1 Red Flag in Blue Apron's Earnings Report

Struggling meal-kit provider Blue Apron Holdings (NYSE: APRN) beat earnings estimates in its first-quarter report. The company narrowed its quarterly loss from $52.2 million a year ago to $31.7 million, or a loss of $0.17 on a per-share basis, giving investors encouragement that the company can eventually be profitable. By market close on May 9, the stock had risen 27% from its pre-earnings price.

However, both sales and the company's customer count continued to fall from the prior year, adding to questions about the overall health of the business. Revenue was down 20%, to $196.7 million, and the customer count fell 24%, to 786,000.

Focusing on the sequential

While companies generally report financial results on a year-over-year basis, which tends to give the most useful comparisons as it strips out the effects of seasonality, Blue Apron management focused on the company's performance relative to the previous quarter.

According to the company's key highlights in the earnings release, revenue and customer count increased 5% sequentially and its net loss improved 19% quarter over quarter. On the earnings call, management explained the decision to present those numbers with quarterly comparisons as it said the cuts in marketing in the second half of last year continue to weigh on the business in the first quarter. However, by presenting the numbers that way, the company seems to be ignoring the seasonality of its own business and meal kits in general.

The seasonality factor

Most businesses are stronger in some parts of the year than others. Retailers see sales spike during the holiday shopping season, for example, and restaurants are generally busier in the summer. For meal-kit providers like Blue Apron, the first quarter is their busiest time of year.

Grocery sales tend to decline in the summer months as Americans go on vacation and eat out more to take advantage of the warm weather. The fourth quarter, meanwhile, is full of holidays like Thanksgiving, Christmas, and New Year's, when consumers' everyday routines are disrupted and they're focused on things like holiday parties and buying presents. The first quarter, then, is essentially perfect for these kinds of companies, as cold weather keeps consumers indoors, New Year's resolutions drive pledges to eat healthier and do more home cooking, and people try to get back into a productive routine after the holidays.

Normally, Blue Apron's marketing and customer growth spikes in the first quarter. The company acknowledges this as one of its risk factors, saying in its prospectus: "We anticipate that the first quarter of each year will generally represent our strongest quarter in terms of customer engagement. Conversely, during the summer months and the end of year holidays, when people are vacationing more often or have less predictable weekly routines, we generally anticipate lower customer engagement."

A study by research firm Second Measure found a similar effect for other meal-kit companies. From the fourth quarter of 2016 to the third quarter of 2017, six out of the seven companies Second Measure profiled had their fastest customer growth in the first quarter. For the industry as a whole, the vast majority of customer growth came in the first quarter as industrywide customer counts grew nearly 30% sequentially in the beginning of the year compared to single-digit growth in the second and fourth quarters and a decline in the third.

Given those numbers and the company's own description of its seasonality, 5% sequential revenue growth seems especially weak. In any other quarter, it likely would have been a decline.

Scratching the surface

On the call, management insisted that the company still is recovering from a operational hangover due to logistics problems last year at its new Linden, New Jersey, facility, and sales were lower year over year due to the pullback in marketing. However, the company significantly ramped up marketing in the first quarter from the fourth quarter.

On a sequential basis, marketing increased 56%, to $39.3 million, making up 20% of revenue compared to 13.4% in the quarter before. Marketing expense still was down 35.1% from the year-ago period when it made up 24.8% of revenue. However, the trajectory of marketing spending increase was almost identical to the year before.

That may give some credibility to management's statement about "methodically accelerating" marketing in the first quarter, but it also means that the company wasted its best opportunity of the year to grow its customer base, which is a sign that either the company continues to have operational problems, or management doesn't see the same demand for the product as it did a year ago.

Rival Hello Fresh has passed Blue Apron as the market-share leader in the U.S., thanks to better execution and its recent acquisition of Green Chef. According to Second Measure, Hello Fresh now has 35% of the meal-kit market compared to 31% for Blue Apron, which is down 9 percentage points from a year ago. Meanwhile, Second Measure also found that growth in meal kits has slowed dramatically as industrywide sales increased just 10% year over year in March compared to 76% in March 2017.

Slowing industry growth and continued market-share losses are two more troubling signs for Blue Apron. While the 5% sequential increase in revenue and customers may look promising, the reality is that the company blew its best opportunity of the year to return to strong growth.

It also looks like management didn't have faith in the business to ramp up marketing when it needed to do so. That bodes poorly for the duration of the year.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.