Ladies and gentlemen, welcome to the Warby Parker Fourth Quarter and Full Year 2023 Results. My name is Neil and I will be coordinating your call today. [Operator Instructions] I will now hand over to Jaclyn Berkley, Head of the Investor Relations, to begin. Jaclyn, 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, 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 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 February 28, 2024 and except as required by law, we assume no obligation to publicly update or revise our forward-looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with 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 Dave to kick us off.

Welcome, everyone, and thank you for joining us this morning. We'll spend the majority of today's call speaking to our 2024 plan and looking forward. But first, I want to take a moment to reflect on 2023. It's a year that we have a lot to be proud of and I'd like to start by recognizing our team's hard work and dedication to delivering the best eyecare products and experiences for our customers while improving our financial results and making progress against our mission to provide vision for all. Last year we delivered consistent double-digit revenue growth each quarter closing the year up 12% year-over-year while growing adjusted EBITDA more than 90% and expanding adjusted EBITDA margin nearly 330 basis points. We are pleased to have achieved a full year of positive free cash flow while we continue to make significant investments in our long-term strategic initiatives; including opening 40 new stores, scaling contacts and eye exams to approximately 9% and 4% of revenue respectively and introducing new innovative products like precision progressives. We are also proud to have surpassed a major milestone of distributing more than 15 million pairs of glasses to people in need through our Buy a Pair, Give a Pair program. But what we hope you'll take away from today's call is that we're not content. We have higher ambitions, in particular for top line growth and preserving more customers, all while maintaining operational discipline and expanding profitability. A focus for 2024 and beyond will be to improve our top line growth rate and we are pleased with the positive momentum we have seen so far year-to-date. Turning to our plan. You'll hear a lot of consistency in our priorities from last year, but we also want to make it clear where we are leaning into…

Thanks, Dave, and good morning, everyone. This year we'll continue to expand our holistic vision care offering, which is attracting new customers and driving higher customer lifetime value. Starting first with our core glasses business. Since launching Warby Parker in 2010, we've intentionally maintained our core $95 price point. Our simple affordable pricing structure has been an integral part of our value proposition and we believe it continues to attract new customers. And while we'll continue to expand our $95 offering, we plan to launch nearly 20 collections this year; many of which will incorporate our $145, our $175 and our $195 price points while introducing innovative frame constructions, new lens types, sizes and more. In addition, we'll look to build upon the momentum in our progressives business. We've made great strides in expanding our progressive penetration to 22.6% of prescription glasses sold in 2023, up from 21.4% in 2022. A key driver here has been customer receptivity to precision progressives, our premium progressive lens that we introduced in Q2 2023. It's a great example of our team's ability to quickly innovate in response to customer feedback while delivering exceptional value. While it's the highest price point product we have ever introduced at $395, it's still well below what a similar product often costs elsewhere. We continue to believe there's significant white space for future growth as progressives represent approximately 40% of the prescription eyeglass market overall. Progressives are closely tied to store expansion as progressives penetration is higher in our retail channel. In addition to being efficient customer acquisition vehicles, our stores are integral to advancing our goal of providing holistic eye care. Like 2023, nearly every new store that we open in 2024 will include eye exam capabilities. Industry-wide nearly 75% of prescription glasses are purchased at the…

Thanks, Neil and Dave. I'll begin with a detailed review of our 2023 fourth quarter performance along with some call-outs on our full year results. Then I'll outline our guidance for the full year and first quarter of 2024 while sharing some trends we're seeing Q1 to-date. Let's jump into Q4 and our full year results. Revenue for the fourth quarter and full year 2023 came in above the high end of our guidance ranges at $161.9 million, up 10.5% year-over-year and $669.8 million, up 12% year-over-year, respectively. From a channel perspective in Q4, retail revenue increased 17.1% year-over-year while e-commerce revenue decreased 1% versus Q4 of 2022. For full year 2023, retail revenue increased 21.7% year-over-year while e-commerce decreased 3.1% year-over-year due largely to impact from marketing pullbacks in H1, but the channel returned to growth in H2 2023 versus H2 of 2022. As a reminder, every year we see a revenue deferral from Q4 into Q1 depending on the timing of when orders are delivered and when we recognize revenue. This year a larger portion of our late December orders were delivered in January, which shifted more revenue recognition into January than we initially expected and will be reflected in our Q1 results. We estimate we deferred $2 million more than anticipated from December into January with a similar channel split of 2/3 retail and 1/3 e-commerce. This higher revenue deferral was driven by strong demand in the final weeks of the year. This momentum has carried through into Q1 to-date including a strong recovery and reacceleration after the weather related store closures in mid-January. Turning to our stores. We added 37 net new stores over the course of the last 12 months ending the year with 237 stores, up from 200 at the end of 2022. This…

