Hello, and welcome to today's Warby Parker First Quarter 2024 Conference Call. My name is Bailey, and I will be the moderator for today. [Operator Instructions] I'd now like to pass the conference over to Jaclyn Berkley, Head of Investor Relations. 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 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 May 9th, 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 Neil to kick us off.

Thank you, Jacqueline, and good morning, everyone. The momentum in our business continued to build throughout the first quarter, primarily driven by strength in our retail channel and glasses business. We are pleased to have delivered record-high quarterly revenue and adjusted EBITDA in Q1, along with improvements to gross margin. Our Q1 net revenue of $200 million was up 16.3% year-over-year, and adjusted gross margin was 56.9%, up from 55.2% in Q1 last year. We also delivered adjusted EBITDA of $22.4 million, representing an 11.2% margin. Over the last couple of years, in spite of challenging industry dynamics, we continued strategically investing in the business for the long term, including expanding our store footprint, hiring optometrists, scaling our contacts business, introducing new frame and lens innovation and, more recently, reinvesting in marketing. Our Q1 results are evidence that these investments are bearing fruit and demonstrate our team's ability to execute and deliver incremental growth and profitability. Based on our first quarter performance, we are raising our full year guidance for both net revenue and adjusted EBITDA. Steve will provide more detail on our financial results and guidance, but first Dave and I will review our progress against Warby Parker's strategic priorities, as well as the drivers of our Q1 results. I'll start first with the positive inflection in our glasses business, where we saw strength in single vision glasses and progressives. In Q1, glasses overall drove approximately 70% of our revenue growth for the quarter, and as a product line, glasses grew over 13% year-over-year compared to average growth of 8% over the course of 2023. In addition, glasses are our highest margin product and the primary driver of gross margin expansion in the quarter. We attribute the improvement in glasses growth to many of our core strategic investments, including…

Thanks, Neil. We told you in our last call that our goal for this year was to re-accelerate glasses growth and active customer growth, and we are pleased that the year is off to a good start across both dimensions. We believe a core reason for this is our team's strong marketing execution. We're proud of what our marketing team has achieved year-to-date, curating high-impact brand moments while driving efficient growth. In Q1, marketing spend was concentrated in 2 main categories. The first being long-term investments to drive brand affinity and awareness. The second being investments to drive customer acquisition and near-term transactions. Hopefully, many of you were able to experience the great North American solar eclipse on April 8th. We took the opportunity to celebrate this rare celestial event by designing and distributing free eclipse glasses in our stores with the goal of making viewing safe and accessible for customers. This activation drove our highest retail traffic week ever, generated thousands of press mentions, and enabled our stores to grow awareness within their communities. We continue to hear that the number one reason people who are familiar with Warby Parker but have not shopped with us is that they're not aware there is a store nearby. We believe that the excitement around the eclipse created significant awareness of our growing store footprint, and when many of these consumers need their next exam or to purchase their next pair of glasses, Warby Parker will be top of mind. We were also excited to work with like-minded partners to extend the reach and impact of our campaign, including Delta Airlines, who distributed custom, co-branded solar eclipse glasses to passengers aboard their eclipse flights and to travelers in select Delta Sky Clubs. Overall, we were very pleased with the strong engagement we…

Thanks, Neil and Dave. Revenue for the first quarter came in at $200 million, up 16.3% year-over-year. From a channel perspective, retail revenue increased 24.4% year-over-year, while e-commerce revenue increased 1.8% versus Q1 of 2023. Turning to our stores, we added 41 net new stores over the course of the last 12 months, ending the quarter with 245 stores, up from 204 stores at the end of Q1 2023. This 20% increase in our store count compares to a retail revenue growth of more than 24% over the same period. Looking at Q1 retail performance on a blended basis, including both new stores and stores open greater than 12 months, retail productivity was 102% as compared to the same period last year. As a reminder, we define retail productivity as the year-over-year change in retail sales per store for the average number of stores open in the period. This metric covers all stores open in the period, even new stores open in the last 12 months. Our new stores continue to deliver strong unit economics, performing in line with our target of 35% four-wall margins and 20-month paybacks. 2/3 of our 2022 cohort have now paid back in an average of 17 months, and the cohort as a whole is on track for approximately 20 months. For stores open more than 12 months, average revenue per store was $2.2 million and performance was in line with our target 35% four-wall adjusted EBITDA margins. Over the course of the past year, we added nearly 50 net new eye exam locations, bringing our stores with eye exams to 204, or 83% of our total fleet of 245 stores. From a channel mix perspective, for the first quarter, retail represented 69% of our overall business. This compares to 64% in Q1 2023. From…

[Operator Instructions] Our first question today comes from the line of Oliver Chen from TD Cowen.

