Hello, and welcome to today's Warby Parker, Inc. 3Q 2023 Earnings Conference Call. My name is Bailey and I'll be your moderator for today. All lines have been muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions]. I would now like to pass the conference to your host, Jaclyn Berkley, Head of Investor Relations. Please go ahead when you're ready.

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

Thank you, Jaclyn, and good morning, everyone. Today, we look forward to discussing the drivers of our Q3 performance and our updated outlook for fiscal 2023. Our net revenue of $169.8 million was up 14.2% year-over-year. Our strongest quarterly revenue growth this year and our adjusted EBITDA of $11 million represents a 6.5% margin. We're particularly pleased to report our results within the backdrop of the broader optical industry during a time when industry growth has been lower than historical norms. Regardless of the environment, we believe our unmatched value proposition and innovation, our multi-channel approach, and our strategic investments in both holistic vision care and marking position us for long-term sustainable growth. Based on our recent outperformance and outlook for Q4, we're raising our full-year guidance. With that, Dave and I will go through how each of these drivers contributed to our strong Q3 results and our outlook for the remainder of the year. Starting with the first driver, our unmatched value proposition, and customer-centric innovation. Because of our direct relationship with consumers, we have the ability to quickly incorporate customer data and feedback into every aspect of our business, from eyewear design to manufacturing to the overall shopping experience. On the product side, our consumer-centric approach to innovation has led to novel frame constructions and a broad lens portfolio that support average revenue per customer. On our Q2 call, we shared that we introduced a premium progressives offering called Precision Progressives. We introduced this lens in response to customer demand, particularly from the retail channel where progressive penetration is higher. Our Precision Progressives start at $395 and like all of our glasses, that price is all-in, including the frame, lenses, and all coating. Precision Progressives provide lift to both average order value and gross margin, while delivering superior…

Thanks, Neil. The third key driver of our strong Q3 results was our expanded holistic vision care offering, which is attracting new customers and driving higher customer lifetime value. Our contacts business had a record quarter, delivering strong growth and representing 9.3% of Q3 revenue, up 240 basis points versus a year ago. This is still well below the industry average of 20% and represents a meaningful opportunity for future growth. While contact lenses have a lower gross margin percentage compared to our other product offerings, their higher purchase frequency and subscription like purchase cycle are accretive to gross margin dollars. Contacts have also been a key driver of new customers and looking forward, provide additional upside for our e-commerce business given purchases tend to skew more online. Eye exams, which are the gateway to prescription eyewear and contacts purchases, represented 4.4% of revenue in Q3 versus 3.2% last year. Scaling exams and contacts continues to be a strategic priority in order to deliver a seamless, holistic customer experience and drive higher customer lifetime value. On average, customers that get an eye exam with us and buy glasses and contacts spend 2.2x with us in their first year versus glasses only customers and continue to purchase more frequently and spend more in subsequent years. To support our holistic vision care business, we added 57 net new optometrists to our team this quarter and we continue to invest in their professional development, their engagement and their ability to provide exceptional patient care. In October, we brought our optometrists and store leaders together for our first ever One Vision Summit where these leaders spent time discussing how to continue to deliver best-in-class customer and patient experiences. In addition to opening stores with physical exam suites and hiring optometrists, we continue to be…

Thanks, Neil, and Dave. Starting with revenue, we generated revenue of $169.8 million, up 14.2% year-over-year and above the high end of our Q3 guidance range of $163 million to $165 million, or up 10% to 11%. From a channel perspective, retail revenue increased 20.7% year-over-year, while e-commerce revenue increased 3% versus Q3 of 2022. For the third quarter, e-commerce represented 33% of our overall business compared to 37% in 2022 and in line with our pre-pandemic channel mix. As Neil mentioned, the positive inflection in e-commerce revenue was driven by marketing spend, returning to growth, and the continued scaling of our contact business, the majority of which is online. As Neil mentioned, while we were encouraged by the growth we saw in Q3, we don't expect the e-commerce recovery to be linear and may see some periods of higher or lower growth in the near-term, including in Q4. Looking ahead, we believe that the overall trend line is positive and our e-commerce business is on a path towards sustainable growth. We opened 11 new stores in Q3 and 40 over the past 12 months, finishing Q3 with 227 stores. Retail productivity in Q3 was 101% versus the same period last year. As a reminder, we define retail productivity as sales per average number of stores open 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. Seven of the new stores in Q3 were expansions within existing markets and four were entries into new markets. All 11 new stores include eye exam capabilities, which brought the number of locations offering eye exams in the quarter to 183, or 81% of our total fleet of 227 locations. From a customer perspective,…

Thank you. [Operator Instructions]. Our first question today comes from the line of Mark Mahaney from Evercore. Please go ahead. Your line is now open.

