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spk11: 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star two. Thank you. I would now like to introduce your host, Tina Romani, Vice President and Investor Relations.
spk03: 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 investors.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 prospectus filed by the company in connection with its direct listing. These forward-looking statements are based on information as of November 12, 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. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. 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. With that, it's my pleasure to turn the call over to Neil to kick things off.
spk07: 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. One of the highlights of Dave and my careers was celebrating our direct listing alongside Team Warby, both inside the New York Stock Exchange and virtually across the US and Canada. The pride that all of us felt was palpable. 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. 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. optical market is roughly $42 billion with an incremental $100 billion internationally and with expectations for robust growth at a rate greater than GDP. With over half a billion in revenue, we still represent only 1% of the U.S. market, underscoring the tremendous opportunity we have ahead. 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 contacts across our more than 150 retail stores, our website, and our apps. By selling directly to our customers and cutting out the middleman, we are able to deliver exceptional value and remarkable customer service while maintaining high gross margins. This is best reflected in our net promoter score. which has remained above 80 throughout our history. And we have not seen similar customer satisfaction industry-wide. We believe that the large incumbent players, which make up 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. Happy customers fuel our growth. We ended the quarter with 2.15 million active customers, an increase of 23% versus last year, and still a fraction of the nearly 200 million adults in the U.S. using some form of vision correction. Our direct-to-consumer model not only enables us to better serve our customers, but also helps us manage crises like a pandemic. Our omnichannel approach enabled us to grow last year thanks to our robust e-commerce presence. and our vertical integration has allowed us to avoid inventory shortages and long lead times encountered by other brands and retailers. Of course, our ability to serve our customers is dependent on a highly engaged team, and Team Warby is deeply committed to providing vision to all. In Q3, we publicly launched the Warby Parker 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 to 1% of the company's outstanding shares for future grants to the foundation or other like-minded charitable organizations. And our work providing glasses to those in need is having a dramatic impact. We are excited to share the results of a three-year clinical study highlighting the impact of our free 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 received glasses were equivalent to adding two to four months of education onto the school year. And for students in the lowest quartile or those participating in special education, wearing glasses had an impact that equated to four to six months of additional learning. The study proved what we've seen firsthand through our Buy a Pair, Give a Pair program in U.S. schools, that a single pair of glasses can significantly improve a child's ability to learn and succeed in school. Our focus on mission and our stakeholder-centric ethos are just two of the reasons we're excited and proud to come to work each day. In every decision we make, we take our customers, employees, the community, our partners, our shareholders, and the environment into account. And across our corporate, customer experience, optical lab, and retail teams, we recruit and retain highly engaged, highly motivated individuals who are excited to connect their work back to our mission. We view this focus on impact as a form of long-termism. 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 first 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've fostered over the years. Our long-term approach to building Morby Parker can best be described as one of sustainable growth. This is a phrase you'll be hearing from us a lot. 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, but for many years and 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. 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, to walk through some of the growth strategies we'll leverage in Q4 and beyond.
