Bulk Invest : Q3 Prepared Remarks

Operator Introduction

Good morning and welcome to the Blue Apron Holdings third quarter 2020 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, Thursday, October 29, 2020 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 Kozlowski, Chief Executive Officer of Blue Apron, and Tim Bensley, 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 and SEC filings, including the third quarter 10-Q filed this morning.

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.

In addition, reconciliations of certain forward-lookingnon-GAAP measures referred to during this call is 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 Kozlowski, Blue Apron's CEO.

Linda?

Linda Findley Kozlowski (CEO)

Thank you [operator name]. Good morning everyone and thank you for joining us today.

Before diving into our third quarter results, I wanted to acknowledge the ongoing impact the pandemic has on daily life and the health of our employees, customers and the communities where we operate. Their safety remains our top priority.

Since we last spoke with you in late July on our second quarter conference call, things have been very active for Blue Apron. We've continued to see strong demand for our meal kits as third quarter revenue grew 13% year over year. As Tim will discuss in a few minutes, top line growth was adversely impacted by approximately $2.0 million of customer credits for boxes related to a voluntary supplier recall of onions. Given that the third and fourth quarters have historically been our seasonally slowest quarters, and that we have continued to face certain challenges with labor availability, it's notable that our year over year net revenue growth in Q3 was at a higher rate compared to year over year net revenue growth in Q2. We also expect an improvement of year over year net revenue growth at a similar rate for the fourth quarter as we saw in the third quarter.

The top line year over year growth, combined with our continued focus on costs and cash management, led to adjusted EBITDA loss and net loss coming in significantly better than our guidance targets. In addition, while we generally face seasonal influences in the third quarter of each year which drive higher packaging and shipping costs, our variable margins improved compared to the same period last year, even as we added operational complexities by introducing new product offerings and made investments in incremental hourly wages and attendance bonuses for our fulfillment center workforce.

Since the end of the second quarter, we have strengthened our balance sheet and provided financial flexibility with the underwritten public offering of four million shares of our Class A common stock in August, resulting in approximately $32.9 million of net proceeds, and a new $35.0 million senior secured term loan, funded two weeks ago, which effectively extends our debt maturity until March 2023. Reflecting this financial flexibility as well as the benefits from our growth initiatives and the positive impact on demand from the COVID-19 pandemic, the Board recently concluded our strategic review process that had been undertaken earlier this year. We believe we are now better positioned to continue to execute on our growth plan.

The year over year improvements we've generated since our growth strategies began to take hold in late 2019, coupled with the continued heightened consumer demand stemming from the pandemic, measured on a year over year basis, has been notable. I'll add that our operating plans have also helped us address the increased demand, though there are still more operational efficiencies to be gained. Against this backdrop, consumers have continued to show an increasing preference for quality recipes and food as they cook at home more frequently. We continue to believe that these changes in consumer behaviors will carry on to some extent even after the pandemic ends. In addition, we believe that our strengthened balance sheet will enable us to further improve our competitive position in the marketplace as we look to attract, engage and retain more customers.

Turning now to some highlights from the third quarter. Despite a decline in customers this quarter partially due to labor constraints, the progress we have made against our growth plan can be seen in the year over year improvements in our other key customer metrics. These metrics include orders per customer, average order value and average revenue per customer which, for the second quarter in a row, was above $300 representing only the second time since 2015 we've achieved this level.

The year over year growth we achieved in the third quarter of 2020, as well as our expectations for continued year over year growth this quarter, is a reflection of the significant improvements we continue to make against customer engagement and retention, as well as a result of the changes we have seen in consumer behavior related to the pandemic.

We continue to evolve our product with quicker prep time recipes and menu options that can adapt to more lifestyles. We also continue to benefit from our premium offerings, which expanded to include new proteins like duck, which was the most purchased premium recipe in the third quarter. Our premium offering features advanced cooking techniques and more ingredient variety. These opt-in-only recipes continue to be popular with our customers. On average, 70% of premium orders each week are repeat premium orders. In addition, these recipes contributed to approximately 29.5% of the year over year increase in average order value in Q3.

Continuing to provide more product variety, flexibility and choice is another critical part of our growth strategy. We recently launched a number of new product expansions that make it more convenient for customers to receive additional meals every week. Now, all of our customers on our 2P Signature menu can order a fourth meal to help remove stress around menu prep or added trips to the grocery store.

Customers can also order multiple boxes per week, providing for greater flexibility in weekly menu planning. This offering allows our customers to get two boxes per week by selecting up to eight different recipes per week at staggered times, doubling recipes to serve up to eight people per meal on the 4P Signature menu, or balancing out their cooking by getting a meal prep box for lunches and quick dinners alongside a Signature box for more elevated and premium meals. The multiple boxes per cycle offering also applies to our wine subscription service, which has continued to see strength this year.

