Warby Parker Inc.

Hello and welcome to today's Warby Parker Inc. 3Q23 earnings conference call. My name is Bailey and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I'd now like to pass the conference over to our host, Jacqueline Berkeley, Head of Investor Relations. Please go ahead when you're ready.

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 company's latest annual report on Form 10-K. These forward-looking statements are based on information as of November 8, 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 prepared 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 Neil to kick us off.

Thank you, Jacqueline. And good morning, everyone. Today we look forward to discussing the drivers of our Q3 performance and our updated outlook for fiscal 2023. Our net revenue of $169.8 million was up 14.2% year over year. our strongest quarterly revenue growth this year, and our adjusted EBITDA of $11 million represents a 6.5% margin. We're particularly pleased to report our results within the backdrop of the broader optical industry during a time when industry growth has been lower than historical norms. Regardless of the environment, we believe our unmatched value proposition and innovation our multichannel approach, and our strategic investments in both holistic vision care and marketing position us for long-term sustainable growth. Based on our recent outperformance and outlook for Q4, we're raising our full year guidance. With that, Dave and I will go through how each of these drivers contributed to our strong Q3 results and our outlook for the remainder of the year. Starting with the first driver, our unmatched value proposition and customer-centric innovation. Because of our direct relationship with consumers, we have the ability to quickly incorporate customer data and feedback into every aspect of our business, from eyewear design to manufacturing to the overall shopping experience. On the product side, our consumer-centric approach to innovation has led to novel frame constructions and a broad lens portfolio that support average revenue per customer. On our Q2 call, we shared that we introduced a premium progressives offering called Precision Progressives. We introduced this lens in response to customer demand, particularly from the retail channel, where progressives penetration is higher. Our Precision Progressives start at $395, and like all of our glasses, that price is all in, including the frame, lenses, and all coatings. Precision progressives provide lift to both average order value and gross margin, while delivering superior quality and exceptional value to our customers, given similar products often cost more than $1,000 elsewhere. In Q3, overall progressives made up 22.5% of our total prescription glasses sold, up from 21.4% in Q3 of last year. We believe there's significant white space for future growth as progressives represent approximately 40% of the eyewear market overall. In September, we launched our memory metal collection, which starts at $195 and was developed in response to customer demand for lighter weight and more flexible frames. We used a titanium alloy for these frames, an innovative material that allows the nose bridge and arms of the frames to bend and return to their original shape. In addition to Memory Metal, we launched three other collections this quarter, including our Circa collection, our Fall collection, and a second collaboration with L.A.-based artist Jeff McFetridge, a longtime friend of the brand whose art you can find in several of our stores. Our customers have come to trust Warby Parker's innovative designs and exceptional quality. We're encouraged that as we've introduced more complex constructions at higher price points, we've seen little price resistance. And now our customers are spending more with us than ever. In Q3, average revenue per customer was up 10% year over year to $284. And while we have expanded our assortment, we've maintained our core pricing of $95 for single vision frames, lenses, and coatings. And we currently offer more assortment at that price than ever before. Since day one, our simple, affordable pricing structure has been an integral part of our value proposition, and we believe it continues to attract new customers. In addition to product innovation, we continually make technology investments to enhance our customer experience. This quarter, we focus on three key areas. The first was leveraging in-house technology to enhance optician efficiency, which in turn drives higher in-store conversion and productivity. One example is a tool our opticians can use that automates optical measurements that previously required time-consuming manual processes. We've heard great feedback from our pilot stores about the efficiency gains they've seen and plan to roll this out more broadly in the coming quarters. Another tool that we are in the early stage of rolling out uses AI to facilitate the transcription of prescriptions with improved speed and accuracy. In Q3, we incorporated our virtual try-on tool into additional parts of the customer journey. As a reminder, our virtual try-on leverages first-of-its-kind technology developed in-house to help customers find the perfect fitting frame. We find that if e-commerce customers see a pair of glasses on their face, they are more likely to convert. We are excited to introduce our virtual try-on to more customers than ever and to continue to invest in its future capabilities. Third, we improved the online experience of booking eye exams and finding nearby Warby Parker retail stores. We've already seen these improvements generate more eye exam bookings online, which we expect to lead to higher conversion and support average revenue per customer over time. The second driver of our growth was expanding our highly productive store base coupled with an improving e-commerce channel. In Q3, we continue to invest in our stores, which have consistently delivered strong unit economics, even in the current demand environment. Retail revenue increased 21% year over year, driven by the addition of 40 new stores since Q3 of last year, including 11 in the most recent quarter. We entered new markets, including Grand Rapids, Michigan, and Gainesville, Florida, and we expanded further in states like Tennessee with the addition of our Franklin and Knoxville stores. We also continue to infill some more suburban locations just outside our largest markets like New York, Northern New Jersey, and Philadelphia. Our new stores continue to pay back within 20 months and generate strong four-wall adjusted EBITDA margins in line with our target of 35%, so we plan to continue investing in store growth. In addition to being highly efficient customer acquisition vehicles, our stores are integral in advancing our goal of providing holistic eye care Every new store that we've opened in 2023 includes eye exam capabilities. We find that exam stores drive higher sales than non-exam stores, and industry-wide, nearly 80% of prescription glasses are purchased at the same location an eye exam takes place. Stores are also a gateway to continued scaling progressives, our highest ASP and highest margin product. In Q3, we saw retail productivity of 101% versus Q3 2022, consistent with the trends we shared in early August. In spite of recent traffic and other macro headwinds, our store leaders have been successful in driving in-store conversion and higher revenue per customer. As we look to the remainder of the year, we are on track to add a total of 40 stores in 2023, having already opened 30 year to date. 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. Last quarter, we shared that we expected to see our e-commerce channel return to growth at some point in H2. In Q3, we're pleased to report that e-commerce revenue is up 3% year over year, driven by marketing, comping positive, and the growth of our contacts business, the majority of which is online. While we are encouraged by the growth we saw in Q3, we don't expect e-commerce recovery to be linear, and we may see periods of higher or lower growth in the near term, including in Q4. Looking ahead, we believe that the overall trend line is positive, and our e-commerce business is on the path towards sustainable growth. And now I'll hand it over to Dave to take us through some of our other product categories and customer metrics.

