Warby Parker Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company sells eyewear and optical services through e-commerce and retail stores; it reported one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $148.8 million | $137.4 million | $451.6 million | $407.9 million |
| Gross profit / margin | $84.4 million / 56.7% | $79.7 million / 58.0% | $260.4 million / 57.7% | $241.5 million / 59.2% |
| Operating loss | $23.7 million | $92.0 million | $89.5 million | $97.8 million |
| Net loss | $23.8 million | $91.1 million | $90.1 million | $98.4 million |
| Adjusted EBITDA | $11.9 million | $11.2 million | $18.6 million | $31.3 million |
| Adjusted EBITDA margin | 8.0% | 8.1% | 4.1% | 7.7% |
Q3 revenue increased 8.3%; nine-month revenue increased 10.7%. Active customers rose to 2.26 million from 2.15 million, and store count increased to 190 from 154. Retail revenue was $93.9 million in Q3 versus $79.2 million a year earlier, while e-commerce revenue declined to $54.9 million from $58.2 million. Progressive-lens mix supported average order value.
Cash and cash equivalents were $197.9 million at September 30, down from $256.4 million at year-end 2021. Nine-month operating cash flow was negative $13.5 million; investing cash flow was negative $46.0 million, primarily from store build-outs and software/property investment. Cash declined by $58.5 million. Inventory was $70.6 million, up from $57.1 million at year-end. The company reported no facility borrowings; $4.2 million of letters of credit were outstanding. Lease liabilities totaled $173.1 million following adoption of ASC 842.
Material changes and unusual items
- Gross margin contracted 1.3 percentage points in Q3 and 1.5 points for the first nine months. Management cited lower-margin contact lens sales, store occupancy and depreciation, and prescription-service costs; progressive lenses and optical-lab efficiencies partly offset these pressures.
- Q3 SG&A fell 37.0%, chiefly because the prior-year quarter included $79.5 million of direct-listing-related costs, including stock compensation and professional fees. Nine-month SG&A rose 3.1%, reflecting higher retail payroll, public-company insurance, technology, and depreciation costs, partly offset by lower nonrecurring costs.
- Stock-based compensation was $78.2 million for the first nine months. Q3 included $1.1 million of asset impairment charges and $1.5 million of restructuring costs; the company also recorded $3.3 million of non-cash charitable expense for shares donated to its foundation during the nine-month period.
Outlook, risks, and contingencies
Management gave no specific financial guidance. It expects operating losses could continue while it invests in growth, but believes cash, the credit facility, and operating cash flows are sufficient for at least the next 12 months. It reported slower sales growth and lower retail productivity than historically, citing consumer activity below pre-pandemic levels. Inflation, interest rates, consumer spending, supply-chain costs, inventory management, competition, and COVID-19 remain risks. Management said supply disruptions had been minimal through the first three quarters of 2022.
The company entered a five-year, $100 million revolving credit facility in September 2022, with a potential increase to $175 million subject to conditions. A maximum 3:1 senior net leverage covenant applies once borrowings exceed $60 million. The facility is secured by substantially all borrower assets. Four subsequent retail leases carried approximately $2.5 million in total commitments. No pending legal matters were identified as likely to have a material adverse effect.
Disclosure controls were deemed ineffective as of September 30 because previously identified material weaknesses in IT general controls and financial-reporting processes remained. Remediation is underway, including ERP implementation, added review controls, and hiring; management warned remediation will take time and incur significant costs.
Investor verification points
- Track whether revenue growth, active customers, and retail productivity improve, and whether retail expansion continues to outpace e-commerce.
- Monitor gross-margin recovery against store costs, contact-lens mix, and prescription-service expenses.
- Assess cash use, inventory growth, capital spending, and liquidity as operating losses continue.
- Review progress on internal-control remediation and the costs and timing of ERP implementation.
- Check stock-based compensation and restructuring charges, and the credit facility’s borrowing, covenant, and collateral terms.