Warby Parker Inc. (NYSE:WRBY) Q1 2024 Earnings Call Transcript May 9, 2024
Warby Parker Inc. misses on earnings expectations. Reported EPS is $-0.02249 EPS, expectations were $0.07. WRBY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to today’s Warby Parker First Quarter 2024 Conference Call. My name is Bailey and I will be the moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I’d now like to pass the conference over to Jaclyn Berkley, Head of the Investor Relations. Please go ahead.
Jaclyn Berkley: Thank you and good morning, everyone. Here with me today are Neil Blumenthal and Dave Gilboa, our Co-Founders and Co-CEOs, alongside Steve Miller, Senior Vice President and Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release and slide presentation are available on our website at investor.warbyparker.com. During this call and in our presentation, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company’s SEC filings, including the section titled Risk Factors in the company’s latest annual report on Form 10-K.
These forward-looking statements are based on information as of May 09, 2024, and except as required by law, we assume no obligation to publicly update or revise our forward-looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with U.S. GAAP. A reconciliation of our non-GAAP measures to the most directly comparable U.S. GAAP measures can be found in this morning’s press release and our slide deck available on our IR website. With that, I’ll pass it over to Neil to kick us off.
Neil Blumenthal: Thank you, Jacqueline, and good morning, everyone. The momentum in our business continued to build throughout the first quarter, primarily driven by strength in our retail channel and glasses business. We are pleased to have delivered record high quarterly revenue and adjusted EBITDA in Q1, along with improvements to gross margin. Our Q1 net revenue of $200 million was up 16.3% year-over-year and adjusted gross margin was 56.9%, up from 55.2% in Q1 last year. We also delivered adjusted EBITDA of $22.4 million, representing an 11.2% margin. Over the last couple of years, in spite of challenging industry dynamics, we continued strategically investing in the business for the long-term, including expanding our store footprint, hiring optometrists, scaling our contacts business, introducing new frame and lens innovation and more recently reinvesting in marketing.
Our Q1 results are evidence that, these investments are bearing fruit and demonstrate our team’s ability to execute and deliver incremental growth and profitability. Based on our first quarter performance, we are raising our full year guidance for both net revenue and adjusted EBITDA. Steve will provide more detail on our financial results and guidance, but first, Dave and I will review our progress against Warby Parker’s strategic priorities as well as the drivers of our Q1 results. I’ll start first with the positive inflection in our glasses business, where we saw strength in single vision glasses and progressives. In Q1, glasses overall drove approximately 70% of our revenue growth for the quarter. And as a product line, glasses grew over 13% year-over-year, compared to average growth of 8% over the course of 2023.
In addition, glasses are our highest margin product and the primary driver of gross margin expansion in the quarter. We attribute the improvement in glasses growth to many of our core strategic investments, including marketing, the expansion of our store fleet and scaling of our exam business as well as positive e-commerce growth. We were particularly encouraged by the improvement in single vision glasses, which continue to make up the majority of our prescription glasses business. A key contributor to this growth was our marketing efforts to drive customer growth, especially within acquisition channels like paid social and streaming, which cater more to our single vision customer. More broadly, we continue to see strong adoption of higher priced frames and more complex lens types like precision progressives, which offer customers better visual quality and comfort at a fraction of the price of what similar products often cost elsewhere.
Progressives overall still only represent approximately 22% of our prescription glasses sold in Q1, and we continue to believe there’s a significant opportunity to increase penetration over time. Underpinning single vision strength and glasses performance overall is our ongoing product innovation, which involves regularly introducing new designs, colorways, materials and sizes. In Q1, we launched four collections featuring a variety of innovative frame constructions and price points ranging from our core $95 up to $145, a $175, and a $195. This included our Terra Collection, a unique capsule assortment that incorporated our signature graduated rivets alongside metal detailing and polished cellulose acetate. We continue to see customers opt-in to higher priced frames and lens enhancements, including anti-fatigue and light responsive, which have contributed nicely to average revenue per customer.
Scaling our eye exam business, including exam utilization has had and will continue to have a direct impact on our glasses business. We find that exam stores drive higher sales than non-exam stores. And industry-wide, approximately 75% of prescription glasses are purchased at the same location an eye exam takes place. As we’ve increased the number of stores offering eye exams, we have seen strong growth in average revenue per customer driven by eye exam revenue, a higher penetration of progressive lenses and contact lenses. While we have yet to see evidence of a return to normalcy in the optical industry, we’ve observed encouraging trends within our business, giving us confidence to invest in customer acquisition to drive growth and profitability amidst the dynamic consumer environment.
