Warby Parker Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Warby Parker sells eyewear and optical services through e-commerce and retail stores. Figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $149.6M | $131.6M | $302.8M | $270.5M |
| Gross profit | $86.3M | $78.1M | $176.0M | $161.8M |
| Gross margin | 57.7% | 59.3% | 58.1% | 59.8% |
| Operating loss | $32.1M | $8.8M | $65.8M | $5.8M |
| Net loss | $32.2M | $10.3M | $66.3M | $7.3M |
| Adjusted EBITDA and margin | $5.9M; 4.0% | $10.8M; 8.2% | $6.7M; 2.2% | $20.1M; 7.4% |
Q2 revenue increased 13.7% year over year, while gross profit grew 10.6%. For the first half, revenue grew 11.9% and gross profit 8.7%. Retail revenue was $91.2M in Q2 versus $73.1M a year earlier; e-commerce revenue was $58.4M, essentially flat year over year. Management attributed revenue growth to a larger active customer base and higher average order value, including a higher mix of progressive lenses.
SG&A rose 36.3% to $118.4M in Q2 and 44.3% to $241.8M for the first half. Stock-based compensation and related payroll taxes were major contributors to the increase. Q2 stock-based compensation expense was $26.8M; first-half expense was $53.9M. The filing reports no debt borrowings outstanding under the company’s credit facility.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $211.6M at June 30, 2022, down from $256.4M at December 31, 2021. Accumulated deficit was $559.5M.
- For the first six months, operating cash flow was negative $14.6M, investing cash flow negative $31.9M, and financing cash flow positive $2.0M. Cash declined by $44.8M.
- Capital expenditures were $31.9M, primarily for new stores and capitalized software. Inventory increased to $70.8M from $57.1M at year-end.
- The company had a $50M revolving credit facility, with $4.1M of letters of credit outstanding and no other borrowings. Management said existing cash, credit availability and operating cash flows were expected to fund operations for at least 12 months.
- Adoption of lease accounting guidance in January 2022 resulted in recognition of operating lease right-of-use assets and liabilities. At June 30, lease liabilities totaled $158.5M, including $18.7M current and $139.7M non-current.
Material changes and management commentary
- Gross margin fell 1.6 percentage points in Q2 and 1.7 points for the first half. Management cited the lower margin mix from contact lenses and higher store occupancy, depreciation and prescription-service costs; progressive lenses and optical-lab scale partly offset these pressures.
- The store base grew to 178 from 145 a year earlier. At period end, 127 stores offered in-person eye exams. Active customers increased to 2.26M from 2.08M.
- Management said supply-chain disruption had been minimal through the first half of 2022, but noted continuing uncertainty around COVID-19. It cited inflation, shipping and component costs, labor, construction and rent as potential pressures.
- No quantified financial guidance was provided. Management expected operating losses could continue as it invests in growth. It said it planned cost-control actions, including corporate headcount reductions, lower marketing spend and other variable-cost reductions.
- Subsequent event: in August 2022, the company initiated a restructuring that eliminated 63 corporate-office positions. It estimated approximately $1.7M of cash severance and related charges, expected in Q3 2022, with completion expected by quarter-end.
- Disclosure controls and procedures were deemed ineffective as of June 30 because previously identified material weaknesses in IT general controls and financial-reporting processes remained. Remediation was in progress; management said it could not estimate the related costs or assure successful remediation.
Risks, contingencies and unusual items
- Warby Parker reported no pending legal matter expected to have a material adverse effect. The filing describes ordinary-course litigation risk and $4.1M in letters of credit securing certain leases.
- Q2 SG&A included a $3.3M non-cash charitable expense for shares donated to the Warby Parker Impact Foundation. Founders’ equity awards also contributed substantially to stock-based compensation expense.
- Management identified risks from macroeconomic conditions, consumer demand, competition, supply-chain costs, inventory valuation and shrinkage, store expansion, COVID-19, and the company’s ability to fund growth. It cautioned that adjusted EBITDA is a non-GAAP measure and is not a measure of cash available for investment.
Important facts for investors to verify
- Whether revenue growth can continue while gross margin and adjusted EBITDA margin recover.
- How much of the elevated SG&A reflects ongoing operating costs versus stock compensation and other unusual or non-cash items.
- Whether cash burn, inventory investment and store expansion remain consistent with management’s stated liquidity outlook.
- The execution and cost effects of the August restructuring and other cost-control actions.
- Progress remediating the reported material weaknesses in internal controls, and any resulting costs or reporting risks.