Warby Parker Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 11, 2021

There are 9 speakers on the call.

Operator

Good morning. My name is Bethany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Warby Parker Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, There will be a question and answer session.

Operator

3rd. Thank you. I would now like to introduce your host, Tina Romani, Vice President and Investor Relations.

Speaker 1

Thank you, and good morning, everyone. Here with me today are Neil Blumenthal and Dave Gilboa, call, our Co Founders and Co CEOs, alongside Steve Miller, Senior Bank President and Chief Financial Officer. Before we begin, we have a couple of reminders. Quarter. Our earnings release and slide presentation are available on our website at investors.

Speaker 1

Warbyparker.com. During this call and in our presentation, call. 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. Call.

Speaker 1

For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors 2021, and we assume no obligation to publicly update or revise our forward looking statements. Additionally, we will be discussing certain non GAAP financial measures. Quarter. These non GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. Quarter.

Speaker 1

A reconciliation of these items to the nearest U. S. GAAP measure can be found in this morning's press release and our slide deck available on our IR website. Quarter. With that, it's my pleasure to turn the call over to Neil to kick things off.

Speaker 2

Thanks, Tina, and good morning, everyone. After 11 years as a private company, we're excited to host our first earnings call on the heels of a strong quarter and a successful direct listing. We'd like to start by highlighting team Warby. Our talented and engaged team continues to thrive while demonstrating strength and resilience during this challenging pandemic. Quarter.

Speaker 2

One of the highlights of Dave and my career as we're celebrating our direct listing alongside team Warby, both inside the New York Stock Through everyone's hard work and shared commitment to doing good, team Warby will continue to have an outsized impact on our customers, our shareholders and the communities we serve. Quarter. As we reflect on our business today, we're grateful to operate in a large and growing market. According to the Vision Council, the U. S.

Speaker 2

Optical market is quarter. With over $500,000,000 in revenue, we still represent only 1% of the U. S. Market, underscoring the tremendous opportunity we have ahead. Quarter.

Speaker 2

We started Warby Parker in 2010 because we were frustrated consumers, frustrated by the high and opaque price of glasses and an antiquated shopping experience. Since our founding, we've pioneered ideas, designed products and developed technologies that help people see. We design and sell prescription glasses starting at $95 and offer a range of convenient and affordable vision care products and services like eye exams and contact across our more than 150 retail stores, our website and our apps. Quarter. By selling directly to our customers and cutting out the middleman, we are able to deliver exceptional value and remarkable customer service quarter.

Speaker 2

And we have not seen similar customer satisfaction industry wide. We believe that the large incumbent players, which make up 3rd quarter. Half of the total market are structurally disadvantaged and the other half of the market, independent optical shops and optometric practices Are not well positioned to make the financial and technological investment required to innovate and create the exceptional customer experiences consumers now expect. Quarter. Happy customers fuel our growth.

Speaker 2

We ended the quarter with 2,150,000 active customers, quarter, an increase of 23% versus last year and still a fraction of the nearly 200,000,000 adults in the U. S. Using some form of vision correction. Quarter. Our direct to consumer model not only enables us to better serve our customers, but also helps us manage crises like a pandemic.

Speaker 3

Quarter. Our omni channel approach enabled us

Speaker 2

to grow last year, thanks to our robust e commerce presence. And our vertical integration has allowed us to avoid inventory quarter. And team Warby is deeply committed to providing vision to all. In Q3, we publicly launched the Warby Impact Foundation, which we created to accelerate the work of our Buy a Pair, Give a Pair program. Warby Parker was incredibly proud to authorize up 1% of the company's outstanding shares for future grants to the foundation or other like minded charitable organizations.

Speaker 2

And our work providing glasses to those in need is having a dramatic impact. We are excited to share the results of a 3 year clinical study highlighting the impact of our 3rd glasses distribution program in Baltimore City Public Schools. In September, JAMA Ophthalmology published a study from Johns Hopkins University investigating the effect glasses have on a student's performance in school. Overall, gains for students who receive glasses quarter. We're equivalent to adding 2 to 4 months of education onto the school year.

Speaker 2

And for students in the lowest quartile or those 3rd customer experience optical lab and retail teams. We recruit and retain highly engaged, highly motivated individuals quarter. We're excited to connect their work back to our mission. We view this focus on impact as a form of long termism. Quarter.

Speaker 2

One of the examples that brings this to life was our approach to store closures in 2020. At the start of the pandemic, We were one of the 1st national retailers to close all of our stores because it was the right thing to do to protect our employees and our customers. Not only was it the right thing to do from a safety perspective, but it was also the right business decision. Fast forwarding to today, We believe we aren't facing the same labor shortages that many retailers are facing because of our employer brand and the goodwill we fostered over the years. Quarter.

Speaker 2

Our long term approach to building Warby Parker can best be described as one of sustainable growth. This is a phrase you'll be hearing from us a lot. Quarter. And by that, we mean our focus on scaling our business and compounding high growth rates, not just for the next couple of quarters or years, quarter for many years decades to come. It's the philosophy we use to guide our strategic investments that we believe will lead to meaningful long term growth, profitability and impact.

