Kits Eyecare Ltd.

Good morning and welcome to the KITS iCare Second Quarter 2025 Financial Results Conference Call. This call is being recorded and available later today for replay. Your hosts today are Roger Hardy, Chief Executive Officer, Joseph Thompson, Chief Operating Officer, and Zhe Chu, Chief Financial Officer. Before we begin, I am 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 the 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 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 KIT's 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 a call over to Mr. Roger Hardy.

Please go ahead. Good morning and thank you all for joining us today.

We're excited to share our Q2 2025 results, which reflect continued execution on our mission to make eye care easy. Kits delivered strong performance in the second quarter, underscoring the durability of our model and the distinctiveness of our strategy. we continue to lead with a customer-first approach, focusing on the most valuable vision-correct consumers in the category and leveraging proprietary technology to deliver a level of convenience, value, and personalization that traditional eye care providers cannot match. Our foundation is built on acquiring and retaining a growing base of annuity-like customers who return to KITS for their evolving vision needs. As we broaden our portfolio of eyewear and optical products, We aim to ensure that every customer visit is met with exceptional service, selection, and value. During our last earnings call, we set out our Q2 revenue expectations at $48 to $50 million with a targeted adjusted EBITDA margin of 3% to 5%. I'm proud to report we delivered record revenue of $49.6 million, up 31% year-over-year. This is our 11th consecutive quarter of positive adjusted EBITDA, exceeding our guidance to reach $2.6 million, or 5.2% of revenue. We led the category in revenue growth, with particularly strong performance in Canada, where revenue increased approximately 44% year-over-year, driven by both new and returning customers across classes and contact lenses. That growth was led by Glasses, which grew 44% year over year and now represent a larger share of the business than ever before. Glasses have always been at the core of our long-term strategy that would be the engine to drive our long-term value creation. It's a larger market, a more complex category, and one where vertical integration especially matters. And Q2 showed the power of this business segment. We delivered over 112,000 pairs of glasses, up 53% year-over-year. And our glasses revenues rose to $7.2 million, reaching another all-time high. What's especially exciting is the quality of these orders. Premium lens upgrades accounted for nearly 46% of glasses revenue. and revenue from those upgrades grew 58% year over year. That's a clear signal that our customers are increasingly choosing us for more personalized, higher-value products. We continue to see repeat glasses orders grow each quarter with returning customers now making up over fifty two thousand glasses deliveries this quarter an eighteen per cent increase over last year that kind of customer behavior through repeat purchases and premium upgrades is a powerful validation of the investments we have made in our optical lab digital experience and branding of kits during q two we saw continued improvement on margins Gross profit grew 45% year-over-year, reaching $18 million, with gross margins expanding 350 basis points year-over-year to 36.3%. We achieved this while absorbing record new customer growth, which typically carries lower AOV. We have now grown our two-year active customer base to over 991,000 people, increasing 13% year-over-year. That base is increasingly loyal, with repeat customers representing over 60% of Q2 revenue. Performance was driven by balanced strength across both new and returning customers. We welcomed over 111,000 new customers, a record for kids, and a 55% increase year-over-year. With this cohort, new customers contributed to over 39% of revenue. We've also been thoughtful about how we invest to build this customer base. Marketing spend increased to 15.2% of revenue in Q2, up from 13.4% last year. This new customer growth is not by chance, but by design. We're not thinking short-term. We are in the business of building lifetime customer relationships. In Q2, we strategically invested in acquiring high-quality, high-potential customers and guiding them into a long-term relationship with kids. That's the essence of our model, to light customers with their first experience and build lifetime value through customer service and product quality. Looking ahead to Q3, we expect continued momentum with revenue projections in the range of $52 million to $54 million and an adjusted EBITDA margin between 5% and 7%. Thank you again for your continued support. With that, I'd like to hand the call over to Joe, who will provide further details on our operational performance. Joe?