spk04: Thanks, Neil. I'd like to echo your sentiments in thanking our incredible team and also share a heartfelt thank you to all of our stakeholders who have supported us in our journey. 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. With that in mind, and as we focus on achieving sustainable growth and look to increase our 1% market share in the U.S., we're focused on four distinct but complementary growth strategies. First, scaling our omni-channel experience by expanding our retail footprint and driving innovation through our website, apps, and integrated digital experience. Second, expanding our core glasses business while deepening our penetration of progressive lenses. Third, evolving into a holistic vision care company as we scale contact lenses, eye exams, and telehealth services. And fourth, driving brand awareness using a strategic mix of organic and paid initiatives to amplify our reach. I'm excited to share a few milestones we achieved against each of these four growth strategies during the quarter, starting with scaling our omni-channel experience. 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 nine new stores in the quarter and entered five 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. This is still just a fraction of the 41,000 optical shops that exist in the U.S. today. As a reminder, we commissioned a third-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. So significant white space remains for our retail expansion. 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. Our stores are also highly productive. We have historically targeted and continue to target average sales per square foot of $2,900, four-wall margins of 35%, and payback in under 20 months. and we expect our stores to generate significant free cash flow over time. Our stores serve as an integral complement to our website and apps in creating a holistic and seamless omnichannel customer experience. 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, 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 like our virtual try-on increasing significantly for customers purchasing both online and in-store. 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. To highlight two from this quarter, in August we launched our fall core collection and traveled to one of our People's 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. In September, we launched our Tortoise Collage Collection. Each hand-finished frame features four distinct tortoise acetate spliced together, a complex, intricate design and construction that is completely new to the industry. We also continue to make significant strides in scaling our progressives business, and we have seen progressives make up a larger percentage of our overall unit mix each quarter since we reopened stores in 2020. Progressives make up nearly half of the optical market, but less than 20% of our optical business. As we tackle this white space in front of us, we expect 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 second optical lab in the U.S. this quarter and welcome our new team members to our Las Vegas facility. We opened our first optical lab in Slotsburg, New York, in 2017, which has expanded to a 52,000-square-foot facility with a team of more than 120. We believe that the opening of our new 69,000 square foot Las Vegas facility 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. The deliberate investments we've made in our supply chain and in-house optical labs enable us to maintain the highest quality standards and exceed customer delivery expectations while also more effectively navigating challenging and dynamic environments like the one we're seeing today. Orders produced and shipped from our own labs have faster turnaround times, lower return rates, higher margins, and result in higher NPS scores. Operating these labs also gives us additional control and flexibility over our inventory, which we believe will continue to insulate us from some of the supply chain and inventory challenges impacting other companies. We also feel fortunate that we sell small and lightweight products. Given the high value-to-weight ratio, we have predominantly used air freight for international shipments of our inventory throughout the company's history. 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 to get their prescription and then have come to us to buy glasses. And the 30% plus of our customers who wear contacts regularly have gone somewhere else to purchase those. We're investing heavily to reduce these friction points to offer a holistic and seamless vision care experience for all of our customers and patients. We saw a strong customer response to our contact lens offering throughout the quarter. Today, the U.S. contact lens market is over $5 billion annually, and roughly 42 million people in the U.S. wear contact lenses, with 70% of them purchasing contacts at least two times per year. Many optical retailers see 20% or more of their business made up from contacts. For us, this is still a new part of our business. Last year was the first full year we offered contacts to our customers, and today contacts make up only 5% of our business. As we look to the future, we see a significant opportunity to scale this part of our business, both to attract new customers to Warby Parker and to sell contacts to our existing Glasses customers. We also see significant opportunities in scaling our eye exam and vision testing offerings. The US eye exam market is over $6 billion annually. 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 and years. We're also investing heavily into telehealth and our excited bias potential to increase access to vision tests across our customer base. This quarter, we introduced Virtual Vision Test, an app that makes it significantly easier and faster to renew glasses and contacts prescriptions from home. 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. And now onto our fourth growth strategy, driving brand awareness. We leverage a number of approaches to increase brand awareness and attract new customers, from unique collaborations and partnerships to creative TV campaigns to ensuring every one of our customers has a remarkable customer experience. 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. Throughout the quarter, we successfully executed on several initiatives to drive awareness and growth, resulting in growth in orders from new customers and an increase in average order value. In response to the Delta variant and potential shifts in consumer behavior as a result, we moderated paid marketing spend throughout Q3. Even so, we ended the third quarter with 2.15 million active customers, an increase of 23% versus last year. One of our core values is to pursue new and creative ideas. We love creating fun and engaging collaborations with interesting partners. 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 what gets us excited is that each of these initiatives will help us both attract new customers and make our existing customers more valuable now i'll hand it over to steve to review our q3 financial results and outlook for fiscal 2021.