The second driver of our growth was expanding our highly-productive store base, coupled with further improvement in our e-commerce channel. We saw strength in our retail channel in particular with retail revenue increasing over 24% year-over-year, compared to store count growth of approximately 20% year-over-year. Since Q1 of last year, we’ve added 41 net new stores including eight in Q1 in 2024, all of which were expansions within existing markets and in largely suburban markets. We added additional stores in the southeast near Atlanta, Miami and Orlando as well as in the Mountain West region near Salt Lake City and Las Vegas. To further contextualize the opportunity ahead of us, over 50% of the major metropolitan areas we operate in only have one store.
With an ending store count of 245 in Q1, we still have a long runway before reaching our longer-term 900 store potential, which would still represent a small fraction of the 45,000 optical shops in the U.S. We continue to see strong returns from our new stores and remain on track to add a total of 40 new stores in 2024. In Q1, our e-commerce channel continued to improve growing 2% year-over-year and contributing to overall top-line growth and fixed cost leverage. We saw strength in contact lenses from both new and returning customers as well as improvement in our single vision glasses business. As we shared on our last call, the composition of our e-commerce channel is evolving with Home Try-On driving a smaller percent of our orders, as we’ve scaled our store base and as customers are increasingly comfortable purchasing directly online with the support of our virtual Try-On feature.
Given this overall channel growth is benefiting from a positive inflection in direct glasses purchases, which is being offset by an ongoing, but diminishing headwind from our headwind from our Home Try-On program. Looking ahead, we believe that our e-commerce business is on a path toward long-term sustainable growth. Now, I’ll pass it over to Dave to talk about additional growth drivers.
Dave Gilboa: Thanks, Neil. We told you in our last call that, our goal for this year was to reaccelerate glasses growth and active customer growth and we are pleased that the year is off to a good start across both dimensions. We believe a core reason for this is our team’s strong marketing execution. We’re proud of what our marketing team has achieved year-to-date, curating high impact brand moments, while driving efficient growth. In Q1, marketing spend was concentrated in two main categories, the first being long-term investments to drive brand affinity and awareness, the second being investments to drive customer acquisition and near-term transactions. Hopefully, many of you were able to experience the great North American solar eclipse on April 8.
We took the opportunity to celebrate this rare celestial event by designing and distributing free eclipse glasses in our stores, with the goal of making viewing safe and accessible for customers. This activation drove our highest retail traffic week ever, generated thousands of press mentions and enabled our stores to grow awareness within their communities. We continue to hear that the number one reason people, who are familiar with Warby Parker but have not shopped with us is that they’re not aware there is a store nearby. We believe that the excitement around the eclipse created significant awareness of our growing store footprint and when many of these consumers need their next exam or to purchase their next pair of glasses, Warby Parker will be top of mind.
We were also excited to work with like-minded partners to extend the reach and impact of our campaign, including Delta Airlines, who distributed custom co-branded solar eclipse glasses to passengers aboard their eclipse flights and to travelers in select Delta Sky Clubs. Overall, we were very pleased with the strong engagement we saw across the country and believe our investment in the eclipse will drive brand awareness and goodwill over the long-term. We’ve also focused on using product collections to expand awareness within influential audiences. Earlier in the quarter, we launched our first collaboration of the year with New York based fashion label, Theophilio. Edvin Thompson Theophilio’s Creative Director and Founder, is one of the fastest rising stars in fashion and won the CFDA’s coveted Emerging Designer of the Year award.
We believe targeted limited edition collaborations like this speak to a more fashion-oriented consumer, while elevating brand perception. We continue to invest in customer acquisition through our new stores and diversified media model. We allocate a portion of our media spend to linear TV and search where we continue to see positive results. At the same time, we’ve been testing and scaling additional channels like influencer, direct mail and streaming, where we’ve also seen strong returns. As a result of our marketing efforts, it was encouraging to see strong sequential revenue growth and, in particular, glasses growth, while maintaining marketing in the low teens as a percentage of revenue. You will see us continue to stay disciplined, while leaning into these marketing strategies the rest of the year.
Our stores and marketing initiatives have also driven our third consecutive quarter of improving active customer growth, a trend we expect to continue throughout the year. We ended Q1 with 2.4 million active customers, an increase of 3.2% on a trailing 12 month basis, while average revenue per customer grew 9.6%. We continue to see positive customer retention metrics and repeat purchasing patterns across cohorts, including a revenue retention rate of roughly 50% over 24 months and roughly 100% over 48 months for the most recent cohort. The fourth and final growth strategy I’ll dive into this quarter is our effort to scale holistic vision care and drive higher customer lifetime value. In Q1, contact lens sales grew approximately 40% year-over-year to a little over 9% of revenue, which remains well below the 20% industry average.