Thanks, Roger. We are focused on delivering results today as well as launching the next wave of growth for KITS. Fortunately, we have a number of initiatives that are helping us do both. These franchises are now meaningful stand-alone growth businesses, and each one plays a critical role in supporting both our top-line trajectory and growing margin profile. We call these our 50-50 club, initiatives that are growing at about 50% year-on-year with approximately 50% gross margin. Leading the way in Q2 was our digital progressives business. with growth well above 50% year over year and gross margin percentage also well above 50%. Our vertically integrated manufacturing is allowing us to maintain the highest level of quality while offering customers up to 90% off the cost of buying digital progressives in a brick-and-mortar store. Importantly, digital progressive customers are also demonstrating some of our highest net promoter scores and some of the highest repeat rates, helping us achieve our goal of more lifetime relationships with more customers, as Roger mentioned. We see no end in sight for our growth potential here. Additional high growth and high margin 50-50 club businesses that performed exceptionally well in Q2 include our premium lens portfolio, our insurance programs, and our kits contact lens business. And the team has a collection of additional initiatives well on their way to 50-50 status. Our technology and digital led model is untethered to a legacy brick and mortar infrastructure. When connected with our onshore vertically integrated lab, it's an enabler to move quickly. We're just starting to see how powerful this advantage can be for our customers and how much growth it could yield for our business. As an example, A digital-led model allows us to innovate on important customer needs like glasses selection. In Q2, our glasses selection grew to over 10,000 styles, representing one of the most comprehensive eyewear catalogs in the industry. This expansion hasn't come at the cost of efficiency, as our technology-driven approach has enabled us to achieve improved inventory turns while maintaining this vast selection. And starting in Q3, our digital-led model is allowing us to go even further for customers. With innovations like Optician AI, Kits is building a customized experience to allow customers to find the best frame, the best fit, and the best lens based on their unique measurements, prescription, and style. Early customers that have tried Optician AI have told us they now see the Kits online experience as superior for them in selecting frames that fit, in addition to offering them more convenience and more value for their dollar. Stay tuned for more innovation that will allow us to deliver results today while launching initiatives to power growth tomorrow. That's a great segue to Zee, our CFO, to share details on our Q2 financial performance. Zee?

Thanks, Joe. After a strong Q1, we kept the momentum going in Q2 during another record-setting quarter filled by strong execution, strategic growth in new customers, and deeper engagement with our customer base. In Q2, we continue to scale efficiently while optimizing costs. Fulfillment expense as a percentage of revenue improved to 10.7% down 50 basis points year-over-year. We processed over 269,000 orders this quarter, benefiting from ongoing efficiency in shipping and labor. As we grow, we expect to see continued leverage and fulfillment, particularly through increased volume of glasses for sales, which remains the key margin driver. As Roger mentioned, customer acquisition was a key focus in Q2, reporting a record of over 111,000 new customers who contributed over 39% of revenue in the quarter. To support this growth, marketing expense was 15.2% of revenue up from 13.4% in Q2 last year. Despite the higher makes of first-time customers, we saw a positive trend in total average order value which increased to $184, up from $182 a year ago. We expect further AOV expansion as these new cohorts mature. General and mean expense represented 7.3% of revenue, consistent with last year. We continue to manage overheads carefully, maintaining our focus on a scalable and efficient growth. We achieved a gross margin of 36.3%, a 250 basis point improvement from 32.8% last year. This was driven by a higher makeshift towards higher margin glasses and lens upgrades, alongside with a tighter control over promotions. These gains reflect the strength of our vertically integrated model and our ability to optimize pricing and product strategy as we scale. We did record a non-operating foreign exchange loss this quarter due to the strengthening of the Canadian dollars. This impact was largely related to unrealized revaluation of intercompany balances and does not reflect underlying business performance. Excluding the exchange loss, net income was $1 million or $0.03 per share. Q2 2025 marked the 11th consecutive quarter of positive adjusted EBITDA, which increased to $2.6 million up from $1.3 million in the prior year. At 5.2% of revenue, adjusted EBITDA margin exceeded our guidance and reflects 170 basis point year-over-year improvement, demonstrating our focus on driving margin expansion and operational efficiency across the business. This quarter, we paid $1.7 million in principal, interest, and a one-time cash sweep on a BDC facility. We remain well capitalized with $18.1 million in cash at the end of the quarter. With a strong balance sheet, scalable infrastructure, and growing efficiency as we scale. We are well positioned to continue executing against our financial and strategic goals. As we expand our leadership in digital eye care to continue innovation, we remain confident in our ability to deliver profitable growth and create long-term value for shareholders.

I'll now turn the call over to questions. Thank you.

Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the number 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Our first question is from Martin Landry from Stiefel. Please go ahead.

Good morning, guys, and congrats on great results. Good morning, Martin. My first question, I'd like to dig on your revenues in Canada. Roger, you highlighted Canada as it had a pretty strong performance this quarter. I just want to understand a little bit, are your revenues in Canada concentrated in a few regions? And if so, are there, you know, white spaces that you could expand to in Canada in the coming years?

Yeah, thanks, Martijn. As you said, and as we pointed out, we've had great success in Canada over the past couple of quarters, strong double-digit growth across both parts of the platform and product categories. especially seeing double-digit growth in frames and lens categories. So we're excited about the way the value and what we're doing is resonating in Canada. I'd say we're seeing accelerating word of mouth in a few geographies. So as you know, we've targeted a few more geographies a bit more specifically. The offer is resonating well there. We're seeing increased order flow, increased returning customers, but it's still very early days. I think we have a very small market presence and market share in Canada, even with these growth numbers, so there's a long way to go from where we are today. I'd only identify a couple of geographies where people have even heard of KITS, to be frank. It's very early days in a very large category and lots of opportunity ahead of us. Our view is the future of eye care is going to be fast, it's going to be personalized, and it's going to be digital first without sacrificing trust or quality. So we think KITS is building that first vertically integrated platform, and it's resonating with customers. Anything I missed there, Joe? No, Joe's okay with that. So thanks for the question, Martin.

