Warby Parker Inc. (WRBY) Earnings Call Transcript & Summary

Accessories and branded goods sector here at Goldman, and I'm very pleased to be joined with our next session with Warby Parker. Here with me today are Neil Blumenthal, Co-Founder and Co-CEO; and David Gilboa, Co-Founder and Co-CEO. Welcome, Neil and Dave. Let's kick it off with a discussion on where you currently see the U.S. optical industry.

What is your outlook for U.S. vision care today? What is the current state of the industry? And are you seeing any changes in replenishment time lines or towards changes to discretionary add-ons relative to prior trends?

So we remain incredibly bullish about the category. Soon, over 50% of the world's population is going to need glasses. So you just have these great, secular tailwinds. The last couple of years have been unusual but if you look over a 20-plus year trend, right, there were a lot of blips over the past few years in various categories. So we see the rest of the year being pretty consistent where the category has been earlier this year. From our perspective, we're going to continue to control what we can control, and that is deliver exceptional customer value, continue to take share, and we're going to continue to do that. As we think about our own customer within the optical industry, we're seeing very consistent replenishment. I mean, we have a pretty wealthy consumer median household income, over $100,000. And if you look at our sales retention by 6 months, 12 months, 36 months, 48 months and beyond it, it's -- the cohorts are very comparable. So we're seeing with our own customers, very traditional replenishment behavior. One of the other things that we've been able to do over the past few years, while our products when we launched all started at $95 inclusive of everything, right? Premium prescription lenses with all the coatings. We've introduced other price points as well. And we found that our customer is very amenable and excited about those additional offerings that we have, which continue to provide exceptional value because they're still about 1/4 of the price of what you pay elsewhere.

That's really helpful color. As you started off the year, you spoke about a few key changes in your plan for the business. And you identified higher marketing spend returning to e-com growth and significant expansion in insurance. So hoping we could dive deeper into each of these in this session today because -- and how it informs your view of the future? So maybe starting with marketing, as you've stepped up your investments in marketing dollars this year, what's changed in how you're allocating those dollars? And are those investments more efficient than in prior years?

Yes. So a couple of years ago, we were really allocating dollars to kind of 2 types of media: linear TV to drive top of the funnel awareness and then search to drive kind of bottom of a funnel purchase intent. And we found that the most efficient message for us to kind of create awareness and drive people into the Warby Parker ecosystem was to talk about our Home Try-On program, which is a free offering with people who can go to our website, select any 5 frames, we send them for free. It's a pretty novel offering, and we find that once people try Warby Parker, once they put glasses on their face, the conversion from that stage is very high. Over the last couple of years, we've really worked to diversify both our media mix and the types of messages that we're putting out into the market, just given the expanded nature of our business and service and product offering. And so in addition to linear TV and search, where we're still spending money, we're also allocating dollars to streaming, influencer, paid social, direct mail and podcast and audio and just kind of having additional channels gives us more opportunity to target specific customer segments and drive efficiency for our overall media mix. And what we also found is that a lot of consumers were not aware of some of our more recent offerings, the fact that we have sort of 250 stores across the U.S. and Canada that every one of those new stores has an eye doctor, where we offer eye exams. Lots of people don't know that we offer contact lenses. And so we found that for some of our very happy customers that had purchased from us online over the last few years, they weren't aware that all of a sudden, we have stores that are conveniently located, that we offer exams, that we can take care of their holistic eye care needs. And we also find that of customers who are consumers, who are aware of Warby Parker, but haven't purchased with us yet. The 2 primary reasons are: 1, they don't know that there's a store nearby and 2, they need a new prescription. And our stores kind of solve both of those problems. And so increasingly, we're using media dollars to educate both new consumers and existing customers around our new offerings. And we're seeing those efforts work over the last few quarters. Each quarter, we've seen an acceleration in our active customer growth. We've seen an acceleration in our overall revenue for the overall business. We've seen an acceleration in glasses growth this year. And so we're encouraged by the returns we're seeing on those increased investments in media and expect those to continue.

