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 Hillcourt today. If you would like to ask a question during the presentation, you may do so by pressing style one on your telephone keypad. I will now hand over to Jacqueline Berkeley, 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 .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 and the company's latest annual report on Form 10K. These forward-looking statements are based on information as of February 28, 2024 and Ascept is required by law, we assume no obligation to publicly update or revise our forward-looking statements. Additionally, we will be discussing certain non-GAP financial measures. These non-GAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with U.S. GAP. A reconciliation of our non-GAP measures to the most directly comparable U.S. GAP 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% -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 -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 -in-class retail economics and outsize 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 -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 .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% -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 omni-channel experience, meeting customers where and how they want to shop. Our fully integrated omni-channel 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 are forced to operate our stores in a limited capacity, and in 2022 and 2023, our e-comm 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-comm 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-comm and retail and expect more stability between channels and positive e-comm growth going forward. Third, within our e-comm 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 -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-on. Fourth, key tailwinds for the e-commerce channel include our growing contacts business, the majority of which is online, and our strong customer attention 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 plant-centered 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 in New York City. For these 40 new stores, we continue to target 35% poor-well margins and paybacks within 20 months. We remain confident in our store growth strategy, given the consistent returns we see across cohorts. The 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.

Thanks, Dave, and good morning, everyone. This year, we'll continue to expand our Holistic Vision Care offering, which is attracting new customers and driving higher customer lifetime value. Starting first with our core glasses business, since launching Warby Parker in 2010, we've intentionally maintained our core $95 price point. Our simple, affordable pricing structure has been an integral part of our value proposition, and we believe it continues to attract new customers. And while we'll continue to expand our $95 offering, we plan to launch nearly 20 collections this year, many of which will incorporate our $145, our $175, and our $195 price points while introducing innovative frame constructions, new lens types, sizes, and more. In addition, we'll look to build upon the momentum in our progressive business. We've made great strides in expanding our progressive penetration to .6% of prescription in 2023, up from .4% in 2022. A key driver here has been customer receptivity to precision progressives, our premium progressive lens that we introduced in Q2 2023. It's a great example of our team's ability to quickly innovate in response to customer feedback while delivering exceptional value. While it's the highest price point product we have ever introduced at $395, it's still well below what a similar product often costs elsewhere. We continue to believe there is significant white space for future growth, as progressives represent approximately 40% of the prescription eyeglass market overall. Progressives are closely tied to store expansion, as progressive penetration is higher in our retail channel. In addition to being efficient customer acquisition vehicles, our stores are integral to advancing our goal of providing holistic eye care. Like 2023, nearly every new store that we open in 2024 will include eye exam capabilities. Industry-wide, nearly 75% of prescription glasses are purchased at the same location an exam takes place. And I'm excited to share that this year, we're planning to further integrate our omni-channel experience by offering our precision progressives online for the first time. Moving on to our other products and services, including contacts and eye exams. Last year, contact lens sales grew 35% year over year to approximately 9% of revenue in 2023, yet our contacts penetration remains well below the 20% industry average. In 2024, we plan to continue to invest and grow this portion of our business, as it not only attracts new customers, but also some of our highest value customers, given the replenishment nature of the product. Approximately 30% of contacts customers in 2023 were new customers to Warby Parker. Adding to this trend, we continue to see many of these customers go on to purchase glasses from us. In 2023, over 50% of contacts customers also purchased glasses from us, and we see an opportunity to expand this over time. Similar to progressives, a big contributor to the growth in contacts has been the growth of our eye exam business. In 2023, eye exams grew 63% year over year to approximately 4% of revenue, yet our exam penetration remains well below the approximately 15% industry average. Today, the majority of our customers are still getting their eye exams elsewhere and bringing their prescriptions to Warby Parker, highlighting the opportunity in front of us. As we've increased the number of stores offering eye exams, we have seen strong growth in average revenue per customer driven by eye exam revenue, a higher penetration of progressive lenses and contact lenses. We find that exam stores drive higher sales, conversion, and growth margin than non-exam stores, while offering a more seamless experience for our customers and patients. A key part of our strategy this year is focused on supporting our existing optometrists. We plan to invest in growing exam awareness among customers and see opportunities to optimize exam coverage where we see the highest demand, which we expect will help further leverage this fixed cost component of gross margin. We are also expanding innovative eye care services like video assisted eye exams, which comprehensive eye health exams in our stores using live remote doctors. In addition, we plan to continue rolling out retinal imaging and exam suites, which enables advanced disease diagnostics without pupil dilation, resulting in a better patient experience. While we have only introduced both technologies in a small number of stores, we are seeing many patients opt into these services and provide positive feedback. As we've shared in our slide presentation, our 2021 cohort of holistic vision care customers continues to show higher lifetime value over a longer period of time. Customers who completed an eye exam with us and bought glasses and contacts spent 1.4 times more with us at their initial purchase than glasses-only customers, 2.2 times more with us after 12 months, and 2.6 times more with us after 24 months. And we're encouraged to see our 2022 cohort spend even more with us than the 2021 cohort. Over the course of 2024, we'll aim to make it easier than ever for customers to access these products and services using their vision insurance benefits. Warby Parker ended 2023 with over 19 million in-network lives. Throughout the year, we saw higher utilization of insurance, both from our in-network customers and from customers seeking -of-network reimbursement. Today we're announcing the expansion of our relationship with Versant Health, a wholly owned subsidiary of MetLife, which will bring an additional 15 million lives in-network with Warby Parker and nearly double the number of lives with in-network access with us to over 34 million. After a phased integration, we expect that these new 15 million members will be able to access their benefits fully later this year. This is an exciting step forward in making it easier than ever for customers to use their benefits with us. In parallel, we continue to think there is an opportunity to educate customers about using their -of-network benefits at Warby Parker. Right now we estimate around 60% of our customers have vision insurance, and most -of-network plans cover an average of $100 reimbursement for a pair of glasses or contacts, meaning that these customers often pay $0 out of pocket for their eyewear purchase at Warby Parker. We're eager to build upon the momentum in this part of our business and believe it can be an exciting unlock in terms of growing brand awareness, attracting new customers, and delivering even better value to our existing customers. We often get asked about the optical industry and when we expect customer behavior to normalize. While we have seen some positive signals and remain confident in the long-term health and durability of the category, our 2024 plan does not assume a meaningful improvement in industry trends. We expect to continue to gain share regardless of the backdrop. As Dave mentioned at the start of the call, we have high expectations for ourselves and our team. The foundation we laid for Warby Parker 14 years ago was one built around delivering both exceptional value and service to our customers, all while growing our company sustainably. We believe we have the right tools, strategic plan, and operational discipline in place to execute this year and beyond. And now I'll turn it over to Steve to review the details of our financial performance.