Speaker 2

As we look to Warby Parker's future, we could not be more excited. And now I'll pass it over to my co CEO and co founder, Dave,

Speaker 4

And to our new shareholders and those whom we are meeting for the first time on today's call, thank you for joining. We're so glad you're here. Quarter. With that in mind and as we focus on achieving sustainable growth and look to increase our 1% market share in the U. S, quarter.

Speaker 4

We're focused on 4 distinct but complementary growth strategies. 1st, scaling our omni channel experience by expanding our retail footprint and driving innovation through our website, apps and integrated digital experience. 2nd, expanding our core glasses business, while deepening our penetration of progressive lenses 3rd, evolving into a holistic vision care company as we scale contact lenses, eye exams and telehealth services. And 4th, driving brand awareness using a strategic mix of organic and paid initiatives to amplify our reach. Quarter.

Speaker 4

I'm excited to share a few milestones we achieved against each of these 4 growth strategies during the quarter, starting with scaling our omnichannel experience. Quarter. We designed Warby Parker from the ground up as a true omnichannel brand, and we're excited to continue to scale both our store footprint and leading digital offerings. We opened 9 new stores in the quarter and entered 5 new markets, including San Antonio, Texas Tucson, Arizona and Princeton, New Jersey, Bringing year to date openings to 28. We're on track to open 35 stores this year, the most stores we've ever opened in a year, Which will bring our store count to 161.

Speaker 4

This is still just a fraction of the 41,000 optical shops that exist in the U. S. Today. Quarter. As a reminder, we commissioned a 3rd party study that concluded we can expand our footprint to over 900 stores at the same productivity based on our current customer and product profile.

Speaker 4

So significant white space remains for our retail expansion. Quarter. With our unaided brand awareness at just 13% today, we deliberately design our stores to serve as billboards and have found them to be highly effective in driving brand awareness, new customer acquisition and in serving our existing customer base. Quarter. Our stores are also highly productive.

Speaker 4

We have historically targeted and continue to target average sales per square foot of $2,900 4 wall margins of 35% and payback in under 20 months. And we expect our stores to generate significant free cash flow over time. Quarter. Our stores serve as an integral complement to our website and apps in creating a holistic and seamless omnichannel customer experience. Call.

Speaker 4

We describe ourselves as customer focused, but channel agnostic, a customer journey that starts in a store, can end with a purchase online and vice versa, quarter. And more than 70% of our customers interact with our website or mobile app before placing an order. We've also seen the adoption of digital tools quarter. Next, I'll talk about our efforts to expand our core glasses business. We introduced new frame styles, sizes, lens offerings and more through the release of over 20 eyewear collections each year.

Speaker 4

To highlight 2 from this quarter, in August, we launched our fall core collection and traveled to one of our Peoples Project Schools to photograph the collection on teachers who have done immeasurable good for their students and their communities in the face of the pandemic challenges. Quarter. In September, we launched our tortoise collage collection. Each hand finished frame features 4 distinct tortoise acetate spliced together, 3rd optical market, but less than 20% of our optical business. As we tackle this white space in front of us, we expect quarter.

Speaker 4

We will continue to see gross margin leverage since progressives are a higher margin product category. To support the expansion of our glasses business, we were thrilled to open our 2nd optical lab in the U. S. This quarter and welcome our new team members We opened our first optical lab in Sloatsburg, New York in 2017, which has expanded to a 52,000 square facility with a team of more than 120. We believe that the opening of our new 69,000 square foot Las Vegas facility 3rd.

Speaker 4

Will give us the power to increase our production and shipping capabilities, scale our in house manufacturing processes and more efficiently serve our West Coast customers. Thank you to all of our team members who have supported this important milestone and a big welcome to all of our new team members in Las Vegas. Quarter, lower return rates, higher margins and results in higher NPS scores. Operating these labs also gives us additional control and 3rd quarter, which we believe will continue to insulate us from some of the supply chain and

Speaker 5

quarter and we expect to continue

Speaker 4

to see the impact of the company's impact on our business and our business. We also feel fortunate that we sell small and lightweight products. Quarter. Given the high value to weight ratio, we have predominantly used air freight for international shipments of our inventory throughout the company's history. Quarter.

Speaker 4

As a result, we have not been impacted by the global cargo shipping backlog and have not had to meaningfully change our transportation methods. As it relates to expanding and scaling our holistic vision care offering, historically, the vast majority of our customers have gone to a non Warby Parker doctor

Speaker 2

customers and patients.

Speaker 4

We saw a strong customer response to our contact lens offering throughout the quarter. Today, the US services with 70% of them purchasing contacts at least 2 times per year. Many optical retailers see 20% or more of their business made up from contacts. Quarter. For us, this is still a new part of our business.

