Hello and welcome to today's Warby Parker’s Third Quarter 2024 Earnings Call. My name is Bailey and I'll be your moderator for today. All lines will be muted during the presentaiton portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I'd now like to pass the conference over to our host today, 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 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 November 7, 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. With that, I'll pass it over to Neil to kick us off.

Thank you, Jaclyn, and good morning, everyone. We are pleased to deliver Q3 results ahead of our guidance with net revenue of $192.4 million, representing 13.3% growth year-over-year, along with 250 basis points of adjusted EBITDA margin expansion, our highest of the year. Driving these strong results is our team's unwavering commitment to delivering on our mission, while taking share, growing sustainably and accelerating growth. We're encouraged by our team's progress against the strategic initiatives we laid out at the beginning of 2024, and believe our year-to-date results in particular, the momentum in active customers and glasses growth are evidence that our strategy is working. We drove accelerating top line and active customer growth in each month of Q3 and continue to see momentum into October, positioning us favorably as we head into our busiest months of the year. Based on our third quarter performance, we are raising our full year guidance and now expect to deliver approximately 14% to 15% revenue growth and approximately $73 million in adjusted EBITDA. Before Steve provides more detail on that later in the call, Dave and I will review the key drivers of our Q3 performance. Underpinning our Q3 results was our highest active customer growth of the year with strength in both new and returning customers. We ended Q3 with 2.4 million active customers, an increase of 5.6% on a trailing 12 month basis. While average revenue per customer grew 7.5%. As expected, active customer growth has improved each quarter this year, even as we've maintained marketing spend as a consistent percent of revenue and we anticipate Q4 being our highest active customer growth year-over-year. While our active customer count captures purchases across channels, we're seeing the highest customer growth come from our stores, which we believe remain highly efficient customer acquisition…

Thanks, Neil. The third driver of our Q3 growth was our highly productive store base, complimented by an improving e-commerce channel. Our omni-channel experience remains unique in our category and we continue to benefit in how our channels support one another. Many of our largest and most mature markets like New York, Boston, Dallas and Chicago, continue to see strong retail growth, while also delivering some of our highest e-com year-over-year growth. We believe this underscores the meaningful opportunities ahead of us to drive omni-channel growth, as we see greater brand awareness and store density benefit overall market growth. In Q3, we opened 13 new stores, 10 of which were expansions within existing markets, including Seattle, Dallas, Milwaukee and New York. Three new stores were in new suburban markets, including Akron, Ohio, Huntsville, Alabama, and Springfield, Missouri. Over 50% of the major metropolitan areas we operate in only have one store, and we believe we have significant potential to expand our presence in existing markets, while also entering new markets. Since Q3 of last year, we've added 42 net new stores and ended the quarter with 269 stores, well below our longer term, 900 plus store potential, which would still represent a small fraction of 45,000 optical shops in the U.S. Retail revenue increased approximately 20% year-over-year, driven by new store growth and consistent performance within our existing stores. Steve will go into more detail on this shortly. I want to take a moment to highlight our store teams. We're fortunate to have tenured store leadership teams, approximately 60% of whom have been promoted from within the company. Just last month, we brought together our store leaders, district leaders, optometrists and more in Dallas for a three day summit where we focused on planning, training and team building as we…

Thanks, Neil and Dave. Revenue for the third quarter came in at $192.4 million, up 13.3% year-over-year. From a channel perspective, retail revenue increased approximately 20% year-over-year, while e-commerce revenue increased approximately 1% versus Q3 of 2023. As Dave mentioned, our e-commerce channel grew in the mid-single-digits on a sales order value basis. Turning to our stores, we added 42 net new stores over the course of the last 12 months, ending the quarter with 269 stores, up from 227 at the end of Q3 2023. Looking at Q3 retail performance on a blended basis, including both new stores and stores open greater than 12 months, retail productivity was 99% 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 of our stores, including newer stores and stores open 12 months or more. As such, this metric is impacted by a number of factors, including the timing and composition of store openings year-over-year, as well as the timing of doctor hiring for new stores. For stores that have been open greater than 12 months. We continue to observe strong year-over-year growth. Our new stores continue to deliver strong unit economics performing in line with our target of 35%, four wall margin and 20 month paybacks. For stores open more than 12 months, average revenue per store was 2.2 million, consistent with the first half of the year and performance was in line with our target 35% four wall margin. Over the course of the past year, we added 45 net new eye exam locations, bringing our stores with eye exam capabilities to 228 stores, or 85% of our total fleets. From a…

[Operator Instructions] Our first question today comes from the line of Brooke Roach from Goldman Sachs.