That's really helpful color. Last quarter, on your public call, you mentioned that you saw an opportunity to actually increase marketing dollars from here given some of the success that you're seeing. Can you elaborate on what you meant there and how you're thinking about this? Would this be an increase in dollars spent or a percent of sales? And where do you feel like you're underspending relative to the opportunity?

Yes. So really thinking about it as increasing -- continuing to increase media dollars over time. And again, we're seeing very strong efficiency. We're finding that once customers try Warby Parker, they tend to be very happy. We have industry-leading NPS, and those customers tend to repurchase -- its very consistent time lines. And so we have very high value customers once we get them into the ecosystem. And now we're just focused on driving more awareness to generate more customer growth. And even in a period where there's been less than usual demand in the category, we continue to outperform, continue to gain market share, and we believe that we continue to drive awareness around Warby Parker, and our increased offering is a core part of that strategy over the next few years. And where are you going to see -- right, our marketing line item includes media, includes Home Try-On expenses, as we've been opening up more stores, as we've been introducing more industry-leading technologies, right, we were the first to introduce a true to scale virtual try-on. And then most recently, we had our tech team develop an AI-powered glasses eraser as part of the virtual try-on. So now you can do a virtual try-on while wearing your existing glasses because there's a lot of people right who need their glasses in order to see. So they put it on, right? We erased the glasses and put on the virtual one. So, as Home Try-On expenses lower or decrease as a percent of revenue, we're able to redeploy those dollars into media, but you should expect marketing to continue to be in the low teens as a percent of revenue where we continue to have leverage across the business is SG&A, excluding marketing. So that's our customer service expenses, it's corporate overhead that we're at a sort of critical mass here. We don't need to make many investments there, and we'll continue to expand profitability. But this additional marketing is also leading to strength in our e-commerce business, which we continue to be excited about.

Let's shift to the e-commerce strength, which was the second kind of big change that we saw in the business this year was a return to e-commerce growth. How do you plan to sustain the growth in that business now that you have normalized your marketing dollars? What initiatives or actions are you taking here?

So some of them are those new features like our glasses eraser. The other is just continuing to raise awareness. There's -- still the majority of the country doesn't know that Warby Parker exists and actually finding some of our highest growth in e-commerce in some of our most mature markets where we have the highest number of stores, and that gives us confidence that we'll be able to grow our e-commerce channel for the foreseeable future.

Glasses momentum, specifically the spectacles, has been something that have improved this year. And that's something that also correlates with your e-com business. How are you thinking about what's driving that increased momentum of the glasses business specifically? Especially given that it drives better gross margin.

Yes, a lot of it is really due to our marketing efforts that are working, our increased points of distribution, the fact that we've opened 40 stores a year for the last couple of years. We've been hiring lots of eye doctors, making it easier for people to get their prescription and then buy glasses from us. Industry-wide, almost 80% of people buy glasses from the same place that they get an eye exam. And if you ask the industry insiders, they would tell you that we've built our business completely backwards by selling glasses without offering an ability for people to get their exams from us. And so historically, the vast majority of our customers have gone to a non-Warby Parker doctor to get their eye exam. They have to have the awkward conversation with them about why they're not buying glasses from their shop, fight for their prescription information and come to one of our stores or go to our website, order glasses from us. Then they also, if they wore contacts, they had to go somewhere else. And over the last few years, we've really been investing to make it as easy as possible to reduce friction around the entire purchasing process for our patients and customers, and we're seeing that start to drive strong returns for the overall business, but also, as expected, it's providing a lift to our core glasses business.

As you think about the customer health, are you seeing any changes or degree of economic sensitivity or macro pressure within your e-com customer relative to your store customer?