Thanks, Neil. The third key driver of our strong Q3 results was our expanded holistic vision care offering, which is attracting new customers and driving higher customer lifetime value. Our contacts business had a record quarter, delivering strong growth and representing 9.3% of Q3 revenue, up 240 basis points versus a year ago. This is still well below the industry average of 20% and represents a meaningful opportunity for future growth. While contact lenses have a lower gross margin percentage compared to our other product offerings, their higher purchase frequency and subscription-like purchase cycle are accretive to gross margin dollars. Contacts have also been a key driver of new customers and, looking forward, provide additional upside for our e-commerce business given purchases tend to skew more online. Eye exams, which are the gateway to prescription eyewear and contacts purchases, represented 4.4% of revenue in Q3 versus 3.2% last year. Scaling exams and contacts continues to be a strategic priority in order to deliver a seamless, holistic customer experience and drive higher customer lifetime value. On average, customers that get an eye exam with us and buy glasses and contacts spend 2.2 times with us in their first year versus glasses-only customers and continue to purchase more frequently and spend more in subsequent years. To support our holistic vision care business, we added 57 net new optometrists to our team this quarter, and we continue to invest in their professional development, their engagement, and their ability to provide exceptional patient care. In October, we brought our optometrists and store leaders together for our first ever One Vision Summit. where these leaders spent time discussing how to continue to deliver best-in-class customer and patient experiences. In addition to opening stores with physical exam suites and hiring optometrists, we continue to be excited by the opportunity to use telehealth to make eye care more accessible, more convenient, and more efficient. Our virtual vision test telehealth app enables patients to renew their prescriptions from home in under 10 minutes, and we continue to see strong engagement in exam growth through this channel. In a small number of stores, we are also testing video-assisted exams that offer comprehensive eye health evaluations using live doctors who remotely engage with patients sitting in our exam suites. We believe this technology offers the opportunity to scale exam capacity efficiently in combination with 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 patient experience, which we expect to drive loyalty and retention. We are pleased with the progress we are seeing on both the contacts and exam front and expect these long-term investments to deliver significant value over time. We also continue to invest in efforts to make it easier for customers to use their vision insurance benefits with us. More than 60% of our customers have Vision Insurance, and in Q3, we saw higher utilization of in-network insurance benefits across our customer base, in addition to the continued usage of out-of-network benefits. While our customers recognize that even without reimbursement, their out-of-pocket spend at Warby Parker is lower than purchasing in-network elsewhere, we want to ensure that our products and services are as affordable as possible. Looking ahead, we continue to explore additional partnerships and capabilities to make it easier for our customers to leverage their in-network and out-of-network benefits with us. The fourth driver was our reinvestment in marketing while making longer-term investments in our brand. As Neil highlighted, the third quarter marked our return to a year-over-year increase in marketing dollars following the rebalance of this expense that began in the second quarter of 2022. With our channel mix between stores and e-commerce back to pre-pandemic levels, we expect marketing spend as a percent of revenue to remain in the low teens. We are pleased with the marketing efficiency we are seeing and expect these levels to drive steady and sustainable new customer growth. In Q3, we saw trailing 12-month active customer growth of 1.8%, up from 1.2% at the end of Q2, and in line with our expectation that active customer growth would positively inflect as our marketing spend comped up year-over-year in Q3. As a reminder, this is a trailing 12-month metric, and our marketing spend is still down 21% on an LTM basis. As marketing spend further increases on a year-over-year and trailing 12-month basis, we expect to see active customer growth rates continue to improve from current levels. Importantly, we continue to see strong customer retention metrics and repeat purchasing patterns across cohorts, including a revenue retention rate of roughly 50% over 24 months and 105% over 48 months for the most recent cohort with four years of purchase history. In addition to our core customer acquisition efforts, during the third quarter, we launched a brand campaign to boost awareness across different media platforms and demographics. This campaign is distinct from our primary customer acquisition efforts in that it is designed to drive top of funnel awareness to fuel future growth, not necessarily near-term transactions, and represents our commitment to investing in our brand to drive long-term growth. We've seen strong engagement throughout the campaign and look forward to updating you more in the coming quarters. In addition to the brand campaign, we've continued to strategically align the brand with unique cultural moments to expand our audience. an exciting example of which was our recent collaboration with Marvel, Insomniac Games, and Sony Interactive Entertainment, tied to the release of the highly anticipated Marvel Spider-Man 2 video game. Warby Parker was one of three brands and the only optical brand that Marvel worked with to launch in-game and real-world products, supporting our longtime commitment to giving back and helping others, a mission that fits perfectly with Spider-Man. Working with Marvel, we launched a capsule collection of character-inspired frames. And working further with Insomniac Games and Sony Interactive Entertainment, select Warby Parker frames, billboards, and a Warby Parker storefront are featured in the game itself. Finally, one of the most rewarding outcomes of our recent performance is the broader impact we're having through our Buy Pair, Give a Pair program. As a reminder, for every pair of Warby Parker glasses sold, a pair is distributed to someone in need. We're now proud to share that 15 million pairs of glasses have been distributed globally via the program, meaning that 15 million more people now have the glasses they need to learn, work, and achieve better economic outcomes. Across Team Warby, we continue to be excited that as our business scales, our impact grows and feels more meaningful than ever. And now I'll turn it over to Steve to review the details of our financial performance.