spk08: Thanks, Neil and Dave. 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 public through a direct listing roughly six 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 know the company, dig into our numbers, and share their perspectives on the business. As Dave and Neil mentioned earlier, the Vision Council measures the size of the optical market at roughly $42 billion, including prescription and non-prescription glasses, contact lenses, and eye exams. And Warby Parker accounts for just 1% of this market, representing tremendous room for growth ahead. I'll start by talking about top-line trends. We're very happy with the top-line momentum we're seeing, measured by revenue and customer growth. We've seen continued top-line growth throughout each quarter this year, and we're very pleased to report strong top-line growth for Q3 2021 as well. In these remarks, I'll make comparisons where relevant to periods in 2020 and 2019 to address top-line and bottom-line trends versus periods pre-pandemic in 2019 and versus the same period last year. For Q3 2021, revenue came in at $137.4 million, up 32% over last year and up 45% versus Q3 2019. active customers increased to 2.15 million, up 23% versus last year. This growth in top line was driven by a number of factors, including a consistent replenishment cycle of our core prescription glasses offering, as well as impressive progress in our contact lens business, which still only represents 5% of our business overall. We're also happy to report continued increases in average revenue per customer. We generated $242 in average revenue per customer on an LTM basis as of September 30th, 2021. This represents a 14% increase over $213 measured as of the end of the same period last year. 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 one year from initial purchase than glasses-only customers. And yet, holistic vision care purchasers continue to represent less than 1% of our active customers, underscoring the continued long-term upside here. 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 to make customer experiences as seamless as possible across our stores, website, and apps. For Q3 21, e-commerce represented 42% of our overall business versus 63% in 2020 and 34% in 2019. Today, our e-commerce mix from a channel perspective still remains moderately elevated versus 2019. E-commerce grew at 102% in Q3 of last year. Compared to that period, e-commerce is down 11% year over year, but up 80% versus 2019, representing a two-year CAGR of 34%. We're very pleased with our retail store performance. We've seen a strong recovery at our existing stores since the onset of the pandemic, and new stores are performing in line with the targets we've outlined, including revenue per selling square foot, four-wall margin, and payback. We finished the quarter with 154 stores versus 123 stores opened the same time last year, representing 31 new stores opened over the period. We opened nine new stores in Q3 21 and 28 stores so far this year. We're on track to open 35 new stores this year, and we feel confident that our new store pipeline is stronger than ever. Next, I'll shift gears to gross margin. 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. As we talk about gross margin, we'll continue to try and lay out the puts and takes that are reflected in changes to gross margin. As we discussed at our investor day in September, we expect our gross margins to fluctuate between quarters as a result of various puts and takes, which include seasonality and product mix. But on an annual basis, we've seen consistency of strong gross margins of 58% to 60%. We have some costs and benefits impacting comparability, which I'll reference, as well as a number of operating factors to bear in mind that reflect changes in gross margin. Gross margin for Q3 2021 came in at 58%. This compares to 61.5% for the same quarter in 2020 and 60% in Q3 2019. Q3 2021 cost of goods sold includes stock compensation expense associated with our direct listing of 70 basis points related to our optometrists and optical lab employees. Excluding this, gross margin totaled 58.7%. In addition, Q3 2020 benefited from a tariff rebate of approximately 0.9% 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. As Dave mentioned, contacts are a $5 billion plus market and represent approximately 5% of our business today versus just 2% of our business for the full year 2020. Contact lenses have a lower margin profile than our core glasses offering, but also have a higher purchase frequency that elevates gross margin dollars, particularly given the subscription-like nature of this product line. We also saw moderate increases in the cost of air freight. We have little exposure to ocean freight trends as we use air for most of the products we directly purchase from overseas. Our product is lightweight and low volume, so these product costs make up a small minority of our overall costs. It's also worth noting the impact of product mix on margin. In Q3 2021, we were pleased to see sales of non-prescription sunglasses return 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. We also opened our second optical lab in Las Vegas this quarter. As this new optical lab ramps to 100% operating capacity, we expect that it will continue to have a moderate drag on gross margin until the lab reaches scale in the latter part of next year. Once online, similar to results we saw with our first optical lab in Sloatsburg, we expect to more efficiently serve our West Coast customers, resulting in higher NPS, lower refund rates, faster turnaround time, and improved