sometimes cash isn’t really cash

This is a post about reading the balance sheet, not a more theory-laden discussion of whether having cash is a good thing for a company or not.

three examples

–The most obvious case where cash is not an unadulterated plus is when it’s offset by short- or long-term debt.  Having $5 a share in cash and no debt is certainly a different situation than having the cash but owing $15 a share to your bankers.  There are all sorts of subtleties here–bonds vs. bank debt, factoring receivables, coupon payments vs. accretion of discount, payables/receivables–but these are stories for another day.

The other two concern working capital, ex debt (as it turns out, the prospectus for Blue Apron (APRN) made me think of both of these).

deferred revenue.  If you subscribe to a magazine or newspaper or a home-delivery food service, you typically pay for the service in advance.  The way this is accounted for on the balance sheet of the company you’ve contracted with is:  the total amount you pay is listed on the asset side as cash; on day zero no services have been delivered so the cash is counterbalanced by an equal deferred revenue entry on the liabilities side.  As services are provided, the deferred revenue is gradually reduced by the amount being recognized on the income statement as sales.

(Note:  I can’t recall ever having seen a long-term deferred revenue balance sheet entry.  MSFT, maybe?  My guess is that if long-term deferred revenues exist, they’re folded into “other” among long-term liabilities.)

Pre-IPO APRN had $61.2 million in cash and $21.8 million in deferred revenue

receivables vs. payables.  Receivables are trade credit a firm extends to customers; payables are trade credit that suppliers are offering to the firm.  Having few payables and a lot of receivables is usually a sign of corporate strength.  Suppliers are eager enough to do business that they offer their wares on credit; customers eager enough to consume that they pay upfront.

Nevertheless, payables are basically the same as short-term loans.  They just come from a supplier rather than a financial lender.  In computing working capital (short-term assets minus short-term liabilities), payables are a subtraction.

In the APRN case, the pre-IPO company had $0.5 million in receivables and $77.7 million in payables.  Receivables – payables  =  -$77.2 million.

 

more on the APRN situation

In APRN’s case, $61.2 million (cash) – $21.8 million (deferred revenue) – $77.7 million (net receivables) =  – $38.3 million.

If we compare APRN at 12/31/16 with 3/31/17, we can see the transition from a positive of about $7 million for the calculation in the paragraph above to the -$38.3 million.  This is financed, as I read the balance sheet, by a $55 million increase in long-term debt during the quarter.  So APRN is not generating cash; it’s burning through it rather quickly.

My quick perusal of the prospectus didn’t turn up enough other data to draw a strong conclusion (e.g., is this seasonal?), but the 1Q17 cash deterioration certainly looks odd.

 

Blue Apron (APRN) at $5+

APRN went public less than two months ago at an offering price of $10 a share.  That was down from pre-offer brokerage chatter (which is  always very optimistic) of $15 – $17.   Given that the average cost for pre-IPO shareholders is just above $1.60, though, any double-digit price must have looked good.

Certainly, the possibility of Amazon/Whole Foods as a competitor was–and still is–a worry.  There are, however, others:

–lack of barriers to entry

–churn:  stories that very large numbers of customers who signed up for trials at promotional discounts balked at continuing at the full price of about $10 a meal

–continuing working capital deterioration.  According to the prospectus, at yearend 2015, APRN had $127 million in unrestricted cash.  By 3/31/17, that figure had shrunk to $61 million, despite APRN taking in $121 million through long-term borrowing and advance subscription payments by customers (listed on the balance sheet as deferred revenue).  Looked at this way, APRN’s operations gobbled up over $180 million in fifteen months.  By 6/30/17, the situation was $30 million worse.

As it turns out, one of my sons had a Blue Apron subscription in the months before the IPO.  I helped prepare some of the meals.  I thought the recipes were excellent but that the ingredients supplied suffered from trying to keep costs down.  So I’m not a fan.  In fact, I’m a bit surprised the IPO went as smoothly as it did.

where to from here?

My initial take is that IPOs like APRN or Snap indicate there’s too much cash sloshing around in the system.  That always seems to end up chasing speculative deals.  My hunch is that APRN won’t be a big success without a significant revamp of strategy.

On the other hand, there’s arguably a price for everything.  In addition, the activist investor that pushed for changes at Whole Foods, Jana Partners, has just disclosed a 2% stake in APRN.

…maybe a turn for the better.  But, as things stand now, I’ll be watching from the sidelines.

 

 

the Blue Apron (APRN) offering

Meal delivery service APRN (originally named Petridish Media) went public yesterday at an offering price of $10 per share through an underwriting syndicate led by Goldman Sachs.

The original pricing range was reportedly $15 – $17, but was reduced to $10 – $11 after Amazon and Whole Foods announced their intention to merge.

The stock traded as high as $11 yesterday, before fading back to the offering price later in the day.  I didn’t watch the stock and there’s surprisingly little price information from yesterday’s trading available this morning, but it seems as if the underwriters made few (if any) “stabilizing” purchases at $10 to keep the stock from closing below the offering quote.

Today APRN opened at $9.98, slipped to $9.50, and is trading at around $9.70 or so as I’m writing this.

Although I have zero interest in owning APRN at this point, I think it’s an interesting issue from a number of perspectives:

–the concept is, I think, for APRN to be the “first mover” in home meal kit delivery.  Doing so would give it brand recognition and scale that rivals starting up later would find difficult to match.  Whether APRN can achieve this position remains to be seen

–as I read the prospectus (meaning: I find it hard to believe what I’ve read), 100% of the proceeds from the offering are going to the company.  None of the VC backers or otheer insiders are cashing out any portion of their positions.  If so, this is either very good (they think APRN is a gold mine) or not so much (they don’t want to scare away buyers)

–APRN is an “emerging growth company,” listing under the provisions of the Jumpstart Our Business Startups Act (JOBS).  JOBS allows early-stage companies to go public without meeting all the SEC-mandated disclosure requirements for public companies.  This makes the financials hard to interpret.  Still, it seems to me that there may be a serious deterioration in APRN’s working capital during 1Q17

–the main metrics/issues for APRN are the cost of acquiring a customer and its ability to retain one once acquired.  Again, it’s hard to get a good read, but Wall Street’s apparent worry–apart from AMZN/WFM–is that the answers to these questions are “high” and “low.”

All in all, the risks of APRN are too high for me, but this will be an informative one to watch.