Kits Eyecare Ltd.

Good morning and welcome to the Kids Eye Care 4th Quarter 2024 Earnings Resolved Conference Call. This call is being recorded and available later today for replay. Your hosts today are Roger Hardy, Chief Executive Officer and Co-Founder of Kids Eye Care, Joseph Thompson, Chief Operating Officer, and Zee Choo, Chief Financial Officer. Before we begin, I'm required to provide the following statement respecting forward-looking information which is made on behalf of KITS and all of its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by the use of words such as intend, believe, could, expect, estimate, forecast, may, would, and other words of similar meaning. This forward-looking information is based on management's opinions, estimates, and assumptions in the light of their experience and perception of historical trends, current conditions, and expected future developments, as well as factors that they currently believe are appropriate and reasonable in the circumstances. Actual results could differ materially from a conclusion, forecast, expectation, belief, or projection in the forward-looking information, and certain material factors and assumptions were applied in drawing a conclusion, or making a forecast or projection as reflected in the forward-looking information. Management cautions investors not to rely on forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in the KITS filings with the Canadian Provincial Security Regulators. During today's call, all figures are in Canadian dollars, unless otherwise stated. And with that, I'd like to turn the call over to Mr. Roger Hardy. Thank you. Please go ahead.

Thanks, Operator. Good morning, everyone, and thank you for joining us today. As we close out another phenomenal quarter and year at KISS, I want to take a moment to reflect on the journey we've been on together. Our vision from the very beginning has been to revolutionize the way people access high-quality eyewear, making it easier, faster, and more affordable. Over the years, we've built a model that not only resonates with customers, but also continues to gain considerable momentum, driving record-breaking results quarter after quarter. This past year, we pushed the bar higher than ever before, whether it was sharing numerous record-breaking revenue weeks, launching new innovations and partnerships, or expanding our offerings in both glasses and contact lenses. Every milestone we've achieved has been a direct result of our team's relentless dedication, creativity, and execution. I want to take a moment to extend my deepest gratitude to the entire KITS team. Your passion and commitment are what drives this company forward, and our success is a reflection of your hard work. This strong foundation base combined with the team's continued execution has resulted in reaching nine consecutive quarters a positive adjusted EBITDA. Now, turning to our financial performance, during our last earnings call, we set expectations for Q4 revenue to be between $43 million and $45 million, with a target adjusted EBITDA margin of 3% to 5%. I'm pleased to share that we delivered $44.8 million in revenue, representing 42% organic year-over-year growth. For the full year, revenue reached $159.3 million, up 32% from the prior year. We also exceeded our Q4 adjusted EBITDA goal, achieving 6.5% or $2.9 million, with full year 2024 adjusted EBITDA reaching $6.4 million, an increase of 182% compared to 2023. We closed the quarter with net income of $2.7 million, and earnings per share of $0.09. Additionally, we generate $3.8 million in positive cash flow from operations and ended the year with approximately $19.3 million in cash, providing us with significant financial flexibility as we move into 2025. Our momentum has been driven by several key factors, including the growing awareness and strength of the Kits brand, a commitment to continuous innovation, and strong customer demand. In 2024, we significantly expanded our Kits branded eyewear lineup, providing our customers access to over 7,500 eyewear styles. Highlights through the year included introducing smart glasses and launching tailored collections like Kits Pixa and the Kits Classic Sport line, enhancing both style and functionality for our customers. These strategic moves resulted in over 60% year-over-year growth in our glasses segment. We also saw continued strength in our contact lens business, led by innovations like Kits Dailies and Kits Colored Dailies. Our auto-ship subscription program played a key role in driving category-leading repeat revenue and further cementing our relationships with customers. Customer loyalty remains one of our most powerful growth drivers, with 63% of our Q4 revenue coming from our existing core customer base, demonstrating the stickiness of our brand. At the same time, we welcome 79,000 new customers in the quarter, contributing a record $16.6 million in revenue, a $6.1 million increase year over year. This reflects not only the strength of our value proposition, but also the trust our customers place in kits as their preferred eye care providers. Beyond product innovation and customer growth, we're also leveraging technology to enhance every aspect of our business. AI-driven efficiencies are now embedded in our marketing, customer service, and fulfillment operations, allowing us to better anticipate customer needs, streamline the purchase journey, and improve satisfaction. Early results are highly encouraging. We've seen higher customer engagement, improved conversion rates, and a noticeable boost in our Net Promoter Score, which remains our North Star for customer satisfaction. Looking ahead, we remain focused on executing against our long-term vision. For Q1 2025, we expect our momentum to continue with revenue projections between $46 million and $48 million, and an adjusted EBITDA margin of target between 4% and 6%. Once again, I want to thank our customers, our partners, and most importantly, our incredible team of kits for another record-setting year. We are more excited than ever about what's ahead for kits. With that, I'd like to hand the call over to Joe, who will provide further details on our operations performance. Joe?

