Warby Parker Inc.

Ladies and gentlemen, welcome to the Warby Parker fourth quarter and full year 2023 results. My name is Neil, and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I will now hand over to Jacqueline Berkley, head of the investors relations, to begin. Jacqueline, please go ahead.

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 FCC 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 February 28, 2024, 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 Dave to kick us off.

Welcome, everyone, and thank you for joining us this morning. We'll spend the majority of today's call speaking to our 2024 plan and looking forward, but first want to take a moment to reflect on 2023. It's a year that we have a lot to be proud of, and I'd like to start by recognizing our team's hard work and dedication to delivering the best eye care products and experiences for our customers while improving our financial results and making progress against our mission to provide vision for all. Last year, we delivered consistent double-digit revenue growth each quarter, closing the year up 12% year-over-year, while growing adjusted EBITDA more than 90% and expanding adjusted EBITDA margin nearly 330 basis points. We are pleased to have achieved a full year of positive free cash flow while we continue to make significant investments in our long-term strategic initiatives. including opening 40 new stores, scaling contacts and eye exams to approximately 9% and 4% of revenue respectively, and introducing new innovative products like precision progressives. We are also proud to have surpassed a major milestone of distributing more than 15 million pairs of glasses to people in need through our buy a pair, give a pair program. But what we hope you'll take away from today's call is that we're not content. We have higher ambitions. in particular for top line growth and for serving more customers, all while maintaining operational discipline and expanding profitability. A focus for 2024 and beyond will be to improve our top line growth rate, and we are pleased with the positive momentum we have seen so far year to date. Turning to our plan, you'll hear a lot of consistency in our priorities from last year, but we also want to make it clear where we are leaning into opportunities or making adjustments in response to recent learnings. There are three key areas in 2024 that we expect will be meaningfully different from the last two years. One, we plan to increase our marketing and brand spend on a full year basis for the first time since 2021. Two, we expect to drive positive, sustained e-comm growth also for the first time since 2021. And three, we will take a leap forward in our ability to serve insurance customers. Alongside these three areas, we plan to continue driving best-in-class retail economics and outsized growth in product categories like progressives, contacts, and exams. We believe these actions will re-accelerate active customer growth and overall glasses growth in 2024 and beyond. We also expect to drive incremental operating efficiencies and profitability as we gain leverage from the strong foundation that we invested in over the last few years. We'll start by discussing marketing spend. We've been pleased with recent efficiencies in this area, which gives us confidence to reinvest in both brand awareness and new customer growth. This year, we expect to keep marketing spend in the low teens as a percent of revenue and higher than 2023 levels on an absolute basis, coming off two years of decreasing spend in response to lower demand signals in the category. We continue to see opportunity to drive awareness and customer growth through linear TV and SEM and also expect to scale other channels where we've seen strong returns including direct mail, streaming, and influencer. To drive top-of-funnel awareness, we plan to launch unique partnerships, collaborations, and awareness initiatives to expand our audience and reach a variety of demographics. For example, in 2023, we launched a collaboration with style icon and glasses connoisseur Emma Chamberlain, who has worn Warby Parker since she first visited our Hayes Valley store eight years ago. Following the success of last year's collaboration, we're excited to work with her again in 2024. Our stores serve as billboards and act as efficient customer acquisition vehicles, and we believe the 40 openings that we have planned this year will also help drive awareness. To amplify our retail channel, we plan to allocate a portion of our media budget towards driving local store awareness and store traffic in a more intentional manner than in prior years. These efforts include expanding exam awareness to drive exam utilization as well. Due in part to these efforts, we expect to drive more balanced growth between active customers and average revenue per customer in 2024 than we saw last year. We ended 2023 with 2.3 million active customers, an increase of 2.5% on a trailing 12-month basis. Given the backward-looking nature of this metric, it is still being impacted by the first half of 2023, in which marketing spend was down 26% year over year. As we've mentioned previously, Some of these customer accounts represent households or multiple individuals. Later in the call, Steve will provide an update on the number of unique individuals we are