Okay. Thanks. Two questions, please. I think, Dave, you referred in the end of your comments to active customer growth rates should continue to improve from current levels. Could you just double click on that a little bit? Maybe either quantify that or qualify that a little bit. What's the pace of active customer growth we saw in the September quarter? Is that a good proxy for how we should think about it going forwards? And then, Steve, on the EBITDA margins, is the business set up so that you'll continue to have this 100 to 200 bps of EBITDA margin expansion going forwards? Is that still the cadence that we should expect? Thank you very much.

Great. Thanks Mark. This is Dave. Just touching on the active customer growth first, as a reminder, this is a trailing 12-month metric. And so as we noted in our Q2 call, we expected that to be the low point given the 30% 12-month trailing marketing cuts that we had made at that point. And we have seen active customer growth trends the way that we expected. And as our marketing investments will continue to increase on a year-over-year basis over the next few quarters, we're expecting active customer growth to continue to trend positively. We're pleased with the returns that we're seeing from our marketing spend and marketing efficiency and expect that to continue into Q4 and deep beyond. The other kind of factor that's impacting our active customer count that we report on, as we mentioned in our Q2 call is that in the back half of last year we introduced new functionality to make it easier for multiple members of the household to transact with us under a single customer account. And as a result, we're seeing more multi-person customer accounts where a family might walk into the store and purchase glasses for a husband, wife and two kids under the same account. Right now, even though, we're serving multiple people under one account, what we're reporting on is the number of accounts. And so as we see more of these households purchasing together, that's also impacting the metric in general. But in spite of that, we are expecting to see continued positive growth in the coming quarters.

Great. And Mark, as it relates to your question on adjusted EBITDA margin improvement at this time, we're still planning for an annual increase of 100 to 200 basis points and incremental adjusted EBITDA each year. We'll provide an updated perspective on what that number should be on our Q4 call early next year. I just wanted to point out the level of increase that we guided to for this year. Really used H2 of last year as the benchmark, off of which we'd add an incremental 100 basis points of adjusted EBITDA margin, so going from 6.9% H2 of last year to 7.9% H2 of this year. If we were to look at that on an annual basis, the improvement would be from 4.5% adjusted EBITDA margins last year to the 7.9% this year. So on an annual basis, the improvement is roughly 340 basis points versus the 100 basis points, which is just benchmarked against H2. Thanks for the question.

The next question today comes from the line of Edward Yruma from Piper Sandler. Please go ahead. Your line is now open.

Hey, good morning guys. Thanks for taking the question. I know you guys have some pretty interesting growth vehicles within the product assortment. I'd love to click down a little bit. I know you spent a lot of time talking about contacts. I guess what's the success of the private label product? Understand that maybe that'll help offset some of the gross margin drag. And then, second, on some of the higher price point frames and mixed materials that you've introduced in recent quarters. I guess kind of where does that stand in terms of percent of mix? And has that been a gross margin driver? Thank you.

Ed, thank you so much for your question. This is Neil. When we first launched contact, which was just a couple of years ago, we thought it was important to launch with our own brand, with Scout, because we're known as direct-to-consumer lifestyle brands, and thought that that was the right way to sort of introduce contacts to customers and the world. That being said, we always knew that it would be a relatively small percent of our overall contact sales as we just look at the overall market and the fact that third-party contact lenses constitute the vast majority of the overall market, and the fact that when you purchase contacts, you need to use a valid prescription. And those prescriptions have the brand of contacts written on the prescription. So we'll continue to have a private label option and it is higher gross margin than our other contacts that we sell. But the vast majority of contacts that we sell will generally be other brands, particularly the big ones from J&J or Alcon and others. You are right to point out that our sort of higher priced frames are higher margin, and you'll continue to see us invest in a broader frame assortment. We have not seen price resistance from our customers, and it's really important to us that we're delivering exceptional value. So while we now have frames at $145 or starting at $175 or $195, they would be sold for in other locations for several hundred, if not over $1,000. And that's just core to our ethos and our pricing strategy is to always deliver exceptional value.

The next question today comes from the line of Brooke Roach from Goldman Sachs. Please go ahead. Your line is now open.

Good morning and thank you for taking our question. I was hoping you could elaborate on the trends you're seeing in the market in terms of traffic and conversion as you've moved through 3Q and into 4Q that's driving the more conservative outlook that you've provided today in your fourth quarter guide. How does this inform your view of future total marketplace growth on a comparable basis?