Okay. If I can just jump quickly into your glasses orders, you had a very strong quarter, 112,000 pairs were delivered. I think that includes 60,000 that were free. If I do exclude that, it looks like your glasses delivered would be down year over year. I assume you had free glasses last year as well that were provided. So if we exclude, you know, free glasses delivered in both this quarter and last year, how would your glass volumes would have evolved?

Hey, Martin. It's Joe. Yeah, we were thrilled with the glasses performance in the quarter. The revenue up 44%, but really it was the units and the new customers coming in through glasses that we were focused on in the quarter. The team was focused on in the quarter and we saw that increase up over 50%. So to your question on the 60, approximately 60,000 first pair free units, we did have first pair free in the market a year ago. So there is some in the base. Net of first pair free, you know, our view is this was still an increase on new customers year on year. And maybe, you know, just to go a layer deeper on that. What we saw this year versus last year is maybe a few more tools in our arsenal within the glasses franchise, so digital progressives playing an even bigger part of our business this year, up significantly, even higher than the overall growth of glasses, and a few other parts of our glasses business.

Okay, so just to be clear, If we exclude three pair of glasses, your glass volumes were up year over year?

That's right, Martin.

Okay, perfect. And then last question for me. Just looking at your average order value, It was... It's Roger.

Just want to confirm. On the 60,000 glasses, those are new customers, not necessarily just free customers. And so a slight difference there. Just want to make sure you got that. Happy to follow up with you after the call just to make sure you've got it clearly. Thank you.

Yeah, super. Just lastly, on your average order value of $184, I assume that's also... impacted by your 60,000 pair of glasses free, right? So is it fair to say that if we adjust for that, your average order value would be closer to $237? Is that the right way to look at it?

Yeah, Martin, again, the 60,000 was new customers. A portion of those would be free, but... we shouldn't have them down at zero value per se. So, no, that math wouldn't quite work. We can get back to you on what the average adjusted with those first pair freeze out would be. You know, I would think about it more that the other, the net new customers, though, were primarily, would have had a lower average order size, but not freeze. Thank you. Okay, yeah, sorry.

Sorry, I see it now. Okay, got it. Thank you. Okay. Anything else, Martin? Great. Operator, maybe we'll move on to the next caller.

No problem. The next question is from Gianluca Tucci from Haywood Securities. Please go ahead.

Hi, morning, guys. Congrats on a nice quarter.

Hey, Martin. Hey, Gianluca.

Sorry. Good to see you. Joe, Roger, could you guys maybe update us on your Own This Town playbook? How far along are you guys? What still has to be done? And just tying that into your elevated marketing spend right now, do you foresee that 15-ish percent holding for the next couple quarters, or how should we think about that?

Hey, good morning, John Lucas. This is Joe. So, yeah, let's talk on this town and then we'll get into marketing spend second. So, you know, we do continue to make investments on this town, no change on our strategy there. And we were delighted to see the continued results in Q2. So some of these seeds that were planted earlier just continuing to pay off with higher awareness in some key markets. Specifically, you'll see it, while we don't break it out town by town, you see it really in the overall Canadian results, which were up 44%. And this was our initial focus on Own This Town. So where is the team focused now on Own This Town? Well, the focus areas are, one, converting these initial customers and this initial awareness boost on kits in the key markets that we have invested in. And then two, planning for subsequent markets. So we won't get into too much detail on where those markets are, but this continues to be an important tool in our arsenal. With regard to your question on marketing, as described, marketing was a little more elevated in Q2, up to around 15.2%. As you see in the Q3 guide, of EBITDA in the range of 5% to 7%. You know, we expect to see marketing as percentage of revenue moderate a little bit, somewhere in the neighborhood of, you know, 50 to 100 basis points, I would imagine quarter on quarter. And we also expect to see a little bit of gross margin favorability quarter on quarter.

Oh, perfect. Thank you, Joe. And actually, that ties into my second question on your targets for the gross margin. As your glasses business continues to scale as it has very nicely and comprise a bigger piece of your revenue pie, what are the kind of short-term and perhaps longer-term targets on the gross margin side we should be thinking about?