Thanks, Roger. At KITS, we are building a culture of growth. With the guidance for Q1 that Roger just shared, we are on track for a 10th consecutive quarter of greater than 30% organic revenue growth on average. And alongside this revenue growth, we've added growth in other critical parts of our operations. We focused on building a strong working capital mindset and have grown at industry-leading rates while generating $13 million in cash flow from operations in 2024. On top of this consistently improving platform, Kit saw a number of operational milestones in Q4. We passed the $1 million mark in glasses shipped since inception in Q4, only a few years after the launch of our glasses business. And in a competitive Black Friday and Cyber Monday period, we celebrated a record-breaking week with $4.3 million in revenue ordered, highlighted by a $1 million day of revenue ordered on Black Friday. But having a growth culture doesn't just mean delivering the year or the quarter. It means investing now for the growth to come in 2025, 2026, and beyond. In 2024, we planted a number of seeds that we believe will bear fruit for years to come. For instance, in Q1, we expanded our digital progressives offering, extending our range of industry-disrupted selection at the $28 to $38 price point, which includes a prescription lens, And we saw breakthrough in influencer marketing, which drove word-of-mouth-led revenue growth while keeping marketing costs low. In Q2, our refreshed virtual try-on tool saw another record with over 1 million sessions. We launched our Kit's daily contact lens full lineup, and we announced our breakthrough API-led partnership with Teleself. In Q3, we launched our smart glasses category, including the Kit's Pangolin smart glasses. We expanded Kit's contact lenses to color. And we introduced a membership program for glasses called Kits Plus. And in Q4, we expanded our selection of designer frames. And we launched a customizable line of frames with the Kits Pixel lineup featuring Kits Bits. We continue to be driven by the mission to make eye care easy. And for us, that means having a deep understanding of what it is that customers love about the Kits experience, making sure customers get that experience every time, ensuring that the experience will scale as we grow. At KITS, this means making it possible to find and buy a fabulous pair of prescription glasses or contact lenses in under five minutes. It means having access to almost any prescription lens and frame for under $50. And it means getting your order in one to two days and loving them on first sight. There's a magic here when we do this. We take an experience that has traditionally put all your shortcomings on display and has cost a lot of money and taken a lot of time, and we've made it simple. With consistent execution at this level, we believe we will continue to earn the trust of customers for life. I'll now turn the call over to our CFO, Zee, for further details on our fourth quarter financial results.

