Berlin-based meal kit delivery service Marley Spoon AG (ASX: MMM) released its results for the quarter which ended 30 September 2018 last week. Net revenues for the quarter hit an all-time high of €23.9 million, up 15% on the June quarter. However, the market reaction to the results was muted, with the Marley Spoon share price falling almost 5% on the day of the announcement. This continues a disappointing run for the health food company, which has seen its share price decline over 45% from the initial June issue price of $1.42.
Investors may have been turned off by the updated guidance the company issued along with its results. Marley Spoon confirmed no change to its expected revenue and contribution margin for the 2018 calendar year, but it did advise that it now expected an EBIT loss of between €32 million to €34 million, an increase of at least 28% over its previously communicated forecast of €25 million. In its updated guidance, the company explained that its decision to increase its investment in marketing was the main driver for its worsening EBIT forecast.
The results announcement stated that the company's intention was to capitalise on the strong sales momentum that had delivered its record revenues by increasing its marketing spending. Marley Spoon hoped to benefit from the current tailwinds and attract even more customers to its product offering. And the numbers do lend some credence to this strategy.
Globally, active customers increased to 173,000 during the most recent quarter, an uplift of 48,000 on the 125,000 active customers recorded at 30 June. This is the biggest quarter-on-quarter jump in the company's history and is significantly higher than the 14,000 increase in customer numbers observed during the prior quarter. Interestingly, the majority of this quarter's uplift came from the US, where customer numbers were up 63% to 91,000.
The US is a geographical segment dominated by Marley Spoon's key rival HelloFresh, so the opportunity to cement a stronger presence there may have been a motivating factor in the company deciding to increase its marketing spending. Marley Spoon also stated that customer acquisition costs for the quarter remained stable at €69 per customer, indicating that spending on items like marketing and advertising were continuing to deliver results at similar levels of efficiency.
Overall, the announcement was a bit of a mixed bag. On the one hand, the significant increase in sales momentum is something worth getting excited about, particularly if it can continue through to the end of 2018. But on the other hand, the decline in forecasted EBIT delays the realisation of profits and represents increased risk for shareholders. Many investors might have rather seen the increased revenues translated more immediately into earnings.
But if shareholders believe Marley Spoon CEO Fabian Siegel, this is just short-term pain for long-term gain. Siegel justified the increased spending in the results announcement: "We are in an exciting period where the customer acquisition momentum continues to grow strongly, and accordingly we decided to increase our investment into marketing to drive further revenue growth based on strong unit economics, as newly acquired customers generate repeat orders in future periods."
Consequently, although Marley Spoon will most likely miss its original EBIT guidance, the company is still on track to achieve its prospectus revenue target of €93 million for 2018. And it believes it will exceed the prospectus target for the number of active customers, which is a solid achievement that could position itself for greater future profit.
Foolish takeaway:
Marley Spoon's current lack of profitability, small market cap and declining EBIT makes it a very risky investment right now. And given the market's recent decreasing appetite for risk it's probably no wonder Marley Spoon's shares were sold off quite heavily last week.
However, the company still believes it is on track to reach profitability within the next 12 to 24 months. Which means that it could deliver some solid rewards to those investors willing to go along for the ride. In my opinion, this makes Marley Spoon one worth watching, but definitely not an investment for the faint of heart.
