Stifel stock analyst Scott Devitt thinks you might want to wait on the sidelines while Blue Apron fixes issues moving some of its food order fulfillment to a facility in New Jersey, an organizational change that is hampering its ability to increase its customer base.
Shares of prepared food delivery service Blue Apron (APRN) are down 16 cents, or 3%, at $5.23, after Stifel Nicolaus’s Scott Devitt this morning cut his rating on the shares to Hold from Buy, writing that he lacks “lack visibility into the timing and path of a correction to recent challenges” after last week’s disappointing financial report, its first quarter as a public company.
The source of management’s disappointing forecast, which was a quarter less than analysts had been looking for, was the fact that it is moving some of its order fulfillment to a new facility in New Jersey, observes Devitt.
That means a degradation of the company’s ability to fulfill orders, which curtails its ability to market its service, which reduces its opportunity, for the moment:
The company is currently grappling with unexpected challenges in transitioning its East Coast fulfillment center to a new Linden, NJ, center while at the same time dealing with lower fulfillment efficiency / accuracy stemming from its recent product expansion (more menu options and greater menu flexibility). Quarter-to-date, Blue Apron reported the Linden center is handling 20%-25% of total volume (from ~3% in 2Q), and still on the path to ~50% of total volume when fully ramped. Lower fulfillment performance, along with lower gross margins as the Linden facility / new product offerings ramp, led management to reduce planned marketing spend relative to prior expectations for the second half of the year and focus on the most efficient channels, which materially lowers the company’s revenue growth assumptions, due to the reduction in customer acquisition / engagement initiatives and lower marketing spend ROI. Management stated it is implementing “additional systems and fixes” to improve margins and OTIF scores (“on-time in-full,” a measure of fulfillment performance and error rates in a supply chain).
Devitt thinks it makes sense to sit on the sidelines while the company goes through this:
We view it necessary to move to a Hold rating as we await further information and signs of improvement in light of the transition risks posed by current initiatives. Both undertakings are coming at a critical time for the young company. Should the company execute through this transition period, we believe the company will benefit from making the necessary facility and product improvements that should both support longer-term margin expansion and broaden its product offering relative to its current state.