Thanks, Neil and Dave. Starting with revenue, we generated revenue of $169.8 million, up 14.2% year over year, and above the high end of our Q3 guidance range of $163 to $165 million, or up 10 to 11%. From a channel perspective, retail revenue increased 20.7% year over year, while e-commerce revenue increased 3% versus Q3 of 2022. For the third quarter, e-commerce represented 33% of our overall business compared to 37% in 2022, and in line with our pre-pandemic channel mix. As Neil mentioned, the positive inflection in e-commerce revenue was driven by marketing spend returning to growth and the continued scaling of our contact business, the majority of which is online. As Neil mentioned, while we were encouraged by the growth we saw in Q3, We don't expect the e-commerce recovery to be linear and may see some periods of higher or lower growth in the near term, including in Q4. Looking ahead, we believe that the overall trend line is positive and our e-commerce business is on a path towards sustainable growth. We opened 11 new stores in Q3 and 40 over the past 12 months, finishing Q3 with 227 stores. Retail productivity in Q3 was 101% versus the same period last year. As a reminder, we define retail productivity as sales per average number of stores open in the period, so even as we continue to add an average of 40 stores per year, our more mature cohorts continue to perform as those newer stores ramp. Seven of the new stores in Q3 were expansions within existing markets, and four were entries into new markets. All 11 new stores include eye exam capabilities, which brought the number of locations offering eye exams in the quarter to 183, or 81% of our total fleet of 227 locations. From a customer perspective, we've finished the quarter with 2.3 million active customers, an increase of 1.8% versus the same period a year ago. and our average revenue per customer increased 10% year over year to $284. As Neil mentioned, we're pleased with our increase in average revenue per customer, which was driven by a few factors, including an increase in progressives as a percentage of our business mix and continued ramping of both contact lens and eye exam sales. Progressives represented 22.5% of total prescription glasses sold in Q3 2023. up from 21.4 percent when compared to the third quarter of 2022 this is still well below the market average of approximately 40 percent leaving a substantial runway for product category growth progressives are also our highest gross margin and highest price point product starting at 295 dollars we also continue to make progress on our move into holistic vision care as we evolved from a glasses-only brand into one that offers glasses, contacts, and eye exams to customers. From Q322 to Q323, contact lenses have increased from 6.9% to 9.3% of our business mix. Over the same period, eye care has increased from 3.2% to 4.4% of our business mix. Contacts and eye exams both represent large opportunities for future growth. each accounting for 15 billion-plus portions of the $76 billion U.S. optical industry. We remain well underpenetrated for sales of these products as a percent of revenue versus other national optical retailers. Moving on to gross margin, as a reminder, our gross margin accounts for a range of costs, including frames, lenses, optical labs, customer shipping, optometrist salaries, store rent, and the depreciation of store build-outs. Our gross margin also includes stock-based compensation expense for our optometrists and optical lab employees. For comparability, I will be speaking to adjusted gross margin, which excludes stock-based compensation. Third quarter adjusted gross margin was 54.8% compared to 54.7% in Q2 of this year and 56.9% in Q3 of last year. The year-over-year decrease was driven by strong growth of eye exams and contact lenses as we evolve into a holistic vision care company and expand into these large segments of the optical industry. Eye exams and contacts have lower gross margin profiles than eyeglasses, but over the medium and long term are accretive to gross margin dollars and allow us to serve all of our customers' eye care needs. Furthermore, expanding our contacts offering is a core part of scaling our holistic vision care offering and a key driver of growing average revenue per customer. In addition, contact lenses have a higher purchase frequency and subscription-like purchase cycle. We also experienced continued year-over-year gross margin deleverage in two areas that represent the more fixed portion of our cost of goods, retail occupancy and optometrist salaries, which are directly linked to our expansion into eye care. Our growth in store count has naturally led to an increase in store rent and depreciation from store build-outs. In Q3 specifically, we opened 11 new stores. As of the end of Q3 2023, we operated with 140 stores where we engaged directly with an optometrist and therefore recognized both revenue from exams and optometrist salaries. This represents