In the prepared remarks you commented a few times about seeing sequential momentum as you moved throughout the quarter and into October. Can you elaborate on the drivers of that sequential momentum? How much of that do you attribute to the overall vision care industry versus specific actions that you're taking within your own business? And then separately, can you also provide a little bit more color on how you're thinking about marketing efficiency and marketing spend as you finish out the year and move into 2025?

We saw some softness in in July and as we speak to sort of other retailers that seem to be across categories and since then we've seen sequential strength building and maintaining as we sort of are going into Q4. We've continued to be disciplined in our marketing efforts as we have increased spend. And as we think about discipline that's really focused on our acquisition cost per customer. That's always been our sort of guiding principle as we've deployed marketing dollars since the beginning of the company. How do we ensure that we're deploying the right dollars across the right channels to make sure that we're acquiring the right customers. And we're really happy with our marketing performance and our ability to scale our marketing spend. And we've been able to do that really over the last year and a half very effectively, which gives us confidence for the rest of the year and the future.

And just building off of that, Brooke, in terms of the momentum that we've seen in the business, we've really seen momentum in a few areas that we've called out. One is active customer growth and we're pleased to see sequential increases every quarter of the last five quarters in active customer growth, which is a very important metric to us. And as we look ahead to Q4, we certainly expect that quarter to be the strongest for us from an active customer growth perspective. We've also seen continued velocity in e-commerce, which we called out in some of our prepared remarks. And our stores continue to perform very strongly, certainly in line with the targets that we put out there, 35% total margins and trending towards 20 month paybacks from a marketing efficiency perspective just building on what Neil said, we have a very disciplined approach where we want to see marketing spend as a percent of revenue being the low-teens. You've seen an increase in that year over year from 11.6% Q3 of last year to 12.3% Q3 of this year. I would anticipate seeing that moderately increase in Q4 as we seasonally spend into holiday demand and FSA expiration, but we'll still plan on being within that mid-teens as a percent of revenue. So I wanted to add that additional color.

The next question today comes from the line of Dana Telsey from Telsey.

As you think about changes that are happening with the election. Tariffs, how do you think about tariffs? I think you source some components from China. What percent of goods are directly imported? How much from China? And how do you think about adjusting in regard to sourcing and pricing to the consumer? And then on another note, smart glasses heard a lot about it lately. What do you see as the opportunity for Warby Parker?

We've been planning internally and have experienced sort of navigating this situation before vis-à-vis increased tariffs from from China. It's obviously early days and not much known as at this time, but over the last five years we've materially reduced our exposure to Chinese produce goods and we'll continue to do so. And we believe we have the ability to flex even further into other regions and work with our vendors to offset tariffs as as much as possible. We've been trending lower in each of the last sort of five years and this year, we'll be around 20% of COGS, so we feel very confident in our ability to sort of manage the current environment.

And then on smart glasses, we're pretty excited about the potential that smart classes have to really transform how we engage with technology and enable us to stop staring at our phones all day. Over the last decade plus, we've been in discussions with various companies and researchers that have been working to miniaturize battery seekers, cameras and other hardware components, and all those technologies are advancing. But what we believe will be a bigger catalyst for the adoption of smart glasses in the coming years is the opportunity to embed always available AI that can provide context and useful information to the where in real time. And AI and smart classes are uniquely complimentary to each other given the amount and complexity of information available. And so we've been particularly excited to see how quickly AI capabilities are advancing. But we also know that regardless of how good any of the tech is, any form of smart glasses, still need to look good on people's faces. Consumers will continue to have a very high bar for the look, feel, and weight of anything they put on their face. They're only willing to wear prescription glasses, the original wearable, because they provide so much utility by enabling site. And so, as we look ahead, we believe the investments that we've made over the last 14 plus years in our brand, design capabilities, distribution across hundreds of stores and our digital properties, our hundreds of doctors, optical lab and supply chain ability to deliver our best-in-class customer experience in the category, enable us to be a very strong partner to large tech companies that have been making sizable investments in AI and some of the hardware components I just mentioned. And so, we expect that the next few years will usher in the first wave of smart glasses that are consumer ready for all day wear and believe, we have an important role to play in this emerging category.

Our next question today comes from the line of Oliver Chen from TD Cowen.

