At the beginning of the year, Blue Apron (NYSE: APRN) CEO Brad Dickerson told investors he thinks the company can reach break-even on an adjusted EBITDA basis in the fourth quarter and for the full year in 2019. That's an ambitious goal for a company that produced an adjusted EBITDA loss of $137.9 million last year, more than three times the loss it posted in 2016.
Blue Apron has shown some improvements in its EBITDA loss in the first half of the year, but it's still a long way from profitability. It's lost $34.7 million so far this year.
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Getting to break-even profitability will require further improvements in three areas: profitable customer acquisition, declining cost of goods sold, and more efficient product, technology, general, and administrative spending.
Profitable customer acquisition
Blue Apron pulled back on its marketing spend last year amid challenges at its Linden, New Jersey facility. The company was sending meal kits with incorrect ingredients, or getting the items to customers' doors late. That led to lower customer retention, and made its marketing spend that much less efficient.
The customer is taking a more strategic approach with its marketing spend this year. Instead of attempting to reach as wide an audience as possible, the company looked at the profile of its most loyal and profitable customers, and is advertising only in the channels those types of consumers spend time in.
This approach means Blue Apron could see slower customer growth, and it may also see an increase in marketing spend per net customer additions. But if it ultimately translates into more profitable customers with higher lifetime customer value, it's certainly worth spending more.
But comments from Dickerson during Blue Apron's second-quarter earnings call indicate that retention isn't improving. If Blue Apron's new marketing strategy is going to work, it needs to show improvement in retention, and it needs to share that with investors -- something it's never really done in the past.
Reducing cost of goods sold
The area Blue Apron has made the biggest progress this year is its cost of goods sold. COGS improved 400 basis points year over year in the second quarter and 110 basis points compared to the first quarter.
The biggest factor leading to improving cost of goods sold is improved efficiency at the Linden facility. Management is doing a better job of planning and taking full advantage of the automation capabilities it installed at the new fulfillment center. Blue Apron is selectively implementing the automation capabilities with the highest return on investment at its other fulfillment centers as well.
Another factor is a new multi-year deal with FedEx that's reducing its shipping costs across the board. Management didn't give any details on the contract, but Dickerson said it will "increase efficiencies in much of our last-mile delivery network," during the company's second-quarter earnings call.
The company is on track to meet its goal of 35% gross margin this year, but Dickerson says there's still room to improve on that number.
Product, technology, general, and administrative expenses
Blue Apron's spending on product, technology, general, and administrative (PTG&A) expenses fell 22% in the first half of the year. Management says most of those cost cuts from better personnel management and reduced overhead.
During the fourth-quarter earnings call, Dickerson said he expects a $20 million to $25 million improvement in PTG&A expenses. It's already exceeded that level through the first six months of the year.
That said, investors might see a step up in technology and product investments in the second half of the year. The company is looking to launch new on-demand products in an effort to reach customers uninterested in a subscription. It's also developing more diet-specific meal kits and, as mentioned, expanding automation technology to other fulfillment centers.
Blue Apron can meet its PTG&A expense outlook for the year while still investing in new products and technology, but it could hold it back from reaching its profitability goal for the fourth quarter. Combined with improvements in cost of goods sold and potentially better marketing efforts, Blue Apron could get there.
Investors should keep a close eye on Blue Apron's expenses and look for management commentary on its marketing efforts during the next few quarters to see if the moves are paying off.
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