Hello, and welcome to the Warby Parker Inc. 2Q 2023 Earnings Conference Call. My name is Elliot and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Jaclyn Berkley, Head of Investor Relations. The floor is yours. Please go ahead.

Thank you, and good morning, everyone. Here with me today are Neil Blumenthal and Dave Gilboa, our Co-Founders and Co-CEOs along side Steve Miller, Senior Vice President and Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release and slide presentation are available on our website at investor.warbyparker.com. During this call and in our presentation, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks please review the company's SEC filings, including the section titled Risk Factors in the company's latest annual report on Form 10-K. These forward-looking statements are based on information as of August 9, 2023 and except as required by law we assume no obligation to publicly update or revise our forward-looking statements. Additionally we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance in accordance with US GAAP. A reconciliation of our non-GAAP measures to the most directly comparable US GAAP measures can be found in this morning's press release and our slide deck available on our IR website. And with that, I'll pass it over to Dave to kick us off.

Good morning, and thank you for joining us today to discuss our Q2 results and our outlook for the remainder of the year. Q2 was another quarter where we delivered strong financial results, while delighting customers, gaining market share and making meaningful progress against our core strategic growth initiatives. Our net revenue of $166.1 million was up 11% year-over-year, and our adjusted EBITDA of $14.2 million represents an 8.5% margin and 450 basis points of year-over-year margin expansion. These results were delivered in spite of continued demand headwinds in the optical industry and our realignment of marketing spend as a percentage of revenue. Over the last 12 months, our marketing spend has been down 30% year-over-year when compared to the prior 12-month period. In contrast and as we will discuss in more detail shortly, we expect Q3 and Q4 marketing spend to be up year-over-year setting us up to deliver strong results in spite of continued macro uncertainty. We believe our growing and highly productive retail footprint digital innovation and continued focus on delivering a superior customer experience combined with unmatched value have enabled us to outperform in a challenging operating environment, and have set us up for continued long-term success. Based on our recent outperformance in our updated view of the rest of 2023, we're raising our full year guidance for net revenue and adjusted EBITDA. Steve will provide more detail on our financial results and guidance shortly. But first Neil and I will spend a few minutes to provide updates on our continued progress against our core business drivers. First, we continue to lead with innovation and expand our product offerings services and technology platform, as we evolve into a holistic vision care company. In Q2, we launched Precision Progressives our new premium progressive lens. Precision progressives are…

Thanks Dave. The third driver of our performance is our ability to attract and retain consumers with our seamless multi-channel approach. Our performance this quarter was highlighted by a 9.2% increase in average revenue per customer to $277 on a trailing 12-month basis. A range of factors contributed to this increase, including scaling progressives, launching precision progressive, growing our contact and eye care business, strong retention and repeat purchasing and continued consumer adoption of our higher-priced spring. We're also pleased to report a consistent revenue retention rate of roughly 50% over 24 months and 105% over 48 months for the most recent cohort with four years of purchase history. As Dave mentioned, we've rebalanced marketing spend to the low double digits in the first half as a percent of revenue, which has had a direct impact on the growth of our e-commerce channel. We dropped marketing spend by 30% on a trailing 12-month basis as we reduced marketing spend year-over-year in each of the past four quarters. We're excited to see marketing spend comp year-over-year beginning in Q3 which we expect will support growth across the business and in our e-commerce channel in particular. In Q2, we saw a trailing 12-month active customer growth of 1.2% which we believe will be our low point for the year reflecting the fourth and final quarter of our marketing spend pullback. We're already seeing positive momentum in active customer growth in Q3 to-date and expect to report increasing active customer growth over the course of the year. Another factor having a small impact on this metric is that in the second half of last year, we introduced new functionality to make it easier for multiple members of the household to transact with us on a single customer account. We believe that once someone…

Thanks, Neil and Dave. Good morning, everyone. Starting with revenue. We generated revenue of $166.1 million, up 11% year-over-year and above the high end of our Q2 guidance range of $160 million to $162.5 million or up 7% to 9% year-over-year. From a channel perspective, retail revenue increased approximately 21.5% year-over-year while e-commerce revenue declined approximately 5.3% versus Q2 of 2022. For the second quarter, e-commerce represented 33% of our overall business compared to 39% in 2022 and in line with our pre-pandemic channel mix. The decline in e-commerce revenue was in line with our expectations and driven by an intentional reduction in marketing spend by 12% year-over-year, as we bring marketing spend as a percent of revenue back to pre-pandemic levels in the low teens. We expect e-commerce revenue to begin comping positive in H2 of this year, as we anniversary the pullbacks we've made in marketing spend and begin to increase marketing spend dollars year-over-year. We opened 13 new stores in Q2 and 39 over the past 12 months, finishing Q2 with 217 stores. Retail productivity in Q2 was 100% versus the same period last year. As a reminder, we define retail productivity as sales per average number of stores opened in the period. So even as we continue to add an average of 40 stores per year, our more mature cohorts continue to perform as those newer stores ramp. From a customer perspective, we finished the quarter with 2.28 million active customers an increase of 1.2% versus the same period a year ago and our average revenue per customer increased 9.2% year-over-year to $277. It's worth noting that our revenue growth by channel follows a similar pattern to our growth in active customers, where active customers are increasing in retail, driven by new store openings and decreasing…