Hi, Neil, Dave and Steve, regarding the prudent investments in doctors, what will happen longer term as we think about the gross margin modeling. Also as you think about you've had a lot of great momentum in store, just would love thoughts on if October was fairly volatile and how you see the consumer and also related to that store traffic relative to e-commerce traffic, year plus one looked like the complexion was driven by the order value. So I'd love thoughts on modeling that going forward as well.

Sure. This is Steve. So as we've talked about we view hiring eye doctors really as a strategic investment in serving and acquiring new customers. Roughly 75% of all prescription glasses are purchased at the same time and at the same location, where an individual got an eye exam. It's why we have increased eye doctor coverage across our fleet such that 228 of our 269 stores have eye doctors roughly at 85% coverage. And so when we talk about gross margin, we are very comfortable seeing gross margin continue to settle out in the mid fifties this year. On our Q4 earnings call next year, we'll provide color as to where we expect gross margin to land for next year as we think about some of the puts and takes within our cost of goods, there's a lot that we put in cost of goods including store rent, the depreciation of store build outs, our eye doctor salaries, which you talked about in addition to all of our product costs, like frames, our two optical labs, third party lenses, we've been able to manage all of these various factors in our cost of goods such that we've still been able to maintain our mid fifties guidance. While we've been scaling two relatively new portions of our business, i.e. eye exams and contacts, as we've talked about eye exams and contacts both have lower gross margin profiles but are accretive to gross margin dollars longer term. Eye doctors in particular, which is the category you talked about, is particularly strategic in our ability to serve and acquire the customer. So I would look for us to continue to make opportunistic hires in this area because the earlier that we hire eye doctors, the more we can issue prescriptions, which leads to higher exam generated sales, which is a metric that we're keenly focused on.

And then as we think about sort of e-commerce growth, Q3 was the channel's toughest comp from last year as we lapped higher quarterly growth last year, which was the beginning of marketing dollars comping positive last year. We continue to see positive momentum in our e-commerce channel. And as with any period orders that we receive at the end of one quarter are recognized as revenue in the next quarter upon delivery to customers. So, just as we think about sort of the channel performance we have seen great momentum and in sort of, if we look at e-commerce velocity, it increased each month in Q3, with a strong end to the quarter in September, and that's continued into Q4. As we just think about volatility in October in general we didn't see that, what we did see was continued strength into Q4 that we experienced at the end of Q3.

Are you encouraged by store traffic? How has that been going and strategies and or the backdrop for how the consumer's behaving?

Yes, in general. We have been encouraged by traffic and order velocity across both e-comm and stores. And yes, we saw that tick up kind of midway through Q3 and has sustained early into Q4 as Neil just mentioned, I'd say it's you probably too early for us to call a sustained recovery in the category or pent-up demand. As we look at industry data and speak to peers, there's some data points that have improved and others that have not. But in our business, we're seeing better demand trends and believe that our team is doing a great job at driving traffic across channels and expect that we'll continue to outperform category growth this quarter and for many years to come.

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

Hi, this is Amy Teske on for Mark. I wanted to ask about gross margin and the modest pressure that you saw in the quarter. It sounds like a optometrist hiring was more than expected, but overall gross margin was in line with your expectations. Can you just walk us through the moving pieces that shifted here versus the first half and if any of those components were different than you expected. And then could you also speak to your perception of the overall health of the optical industry? I know you said different data sources showing different things, but any early thoughts you can provide on your expectations for 2025?

This is Steve. I'll take the first part of the question as it relates to gross margin. So gross margin at 54.6% really came in line with our expectations. As we talked about on our last call. We guided folks to really Q3 last year as a reference point in line with where we thought we would end up. We ended up 13 basis points different if I were to talk about on a sequential basis. The main moving pieces where we saw a shift from Q2 to Q3, really falls into the following categories. So one is occupancy expense. We opened up the highest number of new stores in Q3 that we've opened this year. We opened up 13 new stores with a concentration of new stores in urban areas, which are moderately higher from an occupancy expense perspective within New York in particular. We also continued to see some deleverage from scaling of contacts and eye exams, which are relatively newer businesses as we discussed earlier. Contact and exams have a lower margin profile, but are important in enabling us to serve the customer in a holistic way. Holistic customers who get an eye exam, purchase a pair of glasses and contact are roughly 1.5x more valuable at initial purchase and over 2x more valuable over the course of a year. And lastly, we had a strong hiring season for optometrists. We view an eye exam really in many ways as a gateway to an individual becoming a customer of Warby Parker. And so investments in hiring, ODs, which we believe will pay off in the long term is another important part of the story. In terms of speaking to the perception of health of the optical industry I will turn it over to Neil.