[Operator Instructions] We now have our first question from Mark Altschwager from Baird.

Maybe first for Neil or Dave. Hoping you can give us a little bit more perspective on the eyecare category backdrop, where you think we are in the replacement cycle? I know you said you're not anticipating any major inflections this year, but maybe you're seeing some green shoots given your commentary on the December period and then the January activity. So just any more color there would be great.

I'd say we're encouraged by some of the demand signals that we're seeing, including at year end and so far year-to-date other than when we had to close many of our stores due to extreme weather in January. However, we've yet to see a flood of pent-up demand and over the last couple of years we've seen periods of fluctuating demand. So we continue to guide and plan conservatively while remaining in position to capture increased demand as it materializes. And as mentioned, we're seeing strong efficiency in our marketing spend and plan to deploy dollars as we see opportunity.

Great. And then maybe just a follow-up as we think about kind of the medium-term growth algorithm here. Real estate, you're planning to open 40 stores this year. Is that the right pace we should be thinking about medium term or any opportunity to accelerate? And then guidance this year 100 basis points roughly of EBITDA margin expansion. I know previously you've spoken to a target of 100 basis points to 200 basis points per year. So just kind of any change to how we should think about that growth and margin algorithm.

Mark, this is Neil. 40 stores is a good algorithm for now. We're finding that that is a nice steady structure where we continue to open up stores on time and on budget and continue to see strong paybacks and strong 4-wall margin. So we've been planning for that level of store investment going forward.

And to the EBITDA margin perspective, I think the range that we've given for the foreseeable future is to drive adjusted EBITDA margin improvement of approximately 100 basis points to 200 basis points each year. And so we're targeting roughly 110 basis points of adjusted EBITDA margin improvement for this year from 7.8% to 8.9%. The majority of that improvement will really be driven within SG&A, within corporate expenses and within some of the other expenses associated with servicing the customer, retail salaries and customer service salaries given we're projecting gross margin will stabilize in the mid-50%s similar to the guidance that we gave last year for gross margin.

Thank you. Best of luck this year.

We now have our next question from Edward Yruma from Piper Sandler.

A couple of quick ones for me. First, I know you guys have been adding more premium frames mix material. Would love to understand kind of what the uptake has been there. Does it give you kind of the same lift as you get I think with progressives from a margin perspective or a dollar perspective? And then also just a quick follow-up. On the restructuring charge, just want to make sure I think it was just $1 million. I think that kind of fell from the restructuring earlier in the year, but would love to understand that and kind of why it fell in the fourth quarter.

First of all, I'll sort of tackle the question about our assortment. We plan to have 20 collections this year. As you mentioned, we continue to introduce innovative designs and different materials and different lens options. We have seen our customers gravitate towards these and haven't seen any sort of price resistance. When we look at the market according to the Vision Council, average out-of-pocket spend for even those vision insurance customers is $203, right, which is higher than our glasses ASP. So we also even have room to increase our glasses ASP and even for out-of-network customers, they'll still continue to stay with us. So I just use that as an example of how we continue to provide exceptional value. So as we've introduced higher price point items, we still work off of the algorithm of how can somebody pay a fraction of what it would cost elsewhere.

And that $1 million restructuring charge, it really is an aggregate of reserves to cover various legal cases that we're in the process of dealing with or settling. So it's a round number that we estimate will cover all of those various cases.

We now have our next question from Mark Mahaney from Evercore.