gross margin overall. Next, we'd like to provide more visibility into SG&A for the quarter. The three main components of our SG&A line include salary expense for our headquarters, customer experience, and retail employees, marketing spend, which includes our home try-on program, and general corporate overhead expenses. First, we had a number of unique expenses associated with our direct listing recorded in SG&A. During the quarter, we recognized stock-based compensation expense of $65 million, transaction costs of $24 million, and a cost of $7.8 million, reflecting the start of our stock donations for charitable purposes to nonprofit organizations, including the Warby Parker Impact Foundation. As we expressed in connection with our long-term model, We expect to see leverage across our SG&A spend as the driver of incremental adjusted EBITDA margin over time. In line with this framework, we maintained a very focused approach that enabled us to make continued investments in the business while generating leverage. Excluding stock compensation expense and the one-time costs associated with our direct listing, we saw SG&A as a percent of revenue improve nearly six full points from 60.5% to 54.6%. This improvement was driven by two main factors. 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 of marketing dollars. As it relates to marketing, we maintain a highly flexible model with the only committed spend largely around linear TV during competitive periods. Due to a range of factors, including uncertainty in the broader economic environment as it related to COVID and some elevation of media rates that we wanted to see settle, we maintained a conservative approach to the deployment of marketing spend as we leveraged the flexibility of our model. In addition, we saw expense for our home try-on program decrease as the mix between e-commerce and stores has normalized closer to pre-pandemic levels. We were extremely pleased with our top-line performance given our marketing spend growth was just mid-single digits year-over-year in Q3. 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 during the holiday season and year-end expiration of flexible spending. As it relates to adjusted EBITDA, we saw an expansion of adjusted EBITDA margin in the quarter versus the same periods in 2020 and 2019. We generated adjusted EBITDA margin of 8.1% in the quarter versus 5.2% last year and 6.7% in 2019. This adjusted EBITDA margin is really a reflection of maintaining strong growth while continuing to see leverage in SG&A as just described. We finished the quarter with a strong balance sheet reflecting $266 million in cash, which we'll continue to deploy to make deliberate investments in both growth and infrastructure. Turning to our outlook for the remainder of the year, for the full year 2021, we now expect net revenue to be in the range of $539.5 million to $542 million, 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 35 stores this year, which will bring our store count to 161. As we look ahead, it's important to note that there are a number of unknowns related to the macro environment. As such, we continue to be thoughtful and prudent in setting our financial outlook for the balance of the year. Let me give you some color on the assumptions embedded within our guidance. 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 in the final weeks of the year. Given we recognize revenue upon delivery of product to 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 lowest margin quarter as we make several investments to support the important holiday selling season. These investments include marketing to support and generate customer demand, 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 the 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 fourth quarter call in March. In closing, we've built our business model with a focus on generating sustainable growth while driving incremental profitability of one to two points of adjusted EBITDA margin each year until we reach our long-term adjusted EBITDA margin target of 20% plus. We couldn't be more excited about what lies ahead. Thank you for welcoming us to the public markets. We're thrilled to be here. And with that, I'm excited to open the call up to Q&A.
spk11: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. As a reminder, please limit your questions to one per participant. Our first question comes from the line of Oliver Chen at Cowen. Your line is open.
spk06: Thank you. Congrats on your first public call. Neil and David, we see telehealth at Cowen as a big opportunity. What are some of the key aspects in your roadmap there and your competitive advantages as you think about employing technology and embracing this holistic vision care model? I would also love your thoughts on sustainability as it applies to your supply chain. You have a comprehensive impact report. Orby is one of our top EHT ideas, so I would love thoughts around that as well. Thank you.
spk04: Great. Thanks, Oliver, for joining and for the questions. I'll tackle the telehealth piece and then hand it to Neil to talk about sustainability. And we are extremely excited about the prospect of leveraging telehealth to make it easier, faster, cheaper for our customers and patients to renew prescriptions and increase access to eye doctors. And this quarter, we introduced our Virtual Vision Test, which is an app 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. 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. We're excited to continue to invest in this area. 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.