The active customer growth momentum is quite impressive and attractive. What do you see happening there longer term in terms of your longer-term target growth rate of active customer growth? And then on your comments, you call out macro, and we're seeing a bifurcated customer generally in terms of the health of the consumer, but you also call that more consistency. Would love your thoughts on traffic, traffic trends you're seeing, and if the consumer is still being very considered and how that may or may not interplay with what you're thinking about price points? And lastly, you gave a lot of great ingredients, Steve, on fixed versus variable. What are the rough fixed versus variable mixes? And as you think longer term, what are you most excited about in terms of margin expansion?

This is Neil. On active customer growth, we continue to see improvement there, and we've been seeing that for a while, particularly as we think about sort of the in-period metric. As a reminder, what we share publicly is a trailing 12-month metric. That still includes periods where we pulled back significantly in marketing when we saw slowing demand during periods last year. So we anticipate that our active customer growth will continue to increase. We're also continuing to deploy more capital towards customer acquisitions across more diverse channels and are finding success. We continue to invest with discipline to ensure that we're getting the returns that we'd like. We continue to see really strong customer lifetime value, as you see in our slides related to sales retention rate. So we're pretty excited about what we're seeing with respect to what we have control over, right, the deployment of marketing resources. That being said, your next question about the macro, we are seeing sort of more consistency, let's say sort of month to month, but still we tend to be in the best retail centers across the country and traffic still hasn't sort of rebounded to what we would have expected at this point. So and if we think about the broader optical category, it still has not returned to normalcy. But as a business, we're going to continue to stay focused on what we can control, which is sort of marketing, sort of managing our expense base so we can continue to grow, acquire customers while expanding profitability. And that's sort of the mantra here at Warby, irrespective of the macro, we're going to gain market share and grow sustainably.

The color that we've given in terms of fixed versus variable, particularly as it relates to gross margin, is approximately 60% of our costs are variable, and that's a good number to stick with for now. We're excited to take up our full year adjusted EBITDA number and margin, so that adjusted EBITDA margin is increasing 130 basis points year-over-year, and excited to add that to the full year based on the strong performance we saw in Q1. In terms of what we're most excited about that will continue to drive margin, so one, we saw in Q1 an acceleration in glasses growth. Glasses, as a reminder, is our highest margin product category, and in particular, progressives and our new precision progressive lens in particular is driving really strong gross margin and gross profit dollars. We also plan to maintain marketing intensity. That's marketing as a percent of revenue in the low-teens at around 12% of revenue and we plan to be disciplined as we deploy marketing spend. We also expect to see continued margin improvement as we ramp new store productivity and as we achieve labor efficiencies and higher eye exam utilization at our newer eye exam stores. As a reminder, we've added approximately 50 eye exam locations over the past year. It's critical for us to be able to serve the customer, but it also takes some time for eye exam offerings to ramp. And lastly, is just maintaining discipline with and leveraging our corporate expense base. We're adding very selectively to corporate expenses, and we'll continue to see that as a source of leverage over time.

Our next question today comes from the line of Dana Telsey from Telsey Group.

Nice to see the progress on the results. With the glasses penetration, it seems like moving higher and being higher margin. The drivers of the glasses penetration, is it the newness in the product, and are you seeing higher prices also, and what are you seeing from the customer base, new customers online versus in-store? And then lastly, Steve, you mentioned that obviously you'll no longer be giving guidance on some of those store metrics that you mentioned. On new markets versus existing on terms of where you're opening this year, has anything changed in how you're looking on the productivity profile of store openings?

In terms of glasses, it really comes from great execution from multiple parts of our business, starting from our team designing and bringing to life beautiful and innovative products to continue to open stores that are conveniently located to -- for our customer base, to strong execution on the marketing and customer acquisition front, as Neil was mentioning, and to all the investments that we have been making over the last few years to deliver great products and accessible experiences for customers are delivering and our marketing messages are resonating. And we're seeing strong adoption of our newer products, ranging from precision progressives, as Steve mentioned, to new collections at a variety of price points, including some of our higher price collections, $145, $175 and $195. In terms of where we're generating new customers from, we continue to see that our stores are the primary way that our customers are engaging with Warby Parker and are seeing strong results from our stores. We saw our retail revenue grow over 24% year-over-year, while our store base increased 20%. And so even as many of those new stores are ramping, are seeing really strong performance out of retail and continue to see the majority of our customers and majority of new customers come from those stores.