an increase of 31% for 33 additional locations from 107 employed and PC exam stores at the end of the third quarter last year. We believe this ongoing investment in eye exam capabilities will benefit the business long-term as a result of greater control over the customer experience, new eye exam revenue, and higher in-store conversion rates. There are a few accretive tailwinds to margin that act to partially offset these effects. First, we continue to scale our highest-priced and highest gross margin progressives business. In the third quarter, progressives accounted for 22.5% of our prescription eyeglass units which is up 110 basis points versus a year ago. Secondly, we continue to scale the portion of prescription glasses orders that we insource at our two owned optical labs in New York and Nevada. We expect our continued scaling at these facilities to result in continued gross margin benefits along with higher net promoter scores, lower refund rates, and faster turnaround times. Shifting gears to SG&A, As a reminder, SG&A for our business includes three main components, salary expense covering our headquarters, customer experience, and retail employees, marketing spend including our home try-on program, and general corporate overhead expenses. Adjusted SG&A excludes non-cash costs like stock-based compensation expense, depreciation, and charitable equity donations. Adjusted SG&A in the quarter was 93.4 million, or 55% of revenue, compared to Q3 2022 adjusted SG&A of $82.3 million, or 55.3% of revenue. The 30 basis point decrease in adjusted SG&A as a percentage of revenue was primarily due to adjustments to our cost structure we made in August of last year, including lower salary and general corporate expenses, partially offset by a planned increase in marketing spend. In Q3 of this year, we began anniversarying these pullbacks in SG&A spend, driven by reductions in marketing and salary spend in particular. For the first nine months of this year, adjusted SG&A spend as a percent of revenue was 52.6% versus 59.1% for the same period last year, a decrease of 650 basis points. Marketing spend for the quarter, came in at $19.7 million, or 11.6% of revenue. This is up from $14.9 million and 10% of revenue in the same period last year, driven in part by our new brand campaign aimed at driving longer-term awareness of Warby Parker. Turning now to adjusted EBITDA, in the third quarter, we generated adjusted EBITDA of $11 million, representing an adjusted EBITDA margin of 6.5%, which compares to adjusted EBITDA of 11.9 million or 8% of revenue in the year-ago period. For the nine months ended September of this year, we generated adjusted EBITDA of 42.9 million and adjusted EBITDA margin of 8.5% compared to adjusted EBITDA of 18.6 million and adjusted EBITDA margin of 4.1% for the same period last year. On a year-to-date basis, we've increased adjusted EBITDA margin by 440 basis points compared to last year. Turning now to our balance sheet, we finished the quarter with a strong balance sheet position reflecting $216 million in cash, which we will continue to deploy deliberately to support our growth and operations. We also have an undrawn credit facility of $100 million, other than $4 million for letters of credit that we can upsize to $175 million. Now to our outlook. Based on our strong year-to-date performance and updated view of the rest of 2023, we're raising the full year guidance we outlined on our Q2 call in August. For 2023, we now expect net revenue of 666 to 669 million, representing approximately 11.5% growth at the midpoint of our range. Adjusted EBITDA margin of approximately 7.9% in line with prior guidance, which equates to adjusted EBITDA of $52.7 million at the midpoint of our top line guidance range. We still expect gross margin in the mid-50s as a percent of revenue and to open 40 new stores this year. We're still forecasting stock-based compensation as a percentage of net revenue in 2023 to be roughly 10% compared with 16% in 2022. Stock-based compensation for both years is above our long-term forecast as the result of the multi-year equity grants to our co-CEOs in 2021. We still anticipate stock-based compensation to normalize to a range of two to 4% of net revenue late in 2024. With respect to the fourth quarter, we're guiding to the following. Net revenue of 158 million to 161 million or revenue growth of approximately 8% to 10%. Through the first week of November, we've observed trailing 28-day retail productivity versus 2022 of 100%. From a bottom-line perspective, we're guiding to an adjusted EBITDA margin of approximately 6% at the midpoint of our revenue guidance. With that, Neil, Dave, and I are pleased to take your questions. Operator, please open the line for Q&A.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question and please do ensure that you are unmuted locally. Our first question today comes from the line of Mark Mahaney from Evercore. Please go ahead. Your line is now open.

