In 2021, we produced an industry overview of the corrective eyewear retail industry and Warby Parker and followed that with quarterly updates. 2022 was a soft year for the industry as there was a significant pull-forward into 2021 as the result of excess consumer liquidity stemming from the stimulus checks. As shown in the table below, real personal consumption grew substantially in 2021 compared the 2019 baseline, setting up 2022 to become a “digestion year.”
Another headwind to industry growth has been a shortage of optometrists. A lot of optometrists retired during the pandemic; moreover, like the medical and pet care industries, those who remained have demanded a better work-life balance resulting in few patient hours being worked. Less eye and vision exams result in fewer new corrective lenses being made and fewer prescription glasses being sold. Lastly, we suspect that more optometrists joined independent private practices to find that better balance, resulting in less business for the major brands. However, as shown in strengthening store traffic and improving comp momentum during Q4 2022 from LensCrafters, America’s Best, and Warby Parker, the industry is beginning to recover from these headwinds (which was also evident in management's 2023 guidance).
Achieving those gains requires substantially increasing optometrist pay, allowing for more flexibility in the optometrists’ working hours, and deploying technology allowing for remote exams (with the optometrist working remotely). The figure below from National Vision’s Q4 2022 update presentation gives an idea about what remote looks like.
Source: National Vision March 2023 Investor Presentation
National Vision
- National Vision’s America’s Best reported a more benign -1.8% comp decline and a substantial improvement in the trend vs. 2029 as shown in the table below. Profitability and cash generation were under pressure during 2022 due to expense deleverage and higher inventories. The better pace exiting the year and into 2023, should allow for better profitability and cash generation.
- On its objective to improve upon the number of eye exams being done, National Vision’s CEO Reade Fahs shared, "Optometrists in our network are now being offered a greater variety of scheduling options and improved variable compensation programs and we are progressing the remote medicine initiative that we've been discussing in our last few calls. We are also resetting our management's short-term incentive plan to ensure that we keep our team highly incentivized to perform. In addition, like all companies, we must evolve our systems to support our growing business and gain advantages and efficiencies of ongoing digitization. As we enter 2023, while the actions we are continuing to take will have an impact on our operating margins...There is nothing wrong with our business model. The only challenge is our ability to execute our business model, which is about having the doctor in the store. If we have the doctor in the store, the consumer demand is there. We think our business foundation is strong."
- CFO Melissa Rasmussen stated, “We believe remote care is a key unlock to gain access to more doctors amidst industry-wide supply and demand constraint. Our robust remote care technology enables eye exams to be provided in locations where there is not a physical doctor present or in locations that need additional capacity to meet patient demand. In addition, we believe store digitization through EHR implementation will create efficiencies in store flow. We expect the remote exam technology and store digitization implementation to be substantially completed by mid- to late 2024 and fully productive in 2025, enabling our expectation of a return to mid-single-digit adjusted operating profit margin profile. We also continue to see the opportunity to expand margins beyond this point as we leverage sales growth and drive further productivity improvements across the organization.”
- Fahs reiterated management’s view that they see the opportunity to double the number of locations from 1,041 today to over 2,150. In that vein, the new store plan for 2023 is 65-70 locations.
EssilorLuxottica
- The U.S. makes up roughly half of EssilorLuxottica’s revenue, which from a retail standpoint, is composed of 1,700 Sunglass Hut locations, 1,000 LensCrafters locations, 562 Target Optical stores, a few hundred stores under other brands, their wholesale business, and Essilor. The North American region experienced +4% revenue growth for 2022 with Sunglass Hut up and LensCrafters down. However, for Q4 2022, Sunglass Hut saw slightly negative revenue, whereas the optical banners “ramping up throughout the quarter…Traffic continued to be somewhat challenged, while the conversion of in-store eye exams picked up progressively and price-mix remained favorable. Target Optical also showed a nice acceleration in the quarter, up mid-single digit in comparable-stores sales,” per the earnings release.
- CFO Stefano Grassi shared on the U.S. market, “We see a very nice start of the year for LensCrafters as well as for Sunglass Hut. We enter into 2023 with...pretty good, reassured confidence with respect to the first quarter 2023. We do see traffic coming back. I think we have a pretty solid conversion for eye examination. We continue to leverage the technological development and enhancement that we have available, in particular, in LensCrafters, for example, with respect to teleoptometry has proven to be extremely successful and helpful to drive conversion within our optical retail banner.”
Warby Parker
- As for Warby Parker, retail-only revenue was $2.0M per average location for 2022, down just 1% from 2021’s level. (For comparison, America’s best locations did $1.3M per location.) In contrast, e-commerce revenue was down 6%. During the year, management was able to stabilize the business’ losses, and for the year, the business produced EBITDA of $27M; however, they still struggled with high inventories and working capital, leading to negative free cash flow of -$50M. Year-end cash was $209M. Inventory turns for Q4 2022 were 3.8X compared to a pre-pandemic level of 5.2X.
- Warby Parker ended the year with 240 locations, up 40 during the year. 2023 is to be about further restoring margins (to 8% on an adjusted-EBITDA basis) Co-Founder and CEO David Gilboa shared, “We subsequently made a series of adjustments in the middle of 2022, some of them difficult, which enabled us to operate in a more flexible and nimble manner and drive adjusted EBITDA improvement. A lesson for us is not that we should place less emphasis on growth, but instead that we should work to ensure that our growth is more sustainable and efficient across a range of economic and industry outlooks, including the most conservative ones…Q4 was another quarter where we saw consumers shift their shopping preference back into stores as we move past the peak e-commerce period of the pandemic, and our store teams did a great job of serving the increased demand. Compared with 2019 pre-pandemic levels, store productivity continued to improve from Q2 and Q3 this year, reaching 88% in the fourth quarter…Despite softer industry-wide traffic, our stores that were opened for the full 12 months in 2022 generated approximately $2.1 million in revenue on average with 4-wall margins in line with our historical target of 35%.”
- On 2023’s real estate plans, Co-Founder and CEONeil Blumenthal shared, “We plan to open another 40 new stores this year with a continued focus on suburban expansion. Of these stores, 36 will be in suburban markets and more than 10 markets will be new for us. The remaining 4 stores will be in urban centers, most notably in the New York market. In Q4, our suburban stores had a retail productivity versus 2019 that was 12 points higher than our urban locations…We expect the productivity of our existing stores to improve from 2022 levels as traffic continues to rebound, and we drive further growth in average revenue per customer… Second, we plan to further expand 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 continues to attract new customers. And while we'll continue to expand our $95 offering, we plan to launch nearly 20 collections incorporating our $145, our $175, and our $195 price points while introducing innovative frame constructions, new lens types, and more. We also plan to deepen Progressives' penetration within our product mix, building on the momentum we saw in 2022 through store expansion, increased eye exam capabilities, and growing brand awareness. As of December 2022, Progressives' made up 21.7% of our total prescription glasses purchases but approximately 40% of industry-wide purchases on average, leaving significant white space for future growth. Third, we'll continue to evolve our position as a holistic vision care company by expanding our contacts, eye exams, and insurance offering.
- To drive improved profitability, the company is switching from digital to physical revenue growth, with the expectation that e-commerce will again be down. In Q4, it lowered its marketing spend by 41% to $17.6 million and from 22.3% of revenue to 12% of revenue in the quarter, which says that to drive strong economics, the company needs a strong physical retail business – an interesting change in focus for what was once a DNB. (See our Anchor report from last June.)
