Warby Parker Inc.

Hello and welcome to the Warby Parker Inc. 2Q23 earnings conference call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. And I'd like to hand over to Jacqueline Berkeley, Head of Investor Relations. The floor is yours. Please go ahead.

Thank you and good morning, everyone. Here with me today are Neil Blumenthal and Dave Bilboa, 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 company's latest annual report on Form 10-K. These forward-looking statements are based on information as of August 9, 2023, and except as required by law, we assume no obligation to publicly update or revise our forward-looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance in accordance with U.S. GAAP. A reconciliation of our non-GAAP measures to the most directly comparable U.S. GAAP measures can be found in this morning's press release and our slide deck available on our IR website. And with that, I'll pass it over to Dave to kick us off.

Good morning, and thank you for joining us today to discuss our Q2 results and our outlook for the remainder of the year. Q2 was another quarter where we delivered strong financial results while delighting customers, gaining market share, and making meaningful progress against our core strategic growth initiatives. Our net revenue of $166.1 million was up 11% year over year, and our adjusted EBITDA of $14.2 million represents an 8.5% margin and 450 basis points of year over year margin expansion. These results were delivered in spite of continued demand headwinds in the optical industry and our realignment of marketing spend as a percentage of revenue. Over the last 12 months, our marketing spend has been down 30% year over year, when compared to the prior 12 month period. In contrast, and as we will discuss in more detail shortly, we expect Q3 and Q4 marketing spend to be up year over year, setting us up to deliver strong results in spite of continued macro uncertainty. We believe our growing and highly productive retail footprint, digital innovation, and continued focus on delivering a superior customer experience combined with unmatched value have enabled us to outperform in a challenging operating environment. and have set us up for continued long-term success. Based on our recent outperformance and our updated view of the rest of 2023, we're raising our full-year guidance for net revenue and adjusted EBITDA. Steve will provide more detail on our financial results and guidance shortly, but first Neil and I will spend a few minutes to provide updates on our continued progress against our core business drivers. First, we continue to lead with innovation and expand our product offerings, services, and technology platform as we evolve into a holistic vision care company. In Q2, we launched Precision Progressives, our new premium progressive lens. Precision Progressives are made using additional measurements to optimize vision, reduce peripheral distortion, and provide a wider field of view. Additional benefits include improved visual quality for viewing digital devices, reduced swim effect, and overall superior visual quality and comfort. Precision progressives start at $395, which, like all of our glasses, is all in pricing and includes the frame, lenses, and all coatings. This is the highest price point product we've ever introduced while still delivering best in class value, given that similar products often cost more than $1,000 elsewhere. While still in the early days and only available in our retail channel, we are pleased with the uptake we are seeing from our customers. We also continue to innovate with our frame collections, creating both unique designs and novel constructions. In addition to launching our Summer Core 2023 collection starting at $95, we introduced the Color Block Edit Collection, featuring a complex frame construction handcrafted in northern Italy. Inspired by art, each style has distinctive contrasting hues and color blocks that are laminated together, creating starkly defined lines and beautiful silhouettes. Glasses in this collection start at $195. and the strong response we've seen from customers indicates a continued willingness to purchase products across a range of price points. Our other product categories have continued to deliver strong growth, with contacts representing 8.1% of Q2 revenue of 110 basis points versus a year ago. This is still well below the industry average of 20% and represents a meaningful opportunity for future growth. Eye exams, which are the gateway to prescription eyewear and contact purchases, also now represent 3.9% of revenue in Q2 versus 2.4% last year. Scaling exams and contacts continues to be a primary strategic priority in order to deliver a seamless, holistic customer experience and drive customer lifetime value. We are pleased with the progress we are seeing on both fronts and expect these long-term investments to deliver significant value over time. Supporting our product offering is a suite of proprietary technologies that enhance the customer experience while improving team productivity. We are excited by the rapid evolution of AI and believe we are uniquely positioned to bring this innovation to the optical industry given our digital heritage and our technology investments. We are particularly encouraged by the productivity gains our engineers, product managers, and designers are seeing from the expanding use of generative AI as well as early applications of this technology to create easier, faster shopping experiences for our customers. Our team has leveraged machine learning and AI over the last few years to introduce first-of-its-kind products like our virtual try-on and virtual vision tests, and to improve the digital experience we offer our customers. In Q2, we launched V1 of our personalized frame recommendations in our iOS app. and expect AI-driven enhancements will lead to better and more personalized shopping experiences, which we expect will drive higher conversions over time. As we've talked about in the past, our customer journey is integrated across the two channels, so these digital tools can be used by customers who ultimately check out either online or in our stores. We also continue to be excited by the opportunity to use telehealth to make eye care more accessible, more convenient, and more efficient. In addition to virtual vision test, which enables patients to renew their prescriptions from home in under 10 minutes, we are also investing to expand the number of stores in which we offer video assisted exams. These are comprehensive eye health exams using live doctors who remotely engage with patients sitting in the exam suites in our stores. We have only introduced this technology in a small number of stores, but we are seeing very promising results with great feedback from patients. We believe this technology offers the opportunity to efficiently scale exam capacity in a complementary manner to our efforts to add optometrists to our stores directly or through our PC model. Finally, we continue to roll out retinal imaging in more exam suites, enabling advanced disease diagnostics without pupil dilation, resulting in a better experience for our patients. The second core business driver is our growing and highly productive store base, complemented by an improving e-commerce channel. We continue to invest in expanding our store base, which we believe is integral to advancing our mission to provide holistic eye care. Retail revenue increased 21.5% year over year, driven largely by the addition of 39 net new stores since Q2 of last year, including 13 new stores in the most recent quarter. Seven of the new stores in Q2 were expansions within existing markets, and six were entries into new markets, including Colorado Springs, Albany, Rogers, Arkansas, Wichita, Greensboro, and Jackson, Mississippi. All 13 new stores include eye exam capabilities, which brought the number of locations offering eye exams at quarter end to 169, or 78% of our total fleet of 217 locations. As we've increased the number of stores offering eye exams, we have seen a nice uptick in average revenue per customer driven by both eye exam revenue and a higher penetration of progressive lenses. Stores remain highly efficient customer acquisition vehicles, continuing to deliver compelling unit economics even in the current demand environment. We continue to target new stores that pay back within 20 months and generate four-wall adjusted EBITDA margins of 35%. For the quarter, average store productivity was in line with the prior year period, which is consistent with the quarter to date trends we spoke about in our Q1 earnings call in May. Given recent traffic and other headwinds facing the industry, we are pleased with the relative performance of our more mature stores and are encouraged by the early performance of our most recent cohorts. As we look to the remainder of 2023, we are on track to add a total of 40 stores this year, Longer term, we believe we can open at least 900 stores in the U.S., a significant opportunity for further penetration of new and existing markets for years to come, while still representing a small fraction of the 48,000 optical shops in the U.S. Consistent with the expectations we shared at the start of the year, our e-commerce channel, which is more sensitive to changes in marketing spend, declined 5% year-over-year in Q2 compared to down 8% in Q1 of this year. We believe that we're on track to see our e-commerce channel begin to grow in H2 of this year, supported by marketing dollars counting positive year over year as we anniversary the pullback in marketing spend that began at the end of Q2 of last year. Now I'll hand it over to Neil to review our customer metrics and focus areas going forward.