And Dana, for your question as it relates to the productivity of stores in new markets versus existing markets, we're seeing a lot of consistency in productivity, whether it's a greenfield new market or whether we're expanding an existing market. In 2023, as a reminder, we opened up stores in 17 new markets and 17 existing markets. We're very pleased with the productivity curve we're seeing in those new markets opened in 2023. And the numbers that we talked about earlier in terms of average revenue per store of $2.2 million, 20-month paybacks, and a path to achieving 35% 4-wall margins within 24 months, usually sooner than that, we're seeing both within our existing markets and within our new markets. We also talked about the majority of our stores already having paid back from our 2022 cohort. And as a reminder, in 2022, we opened up stores in just 5 new markets. And across those 5 new markets, we're seeing very consistent performance across the dimensions that we talked about.

Our next question today comes from the line of Mark Altschwager from Baird.

This is Amy Teske on for Mark. To start, you noted that productivity trends were 102% in the quarter, which implies some moderation from where you were tracking at the end of February. So I was hoping you could speak to some of those trends through the quarter? And then second, if you could comment on learnings from your recent marketing investments. It seems like the Eclipse glasses campaign really drove a lot of buzz. So wondering if you're seeing any direct correlation to new customer acquisition yet.

Store productivity question, we typically see that number fluctuate over the course of the quarter. When we talked about that number in February, it was closer to 106%. And the large reason for that was because we were comping against a period where we had bad weather and some easier comps. We also had some fluctuation in that number over the course of Q1, given some bad weather in early January, which normalized. So the 102% number is more in line with the intra-quarter visibility that we've given on previous calls. And we view that as a positive indicator of the performance of our store fleet this year versus last year.

On the marketing front, we did see the solar eclipse activation really drive a lot of traffic and sales, some within Q1 and then some into Q2. It actually drove our highest retail traffic week ever. We were distributing hundreds of thousands of these eclipse viewers. And this comes from sort of a tradition at Warby to do fun things to engage the community and our customers. So we first celebrated solar eclipse back in 2017 and included a big black party in front of our store in Nashville. That was in the path of totality. And we took those learnings and applied it to the great North American eclipse on April 8th. Also in the past, we had the Warby Parker class trip where we purchased an old yellow school bus, took out the seats, replaced those with oak shelving, and basically had a mobile store that traveled across the country. So we share these as examples of some of our brand marketing initiatives that you'll see us continue to engage with over the course of the year and next year as marketing spend has now sort of normalized. We've also been able to sort of diversify the channels across linear and streaming, paid social, direct mail, creator and influencer. And we're finding that this diversified approach is leading to stable acquisition costs that give us confidence in our ability to continue to drive customer growth.

The next question today comes from the line of Mark Mahaney from Evercore.

I wanted to ask about insurance channels. So can you just bring us up to date on where you are in terms of being able to access more customers through those channels, getting more coverage?

Yes. We continue to make good progress on the insurance front. The partnership that we announced last quarter with Versant MetLife, the integration there is on track. We launched a very small pilot earlier this month, but the vast majority of those lives will be integrated in the coming months. And we expect that the incremental 15.5 million lives will be able to use their in-network benefits by the end of the year. I should note that we haven't included contribution from this partnership into our guidance, given that those lives are not integrated just yet. And then we continue to see positive trends from our existing insurance relationships with increasing utilization over time as employees understand that they can use their in-network benefits with Warby Parker. We find that kind of awareness grows along with those relationships are in place and continue to see strong utilization trends. And we also believe that the investments that we've been making to scale our business, and in particular, continuing to open stores across the country, continuing to hire lots of eye doctors, make us a natural and attractive partner to other insurance carriers and such are excited to make progress there and, in particular, are excited to welcome lots of new Versant MetLife members to Warby Parker later this year.

The next question today comes from the line of Janine Stichter from BTIG.

A question for Steve. I wanted to ask about the gross margin guidance in the mid-50s. Just how to think about the range of outcomes there if we continue to see the glasses offering outperform? And then also I was just looking for an update on in-store telehealth, which I think we launched last year, and the initial learnings from those tests?

