Blue Apron Holdings, Inc. Class A

Good morning and welcome to the Blue Apron Holdings third quarter 2022 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, Monday, November 7, 2022, 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 Finley, President and Chief Executive Officer of Blue Apron, and Mitch Cohen, Interim 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 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 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 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 GAAP measures. With that, I would now like to turn the call over to Linda Findley, Blue Apron CEO. Linda?

Thank you, and good morning, everyone. We're pleased to have you here today for an update on the business. Joining me on the call is our interim CFO, Mitch Cohen, who joined us a few weeks ago. We are thrilled to have Mitch on board as we continue our search for a permanent CFO. Mitch comes to Blue Apron with a significant experience in consumer-oriented companies, including Redbox and Serent. I would like to welcome Mitch and appreciate his ongoing support. Before I jump into the quarter, I'd like to directly address our cash position. As many of you know, last month we made the decision to tap the public markets to enhance short-term liquidity and maintain compliance with our minimum liquidity covenant. We completed an at-the-market offering in early October, resulting in approximately $14.1 million after fees, and commissions. We did so in light of not receiving the private placement and other funding that was expected from affiliates of Mr. Joe Sandberg, our largest shareholder, by the end of September. The proceeds of our ATM program enhanced our short-term liquidity and allowed us to remain in compliance with our financial covenants. We continue to remain in active discussions with Mr. Sandberg, and we entered into a pledge agreement with one of his affiliates. Under this agreement, Blue Apron was granted a security interest in certain securities of private companies with a value estimated to be significantly in excess of the $56.5 million owed. Mitch will speak a bit more on this. We are also taking actions to further stabilize our cash position. We are working closely with financial advisors to explore financing and other alternative avenues to manage our liquidity. Over the summer, we began identifying and instituting several cost savings and margin initiatives. including beginning to find additional ways to manage our cost structure and improve margins. In the third quarter, our variable margin was 32.2%, a reduction on both quarter-over-quarter and year-over-year basis. The decline was mostly attributable to higher costs across packaging and logistics. We plan to continue to identify other areas to further manage expenses moving forward. Additionally, we announced today that Chris Halkyard has joined our team as Chief Supply Chain Officer. This position replaces the role of chief operating officer and is accountable for all fulfillment center operations, supply chain, and logistics and procurement. Chris comes to Blue Apron with over 30 years of supply chain and operations experience, specializing in fulfillment center operations management. His background centers on implementing processes to allow for more efficiency, better decision-making, and better cross-functional ways of working. We expect that this expertise will be invaluable to us as we focus our attention on improving our variable margin, increasing productivity, and enhancing quality. While we plan to provide a more comprehensive update on all efforts on our fourth quarter and full year results conference call, another area where we took notable action this quarter is in marketing. During the third quarter, we reduced our spend by 21% as compared to Q2 2022. We saw cost of marketing rise beyond sustainable levels, particularly in search marketing, and therefore, we are adjusting spend and tactics accordingly. We are focused on optimizing our programs to return to payback within one year. Considering the importance of marketing on our business, we are constantly looking at ways to improve our strategy, balancing where we are today and broader market conditions. Over the past few weeks, we welcomed Amber Minson as our new Chief Marketing Officer. Amber comes to us with over two decades of data and growth-oriented marketing experience that we think will be invaluable to our business as we move forward. Over the past two years, we built a solid marketing foundation, including significantly strengthening our brand equity. In parallel, we have also invested in key tech improvements. These efforts will allow us to shift our marketing strategy efficiently to be more data and performance driven. Looking ahead, we are taking measures to be disciplined in managing the business and cash. We remain focused on our goal of long-term profitable growth. In Q3, we continue to deliver consistent key customer metrics. Average order value of $70.83 was the new company record, as was average revenue per customer of $340. Order frequency held steady at 4.8, down modestly from Q2, and in line with seasonal quarterly trends. The price increases implemented over the summer, along with our ability to continually provide greater menu options and additional variety, drove our success with these metrics. Total active customers over the 12 months ending September 30th was approximately 679,000. This was a decline of 1.3% from the equivalent period a year ago. As we mentioned last quarter, we believe our 12-month customer number represents a more complete view of the active customers in our business and smooths out seasonality. For the quarter, total customers were 323,000, down 7.5% sequentially and 7.9% year-over-year. Similar to Q2, seasonal and macroeconomic pressures on purchasing due to the inflationary environment drove reports for the declines. We found that our marketing efforts in Q3 were less efficient than in prior quarters, which equally impacted our customer count. Our product pipeline also remains strong as we continue to innovate and provide our customers with new and unique ways to shop with us. As our latest offering, our new ready-to-cook recipes are resonating well with customers. These meals help meet their growing need for quick, convenient, and delicious mealtime options. Our culinary team executed a well-thought-out testing plan, allowing us to launch this product without introducing new ingredients into our pantry. So far, these meals are performing well and continue to receive high praise from our customers. In addition, we expanded the subscription experience to be more customer-friendly. Now, customers have the optionality to order as many recipes and add-ons as they want per week with no limitations. Our seasonal occasion-based boxes are also a big hit. Between now and the end of the year, we are helping our customers celebrate the holiday season. We introduced our biggest Thanksgiving offerings to date, followed by our new holiday roast box to extend the season. These offerings are created to give customers the flexibility to tailor their orders to appeal to their party size, specific tastes, and dietary preferences. Partnerships also remain a big focus for us. We continue to expand our e-commerce presence to a wider pool of potential customers beyond our core ecosystem, including our gift card sales. Customers can now purchase a Blue Apron digital gift card on Costco.com. This allows us to bring a gift option to their customer base at a great value, especially as gift experiences are growing in popularity. In addition, starting in October, a selection of our popular meal kits along with our seasonal boxes are for sale online in the U.S. Amazon stores without a subscription. We were able to do so effectively by leveraging the process we established earlier this year when we introduced our product on another e-commerce platform. While the kits are sold on Amazon.com, the boxes are directly fulfilled by us taking advantage of our ability to ship boxes within one business day. Furthermore, we continue to work with our current enterprise partners and look for additional opportunities to expand these efforts. We view our enterprise sales as a good way for us to further build brand awareness and drive revenue and customer growth. We also continue to focus on ESG and had several notable developments this quarter, including the launch of our inaugural ESG report, the Better Living Roadmap. This report details Blue Apron's ESG progress through 2021 and also highlights our first-ever SASB report. The ESG roadmap focuses on three key priorities, people, product, and progress, and details our actions along with key initiatives against each of these areas. We also signed a partnership with Planet Ford, the leading carbon management platform for consumer companies, as we look to take proactive steps towards our net zero goals. Lastly, we also joined the United Nations Global Compact Initiative. As a participant, we have committed to elevating our role to show the different ways we can help support the outcomes of the United Nations 17 Sustainable Development Goals. Before I turn the call over to Mitch, I want to reiterate that we continue to drive towards our goal of achieving long-term sustainable growth in the future. We are implementing initiatives designed to address key fundamentals, including margin levels, PTG&A, and marketing. With that, I would like to turn the call over to Mitch for a review of our financials. Mitch?