spk07: 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 slash impact dash report. But since 2018, we've been publishing a thorough annual impact report based on the GRI framework, and recently also started providing a SASB summary. And we think that's critical to be transparent in our efforts to make the world a better place and for us to create lasting impact. And one of the ways it really impacts our business, besides making us feel good at night as leaders, is that it helps us recruit and retain the absolute best talent. And we have talent across the U.S. and Canada, but we also have talent based where our frame factories are based that are constantly monitoring our factories. with respect to social practices, but also ensuring that we're actively measuring carbon emissions and working with our social innovation team to purchase the best carbon offsets available. We'll continue to explore ways to reduce water use and reduce carbon emissions. One of the nice things about opening up our second optical lab facility in Las Vegas, as we did in Q3, is that 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, you know, should we commit to a percent of revenue or a percent of profits? And we thought that was important to focus on impact, right? A 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 extending the school day, not providing private tutoring, not providing computers in classrooms. Giving a pair of glasses effectively extends a school year by two to four months, and we're super proud to have provided over 8 million pairs of glasses to people in need around the world and in the U.S. And with a billion people in need of glasses that don't currently have access, we think that this is solvable, and we're going to lead the charge in solving this large and tractable problem. Thanks, Oliver. Thank you.
spk11: The next question comes from the line of Paul Lejouet at Citi. Your line is open.
spk05: Hey, thanks, guys. Curious if you can share what your customer growth expectations are for 4Q 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? Are they coming from schools or fresh out of schools? Are they coming from places, other retailers that may have closed up shop? Or are they sort of independents that decide to come work for you and shut down their own practice? Thanks.
spk08: Great. Thanks so much for the question, Paul. I'll answer 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 and analysts. As you think about our model, the way that we have talked about growth, it's really a function of two factors. One is consistent growth in terms of average revenue per customer, which you've seen has increased to $242 or 14% year-over-year. And 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. And what we will do is just draw your attention to the consistency that we've seen on a historical basis and the sustainable growth around those metrics, as opposed to giving you a fixed active customer number for the next quarter.
spk07: And with respect to our hiring and retention of optometrists, as we mentioned, we now have 99 stores with eye doctors. That's up from 49 stores in Q3 of 2019. We have found that we've become a preferred employer of optometrists, and that's because of the work environment. Our stores are fun. Our team members are friendly and warm. Our stores and our eye exam suites are beautiful and new and use the latest technology. We 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. 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 is 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 in that more and more doctors Graduates of optometry school are graduating with increased debt loads versus, you know, perhaps a decade or two ago. And that's making it difficult for recent graduates to buy into private practices, for example. So more and more are looking to work at a stable employer like Warby Parker. We've also found that we've earned a lot of goodwill within the optometric community because of our racial equity strategy. Last year, we laid out a plan to increase black representation in the field of optometry. Less than 3% of optometrists in America are black, and we want to change that. We're working with other groups 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 a ton. Good luck.
spk11: The next question comes from the line of Brooke Roach at Goldman Sachs. Your line is open.
spk10: Good morning, and thank you so much for taking your question. Today's call really highlighted the momentum that you have across the business, and in particular in some of those newer emerging product categories such as contact lenses, progressives, and sunglasses. I was hoping you could provide a little bit more detail about how you expect each of those categories to trend maybe through the remainder of 2021 and 2022, and then the puts and takes on the margin impact that you're anticipating as a result of those changes. Thank you.
