Boxed Stock: A Technology-First Grocery Retailer (NYSE:BOXD)

Investment Thesis

Boxed (NYSE:BOXD), an online grocery platform went public through a SPAC merger last year with Seven Oaks Acquisition Corp. Unlike other SPAC companies that are down over 80%, its stock is holding up very well since its de-SPAC hovering around $10. It is now trading at $9.92 which represents a mere 0.8% loss from its SPAC price of $10. Backed by notable companies like Palantir (PLTR), Boxed has a really strong prospect in my opinion. Its platform makes bulk buying groceries online easy while providing a superior user experience. It also has a fast-growing proprietary e-commerce software that it licenses to other companies. The company is growing revenue while expanding its margin rapidly. I believe the stock is a hold right now as fundamentals are strong but profitability is still an issue and valuation is also a bit stretched at the moment.

Introduction

Boxed is a technology-first e-commerce grocery platform founded in 2013 by Chieh Huang. The company has two business segments. The first is its online platform which provides bulk pantry essentials to businesses and household customers. The second one is the software segment which licenses its e-commerce software to other retailers. The company gained a lot of traction in the last two years as the pandemic forced customers to stay at home and shop for groceries online. The software segment is also seeing tremendous growth as more traditional retailers are starting to offer an omnichannel experience by expanding into e-commerce.

E-commerce is a massive opportunity for Boxed. According to the company, the total grocery e-commerce sales are forecasted to grow from $106 billion in 2020 to around $248 billion in 2025, representing a 19% CAGR (compounded annual growth rate). The current US online grocery penetration rate is also only at 10% and is expected to increase to 21% by 2025. This presents a huge TAM (total addressable market) for Boxed to grow into in the future.

How is Boxed different?

Unlike most traditional grocery stores like Walmart (WMT) and Costco (COST), Boxed does not have any physical stores. It purely focuses on e-commerce and takes a technology-first approach. Being an online platform allows it to attract customers from rural areas where stores like Costco and Walmart aren’t nearby. While companies like Walmart do offer online shopping, its user experience is far from good. By focusing solely on e-commerce, Boxed is able to provide a much better shopping experience. The company’s website is built for simplicity and discoverability. It is easier to use with a cleaner layout compared to its competitors, therefore customers are able to discover and shop much more smoothly. The company is also able to leverage its collected data and provide personalized recommendations to each customer.

It also values mobile users and offers an easy-to-use app that allows customers to shop on their phones easily. Due to its bulk buying nature, it is also able to provide competitive pricing and free shipping on most orders with no membership required. It has an optional membership program called BoxedUp which offers 2% cash back on every purchase, free shipping over $20, and exclusive discounts. BoxedUp is priced at $49 per year. The company also recently launched another free subscription called auto-save which lets customers schedule regular deliveries and save 5% on all orders.

I believe customer experience is the key to Boxed. It makes shopping much more pleasant which drives up loyalty and engagement rate. Features such as personalized recommendations are able to significantly increase AOV (average order value). According to the company, customers’ AOV for their first orders is $82 and the number increases to $109 for their 20th order, representing a 33% increase. On average, customers order 8 items with an order value of $97 while businesses order 12 items with an order value of $202. Its AOV is much higher compared to the majority of grocery stores. The company currently has around 500k active retail customers and 25k business customers which includes Fortune 500 companies like United Airlines (UAL).

The technology

The company also has a comprehensive in-house tech platform which is crucial to its operation in my opinion. Besides the personalised customers’ shopping experience that I mentioned, it is also able to improve the company’s operating efficiency on other ends. Its platform is able to capture 40 billion events from 25 million user sessions each year. The provides valuable insight into customers’ shopping behavior, supply chain data, and marketing data that allows the company to make smarter decisions based on these data. The platform also offers robust fulfillment and logistics solutions such as automated in-house robotics with customizable software, inventory management, and more. These technologies allow Boxed to operate more efficiently and increase its margins over time.

Boxed is now licensing this full suite of software to other retail companies. The software allows retailers to launch an end-to-end e-commerce platform with their own purpose-built storefront, marketplace, analytics, fulfillment, advertising, and robotics technologies. This allows retailers to increase supply chain efficiency, integrates advertisements into their marketplace, and use automated robots in their warehouses. Current retailers using the platform include companies like AEON. The software segment is huge to Boxed as it provides them a high margin, SaaS-like recurring revenue. The addressable market is also huge for this segment as more retailers need these types of software to improve their operational efficiency.