Thank you, Linda, and good morning, everyone. Great to chat with you today. To start, as Linda discussed, we completed an at-the-market offering in early October after not receiving funding from Mr. Sandberg's affiliates as expected by September 30th. The offering helped to enhance short-term liquidity and keep us in compliance with our financial covenants. As part of the offering, we sold approximately 4.6 million Class A common shares at an average sales price of $3.25 for approximately $14.1 million after fees and commissions. I'll speak more on our current cash position towards the end of my remarks. With the execution of the at-the-market offering, we exhausted our prior shelf registration statements. Today, we filed the universal self-registration statement for the registration of $100 million worth of shares of Class A common stock, senior or subordinated debt securities, preferred stock, and or warrants. With this backdrop, let me run through our quarter performance and touch on some of the cost-saving initiatives we implemented. Starting with the top line, third quarter net revenue was $109.7 million, down 4% sequentially and roughly flat with the prior year. The sequential decline was primarily tied to seasonality and the presence of a bulk sale to an enterprise customer in the second quarter. As Linda highlighted, average order value hit another all-time high of $70.83, while average revenue per customer also in the record at $340. Price increases introduced over the summer, along with added variety and customization of our menu, built a strong performance. Average orders per customer slightly declined sequentially from 4.9 to 4.8 due to the seasonal uptick in travel in the quarter. Travel also drove a decline in total customers to 323,000. Customers paying back their spending over inflationary concerns also impacted our customer count in the quarter. Turning to expenses, variable margin was 32.2%, representing a decline of 250 basis points quarter over quarter and 90 basis points year over year. The decline was due primarily to increased packaging and shipping costs, alongside a reduction in total customers in the quarter. The past summer, we experienced warmer than usual temperatures across the nation, requiring us to add additional packaging to keep food fresh. We also experienced a supplier issue on one ingredient and a logistics issue. and we are working to recover the associated costs. In the third quarter, PTG&A cost total $37 million compared to $35.2 million in the same quarter last year, mainly driven by an increase in consulting spend to support our strategic priorities. Moving forward, we believe that we will achieve savings through the cost-management initiatives we have begun identifying and implementing and remain focused on optimizing our cost structure and improving margins. In addition, we paired back marketing spend in the quarter. In Q3, marketing spend was declined 21% to $17.3 million. In Q4, we expect marketing spend to be relatively flat versus Q4 2021 levels as we look at the managed spend and invest in areas with better ROI. Looking at our bottom line, we reported a net loss of $25.8 million and adjusted EBITDA loss of $17.5 million. operating cash flow was a negative 20.7 million. At the end of Q3, we had cash and cash equivalents of 31 million, which excludes the approximately 14.1 million after fees and commissions that we received from the completion of our ATM shortly after quarter end. As Linda discussed earlier, we remain active in discussions with Mr. Sandberg regarding his funding. On November 6th, we entered into a pledge agreement under which an affiliate of his granted us a security interest in certain assets of private companies with a value estimated to be significantly in excess of the 56.5 million owed to us under the RJB private placement agreement. Additionally, we're working on a number of cost savings initiatives and in discussions with financial advisors to evaluate financing and other alternatives. We also are in discussions with our lenders as assuming we receive no funding from Mr. Sandberg or other sources, We expect to be in breach of our minimum liquidity requirement of the covenant as early as later this month. We believe the pledge from Mr. Sandberg's affiliates gives us an alternative path to secure the funding and demonstrates to our lenders we are taking necessary steps and necessary actions to secure liquidity. Finally, before I turn over to Q&A, let me touch briefly on the outlook. Because we have not yet received the anticipated funds from Mr. Sandberg's affiliates, we are withdrawing our previously announced revenue growth target of 7% to 13% for full year 2022. Moving forward, we will remain focused on achieving adjusted EBITDA profits and profitability in the future and will evaluate providing updated targets once we have more clarity on our liquidity position. With that, let us open up the call to your questions.