Thanks, Joe. We are very pleased of strong financial performance in the fourth quarter, driven by operational efficiency across our business. in Q4 2024 continued to scale efficiently while optimizing costs, fulfilling 14% more orders compared to Q4 2023 while reducing fulfillment costs from 12.6% to 10.6% of revenue. This operational improvement significantly enhanced cash flow generation, reinforcing our disciplined expense management and overall financial strength. Our fulfillment team executed well with fulfillment expense as a percentage of revenue declining to 11.1% for the full year 2024 compared to 12.6% in 2023. By optimizing shipping logistics and order consolidation strategy, we leverage higher order volumes to drive greater operation efficiency. Our vertically integrated optical lab remains a key competitive advantage, ensuring high quality production while mitigating broader industry supply chain disruption. Marketing expenses percentage of revenue were 14.6% in Q4, driving a 41.6% year-over-year revenue growth, demonstrating strong returns on customer acquisition and engagement. Despite the traditionally promotional nature of Q4 advertising campaigns, we effectively increased brand awareness and customer acquisition. New customers contributed approximately 37% of revenue, up from 33.5% in the prior year. For the full year, Marketing expense as a percentage of revenue declined to 13.7% down from 14% in 2023. This reflects our disciplined approach to marketing spend optimization and our focus on executing targeted brand campaigns to drive awareness. In 2024, we served over 300,000 new customers while continuing to strengthen our market position. G&A expense continued decline as a percentage of revenue from 6.7% to 5.8% in Q4 2024 and from 6.7% to 6.5% for the full year. This demonstrated our ability to scale efficiently and leverage on our existing infrastructure while maintaining disciplined costs and resource allocation. This efficiency enabled us to support business growth while effectively managing operational costs. Our gross margin increased to 36.3% in Q4, up from 35% in the prior year period, driven by targeted discounting and promotion aimed at acquiring higher value new customers while retaining repeat buyers. Despite intensifying competition and pricing pressure in the industry, we maintain a gross margin of 33.7% for the full year, compared to 33.8% in 2023. Our ability to manage pricing, product mix, and promotion any but I to try for you and people cheetah what could have been strong financial result this quarter my night when they record a positive adjusted it up which increases 2.9 million compared to 0.9 in a prior year at 6.5 percent of revenue and get that you got it you know all range affecting attorney eighty-eight point increase year-over-year a testament to all but I think it's just a positive that the continent scale We are committed to making investments that align with our long-term vision of sustainable growth and enhanced financial performance. We are committed to operational excellence, innovation, and customer-centric strategies. This will position us to drive long-term shareholder value and strengthen our competitive advantage. I will now turn the call over for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star 4 by the 1 on your telephone keyboard. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star four by the two. And if you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Najib Islam from Canaccord Genuity. Please go ahead.

Sure. I'm speaking in for Luke. So on the new pricing strategy, is the migration towards the higher price tiers primarily coming from customers that were purchasing glasses at $28 a pair or from customers that would have purchased branded frames otherwise?

Hey, good morning, Jeeb. Yeah, thanks for the question. It's a mix. So we did see a number of new customers come in in the quarter. And what you see in the notes is revenue from new customers in Q4 in particular was up over 50% year on year to about 16 million. And that was led in part by a big AOV growth led by glasses, which was AOV growth on glasses was up over 75% in the quarter. And so what we did see was a lot of digital progressive new customers coming in. We saw a number of new customers coming in and taking lens upgrades. Both of those categories were up over 60% year on year. And we saw a number of repeat glasses customers that were coming in and we're seeing lens upgrades with them and multiple purchases. So really a mix.

Sure. Got it. And I remember you touched on this a bit on the prior quarter. So has any of the sourcing channels changed now that tariffs are in place and what's kind of going on there?

Sure. Yeah. It's something we're watching closely and evolving by the day and really by the hour. The work that our team has done is to identify for every source channel and component we buy, we've identified clear alternatives and we're ready to execute those alternatives as necessary to ensure no disruptions to our customers or our business. In some cases, that means alternative sources. In some cases, that means having products and suppliers in the U.S. But expect us to be on top of any change and our goal is to be well ahead of the market on this.

Sure, got it. And then last question. So on the AI initiatives you're rolling out, are there any financial targets you can share on how much costs are expected to take out of the business?

Yeah, and we touched in the prepared remarks on some of the initiatives that we've already seen. And it'll be a blend of initiatives that drive leverage on our operating lines. We saw continued leverage and fulfillment in G&A. And we expect to blend that out with additional AI initiatives in 2025 and 2026 that improve ability for customers to find the product they're looking for quickly, find the fit they're looking for quickly. And we'll see our anticipation and our view is that we'll see AI continue to drive more upsell opportunities, more gross margin opportunities, and to make it easier for customers to repeat as well. So I think on this one, too, it'll be a blend of gross margin appreciation and repeat appreciation together with a little bit of leverage on the operating lines. Let me just pause there and check with Roger and see if there's anything else to add.