Speaker 4

Last year was the first full year, we offered contacts to our customers. And today, contacts make up only 5% of our business.

Speaker 3

As we look to

Speaker 5

quarter and we will continue to

Speaker 4

sell contacts to our existing glasses customers. We are now taking opportunities in scaling our eye exam vision testing offerings. The U. S. Eye exam market is over $6,000,000,000 annually.

Speaker 4

Quarter. Many optical retailers see 10% to 15% of their business coming from exam revenue and the majority of their sales coming from exam customers. For us, both of these percentages are quite small. We now have 99 Stores with Doctors, where customers can get a comprehensive eye exam, up from 49 stores with doctors as of Q3 2019, and we expect this number to grow significantly in the coming quarters years. We're also investing heavily into telehealth and are excited by its potential to increase access to VEST, an app that makes it significantly easier and faster to renew glasses and contact prescriptions from home.

Speaker 4

Since launching in July, we've seen the number of vision tests performed via telehealth nearly double with limited promotion, and we plan to introduce new features to continue to enhance the customer experience in the coming months. Quarter. And now on to our 4th growth strategy, driving brand awareness. We leverage a number of approaches to increase brand awareness and attract new customers call. From unique collaborations and partnerships to creative TV campaigns to ensuring every one of our customers has a remarkable customer experience.

Speaker 4

Quarter. Our customers have been and remain our best marketing channel. To this day, more than half of our customers still learn about us via word-of-mouth. Quarter. Throughout the quarter, we successfully executed on several initiatives to drive awareness and growth, resulting quarter.

Speaker 4

In response to the Delta variant and potential shifts 1st quarter. As a result, we moderated paid marketing spend throughout Q3. Even so, we ended the 3rd quarter with 2,150,000 active customers, an increase of 23% versus last year. 1 of our core values is to pursue new and creative ideas. We love creating fun and engaging collaborations with Christian Partners.

Speaker 4

In this quarter, we were thrilled to partner with Searchlight Pictures to celebrate Wes Anderson's newest film, The French Dispatch. Readers, writers, film lovers and more were invited to an experiential pop up in SoHo where there were lines around the block throughout opening weekend. Quarter. What gets us excited is that each of these initiatives will help us both attract new customers and make our existing customers more valuable. Quarter.

Speaker 4

Now I'll hand it over to Steve to review our Q3 financial results and outlook for fiscal 2021.

Speaker 3

Thanks, Neil and Dave. Quarter. I wanted to start by sharing just how excited I am to welcome all of you to our first earnings call. As you know, the company went 3rd public through direct listing roughly 6 weeks ago, and we couldn't have done that without the support of all of our team members, customers, Partners and Investors, both existing and new. I also wanted to thank all the sell side analysts covering our stock who've taken the time to get to Capital market at roughly $42,000,000,000 including prescription and non prescription glasses, contact lenses and eye exams.

Speaker 3

And Warby Parker accounts for just 1% of this market, representing tremendous room for growth ahead. Quarter. I'll start by talking about top line trends. We're very happy with the 3rd. We're seeing measured by revenue and customer growth.

Speaker 3

We've seen continued top line growth throughout each quarter this year quarter. And we're very pleased to report strong top line growth for Q3 2021 as well. In these remarks, and versus the same period last year. For Q3 2021, revenue came in at 137,400,000, quarter, up 32% over last year and up 45% versus Q3 2019. Quarter.

Speaker 3

Active customers increased to 2,150,000, quarter, up 23% versus last year. This growth in top line was driven by a number of factors, including a consistent replenishment cycle customer. We generated $2.42 in average revenue per customer on an LTM basis as of September 30, 2021. Quarter. This represents a 14% increase over $2.13 measured as of the end of the same period last year.

Speaker 3

Quarter. This growth in average revenue per customer illustrates our ability to execute on our holistic vision care strategy, where we are evolving from a glasses only company To one that meets the holistic vision care needs of all of our customers. And as we do so, we believe our customers will become even more loyal over time. Customers that purchase exams, contacts and glasses from us generate roughly 2.2 times the revenue after 1 year from initial purchase and glasses only customers. And yet holistic vision care purchasers continue to represent less than 1% of our active customers, quarter underscoring the continued long term upside here.

Speaker 3

As Neil and Dave said, we very much view ourselves as an omnichannel brand. Customer journeys are nuanced and complex purchases that start online might end up in store and vice versa. And given that, we strive quarter. For Q3 'twenty one, e commerce represented 42% of our overall business versus 63% in Q3. Quarter.

Speaker 3

Today, our e commerce mix from a channel perspective still remains moderately elevated versus 2019. Quarter. E commerce grew at 102% in Q3 of last year. Compared to that period, e commerce is down 11% year over year, quarter, up 80% versus 2019, representing a 2 year CAGR of 34%. We're very pleased with our retail store performance.

Speaker 3

Quarter. We've seen a strong recovery at our existing stores since we declined, including revenue per 7 3rd. We finished the quarter with 104 stores versus 123 3rd quarter. We opened the same time last year, representing 31 new stores opened over the period. Quarter.

