Tuesday, August 25, 2020

We hadn’t noticed this until now, but if you want a fascinating glimpse of how coronavirus leaving some firms trapped in a game of three-dimensional chess, you might want to read the latest quarterly filing from meal kit delivery service Blue Apron ($APRN).

Let’s start with the numbers. Blue Apron filed its Q2 earnings report on July 29, and in a startling break from historical norms, printed its net income number in black ink.

Revenue rose 28.6 percent from the prior quarter to $131 million, and while cost of goods sold also rose by a comparable amount, the company cut spending in other line items enough that operating income was $2.67 million and net income was $1.11 million. That was the first quarterly profit Blue Apron had turned in years. See Figure 1, below.

From the income statement alone, those numbers look good: a young e-commerce subscription service making money. You don’t see that too often.

Moreover, the numbers also seem sensible. The pandemic has forced tens of millions of people to work from home. Restaurants have been closed. Why wouldn’t some portion of us try to sharpen our cooking skills with a meal kit delivery service?

That analysis isn’t wrong per se, but it’s also far from right. When you start digging into Blue Apron’s footnote disclosures, a much more complex picture emerges.

The Price of Popularity

In the Management Discussion & Analysis, Blue Apron provides several non-GAAP performance metrics to give a better sense of business activity. As you can see in Figure 2, below, those metrics all trended in the right direction for the first half of 2020, although the total number of customers was still lower than one year ago.

Then comes the narrative disclosure from Blue Apron.

Yes, management says, demand has risen thanks to a hungry, idle public looking to do something other than watch Netflix and attend Zoom meetings — but, management adds, it doesn’t know how long that higher demand will last.

This increased demand may not continue at current levels, if at all, depending on the duration and severity of the COVID-19 pandemic, the length of time stay-at-home orders and restaurant and other restrictions continue to stay in effect to a significant extent and for economic and operating conditions, and consumer behaviors to resume to levels prior to the COVID-19 pandemic and numerous other uncertainties.

It’s a valid concern: as recession drags on, consumers might look to cut spending; and subscription services such as Blue Apron are one easy target for most households. Meanwhile, if the pandemic does recede quickly, that means more restaurants returning to full operations, which means more competition for Blue Apron.

Then Blue Apron talks about the challenges of meeting the current demand surge, and it’s fascinating…

During the COVID-19 pandemic, we have also seen higher than normal rates of absenteeism among our fulfillment center workforce and, at times, we have experienced difficulty in hiring a sufficient number of employees to adequately staff our fulfillment centers. As a result, we have also closed, and may again in the future close, some weekly offering cycles early to cap orders as we continue to increase headcount to meet demand.

So sometimes manpower problems have been so great, Blue Apron maxed out on its ability to take orders.

There’s more. Surging demand did allow Blue Apron to cut its marketing spending in Q2 (and look at Figure 1 again; that $4 million cut to marketing spend was the difference between net profit and net loss), but more marketing spend resumed in Q3:

[W]e increased our marketing spend at the end of the second quarter and we expect to re-engage in additional marketing spend as part of our previously announced growth strategy to retain existing and attract new customers.

And then a warning about future growth opportunities, which might be constrained because Blue Apron is spending so much time and money on immediate operational needs:

As a result of the challenges we have seen from time to time in hiring a sufficient workforce to adequately staff our fulfillment centers and in order to manage increased demand, we also made a decision to delay certain new product offerings that are part of our growth strategy, which may negatively impact net revenue in future periods.

Phew! That’s a lot of caveats to income statement numbers that seem good at first glance. There’s much more to the picture if you read the footnotes.

Which, as we always say, every analyst should do.

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