Description

Blue Apron (APRN)                                        Feb. 17, 2021

I am recommending the purchase of the on-line meal kit provider Blue Apron (APRN). Most investor’s response will be, YOU MUST BE KIDDING!!!  A skeptical investor will tell you that  the  company went public in 2017. Sales have declined 50% over the past four years and the stock price has plummeted by 94%.  All true!  A new CEO Linda Kozlowski was appointed in April 2019. She has been driving a turnaround at Blue Apron by improving the menu, modernizing the web site,  and reducing costs. The balance sheet has improved and with the extra cash Blue Apron has turned on the marketing effort to  acquire new customers and drive sales growth. Clearly investors have not recognized the changes as Blue Apron is valued at 0.4 times EV/sales, while other meal kit companies are valued at about 2.0x times 2021 enterprise value to sales.   

Historical & Competitive Background:

Four years ago Blue Apron went public at a reverse split adjusted $150/share.  The company was the market share leader in the United States  on-line meal kit market with $1 Billion in annual sales that were growing +42% year over year. Investors soon realized that the company was over paying to acquire new customers and most customers were cancelling their meal kit subscriptions within a few months. The life time value of customers was negative. It took two years of declining sales and $300 million of losses before the board ran out of patience and appointed Linda Kozlowski as the new CEO in April 2019. Linda has an impressive resume with time spent in marketing positions at on-line firms such as Alibaba, Evernote and most recently the Chief Operating Officer at Etsy.

Blue Apron was still losing customers the first year Linda was CEO because the company’s product offering was inferior to its competitors.  The number of menu items offered to consumers  was too limited and it took too much time to prepare the dinner meals. Consumers also wanted healthier food options that were not available. 

It has taken two years, but Blue Apron has substantially improved its meal kit offering for consumers relative to competitors.   The on-line meal kit industry leader in the United States is Hello Fresh with about 50% market share compared to 8% share held by Blue Apron.  In 2017 Blue Apron was the market share leader in the United States, but Hello Fresh with a superior menu offering and aggressive marketing substantially grew its customer base in the USA.

A head to head comparison of the 2 companies web sites will make the differences more apparent. 

I have been a Blue Apron meal kit customer for the past 18 months so I have seen the improvements take place first hand. 

Company                          Hello Fresh                 Blue Apron            Blue Apron

Dates  Feb 2021                   Oct 2019              Feb 2021

Number of Menu Items     25 8                      12 plus 6 customization options = 18

Preparation Time                20-50 minutes 30-60 minutes   20 – 50 minutes – faster meal prep

Pricing for 2 weekly meals   $59                                                       $48   19% lower price

Healthier Options No                            Yes - Weight Watchers Approved

Yes - American Diabetes Association

Customized Meals No                             No                           Yes – starting in the Dec 2020 Qtr

Premium Recipes At Higher Prices                                  No                            Yes – starting in March 2020

Web Site Design & Ease of Use                                                                       Much Improved

In October 2019 it was clear why Blue Apron was losing customers. Their customer offering was inferior. Today Blue Apron’s competitive position has greatly improved. With 18 weekly menu options up from 8 items,  I am far more likely to find items I like and order them.  Customization ( a new feature)  also  allows me to make the menu items even more attractive. This week Greek Chicken Vegetables & Farro was on the menu. I had the option to remove the chicken and add shrimp.  The meals today can also be prepared faster and fewer  pots and pans are used in the cooking process.  As a result I spend less time cooking and cleaning up after dinner. Finally, the prices for Blue Apron meals are also more affordable versus the competition. I usually order 2 meals a week for dinner.  The Blue Apron price with shipping is $48, while the price at Hello Fresh is $59. Thus Blue Apron is 19% less expensive. 

Sales Growth Should Accelerate At Blue Apron In 2021:

In the September 2020 Quarter Blue Apron reported sales growth of +13% year over year compared to Hello Fresh that grew sales in the United States +100% year over year.  I expect sales growth to accelerate in 2021 at Blue Apron for the following reasons:

1. In 2019 the Blue Apron product offering was dramatically inferior to Hello Fresh. Today, Blue Apron has improved its competitive position. The product offering is still inferior on some metrics, but it is superior on other metrics. 

2. The company raised $37 million in August 2020 and now has the ability to invest in marketing . Since the product offering is stronger in Feb 2021, it suggests that the return on marketing investments should be attractive and Blue Apron will be able to add new customers. 

3. Existing customers should also spend more money.  An improved menu should result in higher average order, and more frequent orders. 

4. Customer retention rates should rise with customers happier with the menu offering and spending more time working at home. 

Wall Street Analysts Have Not Noticed The Improvements at Blue Apron:

At the time of the 2017 IPO 15 Wall Street analysts were publishing research on Blue Apron. Over the past four years most of these analysts discontinued coverage and now only three analysts cover Blue Apron. Of the three analysts only one has a buy rating on Blue Apron. 