Speaker 3

We opened 9 new stores in Q3 'twenty one and 28 stores so far this year. Quarter. We're on track to open 35 new stores this year and we feel confident that our new store pipeline is stronger than ever. Quarter. Next, I'll shift gears to gross margin.

Speaker 3

Our gross margin is fully loaded and accounts for a range of costs, including frames, Lenses, Optical Labs, customer shipping, eye doctors, store rent and the depreciation of store build outs. Quarter. As we talk about gross margin, we'll continue to try and lay out the puts and takes that are reflected in change in our gross margins to fluctuate quarter and we expect to continue to see the results of various puts and takes, which includes seasonality and product mix. Quarter. But on an annual basis, we've seen consistency of strong gross margins of 58% to quarter and a number of operating factors to bear in mind that reflect changes in gross margin.

Speaker 3

Quarter. Gross margin for Q3 2021 came in at 58%. This compares to 61.5% for the same quarter in 2020 2019. Q3 2021 cost of goods quarter expense associated with our direct listing of 70 basis points related to our optometrists and optical lab employees. Quarter.

Speaker 3

Excluding this, gross margin percent. In addition, Q3 2020

Speaker 5

quarter. We also benefited

Speaker 6

from a tariff rebate of

Speaker 3

approximately $1,000,000 of revenue. With regards to the various operational puts and takes to gross margin, Increased contact lens penetration accounted for the majority of the decrease we saw during the quarter. We saw contact lenses accelerate as a percentage of our business mix as we've driven brand awareness around that product offering. Quarter. As Dave mentioned, contacts are $5,000,000,000 plus market and represent approximately quarter and we expect approximately 5% of our business today versus just 2% of our business for the full year 2020.

Speaker 3

Contact lens higher purchase frequency that elevates gross margin dollars per share of this product line. Quarter. We also saw moderate increases in the cost of airfreight. We have and

Speaker 5

the company's most important and most important and

Speaker 3

important and important and important and

Speaker 5

important and important and important.

Speaker 3

These product costs make up a small quarter

Speaker 5

and full

Speaker 2

year

Speaker 3

2019. In Q3 2021, we were pleased to see sales of non quarter. Prescription sunglasses returned to pre pandemic levels of 10% plus of our business. During 2020, we saw sales of this product line drop to half of pre pandemic levels. Given sunglasses have moderately lower margins, This ultimately elevated gross margin in Q3 2020.

Speaker 3

We also opened our 2nd optical lab in Las Vegas this quarter. Quarter. As this new optical lab ramps to 100 percent operating capacity, we expect that it will continue to have a moderate drag on gross margin Third Quarter and Quartermark. We expect to more efficiently serve our West Coast customers, resulting in higher NPS,

Speaker 5

lower than expected to

Speaker 3

be improved gross margin overall. Quarter to provide more visibility into SG and A for the quarter. The 3 main components marketing spend, which includes our home try on program and general corporate overhead expenses. Quarter. First, we had a number of unique expenses associated with our direct listing recorded in SG and A.

Speaker 3

During the quarter, we recognized stock based compensation expense quarter. In line with this framework, we maintained a very focused approach that enabled us to make continued investments in the business, while generating leverage. Quarter. Excluding stock compensation expense and the one time costs associated with our direct revenue improved nearly quarter, we expect to be approximately 6 full points from 60.6%. This improvement was driven by 2 main factors.

Speaker 3

Quarter. First, a thoughtful approach to hiring, making sure that incremental hires have clear alignment to supporting growth and infrastructure and second is a disciplined deployment quarter. As it relates to marketing, we maintain a highly flexible model quarter. With the only committed spend largely around linear TV during competitive periods 3rd quarter. We maintained a conservative approach to the deployment of marketing spend as we leverage the flexibility of our model.

Speaker 3

Quarter. In addition, we saw expense for our home try on program decrease as the mix between e commerce and stores has normalized close to the pre pandemic levels. Quarter. We were extremely pleased with our top line performance given our marketing spend growth was just mid single digits year over year in Q3. Quarter.

Speaker 3

As we look ahead to Q4, we plan to redeploy some of those dollars from Q3 into Q4 as we drive brand awareness and demand quarter and during the holiday season and year end expiration of flexible spending. Quarter. As it relates to adjusted EBITDA, we saw an expansion of adjusted EBITDA margin in the quarter versus the same periods in 2020 2019. Quarter. We generated adjusted EBITDA margin of 82% last year and 6.7% in 2019.

Speaker 3

Quarter. This adjusted EBITDA margin is really a reflection of maintaining strong growth quarter, while continuing to see leverage in SG and A as just described. We finished the quarter with a strong balance sheet reflecting 266,000,000 in cash, quarter, which will continue to deploy to make deliberate investments in both growth and infrastructure. Turning to our outlook for the remainder of the year. Quarter.