Thanks, Neil and Dave. I'll begin with a detailed review of our 2023 fourth quarter performance, along with some call-outs and our full year results. Then I'll outline our guidance for the full year and first quarter of 2024 while sharing some trends we're seeing Q1 to date. Let's jump into Q4 and our full year results. Revenue for the fourth quarter and full year 2023 came in above the high end of our guidance ranges at $161.9 million, up .5% year over year, and $669.8 million, up 12% year over year respectively. From a channel perspective in Q4, retail revenue increased .1% year over year, while e-commerce revenue decreased 1% versus Q4 of 2022. For full year 2023, retail revenue increased .7% year over year, while e-commerce decreased .1% year over year, due largely to impact from marketing pullbacks in H1, but the channel returned to growth in H2 2023 versus H2 of 2022. As a reminder, every year we see a revenue deferral from Q4 into Q1, depending on the timing of when orders are delivered and when we recognize revenue. This year, a larger portion of our late December orders were delivered in January, which shifted more revenue recognition into January than we initially expected and will be reflected in our Q1 results. We estimate we deferred 2 million more than anticipated from December into January, with a similar channel split of 2 thirds retail and 1 third e-commerce. This higher revenue deferral was driven by strong demand in the final weeks of the year. This momentum has carried through into Q1 to date, including a strong recovery and re-acceleration after the weather-related store closures in mid-January. Turning to our stores, we added 37 net new stores over the course of the last 12 months, ending the year with 237 stores, up from 200 at the end of 2022. This .5% increase in our store count compares to retail revenue growth of 22% over the same period, so we continue to be pleased with the productivity and growth of our more mature store cohorts. Retail productivity in Q4 was 101% versus the same period last year, and 101% for the full year 2023. As a reminder, we defined retail productivity as sales per average number of stores opened in the period, including newly opened stores, so even as we continue to add an average of 40 new stores per year, our more mature store cohorts continue to perform strongly to offset the new stores that are ramping. All 40 new stores included eye exam capabilities, which brought the number of locations offering eye exams in the quarter to 194, or 82% of our total fleet. As Dave mentioned, in 2023, our stores that were open 12 months or more generated approximately 2.1 million in revenue on average, with four-wall margins in line with our target of 35%. From a channel mix perspective, for the fourth quarter, e-commerce represented 33% of our overall business, in line with our pre-pandemic mix. This compares to 37% in Q4 2022 and 34% in Q4 2019. From a customer perspective, we finished 2023 with 2.33 million active customer accounts, which represents an increase of .5% versus last year. Over the same time period, we dropped marketing spend by 7% as we rebalanced marketing to the low teens as a percent of revenue. Since anniversary marketing spend pullbacks in Q2 of last year, we are pleased to see sequential improvements in -over-year active customer growth. Starting in Q3 of 2024, we will no longer be comping customer growth off a period that included significant marketing spend pullbacks. Given we report this metric on a trailing 12-month basis, we anticipate seeing this metric continue to inflect upward as we move past the 26% pullback in marketing spend we observed in H1 of 2023. As mentioned on our last two earnings calls, one other factor that's impacting our active customer metric is that in the second half of 2022,