spk08: Sure. Thanks for the thoughtful questions, Brooke. We'll talk a little bit about product mix and our three core categories of products are eyeglasses, contact lenses, and eye exams. We're predominantly a glasses-only business today. And as you heard in the remarks, we've made some remarkable strides as it relates to increases in our contact lens business. As it relates to progressives, what we do know is that we continue to be highly under-penetrated versus 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 20% of our business. 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's 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 a 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 of those customers after a year from initial purchase are over two 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 three product lines. And what we do here is make sure that folks understand the amount of light space that is ahead of us and the starting point for us versus the remainder of the industry. We do anticipate growth in eyeglasses, contact lenses, and exams. We do not provide guidance around product mix for those three categories. As it relates to gross margin, as a reminder, we have what we like to refer to as a fully loaded gross margin line. So, we include in there, just as a reminder, frames, lenses, customer shipping, consumables, store rent, the depreciation of store build-outs, eye doctor costs, And so, as we talk about some of the fluctuations 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 continue to do, is provide color on the puts and takes and what has resulted in some of the changes. that you'll see on our financial statements. In the context of this quarter, gross margin in Q3 of last year, as a reminder, the pandemic year was 61.5%. Gross margin this year on the face of our financial statements, 58%. 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 of sales. And so if not for that expenditure, gross margin would have been at 58.7%. On the back end, comparable quarter, we also called out a unique tariff 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 change in gross margin percentage. 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. And so, we wanted to call that out as the biggest change from a percentage perspective, but really as a positive because it helps us to propel our holistic vision care strategy. The next factor that we talk about is just a shift in product mix. We saw non-prescription sun drop to roughly half of our typical product mix in the back comparable quarter of the period that we're discussing, and we saw that product line recover to roughly 10% of the product mix in Q3 of this year. Non-prescription sunglasses have a moderately lower gross margin, moderately reducing gross margin this quarter and elevating gross margin in the comparable quarter. In addition, we saw some very moderate increases in air freight. As a reminder, our products that we receive 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 and in the context of air freight have just seen a very moderate increase that has a that has had a very minor impact on our gross margin And last is we're excited that we continue with our path toward vertical integration. We opened up our second optical lab in Las Vegas, and it'll 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 New York facility. And so I wanted to address your question on gross margin, realizing that there are lots of different puts and takes in there. But given this is our first earnings call, we wanted to make sure that we set the stage, painted the picture, and then provided some detail behind some of the fluctuations.
spk11: Thank you. I'll pass it on. The next question comes from the line of Mark Mahaney at Evercore ISI. Your line is open.
spk01: Okay, thanks. Two questions. I think you'd 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 bank. You just double click on that a little bit. You know, this is a not unprecedented, but it's a pretty glaring market in terms of wage inflation kind of across the board. So 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 outlook? You're right in the middle of this kind of long-term gross margin range. You talk 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, you know, over the next several years to actually go below that range? Like hypothetically, what would cause that? Thanks a lot.
spk07: 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 may be due to the fact of where we started and the fact that it's important to us to pay wages 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 that sometimes make traffic to centers, for example, a little less predictable. And it's one of the reasons why we pulled back marketing a bit in Q3 is just with the increase in In COVID, there was less predictability and more uncertainty. And we continue to see some uncertainty, and we continue to see a little less predictability in traffic patterns to our stores, particularly urban stores that are reliant on office workers or tourism, for example, as those patterns have not returned to the same level of consistency as we saw pre-pandemic. That being said, our urban stores continue to perform well and continue to improve versus last year and sort of in the depths of the pandemic. But we don't foresee any labor shortages or wage challenges going forward out of our stores.
spk08: Mark, on your second point as it relates to gross margin, so Q3, we were close to the middle of the annual range that we've guided toward. 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, not on a quarterly basis. We know that there will be some fluctuations on a quarterly basis, particularly given how certain product lines perform. And we've certainly seen this this quarter, we've seen this in previous quarters. But if you look at the consistency in our gross margin line, it's really been within that 58% to 60% zone. In terms of talking about some of the questions you asked about the risk to gross margin, I would say one of the risks is really just around product mix. So, our three core products have different gross margin profiles, glasses, contacts, and eye exams. And so, hypothetically, we could see something similar to what we saw this quarter, where a product line really takes off much faster than anticipated and becomes a larger mix of our overall product mix, i.e., contact lenses as a percentage of uh eyewear eyeglasses contacts and eye exams that we sell so that is certainly one factor another factor would really be on the cost side so we in source and outsource 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 third-party labs throughout the U.S., 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, 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 to talk about, and as a retailer, there is a level of fixed cost that we sign up for when we negotiate leases, but I would say we have a best-in-class real estate development team. uh with a tremendously experienced head of real estate and all of the deals that we put in place the feedback that we continue to get before we sign a single deal is that the rent per square foot and the level of concessions based on what we bring to the retail environment are best in class and so there are always going to be risks and challenges but what we've done is trying to figure out what we can clearly control and what we can. We'll go to the extent of vertically integrating, like building an optical lab, and where we rely on third parties, the way we mitigate and manage that is just through long-term sales and supply contracts.