Speaker 3

For the full year 2021, we now expect net revenue to be in the range of $539,500,000 to $542,000,000 representing growth of 37% to 38% versus 2020 and growth of 46% versus 2019. Adjusted EBITDA margin of approximately 4% to 5% in line with prior guidance, and we are on track to open 3rd 5 stores this year, which will bring our store count to 161. As we look ahead, it's important to note call. That there are a number of unknowns related to the macro environment. As such, we continue to be thoughtful quarter and prudent in setting our financial outlook for the balance of the year.

Speaker 3

Let me give you some color on the assumptions embedded within our guidance. Quarter. As it relates to top line, we observed moderately higher seasonal demand during the month of December due in part to customer usage of health and flexible spending benefits and the final weeks of the year. Given we recognize revenue upon delivery of product for the customer, we recognize revenue in Q1 for most orders placed in the final week of the year. From a seasonality perspective, Q4 is generally our reselling season.

Speaker 3

These investments include marketing to support and generate customer demand, quarter. Investments in shipping as we expedite orders to meet holiday timing, increasing store staffing to accommodate higher traffic and extended store hours and increasing our customer experience staffing to support higher demand as well as elevated call volume related to Flexible Spending Benefit Questions. For additional context, this demand from December continues into January in Q1, which sets 3rd stage for growth for the full year. Lastly, to be helpful, ahead of our direct listing, we provided a framework for 2022 net revenue growth and adjusted EBITDA margin improvement. We look forward to providing our formal 2022 outlook with our Q4 call in March.

Speaker 3

Quarter. In closing, we've built our business model with a focus on generating sustainable growth, while driving incremental profitability of 1 to 2 points of adjusted EBITDA margin each year until we reach our long term adjusted EBITDA margin. We couldn't be more excited about what lies ahead. Quarter. Thank you for welcoming us to the public markets.

Speaker 3

We're thrilled to be here. And with that, I'm excited to open the call up to Q and A.

Operator

Phone Keypad. Our first question comes from the line of Oliver Chen at Cowen. Your line is open.

Speaker 7

Hi, thank you. Congrats on your 1st public call. Neil and David, we see telehealth at Cowen as a big opportunity

Speaker 5

quarter results

Speaker 7

on sustainability as you have a comprehensive impact quarter. Warby is one of our top ESG ideas, so would love thoughts around that as well. Thank you.

Speaker 4

Conference. Great. Thanks for joining and for the questions. I'll tackle the telehealth piece and then hand it to Neil and increased access to eye doctors. And this quarter, we introduced our virtual vision test, which is an half that you can download, do a vision test from home in just a few minutes and an ophthalmologist who's licensed in your state can write a prescription remotely.

Speaker 4

We're seeing a very positive response from our customers with limited promotion so far and I really feel like we're in the top of the first inning. And if there's been any silver lining from the pandemic, it's that a lot of the barriers to telehealth adoption Have been lowered both from a consumer adoption standpoint and from a regulatory standpoint. And so we're excited to continue to invest in this area and some of the near term items that we have are going to make it easier for Our customers to use one vision test to renew both glasses and contacts prescriptions, be able to scan their contacts box to Make it even easier and faster for our customers and patients to renew their contacts prescriptions.

Speaker 2

With respect to ESG, you did mention our impact report and I would encourage everyone to take a look if they haven't already at warbyparker.com/ 3rd quarter. Since 2018, we've been publishing a thorough 3rd quarter and 3rd quarter. And we have talent across the U. S. And Canada, but we also have talent based quarter, where our frame practices, but also ensuring that we're quarter and working with our social innovation team to purchase the best carbon quarter and we'll continue to explore ways to quarter.

Speaker 2

Reduce Water Use and Reduce Carbon Emissions, Utility in Las Vegas as we did in Q3 is that quarter. The more control that we have and the further that we vertically integrate, the more that we can do to reduce carbon emissions and it's something that we're really excited about. But perhaps the thing that we're best known for is providing a pair of glasses for every pair that we sell. And in the early days of Warby Parker, we thought, should we commit to a percent of revenue or a percent of profits? Quarter.

Speaker 2

And we thought that was important to focus on impact, right? The pair of glasses on someone's face dramatically changes their ability to learn, their ability to work. And as we saw with this Johns Hopkins University study, There is no better intervention in school than providing a pair of glasses, not 3rd. Extending the school day, not providing private tutoring, not providing computers in classrooms, giving a pair of glasses effectively class and with a billion people in need of glasses that don't currently have access, contractable problem. Thanks, Oliver.

Speaker 7

Thank you.

Operator

Question. The next question comes from the line of Paul Lejuez at Citi. Your line is open.

Speaker 2

Quarter. Thanks guys. Curious if you can share what your customer growth expectations are for 3rd Q and if that's something that you will be sharing with us in the future. And then just second, as you look to bring more doctors on staff and open stores with doctors in them. Where are you sourcing the majority from?

Speaker 2

Are they coming from 3rd. Schools are fresh out of schools, are they coming from places, other retailers that may have closed up shop or are 3rd. The sort of independents that decide to come work for you and shut down their own practice.

