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.