Okay, thanks. Two questions, please. I think, Dave, you referred in the end of your comments to active customer growth rates should continue to improve from current levels. Could you just double-click on that a little bit, maybe either quantify that or qualify that a little bit? What's the pace of active customer growth we saw in the September quarter? Is that a good proxy for how we should think about it going forwards? And then, Steve, on the EBITDA margins, is the business set up so that you'll continue to have this, you know, 1 to 200 BIPs of EBITDA margin expansion?

know going forwards is that still the cadence that we should expect thank you very much great uh thanks mark this is dave um just touching on the active customer growth first um as a reminder this is a trailing 12-month metric and so um as we noted in our q2 call we expected that to be the low point given the 30 percent 12-month trailing marketing cuts that we had made at that point. And we have seen active customer growth trends the way that we expected. And as our marketing investments will continue to increase on a year-over-year basis over the next few quarters, we're expecting active customer growth to continue to trend positively. We're pleased with the returns that we're seeing from our marketing spend and marketing efficiency, and expect that to continue into Q4 and beyond. The other kind of factor that's impacting our active customer count that we report on, as we mentioned in our Q2 call, is that the The back half of last year, we introduced new functionality to make it easier for multiple members of the household to transact with us under a single customer account. And as a result, we're seeing more multi-person customer accounts where a family might walk into the store and purchase glasses for a husband, wife, and two kids under the same account. Right now, even though we're serving multiple people under one account, what we're reporting on is the number of accounts. And so as we see more of these households purchasing together, that's also impacting the metric in general. But in spite of that, we are expecting to see continued positive growth in the coming quarters.