Thank you. [Operator Instructions] Our first question comes from Oliver Chen with TD Cowen. Your line is open.

Hi David, Neil and Steve. Great quarter. As we think about the consumer environment, it's been mixed. Would love your thoughts on traffic and what you're seeing with traffic and potential volatility there in the face of inflation and disinflation. Also, as you think about the big opportunity for more unit growth, how has new store productivity been trending? And what markets are you most excited about with that development? And then Steve, as we look at our models, on the gross margin line, the gross margin compare gets a bit easier in the fourth quarter. So would love any thoughts on modeling 3Q versus 4Q there. Thank you.

Thanks, Oliver. This is Neil. We're seeing traffic start to normalize and be more consistent than we've seen over the past year, which is encouraging. It's still below sort of 2019 levels and that's true when we talk to sort of our peers in the optical space but also other retailers as well, and our teams are doing a phenomenal job in making the most of that traffic and we continue to see elevated conversion rates in our stores. One of the things that is very encouraging is just how traffic is becoming more and more predictable as we look at days of the week as we look at split between urban and suburban, some of the gaps that we previously saw a year ago have been narrowing. We attribute this to more steady and consistent return to work habits as many sort of corporate workers are now in the office, three to four days, sometimes five days a week, but we know in each community what to expect and are able to schedule our store teams accordingly. One of the things that we're excited about is sort of back-to-school and we anticipate sort of a stronger back-to-school this year than last year just as we had a stronger FSA season than last year, and we're already seeing some signs of that in terms of eye exams being scheduled at this point in the back-to-school season. So in general, we're optimistic about traffic for -- particularly for our category through the back half of the year.

As it relates to new store productivity, we're seeing stores perform in line with the targets that we previously talked about which is achieving paybacks within 20 months and four-wall margins of 35%. So we're seeing consistent performance across our store fleet. The number that we talk about is store productivity versus the prior period and in Q2, our stores were at 100% of Q2 levels. And as we think about that calculation, it's really a productivity metric across our entire fleet that is open in a given period. So, average stores opened in Q2 of this year 212, average stores opened in Q2 of last year 173, which is a blend of existing stores and new stores, with existing stores making up the bulk of that productivity metric, because they've had a chance to mature and perform. And so we're very happy with the levels of productivity that we're seeing across our retail fleet new stores and existing stores in particular. If we think about some of the markets that we're excited about we've talked about opening up stores in existing markets and new markets. And from an existing perspective, we're excited about New York, L.A., Dallas, Chicago will continue to drive significant business there. From a new market perspective, Jackson, Mississippi, Knoxville, Tennessee, Charleston, South Carolina all performing quite well. Neil and Dave can provide some additional color from a market perspective. But one of the round out on your question as it relates to new store productivity and how we're thinking about market level performance and what's getting us excited. On your last question, which is really the gross margin compare Q3 to Q4, we're expecting a similar trend line that we see in a typical year, where there is a decline in gross margin from Q3 into Q4 where Q4 is typically our lowest gross margin quarter driven by the fact that we have a fair amount of revenue that we defer from December into January as we staff up and capture orders for the busy holiday season. We ship and deliver those orders in January and into Q1 and we recognize revenue at the time of order delivery not at the time of order placement. And so I would expect to see a similar trend line as it relates to Q3 and Q4. Part of the reason why we do have an easier comp heading into Q4 is really just due to that revenue deferral from the end of one year into the next. We are still reaffirming our guidance for the full year for gross margin in the mid-50s.

Thanks a lot. Best regards.

Our next question comes from Mark Altschwager with Baird. Your line is open.

Good morning. Thanks for taking the question. Just following up on the guidance. It sounds like store productivity 101%. That's stable to improve versus what you are seeing in Q2. At the same time, it sounds like you're expecting e-commerce to flip from a down 5% to perhaps positive in Q3. So putting those two things together would seem to imply an acceleration in revenue versus Q2, but I think the high end of the guide for third quarter would be stable. So maybe just unpack that a little bit for us? Is that typically conservative and there other considerations as we think about the back half of the year?

Steve?

