Warby Parker Inc.

Hello everyone and welcome to the Warby Parker second quarter 2024 earnings call. My name is Seb and I will be the operator for your call today. If you would like to ask a question during the Q&A session, please press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. I will now hand the floor over to Jacqueline Barkley to begin. Please go ahead.

Thank you and good morning everyone. Here with me today are Neil Blumenthal and Dave Bilboa, our co-founders and co-CEOs, alongside Steve Miller, Senior Vice President and Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release and slide presentation are available on our website at investors.warbyparker.com. During this call and in our presentation, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors, in the company's latest annual report on Form 10-K. These forward-looking statements are based on information as of August 8, 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 US GAAP. A reconciliation of our non-GAAP measures to the most directly comparable US 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.

Thank you, Jacqueline, and good morning, everyone. We're pleased to share that our team executed another strong quarter in Q2, delivering net revenue and adjusted EBITDA ahead of the high end of our guidance while making strong progress against our key long-term strategic initiatives. On a year-over-year basis, We grew net revenue 13.3% to $188.2 million and improved gross margin 140 basis points to approximately 56%. We also grew adjusted EBITDA nearly 40% to $19.6 million, representing a 10.4% margin and generated $14 million of free cash flow in the quarter. When we introduced our 2024 plan, we called out three notable differences that we expected this year relative to the previous couple years. The first was increased marketing spend to drive in acceleration and customer growth. The second was returning our e-commerce channel to positive growth. And the third was to significantly expand our insurance offering. Halfway through the year, we feel great about our progress against these goals and are happy to report our fourth consecutive quarter of improving active customer growth our highest quarterly e-commerce growth since Q1 of 2021, and progress on our insurance expansion, which we will speak to shortly. Amidst the challenging consumer and optical backdrop, our Q2 performance indicates we're continuing to take share and drive consumer demand. Importantly, our results also demonstrate our ongoing commitment to driving sustainable growth as we continue investing in customer acquisition and brand building, while expanding both adjusted EBITDA and pre-cash flow. Based on our second quarter performance, we are raising our full year guidance for both net revenue and adjusted EBITDA and now expect to deliver $72.5 million in adjusted EBITDA at the midpoint of our guidance, which represents 170 basis points of margin expansion. Before Steve provides more detail on that later in the call, Neil and I will review the key drivers of our Q2 results. First, we continue to see positive momentum in our glasses business with an acceleration in growth versus Q2 of last year. We attribute the improvement in glasses growth to many of our core strategic investments, including marketing, expanding our store fleet and our exam business, and our product innovation. Given that glasses are our highest margin product, improved glasses growth is also an important driver of gross margin expansion in the quarter. On a year-over-year basis, We drove an acceleration in the growth of single vision glasses, which represent the majority of our prescription glasses business, driven by our marketing investments within channels like Paid Social, Streaming, and Influencer, which cater to our single vision customer. Glasses growth also continues to benefit from progressive penetration and the adoption of more complex lens types. Progressives overall still only represent 23% of our prescription glasses sold in Q2. and we believe there's a significant opportunity to increase penetration over time. Within the progressive category, we have seen strong uptake of precision progressives, which start at $395, including frames, lenses, and coatings, and offer customers better visual quality and comfort at a fraction of the price of what similar products often cost elsewhere. While we expect progressive penetration to remain higher in our stores than in e-comm, We only recently launched Precision Progressives Online this quarter to provide a more seamless experience for our customers. We also continue to expand our lens options to give customers more choice. Within our sun business, we recently introduced the option to add polarized and custom lens colors to non-prescription sunglasses and the ability to add additional anti-reflective coatings to prescription sunglasses. Options like these, in addition to lens enhancements like anti-fatigue, blue light and light responsive have contributed nicely to average revenue per customer. we're not only seeing customers buy more complex lens types we're also seeing them select higher price frames with more complex constructions like those in our recently launched Italian made diamond cut collection starting at $195. While the response to our new frames across multiple price points has been very positive, the majority of our frames are still sold at our accessible, all-inclusive $95 price point. The second key driver of our strong Q2 results was active customer growth, which has now improved for four consecutive quarters. Similar to Q1, we've been scaling our media spend across a variety of channels, and we've been pleased with the efficiencies we're seeing while maintaining marketing in the low double digits as a percent of revenue. We believe our diversified media model affords us significant flexibility, including the ability to stay disciplined while leaning into certain channels where we're seeing strong results. Looking ahead at the remainder of the year, we'll continue testing and scaling certain channels to drive store and exam awareness, as these are the top reasons that customers who are aware of Warby Parker have not yet shopped with us. Direct mail has shown promising results in this regard, complement our broader linear search, streaming, and influencer spend. As a result of our strategic investments in marketing and new stores, we ended Q2 with 2.4 million active customers, an increase of 4.5% on a trailing 12-month basis, while average revenue per customer grew 8.8%. We anticipate seeing active customer growth continue to inflect upward throughout the year. We know once we acquire a customer and deliver an exceptional Warby Parker experience, we see consistent retention metrics and repeat purchasing patterns across cohorts. For the most recent cohort, we had a revenue retention rate of roughly 50% over 24 months and roughly 100% over 48 months. Complementary to our core marketing efforts, we're excited to be able to serve even more customers through in-network and out-of-network insurance plans. Earlier this year, we announced an expanded in-network relationship with Versant Health, a wholly owned subsidiary of MetLife, which once fully integrated will bring millions of additional lives in-network with Warby Parker. Our integration with Versant Health is expected to be complete before our busy period at the end of the year. Given the time it takes for in-network awareness to grow and for customers to realize they can use their benefits at Warby Parker, we have not incorporated this into our guidance and expect it to be a longer-term tailwind over the next several years. In parallel to our in-network insurance initiatives, we continue to leverage our universal eligibility check tool in stores and online to help customers easily locate their in-network insurance coverage and average Adam Network benefits. Most Adam 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. And now, I'll pass it over to Neil to talk about additional growth drivers.