You bet, Gianluca. So no change again to our strategy on continuing to use our glasses business and the growth of our glasses business in addition to continued leverage on size to take up gross margin percentage. You know, about a year and a bit ago, it was low 30s. It's now, you know, approaching higher 30% gross margin. And our destination is 45% and above over the next three to five years. And so, you know, that will come as we see some of these franchises. We talked about Digital Progressives, some of the other 50-50 club members really helping to boost that. But, yeah, no change, more of the same. continued march up on gross margin. 45% is the next big milestone over the next three to five years.

Perfect. Thank you, guys. Thanks, Jean-Luc.

Your next question is from Lou Cannon from Canaccord Genuity. Please go ahead.

Thanks. Good morning, everyone. I wanted to follow up on the first pair-free discussion. I know that this is a tactic and a promotional tool that you've used in the past, but what's the ROI, or I guess, how do you measure the ROI on this? If you just want to look at it in terms of time of conversion from a new customer to a returning customer, the number of units that they maybe have in the basket, the upgrades to higher margin items like premium lenses, for example. If you look at the results from the most recent iteration of deploying your first pair free program and you measure that versus the first few instances where you would have used it. How does the ROI look now?

Hi, Luke. Good morning. So, yeah, on first pair free, again, and maybe we'll frame this, we'll get into the details on first pair free, but it is, you know, one tool in our arsenal. And it's one that customers love. And so the way we think about the economics of First Pair Free is it's an investment in product, to be sure, where it's an invitation for customers to try us out. Typically, customers will make some type of purchase alongside the First Pair Free. So it's typically not a $0 purchase. average order value. But where we look to the economics is a mix of lower cost of acquisition. So instead of spending, you know, in the category $100 to $200 is the average cost of acquisition for prescription glasses. And our cost of acquisition is far, far lower thanks to promotions like First Pair Free. So blending down cost of acquisition And making an investment in the customer in that first purchase with the view that they'll be so blown away by the experience, by the quality of the glasses that they'll come back and become lifetime customers. And so to your question on return on investment, we typically look at first customers while the market looks at repeat in the 18 to 24 month range. we tend to cut that in half and set the target at can we do it in six to 12 months or sub-12 months to get that repeat customer coming back. And that's the target the team works against, and we've been very happy with the results, and that's why we keep investing in it.

That's great. Thanks so much for that, Collar. I also wanted to follow up. Joe, you touched on the learnings thus far from the Own This Town initiative, and I think – I imagine – and subsequent rollouts across various geographies, both in Canada and south of the border, you're only going to fine tune that even more. Has there been anything that's come out of the initiatives to date that you believe has helped inform or maybe fine tune your approach for when you eventually deploy this a little bit more meaningfully in size south of the border?

Yeah, Luke, still very much in our plan. As you know us by now, we test, we iterate, and then we roll out. And that's exactly what we're doing with Own This Town, alongside a number of other initiatives. Every time we execute for spare free each quarter, we think the experience gets a little bit better. We think the economics get a little bit better. And we think the value for customers gets a little bit better. Same with Own This Town. So I think we'll probably have more to share in quarters to come on it. I think what I would say is the tailwind that promotions like Own This Town and First Pair Free deliver are in the overall economics. So if you look at traffic, which is a good read for word of mouth and cost of acquisition, we saw traffic up, again, ahead of our growth rate over 100% in the quarter. Lots of exploration on the site, good leading indicator for us of interest and demand. And a big part of that is driven by some of this awareness and curiosity around tactics like for spare free and on this town. Another driver that we see, especially when you see other consumer companies, you see marketing really being a cost item that goes up and up. you know, if you look at our performance in Q2, we saw average order value increase year on year up about 1%. And cost of acquisition was down in the neighborhood of around 9% to 10%. And on glass is even more significant than this. So, you know, so for us, we look at the whole picture. It's not just one gross margin line. It's not just one AOV line. It's the whole thing, including cost of acquisition and then I think as Roger referred to in the prepared remarks, the mission is building the lifetime relationship with that customer. And we're happy with the short-term economics for sure, and you see it in our results in Q2, but what we're really focused on is that lifetime relationship with the customer.

That's great. Last question for me, and then I'll pass the line. You had mentioned the inventory, the number of styles that you have now. I believe it's over 12,000, and if we were to go back a quarter ago, it was just under 7,000. So that is a big step up, but no real meaningful change appears as far as investment and working capital. So I guess it's probably a tough question to answer, but how is it exactly that you're now able to offer so many styles without it necessarily becoming a burden on your cash flow from operations going forward?

Sure, yeah, no, we're delighted to talk about things like inventory and increasing selection for customers. So this is really where we're untethered to a legacy brick and mortar network of hundreds or even thousands of stores. And having a digital-led model allows us to plug in more selection and have it be demand-driven, really led by the customer, how they're browsing, what they're looking for, and to go wide with our selection, but shallow with our inventory levels. And what you should expect from us is that we get better and more efficient every quarter, every year on that, so that we're not burdening cash flow and we're not burdening cash flow from operations from inventory. And so we were, you know, and I think you called this out last quarter, we were a little bit higher in Q1 and our commitment was to come down in Q2 and the team delivered on that down about $4 million quarter on quarter.