we added new

functionality to make it easier for multiple members of a household to transact with us under a single customer account. As a reminder, we define active customers based on unique email addresses, which is more reflective of active households. Since implementing these new features, we've observed increases in multi-person account purchasing and we wanted to provide visibility into the number of unique individuals we actually serve. In Q4 2022, we served an additional approximately 80,000 individuals and in Q4 2023, an additional approximately 120,000 individuals within these multi-user customer accounts. This translates to .2% growth at the individual level on a trailing 12-month basis. We continue to see strength in average revenue per customer of $287 in Q4, up .3% year over year, and the comparable average revenue per individual customer of $273, up .5% year over year. This 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. Moving on to gross margin. As a reminder, our gross margin is fully loaded and 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 expenses for our optometrists and optical lab employees. For comparability, I will be speaking to gross margin, excluding stock-based compensation. Fourth quarter adjusted gross margin came in at 54% compared to .2% in the year ago period. Full year adjusted gross margin was .7% compared to .2% in 2022. There are a number of drivers of the sea leverage and gross margin that I'll walk through. The primary driver of the decrease in gross margin was the continued growth in contact lenses from .7% in Q4 2022 to .5% in Q4 2023 and from .2% in full year 2022 to .6% in full year 2023 as a percentage of our total business. Expanding our contacts offering is a core part of scaling our holistic vision care offering and a key driver of increasing average revenue per customer. While contact lenses have a lower gross margin percent versus our other product categories, they are accretive to gross margin dollars given their higher purchase frequency and subscription-like purchase cycle. Contact lenses represent a $12 billion market and account for almost 20% of the optical market. Next, we saw -over-year deleverage in gross margin in two areas which represent the more portion of our cost of goods. These fixed elements of our cost of goods stack are retail occupancy and optometrist salaries which generally remain the same regardless of revenue. The first is from growing our store base .5% over the course of 2023 which naturally leads to an increase in store rent and depreciation from store build-outs. The second is from an increase in overall optometry salaries as we hired optometrists for our new stores. As of the end of 2023, we operated with 150 stores where we engaged directly with an optometrist and therefore recognized both revenue from exams and expense from optometrist salaries. These 150 stores compared to 114 stores at the end of 2022. We expect that our investment in eye exam capabilities in store will benefit us in the long term as it gives us greater control over the customer experience, enables us to recognize exam revenue, and results in higher product sales, conversion, and gross margin than non-exam stores. Offsetting a portion of these dilutive factors are a few creative tailwinds to margin. First, we continue to scale our progressive business which includes our highest price and highest margin products. 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. As discussed, there are many benefits we see from insourcing orders at our labs, including higher NPS, lower refund rates, faster turnaround time, and improved gross margin. Shifting gears to SG&A. As a reminder, SG&A for our business includes three main components. Salary expense for 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. Adjusted SG&A in the fourth quarter came in at $91.4 million, or .4% of revenue. This compares to Q4 2022 adjusted SG&A of $81.5 million, or .6% of revenue. The primary sources of deleverage in SG&A were an increase in media spend, as well as labor associated with our store expansion, which were partially offset by leverage in general corporate overhead expenses. Marketing spend for the quarter came in at $20.3 million, or .5% of revenue. This is up from $17.6 million, and 12% of revenue in the same period last year. In response to strong demand at the end of December, we opportunistically increased customer acquisition spend, which has contributed to positive momentum we're seeing in Q1. For the full year on an adjusted basis, SG&A of $358.6 million was up just .9% year over year. As a percentage of net revenue, adjusted SG&A was at .5% versus .3% of revenue in 2022, representing leverage of 470 basis points year over year. Turning now to adjusted EBITDA. In the fourth quarter, we generated adjusted EBITDA of $9.4 million, representing an