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Warby Parker and National Vision: Category's High Profitability to Hold Them Over Until 2023

Thomas Paulson
Dec 2, 2022
Warby Parker and National Vision: Category's High Profitability to Hold Them Over Until 2023

  • Allbirds' digital-native big brother is Warby Parker. Warby Parker is also struggling to return store sales volumes above 2019 levels and improve customer acquisition growth. Some of this is due to the vision care industry having to move beyond the pull-forward of demand into 2021 that resulted from consumers getting new glasses with their stimulus funds. As evidence of this, National Vision (parent company for America’s Best and Eyeglass World) has a less-affluent customer mix; these two produced 1H21 comparable-store sales that were +20% above 2019. 1H22 comps were down -10% and 2H22 comps will be down 8%.
  • Despite the pull-forward headwind, the category’s (vision care) better unit economics and less competitive intensity has allowed Warby Parker generate positive EBITDA. (See our Tenant Overview Report on Warby Parker and the vision care market.) Additionally, Warby Parker’s faster inventory turns (3.6X) have allowed it to better maintain its cash levels. The absence of an international business and the associated complexity is also a comparative benefit for Warby at this moment. (Allbirds has 22% of its revenue coming from international markets; Warby only has four stores outside, and those are in Canada.)
  • Warby’s 3Q22 EBITDA and free cash flow was $10M and -$13M, respectively. Trailing-twelve-month (TTM) figures improved from -$24M and -$101M to +$7M and -$106M. Cash on the balance sheet was $200M and the company is expected to generate cash in 4Q22 despite the quarter being the low point in its year.
  • Warby Parker's LTM active customers were flat QoQ, despite 3Q22 being a seasonally stronger period for the category (back-to-school) and revenue was essentially flat QoQ. For comparisons, 3Q19 revenue was up 40% from 2Q19. This more subdued seasonality speaks to the pull-forward effect from stimulus.
  • Given this retail category’s more benign competitive intensity, Warby was able to hold the gross margin rate relatively stable on a YoY and QoQ basis and it was able to increase its profits.
  • Warby added 13 new locations bringing the total to 190, with a total of 40 planned for the year taking the count to 200. Pleasantly, Warby reported that retail productivity (versus 2019) improved during the quarter and into October as shown below. However, as shown, it is still down. Urban stores continue to lag in this measure at 80% (compared to suburban locations at 90%+). TTM sales per square foot will likely reach $1,236 this year (or $2,015 with e-commerce). Co-CEO and Founder David Gilboa shared, “our stores…4-wall margins [are] in line with our historical target of 35%... [New] stores on average remain on track to pay back within our target of 20 months.”

Source: Warby Parker Investor Relations

  • Given that Warby Parker will be generating cash, we would expect them to open an additional 40 locations in 2023. In contrast, Allbirds’ prior unit goals ambitions are suspect. For the year, Warby’s retail business will be around $365M in size, substantially larger than its e-commerce $232M, a business that is likely down -8% YoY in 2022.
  • Co-CEO and Founder Neil Blumenthal stated, “Until a demand recovery materializes, we'll remain focused on what is in our control, driving increased operating leverage through diligent expense management and smart investments in future growth.” In terms of those investments, Gilboa cited good progress in expanding eye exams to 150 locations, expanded insurance options (Blue Cross Blue Shield and others), innovative products (MiSight contacts), and new designer collaborations for frames. Driving upsell (progressives) and cross-sell (contacts) are key growth and profit drivers; revenue per customer increased to $228 (on a TTM basis).

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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