Blue Apron: A Recipe for Disaster

Blue Apron Holdings Inc. (NYSE: APRN), the meal-kit delivery company named for the uniform that apprentice chefs wear in France, is seeing red, as in huge losses.

But it gets worse. Blue Apron's stock, which just debuted on June 28, is losing ground even faster than the company's losing subscribers.

Initially founded in 2012, Blue Apron's business model of delivering prepackaged ingredients and recipes to subscribers' doorsteps for them to prepare at home sounded sexy.

The theory was sound. Talk of how the smart business model would disrupt traditional grocery shopping and pose a new challenge to restaurant businesses drew a lot of attention and garnered the young Blue Apron some neat headlines.

But there are headlines, and then there's the story.

Here's how Blue Apron doomed itself and what makes it a really bad investment...

A Half-Baked IPO

Blue Apron is not profitable. It never has been.

According to filings with the U.S. Securities and Exchange Commission, Blue Apron lost $54.9 million in 2016, even though revenue more than doubled to $795.4 million.

The company filed to go public in 2017 and launched its IPO on June 28. Contrary to the company's highest hopes, it wasn't a pretty entree.

Coming to market, Blue Apron was the biggest meal-kit company in the United States. It expected an initial market valuation of $3.2 billion, but that turned out to be a pie in the sky.

Timing is important when debuting your company. Poor Blue Apron got it all wrong.

It wasn't just that the company's IPO was coming in just as the market's high-flying tech stocks suddenly tumbled. The 800-pound gorilla in every retailer and wholesaler's home, Inc. (Nasdaq: AMZN) announced it was buying Whole Foods for $13.7 billion.

Even before its untimely entrance into the market, rumors were circulating. Bloomberg Technology recently wrote that, "Blue Apron had sought additional available credit before the initial public offering, according to people familiar with the matter. Some firms declined to lend the company money because it was seen as too risky, while others weren't willing to extend as much as was requested..."

Apparently, going public was a necessity. In the IPO prospectus, the company said that those risky funds could cover it for at least a year. Its plan for when it becomes strapped for cash is to increase its borrowing capacity under a revolving credit facility or raise additional funds through equity or debt financing arrangements.

That financial baggage, along with the tech sell-off and Amazon buying Whole Foods, forced the IPO's underwriters to knock down what Blue Apron would be priced at.

From the high teens, the stock was eventually priced at $10, giving the company an initial valuation of $1.9 billion... As opposed to the hoped-for $3.2 billion it originally trumpeted.

On opening day for the stock, a firm market seemed to buoy the new entrant and the stock traded 10% higher than its $10 set price. But that didn't last, and the stock closed trading pretty much where it had been priced the night before.

Since then? Things have gone from bad to worse for the company and the stock.

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APRN Was a Flash in the Pan

I was asked on FOX Business Network's "Varney & Co." what I thought of the stock's prospects, and I didn't mince words. Not only did I point out that Amazon was monumentally ramping-up its grocery business with the Whole Foods acquisition and it likely entry into the meal-kit delivery business would be a potential game changer, I disclosed that company filings told of how Blue Apron was losing subscribers at an alarming rate. And that I was one of those former customers who had recently cancelled their subscription.

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Apparently, cancellations are a major problem.

According to a survey of 45,000 meal-kit subscribers by Cardlytics in 2016, after one month, the retention rate was only 77%. After six months, the retention rate dropped to 48%. And after one year, only 29% of subscribers were still on board.

Acquisition costs for new subscribers have been soaring, with estimates running as high as a couple hundred dollars per new subscriber. We'll see when the company files its first earnings as a public company and it hits the news reels.

Another reason I'd never buy Blue Apron stock is that Blue Apron's management isn't giving up control of the company.

The public company has three classes of stock:

  • Class A shares are sold to the public and carry one vote per share
  • Class B shares, which the founders and early investors own, which carry 10 votes per share
  • Class C shares, which come with no voting rights, will be used for purposes like acquisitions

Acquisitions? Good luck with that.

The only hope that shareholders and the company has is if Blue Apron is the one acquired.

The company posted a net loss of $52.2 million for the first quarter of 2017 on revenue of $244.8 million.

The stock's down 35% since its opening day markdown.

And, wouldn't you know it, Amazon just pulled out the biggest carving knife Blue Apron's ever seen and is going to slice and dice Blue Apron into mincemeat.

On Friday, I'll tell you what the 800-pound Amazon gorilla's about to do to the meal-kit business and exactly how to play Blue Apron's stock. Stay tuned.

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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