Brad Dickerson started off his first earnings call as Blue Apron's (NYSE: APRN) CEO with a bang. He said the company's goal is to reach breakeven EBITDA in 2018, supported by double-digit revenue growth. He later said breakeven EBITDA could show up as soon as the fourth quarter this year.
Such a statement wouldn't be too outlandish just a year ago. Blue Apron grew revenue 42% year over year in the first quarter of 2017, and it had already shown it can produce an operating profit in in the first quarter of 2016.
But Blue Apron's 2017 results were spoiled by complications in launching its new fulfillment center in Linden, New Jersey, and a pullback on marketing spend, which resulted in a decline in active customers. Blue Apron ended the year with 15% fewer customers than it ended 2016 with.
Reducing the cost of goods sold and improving margins
Improvements at Linden helped decrease cost of goods sold (COGS) as a percentage of revenue by 800 basis points in the fourth quarter compared with the third quarter. COGS totaled 70.1% of total revenue. Still, that number was up 190 basis points year over year, indicating there's still plenty of room for improvement.
To that end, Dickerson guided for COGS to decline 300 to 400 basis points in 2018, reaching as low as 67% of total revenue. That will be largely driven by improvements in operating efficiencies, as he expects net revenue to decline modestly this year. Most of that decline will come in the first quarter, which Dickerson guided for $190 million to $200 million, a 20% year-over-year decline at its midpoint.
Dickerson also sees room for improvement in product, technology, general, and administrative expenses. He sees room to save $20 million to $25 million compared with last year, as it won't have to invest as much in Linden.
Stabilizing customer losses and revenue declines
Along with improving its gross margin, Blue Apron needs to get its revenue headed in the right direction to benefit from the scale of its operations. Revenue is largely driven by the number of customers, as orders per customer and cost per order haven't changed much in Blue Apron's history. And increasing customers requires more marketing.
Blue Apron started ramping up marketing at the end of the fourth quarter. Management previously said it wouldn't increase marketing again until it improved margins. Apparently the fourth-quarter results were good enough for management, or it came to its senses about that strategy.
But Dickerson warned the investment in marketing wouldn't be as much as it made in the first quarter last year on both an absolute basis and as a percentage of revenue. For reference, Blue Apron spent nearly $61 million on marketing in the first quarter last year, about 25% of revenue.
In addition, he said it will take time for Blue Apron to regain the momentum it entered 2017 with, so he doesn't expect its ad dollars to be particularly efficient to start the year. Considering Blue Apron's marketing efficiency has cratered over time, that doesn't inspire confidence. And the meal-kit market is much more crowded today than it was just a couple of years ago, which may make it even more challenging for Blue Apron to win back customers.
That said, Blue Apron doesn't have much of a choice. It doesn't have much in the way of a competitive advantage, and thus the only way for it to grow is by spending more. If its marketing pays off with more customer growth, it could result in significantly improved EBITDA by the end of 2018. But it wouldn't be a surprise if Blue Apron has to spend more on marketing than it anticipates to stabilize its revenue.
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