adjusted EBITDA margin of 5.8%, which compares to adjusted EBITDA of $8.6 million, or .8% of revenue in the year ago period. For the full year 2023, we generated adjusted EBITDA of $52.4 million, representing an adjusted EBITDA margin of 7.8%, which compares to adjusted EBITDA of $27.2 million, or .5% of revenue for the full year 2022. This represents margin improvement of approximately 330 basis points, a meaningful increase on an annual basis. Our adjusted EBITDA margin was partially impacted by a moderate increase in media spend in December in response to strong customer demand that's continued into Q1 of this year. Turning now to our balance sheet. We were free cash flow positive in 2023 and ended with a strong balance sheet position reflecting approximately $217 million in cash, which we will continue to deploy deliberately to support our growth and operations. We also have a new upsized credit facility of $120 million, up from $100 million that we can increase to $175 million. Turning to 2024, before I get into the specifics of our outlook, I want to point out that we expect quarterly cadence of our results to look similar to 2023, with Q1 our most profitable quarter and Q4 our least profitable quarter as we spend into holiday and FSA demand. The one difference year over year relates to the profitability between Q2 to Q3. In 2024, we expect Q3 to be more profitable than Q2, given the outsized impact last year's brand campaign spend had on the third quarter. Now to guidance. While we are encouraged by our momentum at the start of this year, we still are maintaining a conservative stance on guiding our business given the broader macro economic environment. For the full year 2024, we're guiding to the following. Revenue of $748 to $758 million, representing approximately 12 to 13 percent year over year growth. Adjusted EBITDA of $67 million, which equates to an 8.9 percent adjusted EBITDA margin at the midpoint of our revenue range. Gross margin in the mid-50s as a percent of revenue. 40 new store openings. Looking at our channels, our revenue guidance at both the low and high end is based on our open 40 new stores in 2024 with an opening cadence similar to 2023. We're guiding gross margin to remain stable in the mid-50s as a percent of revenue, consistent with last year. We plan to continue to drive growth for both contacts and eye exams and offset the dilutive impact of these newer offerings by continuing to scale our glasses business and our progressives business in particular, as well as efficiencies achieved through our in-house optical labs. We also expect to see lower year over year growth from some of the more fixed components of our COG stack, including optometra salaries and store rent as the pace of dollar growth of these expense lines will naturally slow as we keep new store openings consistent at 40 new stores per year and as we to see utilization of eye exams ramp and mature. For 2024, we plan to see marketing remain in the low teens as a percent of revenue and we will continue to maintain a disciplined approach to operating expenses, which we expect will be reflected in SG&A continuing to drop as a percentage of revenue. We remain committed to expanding our adjusted EBITDA margin by approximately 100 basis points this year at the midpoint of our revenue guidance, which equates to $67 million and we plan to preserve flexibility to either allow incremental revenue to flow through to EBITDA or to reinvest in the business, including into customer acquisition. Finally, with respect to our outlook for 2024, we are forecasting stock-based compensation as a percentage of net revenue to be approximately 6% compared with .5% in 2023. Stock-based compensation for both years is above our long-term forecast as a result of the multi-year equity grants to our co-CEOs in 2021. We still anticipate stock-based compensation to normalize in the 2 to 4% range as a percent of next year. For Q1 2024, we're guiding to the following. Revenue between 195.5 million and 197 million, which represents growth of .7% to .6% year over year. This represents sequential top-line growth of approximately 21 to 22% from Q4 2023 to Q1 2024. Through February, we've observed 106% productivity in our retail stores on a trailing 28-day basis as compared to 2023. From a bottom-line perspective in Q1 2024, we're guiding to adjusted EBITDA of 19.5 million, representing a margin of approximately 10% at the midpoint of our revenue guidance. Thank you again for joining us this morning. We believe our unmatched value proposition, our ability to innovate, our multi-channel approach, and our strategic investments in both our brand and holistic vision care offering position us for long-term sustainable growth and margin expansion. With that, Neil, Dave, and I are pleased to take your questions. Operator, please open the line for Q&A.

Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2 to withdraw a question. When preparing to ask a question, please ensure your phone is unmuted locally. We now have our first question from Mark Oschweger from Baird. Please go ahead.

Great. Good morning, everyone. Thanks for taking the question. Maybe first for Neil or Dave, hoping you could give us a little bit more perspective on the eye care category backdrop, where you think we are on the replacement cycle. I know you said you're not anticipating any major inflections this year, but maybe you're seeing some green shoots given your commentary on the December period and the January activity. So just any more color there would be great.

Great. Thanks, Mark. I'd say we're encouraged by some of the demand signals that we're seeing, including at year end and so far year to date, other than when we had to close many of our stores due to extreme weather in January. However, we've yet to see a flood of pent-up demand, and over the last couple of years, we've seen periods of fluctuating demand. So we continue to guide and plan conservatively while remaining in position to capture increased demand as it spends and plan to deploy dollars as we see opportunity.

Great. Thank you. And then maybe just a follow-up as we think about the medium-term growth algorithm here. Real estate, you're planning to open 40 stores this year. Is that the right pace we should be thinking about medium-term or any opportunity to accelerate? And then guidance this year, 100 basis points roughly at EBITDA margin expansion. I know previously you've spoken to a target of one to 200 per year. So just any change to how we should think about that growth and margin algorithm. Thank you.

Thanks, Mark. This is Neil.

40 stores is a good algorithm for now. We're finding that that is a steady structure where we continue to open up stores on time, on budget, and continue to see strong paybacks and strong four-wall margins. So we've been planning for that level of store investment going forward.

And from EBITDA margin perspective, I think that the range that we've given for the foreseeable future is to drive adjusted EBITDA margin improvement of approximately 100 to 200 basis points each year. And so we're targeting roughly 110 basis points of adjusted EBITDA margin improvement for this year from .8% to 8.9%. The majority of that improvement will really be driven within SG&A, within corporate expenses, and within some of the other expenses associated with servicing the customer, the retail salaries and customer service salaries. Given we're projecting gross margin, we'll stabilize in the mid-50s, similar

to the guidance that we gave last year for gross margin. Thank you. Best of luck this year.

Thank you very much. We now have our next question from Edward Ruma from Piper Center. Please go ahead.

Hey, good morning, guys. A couple quick ones for me. First, I know you guys have been adding more premium frames to mixed material. We'd love to understand kind of what the uptake has been there. Does it give you kind of the same lift as you get, I think, with progressives from a margin perspective or dollar perspective? And then also just a quick follow-up on the restructuring charge. Just want to make sure I think it was just a million. I think that kind of fell from the restructuring earlier in the year, but we'd love to understand that and kind of why it fell in the fourth quarter.

Thanks. Thanks,

Ed. First, we'll sort of tackle the question about our assortment. We plan to have 20 collections this year. As you mentioned, we continue to introduce innovative designs and different materials and different lens options. We have seen our customers gravitate towards these and haven't seen any sort of price resistance. When we look at the market, according to the Vision Council, average -of-pocket spend for even those vision insurance customers is $203, which is higher than our glasses ASP. We also even have room to increase our glasses ASP. Even for -of-network customers, they'll continue to save with us. I just use that as an example of how we continue to provide exceptional value. As we've introduced higher price point items, we still work off of the algorithm of how can somebody pay a fraction of what it would cost elsewhere.

And that $1 million restructuring charge, it really is an aggregate of reserves to cover various legal cases that we're in the process of dealing with or settling. It's a round number we estimate will cover all of those various cases.

Thank you.

Thank you very much. We now have our next question from Mark Mahoney from Evacor. Please go ahead.