That's great. Thank you very much. Your next question is from Kyle McPhee from Cormac Securities.

Please go ahead.

Hi, everyone. I just want to quickly chat on the balance between the level of margins and the level of growth, you know, beyond just, you know, the Q3 color we already talked about. Now, you've been leaning more aggressively into growth lately. It's working. The new customers are arriving, all the evidence suggests. You're keeping them for the repeat purchase cycles. How should we expect this balance of growth risk margins to evolve through the rest of 2025 and into 2026. Do you plan to keep the pedal down on growth, given it's working so well, or do you think you'll opt to unleash larger margin expansion sooner rather than later? You seem to have total control over this decision, so just please give us a preview of what you're thinking kind of midterm.

Good morning, Kyle. Yeah, thanks for the question. You know, what we saw in Q2 and we wanted to demonstrate is that we, you know, that we share your point of view, that we really do feel like we have control of the dials and some quarters, you know, will dial up the EBITDA levels and some will invest a little bit more into future growth. So as we look, maybe we can talk specifically to Q3. And I think, you know, we've said this will be our – our third quarter or our fourth quarter that we're guiding to plus 5% adjusted EBITDA margin in the 5% to 7% range. So specifically in Q4, we expect to see some favorability on marketing and some gross margin favorability. And then we'll see how we'll have more to share on how far these numbers could reach into Q4. But really, no change, more of the same story from us. Our next milestone on EBITDA over the next few years is to cross 10% on adjusted EBITDA, and then within five years to be in the 15% to 20% range. All indications we're seeing on the business are that we're right in line with that plan. So no change. The drivers continue to be the same drivers, more glasses, and more expansion with more parts of our 50-50 club, including premium lenses, Sun RX, kids brand contact lenses, kids colors, and of course, digital progressives.

Okay, thank you for that, Keller. Next question. A lot of the evidence in your results is suggesting that while you've been thinking more aggressive marketing, and growth spend that you're skewing more of these kind of growth dollars into onboarding customers in the eyeglasses platform versus contact lens. Am I reading too much into the details to make this conclusion, or is it true you're, in fact, making a relatively more aggressive push with growth spend in the eyeglasses category?

You know, what I would say, Kyle, is, you know, we do talk – a lot about our growth in glasses, and we were delighted with the performance. But you'll see, as you break it down, we onboarded a number of new customers in contact lenses, and that continues to be just a terrific workforce for us. Customers in contact lenses are looking for more value, and they're looking to the online channel to deliver it. So we continue to invest. Contact lenses continues to grow. But I think you're right to call out that we could talk a little bit more about that in both prepared remarks and in some questions. So thanks for highlighting it.

Okay. And then I'm curious on one specific dynamic within the base of eyeglasses revenue you have. You seem to be adding more and more third-party branded options to the platform. is there a noticeable revenue mix shift starting to occur in your eyeglasses revenue mix, you know, away from kits branded? And can you talk through the impact on your margins when a customer does opt for third-party branded frames? So for example, for a given lens type, is there a noticeable difference for gross margin percentage on that sale or more importantly, gross margin dollars on that sale when they opt for third-party branded?

Sure, Kyle. So I'd say on the mix, The mix has maybe been marginally increasing to branded, but it was coming from a lower base. I think we were, for the first few years of building our glasses franchise, we were really solely focused on the Kits brand. And so we've been expanding that selection. But still, the frame levels as a percentage of total frames is still north of 80% are Kits. You know, we don't expect that to shift too dramatically. Each designer frame still comes with a kid's prescription lens and still comes delivered in a kid's box. Regarding gross margin levels, on percentage, the levels are comparable, so no real change. But with a higher average order value on some branded frames, gross margin dollars would be higher. You're right to call that out. Great.

Okay. Thanks for all the answers. I'll pass to them. Thanks, Kyle.

Your next question is from Doug Cooper from Beacon Securities. Please go ahead.

Hey, good morning, everybody, and terrific work. Just a couple, just to start with, I just want to confirm, I think, something you said, Roger, in the opening. Can you tell me progressives as a percentage of glasses sales? What percentage of glasses sales include progressive lenses? What was that number?

Doug, it's just, I would say, north of 10% of the orders on the glasses side. We don't break out the exact number, but it's north of 10 and growing very rapidly. Okay.

And what do you think the general market of people who wear glasses use progressives? I guess I'm just trying to get to what do you think it can ultimately be of your glasses portfolio?