Brooke thanks for the question. We're seeing consistent trends thus far as it relates to traffic and conversion. The metric that we report each quarter is our trailing 28-day store productivity as of the most recent week before our earnings call, and that number for store productivity is 100% on a trailing 28-day basis. That number now will fluctuate over the course of the quarter. So it's not necessarily that's the number that we'll see on a consistent trailing 28-day basis as the quarter evolves and as we ramp up for the busy holiday period. And so that's the color we've given from a quantification perspective as it relates to store productivity. What I will say is we've seen consistent trends as it relates to higher conversion and higher AOV and higher average revenue per customer in our stores that have offset lower traffic trends that the industry has been experiencing for several quarters.

Yes. And I'd say at a high level, we've seen some signs of stability over the last few months in the category and in more predictable customer behavior around periods like back-to-school than we've seen over the last couple of years. But we have yet to see evidence of significant pent-up demand flowing through the category in store traffic still remains below 2019 levels. And as we've seen -- throughout the last couple of years, there have been some choppiness in trends, including from weather disruption and continued macro uncertainty. And so while we're encouraged by some of the recent trends, we're maintaining a conservative outlook in general.

Great. Thank you. And if I could just ask one follow-up, on the insurance industry dynamics, can you provide an update on the amount of new wins that you have recently had on getting more customers to be in-network with Warby Parker?

Yes. We are encouraged by the progress that we're making on the insurance front. In Q3, we saw higher utilization of insurance usage both from our in-network customers and continued strong usage of out of network reimbursement. Some of the new functionality that we've introduced, like our universal eligibility check makes it easier for customers to understand their benefits and how to use them at Warby Parker and some of the relationships with large employers and carriers that we've introduced over the last year. We're seeing a stronger utilization there. So that's encouraging. And then, we also believe that as we continue to scale, as we expand our store footprint, as we hire more doctors, we continue to be, position ourselves to be a better partner to large employers and large carriers, and are encouraged by the potential for us to unlock much bigger relationships over time.

The next question today comes from the line of Oliver Chen from TD Cowen. Please go ahead. Your line is now open.

Thanks. Hi Neil, Dave, and Steve. Regarding your guidance and what's ahead and sort of the mixed consumer picture, what are you forecasting in terms of promotions, and how are you thinking about promotions on a year-over-year basis in this environment? And then, second, as we zoom out longer-term on the 900 store target, lots of opportunity ahead. What role will opticians play? And also, how is new store productivity helping inform that longer-term target? And why is that the right number, 900, in terms of what you see? Thank you.

Thank you so much for your question. This is Neil. On the consumer front and promotions in general, we've tried to run the business to always provide exceptional value, right? Whether that's $95 pair of glasses all-in that would typically cost $400 elsewhere, or our progressives offering, whether that's our standard progressives at $295 or our Precision Progressives at $395 that would cost over $1,000 elsewhere. And given that sort of exceptional value, we haven't felt the need to offer tons of promotions. So you shouldn't expect to see us introducing promotions during the holiday season. We do have an add a pair and save promotion that's currently been running now for a while and that encourages folks to buy more from us and that drives UPT and AOV, and so the more you spend with us, the more you save. But we'll continue to ensure that everything that we're selling is exceptional value and that price to quality ratio will continue to be unmatched. As we think about our retail rollout, we continue to be on track to open 40 stores next -- this year, and we plan to continue on a similar trend next year. We -- as we've sort of done analysis and worked with third-parties, right, we've identified that 900 number. There's over 48,000 optical shops in the U.S., and there's plenty of white space ahead of us. We continue to have no challenges hiring and training opticians. Opticianry is a licensed profession in most states and we've been able to develop a lot of talent internally. So not only do they have the competency and skillset around fitting glasses and expertise around lenses, but also are ingrained with our sort of culture around great customer experiences and making sure that every customer and patient feels amazing walking in and walking out of a Warby Parker store. As we think about hiring optometrists, we still continue to be a preferred employer of optometrists. And while only 1,800 or so optometrists graduate every year, we're not finding the challenges hiring optometrists that some other companies often speak to. So we'll continue to create an amazing work environment for optometrists. So that way we continue to hire the best and the brightest in the field, and we'll continue to invest in technology that leverages their expertise so they can focus on clinical care rather than administrative tasks and that also helps us on recruitment and retention of optometrists.

The next question today comes from the line of Mark Altschwager from Baird. Please go ahead. Your line is now open.

Thank you. Good morning. I guess first off was hoping you could talk a little bit more about some of the takeaways from the new marketing campaign and just the broader re-ramp in marketing spend. Are you seeing the demand lift you would expect there? You also mentioned that you would not expect the e-commerce growth line to be linear. Wondering if that signals maybe some more choppiness quarter to-date and what your readings are there.

