Blue Apron Holdings Inc (NYSE:APRN) stock is trying to make a comeback. The APRN stock price has bounced 46% off lows reached just last month.
Certainly, APRN shareholders needed some good news. As I joked back in July, it was an impressive feat to displace Snap Inc (NYSE:SNAP) as the worst IPO of the year. Yet Blue Apron’s time as a public company has been a disaster from the jump. The IPO originally priced at $15 to $17 — but wound up being priced at $10. Thanks to help from underwriters, the APRN stock price closed flat the first day; after that, the stock would fall 70% in less than five months.
The recent rebound seems to have little basis, other than perhaps some short covering. A bullish note from Barclays PLC (ADR) (NYSE:BCS) did give the stock a boost earlier this month. The appointment of new CEO Brad Dickerson, formerly of Under Armour Inc (NYSE:UAA), raised hopes of a possible turnaround, and his insider buying helped the APRN stock price as well.
But it’s a false move — a dead cat bounce. Blue Apron is massively unprofitable, and at the current pace, bankruptcy in 2019 is a very real possibility. Competition is coming, and the business model looks downright broken. Laura Hoy wrote earlier this month that Dickerson alone can’t fix Blue Apron and she’s right. In fact, I don’t think anyone can.
It might sound like hyperbole to suggest that Blue Apron could go bankrupt in 2019, two years after its IPO. And, to be fair, it’s unlikely. But it’s far from impossible.
Blue Apron ended Q3 with $266 million in cash. It has another approximately $75 million in availability on its revolving credit facility, which matures in 2019. But bear in mind that Blue Apron this year alone has burned $239 million in cash. Nearly half of that burn is coming from capital expenditures, mostly related to new fulfillment centers, and that spend will come down. But simply on an operating basis, Blue Apron is on pace to burn $160 million this year.
Maintaining that pace would leave the company insolvent by the end of 2019; default could occur in August of that year, when the revolver matures.
To avoid that outcome, Blue Apron has three options. It can issue more Blue Apron stock. But that would require issuance at a low share price — and heavy dilution to existing shareholders. To raise the $200 million needed to repay the revolver, Blue Apron likely would have to issue something close to 30% of its shares outstanding at a price in the $3.50 range.
That’s obviously an unpalatable outcome, an option of last resort. Getting more debt is close to impossible, given the company remains unprofitable on even an EBITDA basis.
And so Blue Apron’s only option is to cut those losses, both substantially and quickly. But how?
One way is to cut costs — and Blue Apron already is doing so. Marketing spend came down in the third quarter. The company reduced its headcount by 6% in Q3. But that move is estimated to save just $23.5 million a year — not even 15% of the current cash burn run rate. Those savings in theory maybe extend Blue Apron’s cash by another four months.
The other way is to grow. But Blue Apron isn’t growing – it’s shrinking. Revenue in Q3 increased just 3%. But the customer count dropped by 6% year over year and 9% quarter over quarter, due in part to the lower marketing spend. Second-half guidance implies that revenue, even at the high end, will drop roughly 10% YOY in the fourth quarter.
It’s true that Blue Apron has cut its marketing spend. But the quick and direct impact of that lowered spend shows that Blue Apron isn’t creating this base of recurring long-term customers. Rather, it’s acquiring short-term, short-lived customers through marketing and promotional spend. Average orders per customer were 4.2 in Q3, up modestly from the year-prior period but below 2015 levels. Spend per customer hasn’t moved much either — though if there were this large base of recurring, satisfied Blue Apron customers, it should be doing so.
There should be some improvement going forward, thanks to the fulfillment center investments. But this is a business model that, simply put, looks like it is not viable. And even if Blue Apron improves operationally, it doesn’t have the market to itself.
Blue Apron, right now, isn’t anywhere close to profitable. And yet, competition isn’t even close to ramped. In October, rival Hello Fresh went public in Germany, raising funds for its own U.S. efforts. Albertsons bought smaller competitor Plated. Kroger Co (NYSE:KR) is working on an internal meal kit option. And of course, the acquisition of Whole Foods Market by Amazon.com, Inc. (NASDAQ:AMZN) presents a formidable combination of Amazon’s delivery expertise and the Whole Foods supply chain.
It’s all just too much for Blue Apron. And it’s too much to expect any outcome but the APRN stock price headed to zero. The one hope is a buyout — but there’s little need for anyone in the space to buy Blue Apron now, and pay shareholders. Odds are, Blue Apron’s assets will be up for sale in a matter of time, but not by its own choice.
As of this writing, Vince Martin has no positions in any securities mentioned.