Okay. Two questions, please. The marketing spend or intensity seems to be pretty consistent in '24 versus '23. I know you talked about increasing your marketing spend, I assume that means just in absolute dollars. Any change in your thinking on channels that may be more or less effective than what you did this last year or 2? And then secondly, your guidance so you've got this kind of decelerating growth in your guidance. Your Q1 outlook has faster growth than your full year guidance implies. I don't think it's an issue of tougher comps. So if you're able to hit your Q1 numbers, why would growth decelerate as you go through the year?

Sure. I'll start off with the marketing spend as a percent of revenue question. We're planning to keep marketing spend as a percent of revenue consistent in the low teens and that will naturally let us see marketing spend dollars comp up year-over-year. $90 million at the high end of our guidance assuming 12% of revenue, which is fairly consistent with where marketing spend landed for the full year here. But for us, marketing spend in the low teens means somewhere between 11% to 13% so 12% would be a safe number to use for now. In terms of our guide, we are still projecting the business with some level of conservatism because we think it's the prudent thing to do in this macro environment. We are guiding to 11% to 13% for the full year, but we are seeing very positive trends in the business through Q1. So that gives us comfort giving a guidance range that is appreciably higher than the full year guide. So we're guiding to 13.7% to 14.7% for the quarter. And as the year progresses, we'll hopefully look to revisit our full year outlook. But for now, we're guiding conservatively and feel very confident with the numbers that we're putting out for Q1, which are a notch higher than the full year.

And then as we just think about our marketing mix, we've been pleased by the returns that we've seen from our increased marketing investment and we'll continue to deploy dollars opportunistically. During sort of the periods of lower demand in the category, we did sort of shift a lot of our marketing towards paid search and towards winning our TV. And then over the past year, we started to redeploy dollars into paid social, into streaming, into influencer and creator marketing to good success. So you'll see us continue to diversify and invest more in those channels which we did vis-a-vis 2019 and prior.

We'll now take our next question from Dana Telsey from Telsey Group.

As you think about the gross margin component, Steve, and the puts and takes especially as more eye exams are added and the benefit from attachment sales; how do you think about the buckets of expenses and growth for each of them as we go through 2024? Is there any difference in cadence as we move through the year?

Thanks for the question, Dana. We plan to see consistency in growth from our glasses category. And as I think we've observed in 2023, we saw a modest reacceleration in growth for glasses while we continued to scale both contacts and eye exams significantly. We plan for more moderate growth, but still strong growth within contact lenses and eye exams and we scale these still new product categories while we maintain a very consistent glasses growth profile. And as we scale progressives and precision progressives in particular, we think that the puts and takes of higher glasses margin will help to stabilize some of the deleverage that we've seen from contacts and eye exams. And within the other elements of our cost of goods, the more fixed components, i.e., optometrist salaries and store rent expense. Given we're opening a consistent number of stores, i.e., 40 new stores per year, we'll naturally see a slowdown in year-over-year dollar growth in eye doctor salaries and store rent. So we'll see less deleverage from those categories. In addition, we're projecting for the first time since 2021 that e-com will comp positive in the low single digits. So that will no longer be a source of deleverage, which really accentuates the fixed cost nature of our comp stack as we calculate gross margin.

We now have our next question from Oliver Chen from TD Cowen.

This is Katy on for Oliver. Just kind of on that Versant Health announcement, what is the long-term revenue opportunity with doubling the number of people that are in-network for Warby Parker? And then I've got a follow-up as well.

Yes. We're very excited to announce this new partnership with Versant Health to add 15 million incremental lives later this year. And overall, we've seen a lot of strength from our insurance business due to increasing utilization in part stemming from some of the tools that we've built like our universal eligibility check and education for consumers on how they can use their insurance benefits with us. And so our existing insurance business has been a source of strength and we're excited to nearly double the number of people who can use their in-network benefits. Right now we kind of haven't modeled in the positive impact from those future lives into our projections and guidance for the year, but plan to update you all in the coming quarters.

Okay. Got it. And then my follow-up is really around traffic and conversion during the quarter. Could you just talk a little bit about the cadence that you saw?