Speaker 3

To the first part of the question, And then we'll kick it over to Neil to answer the second part. In terms of providing guidance around active customers, we don't project active customers that we express externally to investors quarter model, the way that we have talked about growth, it's really a function of 2 factors. 1 is consistent growth in terms of Average revenue per customer, which you've seen has increased to $2.42 or 3rd quarter. Our active customer growth is up 23% year over year. The way that we have built our model is very consistent around how we think about customer economics and customer growth and growth in AOV.

Speaker 3

And what we will do is just draw search.

Speaker 2

And with respect to our hiring and retention of optometrists, quarter. As we mentioned, we now have 99 stores with eye doctors, that's up from 49 stores in Q3 of 20 optometrists, and that's because of 3rd quarter. Our stores are fun. Our team members are our same suites are beautiful and and we expect to continue to invest a lot to ensure that our optometrists are focused on clinical care rather than administrative tasks. And then even the location of our stores tend to be in close proximity to where our eye doctors live.

Speaker 2

Quarter. And I forget what the detail was, but there was a study that came out not too long ago that showed that actually commuting time It's the biggest indicator of happiness. But we tend to hire eye doctors that have several years experience often coming from other optical retailers or optometric practices. We do see some shifts happening in the industry 3rd quarter. In that, our graduating with increased debt loads versus perhaps 3rd.

Speaker 2

We've also found that we've earned a lot of goodwill within the optometric community because of our racial equity strategy. Quarter. Last year, we laid out a plan to increase Black representation in the field of optometry. Less 3rd. So 3% of optometrists in America are black and we want to change that.

Speaker 2

We're working with other groups 3rd. To increase awareness about the field of optometry and sponsor career fairs at historically black colleges and universities and have created scholarships for black students at the New England College of Optometry. Thanks again for your question. Thanks, Tom. Good luck.

Speaker 2

Quarter.

Speaker 1

Today's call really highlighted the momentum quarter that you have across the business and in particular in some of those newer emerging product categories such as contact lenses, Progressives in Sunglasses.

Speaker 5

I was

Speaker 1

hoping you could provide a little bit more detail about how you would expect each of those categories trend, maybe through the remainder of 2021 2022 and then the puts and takes on the margin impact that you're anticipating as a result of those changes. Thank you.

Speaker 3

Sure. Thanks for the thoughtful questions, Brook. We'll talk a little bit about product mix and our 3 core categories of products are eyeglasses, contact lenses and eye exams. We're predominantly 3rd quarter. And as you heard in the remarks, we've made some remarkable strides as it relates to increases in our contact lens business.

Speaker 3

Quarter. As it relates to progressives, what we do know is that we continue to be highly under penetrated versus quarter. The rest of our optical peers, progressives make up approximately 45% of all prescription eyeglasses sold in the U. S. Today, and that's still just 30% of our business.

Speaker 3

Eye exams, also a minority of our business today make up less than 3% of our business and almost 10% to 15% of the typical optical retailer sales. So we actually view our growth drivers around those three product lines for next year as tremendous, particularly when we talk about the attach rate of turning 1st customer from a glasses only customer into a holistic vision care customer that is purchasing a pair of glasses, contact lenses and an eye exam. We found that the value Those customers after a year from initial purchase are over 2 times more valuable than that of a glasses only customer. So we will continue to focus on evolving into a holistic vision care company that really relies upon growing each of those 3 product lines. And what we do here is make sure that folks understand the amount of white space that is ahead of us and the starting point quarter.

Speaker 3

For us versus the remainder of the glasses, contact lenses and exams, we do not provide guidance around product mix for those three categories. Quarter. As it relates to as a fully loaded gross margin line. So we include in there just as a reminder, frames, lenses, quarter, which is customer shipping, consumables, store rent, the depreciation of store build outs, eye doctor costs. In our gross margin, what we want to do is make sure that we're providing the broad picture of what's in gross margin and then where relevant as we've done this quarter and as we'll quarter.

Speaker 3

In the context of this quarter, gross margin in Q3 of last year, as a reminder, the pandemic went 58%. Quarter. We did have one time stock comp expense related to our direct listing. We record stock comp expense for our eye doctors and optical lab employees within cost quarter sales. And so if not for that expenditure, gross margin Would have been at 58.7 percent.

Speaker 3

On the back end comparable quarter, we also called out a unique 3rd rebate that we received that accounted for roughly 0.9 points of revenue. So there were some one timers in the quarter that we wanted to call out. And then as we talk about some of the operational factors that impacted the changes, the biggest one really is contact lenses accounting for the majority of the 3rd. As a reminder, contact lenses have a moderately lower gross margin than eyeglasses, But they have a much higher repeat frequency rate, repeat purchase rate and that product line amplifies our gross margin dollars. Quarter.

