Warby Parker Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Warby Parker sells eyewear and optical services through e-commerce and retail stores; it reported one operating segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $166.1 million | $149.6 million | $338.1 million | $302.8 million |
| Gross profit | $90.6 million | $86.3 million | $185.4 million | $176.0 million |
| Gross margin | 54.6% | 57.7% | 54.8% | 58.1% |
| Operating loss | $(18.2) million | $(32.1) million | $(30.7) million | $(65.8) million |
| Net loss | $(15.9) million | $(32.2) million | $(26.7) million | $(66.3) million |
| Adjusted EBITDA (non-GAAP) | $14.2 million | $5.9 million | $31.9 million | $6.7 million |
Q2 revenue grew 11.0%, primarily from more units sold and higher average selling prices. Retail revenue increased to $110.8 million from $91.2 million, while e-commerce revenue declined to $55.3 million from $58.4 million. Gross margin contracted 310 basis points in Q2 as contact lenses, prescription services, and higher store occupancy and depreciation costs weighed on margins. SG&A fell 8.1% to $108.9 million, principally due to lower stock-based compensation and marketing costs, partly offset by ERP-related technology costs.
Active customers were 2.285 million versus 2.258 million; the store count rose to 217 from 178, including 169 stores offering in-person eye exams. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, stock-based compensation, ERP implementation costs, and certain other costs.
Cash, liquidity, and obligations
Cash and cash equivalents were $212.7 million at June 30, 2023, versus $208.6 million at year-end 2022. For the first half, operating activities provided $27.4 million, compared with $14.6 million used in the prior-year period; investing activities used $24.6 million, primarily for property, equipment, store build-outs, and software. Cash increased $4.1 million during the half.
The company had no revolving-credit borrowings outstanding; $4.3 million of letters of credit were outstanding. Its credit facility provides a $100 million five-year revolving capacity, with a potential increase of up to $75 million subject to conditions. Lease liabilities totaled $170.3 million. Management said existing cash, credit availability, and operating cash flows should fund operations for at least the next 12 months, while noting that operating losses may continue as the business expands.
Changes, outlook, and risks
- Revenue growth continued, but gross margin declined year over year. The company attributed slower sales growth than historically experienced to subdued consumer activity in the optical industry and expected the industry to remain flat in 2023, citing Vision Council projections.
- No specific revenue, earnings, or margin guidance was provided. Management expects continued investment and possible operating losses; capital needs depend on store growth, laboratories and distribution, product and service expansion, and technology and staffing investments.
- Management cited inflation, interest rates, consumer spending, supply-chain and shipping costs, competition, customer acquisition, inventory management, and recruiting vision-care professionals as risks. The company said inflation had so far had limited impact but could raise operating costs.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2023 because of two material weaknesses: IT access and change-management controls, and financial-reporting process and review controls. Remediation was underway, but not complete; management said remediation would take time and incur significant costs.
- Two California employment-related proceedings allege wage-and-hour violations. The company denies the allegations and intends to defend the cases; potential loss could not be estimated.
- After quarter-end, the company entered into four new retail leases and extended two others, with approximately $3.8 million in commitments. In August, it donated 178,572 shares to its Impact Foundation, with a grant-date fair value of $2.6 million.
Important facts for investors to verify
- Whether revenue growth and store expansion can offset persistent gross-margin pressure, particularly from product mix and retail costs.
- How much of improved adjusted EBITDA and operating cash flow reflects sustainable operations versus non-cash compensation and working-capital movements.
- Progress and cost of remediating the material weaknesses, and whether controls operate effectively for a sufficient period.
- Future cash needs, lease commitments, and any use of the revolving credit facility if operating losses or investment requirements persist.
- Developments in the California litigation and any eventual estimate of potential exposure.