Valuation Is Attractive:

The largest on-line meal kit company in the world is Hello Fresh.  The company is headquartered in Germany and has a E13 Billion Euro market cap. The 2021 Enterprise Value to Sales Ratio is 3.0x compared to 0.4x for Blue Apron.  Hello Fresh has 11% EBITDA margins, but Blue Apron’s EBITDA profitability is at break-even as its assets are underutilized. 

There are other public and private meal kit companies with valuation metrics. 

GoodFood in Canada is valued at 1.8x times 2021 sales. They have over 50% market share in Canada despite the presence of HelloFresh in Canada. 

In October 2019 Nestle acquired Freshly, a US meal kit company. They paid $430 Million or 2.21x price to sales for Freshly which has lower sales than Blue Apron. 

Blue Apron also has over $500 million in net operating losses ($26/share) and buildings worth $129 million or $8/share.  No one has acquired the company because there are super-majority voting shares held by board member and founder Matt Salzberg. 

Industry Tailwinds:

The COVID pandemic has resulted in many of us eating more meals at home. This change in behavior is likely to be permanent. When you work at home you eat more meals at home versus at restaurants or at a corporate cafeteria. Companies are still figuring out when it will be safe to ask their employees to return to the office, but leading edge firms such as Salesforce,  Spotify, Google, Twitter, Facebook have announced new “ work from anywhere policies. “  Salesforce expects that two-thirds of office workers will only work in their corporate offices one to three days a week. 

The nine to five workday requirement in one office is dead.  Corporations are realizing that this new flexible work policy will allow them to hire employees from anywhere. Employees will be able to work and live in lower cost locations.  Employee retention will also rise as employers allow a more flexible work schedule for employees and fewer hours wasted travelling  to work. 

Why Do Consumers Purchase On-Line Meal Kits ?

There are several good reasons for purchasing meal kits especially if your household only has one or two individuals. First you save time by not needing to shop at a grocery store. All the ingredients are shipped to your home.  Blue Apron provides new menu choices every week versus eating the same food week after week if you are in charge of the shopping and cooking. The food is healthier than ordering take-out from a restaurant and much cheaper.  Meal-kits are not the right choice for everyone, but there are millions of potential customers relative to under  400,000 customers that Blue Apron currently serves. 

How Fast Will Blue Apron Grow in 2021?

Today Blue Apron trades at a low valuation of 0.4 times EV/Sales as investors view the company as a loser in the meal kit industry.  More rapid sales growth in 2021 with an explanation for why the company is doing better should lead to a rerating of the company. In Phase One of the sales recovery it seems reasonable that Blue Apron’s valuation could double to 0.8 EV/sales with 20% year over year sales growth in 2021. Valuation could rise even further if sales grow at an even more rapid rate. Sales can grow +30% year over year in 2021 if Blue Apron adds  80,000 net new customers and these customers spend 10% more by ordering meals more frequently. 

Near-Term News:

Blue Apron will be reporting its December 2020 quarterly results this week and hosting a conference call on Thursday Feb. 18th at 8:30 AM. 

Negatives:

Turnaround Not Guaranteed:

I have made the case that Blue Apron is in the process of implementing a turnaround, but success will not be easy.  The meal kit market is very competitive. There are dozens of competitors such as Home Chef, Sun Basket, Freshly, Gobble, Dinnerly and others. Many of them offer $80 coupons for first time customers to try their service. This heavy couponing makes it difficult for Blue Apron to retain customers as consumers can save money by moving to a new meal kit company once a month. 

Many Other Adjacent Competitors:

Outside of meal kit providers Blue Apron is also competing with grocery stores and restaurants. 

Hard To Differentiate:

Blue Apron’s product offering has dramatically improved over the past 18 months, but it is difficult to communicate these changes in a crowded competitive market.  Sales may not grow if Blue Apron fails to persuade consumers that Blue Apron is a good meal solution for them. 

Blue Apron Has Not Been Profitable:

Blue Apron has lost money as they have spent  50% of sales on sales and marketing while gross margins are only at 40%. Competitors have shown that if Blue Apron can reduce its customer acquisition costs, then it can become profitable. 

Inadequate Labor Supply Has Led To Lost Sales:

Even if Blue Apron is successful in attracting new customers, they may not be able to hire and retain enough employees to deliver the meal kits.  Several times during 2020 Blue Apron did not have enough employees arriving for work. Attendance was challenged for two reasons. First during the pandemic employees could not arrive at work if their child care providers fell through.  Many employees also use public transportation such as trains or buses to commute to the Blue Apron fulfillment centers.  At times employees felt unsafe using public transportation during the pandemic and did not show up at work. 

Catalyst

Quarterly earnings releases will show that the turnaround is working.