Great. And Mark, as it relates to your question on adjusted EBITDA margin improvement, At this time, we're still planning for an annual increase of 100 to 200 basis points in incremental adjusted EBITDA each year. We'll provide an updated perspective on what that number should be on our Q4 call early next year. I just wanted to point out the level of increase that we guided to for this year really used H2 of last year as the benchmark, off of which we'd add an incremental 100 basis points of adjusted EBITDA margins, so going from 6.9% H2 of last year to 7.9% H2 of this year. If we were to look at that on an annual basis, the improvement would be from 4.5% adjusted EBITDA margins last year to the 7.9% this year. So on an annual basis, the improvement is roughly 340 basis points versus the 100 basis points, which is just benchmarked against H2. Thanks for the question.

Thank you.

The next question today comes from the line of Edward Rimmer from Piper Sandler. Please go ahead. Your line is now open.

Hey, good morning, guys. Thanks for taking the question. I know you guys have some pretty interesting growth vehicles within the product assortment. I'd love to click down a little bit. I know you've spent a lot of time talking about contacts. I guess what's the success of the private label product? Understand that maybe that'll help offset some of the gross margin drag. And then second, on some of the higher price point frames and mixed materials that you've introduced in recent quarters, I guess kind of where does that stand in terms of percent of mix, and has that been a gross margin driver? Thank you.

Ed, thank you so much for your question. This is Neil.

When we first launched Contacts, which was just a couple of years ago, we thought it was important to launch with our own brand, with Scout, because we're known as a direct-to-consumer lifestyle brand and thought that that was the right way to introduce Contacts to customers and the world. That being said, we always knew that it would be a relatively small percent of our overall contact sales as we just look at the overall market and the fact that third-party contact lending constitutes a vast majority of the overall market and the fact that When you purchase contacts, you need to use a valid prescription, and those prescriptions have the brand of contacts written on the prescription. So we'll continue to have a private label option, and it is a higher gross margin than our other contacts that we sell. But the vast majority of contacts that we sell will generally be other brands. particularly the big ones from J&J or Alcon and others. You are right to point out that our higher-priced frames are higher margin, and you'll continue to see us invest in a broader frame assortment. We have not seen price resistance from our customers, and it's really important to us that we're delivering exceptional value. So while we now have frames, you know, at $145 or starting at 175 or $195, they would be sold for in other locations, you know, for several hundred, if not over a thousand dollars. And that's just core to our ethos and our pricing strategies to always deliver that exceptional value.

Thanks so much. The next question today comes from the line of Brooke Roach from Goldman Sachs. Please go ahead. Your line is now open.

Good morning and thank you for taking our question. I was hoping you could elaborate on the trends you're seeing in the market in terms of traffic and conversion as you've moved through 3Q and into 4Q that's driving the more conservative outlook that you've provided today in your fourth quarter guide. How does this inform your view of future total marketplace growth on a comparable basis?

Brooke, thanks for the question. We're seeing consistent trends thus far as it relates to traffic and conversion. The metric that we report each quarter is our trailing 28-day store productivity. As of the most recent week before, our earnings call on that number for store productivity is 100% on a trailing 28-day basis. That number now will fluctuate over the course of the quarter, so it's not necessarily – that's the number that we'll see on a consistent trailing 28-day basis as the quarter evolves and as we ramp up for the busy holiday period. And so that's the color we've given from a quantification perspective as it relates to store productivity. What I will say is we've seen consistent trends as it relates to higher conversion and higher AOV and higher average revenue per customer in our stores that have offset lower traffic trends that the industry has been experiencing for several quarters.