We haven't seen big differences in behaviour between the 2. This back-to-school season, we're seeing pretty traditional trends, right, the start in the South and the West Coast. And we're -- today is the first day of school for New York City schools, for example, [ Mike ] is out there this morning. They were surprisingly excited, so that's great. But we were just visiting 2 of our newer stores here in New York City and Long Island City and Queens Center yesterday, and the streets and the malls were busy. And our stores are doing strong back-to-school. So we're -- we feel confident that we're going to continue to be able to take share in the category, continue to build these newer categories for us, as Dave was mentioning, eye exams. It's 5% in Q2, it's 5% of our business. For a typical optical retailer, it's 10% to 15%. So we just have a long runway there and also contacts, right, that tends to have an even higher replenishment rate than glasses, right? Because you're wearing those every single day. So that continues to be a tailwind in our business.

Just to put a finer point on this macro comment and then we can move on to some of the other strategic initiatives here, one of the questions we're asking all companies that are at our conference today is their expectations for the macro outlook in the second half relative to recent trends. Do you expect things to be the same, better or worse?

We think they'll be the same. I mean, one thing to know about our business in particular is there's not as much seasonality as there is for apparel or other accessories. Where you do see some seasonality is around back-to-school at the very end of the year for FSA season between Christmas and New Year's, and that's always the same number of days irrespective of an election or other dynamics. And a lot of that revenue is recognized in Q1 for us in January. And then you also have some FSA expiration dates in March as well. So we're coming up in Q4 off an easier comp than usual because of the fact that this year we had a larger revenue deferral from Q4 to Q1 2024. So we feel calm and confident for the rest of the year.

That's great to hear. One of the other big unlocks for your business this year has been insurance. And you've been gaining momentum in the last few years with some incremental in-network providers. But this year, you announced a bigger expansion. Can you talk about how you're thinking about the opportunity to nearly double your in-network insurance customers? What's your strategy for marketing to those customers? And how should we be thinking about the path and cadence of potential tailwinds that we could see to your customer count over the next few years?

Yes, we're pretty excited about vision insurance. It's a -- it's kind of an interesting part of the kind of overall insurance landscape. In a lot of ways, it's not really insurance. It doesn't cover any catastrophic risk, but it's a prepaid plan that gives people defined discounts around exams, glasses and contacts. And the majority of Americans have vision insurance benefits, and they love using them, and they feel like they get really good value when they leverage those benefits. We serve lots of insurance customers, over 60% of the customers that we serve have vision insurance today. Some of those customers, a small percentage, are using their in-network benefits with us through some of the relationships that we have with United Healthcare and some large employers, and others are submitting on their own out-of-network reimbursement claims. And what we found is that our customers realize that the value that we offer is much greater than if they go in-network -- even if we're out-of-network, and even if they're paying completely out of pocket, the value we offer is much greater than if they go in-network somewhere else. If customers have VSP or EyeMed and they go in-network, they tend to spend over $250 out of pocket on purchasing a pair of eyeglasses. They can come to Warby Parker and buy a pair of glasses with prescription lenses, all the coatings for $95 and so. And most people have out-of-network benefits that can pay for the majority or even 100% of that purchase. That being said, we know that people still prefer using in-network benefits and it's easier for them, and they feel like they get more value. And so we have been focused on expanding the relationships that we have with insurance carriers. And so the tone of the conversation is dramatically different than it was a few years ago when we were primarily an online business, really only selling glasses. Now that we have over 250 stores, we have a couple hundred eye doctors, we offer contact lenses, we offer progressive -- multiple options of progressive and different lens types, we look much more similar to the types of providers that vision insurance carriers are used to partnering with. And those carriers are increasingly hearing from large employers that are either existing customers or prospective customers for the carriers that their employees want to use their benefits at Warby Parker. And so we were excited earlier this year to announce an integration with Versant, which is a fully owned subsidiary of MetLife to nearly double the number of insurance customers that can use their in-network benefits with us. And we've been working hard at that integration and are expecting all those lives to be fully integrated by the end of the year and are continuing conversations with the other large carriers and believe that, over time, we'll have ability to serve tens of millions, if not more, of consumers with in-network benefits and those dollars will go further with Warby Parker than any other in-network option for them.