Maybe I'll start, Doug, and then pass it on from here. But we think the next milestone is 20%. I think if you look at the dollars in the category, the dollars in the category broadly, and this is U.S. data, is north of 40% of the dollars in the category. are driven by progressive. And part of that is just the price point is so high in the market for digital progressives, $800 to $1,000. And on kids.com or kids.ca, you can get digital progressives for under $200. And that's part of the reason why delivered in a day or two. And that's part of the reason why the repeat, the net promoter score is so high. And that business just continues to grow. So I think 40% would probably be would probably be high in the short term, but certainly 20 and north of 20% would be the next milestone we'll be looking at. But let me just stop there.

Okay, and just be clear, the 10% number you gave me is dollars or units? I think it's units, right? That's units, correct. Okay. You mentioned earlier targeting gross margin ultimately 45% plus, and maybe just in terms of the next milestone of 40%, which you've mentioned in the past. What percent of total revenue needs to be glasses to get to that level, in your opinion? Right now, glasses are sitting at 14.5% of total revenue.

I think the way we've been thinking about it, Doug, is to continue to grow in a balanced way.

So we've been balancing growth and earnings across both contact lenses and eyeglasses. And that's kind of the way we're thinking about how to continue the growth. So as Joe talked about, a steady progression up north of 40 over time with glasses starting to drive a more meaningful percent of gross margin dollars. Having said that, We still believe the most valuable customer in the category is the one we acquire first, that 20 to 30-something-year-old fashion-conscious person that needs vision correction. We believe when we acquire them and really wow them that they become a customer for life. And that's been our goal since we started, to really serve that customer in a way that makes eye care easy for the next generation. And so to the extent we're able to do that, acquire them as a contact lens, customer in their 20s, keep them in the 30s as they age into glasses, and then as they come into the 40s and the progressives become a part of their life, we're able to retain them as a customer. So that's kind of the life cycle that we're seeing. It's still very early days, so, you know, as you've heard us say before, the eyeglasses category is, you know, much bigger than the contact lens category. So we still have a cohort of young customers that over time are going to move into glasses and then over time we'll be in progressive. So it's an exciting time, but it's early days. So as we progress through that life cycle, we'll continue to stay balanced in our approach, you know, growth and earnings like we've talked about in the past. And, you know, and balance the portfolio between acquisition and then migration into the next parts of the value chain.

Okay. Just getting back to this sort of what the profile of this company can look like in the next three to five years, Joe, if you mentioned the goal is 45% plus gross margin. Did I hear you correctly in saying ultimately at 45% plus gross margin, that would translate to EBITDA margin in your opinion of 15% to 20%?

Hi, Doug. Yeah, no, we haven't put a specific year on that, but those numbers, that's where we're progressing towards, about a 45% gross margin, and then north of that, yielding a 15% to 20% adjusted EBITDA number. Steady progress every year, every quarter.

And I think, obviously, Doug, the real leverage in that is accelerating word of mouth. To the extent marketing stays consistent, and to the extent you have increased trust with customers and positive experiences, gross margin goes up and the rest flows through. We've got a lot of capacity in our facility today, and so we don't see a ton of expense as that growth occurs.

Right. And just to be clear, at the end of the day, it looks like you're about to pay off the rest of your debt in the next quarter or two. So you'll be debt-free, so there's no really I, and then there's not much D in the business. So that's almost pre-tax earnings levels. Just moving on, on the technology side, I just want to focus the optician AI. Early days, but you've gotten some positive feedback on frame selection and so forth. You know, I think there's some technology out there that gives prescriptions and I think it's as quickly as 90 seconds through an ATM-like machine out there. Is that something you can migrate to online or maybe just talk about, you know, the next level of technology to actually get prescriptions online and just do that, the one total one-stop shop?

Yeah, you bet, Doug. Maybe I'll start and then I'll pass the mic on because this is an important topic for us. So, you know, I think yes is the short answer to your question. I think it all will migrate online. That's our view and that's what we're seeing with the technology. And so early days in optician AI, we're, you know, delighted to get this technology out there. And the more customers come through, the more data we have, the faster it iterates and improves each week, each month, each quarter. And as we look to this technology, we expect it to be a game changer on customer engagement over time and lifetime value. As a customer comes in and they can customize the right frame based on their face shape, their unique measurements, their style, their prescription, and that's recorded in their customer file, it's an easy return for that customer to come back and say, this is almost a custom fit for me on frame, on lens, on experience, on style. And selection has to continue to grow alongside. We need to have the right lenses available, all those things. But overall, this is, we see a big LTV boost. And in short term, you know, I think there's some other favorabilities on, you know, on conversion, on a, you know, on net promoter score and on word of mouth that we're looking forward to as well. But maybe I'll pass the mic and just see what I missed there from Zee and Roger.

