invest in ways to improve the customer experience. We are also taking advantage of increased production capabilities and network capacity to expand Monday delivery to regions outside of the Northeast and California. We are doing so by actively identifying additional ways to ship longer distances while mitigating increases in fuel and transportation costs. We have plans to rapidly increase our Monday footprint to include Florida, the Upper Midwest, and the Lower Great Lakes. By the end of Q3, we intend to offer seven days a week delivery to over 75% of the continental United States. Turning to ESG, we successfully met our commitment to become carbon neutral by March 31st, offsetting estimated Scope 1, 2, and 3 emissions. We achieved this goal by purchasing carbon offsets to cover upstream and downstream emissions that range from sourcing, packaging, and transporting our products. We are now working on implementing systematic reductions as we look to achieve our longer-term goal of being net zero. Becoming carbon neutral is an integral part of our better living roadmap. The plan is structured to sustain, preserve, and build on our existing sustainability commitments with a focus on people, products, and progress. We have included more detail in this roadmap than our proxy statement that we filed at the end of April, and our head of sustainability and social impact, Kelly Burton, will provide a deeper guide into our ESG strategy during tomorrow's Investor Day. We remain confident in the business and feel strongly that we are on the right path to creating long-term sustainable growth. We have more work ahead of us, and we hope you'll join us on this journey. And finally, we look forward to seeing many of you tomorrow in Linden or joining us virtually for the Investor Day. With that, let me turn things over to Randy for a review of the numbers. Randy?