Mar 20 2020 - The Data So Far Indicates Blue Apron

This could change, but through the evening of March 18th, app downloads are still running down year-over-year.

APRN burned mm in Q4.

.1mm gross cash left at year end.  Our model projects .1mm left a 3/31/20.

Borrowing capacity appears maxed out (per company's own statements).

Blue Apron (APRN) used to be the leading meal kit company in the United States (Hello Fresh has long since surpassed it). It is, however, a leading candidate for one of the worst IPOs in US history. Blue Apron has never made money, consistently burns cash, and routinely records revenue declines of greater than 30% year over year. The company was appropriately trading for just over on 3/13/2020 as bankruptcy looms around the corner. However, in just a few trading days, the stock is now multiples higher. APRN has clearly been a beneficiary of the “stay at home” trade due to the coronavirus. We believe the longs have failed to consider some crucial factors and data in their thesis. In this article, we examine why APRN is not a good candidate for the “stay at home” trade in two parts: 1) Demonstrating that, based on data as of the evening of 3/18, that APRN is not likely to get a large enough benefit from the “stay at home” effect and 2) Showing the math that seems to point to bankruptcy being a likely outcome. We believe it is dangerous for longs who ignore data and actual financials in favor of broad thematic trades.

Alternative Data Does Not Support a Big Boost from “Stay at Home” Effect

The thesis that Blue Apron as a delivered meal kit should benefit from the “stay at home” effect of the Coronavirus seems plausible at first glance. However, it is a flawed thesis if one digs deeper. As the empty shelves at grocery stores nationwide can attest, consumers have not shied away from shopping for food and have proactively stuffed their pantries. So yes it is logical that consumers might replace some of the food purchases that they previously made from grocery stores or restaurants with Blue Apron or other similar options. However, real-time alternative data shows that Blue Apron has not benefited significantly from people staying at home yet.

First, Blue Apron’s mobile app downloads is a good proxy for new customer sign ups. The chart below compares Blue Apron’s download ranking within the US Food and Drink app category for the past five years. Blue Apron’s app download ranking has deteriorated each and every year with 2020 being the worst yet. Despite benefiting from any “stay at home” effect, Blue Apron’s download ranking is still down year over year and not much different from trends earlier in the year in January and February. While it is starting to catch up to the 2019 trend, note that 2019 was a horrible year and represents a very easy comparison. Also, note that the most recent data point we have for download ranking is for 3/18/2020 and we believe it takes into account data until late in the evening last night, so it is very current. Given that the hysteria around food and toilet paper started reaching a fever pitch by about 3/9/2020 we believe this is a significant data point. Could it go positive in the coming days? Certainly, but as we discuss below, a moderate year-over-increase will not allow the company to survive. We believe it needs to more than surpass the 2018 business levels while maintaining a smaller cost base.

Second, we subscribe to a proprietary traffic data service and this data shows that traffic for BlueApron.com for the past month shows a flattish sequential trend with no noticeable boost from Coronavirus. The most recent data point on this is from 3/16/20 so if it is going to pick up it better do so soon. Unfortunately, our user agreement with this service does not allow us to share the traffic chart in this article but most readers of this article can and should use various means to look up traffic data in this situation.

Finally, the best proxy for Blue Apron’s reported revenues is credit card data on consumer spending. The most recent credit card data for the first quarter through 3/12/20 suggests that Blue Apron revenues are down 32% y/y. With just a few days left in the first quarter, I expect Q1 revenues to finish down near 30% y/y. We find the “stay at home” effect underwhelming thus far for APRN.

Could the data improve as the reaction to the pandemic evolves? Of course it could. That is anybody’s guess. In fact, we expect the download lines above to likely show a moderate cross over where the 2020 line moves above the 2019 line in the coming days. However, we believe that APRN would see a sustained and material increase in volume from current levels for it to become cash flow breakeven based on our analysis of fixed and partially fixed costs in its public filings. We do not have the time or the space to detail those here, but would encourage all investors to read the filings and do their own math.

Could Blue Apron Meet a 35% Increase in Demand from Recent Levels if there was One?

We believe the answer is likely no, particularly if they needed to meet that increase in demand in the next five to six weeks? We believe it is more doable to at least approach this level of production increase in the next seven to eight weeks. Beyond eight weeks, we believe that Americans will have time to further adjust their food procurement patterns. Initially the major grocery chains were backed up on food delivery scheduling windows and people panicked, but indications are that the constraints are easing gradually but measurably and we are only days into what could be the new normal for a while. So while there could very well be a tailwind beyond eight weeks, we believe the various food delivery choices with capacity becoming available and the already subsiding levels of panic (in the area of grocery shortages specifically) will mean that there will be less of a tailwind nine weeks from now than there is at this moment today. But we digress. Why do we believe that APRN will have a hard time increasing volume by 35% in such a short window? The company recently closed its Arlington, TX fulfillment center that was serving the center of the country and abruptly laid off the entire staff. (The 10-K filing states that it is trying to sublease this facility in an obvious attempt to cut the cash burn but we doubt the pandemic will make subleasing that facility out on short notice any easier.) Now the center of the country will be served (with longer shipping distances) from the fulfillment centers on either coast. Since it apparently has not subleased the Texas facility could it re-open and re-staff that facility to meet an increase in demand? Yes, theoretically, but it would take a while to rehire and train people. In the meantime, that effort would increase the weekly cash burn of the company and there is a risk that once operations in Arlington were at least somewhat optimized, the coronavirus-related demand will have already crested. We also believe that the people who were let go from this facility have already moved on. Our industry research, including a conversation with a manager for large food distribution company who offices, ironically, in Arlington, TX, indicates that quality people in the industry are snapped up by other companies as soon as they become available. Similarly, APRN could further increase hiring at the two other facilities, but by the time the extra people are trained and the facility is optimized at a higher level of throughput, the opportunity could be gone and the company needs to be very careful with its weekly expense levels.