We plan to continue to grow this portion of our business as it not only attracts new customers but also some of our highest value customers, given the replenishment nature of the product and their propensity to go on to purchase glasses. In the quarter, eye exam revenue also grew over 40% year-over-year to approximately 5% of revenue, which remains well below the approximately 15% industry average. Today, the majority of our customers still gets their eye exams elsewhere and brings their prescriptions to Warby Parker, highlighting the opportunity in front of us. As we’ve increased the number of stores offering eye exams, including stores with in-person and remote doctors, we have seen strong growth in average revenue per customer, driven by eye exam revenue, strong uptake of precision progressives and contact lenses.
Finally, as many of you know, earlier this year, we announced an expanded relationship with Versant Health, a wholly-owned subsidiary of MetLife, which will bring an additional 15 million lives in network with Warby Parker and nearly double the number of lives within network insurance access with us to over 34 million. Our phased integration began earlier this month and will continue throughout the next couple of quarters. We look forward to updating you as the integration moves forward. In parallel, we continue to leverage our universal eligibility check tool in stores and online to help customers easily locate their in-network insurance coverage and average out-of-network benefits. Most out-of-network plans cover an average of $100 reimbursement for a pair of glasses or contacts, meaning that these customers often pay $0 out-of-pocket for their eyewear purchase at Warby Parker.
Looking ahead, we’re eager to build upon the momentum we’ve seen throughout the business and plan to maintain a healthy balance between driving growth and expanding adjusted EBITDA margins. Now, I’ll turn it over to Steve to review the details of our financial performance.
Steve Miller: Thanks, Neil and Dave. Revenue for the first quarter came in at $200 million, up 16.3% year-over-year. From a channel perspective, retail revenue increased 24.4% year-over-year, while e-commerce revenue increased 1.8% versus Q1 of 2023. Turning to our stores, we added 41 net new stores over the course of the last 12 months, ending the quarter with 245 stores, up from 204 stores at the end of Q1 2023. This 20% increase in our store count compares to retail revenue growth of more than 24% over the same period. Looking at Q1 retail performance on a blended basis, including both new stores and stores opened greater than 12 months, retail productivity was 102% as compared to the same period last year. As a reminder, we define retail productivity as the year-over-year change in retail sales per store for the average number of stores opened in the period.
This metric covers all stores opened in the period, even new stores opened in the last 12 months. Our new stores continue to deliver strong unit economics, performing in line with our target of 35% overall margin and 20 month paybacks. Two-thirds of our 2022 cohort have now paid back in an average of 17 months and the cohort as a whole is on track for approximately 20 months. Our stores opened more than 12 months, average revenue per store was $2.2 million and performance was in line with our target 35% overall adjusted EBITDA margins. Over the course of the past year, we added nearly 50 net new eye exam locations, bringing our stores with eye exams to 204 or 83% of our total fleet of 245 stores. From a channel mix perspective, for the first quarter, retail represented 69% of our overall business.
This compares to 64% in Q1 2023. From a customer perspective, we finished Q1 with 2.36 million active customers, which we believe is more reflective of active households and represent an increase of 3.2% on a trailing 12 month basis. As we’ve started anniversarying marketing spend pullbacks in Q2 of last year, we’ve been pleased to see the sequential improvements in year-over-year active customer growth. Starting in Q2, our trailing 12 month metric will no longer capture periods that had significant marketing spend pullbacks, so we anticipate seeing this metric continue to inflect upward throughout the year. We also continue to see strength in average revenue per customer of $296 in Q1, up 9.6% year-over-year. This was driven by a few factors, including an increase in higher priced lenses, including progressives and continued ramping of both contact lens and eye exam sales.
As previously noted, we have multi user accounts in which one person in the household places an order on behalf of others, and if we look at our customers on an individual basis, we served 2.49 million individuals, which is up 4.5% on a trailing 12 month basis and reflects average revenue per individual up 8.3%. Moving on to gross margin. As a reminder, our gross margin is fully-loaded and accounts for a range of costs, including frames, lenses, optical labs, customer shipping, optometrist salaries, store rent and the depreciation of store build outs. Our gross margin also includes stock-based compensation expense for our optometrists and optical lab employees. For comparability, I will be speaking to gross margin excluding stock-based compensation.
First quarter adjusted gross margin came in at 56.9% compared to 55.2% in the year ago period. The increase in gross margin was primarily driven by faster growth in our glasses business, which is our highest gross margin product category, efficiencies in our owned optical laboratories and lower outbound customer shipping costs, as a percent of revenue. As expected, we saw stability and modest leverage within the more fixed portion of our cost of goods, including retail occupancy as we’ve continued to scale our store base. Partially offsetting gross margin leverage in Q1 were higher optometrist salaries as the number of stores offering eye exams grew and continued strength in contact lenses and eye exams, which have lower gross margin profiles than eye glasses, but over the medium and long-term are accretive to gross profit dollars, which were up 20% year-over-year in Q1.