No, I think that makes sense. We're also thinking that we'll see some improvements in the overall customer journey, customer experience.

So, yeah, I think that covers it. Thank you.

Thank you.

Thank you. And your next question comes from the line of Kyle McPhee from Cormac Securities. Please go ahead.

Everyone. First, I want to get a little bit more detailed on the tariff question there. So KITS has pockets of the business that are not impacted at all, and then pockets of the business that are impacted. Can you address the supply chain changes you plan on implementing to circumvent the tariff impact for that main impacted pocket, which is your contact lens sold in the U.S.? So what are you going to do? What kind of timing is it? And what would the budget for something like that be?

Hey, Kyle, it's Roger. You know, Kyle, we're not at this moment anticipating any impact from any of the tariffs that have been discussed up until now or implemented. We're not seeing, as Joe said, we've got a number of different scenarios in place that will manage any tariffs that come on stream. We think that probably costs... stay consistent and we're not expecting any increased costs if tariffs come in line. So just want to make sure we're clear on that. We're not expecting any impact as of now. If that changes, we'll certainly update shareholders and investors.

You know, you already have a way to basically keep all the contact lenses in the U.S. before selling them to your U.S. client? Or are they still kind of crossing the border?

We've got enough scenarios set up that we're not anticipating any impact, whether it's in Canada or within the U.S. Thank you. Okay, thank you.

And then... Can you speak to how your marketing spend and marketing campaigns may play out during 2025? In the past, we've talked about a lineup of city takeovers, city marketing blitzes. What's the timing for that type of tactic, and do you have an updated view on how this tactic might impact your marketing budget? We're seeing nice EBITDA margin expansion. Do you think that reverses at all on account of this type of tactic?

Hi, Kyle. Yeah, it's a campaign that we call Own This Town, and you bet it's still in our plans for 2025. And we're excited as we continue to roll out new markets with Own This Town to share that news and to share those results. To your question on marketing costs, we've been pretty stable on marketing costs. They didn't go up moderately in Q4, and this is something we had anticipated. As Q4, we were up about 40 basis points year on year in Q4 on marketing. In Q4, marketing is typically a little bit higher with holiday premiums and particularly during the election year. We do anticipate marketing actually to moderate down in Q1 or Q2 and Q2. As a percentage of revenue, you know, one of the benefits of Own This Town is that we can really consolidate our marketing on one market and really build that awareness and adoption and then rely on our retention engine, which has, you know, continues to deliver over 60%. of revenue to bring those customers back again and again and turn those customers into lifetime customers. And a bit of an unfair advantage we have is that we start across North America with nearly a million contact lens customers. And so in any given city or market, we already have a base of KITS customers buying contact lenses that we start from. So in that specific market, there might be an increase in marketing, but across the overall business, we don't anticipate big increases. Thank you.

Got it. Okay. And then one last follow-up. In these regions where you have more penetration, more customer density, Are you noticing a materially lower customer acquisition cost? You know, maybe because when you have that density, something like word of mouth really starts to take over in this type of category. Like, is there a big spread of customer acquisition costs where you have density versus where you don't? Maybe a preview of where this metric goes overall for kids going forward?

Yeah, you bet. That is, and that's one of the drivers to, you know, to the On This Town campaign. And, you know, as a movement starts and, you know, if you see you know, one or two other folks wearing KITS glasses and, you know, they're talking about the experience, you know, you're more likely to give KITS a chance for the first time. And so, you know, really building that awareness, building that movement, building that density market to market, you know, we have a, you know, we're very happy with our glasses business. And you heard about the results this morning, you know, up 60% in the quarter and, you know, continuing to grow. But really, we only have density and you know, in one or two markets right now. And so as we think about expanding that density and, as you said, that movement and that efficiency from an acquisition cost across, you know, 10 to 20 markets in North America in the coming years, I mean, we're really excited about that.

Okay. Thanks for the answers. That's it for me.

Thank you. And your next question comes from the line of Martin Landry from Stifel. Please go ahead.