We also launched a staggered rollout of customization for select recipes on our 2P and 4P Signature menus. Customization options include things such as the ability to upgrade a protein for a more premium protein, replace a meat with a plant protein, swap a vegetable for a starch, or increase portion size by adding more proteins, carbs or vegetables. This feature is being rolled out by percentage of audiences and we expect it to be available to all customers by the end of the year.

Our chef partnerships remain a key contributor to our customer engagement strategy as we continue to focus on adding flexibility and discovery to our menus. These recipes have proven

to be popular and our customers seek them as another way to get more of what they know and love from Blue Apron - unique recipes that feature seasonal and premium ingredients.

We recently concluded a successful six week partnership with chef and TV personality Amanda Freitag and earlier this week, we announced our newest partnership with Chef Edouardo Jordan. Through this recent collaboration, we also created our first-ever full Thanksgiving meal offering to help home cooks easily navigate their holiday menu as we know they may be playing a different role in their kitchen this season.

While adding variety to our menus has helped drive customer engagement and average order value, we've had to continue to balance adding variety and options, as well as more marketing, with our ability to adequately staff our fulfillment centers. As it does for other companies, adequately staffing our facilities remains a challenge, and, as such, we did not lean into marketing in the third quarter to drive higher growth as much as we otherwise would have. To be clear, while we believe we have the infrastructure in place to support significantly higher levels of demand, we have experienced labor shortages throughout the pandemic. Because of this, in the third quarter we continued to implement actions first introduced in the second quarter, including cancelling or delaying some orders, closing some weekly offering cycles early and discontinuing a subset of menu offerings in addition to managing our marketing programs.

To address some of the labor challenges we are implementing several new operating practices, using Six Sigma, to improve productivity across our facilities. We're adjusting key factors that, in effect, increase line speed and overall labor utilization. These practices include ensuring a better packing process across lines, adjusting distribution of labor and better use of our equipment.

As a result, where we have implemented improvements over the last two months, we've effectively decreased the labor required per pack line by approximately 18% and labor minutes per box was lowered by nearly 22%. We're planning to use the fourth quarter to continue implementing additional optimizations across both of our fulfillment centers, which we believe will position the company to more effectively address demand, enabling us to continue to maintain the strength in our underlying customer metrics and drive increases in customers and revenue forecasted for the first quarter.

With regard to our supply chain availability and safety, we have not experienced any significant disruption over the last seven plus months relating to the pandemic. In fact, we have been able to leverage our robust supply chain and strong supplier network to expand the diversity of ingredients available to create our weekly menus. This has allowed us to include exciting new items for our premium offering including duck and lamb, and support our new customization options.

As I wrap up, I think it is important to note that our three-part return to growth plan has continued to deliver. While it's true that the year over year improvement in our key customer metrics the last two quarters reflect increased demand, we believe that without the benefit of

our growth initiatives, cost discipline and return-focused marketing programs, we would not have been in a position to turn that demand into improved operating results at the levels we've delivered.

In addition, as we implement the next phase of our growth strategy, we also appointed four new directors at the end of the third quarter with proven expertise in e-commerce, marketing, direct-to-consumer, digital media, operations and finance. We expect to benefit from the refreshed board's skill mix and record of success as we continue to execute on our strategic priorities.

With the financial flexibility afforded to us from our recent equity offering and debt refinancing, as well as our ongoing execution of our growth strategies, we believe that Blue Apron is positioned to drive continued improved operational performance.

As always, we appreciate our long-standing 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'd like to thank our dedicated employees who have continued to step up to deliver more food to more people. We are taking heightened precautions to ensure their well-being, particularly inside our fulfillment centers, by continuing to enhance personal hygiene, employee safety and sanitation standards.

I will now turn it over to Tim to talk about our financials in more detail.

Tim Bensley (CFO)

Thank you and good morning everyone.

My comments this morning will include a review of our third quarter performance, as well as some color on the equity raise and debt refinancing that we completed over the last few months. These actions have strengthened our balance sheet by providing us with financial flexibility to help us continue to execute our growth strategy. Before that, I also want to express my highest level of appreciation for all of our team members who continue to step up and execute each day.

As highlighted in this morning's press release, and in Linda's opening comments, our results for the third quarter were ahead of the guidance we provided in late July. As many of you are aware, the third quarter has historically been our seasonally weakest quarter as we typically see fewer meals being ordered during the summer months and also see an impact from higher costs for packaging and shipping due to the hotter weather. For this reason, to assess our performance, we focus on a comparison to the year-ago period. When you look at the year over

year comparison, it is clear we are continuing to move the ball forward with regards to our return to growth strategies.

Net revenue in the third quarter of 2020 rose 13% year over year to $112.3 million. Net revenue, as well as some of the key customer metrics that I will review in a moment, reflect the adverse impact of customer credits issued related to a voluntary supplier recall of onions in August. These credits amounted to approximately $2 million and we are seeking to recover the cost of the recall. Even without adding back the $2 million in customer credits, our year over year revenue growth accelerated from the 10% year-over-year growth recorded in the 2020 second quarter.