So, as Dave mentioned, it's too early to say if there's been significant change in demand. We continue to manage the business in a way that is not dependent on sort of industry trends for us to grow. We continue to deploy more marketing dollars across more diverse channels to ensure, efficiency and drive that traffic to our stores and to our website and apps. And we believe if we continue to control what we can control, if we can continue to deliver, accept value $95 products with everything included, which is a fraction of the price of what you typically find elsewhere. And that goes for all of our products and services. And we continue to deliver exceptional customer experiences that will continue to win. We'll continue to gain market share. We'll continue to outperform the market, and that is true as it is today, as it was when we launched in 2010.

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

Wanted to ask about the e-commerce business. I know there's a lot of moving pieces in that 1% number. You mentioned the deferral, so maybe just some perspective on how you think about the medium-term growth of the channel. And then curious, what you see as you open new stores. If you typically see you acquire new customers to those stores, if you typically see those customers come back to e-commerce channel, later in their lifetime.

Yes, so at the beginning of this year, we stated that our goal was to to return our e-comm channel to growth. And we believe that we're on a strong path to do that. And, yes, while we typically don't comment on channel dynamics as it relates to deferred revenue we wanted to just call out that either Q3 recognized revenue for e-comm doesn't necessarily reflect the momentum that we've seen and continue to see in that channel. And in particular, we're encouraged by the growth that we're seeing in customers purchasing glasses directly without doing a home try-on and leveraging our best in class capabilities and tools like our virtual try-on. And some of the sophisticated recommendations that we're now offering customers and will continue to do so. And as a result, we're seeing meaningful positive growth in those customers. And also continue to see very strong growth on the contact lens side, in the e-comm channel. As it relates to customers shopping in stores first and then coming back to e-comm, we do see that take place. We find that customers tend to repeat in the channel where they made their first purchase. They tend to have a great experience there and want to replicate that experience. But we do see a fair number of customers after they make their initial purchase in a retail store, then go on and make subsequent purchases online.

And then maybe just a follow up on the Versant Health Partnership, understanding that it's not in the guidance for this year and there's multi-year benefits, but just how to think about potentially the benefits next year and what that typically looks like when you add on a new insurance partner.

So we're excited about this partnership and the number of lives that we've been able to integrate this year and enable a much larger population of our customers to be able to use their in-network benefits with us. What we see is that, it takes time for those patients and customers to leverage their benefits depending on where they are in the purchase cycle, when they need their next eye exam. And with our previous integrations, we see that as more time passes from the point of integration, the revenue that we generate per member attempt to steadily increase over a multi-year period. And so we're expecting that to take place with these new Versant lives as well. And so, we're pleased with the integration this year but have yet to benefit meaningfully from those lives and expect that will be a multi-year tailwind, that we can benefit from starting towards the end of this year.

Our final question today comes from the line of Nick Jones from Citizens JMP.

Two, if I can. First, I think you've kind of communicated plan to open around 40 stores a year. Can you maybe speak to the puts and takes, particularly as you get back bigger and clearly you have a playbook that works as you open source. What are the puts and takes and maybe taking that higher or maybe what would make you want to take that lower on an annual basis? And then the second question is around kind the in insurance integration, is there anything you can do to kind of accelerate awareness to in-network folks or is that somewhat of the challenge of getting it's kind of organic as the awareness comes on? Just trying to understand maybe if there's anything in your control that could accelerate awareness for in-network folks.

We plan to open at least 40 stores a year, sort of going forward. And we don't anticipate opening fewer than those our stores continue to perform in line with expectations sort of offerings for best-in-class metrics, not only within the optical industry, but across all retail categories. So we're really happy with our store performance and store rollout and that will continue vis-à-vis insurance. And how might we further raise awareness about in-network options. There's a few ways that we do this. One is through training our teams, given that we have sort of outside traffic to our stores and site and apps relative to others in the category. But we also tend to partner with our in-network in insurance carriers, and we do things such as inviting brokers in for events in our stores. Now that, we have 270 plus stores across the country. So we'll do in-person events. We tend to get highlighted in a lot of our insurance partners materials as they kind of view us as a preferred partner and frankly a sexy partner with which they use to try to attract new business. And something that benefits managers within companies can speak to on how they're providing great benefits to their employees and coworkers. So it is something that we do think a lot about and it is a portion a focus of our marketing teams.

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