Okay, two questions, please. The marketing spend or intensity seems to be pretty consistent in 24 versus 23. I know you talked about increasing your marketing spend. I just assume that means just an absolute dollars. Any change in your thinking on channels that may be more or less effective than what you did this last year or two? And then secondly, your guidance. So you've got this kind of decelerating growth in your guidance. Your Q1 outlook has faster growth than your full year guidance implies. I don't think it's an issue of tougher comps. So if you're able to hit your Q1 numbers, why would growth decelerate as you go through the year? Thank you very much.

Sure. I'll start off with the marketing spend as a percent of revenue question. We're planning to keep marketing spend as a percent of revenue consistent in the low teams, and that will naturally let us see marketing spend dollars comp up year over year. $90 million at the high end of our guidance, assuming 12% of revenue, which is fairly consistent with where marketing spend landed for the full year here. But for us, marketing spend in the low teams means somewhere between 11% to 13%. So 12% would be a safe number to use for now. In terms of our guide, we are still projecting the business with some level of conservatism because we think it's the prudent thing to do in this macro environment. We are guiding to 11% to 13% for the full year, but we're seeing very positive trends in the business through Q1. So that gives us comfort, giving a guidance range that is appreciably higher than the full year guide. So we're guiding to .7% to .7% for the quarter. And as the year progresses, we'll hopefully look to revisit our full year outlook. But for now, we're guiding conservatively and feel very confident with the numbers that we're putting out for Q1, which are a notch higher than the full year. Okay. Thank you, Steve.

And then as we just think about our marketing mix, we've been pleased by the returns that we've seen from our increased marketing investment, and we'll continue to deploy dollars opportunistically. During the periods of lower demand in the category, we did shift a lot of our marketing towards paid search and towards linear TV. And then over the past year, we've started to redeploy dollars into paid social, into streaming, into influencer and creator marketing to good success. So you'll see us continue to diversify and invest more in those channels, which we did -a-vis 2019 and prior.

Okay. Thank you.

Thank you very much. We are now to our next question from Dana Telsey from Telsey Group. Please go ahead.

Hi. Good morning, everyone. As you think about the gross margin component, Steve, and the puts and takes, especially as more eye exams are added and the benefit from attachment sales, how do you think about the buckets of expenses and growth for each of them as we go through 2024? Is there any difference in cadence as we move through the year? Thank you.

Yeah. Thanks for the question, Dana. We plan to see consistency in growth from our glasses category. And as I think we've observed in 2023, we saw a moderate re-acceleration in growth for glasses while we continued to scale both contacts and eye exams significantly. We plan for more moderate growth, but still strong growth within contact lenses and eye exams as we scale these still new product categories while we maintain a very consistent glasses growth profile. And as scale progressives and precision progressives in particular, we think that the puts and takes of higher glasses margin will help to stabilize some of the leverage that we've seen from contacts and eye exams. And within the other elements of our cost of goods, the more fixed components, i.e., optometry salaries and store rent expense, given we're opening a consistent number of stores, i.e., 40 new stores per year, we'll naturally see a slowdown in -over-year dollar growth and eye doctor salaries and store rent. So we'll see less deleverage from those categories. In addition, we're projecting for the first time since 2021 that EECOM will comp positive in the low single digits. So that will no longer be a source of deleverage, which really accentuates the fixed cost nature of our COG stack as we calculate gross margin.

Thank

you.

Thank you very much. We now have our next question from Oliver Chan from TD Cohen. Please go ahead.

Hi there. This is Katie on for Oliver. Just kind of on that birth and health announcement, what is the long-term revenue opportunity with doubling the number of people that are in network for Warby Parker? And then I've got a follow-up as well. Thank you.

Great. Yeah, we're very excited to announce this new partnership with Versant Health to add 50 million incremental lives later this year. And overall, we've seen a lot of strength from our insurance business due to increasing utilization, in part stemming from some of the tools that we've built, like our universal eligibility check and education for consumers on how they can use their insurance benefits with us. And so, our existing insurance business has been a source of strength, and we're excited to nearly double the number of people who can use their in-network benefits. Right now, we kind of haven't modeled in the positive impact from this future lives into our projections and guidance for the year, but plan to update you all in the quarters.

Okay, got it. Thank you so much. And then my follow-up is really around traffic and conversion during the quarter. Could you just talk a little bit about the cadence that you saw?

Thank you. Sure.