Yes, thanks, thanks Mark. In general, we've been pleased with the returns and the response that we've seen from investing more in marketing in general. As we noted last quarter, our marketing efforts have kind of fallen into two categories in this last quarter, and that's extended to Q4, where there's the core marketing effort designed to drive transactions, and then there's a separate effort that is our brand awareness campaign, where that really reflects a commitment to long-term investment in our brand and increasing brand awareness. And we're pleased with the engagement and the response that we're seeing from that campaign. The goals there are really to move some of our brand awareness metrics and not necessarily convert in the current period. And so we need to wait a few months to look back at our brand awareness and see how much we've moved it. But in general, the engagement that we've seen on some platforms that we haven't been doing much marketing on previously, like YouTube and TikTok. We've seen – we’ve achieved kind of all our engagement goals there and are pleased with the returns that we've seen so far. And then as it relates to e-comm, we're confident in the overall trend line for e-comm continuing to go up and to the right. But I do expect there to be some volatility from quarter-to-quarter. And so there may be some acceleration or deceleration when looking at year-over-year growth from one period to another. That part of our business is more sensitive to marketing spend and media rates. And as we've started to allocate more of our budget to experimentation and new channels, recognize that some of those things will work, some won't, and we plan to take more shots on goal over the next few quarters than we did in the prior few quarters. And so that may be reflected in kind of some near-term volatility there. But overall, our focus on ensuring that our e-comm business is returning to long-term sustainable growth, and we certainly believe we're on a path to that.

And Mark --

This is very helpful.

We talked a little bit about this before the other factor impacting e-comm growth, and this occurs every year as we talk about making sure that we're capturing consumer demand during the busy holiday season, there's a fair amount of orders that we take in December, the back half of December in particular, and some of those we recognize as revenue in Q4 in December. But there are a number of them, the vast majority, actually, that will actually deliver and recognize revenue on in January and Q1 of the following year. So there's also that element of timing involved in the pace of e-commerce growth and orders over the course of Q4 within December in particular.

Thank you. And Steve, that actually dovetails nicely into my follow-up. I guess I'm wondering if there's any initial views you can share on sales growth plans for 2024. And I guess typically, as you called out, you do see your biggest quarter-over-quarter revenue gain from Q4 to Q1. Any reason we shouldn't expect that same typical seasonality as we look at the next few months here?

Yes, great question, Mark. It's safe to assume that we should assume the step-up from Q4 to Q1 will follow a similar trend line to what we've seen in previous years. That's just the pattern that our business has exhibited for many, many years, and we expect the same step-up from Q4 to Q1 looking ahead to next year.

The next question today comes from the line of Paul Lejuez from Citigroup. Please go ahead. Your line is now open.

Hey, everyone, this is Brandon Cheatham on for Paul. I was wondering; now that we've lapped the reduction in marketing spend. Can we assume active customer growth to accelerate over the next couple of quarters? And then, I was also wondering, could you quantify just how much of a drag on active customer growth is the change to multiple people ordering from one household account, and how should we think about that going forward? Thanks

Yes. Thanks, Brandon. To start, yes, we do expect that active customer growth will continue to accelerate. As mentioned, this is a trailing 12-month metric. And so we're currently comping against a period where three of the quarters we were spending materially less on marketing and then one quarter where we've seen marketing spend return to year-over-year growth. And we have seen that metric move positively as we've reintroduced some marketing investment and expect that to continue in the coming quarters. And right now we aren't provide any additional color on kind of the multi-person accounts, but it is a factor that is moderately impacting that metric and one that we may be able to provide some additional visibility into -- in the coming quarters.

Got you. And if I can just a quick follow-up. The direct business return to growth, I'm just wondering, can you help frame that with ex-contacts, my understanding is that's almost entirely online and your penetration has increased there. So I guess what is the core direct business and what is your outlook for that? Thanks.

Haven't broken out the split online of contacts versus glasses, and we'll continue to report on e-comm really as a blended channel. Suffice it to say that we're excited with the progress we're making selling contacts online and seeing that account for a greater portion of our business. We're also excited at how customers are using our e-commerce channel both to purchase new glasses and to more importantly, return to purchase a second or third pair of glasses.

The final question today comes from the line of Alex Straton from Morgan Stanley. Please go ahead. Your line is now open. Please do ensure that you are unmuted locally. It appears we may have lost Alex.

This concludes today's question-and-answer session and this concludes today's call. Thank you all for your participation. You may now disconnect your lines.