Sure. So we're excited about sort of the growth and the momentum that we're seeing in sort of Q1 to-date and you can see some of that in our Q1 guide. But we are seeing a deliberate customer. We saw some of the return to normalcy a little bit during the FSA period and we continue to see those customers sort of coming into our stores familiar with the brand, excited about the assortment that we have and taking more and more advantage of our sort of holistic vision care offering, including exams and contacts. So we continue to see strength in conversion and at least here in Q1 have seen some improvements to traffic.

We now have our next question from Brooke Roach from Goldman Sachs.

I was hoping you could elaborate on your priorities for driving accelerated top line growth versus optimizing efficiency on marketing spend and other investments. As you look ahead, what factors are underpinning your decision to reinvest some of those top line outperformance quarters into additional investments, including marketing versus flowing that through to the bottom line?

So as we think about our growth priorities, right, one is opening up new stores that we know are highly productive. The second is deploying marketing dollars efficiently and we're comping off of a period last year where we cut marketing pretty substantially and as we've reinvested in marketing, we're seeing good efficiency. And as we continue to see very consistent repeat purchase behavior and even expanding customer lifetime value, we recognize that every new customer is a good investment. So you'll see us invest more in marketing this year and have that flywheel sort of going as we sort of reinvigorate growth and start to return to a growth profile that we had pre-pandemic. So you'll continue to see us experiment more from a marketing perspective. You'll continue to see us deploy across these multiple channels. The advantage to the marketing sort of structure that we built is that those dollars can be sort of increased or decreased on a very short-term basis so we're able to respond very dynamically to market conditions. And we've also found just incremental margins through higher growth, right, especially as we look at our gross margins and the fixed components of those including store rent and optometry salaries. And as we just look at expanding our adjusted EBITDA margins, right, that's really going to come from leverage over operating expenses, in particular corporate expenses. So we think that investments in marketing will continue to drive margin expansion.

Great. And just a quick follow-up. Are you seeing any notable differences between your urban and suburban market locations, whether that's customer acquisition, retention or marketing efficiency?

We're starting to see the gap narrow from what we saw for example a couple of years ago. That being said, we are investing more in suburban areas and in suburban areas, right, we tend to see more families, we tend to see higher progressive penetration. I should also note that our new stores have exam capabilities so the exam capabilities are also driving higher AOV, right? We have more examine sales, more contact sales, more progressive penetration. So there's a little noise in that. But the good news is that we're seeing strength both in suburban and urban locations.

We will now take the last question from Alex Straton from Morgan Stanley.

I wanted to talk a little bit about the store and e-com opportunity going forward. I think you said stores were doing about $2 million a box or so. I'm just wondering where do you think that goes over the long term? And then with e-com returning to growth this year, I think that's what you said, how do you think about the right size of that business over time?

So for stores, we've seen a lot of consistency and we continue to see sort of growth. So we plan to continue to see expansion from that $2 million, $2.1 million going forward. Again we have these tailwinds at our back from exams, from contacts, from progressives penetration and now also from insurance and nearly doubling the number of in-network lives and we know that those customers tend to spend more than noninsurance customers. As we think about our e-commerce business, right, that will be comping positive going forward and no longer sort of be a drain from a top line perspective, but also from a bottom line perspective as we've seen growth normalize there from the outsized growth that we saw during the pandemic. The category will always have lower e-commerce penetration than many other categories because of the prescription nature, because of the infrequent purchase process, because of just the unique challenges of buying glasses. But we'll continue to be a leader in driving overall penetration in the category and continue to roll out new products and features, whether it was the first of its kind true to scale virtual try-on that we have that we continue to deploy, whether it's our virtual vision test that will just continue to make it easier and easier to shop online. At the end of the day, right, we view our business in an omnichannel manner and we see folks go back and forth between channels. So right, you may see increasingly more repeat purchase behavior online from folks that may have gone in the stores to start in particular, right? We see that a lot with contacts, but we also see it with glasses as well. So you'll continue to see sort of growth in e-commerce.

Thank you very much. This is the end of the Q&A session. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.