Hi, good morning, guys, and congrats on an impressive year.

My first question is on the consumer confidence in Canada. It's not that strong given the macro environment, and I'm wondering if you're seeing any changes in your KPIs, any change in churn or in acquisition costs, in add-ons, in upgrades, Just what's your view of the customer landscape right now, and is there any impact to your business?

I think, Martin, thanks for your comments. I think phenomenal fourth quarter, strong end to the year. Just great work by the team in terms of acquiring record numbers of new customers and maintaining record numbers of return customers. tight control on OPEX, a little uptick in marketing, which you and I talked about, somewhat related to more election noise, I would say, in the market. And then as it relates to consumer confidence, I think we're seeing customers trading into value and into innovation. We're certainly not sacrificing on quality in anything we do, so customers are choosing us for quality. They're choosing Kits the name for value, and I think it's resonating. So, no, I don't think we're seeing anything that would lead us to believe that, you know, overall the category is resilient, it's probably worth saying. You know, vision care remains non-discretionary, so people need to see. As, again, you and I have talked about in the past, people wake up and when they need contact lenses, typically a few days later than they would have liked to have had them, and time is of the essence. So we're not seeing any change in that consumer behavior, certainly as the year ended and as the quarter finished up so well.

Okay, and then how do you see 2025 evolve?

You know, do you have any large investments planned? Any, you know, costly marketing campaign that could, you know, impair your profitability? Or like, could we expect your guidance for Q1 in terms of the margin of four to 6%? Is that repeatable? for the remainder of the year, any call-out would be great.

Yeah, I mean, you know, and I guess a good call-out, we've given guidance for Q1, which, again, is very steady growth over last year, between $46 and $48 million with 4% to 6% EBITDA. So those numbers are good, solid progress. Historically, we were looking at 3% to 5% EBITDA while growing aggressively. we're now comfortable moving that up to between 4% and 6% for Q1. Presumably, we don't anticipate going backwards. Like I said, record number of returning customers continues to fuel high average order values, growing gross margins, growing EBITDA margins. So over time, You know, our expectations are that we keep acquiring new customers in record numbers. We keep returning customers at record numbers. And, you know, that will flow through to EBITDA. So no other catalyst that I see. I'll turn it over to Joe in case he's got something to add there. Joe, anything else you want to hit on?

Yeah, good morning, Martin. I think just in terms of your question on CapEx for 2025, you know, We aren't forecasting a change in CapEx as a percentage of revenue. In 2024, it was about 1.9%. So no increase in 2025. The CapEx has largely been deployed, and we're excited to grow into that. And I think, as Roger said, we're delighted to show steady progress year on year, each quarter on EBITDA. Each quarter is a little different. And so in Q4, we were 6.5% up 380 basis points. And in Q1, you know, on track for this again with our 4.6% adjusted EBITDA guide this morning, which is up from 1.8% in Q1 2024. You know, we'll just, you know, continue on and towards the next threshold and then the threshold after that.

Okay, and then maybe just last question, you know, your cash is accumulating, your debt is going down, you're going to be in a net cash position pretty soon. What's the plan with your balance sheet? Like, what are the priorities in terms of... capital deployment. Would it be M&A? Would it be dividend? Because you did speak about M&A last year, and that narrative seems to have paused a little bit. So just trying to understand a little bit what's the plan with the capital. It's a good problem to have, but I'd like to just know a little bit what are your priorities.

Yeah, I think... Martin, you make a good point. Capital is starting to accumulate. We're going to be productive with it. We've looked at a number of different possible transactions in terms of M&A. We're not seeing anything that really gets us that excited in this moment, and certainly not at the pricing that's out there. I think the key for us is for us to do anything in M&A, it needs to be a creative, and it's as you probably well know, very difficult to find other businesses growing in the high 30s and 40% range with growing gross profits and growing EBITDA the way we have. Almost anything that we look at would become a drag on our business. We spend a lot of time thinking about synergies. Where would there be synergies? What would help us grow and really be creative to the overall exercise. So in that vein, you know, as we think about capital, the best use of capital in our mind would be our own stock. You saw us buy back a little bit of stock last queue in the NCIB. You know, maybe look for us to continue that. But phase one is like you said, it's just pay down the rest of the debt. It's almost gone now. We've got, you know, it's a minimal amount of debt under $5 million now. And so we're pretty comfortable. Keep paying off the debt, and then we'll find a productive use of that capital. You know, hopefully that gives you a sense.