Speaker 3

And so we wanted to call that out as the biggest change from a percentage perspective, quarter. Just a shift in product mix. We saw non prescription sun drop to quarter, roughly half of our typical product mix in the back comparable quarter of the period that we're discussing. Quarter. And we saw that product line recover to roughly 10% of the product mix in Q3 of this year.

Speaker 3

Non prescription sunglasses have a moderately lower gross margin, thus moderately reducing gross margin this quarter and elevating gross margin in the comparable quarter. In addition, we saw some very moderate increases in airfreight. As a reminder, our products that we received from overseas. Eyeglass frames is very low weight, low volume and accounts for a minority of our overall cost of sales, But did want to call out in the context of some of the supply chain disruptions that the world is experiencing. We feel that we're largely insulated in the context 3rd.

Speaker 3

We opened up our 2nd optical lab in Las Vegas, and it will take some time for that ramp to scale. We expect that lab to reach full scale by the latter part of next year. We opened up a similar facility in early 2017 and the ramp that we're now seeing in Vegas really mirrors the ramp that we saw with that 3rd New York facility. And so wanted to address your question on gross margin, realizing that there are lots of different puts and takes in there, and then provided some

Speaker 2

detail quarter.

Speaker 1

Thank you. I'll pass it on.

Operator

Call. The next question comes from the line of Mark Mahaney at Evercore ISI. Your line is open.

Speaker 6

Okay, thanks. Two questions. I think you've been at this point that you hadn't seen some of the employee shortage issues or employee Wage inflation issues of other companies, perhaps because of the strength of your brand. Can you just double click on that a little bit? This is a Not unprecedented, but it's a pretty glaring market in terms of wage inflation kind of across the board.

Speaker 6

So just Just spend a little bit more time on how you're able to avoid some of those challenges. And then, Steve, could you talk a little bit more about the gross margin You're right in the middle of this kind of long term gross margin range. You talked about a bunch of puts and takes. And I guess, I would think about the mix shift of your products would make you sort of rise above that gross margin range. So I guess talk to the negative, like what are the factors that would actually Cause your gross margins to over the next several years to actually go below that range.

Speaker 6

So like hypothetically, what would cause that? Thanks a lot. Call.

Speaker 2

Sure. Thanks for your question. With respect to our team and our stores and in our Optical Lab. We have not seen Shortages from a hiring or a retention standpoint. Similarly, we haven't seen major wage pressures now that quarter.

Speaker 2

Maybe due to the fact of where we started and the fact that it's important to us to pay fair and appropriate wages to all team members at Warby Parker and to create a culture where people can learn and grow and thrive. Where we've seen labor shortages is not at Warby Parker, but at times at the stores adjacent to us Sometimes make traffic to centers, for example, quarter. A little less predictable, and it's one of the reasons why quarter. We pulled back marketing a bit in Q3 is just with the increase in COVID, right, there was less predictability and more quarter. And we continue to see some uncertainty and we continue to see a little less predictability in traffic, for example, as those patterns have not returned to the same level of consistency.

Speaker 2

As we saw pre pandemic. That being said, our urban stores continue to quarter. Perform well and continue to improve versus last year and sort of the in the depths of the pandemic, but we don't foresee any labor shortages 3rd or wage challenges going forward out of our stores.

Speaker 3

And Mark, on your second point as it relates to gross margins, so Q3, we were close to the middle of the annual range that we've guided toward. Quarter. As a reminder, the annual long term guidance that we've provided around gross margin is to be in the range of 58% to 60% on an annual basis, 3rd quarter. On a quarterly basis, we know that there will be some consistency in our gross margin line. It's really been within that 58% to 60% zone.

Speaker 3

In terms of talking about some of the questions you asked about the risk to gross margin, I would One of the risks is really just around product mix. So our 3 core product contacts and eye exams. Quarter. And so hypothetically, we could see something similar to what we saw this quarter really takes off much faster than quarter mix of our overall product mix, I. E.

Speaker 3

Contact lenses as a percentage of eyewear eyeglasses, contacts 3rd. Optical Lab Services. And we built one optical lab, we've now built another, and we feel that having our own vertically integrated optical lab infrastructure really helps mitigate some of the external pressures that we might feel. In addition to that, we work with a network of 3rd party labs quarter throughout the U. S.

Speaker 3

And we have long term contracts that are very defined and include pricing really at the product level and we feel we have very, very good visibility into that component of our pricing architecture. Another is customer shipping costs. Again, quarter. We've done a very thoughtful job of negotiating long term shipping rates with various carriers, some national, some on a regional basis. And the last component call to talk about and as a retailer, there is a level of fixed costs that we sign up for when we negotiate leases.

Speaker 3

Quarter. But I would say we have a best in class real estate development team, quarter. A tremendously experienced Head of Real Estate and all of the deals that we put in place, the feedback that we continue to get 3rd quarter. And the level of concessions based on what we bring to the retail environment are best in class. And so 3rd.