Driving this revenue growth was the benefit of our more expansive menu offerings, as well as the increased demand for meal kits as a result of changes in consumer behavior that we believe continue to solidify around cooking at home more frequently.

Given the net revenue and adjusted EBITDA loss performance, it's logical to ask if there was an opportunity in the quarter to lean harder into marketing to drive more demand. To address that, I'll highlight that while we have the equipment, facilities, supply chain and food safety protocols in place to support higher demand, adequate labor availability remains a challenge caused in part by a portion of our labor pool facing reductions in public transportation and/or childcare arrangements. However, as Linda discussed, we are also working to improve operational efficiencies to reduce labor needs. We also continue to actively manage our marketing spend levels to ensure they are balanced with our ability to staff our fulfillment centers with adequate labor to support that demand.

That said, we moderated our marketing efforts in the third quarter to help manage fulfillment center capacity. Marketing spend in the third quarter of 2020 was down in both absolute dollars and as a percentage of net revenue, from $12.1 million in the prior year to $10.9 million, and from 12.2% as a percentage of net revenue to 9.7%.

As we've demonstrated for the last several quarters, our strategic focus on customer engagement and retention has made our marketing spend more efficient and we're getting a better return on our investment. We had 357,000 customers in the third quarter of 2020 compared to 396,000 in the second quarter representing normal seasonal influences. For the second consecutive quarter, Orders per Customer were 5.4, representing our highest level since prior to 2015 and a 20% increase year over year. Average Order Value was also $59 compared to $58 in the third quarter of 2019. However, if you add back the cost of the recall credits, Average Order Value in the quarter was $60. Inclusive of the $2 million of recall credits, Average Revenue per Customer was more than $300 for the second consecutive quarter, rising 22% year over year to $314. Excluding the recall credits, third quarter Average Revenue per Customer was $320. The last two quarters have been the only time Blue Apron has recorded Average Revenue per Customer of more than $300 since prior to 2015.

On the cost side, COGS, excluding depreciation and amortization, as a percentage of net revenue declined year over year by 130 basis points to 66.4%. Our variable margin was 33.6% in Q3 of 2020 compared to 32.3% in Q3 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 front-line wage and attendance bonus investments made in our fulfillment centers during the pandemic.

Our focus on cost discipline is also evident in product technology and G&A costs, or PTG&A, which declined 5% year over year to $33.7 million, and 550 basis points to 30.0% as a percent of net revenue. This also reflects a full quarter's benefit from the closing of the Arlington facility in May.

Other operating expense for the third quarter was $1.1 million for a charge relating to an estimated non-recurring legal settlement.

On the bottom line, we reported a net loss of $15.3 million which compares favorably to our guidance for a net loss of no more than $18 million.

Our adjusted EBITDA loss improved 64% year over year to $4.7 million. And we recorded negative operating cash flow and free cash flow of $7.1 million and $9.1 million, respectively. Both of these metrics demonstrate improvements from last year's third quarter.

In August, we completed an underwritten public offering of four million shares of our Class A common stock which resulted in net proceeds after underwriting discounts and commissions and costs of $32.9 million. As required under the terms of our revolving credit facility at the time, we utilized approximately one third of the proceeds, or $10.8 million, to pay down our revolver. Reflecting those actions, we ended the third quarter with $58.7 million of cash and cash equivalents.

Subsequent to the end of the third quarter, we entered into a new $35.0 million term loan that matures in March 2023 and we utilized the proceeds from the term loan and cash on hand to repay, in full, all of the outstanding indebtedness under the revolving credit facility. The equity raise and debt refinancing, combined with our recent improved performance, have served to strengthen our balance sheet and improve financial flexibility. As such, we are confident that we have the necessary capital resources to continue to execute our growth plan and we believe that Blue Apron is now in a sounder competitive position.

Turning to our financial outlook, let me preface our Q4 guidance by sharing some assumptions.

Our guidance assumes both the consistent benefit to our business from the execution of our strategic growth initiatives and ongoing operational improvements, the company's ability in the fourth quarter to recognize the recovery of up to $2 million of customer credits issued for the onion recall, as well as continued higher levels of demand from changes in consumer behavior.

Further, our guidance assumes that we will not experience any significant disruptions in our fulfillment center operations or supply chain as a result of the pandemic or otherwise.

Reflecting these factors and assumptions, we are expecting fourth quarter net revenue growth of approximately 15% to 19% year over year to $108 to 112 million, the third consecutive quarter of double digit year over year growth in revenue. We expect to incur a net loss of no more than $15 million in the fourth quarter, and an adjusted EBITDA loss of no more than $5 million.

Looking a little further ahead, with operational improvements in our fulfillment centers that we expect to continue to help address labor challenges, we intend to increase our first quarter 2021 marketing expenditures which we believe will help drive year over year double digit net revenue growth and a year over year increase in Customers for that period.

For easy reference, our reconciliation table from our net loss with 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.