Cut The Apron Strings- Steer Clear of Blue Apron IPO

Blue Apron, the home delivery meal service, just filed documents with the SEC for its IPO. Although the preliminary prospectus does not include data outlining the potential valuation of the deal, recent revenue and cost trends do not look appetizing. I’d advise investors to take this IPO off their investing menu.

Blue Apron hails itself a savior to the disappearing family meal. Hectic schedules and demands of modern life leave little time to shop, chop and prepare a home cooked meal on a regular basis. Enter Blue Apron, who sources ingredients from local suppliers and delivers pre-portioned ingredients with detailed recipes for nightly meals.

In full disclosure, I’ve never tried the Blue Apron service but know several people who have. Blue Apron has two sizes of meal plans, a two-person plan and a family plan (feeds 4).Orders can be adjusted for 2-4 meals per week. A family plan delivering two meals per week, for example, costs $71.92 per week.

The cost per meal is much higher than the cost to purchase ingredients from the grocery store but less than a restaurant meal. Many customers note the portions are small; a negative Blue Apron turns into a positive by extolling the little waste produced with its meal kits. Reviews are directly correlated to the size of your stomach and your wallet. Those with big wallets and small stomachs seem to like the service most.

The problem is that after a period of time, the novelty of meal delivery wears thin and the convenience factor is not strong enough to support the expense. Even with two Blue Apron boxes showing up on your porch each week, customers must still visit the grocery store for breakfast, lunch and snack food and other household items. Although customers love the variety of meals and give them high taste scores, the value proposition is bland.

Blue Apron’s numbers reflect this fact. Data included in its prospectus shows that customers spend about $68 per month in their first six months of service, but that amount drops precipitously to just $26 per month by year three.

Withering revenue per customer sets the company up on a tough treadmill. It must constantly add new higher paying customers, those eager to receive two or three orders per week, to compensate for the lower spend by older customers.

Revenue grew 338% in 2015, 133% in 2016 and just 42% in 2017. Quarterly revenue per customer dropped 11% in the first quarter of 2017. Most bothersome is that the company lost $52 million in the first quarter of this year versus a small profit last year. In fact, Blue Apron lost almost as much money in the first quarter of 2017 as it did in the entire 2016 year.

As with most growth companies, part of the loss is associated with increased marketing spend. Increases in this type of expense do not worry investors too much. The thinking goes that higher advertising and promotional expenses are necessary to build up a customer base. Once the company has revenue up to a higher level, it can dial that expense back down to produce the desired profits.

The problem for Blue Apron is that much of its loss is due to a structural issue with its costs. Higher labor costs and delivery expenses ate up a bigger portion of revenue than the prior year period. The inflated level of expenses is expected to continue and will delay the company’s chance of profitability.

The IPO market can be fertile ground for new investing ideas. Profit Catalyst Alert has a new issue portfolio holding that is up 78% since January and just sold two others from the IPO bin for 66% and 44% gains respectively.

While it’s obvious from my review of Blue Apron that not every IPO delivers a satisfying meal, I’m always rooting through the food bin for the most fruitful ones.

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