Yeah, that's fine. Thank you, and best of luck. Thanks, Marte.

Thank you. And your next question comes from the line of Matt Caronda from Roth Capital. Please go ahead.

guys. Good morning. Um, we just wanted to see if you could speak a little bit more to the first quarter growth guidance. Um, anything you can call out in terms of trends on AOVs versus unit growth, glasses versus contacts, uh, new versus existing customers that's built into the first quarter guide. That'd be great.

Hey, Matt. Yeah, we're, we're not going to, um, break, you know, I think we've given, you know, good kind of, uh, guidance for, for Q1 and, and, um, There's obviously a number of moving parts inside that. We're not going to break them all out, but I'd say look for consistent growth in the contact lens business, growth in the glasses business, and growth in segments, and including that return customers. Like I said, we're continuing to see return record numbers of customers. I think we're just seeing consistent growth across channels and segments. We're being selective in acquiring the most valuable customers, the highest valuable customers. Those segments that we think return fastest with the best margins. I think the last piece is there's a lot of innovation fires burning and any one of them could be a catalyst for increased growth. Yeah, I think that's kind of how we're thinking about it. But I'm not going to get into breaking out, you know, just everything for Q1 at this moment.

Yep, fair enough. I did notice, I guess, glasses. It looks like unit volume may have picked up in the fourth quarter. So just curious if you can maybe speak to sort of the unit volume in glasses and the improvement there in the fourth quarter and sort of what we're seeing in terms of trends.

Yeah, sure. I would expect that to continue in Q1 on the unit volume side. You know, we think we have a good engine for acquiring net new customers in terms of lots of influencers, lots of word of mouth being generated organically. We're seeing that uptick. And so that steady growth in terms of net new glasses customers we think will continue. And again, we're seeing those record numbers of return glasses customers. So both continue to be strong.

Okay. And then maybe just on the gross margins, really good flow through in the fourth quarter. And obviously there's a mixed benefit from some incremental glasses growth in the fourth quarter. But maybe any other levers that you guys have at your disposal for the gross margin improvement line, maybe just wanted to see if you guys could call out if there's any scale benefit here in the near term as you sort of get that top line moving. Yeah, I mean, I think you're right.

There's really solid flow through from the OPEX, from fulfillment and G&A costs just continuing to come down as we keep scaling up the business. So the business is getting more and more efficient. And it does You know, I think we have a sense that we've, you know, and that's why you see the guide to 4% to 6% EBITDA. We don't think, and Joe touched on, no CapEx, no additional meaningful expenses. So the operation is getting more efficient. In fact, we're just seeing opportunities to continue to scale efficiency. So that's why we're comfortable with that 4% to 6% in terms of EBITDA. And, yeah, I think... you know, from the volume standpoint, as volume goes up, we're seeing improved efficiency leverage in both fulfillment and G&A. So I think those are kind of the keys. And then, as always, you know, to the extent we're doing a great job serving customers, we'll see that marketing line get more efficient. And that's probably where the, you know, the largest multiplier is, Matt, is that, you As Joe's talked about, we have brand awareness in one or two cities now. As we see that starting to amp up, the word of mouth makes marketing more efficient in those markets. I think we'll start to get more and more efficiency from those marketing dollars. You know, they've been remarkably efficient so far. Call out to the marketing team, you know, growth in the queue at even in an election quarter of 40 plus percent and 14 percent marketing while improving margins. It was solid. But yeah, so all that to say, you know, lots of shots on that. And, you know, we're looking forward to executing for Q1 here.