It is worth noting that one of the two remaining fulfillment centers is in Contra Costa County, one of the Northern California counties with a mandatory shelter in place order due to a much worse outbreak of COVID-19 as compared to the rest of the country. We believe that Blue Apron is exempted from this order so it can still ask employees to come to work. However, even if is exempted, we believe that it will be hard enough to keep daily attendance of the labor force at its most recent levels, much less add enough people on shift to increase output 35%. Obviously, anyone who is feeling even slightly ill is being urged not to come into work and others may have trouble arranging child care with schools and daycare centers closed and others might call in sick just because they think going into to work right now is not worth the risk. Granted, the Blue Apron facility in New Jersey is newer and probably better suited to handle the majority any necessary rushed ramp in volumes, but it is not likely immune to labor force distractions. Further, shipping distances would dictate that at least a material portion of the increase in demand is served by the Northern California facility unless somehow all of the increase in demand comes from the eastern and central regions. We are not pretending to know the answers here, but are pointing out some considerations.

We are tracking the availability of certain meals on Blue Apron’s site and have seen an increase in recent days in the amount of meal options that are “sold out” for various nearer-term delivery windows. Initially, one would think this is a positive data point. Yes, it is likely indicative of a recent uptick in demand (or partially due to problems with people showing up to work or a backup in the supply chains of certain ingredients necessary for those specific meals). However, the fact that the company is already experiencing an uptick in sold out meals while app downloads (through last evening) have not even turned positive year-over-year yet, is not a good indication for anybody blindly expecting a significant year-over-year increase in volumes in the coming weeks. We ask that longs evaluate their coronavirus thesis and consider that the thesis might have a problem with its supply assumptions or demand assumptions or possibly both. That brings us to the cash problem.

Blue Apron’s Likely (in our opinion) Path to Bankruptcy

We urge the longs who have rushed in to buy Blue Apron on the “stay at home” trade to build out a detailed financial model. We have and it appears there are multiple potential triggers for bankruptcy. Blue Apron’s Credit Agreement requires the company meet certain minimum EBITDA covenants each quarter and a minimum liquidity covenant of million. Our model shows Blue Apron breaching these covenants by Q3 (even after giving them a modest “stay at home” boost). Blue Apron’s creditors could then force the company into bankruptcy as it is less likely for the banks to be forgiving in this risk-averse environment. And with or without a risk-adverse environment, the revenue is shrinking while the company simultaneously burns cash, so one would logically expect lenders to act as soon as the debt agreements allow (we estimate immediately after Q3) because their collateral is being reduced with each passing month.

If you are willing to be patient and wait another couple of months, Blue Apron can also go bankrupt the old fashioned way, by running out of cash. Blue Apron only had million in gross cash as of 12/31/19. The company burned million of cash in just Q4 alone and we project the burn to increase moderately in Q1. We estimate that Blue Apron will run out of cash during Q4 2020. The company has already maxed out their recently reduced bank line so has no ability to draw down.

Blue Apron has effectively admitted this much themselves, with the risk factors in their 10-K amended to reflect these risks.

Blue Apron has responded by announcing a strategic review to raise cash or look for a sale. Unfortunately for Blue Apron, this is one area that the coronavirus hurts them significantly. The collapse in equity and high yield markets over the past month makes it nearly impossible for the company to raise money. Pursuing a sale is also difficult with risk-averse buyers unwilling to stomach this money-losing, black hole of a company. As for HelloFresh, why buy Blue Apron when they have been taking APRN’s customers for free through competition. For anyone interested in the rapidly fading Blue Apron brand, we recommend you pick it up in bankruptcy after the money-losing direct-to-consumer business has been shut down and the expensive facility leases are terminated.

Remember if a company buys Blue Apron “for the brand” before it files for bankruptcy the cost to acquire is not just the market cap. We project net debt at the end of Q1 of million (including facility related obligations) and we estimate this number grows to over 0 million by the end of this year. Further, we project negative cash flow out in future years, even with a temporary bump from the coronavirus, as APRN is caught between a rock and hard place. If it does not advertise materially (as it historically did when was a VC-backed company spending money like there is no tomorrow and shortly after its IPO), its revenue shrinks 30% or more. If it does advertise materially, recent history shows that its revenue does not necessarily decline a full 30% but still shrinks meaningfully year-over-year and the higher sales and marketing expense keep it far away from being cash flow positive. So the present value of these cash flows needs to be added to the true acquisition cost. Any acquirer that cannot exit the leases and shut down all operations immediately is going to have to deal with these costs. The only way we see to acquire Blue Apron without these ongoing obligations and monthly expenses is to, again, acquire the company in bankruptcy after the equity holders and landlords have been whipped out.

Conclusion

Investors who are looking for “stay at home” plays should look elsewhere. Alternative data shows any boost to Blue Apron’s business will likely not be large enough. Longs who have aggressively bid up Blue Apron will likely be disappointed. We believe Blue Apron is a company with one-foot in the grave.

As a side note, traders looking to play the “stay at home” theme might consider looking at Grubhub (GRUB). With most restaurants in major cities moving towards delivery / take out only, food delivery is a natural beneficiary of people afraid to go out. Unlike APRN, which is up 7x as of this writing and the trade has already played out, GRUB is actually near 52-week lows. That seems like a much more appealing “stay at home” play than APRN.

Disclosure: I am/we are short APRN.