APRN - Blue Apron: Dilution Set To Go Parabolic

2023-05-01 18:22:20 ET

Summary

• Blue Apron has fallen 27% year-to-date but still needs to sell common stock worth up to 175% of its market cap.
• The company's shares outstanding are up by 215% over the last three years against entrenched unprofitability.
• Announced cost cuts are critical in its pursuit of liquidity but don't go far enough. This has set the backdrop for poor returns in 2023.

Blue Apron ( APRN ) is down 27% year to date to extend a decline that has left the company trading on a market cap that implies near-term bankruptcy. The company is down over 98% from its IPO price with its now $40 million market cap set against fiscal 2022 revenue of $458.5 million . To be clear, Blue Apron's price-to-sales multiple at 0.04x is a huge market signal that a Chapter 11 filing is a 2023 possibility against total debt of $60.1 million on its balance sheet as of the end of the fiscal 2022 fourth quarter. The company also now faces the specter of being delisted by the NYSE or engineering another reverse stock split after a 1 for 15 stock split back in 2019.

At the core of its decline is Blue Apron's existential dependency on selling stock to meet is quarterly cash needs. The number of shares outstanding has ballooned by 215% over the last 3 years and is set for an even greater increase with the company set to sell up to $70 million worth of shares through an at-the-market equity program under its existing shelf offering filed with the SEC last November. This is more than 175% of its current market cap and comes against cash burn from operations that stood at $23.4 million for the fourth quarter.

Things are bleak. The online meal kit company held cash and equivalents of $33.5 million as of the end of the fourth quarter, enough to form a cash runway that's under two quarters against fourth-quarter cash burn from operations. What exactly is the bull case here? The current business model has proved deeply hostile to shareholder value creation with current bulls being faced with a wall of dilution to plug a liquidity gap that threatens the company with bankruptcy. Bulls would of course be right to state that 2022 was a challenging and perhaps abnormal year for Blue Apron with record food inflation against an operating footprint that the company has sought to rightsize. Indeed, Blue Apron reduced its marketing spend by 18% year-over-year to $17.1 million.

The Pursuit Of Liquidity

Blue Apron is chasing $50 million in annualized cost savings and has already achieved a 50% reduction in cash burn as of the end of February 2023. This is set to be combined with upselling customers on higher-value products like Premium Recipes, Customization Options, and Add-ons. The intention is to boost gross margins whilst chasing every incremental dollar in liquidity from cost savings. The company realized fiscal 2022 fourth-quarter revenue of $107 million , broadly flat versus the year-ago quarter but a beat by $6.87 million on consensus estimates.

This was driven by an average order value of $73.15, a new record and an increase of 14.7% over the year-ago comp and by 3.3% versus the third quarter. This happened on the back of price increases and upselling. It also came against total customers of 298,000, an 11.2% decline over the year-ago period. Gross profit margins at 34.88% was a small 46 basis points decline from the year-ago quarter. Underlying gross margins have stayed stable as SG&A expenses at $53.5 million fell from $57.8 million in the year-ago period.

It's Dilute Or Die

Blue Apron's cost cuts have been critical to expanding its always precarious cash runway but do not go far enough. Crucially, there's only a certain extent to which a company is able to peel back its operational footprint or raise prices before hurting. Blue Apron for example would blame the decline in customers during the fourth quarter on reduced marketing spend. Whilst management flagged during their fourth-quarter earnings call that they intend to make marketing more efficient and balanced, the current quarterly marketing cost as of the end of the fourth quarter amounts to almost 50% of their market cap and is just over 50% of their cash position.

Hence, to state that the current business is deeply hostile to shareholder value creation would be an understatement. The company's current mantra is in all essence dilution or death and it has understandably chosen the former. This type of dilution unbacked by a move to cash flow breakeven is destructive as it simply amounts to a delay of what bears, who form the 17% short interest, are highlighting as likely sometime this year. Bulls might great a break from a relief rally against a stock market still under stress from a hawkish Fed. However, I believe this would be short-lived, temporary, and fleeting at best. Hence, even with its current distressed multiple, I'm rating Blue Apron as a sell. This is against a wall of dilution in its pursuit of liquidity that is set to leave current shareholders with significantly lower ownership of the company.

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