serving. Importantly, whether it's individuals or households, 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 2018 cohort. We believe the power of our brand and our ability to delight customers continue to differentiate us within the industry. As a second area of focus, we plan to further invest in scaling our industry-leading omnichannel experience, meeting customers where and how they want to shop. Our fully integrated omnichannel experience is unique in our category and has enabled us to effectively serve customers over the last few years as shopping behavior between channels fluctuated. In 2020 and 2021, we were forced to operate our stores in a limited capacity, and in 2022 and 2023, our e-commerce channel was negative, creating a drag for the overall business. We're excited this year to see both channels contribute positive growth, and we expect this to be the case going forward. In 2024, we anticipate our e-commerce channel will be up low single digits on a full year basis, and positive for the first time since 2021 due to a few underlying drivers. As just discussed, the channel will benefit from our first full-year increase in marketing spend since 2021. Our e-comm channel requires more marketing support to drive growth in our stores, and we observed the impact of our pullback on marketing the last couple of years. The second is channel shift renormalization coming out of the pandemic. Our e-com business grew at a compounded annual growth rate of 15% from 2019 to 2023, but that growth was heavily front-loaded during the pandemic. We have now returned to our pre-pandemic transaction mix between e-com and retail and expect more stability between channels and positive e-com growth going forward. Third, within our e-com glasses business, We have seen shifting dynamics between customers purchasing after completing a home try-on versus those purchasing directly. Home try-on has been driving a smaller percent of purchases than in the past, and we expect this trend to continue. Our free home try-on has been a core part of our offering since launch in 2010 and was designed as a novel service to enable potential customers to try on glasses. Now that we have over 230 stores in our virtual try-on on web, iOS, and Android, Customers have other convenient methods to try on our frames. While we still see high conversion rates and strong ROI from home try-on-led purchases, direct glasses purchases lead to shorter timelines from try-on to purchase, while requiring less inventory, shipping, and operating costs. Going forward, you'll see us invest further in virtual experiences and advanced personalization, while being more intentional in where and how we lead with home try-ons. Key tailwinds for the e-commerce channel include our growing contacts business, the majority of which is online, and our strong customer retention and repeat purchase trends, as many of our returning customers opt to transact online. Finally, as we've discussed before, opening stores in new markets generally creates a temporary headwind for local e-commerce sales in the store's first year of operations, after which this effect abates. With plans to enter 10 new markets in 2024 versus 17 in 2023, we expect to see less pressure on overall e-commerce growth in the coming year. Now shifting to retail, where we expect to see the majority of our growth come from in 2024. We ended 2023 with 237 stores, and longer term, we believe we can open more than 900 stores in the U.S., highlighting a significant opportunity for further penetration of both new and existing markets for years to come. while still representing a small fraction of the 45,000 optical shops in the U.S. We plan to open another 40 new stores this year with a continued focus on suburban expansion. Of these stores, 29 are expected to be in suburban markets, and the remaining 11 stores in urban centers, including in our largest market of New York City. For these 40 new stores, we continue to target 35% four-wall margins and paybacks within 20 months. We remain confident in our store growth strategy given the consistent returns we see across cohorts. Our stores that were open for the full 12 months in 2023 generated approximately $2.1 million in revenue on average and four-wall margins in line with our target of 35%. Over half of our 2022 stores paid back in an average of 16 months, and the cohort overall is on track to pay back in line with our target of 20 months. I want to quickly highlight our store teams, in particular, our store leaders and optometrists, who provided more eye exams last December than in any month during the company's history, driving conversion and AOV throughout. We're fortunate to have a tenured store leadership team, many of whom have been promoted from within the company. We believe our ability to grow and retain talent is differentiated within the market and will remain a critical component of our retail strategy in 2024 and going forward. This year, we plan to drive store productivity through active customer growth and growth in average revenue per customer, driven by higher eye exam utilization and increased purchasing of progressive contact lenses and higher price frames. And now, I'll pass it over to Neil to talk more about our holistic vision care offering, which will continue to be another key area of focus for us in 2024.