So, we're excited about sort of the growth and the momentum that we're seeing in sort of Q1 today. Then you can see some of that in our Q1 guide. But we are seeing deliberate customer. We saw some of the return to normalcy a little bit during the FSA period, and we continue to see those customers sort of coming into our stores familiar with the brand, excited about the assortment that we have and taking more and more advantage of our sort of holistic vision care offering, including exams and contacts. So, we continue to see strength and conversion, and at least here in Q1 have seen some

improvements to traffic. Thank you.

Thank you very much. We now have our next question from Brooke Roche from Goldman Sachs. Please go ahead.

Good morning, and thank you for taking our question. I was hoping you could elaborate on your priorities for driving accelerated top-line growth versus optimizing efficiency on marketing spend and other investments. As you look ahead, what factors are underpinning your decision to reinvest some of those top-line performance quarters into additional investments, including marketing versus flowing that through to the bottom line? Thank you.

So, as we think about our growth priorities, one is opening up the stores that we know are highly productive. The second is deploying marketing dollars more efficiently, deploying marketing dollars efficiently, and we're copying off of a period last year where we cut marketing pretty substantially, and as we've reinvested in marketing, we're seeing a good efficiency, and as we continue to see very consistent repeat purchase behavior and even expanding customer lifetime value, we recognize that every new customer is a good investment. So, you'll see us invest more in marketing this year and have that flywheel going as we reinvigorate growth and start to return to a growth profile that we had pre-pandemic. So, you'll continue to see us experiment more from a marketing perspective. You'll continue to see us deploy across these multiple channels. The advantage to the structure, the marketing structure that we've built is that those dollars can be increased or decreased on a very short-term basis, so we're able to respond very dynamically to market conditions, and we've also found just incremental margins through higher growth, especially as we look at our gross margins and the fixed components of those, including store rent and optometry salaries, and as we just look at expanding our adjusted EBITDA margins, that's really going to come from leverage over operating expenses, in particular corporate expenses, so we think that investments in marketing will continue to drive margin expansion.

Great, thanks, and just a quick follow-up, are you seeing any notable differences between your urban and suburban market locations, whether that's customer acquisition, retention, or marketing efficiency?

We're starting to see the gap narrow from what we saw, for example, a couple years ago. That being said, we are investing more in suburban areas, and in suburban areas, right, we tend to see more families, we tend to see higher progressive penetration. I should also note that our new stores have exam capabilities, so the exam capabilities are also driving higher AOV, right, we have more exam sales, more contact sales, more progressive penetration, so there's a little noise in that, but the good news is that we're seeing strength both in suburban and urban locations.

Thanks so much, I'll pass it on.

Thank you very much, we will now take the last question from Alex Stradon from Morgan Stanley, please go ahead.

Perfect, thanks for taking the question. I wanted to talk a little bit about the store and the EECOM opportunity going forward. I think you said stores were doing about two million a box or so, I'm just wondering where do you think that goes over over the long term, and then with EECOM returning to growth this year, I think that's what you said, how do you think about the right size of business over time? Thanks a lot.

So

for our stores, right, we've seen a lot of consistency and we continue to see sort of growth, so we plan to continue to see expansion from that two million, 2.1 million going forward. Again, we have these tailwinds at our back from exams, from contacts, from progressives penetration, and now also from insurance and nearly doubling the number of in-network lives, and we know that those customers tend to spend more than non-insurance customers. As we think about our E-commerce business, right, that will be copying positive going forward and no longer sort of be a drain from a top line perspective, but also from a bottom line perspective as we've seen growth normalized there from the outsize growth that we saw during the pandemic. The category will always have lower E-commerce penetration than many other categories because of the prescription nature, because of the infrequent purchase process, because of just the unique challenges of buying glasses, but we'll continue to be a leader in driving overall penetration in the category and continue to roll out new products and features, whether it was the first of its kind true to scale virtual try on that we have that we continue to employ, whether it's our virtual vision test that will just continue to make it easier and easier to shop online. At the end of the day, we view our business in an omni-channel manner and we see folks go back and forth between channels, so you may see increasingly more repeat purchase behavior online from folks that may have gone in the stores to start. In particular, we see that a lot with contacts, but we also see it with glasses as well, so you'll continue to see sort of growth in

E-commerce. Thanks a lot. Good luck.

Thank you very much. This is the end of the Q&A session. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.