The prescription eyeglasses market was an unsuspected beneficiary of last year’s stimulus. This pull-forward leaves the category in a demand "air pocket" against an elevated base period. However, for eyeglasses, all is not blurred. First, it’s proven to be a robust category for growth over time and so in time, it will turn up. Our work on personal expenditure mean-reversion suggests that the category has 10% of mean-reversion in front of it (and we discuss more in the economics section of this report). Second, Placer.ai data shows some recovery in late July and August, reflecting back-to-school seasonality.
National Vision
- National Vision reported soft results – as expected – but also lowered its 2H22 and full-year outlook (with expectations of mid- to high-single-digit comp declines). The company also announced several executive changes, including the departure of Chief Stores Officer Roger Francis for another company (he will be succeeded by VP of Store Operations Heidi Hennman); the transition of Chief Financial Officer Patrick Moore to Chief Operating Officer; and Malissa Rasmussen, currently the Chief Accounting Officer is rising to the CFO role.
- Comparable-store sales declined -12.4%, which brought the 3-year comp CAGR to +2.6%. The decline was primarily due to a decrease in transactions, but ticket modestly decreased as well. CEO Reade Fahs said the comps were the result of a, "weaker consumer environment as well as constraints on our exam capacity. As the quarter progressed, economic conditions for consumers further deteriorated. The macro headwinds...[continue] to pressure our lower-income, predominantly uninsured customers, especially when compared to record demand last year. In terms of constraints to our exam capacity, we feel incrementally better about our capacity situation...We're making sequential progress."
- Reade added, "Our lower-income, predominantly uninsured consumers are feeling the greatest pressure. Demand softness is noticeably more pronounced for these customers who are paying out of pocket for our products and services. Last quarter, we noticed that we're seeing the beginnings of a trade-down of higher-income consumers into our stores, what we've referred to in the past as "nicer cars in the parking lot." We especially are seeing stronger trade-down behavior in markets where our stores are exposed to higher concentrations of higher-income consumers."
- We estimate that America’s Best trailing-twelve-month (TTM) sales per square foot declined $18 QoQ to $462. Moreover, it is likely to decrease by a mid-single-digit rate over the next twelve months given the pull-forward into 2021.
- 22 stores were opened in the quarter and the plan remains of "at least 80" for the year.
- Profitability declined due to deleverage of optometrist related costs, reduced eyeglass mix, lower eyeglass margin, and deleverage of store payroll and occupancy expense. Of note, eyeglass margin is down because its supplier costs are rising faster than its consumer price – i.e. a margin squeeze given America’s Best less affluent customer. National Vision is increasing its prices, but at a lower rate than the cost increases. Management expects to remain profitable and generate cash for the year.
Warby Parker
- Warby Parker meaningfully lowered their full-year revenue growth outlook to +8%-10% compared to prior estimates calling for +20%-22% growth (which had already been lowered twice during the 1H22). The new outlook implies mid-single-digit growth in the 2H22, despite 33 more locations in chain (a 23% increase year-over-year) than the start of 2H21. In light of the lower revenue outlook, the company is undergoing a headcount (-15% of corporate headquarters) and expense rationalization (especially marketing expenses, which are expected to be down 20% for the year) to sustain profitability. EBITDA margin for the year is expected to be 4%.
- Warby’s reduction in marketing is one more example for why advertising revenue for Meta, Snap, and others is expected to decline in 2H22, and it is likely to be representative of other digital native brands (DNBs) and previously DNBs. Moreover, Warby is cutting marketing because of lower responses to ads and lower ROIs for its e-commerce business, or customer acquisitions, which implies IDFA (Apple) reasons as well as the macro headwinds (very few customers were added in 2Q22).
- Warby doesn’t report comparable-store sales, but 2Q22 sales per average store (excluding digital) was roughly flat YoY and guidance implies it to be down mid-teens in 2H22. The shortfall is traffic related as conversion and ticket are positive. Digital sales were flat YoY.
Source: Warby Parker Investor Relations
- The company opened 9 new stores during 2Q22, ending the quarter with 178 locations. Management reiterated plans for 40 total new stores in 2022, and implied that the number of openings would remain similar in the years ahead (in other words, they haven’t reassessed their view of the store model, its financial returns, or the pace of investment in new stores). As a reminder, Warby store financial model targets $2.1 million in revenue per store, 35% 4-wall margins, and a 20-month payback. However, they did share that suburban stores continue to have higher productivity than urban stores. As such we would expect suburban locations to dominate their future store openings.
- Warby's profitability declined due to higher store occupancy and depreciation costs (as a % of sales), increased store payroll costs, optometrists expense as it expands in-store eye exams in their fleet, and IT infrastructure, as well as some other revenue mix/timing dynamics. CFO Steve Miller shared that the majority of employee stock compensation doesn’t go into the money until the stock price per share reaches into $47.75-$103.46 range, substantially above the current price of $16.75 per share, which raises the prospect of a reset lower in the strike prices.