Financials and valuations

The company recently reported its earnings for the first quarter of 2022. It reported a revenue of $46.6 million, a 14.1% increase compared to $40.8 million a year ago. The retail segment grew 11.3% YoY (year over year) due to tough comps while the software segment grew 127.1% as it starts to scale. Gross profit is $6.1 million compared to $4.9 a year ago, representing a YoY increase of 23.7%. Gross margins improved 101 basis points to 13.1% due to the increase in net revenue mix from the higher-margin software segment. GMV (gross merchandising volume) increased by 19.2% to $53 million while AOV increased by 16.6% to $130. The increase is driven by higher B2B GMV which grew 65.4% YoY.

Profitability remains an issue. Adjusted EBITDA was a loss of $22.2 million for the first quarter, compared to a loss of $11.0 million in the prior year, this is due to higher growth-related and public company-related investments, including advertising, staffing, insurance costs, and professional services costs. For the outlook of FY22, the company expects growth to accelerate and guided total net revenue to be between $220 to $245 million, representing a growth of 24%-38% YoY. While adjusted EBITDA loss is forecasted to be between $70 to $80 million.

The company’s top-line growth is very impressive, especially within the B2B customers and the software segment. AOV is still increasing which proves that the company’s personalization strategy is working. Profitability and gross margins remain weak but I expect them to improve over time. As AOV continues to increase, the company will have a better unit of economics. The increase in software and subscription will also help margin and bottom line significantly as these revenues are recurring with a much higher margin. The continuous investment into their in-house technology will also improve its operational efficiency as it helps optimize cost over time.

It is hard to value the company using most metrics as it is still unprofitable with negative cash flow, in this case, we only use a P/S (price to sales) ratio. The current trading price of Boxed translates to a P/S ratio of 3.04. From the chart below, you can see that the multiple is much higher than companies like Amazon (AMZN), Costco, and Walmart. The multiple can’t be compared directly as Amazon is a much more diverse business while Costco and Walmart don’t have the software segment that Boxed has. From the second graph, you can also see that Boxed is expected to grow its top line much quicker than all these other companies. It also has a significant opportunity for margin expansion as it scales further. The valuation is still a bit elevated, especially in the current environment and it should trade at levels closer to Amazon’s in my opinion.

Macro Environment

The current macro environment is very unstable with inflation at high levels, interest rates rising, and a possibility of a recession happening later this year. However, I believe Boxed is relatively immune to these macro headwinds. The company focuses solely on groceries which are consumer staples that customers can’t live without. This also gives Boxed some pricing power and is able to pass on the cost to customers. The retail segment may fluctuate a bit as it is possible that AOV will decrease but the subscription and software segment is able to provide a stable revenue stream as the revenue is recurring. As gas prices increased significantly over the past year, people may now decide to purchase groceries online rather than driving out to physical stores in order to save gas money, which will be beneficial to Boxed. The company also recently announced a multi-year collaboration with FedEx (FDX), allowing them to reduce the amount it spends on transportation across all its fulfillment centers, which will help them navigate the challenging supply chain environment better.

Conclusion

In conclusion, I believe Boxed has a strong prospect with a clear growth runway ahead. The company is able to differentiate itself from other grocery retailers by focusing heavily on technology and user experience, which results in much stronger customer loyalty and higher AOV. Its proprietary software allows it to increase its operational efficiency by deploying automated robotics, providing better inventory and supply chain management, improving personalization, and more. The licensing of the software also opens up a new recurring revenue stream for the company and expands its addressable market. The company is seeing strong top-line growth led by B2B revenue, software revenue, and higher AOV.

However, EBITDA loss widened YoY. A higher subscription and software revenue mix should improve margins over time but the company will still need to prove that it is able to control costs sufficiently. The current macro environment is very unstable but I believe Boxed is able to navigate it as it focuses on consumer staples, and the recent deal with FedEx will also allow it to reduce supply chain headwinds and reduce logistics costs. Overall, I rate the stock as a hold as the valuation is still a bit stretched at the current moment and I believe investors should wait for a better price point to initiate a position.