Expanding our contact offering is a core part of scaling our holistic vision care offering and a key driver of growing average revenue per customer. In addition, contact lenses have a higher purchase frequency and subscription like purchase cycle purchase cycle. All-in-all, we’re pleased with our gross margin in Q1 and we continue to have confidence in our ability to consistently deliver mid-50s gross margin this year, as we expect glasses growth to offset the dilutive effects of contacts and eye exam growth. Shifting gears to SG&A. As a reminder, SG&A for our business includes three main components: salary expense for our headquarters, customer experience and retail employees; marketing spend, including our home try on program; and general corporate overhead expenses.
Adjusted SG&A excludes non-cash costs like stock-based compensation expense. Adjusted SG&A in the first quarter came in at $103.4 million or 51.7% of revenue. This compares to Q1 2023 adjusted SG&A of $87.2 million or 50.7% of revenue. The primary source of deleverage in the quarter was marketing spend increasing as a percent of revenue from 11.7% to 12.4%, while non-marketing SG&A remained flat as a percent of revenue at approximately 39%. In addition, we also saw natural increases in retail salaries as we expanded our store base as well as investments in fully integrating our new ERP system, which we anticipate will begin to moderate in Q2 and the rest of the year. As a reminder, this year, we expect to keep marketing spend in the low teens as a percent of revenue.
Marketing spend for the quarter came in at $24.9 million or 12.4% of revenue. This is up from $20.1 million and 11.7% of revenue in the same period last year. Turning now to adjusted EBITDA. In the first quarter, we generated adjusted EBITDA of $22.4 million, representing an adjusted EBITDA margin of 11.2%, which compares to adjusted EBITDA of $17.7 million or 10.3% of revenue in the year ago period. Turning now to our balance sheet. We were free cash flow positive for the fourth consecutive quarter and ended with a strong balance sheet position reflecting approximately $220 million in cash, which we will continue to deploy deliberately to support our growth and operations. We also have an undrawn credit facility of $120 million that we can increase to $175 million.
Now to our outlook. We are encouraged by our momentum year-to-date, but we still are maintaining a conservative stance on guiding our business, given the broader macroeconomic environment. Given our performance in Q1, we’re revising our full year 2024 guidance higher to the following: revenue of $753 million to $761 million, representing approximately 12.5% to 13.5% year-over-year growth; adjusted EBITDA of $70 million at the midpoint of our revenue range, which equals an adjusted EBITDA margin of 9.2%; stability in gross margin in the mid-50s as a percent of revenue consistent with last year, and 40 new store openings. We anticipate adjusted EBITDA margin expansion over the remainder of the year will be driven more by leverage within SG&A as new stores ramp, as we see marketing spend consistent as a percent of revenue and as we leverage our corporate expense overhead.
As a reminder, because of the brand campaign in Q3 last year, we anticipate this year’s Q3 will be more profitable than Q2. We anticipate gross margin closer to the mid-50s in line with our full year guidance. We plan to continue to drive growth from both contacts and eye exams and offset the dilutive impact of these offerings by continuing to scale our glasses business, as well as efficiencies achieved through our in-house optical labs. We also expect to see lower year-over-year growth from some of the more fixed components of our COGS stack, including optometrist salaries and store rent. We’re still forecasting stock-based compensation as a percentage of net revenue in 2024 to be approximately 6% compared with 10.5% in 2023. Stock-based compensation for both periods is above our long-term forecast, as a result of the multi-year equity grants to our Co-CEOs in 2021.
We still anticipate stock based compensation to normalize to a range of 2% to 4% of net revenue next year. For Q2 2024, we’re guiding to the following: revenue between $185 million and $187 million, which represents growth of approximately 11.5% to 12.5% year-over-year. Quarter-to-date, we’ve observed 101% productivity in our retail stores versus the same period last year. As we’ve seen more consistency in our business across channels, we do not plan to share intra-quarter metrics going forward. Our quarterly guidance reflects our outlook for retail productivity and e-commerce in the relevant period. From a bottom-line perspective in Q2 2024, we’re guiding to adjusted EBITDA of approximately $17 million, representing a margin of 9.1% at the midpoint of our range.
Thank you again for joining us this morning. With that, Neil, Dave and I are pleased to take your questions. Operator, please open the line for Q&A.
See also 12 ChatGPT Penny Stock Picks Right Now and 25 Countries with the Highest Informal Employment in the World.
To continue reading the Q&A session, please click here.