One of the big unlocks of insurance has been your new store fleet expansion. And you've densified a lot of markets, you've expanded into a lot of new markets with 40 stores opened per year. How do you think about the decision to densify the markets that you're already in as you look ahead relative to further additional market expansion? And should we continue to expect 40 stores per year?

Yes. You should anticipate at least 40 in next year and beyond. We continue to have great success in existing markets. If you all are around later this week, we have a couple of new stores in Manhattan. This weekend we have the grand opening of our location at Hudson Yards, and then also we have 69th and Third Avenue. But if we look at Q2, we opened 11 stores, 6 in existing markets, 5 in new markets, that split going forward will be more towards existing markets, just because we're now over 250 stores and in most major markets. And we tended to start in urban street locations and then expand into lifestyle centers and malls, we're going deeper into suburbs. Those customers tend to spend a bit more because they tend to be slightly older, so you have more progressive penetration, for example. We continue to see great metrics out of our stores. They continue to be very efficient uses of capital, well under a $1 million to build out a store paying back at our target of 20 months. So yes, we'll continue to invest there.

How have you densified into current markets, such as the New York City market, which you've mentioned a few times today? Are you seeing higher levels of overall profitability for the entire fleet? And with each incremental store being added, is that additive to customer count to the same degree that you would have seen somewhere else?

Yes. One of the nice things that we see with the new store within an existing market is that often, we're pulling from existing, sort of, our team, so we're often starting that store with a more experienced team. So some -- often, you'll see a faster ramp. And you'll see efficient uses of capital across the entire market, again, because we're able to leverage a lot of labor that we have and scheduling and dynamically right schedule across the entire fleet. So, yes, we continue to see increased profitability across an existing market.

One of the opportunities that you've seen this year is in efficiency initiatives. And one aspect of that is doctor utilization. You've added a lot of new optometrists to your fleet the last few years. Keeping them busy is a key part of keeping your fleet profitable. What is current utilization? How is that trending versus your expectations? And are you changing the staffing model to optometrists at all?

Sure. So one of the things that we've been focused a lot on is also the timing of doctor hiring. So what we've been doing when we build a new store, right, we build out the capacity to have at least one exam room, sometimes multiple, and with pre-screening rooms as well. And then we time bringing in the doctor based on sort of the ramp of the store and the awareness and our projections for those stores. So within an existing market, like let's take New York City, for example, we have a very good perspective of demand and how quickly we should staff that exam suite with 1, several eye doctors, technicians, for example, to increase the productivity of those doctors. So as we've introduced this new area of business for us, over time, it's gotten more profitable for us as we time the hiring of doctors to coincide with raising awareness that we offer eye exams.

And one of the ongoing questions that we get from investors frequently is just availability of optometrists. Have you seen any change in optometrists' hiring availability, ease of hiring?

So there's only 1,800 graduates from optometry schools every year, and there's over 45,000 optical shops across the U.S. So there has been and there will continue to be a labor shortage of optometrists. We haven't seen any changes in our ability to recruit and retain optometrists. And part of that is our fleet, frankly, just the absolute numbers are not as big as some of the other folks in the category, but the second is that we're a preferred employer for a lot of eye doctors. We have top-of-the-line technology, and that includes the software that enables doctors to focus on clinical care rather than administrative tasks. It also is also top-of-the-line equipment that they're using to treat patients that are just easy to use and a joy to use. We find that optometrists are very of tech-centric. As you were to look, I think in all areas of health care, optometrists tends to be very excited about emerging technologies, and that's to our favor being a tech-forward brand. The stores and the work environment is super pleasant, both just the culture at Warby Parker, it's just kind and friendly and the team dynamic, but also that the stores are beautiful and they're located close to where our optometrists live. So that continues to put us in a position to win as we're recruiting and retaining eye doctors. And then one other area that we're investing in is telemedicine that helps alleviate some of the pressure around optometrist shortages. So we offer a couple of different forms of telemedicine. Our teams built something called a Virtual Vision Test where you can download an app, and again, in 28 states, you can do a visual acuity test and ophthalmologists who's licensed in that state can write a prescription remotely. It takes less than 10 minutes and solves a problem for customers and patients whose vision hasn't changed, and they don't have concerns around eye health conditions. And then we've also more recently been investing in what we call video-assisted exams, where a patient can be sitting in one of our exam suites and they get a comprehensive eye health exam using all the same equipment as if a doctor was in that room with them, but a doctor can operate the equipment remotely. It's a live interaction with that patient, but the doctor can be located in a different city in a different state, and that enables us to just have much more efficient scheduling around both doctor time and patient time.