I'll address the question on gross margin and then turn it over to Neil and Dave for an update on what we're doing in telehealth. So we're still very comfortable with the guidance that we've given to be in the mid-50s from a gross margin perspective. We're very pleased with the leverage that we saw in Q1, driven by the acceleration of glasses growth. We are still operating in a dynamic macro environment with a level of uncertainty that still persists for the optical industry. We are growing faster than others in our category in taking share, which gives us optimism. But at the same time, as we project our business for the remainder of the year, we still want to maintain a thoughtful and prudent stance as it relates to the growth of glasses and the recovery of that category. We are still seeing very strong momentum and growth as it relates to contacts and eye exams. And so as we potentially see those 2 categories make up a greater portion of our product mix in Q2 to Q4, we are still maintaining a conservative approach as to how we're modeling gross margin. It's still in the mid-50s. Assuming glasses margin persists, it could be the higher end of that range. But for now, I think we want to be thoughtful and maintain a very consistent level of guidance, as we did last year, to be within the mid-50s and perhaps toward the low end of that range, depending on the ultimate mix we see of glasses, contacts, and exams the remainder of the year.

One other thought on gross margin is that we tend to see it highest in Q1, thanks to some of the revenue deferral from Q4 and into Q1 coming out of the FSA season at the very end of the year. That being said, we continue to have great leverage of the fixed costs of COGS, thanks to our retail growth and our e-commerce channels sort of returning to growth. And we've always maintained that we have significant opportunities to gain leverage over those fixed costs. One of those fixed costs is our investment in our eye exam business, particularly our doctor salaries. As you mentioned, we are continuing to invest in telehealth, and we view this as a way to supplement our in-person doctors and provide more availability and convenience to our customers and patients. As we have an in-person doctor, we may be able to have broader hours, thanks to telehealth. So you'll see us continue to expand the pilots on video-assisted eye exams that we currently have. But the biggest impact will likely be next year as that gets scaled and we continue to sort of invest in that area of our eye exam business.

The next question today comes from the line of Dylan Carden from William Blair.

Just curious, how you think about the comp lift from new doctor availability. And if there's sort of incremental marketing that you're putting towards that to kind of grow awareness? I appreciate there's a lag time just sort of given the purchase cycle. And then if I missed it, apologies, but any color between sort of growth by channel as you think about the second and full year guide revenue?

Yes. So overall, we continue to see that our stores with doctors drive higher level of sales. And so we've been excited to expand our doctor network and onboard new doctors into all of our new stores. In addition to adding doctors to some of our existing stores. There is a ramp up period, as you noted. And there is a big opportunity for us to drive more awareness that we offer exams and that we have doctors conveniently located across the country. We find that even with some of our longstanding customers who have bought multiple classes from us online, that they're not aware that we have stores that are now conveniently located in their cities and there's even less awareness that we have eye exams. And so our team has been focusing on leveraging our increased media investment to drive home some of those messages, whether that's through TV commercials or direct mail campaigns within a certain radius where we're opening new stores or have brought on new doctors. And so we're excited to continue to build a momentum there. We also believe that as more customers are able to use their in-network benefits, that will also help increase doctor utilization over time. And in terms of our channel growth, we know that we continue to see the majority of our growth driven from retail. We have seen e-com influx positively over the last few months here, but still projecting, still guiding to low single-digit growth for e-com for the remainder of the year.

Our next question today comes from the line of Brooke Roach from Goldman Sachs.

This is Evan Dorschner on for Brooke. I guess first, just a follow up on Mark's question earlier regarding insurance. Are you seeing any differences in trend between in-network customers and out-of-network customers and just how they shop? And then separately, could you just talk a little bit more about e-commerce trends? And I may just mention still guiding to low single-digit growth for the year. What's it going to take to drive an even further acceleration on things reflected this quarter, especially as you start to lap lower marketing spends last year?

So on the insurance front, we tend to find that customers who use their in-network benefits at Warby tend to be some of our best customers. They tend to spend a bit more in both for their initial purchase and over time. And so, we're excited to expand that population. The majority of our customers do have vision insurance. So 60% of people who shop with us have vision insurance. Some of those people are leveraging their benefits and others just know that they're getting great value with us. But we are excited to make it even easier for people to get value out of those benefits, both in-network and out-of-network. And then as it relates to e-com, we're seeing modest growth at this point, but it is a significant improvement when you compare to where we were a year ago when e-com was a drag on our overall business and was negatively impacting both revenue and gross margin. Our team has driven better trends, particularly in glasses. And we know that we still have a headwind from Home Try-On as a diminishing portion of our overall sales and our e-commerce sales, but direct glasses purchases are growing nicely. And those direct glasses purchases enable us to serve customers faster. They're also higher margin. So we're encouraged by that trend. We also find that a higher percentage of repeat purchases take place online. And so, as our overall installed base of customers grows, that will be a tailwind in addition to contact sales, largely taking place online as well. And so, we continue to believe that e-commerce is on the right track and will continue to positively impact growth going forward and are excited to continue to evolve our digital experience and introduce some improved digital features that will make shopping more fun and convenient across channels later this year.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.