Yeah, and I'd say at a high level we've seen some signs of stability over the last few months in the category. and more predictable customer behavior around periods like back to school than we've seen over the last couple years. But we have yet to see evidence of significant pent-up demand flowing through the category. In-store traffic still remains below 2019 levels. And as we've seen throughout the last couple years, there's been some choppiness in trends, including weather disruption and continued macro uncertainty. And so while we're encouraged by some of the recent trends, we're maintaining a conservative outlook in general.

Great. Thank you. And if I could just ask one follow-up on the insurance industry dynamics. Can you provide an update on the amount of new wins that you have recently had on getting more customers to be in-network with Warby Parker?

Yes, we are encouraged by the progress that we're making on the insurance front. In Q3, we saw higher utilization of insurance usage, both from our in-network customers and continued strong usage of out-of-network reimbursement. Some of the new functionality that we've introduced, like our universal eligibility check makes it easier for customers to understand their benefits and how to use them at Warby Parker and some of the relationships with large employers and carriers that we've introduced over the last year. We're seeing a stronger utilization there, so that's encouraging. And then we also believe that as we continue to scale, as we expand our store footprint, as we hire more doctors, we continue to be position ourselves to be a better partner to large employers and large carriers and are encouraged by the potential for us to unlock much bigger relationships over time.

Thanks so much. I'll pass it on.

The next question today comes from the line of Oliver Chen from TD Cowen. Please go ahead. Your line is now open.

Thanks. Hi, Neil, Dave, and Steve. Regarding your guidance and what's ahead and sort of the mixed consumer picture, what are you forecasting in terms of promotions and how are you thinking about promotions on a year-over-year basis in this environment? And then second, as we zoom out longer term on the 900-store target, lots of opportunity ahead, what role will opticians play And also, how is new store productivity helping inform that longer-term target, and why is that the right number, 900, in terms of what you see? Thank you.

Thank you so much for your question. This is Neil. On the consumer front and promotions in general, You know, we've tried to run the business to always provide exceptional value, right, whether that's a $95 pair of glasses all in that would typically cost, you know, $400 elsewhere or our progressives offering, whether that's our standard progressives at $295 or our precision progressives at $395 that would cost. over a thousand dollars elsewhere. And given that sort of exceptional value, we haven't felt the need to offer tons of promotions. So you shouldn't expect to see us introducing promotions during the holiday season. We do have an add a pair and save promotion. That's currently been running now for a while and that encourages folks to buy more from us and that drives UPT and AOV and sort of the more you spend with us, the more you save. But we'll continue to ensure that everything that we're selling is exceptional value and that price to quality ratio will continue to be unmatched. As we think about sort of our retail rollout, we continue to be on track to open 40 stores this year, and we plan to continue on a similar trend next year. As we've sort of done analysis and worked with third parties, we've identified that 900 number. There's over 48,000 optical shops in the U.S., and there's plenty of white space ahead of us. We continue to have no challenges hiring and training opticians. Opticianry is a licensed profession in most states, and we've been able to develop a lot of talent internally. So not only do they have the competency and skill set around fitting glasses and expertise around lenses, but also are ingrained with our sort of culture around great customer experiences and making sure that every customer and patient feels amazing walking in and walking out of a Warby Parker store. As we think about hiring optometrists, we still continue to be a preferred employer of optometrists. and while only 1,800 or so optometrists graduate every year, we're not finding the challenges hiring optometrists that some other companies often speak to. So we'll continue to create an amazing work environment for optometrists, so that way we continue to hire the best and the brightest in the field, and we'll continue to invest in technology that leverages their expertise so they can focus on clinical care rather than administrative tasks. And that also helps us on recruitment and retention of optometrists.

Best regards. Thank you.

The next question today comes from the line of Mark Oltschwerger from BED. Please go ahead. Your line is now open.

Thank you. Good morning. First off, I was hoping you could talk a little bit more about some of the takeaways from the new marketing campaign and just the broader rewrap in marketing spend. Are you seeing the demand lift you would expect there? You also mentioned that you would not expect the e-commerce growth line to be linear. Wondering if that signals maybe some more choppiness quarter to date and what your readings are there.