I think you covered it, Joe. I mean, I think... It's exciting for KITS and for the people at KITS to be leading the category in terms of innovation, in terms of pushing the category to new highs. I can say I've frankly never heard from so many of our quote unquote competitors or others in the category sending us questions and emails congratulating us on Optician AI and starting to see really where the category can go. with the help of technology. So it's an exciting time. It's an exciting time to be at KITS when we're leading this transition and integrating technology in a way that makes things easier for customers. And I guess that's kind of the excitement of it. It is still early, as Joe said, but customers are telling us they like the experience already and it can only get better. And it's helping them have confidence in buying online. It's improving the order flow. And over time, I think we see it becoming a cornerstone of how customers experience vision care. So it will become even more personalized. It will become more intelligent and provide accessibility to customers. So, yeah, it's just an exciting time and place for us. Doug, thank you. Okay.

Just the last one for me, just getting back to the earlier question on Own This Town, when, and maybe you don't want to put a specific date on it, but when do you think are, you know, myself in Toronto or other clients in Montreal will be able to see with our own eyes the Own This Town in our specific cities?

I mean, probably the best news, Doug, is when you're saying you don't see it yet because it tells us how much opportunity there really is there and how early the days really are. You've seen the progress we've made in markets where we have launched. So we don't need to telegraph everything, but I think you'll start to see us in more obvious ways over the coming months and days. Anything you want to add there, Joe? No, it's perfect. Okay, perfect.

Thank you.

We'll continue to keep it balanced, Doug. Thank you. Okay, thanks, Roger.

Your next question is from Frederick Tremblay from Desjardins Capital Markets. Please go ahead.

Thank you. Good morning. I just wanted to follow up on the Optician AI. I know it's early days, but I'm wondering if you're seeing any benefits from that in terms of adoption of premium products from customers that have used Optician AI so far.

Good morning, and welcome to the call. So yes, I will caveat this by saying it is early days, but really the intent is to help customers find the perfect frame and the perfect lens for them. And I think you're right to think that for a number of customers, this will allow them to be introduced to our broad lens portfolio in a new way. And so some examples of that are some of the technology that we have on thinner frames and some of our unique coatings in addition to a number of other in mass blue blocker or blue light glasses. And so that is our expectation. That we will see more lens upgrades that that business will continue to to perform help by optician AI, but I would say you know that that that's not the design is really around building. A lifetime relationship with that customer and building trust, I think, is as Roger put it really well earlier with that customer that you know that that the online experience, if you think. you know, if you were to plot on a grid, you know, five, 10, 15 years ago, the in-store experience versus the online experience for the general population, you know, that experience is getting, you know, closer and closer together to the point where, you know, our view is technologies like optician, AI, you know, the intercept point will happen where the population says, well, wait a minute, this is actually, you know, it's actually better to go online to get great fitting perfect fitting frames with a guarantee and the right lenses that come with them based on my unique measurements and in addition to offering you know great value and great selection so that's mostly what we're excited about but yes we do expect it to yield some some greater upgrades on the lens side understood that's really helpful

Maybe just a segue into competition, excluding optician AI and other technology tools. Are you seeing any changes lately in the competitive landscape, whether it's new entrants or changes in the promotional activity? Anything to highlight there?

No, I think as usual, we tend to stay focused on our business. and thinking about how we can do a better job for customers and how we can improve service times and improve quality. So we don't spend a lot of time looking outside. Like I said, one of the rare times we've heard from so many of the others in the category was with the launch of Optician AI. But otherwise, we're heads down focused on how to wow customers and how to keep our you know, keep growing and keep leveraging this efficient model to the extent we can to help customers. So nothing to report.

Okay, and then maybe last question for me. Given the significant success in attracting new customers and historical retention as well, which is quite strong, I wanted to understand a bit better the path for AOV. I understood that the second order is typically higher than the first order, but what about third and fourth orders? Are you still seeing AOV growth for those courts of customers that have been around for years? for more than two orders. Just wanting to see if there's a continued rise in AOV for those customers or if we plateau at some point.

Yeah, and we do watch those and monitor them. We don't break it out at this point, but we do see as we move into years three and beyond an increase in the LTVs of customers. At this point, still driven primarily by the contact lens customer, but obviously the glasses AOVs have been going up over time, so that cohort's improving. And then, you know, we do see a, we've talked about it before, a small percent of customers that really give us their entire basket of optical, and it tends to be quite a wow, the extent that people, you know, can invest in the optical category. But, yeah, we're continuing to see those cohorts get stronger over time. and, you know, look to continue that as I think, you know, to tying it into your question about optician AI, you know, it's interesting the number of prompts and so on that we can, you know, work with optician AI, but really AOV and those types of things will be driven by understanding customer needs. So figuring out if somebody needs a prescription sun or if they need a photochromatic lens that that can change, you know, change from light to dark depending on sun and so on. So there are lots of, and then, you know, as someone moves into progressives, understanding those needs. So over time, you know, like we talked about earlier, we see the progression, a natural progression as customers age, that their vision care needs increase, the spend increases, the AOV goes up over time, and then we, you know, Our goal is to make sure we're standing at the ready to wow them with even better and better products over time that fulfill those needs.