Okay, great. Maybe just, we touched on marketing for my last one. Curious if you guys could give any color as to how the Own This Town strategy rolls out throughout the year or anything you can give around sort of number of MSAs you might be targeting, how that kind of builds into later this year. I know Joe already mentioned sort of expecting a little bit better efficiency on marketing in the first half of the year. But how does that play into the on this town strategy for the rest of the year?

Yeah, Matt, we're excited to bring the next iteration of Own This Sound to market. Too soon to share too much on this call, but stay tuned. And we just continue to be excited about going market to market based on data, based on where customers are, not tethered to a legacy brick and mortar network and being forced to drive advertising around those stores. So we're very excited about it. And really, I would say, you know, stay tuned. And, you know, the comment on marketing, I think, you know, could not say it any better than the way Roger just put it. The team, you know, to deliver... A 50% increase on new customer revenue in Q4 with limited marketing dollars, a slight uptick, but nothing really significant, is an incredible accomplishment. And that's in a Q4 where costs are elevated historically and during an election year. And so based on some of those headwinds not being as much of a factor, we do expect marketing costs to moderate down, and word of mouth and influencers continue to make the business more efficient. So that's what I'd share.

Okay, awesome. Thanks, guys.

Thank you. And your next question comes from the line of Kian Luka from Heward Securities. Please go ahead.

Hey, good morning, guys. Congrats on a solid quarter and great outlook. Maybe I'll just continue on the margin front. Margin growth is accelerating very nicely. It seems like you're able to do more with less on the whole. I'm just wondering if there are any optimization measures you're enacting on marketing and if you expect this increased level of ROI to hold or even expand on that this year, Joe and Roger?

Yeah, maybe I'll start off and then pass it to Joe. Just from a high level, John Luke, one of the things that's interesting is if we look at kind of our web store as the same source sales being up 40 plus percent in Q4, and then we look at our physical store presence was up more than 60 percent in Q4. So we don't spend a lot of time breaking out the physical store, but as Joe's talking about kind of the own this town and You know, we look at others in optical, and I don't think they're seeing this type of, you know, it's just not resonating for them the way ours is. We've got a lineup out the door on the weekends. We're transacting in a day what most retail optical stores do in a week, and that's in one day. And so, you know, just kind of as we think about the Own This Town strategy, there are some, you know, benefits to having that physical presence that we're starting to see you know, whether that's in a pop-up format or in some other format, you know, I think the analysis is still being done. But, you know, just wanted to give you that color. In terms of marketing resonance, it's not necessarily about the efficiency of the spend. It's more about acquiring the right customer and then letting them tell the story for us. And that's what's really driving that type of traction. Joe, you got any more comments to add?

We just continued in Q1. The confidence we have in Q1 just has continued, and the lift the team is seeing from influencers continues to come through. We talk a lot about new customers, and the results were really impressive in Q4. The team did an unbelievable job bringing great, high-value customers into the Kits franchise. But in addition to that, we're very focused on retention. This business works in a spectacular way, and this category works in a spectacular way when customers come back. Because once you need vision correction, you need it for decades. And so our team, as focused as we are on and as happy as we are on those new customers and that new customer growth, we're equally focused on that second purchase and the third purchase and the LTV that we continue to see. I would say it's sometimes overlooked, Gianluca, it's easier to focus on the new customer and we're very happy with that. But I think our retention team and just a reflection of what the work that the fulfillment team has done to get those orders to customers in a day or two and to have them be perfect, that's what's driving our business as well.

Yeah, it's really a phenomenal growth and far exceeds any of the e-commerce players and even optical guys that I track. So keep up the great work. And then just secondly, as it pertains to the TELUS Health Partnership, Joe, Roger, can you give any context or any color on how that rollout has evolved through 2024 up until this point? And is it starting to generate meaningful revenues for you guys at this point, or is it still kind of early?

Yeah, strong and steady growth on insurance, a driver of AOV growth, a driver of retention, and a driver of marketing efficiency. So we continue to be delighted with our insurance customers. And in the recent period, up over 200%. And so, you know, we're continuing to build that out. But also, you know, our insurance partnerships have been, for the most part, focused on Canada. And so expect more news on, you know, throughout 2025 on expanding this success into the U.S. market.