Speaker 3

There are always going to be risks and challenges, but what we've done is try and figure out what we can clearly control and what we can. We'll go to the extent of vertically integrating like building an optical app and where we rely on third parties, the way we mitigate and manage that is just through long term sales and supply contracts.

Speaker 2

And Mark, this is Neil again. It just dawned on me another reason why The health and safety of our team members ahead, one of the first things that we did was engage with 3rd epidemiologists and infectious disease experts and hiring folks that have been on the White House COVID task force, for example, to Advise us on best price are still part of the interview process for every store manager that we hire because we know that those stores are so critical quarter. When we're speaking to the store managers that we're hiring, they're excited to come to Warby Parker because month and did not necessarily by their corporate teams as quarter. They would have expected, and they've heard at Warby Parker that the field teams get this

Speaker 5

quarter. Thank

Speaker 6

you, Neil. Thank you, Steve.

Speaker 2

Thank you, Mark.

Operator

The next question comes from the line of Mark Altschwager from Baird. Your line is open.

Speaker 1

Good morning. This is Sarah Goldberg on for Mark. Thanks for taking our question and congrats on quarter and Q3 came in nicely ahead of your guide from late September of 4% to 5%. So you're holding the full year guide, which implies a little bit more cost pressure in Q4. And can

Speaker 5

3rd question. Can you speak to some of the puts and takes here

Speaker 1

and maybe how that breaks down between gross margin and SG and A? Thanks.

Speaker 2

Yes. Quarter. For sure, for sure.

Speaker 3

So on an annual basis, I'll just start with gross margin. Quarter. We're still maintaining our long term guidance for the full year of being in the 58% to 60% zone. Quarter. We see in buying toward the end of the year.

Speaker 3

And what we experienced is some increased demand quarter and during the holiday season and increased demand with the expiration of Flex spend. And there were 2 explorations of Flex spend, there's sort of the big one, which is December 31, and there's another one March 15, the following year. And what we do to 3rd. Prepared for this demand as we make certain investments ahead of the curve, which I'll talk about in a moment. But the demand that we drive the latter 2 weeks of December, quarter.

Speaker 3

Last week in December in particular, we generate revenue from those orders into January. So there was a revenue deferral aspect Where the investments we're making to staff up our retail stores, staff up our optical lab, expedite orders to customers so that they may get them in time for holiday staff up our customer experience team to deal with questions on the phone as it relates to flex spend and invest in marketing, quarter. A lot of those investments really bear fruit in January and into Q1. And so I just wanted to call that out. We've typically seen moderately less profit in Q4 of every single year since inception than we do in the other quarters.

Speaker 3

It 3rd. It was true last year, it was true the year before, and we're projecting consistency as it relates to that number. Also as we put together our financial model, as a general rule, given that there is still some level of uncertainty in the areas as it relates to the pandemic, We do want to be prudent and conservative where appropriate in projecting our business and our costs. So we feel very confident 3rd. Simply maintaining the adjusted EBITDA margin target that we gave and as we think about where that puts us as a starting point, plan to add on top of that.

Speaker 3

So I hope that helps provide some

Speaker 4

quarter.

Speaker 1

Yes, thanks for all the detail.

Operator

The next question comes from the line of Dana Telsey from Telsey Advisory Group. 3rd. Your line is open.

Speaker 8

Good morning and congratulations on obviously now opening the 2nd lab in Las Vegas. What percent of product do you see targeted 3rd. Are there higher margins or returns on products from the labs? I mean, higher margin returns from those? 3rd question.

Speaker 8

Thank you.

Speaker 4

Thanks, Dana. And yes, we're incredibly excited 3rdsberg over the last few years. And we do see that glasses that are produced in our own labs And so we are excited to higher percentage of our orders through our own optical labs over time. Today, we're already producing more than half of and we see substantial opportunity to increase that percentage and Both scale our operations at Flotsberg in addition to our Las Vegas facility, which is already well ahead of schedule on producing over 1,000 pairs of glasses per day.

Speaker 8

Thank you. Just a follow-up. On the doctors in your stores, the attachment rate would you see from those sales? As you add more doctors, do you see the attachment rate sales being higher for multiple purchases or anything in terms of attracting those optical customers who go to existing and

Speaker 3

the industry is quite high. We see that roughly 70% of prescription eyewear is purchased at the same place where the individual got the eye example where we can't employ directly quarter, where we'll lease some incremental space next door as part of our storage, call it 2 50 square feet. And that 3rd practitioners, we don't have visibility into the attach rate. We do hope that after getting that exam walks over to Warby and gets a pair of glasses For the eye doctors that we do employ where we can employ them, we do have visibility into that data and I can indicate that our

Speaker 4

question. So thank you all for the great questions today and thank you to everyone Group who joined us for our first earnings call. We are incredibly excited for the quarters and years to come. If you have any additional questions or follow ups, please conference call. Feel free to reach out to Tina or our Investor Relations inbox at investors@warbyparker and we look forward to seeing you all again soon.

Speaker 5

Conference

Operator

call. Thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Warby Parker Q3 2021
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