spk07: And, Mark, this is Neil again. You know, it just... dawned on me another reason why I believe we're not facing the same labor shortages as other retailers, and that's sort of how we've managed the pandemic and putting the health and safety of our team members ahead. One of the first things that we did was engage with 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 practices. And when we're making hires today, and Dave and I are still part of the interview process for every store manager that we hire because we know that those stores are so critical to our long-term success. It's important to create the proper culture around performance. that when we're speaking to the store managers that we're hiring, you know, they're excited to come to Warby Parker because they had a really difficult last 18 months and did not necessarily feel as supported by their corporate teams as they would have expected. And they've heard at Warby Parker that the field teams get the support that they need to be successful.
spk04: Thank you, Neil. Thank you, Steve. Thank you, Mark.
spk11: The next question comes from the line of Mark from Baird. Your line is open.
spk09: Good morning. This is Sarah Goldberg on for Mark. Thanks for taking our question and congrats on your first quarter. And I wanted to dig in a little bit further on the margin guide for the full year. 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 than we had previously anticipated. Can you speak to some of the puts and takes here and maybe how that breaks down between gross margin and SG&A? Thanks.
spk08: Yeah, for sure. For sure. So on an annual basis, I'll just start with gross margin. We're still maintaining our long-term guidance for the full year of being in the 58% to 60% zone. As it relates to some of the other puts and takes, it's worth spending a little bit of time talking about some of the seasonal patterns we see in buying toward the end of the year. And what we experience is some increased demand during the holiday season and increased demand with the expiration of flex spend. And there are two expirations of flex spend. There's sort of the big one, which is December 31st, and there's another one March 15th of the following year. And what we do to prepare for this demand is we make certain investments ahead of the curve. which I'll talk about in a moment. But the demand that we drive the latter two weeks of December, the 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 get them in time for the holiday, staff up our customer experience team to deal with questions on the phone as it relates to flex spend, and invest in marketing, 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. It certainly 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 area 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 simply maintaining the adjusted EBITDA margin target that we gave. And as we think about where that puts us as a starting point for next year, reiterating the incremental one to two points of adjusted EBITDA margin that we'll plan to add on top of that. So I hope that helps provide some additional colors to how we're thinking about the quarter and adjust the data in particular. Yes, we'll try to detail.
spk11: The next question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open.
spk02: Good morning and congratulations on the nice first quarter out of the box. As you think about the lab opportunity, obviously now opening the second lab in Las Vegas, what percent of product do you see targeted to come from the labs? Are there higher margins or returns on products from the labs? I mean, you know, higher margin returns from those. And what percent of capacity can you produce and the profit implications from it? Thank you.
spk04: Thanks, Dana. And yeah, we're incredibly excited to have opened our second lab in Las Vegas. We've seen really meaningful benefits of operating our lab in Slotsburg over the last few years. And we do see that glasses that are produced in our own labs have faster turnaround times, higher quality, higher net promoter scores, and higher margins. And So, we are excited to send a higher percentage of our orders through our own optical labs over time. Today, we're already producing more than half of the glasses that we ship out to customers through our own labs, and we see substantial opportunity to increase that percentage. Both scale our operations at Sloatsburg, in addition to our Las Vegas facility, which is already well ahead of schedule on producing over 1,000 pairs of glasses per day.
spk02: Thank you. Just a follow-up. On the doctors in your stores, the attachment rate, what you see from those sales, as you add more doctors, do you see the attachment rate on sales being higher for multiple purchases, or anything in terms of attracting those optimal customers who go to existing doctors to your stores.
spk08: So the optical attach rate in 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 exam. As you think about our model, we employ eye doctors directly. We also have an independent OD model where we can't employ directly yet. where we'll leave some incremental space next to or as part of our store to call it 250 square feet. And that eye doctor is an independent practitioner. So for eye exams from those independent practitioners, we don't have visibility into the attach rate. We do hope that the client or customer, 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 attach rate is at or above the industry benchmark that I just mentioned.
spk02: Thank you.
spk04: Great. Well, I think that was the last question. So thank you all for the great questions today, and thank you to everyone 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 feel free to reach out to Tina or our investor relations inbox at investors at Warby Parker, and we look forward to seeing you all again soon.
spk11: This concludes today's conference call. Thank you for joining. You may now disconnect your lines.
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