Okay.

That's great. Thank you. Thanks. Your next question is from Matt Caranda from Roth Capital.

Please go ahead.

Hey, guys. Good morning. I wanted to get your thoughts on the pricing environment and optical in general. I guess a lot of your larger, more traditional peers have been taking price in various ways over the last six months or so. Does that give you guys room to do the same, or do we sort of just let the price gaps grow and try to generate market share gains? Is that sort of the strategy here?

Hey, good morning, Matt. So, you know, we see some data on pricing. It's mostly U.S.-based, and And the data that we've seen is consistent with yours, where the market is really seeing, in some cases, north of 10% price increases, which is pretty significant. If the average pair of prescription glasses in the U.S. last year cost north of $300, around $350, 10%, that's a big increase. And so, you know, if that continues, it gives us comfort that the consumer is going to be looking for fair value more than ever. And so, you know, as we think about pricing, we think about, you know, our pricing is really in the $38 to $58 range. About 80% of our selection is priced on the kits lineup in that range of $38 to $58, and And that includes a prescription lens. So that's the frame, the lens made the same day it's ordered and shipped to you in a day or two. So for us, that really feels like we're yielding great gross margin on that. We're getting more efficient every quarter, and we're delivering a great experience for customers. And if we can continue to do that, You know our one option is to take up pricing considerably as you know, as we see in the market, but you know where where that comes at a cost is on cost of acquisition and on retention. And so we're comfortable where we are right now in the $38 to $58 range for the majority of our kits lineup. We think the feedback we're hearing from customers and the word of mouth and retention data suggests that we're offering something that's very unique and very valued. And so we're gonna stay focused on that and we'll kind of update you in the market quarter on quarter.

Okay, that makes sense. Thanks, Joe. For the third quarter EBITDA guidance range, I may have missed this earlier as I rolled on a little late, but I guess does that margin dynamic look similar to what we saw in the second quarter where most of the improvement came from gross margins and then we reinvested in OPEX line items like marketing? Maybe just a little bit more color on sort of how we get to the five to seven range.

Sure, yeah, maybe some, just some broad thinking from our side, you know, still early days in the quarter. But, you know, what we expect, this is our, we're guiding to our fourth quarter of over 5% adjusted EBITDA margin with a 5% to 7% range. As we think quarter on quarter, so at the midpoint, that's about, you know, 220 basis points improvement year on year. But to your question on quarter-on-quarter, we expect favorability on the marketing line in the neighborhood of 50 to 100 basis points, plus or minus a little bit, quarter-on-quarter, and some gross margin favorability. And then just to be conservative, we'll assume the other line items are flat quarter-on-quarter. So that's where we see the growth, and we'll, you know, look forward to updating you and the market as the quarter progresses and as we wrap and go into Q4. Okay.

Makes sense. Maybe just one more from me. Just with the glasses unit growth accelerating this last quarter, where do we stand on capacity utilization currently and sort of maybe how do you think about the gross margin lift that you may get as utilization further improves.

Yeah, no, thanks, Matt, for bringing that up. Lots of, you know, we have built a significant amount of capacity, we think, at least, you know, that will support us at least to $500 million in revenue and beyond. And I think, you know, the mix on gross margin appreciation, there will be some efficiency gains, which will hit the gross margin line. You know, maybe, you know, kind of a third of the gross margin improvement, maybe, you know, slightly above that. And the balance will just be mixed as, you know, as we sell more glasses and more premium parts of the glasses business as well.

I appreciate that. I'll jump back in queue, guys. Thanks. Thanks, Matt. There are no further questions at this time. Please proceed with closing remarks.

Thank you, operator, and thanks to everyone for joining us today. Q2 was another quarter where we focused on the fundamentals, showing strong growth through our disciplined execution, ultimately making steady progress towards our long-term goals. We saw record customer growth and strong momentum in glasses and did it all with a clear focus on margin and capital efficiency. We're still early in the kit story. Each quarter we see more evidence that the model is working. Our glasses business continues to scale and our ability to compound value is becoming clearer. That's what excites our team, not just the growth today, but what that growth will mean years from now. Kits will continue to play the long game and remain focused on building a company that lasts, driven by customers who come back to a company that has proven to deliver. Thanks to our team, our customers, and our shareholders for the continued belief in the mission we are building.