That's amazing. Thank you, guys. And keep up the good work. Congrats. Thanks, Sean Luca.

Thank you. And your next question comes from the line of Devin Schilling. From Ventum Financial Corp, please go ahead.

Well, good morning. Maybe you guys can just provide an update on the Kits branded contact lenses. How has the uptake been thus far, and are you guys looking to expand this category further?

Yeah, thanks. It was a great quarter for the Kits contact lens brand. You know, good success in the dailies, good success in the colors. You know, we've even brought on some dedicated teammates to manage that business who's had good success out of the gate. So we're excited there. Joe, do you want to add anything more specific?

Sure, yeah. And good morning, Joe, and great to hear from you. You know, like all the seeds that we plant, you know, we set a milestone and then work to hit that milestone and then move to the next one. So, you know, we set the initial milestone for kits. to be greater than 5% of the category have surpassed that. Now on to the next milestone of 10% and then onwards from there. focused on all the things you'd expect us to be focused on, offering great value to customers, making sure that our retention is at or above the rest of the category, and continuing to innovate on new products. So, yes, delighted with that. It's still a small part of our business, but one of the seeds that we mentioned in the prepared remarks that we expect to be a driver of both growth, revenue growth and margin moving forward.

Yeah, and probably just to hammer home Joe's point, you know, it's a next generation silicon hydrogel lens, which is the newest technology, great oxygen transmissibility, so very healthy on a customer's eyes and very nice high water content. So it gives customers that initial wear comfort that they look for when they try on a contact lens. So it's a lens that's resonating with customers, especially when it's put head to head with a legacy product, more comfortable, more healthier on people's eyes. And, and then it's a, you know, it's a daily product. So ultimately the average order value goes up and it's margin accreted for us, you know, on the first order. So it's, it's, it's been a nice addition to the toolkit. Thank you.

Yeah. Sorry. Did you break out what percentage of the contacts revenue is coming from the kits branded or is that not, not disclosed yet?

No, we haven't disclosed it yet. It's not yet over 10%. We'll put it that way. So it's a complementary, but it's not yet over 10%. Somewhere around 10%, we will break it out.

Okay. Yeah, no, that's helpful. Just one last question for me. On the glasses side, you guys mentioned from going from a single-tier $28 model to a more diversified pricing structure. Is this referring just to lens upgrades or are there other premium features being added?

Yeah, Devin, we'll expect us just to continue to bring new products to market. And we have a great selection base of $28 products available to customers that includes a prescription lens, roughly 90% less than what we see on average in the market of on average $350 for a pair of prescription glasses. We also have innovated into a $38 price point and in some cases a $48 price point. And so, you know, still offering and some of those would be like the titanium rimless line of glasses, which has been very successful for us and compares to a $600 or $700 pair. that you could find in retail. So expect us to continue to expand selection and going very wide on selection but shallow on our inventory buy as a style or frame gets traction. And then continuing to innovate and offer customers in and around 90% savings. versus what they could see in brick and mortar. And then, you know, you're right, on top of that, we are seeing lots of lens upgrades. Lens upgrades, as a category, we're up over 60% year on year in Q4. And, you know, there's a number of drivers of that. Some customers are choosing a thinner lens, some blue blocking continues to be a big driver, blue light glasses, and digital progressives, of course, is a growing force in our lineup.

Perfect. Yeah, no, that's all for me, and congrats on a fantastic year. Thank you.

Thank you. There are no further questions at this time. I will now hand the call back to Mr. Roger Hardy for any closing remarks.

Thank you, Operator, and thanks to everyone for joining us today. We're grateful for the ongoing support from all our stakeholders as we work to make KITS the leader in the eye care industry. I'm confident that our strategy, combined with the exceptional talent across our team, positions us well to continue our strong growth momentum. The foundation we've built gives us a unique platform to drive innovation, expand our reach, and deliver meaningful value to our customers and shareholders. 2025 is already shaping up to be another milestone year, and we remain focused on executing our profitable growth initiatives as we continue to create long-term value. Thank you all for being with us today, and have a great day.

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.