Warby Parker Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless otherwise noted, amounts are in U.S. dollars. The company sells eyewear and optical services through e-commerce and retail stores; it reported 227 stores at quarter-end, including 183 offering in-person eye exams.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $169.8M | $148.8M | $507.9M | $451.6M |
| Gross profit / margin | $92.7M / 54.6% | $84.4M / 56.7% | $278.2M / 54.8% | $260.4M / 57.7% |
| Operating loss | $19.8M | $23.7M | $50.4M | $89.5M |
| Net loss | $17.4M | $23.8M | $44.2M | $90.1M |
| Adjusted EBITDA and margin | $11.0M / 6.5% | $11.9M / 8.0% | $42.9M / 8.5% | $18.6M / 4.1% |
Q3 revenue rose 14.2%; nine-month revenue rose 12.5%. Active customers increased 1.8% to 2.303 million, while average revenue per customer increased to $284 from $258, which management attributed to more units per order and purchases of contacts or exams alongside glasses. Q3 retail revenue was $113.3M versus $93.9M; e-commerce revenue was $56.6M versus $54.9M.
Gross margin fell 210 basis points in Q3 and 290 basis points for the nine-month period. Management cited the growing mix of lower-margin contact lenses, optical exam costs, and higher store occupancy and depreciation costs as the store base expanded. SG&A rose 4.1% in Q3 but declined 6.1% year to date, including lower stock-based compensation and marketing costs. Net loss narrowed year over year; Q3 adjusted EBITDA declined, while nine-month adjusted EBITDA improved. Adjusted EBITDA is a non-GAAP measure.
For the nine months, operating cash flow was $47.3M, versus cash use of $13.5M in 2022; investing cash use was $41.1M, primarily for property, equipment and software, and financing cash provided $2.1M. Cash and cash equivalents were $216.0M at September 30, compared with $208.6M at year-end 2022. The company had $170.2M of lease liabilities. It reported no revolving-credit borrowings, with $4.3M of letters of credit outstanding; the facility provides up to $100M, subject to its terms.
Outlook, risks and notable items
- No quantified revenue, earnings or margin guidance is provided in the filing. Management expects operating losses could continue as it invests in expansion, but believes cash, available credit and operating cash flows will fund operations for at least the next 12 months.
- Management said consumer activity in the optical industry remained below pre-pandemic growth levels and was expected to remain flat in 2023, citing inflation, higher interest rates and other economic pressures. It also identified competition, customer acquisition, supply-chain costs, inventory management, hiring vision-care professionals and store expansion as risks.
- Two material weaknesses in internal control over financial reporting remained unremediated at September 30: IT access and change-management controls, and certain financial-reporting process and review controls. Management reported remediation progress but said completion and effective operation over a sufficient period are still required; disclosure controls were not effective.
- The company faces California wage-and-hour and related representative litigation brought by former employees. It denies the allegations; due to the early stage, it could not estimate any possible loss or range of loss.
- In August 2023, the company invested $1.0M in a private optical-equipment company and issued 178,572 shares to its nonprofit foundation, recording $2.6M of Q3 charitable stock-donation expense. After quarter-end, it entered into seven retail leases with approximately $3.8M of total commitments.
Most important facts for investors to verify
- Whether revenue growth and customer spending trends continue, and whether the margin decline from contacts, exam services and store costs stabilizes.
- Whether operating cash generation is sustainable relative to continued store, technology and other capital investment.
- Progress and timing in remediating the material weaknesses, including whether controls operate effectively for a sufficient period.
- Developments in the California litigation and any change in the company’s ability to estimate potential exposure.
- Execution of the store expansion and new lease commitments, and any effect on costs, liquidity or profitability.