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This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
Warby Parker was founded in 2010 in Philadelphia by University of Pennsylvania students David Gilboa and Jeffrey Raider. Their goal was to offer a more budget-conscious alternative in an eyewear market dominated by a handful of companies with very high margins. The name “Warby Parker” is a combination of characters created by fiction author Jack Kerouac, an early creator of what came to be known as “hippie” culture. Their catchy-named sales tactics boosted sales early on, using offers like “$95 Glasses,” “Try 5 At Home,” and the charity-focused “Buy-a-Pair, Give-a-Pair” (8 million free pairs distributed).
Throughout the 2010s Warby Parker completed several early series fundings, growing in valuation at round. In their final capital raise prior to the IPO, Warby took in $245M from private investors at a valuation of $3 billion. This capped off its total venture capital intake of $572M since 2011. The company went public in September 2021, selling 92.5M shares at $40 each in a direct listing where the corporate entity received no additional capital. Shares closed at $54.59 on the first day of trading, totaling market capitalization at $6.8B. At that point in time, Warby’s fully direct-to-consumer business model split their projected 2021 sales of $535 million evenly between online and physical retail.
The strategy in 2022 has been communicated as expanding their store count and pursuing omnichannel growth, a popular move among DTC brands that IPO’d during the COVID pandemic. Management sees their stores (usually in affluent shopping areas) as highly efficient customer acquisition tools. Their impressive growth in average revenue per customer ($211 in Q2 2022, $235 in Q2 2021, $254 in Q2 2022) is aided by the expansion into multi-segment: glasses, contacts, and eye exams. Store count expanded from 118 to 178 over this period, while 141 stores have been open 12+ months as of Q2 2022.
Warby Parker's Q2 results. (Photo: Warby Parker)
Sales and margin performance
In Q2 2022, revenue increased 13.7% to $150M, while active customers grew 8.7% to 2.26M. Their Q2 2022 ecommerce revenue was up 24% on a 3 Yr basis and was 39% of total sales in Q2 2022 vs 44% in Q2 2021 and 34% in Q2 2019. On a three-year CAGR basis from 2019 to 2021 WRBY grew total revenue by 46% vs 5% growth in the eyewear market. The 1 year YoY e-commerce sales comparison was not disclosed.
On the guidance front, they are taking down expectations in the face of lower consumer demand. They initially forecasted FY2022 revenue growth of 20% to 22% or $650M to $660M. They now see 8% to 10% YoY sales growth from revenue of $584M to $595M. This approximate 10% reduction in total revenue for FY2022 comes almost completely from a reduction in the projection for their customer base growth(+15% reduced to +3%).
Active customers and revenue. (Source: Warby Parker)
Warby saw this slowness start in the back half of May and took action to eliminate 63 positions which were 15% of their corporate headcount. When prompted by Cowen’s Oliver Chen on the potential for demand reacceleration, leadership mentioned that they believe their seasonally strongest first quarter was heavily impacted by the Omicron variant. They added that there is no assumption for this lost pent-up demand to return in their “conservative” guide for the second half of 2022.
After originally projecting a gross margin of 58% to 60% for FY2022, they now expect 57% for FY2022. This is a result of lower top line sales, causing deleverage against the approx. 40% proportion of their Cost of Goods that is fixed. This 40% consists of retail store rents and optometrists’ salaries. They remain very bullish about continuing to grow optometrist headcount to further penetrate the $6.5B eye exam market. They also notice stronger sales performance and a more favorable product mix of contacts and progressive lenses in stores where an optometrist is present.
In Q2 2022 marketing spend increased only 1% YoY compared to +13% sales growth. This resulted in a reduction of marketing spend as a percent of revenue down to 13.8% in Q2 2022 vs 15.6% in Q2 2021. After reaching a temporarily high baseline of approximately 17% during the COVID pandemic, their current goal is steering this back in line with pre-pandemic levels (low teens) by the end of 2022. On a sequential basis, they’ve reduced marketing spend by almost 700bps from Q1 2022, commenting in the earnings call Q&A that a certain amount of lost e-commerce sales are potentially attributable to this reduction in marketing expense. CACs came down sequentially in Q2 vs Q1 by 25%. Q2 2022 CACs were at the lowest levels since early 2020.
4 key growth initiatives
1. Scaling Omnichannel by opening stores. They opened 9 stores in Q2 with a goal of 40 in 2022. Currently seeing $2.1M sales per store with store level margins of 35% (this is their operating target). New stores on track to pay back within 20 months.
2. Expanding Core Glasses Business: Progressives segment is their high average sales price and higher margin segment. This segment grew to 22% of total glasses revenue in Q2 2022 up from 20% last year.
3. Scaling Contacts: Product segment grew 100% YoY to now being 7% of total sales vs 3% in Q2 2021. This compares to a range of 15% to 20% of sales for the average optical retailer. Approximately 30% of contacts customers who are new to the brand also buy glasses. Their contacts customers spend more overall as they tend to purchase from multiple segments.
4. Investing in Eye Exams Business: Continue hiring optometrists for in-store exams, with 70% of stores currently providing eye exams. Gross margin will deleverage in the short term as these salaries sit in Cost of Goods sold.
The omnichannel growth strategy has been a lever that many retailers are pulling. Digital natives are expanding store count, while legacy brick-and-mortar retailers already bolstered their ecommerce abilities in 2020. It has yet to be proven that the more capital-intensive digital to omnichannel expansion path is going to work in the softer consumer demand scenario.
Warby appears to be correctly focused on scaling their product and service offerings alongside store growth. They’re confident in being able to maintain 35% store level margins. In the near term, this may play out as continued sales growth in the teens with slightly lower gross margins as optometrist headcount and their services scale up. The true strength will show at the bottom line, from a leaner corporate team, seasoning of new stores and declining store opening costs as a proportion of revenue.