Hi, Mark. This is Steve. It's a great question. So, a couple of points of context. As it relates to e-com growth, we're confident that e-com growth will return to positivity in the back half of the year. It may not be in Q3. It might be in Q4, although, we are seeing positive signs. So there is still some level of uncertainty as to whether it's a Q3 phenomena or Q4 phenomenon, which will be driven by increasing marketing dollars year-over-year for the first time in five quarters. As it relates to store productivity, we are seeing some promising signs with that metric at the start of Q3. But that metric will evolve over the course of the quarter as it has evolved over previous quarters. So it's really a snapshot as to how we're performing really through the first week in August. We've still got some additional time in the quarter to go. And as that metric fluctuates and as we see where e-com growth ultimately shakes out, that will determine how fast we grow and whether it's at the high-end of the range, above the high-end of the range. There is also still some level of uncertainty in the broader macroeconomic environment and within the optical industry in general. So we are maintaining a conservative position. And I believe the guidance numbers that we put out there are prudent and certainly are based on the metrics that we're seeing across both channels.

Thank you for that Steve. And then, Neil or Dave, could you size up the opportunity you see in this Precision Progressive category, who is the target customer there? And just given the higher price point, maybe update us on how you're thinking about growth in customers versus rev per customer, for the model in the medium-term. Thank you.

Great. Thanks. Our Precision Progressives is off to a great start. One of the things that we always try to deliver for our customers is exceptional value. So how can they get something that's great quality, but a fraction of the cost of purchasing elsewhere? And we found with our Precision Progressives really significant up-tick, as we look at sort of a percent of our Progressives mix. So as we think about potential gross margin expansion or what provides sort of benefits to gross margin. It's obviously increasing our mix of progressive which we're still very underpenetrated versus the market which is around 40%. And then it's increasing that mix within Progressives from our standard $295 Progressives offering to our $395 Precision Progressives offering. And we've seen those customers have equal to higher Net Promoter Score and are also just as happy if not more happy to tell their friends and the other members in their household about it. And just the feedback has been great, because these are customers that are going to independent optical shops or other chains and spending well over $1,000. So, it's sort of in line with the Warby's philosophy on, how do we provide incredible customer experiences and providing just great value that price-to-quality ratio.

And we're also seeing, a higher percentage of new customers that are purchasing Precision Progressives. And this is the type of product that we have gotten a lot of consumer feedback around that people wanted to purchase from us. And I think it just further indication around the type of customers and the demographics that we're serving where the median household income is over $100,000. And people are really looking to purchase premium products for us but still expect that great value that we deliver across all our products.

Great. Thanks again.

We now turn to Edward Yruma with Piper Sandler. Your line is open.

Hey. Good morning guys. Two quick ones for me, I guess first, you kind of called out on the last call that you were going to add more premium frames over $99. I noticed you guys launched Hale or Baird. Kind of any signs of kind of how those are doing and if that had a positive impact on gross margin. And then as a follow-up, I know that you've cited for a number of quarters now kind of an elongation of the purchase cycle, which is customers deferring some of the vision care that they might need. Are you seeing stabilization there or even improvement? Thank you.

Thanks, Ed. We are seeing sort of stabilization. I think the question remains is has the industry sort of hit that two, 2.2-year sort of milestone right? Because the Americans on average by glasses every two to 2.2 years. And right there was that period, during the depth of COVID in 2020, where folks were really not purchasing the industry then bounced back in 2021. And then the question is right are we sort of returning to a cycle where all those folks that defer their purchases in 2020, but then purchased in 2021 are they sort of coming back to the market now in 2023. We haven't seen sort of big upticks in traffic or sales, which is why we're trying be prudent with our guidance for the rest of the year but there is the potential for those customers to return to the market whether it's the back half of this year or to next year, the one thing that we know for certain is that there's this physiological need that isn't going away that's actually only expanding by 2050, 50% of the world's population will need glasses or contact to correct their vision. So we do expect sort of those customers to return for eye exams and glasses to the category sort of rate large. On your previous question, just around premium frames. We are seeing those perform well and not seeing any price resistance. Our customers get really excited of like our color block edit collection for example that are these innovative construction that we've developed in-house and then work with sort of premium suppliers on. And you'll continue to see those launch. We just launched our fall core collection, which we're really excited about and we featured Natasha Lyonne, the Emmy winning actress and filmmaker and Tyshawn Jones, the two times Skatebaorder of the Year, who we've partnered with in the past as part of the campaign to sort of advertise and promote the collection and are already starting to see sort of good results there. So we expect premium frames just like our premium Progressives to continue to be sort of a benefit for our gross margin going forward.

Thank you.

Our next question comes from Brooke Roach with Goldman Sachs. Your line is open.