Thanks, Mark. In general, we've been pleased with the returns and the response that we've seen from investing more in marketing in general. As we noted last quarter, our marketing efforts have kind of fallen into two categories in this last quarter, and that's extended to Q4. where there's the core marketing effort designed to drive transactions. And then there's a separate effort that is our brand awareness campaign, where that really reflects the commitment to long-term investment in our brand and increasing brand awareness. And we're pleased with the engagement and the response that we're seeing from that campaign. The goal is there really to move some of our brand awareness metrics and not necessarily convert in a current period. And so we need to wait a few months to look back at our brand awareness and see how much we've moved it. But in general, the engagement that we've seen on some platforms that we haven't been doing much marketing on previously, like YouTube and TikTok, we've seen we've achieved kind of all our engagement goals there and so are pleased with the returns that we've seen so far. And then as it relates to e-comm, we're confident in the overall trend line for e-comm continuing to go up and to the right, but I do expect there to be some volatility from quarter to quarter. And so there may be some acceleration or deceleration when looking at year over year growth from in one period to another. That part of our business is more sensitive to marketing spend and media rates. And as we've started to allocate more of our budget to experimentation and new channels, recognize that some of those things will work, some won't. And we plan to take more shots on goal over the next few quarters than we did in the prior few quarters. And So that may be reflected in kind of some near-term volatility there. But overall, our focus on ensuring that our econ business is returning to long-term sustainable growth, and we certainly believe we're on a path to that. Mark, this is – Very helpful.

We talked a little bit about this before, the other factor impacting e-comm growth, and this occurs every year as we talk about making sure that we're capturing consumer demand during the busy holiday season. There's a fair amount of orders that we take in December, the back half of December in particular, and some of those we recognize as revenue in Q4 in December, but there are a number of them, the vast majority actually, that we'll actually deliver and recognize revenue on in January in Q1 of the following year. So there's also that element of timing involved in the pace of e-commerce growth and orders over the course of Q4 within December in particular.

Thank you. And Steve, that actually dovetails nicely into my follow-up. I just am wondering if there's any initial views you can share on sales growth plans for 2024 And I guess typically, as you called out, you do see your biggest quarter over quarter revenue gain from Q4 to Q1. Any reason we shouldn't expect that same typical seasonality as we look at the next few months here?

Great question, Mark. It's safe to assume that we should assume the step up from Q4 to Q1. We'll follow a similar trend line to what we've seen in previous years. That's just the pattern that our business has exhibited for many, many years, and we expect the same step up from Q4 to Q1 looking ahead to next year.

Great. Thank you. The next question today comes from the line of Paul Legrez from Citigroup. Please go ahead. Your line is now open.

Hey, everyone. This is Brandon Chudamon for Paul. I was wondering, now that we've lapped the reduction in marketing spend, can we assume active customer growth to accelerate over the next couple quarters? And I was also wondering, could you quantify just how much of a drag on active customer growth is the change to multiple people ordering from one household account? How should we think about that going forward? Thanks.

Yeah, thanks, Brendan.

To start, yeah, we do expect that active customer growth will continue to accelerate. As mentioned, this is a trailing 12-month metric, and so we're currently comping against a period where three of the quarters we were spending materially less on marketing, and then one quarter where We've seen marketing spend return to year-over-year growth, and we have seen that metric move positively as we've reintroduced some marketing investment and expect that to continue in the coming quarters. And right now, we aren't going to provide any additional color on the multi-person accounts, but it is a factor that is moderately impacting that metric and one that we may be able to provide some additional visibility into in the coming quarters.

Gotcha. And if I can, just a quick follow-up. You know, the direct business return to growth, I'm just wondering, you know, can you help frame that with X contacts upon understanding that's almost

entirely online and your penetration has increased there so i guess what is like you know the core direct business and what is your outlook for that thanks haven't broken out the split online of contacts versus glasses and we'll continue to report on ecom really as a as a blended channel suffice it to say that we're excited with the progress we're making selling contacts online and seeing that account for a greater portion of our business. We're also excited at how customers are using our e-commerce channel, both to purchase new glasses and to more importantly, return to purchase a second or third pair of glasses.

Appreciate it. Good luck. Thanks, guys.

The final question today comes from the line of Alex Stratton from Morgan Stanley. Please go ahead, your line is now open.

Please do ensure that you are unmuted locally. It appears we may have lost Alex.

This concludes today's question and answer session, and this concludes today's call. Thank you all for your participation. You may now disconnect your lines.