Let's talk a moment about pricing because Warby Parker has kept with the $95 opening price point for quite some time now, since launch. Almost a Costco hot dog if you give it another 20 years. I guess I'm just curious, are you seeing any change in customer affinity for your opening price point at $95 relative to some of the newer pricing add-ons that you've had such as the Diamond Cuts line?

Yes. One of the things that we're excited about is just the competitive dynamic where glasses inflation has outstripped regular overall inflation. So all of our competitors have been taking price pretty significantly to the point where we expect to actually see some promotional activity. I don't know if it'll go back down. We don't expect it to go back down to where it was, but we think [ folks rose ] increased prices too much, but that just makes our offering even more compelling and it demonstrates that we're providing even more value to our customers. We are seeing, right, every single quarter, higher percent of sales coming from our higher price point products. And they are differentiated, like you're saying like our Diamond Cuts, right? We continue to come up with innovative constructions and work with our producers and our own manufacturing facilities to make sure that we're still delivering this exceptional value and great margins for ourselves.

You mentioned promotions, and that is something that we're asking all companies at our conference. What is your expectation for your own promotions this holiday season relative to last year? And how does that compare to the industry?

We don't expect any change to our traditional strategy. We've never been overly promotional and aren't expecting that to change. We believe in offering great value and transparent pricing to our customers. That was one of the things that attracted us to the category in the first place and was one of the reasons that we founded the company and offered all-in $95 pricing that has stayed consistent now nearly 15 years later, and we don't expect that to change. As Neil mentioned, we have seen the rest of the category take price pretty meaningfully, in particular, over the last couple of years, where volume -- unit volume for the category has been challenged and has been kind of flat to down over the last couple of years. And so we've seen a lot of folks really take price to try to make up for that and any industry growth has come from price taking. And I think that worked in an environment where there was a lot of stimulus and people had lots of dollars in their bank account. And now what we're hearing and seeing is that people are being a bit more judicious around where they spend and are fed up with really high prices. And so we expect that as a category, there will be probably more promotion, but that's not going to impact our pricing strategy.

That's really helpful. Let's turn around the discussion with a conversation on margins. Gross margins have been positive for each of the last 2 quarters, which has been a big step function change relative to the trend we had seen before. How should we be thinking about the path for gross margins from here and those puts and takes? And then conversely, how should we be thinking about the path for EBITDA margin expansion? Is 1 to 2 points of annual expansion still the right rate? And what is the opportunity longer term?

Yes. So we think that 100 to 200 basis points is still the right rate for us as we continue to expand EBITDA. That will continue to come from leverage over corporate expenses and overall SG&A. As we mentioned earlier, we're going to continue to invest in marketing, and that will continue to be a low teens as a percent of marketing. So where the leverage is going to continue to come from is over our corporate overhead. And we continue to build efficiencies throughout the business, whether it's from a CX customer service perspective, on the gross margin, we have been having some success around shipping, but also just as glasses continue to grow from a unit perspective, that's our highest volume -- our highest gross margin product. And as we grow contacts, right, those 2 things tend to balance each other. The past few years, we made a big investment in our eye care business and hiring a lot of doctors, but also converting a lot of our independent optometrists who we are leasing space to be part of the PC model or as employed optometrist, and that was a onetime thing that we did a couple of years ago. So that's now completely stabilized. So you'll continue to see gross margins be stable and strong in the mid-50s.

Excellent. Well, thank you so much. With that, I'm afraid we're out of time. Thank you, Neil. Thank you, Dave, and thank you for all of those in the audience for joining in.