Good morning and thank you for taking my question. Neil and Dave, I was wondering if you could contextualize how you're thinking about the opportunity for video-assisted exams. Is this a big initiative for you in the near-term, or is this a test and learn at this stage? And what could that mean for financial contribution of eye exams to growth and profitability looking forward?

Yes. Overall, we're really excited about video-assisted exams. This has been sort of in that pilot phase, where we rolled this out to a small number of stores and we're seeing really positive feedback from patients, from our store teams, from doctors and we view this really as complementary to our efforts to hire full-time optometrists into our stores or through our PC model. And we view video-assisted exams as an opportunity to add exam capacity in newer stores that may not be mature enough or have enough volume to justify a full-time eye doctor from the start. We also view it as a really interesting opportunity to expand capacity even in stores, where we have existing doctors that may not be working seven days a week or we may want to supplement certain hours of a day. And from a financial standpoint, this is -- enables us to scale exam capacity in a really capital-efficient way. It enables us to offer exams in more locations without incurring the cost of full-time OD from the get-go. And those optometrist costs are absorbed within gross margin. And so, as we look at the kind of store paybacks for new stores and the impact on gross margin, we expect that as we roll this out across the country that we'll see a positive benefit to both of those metrics.

Great. Thanks. And then for Steve, I'm hoping you can refresh us on how you're thinking about the potential for adjusted EBITDA margin expansion now that you've cycled some of these marketing initiatives. In particular, could you contextualize the drivers of the lower EBITDA margin that you've guided for 3Q of this year? Thank you.

Sure. Thanks, Brooke. So, I'll first start at a higher level and then we'll talk a little bit about Q3 and the back half of this year. So the guidance that we provided at the beginning of the year is to achieve an adjusted EBITDA margin of 7.9% which is significantly above full year adjusted EBITDA margin for last year, but we really pegged that to the adjusted EBITDA margin we achieved in the back half of last year post making a number of cost adjustments to the business, which allowed us to generate adjusted EBITDA of 6.9% H2 of last year. So I just wanted to reiterate that framework. As Neil mentioned on his -- as part of his prepared remarks, we are planning for a brand awareness campaign that will kick off in Q3. Brand awareness by its very nature is a little bit less intentional in terms of incenting the customer to make an acquisition in the moment, but it really has an incredible long-term ROI, as it builds better awareness about the brand, about the fact that Warby Parker has not only stores, stores near you with eye doctors. And so, as we put together our gross margin guidance for the back half of the year, we feel very confident that we'll hit the 7.9% margin and more of the adjusted EBITDA that we'll generate is in H1 versus H2, but we wanted to give ourselves some leeway heading into Q3 to account for the fact that we are launching this brand awareness campaign as part of driving future growth in the business. And so that's why we're guiding with some level of conservatism as it relates to EBITDA next quarter.

Thank you, so much. I’ll pass it on.

Our final question today comes from Janine Stichter with BTIG. Your line is open.

Hi. Good morning. Thanks for taking my question. I was hoping you could speak a little bit more to the overall hiring environment for optometrist. I know you called out some wage pressures in Q2. Is any of that more than you expected? I would just love to hear what you're seeing in terms of constraints around the optometrist hiring? Thank you.

Thanks, Janine. We continue to be a preferred employer of eye doctors and continue to see sort of strong retention rates as our stores tend to be new have top-of-the-line equipment tend to be located near where eye doctors live and work. The environment is super friendly, and the collaboration between our doctors and our retail, advisers and store management are highly collaborative. So we continue to be able to hire the eye doctors that we need for our store expansion. In fact, across the entire organization we're finding very good access to talent and we're seeing attrition rates across every aspect of the business to be some of the lowest that we've ever experience since we started measuring attrition at the company. So it's -- so we're proud to say that the strength of our team is the strongest that it's ever been and engagement levels as we look at productivity and employee satisfaction remain high.

Great. And then just a quick follow-up to Brooks' question around the EBITDA margin guidance. For the full year, you're keeping the EBITDA margin guidance you had previously but you're raising the revenue. Is that just the marketing campaign in Q3? Are there any other additional expense items to be aware of?

No, other additional expense items to be aware of. And so raising our revenue guide and maintaining the 7.9% margin naturally raises our EBITDA dollar guide from -- at the midpoint $51.5 million to a little over $52 million, and we don't have any other anticipated expenses. This brand awareness campaign is an expense that is anticipated, but we wanted to make sure that we're communicating that in the context of our Q3 guidance. But beyond that, I think there's no incremental or additional color as to the cadence or sequencing of EBITDA for the full year that is worth mentioning.

Okay. Great. Thanks and best of luck.

Ladies and gentlemen, this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.