Warby Parker Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Warby Parker sells eyewear and optical services through e-commerce and retail stores. It completed a direct listing on the NYSE on September 29, 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $137.4 million | $104.1 million | $407.9 million | $280.9 million |
| Gross profit | $79.7 million | $64.0 million | $241.5 million | $166.8 million |
| Gross margin | 58.0% | 61.5% | 59.2% | 59.4% |
| Operating loss | $(92.0) million | $(41.3) million | $(97.8) million | $(50.5) million |
| Net loss | $(91.1) million | $(41.6) million | $(98.4) million | $(51.6) million |
| Adjusted EBITDA* | $11.2 million | $5.4 million | $31.3 million | $6.6 million |
Revenue grew 32.0% in Q3 and 45.2% year to date. Management attributed growth to more active customers and higher average order value, including a greater mix of progressive-lens purchases. Q3 active customers were 2.15 million versus 1.76 million; stores numbered 154 versus 123. Retail revenue was $79.2 million in Q3, up from $38.5 million, while e-commerce revenue was $58.2 million, down from $65.6 million, reflecting the prior-year store closures and channel shift during COVID-19.
Gross margin fell 350 basis points in Q3, primarily due to greater contact-lens mix, higher international shipping costs, listing-related stock compensation and comparison with a prior-year tariff reimbursement. Nine-month gross margin declined 20 basis points. SG&A increased 63% in Q3 to $171.6 million and 56.1% year to date to $339.3 million, reflecting listing costs, stock-based compensation, charitable expense and higher marketing. Q3 and nine-month results include $23.9 million and $27.7 million, respectively, of direct-listing professional fees. Net loss attributable to common stockholders for the nine months was $111.5 million, including a $13.1 million deemed preferred-stock dividend.
Cash flow and liquidity: Operating cash flow was $(0.1) million for the nine months, versus $13.4 million provided in 2020. Investing cash outflow was $34.0 million, mainly for stores, supply-chain infrastructure and software; financing cash outflow was $13.6 million. Cash and equivalents were $266.2 million at September 30, down from $314.1 million at year-end. Current assets were $353.5 million and current liabilities $134.4 million. No credit-facility borrowings were outstanding; $3.6 million of letters of credit supported leases. The revolving facility permits up to $50 million, including a $15 million letter-of-credit sublimit.
Changes, outlook and notable matters
- In connection with the direct listing, preferred shares converted into Class A common stock. The company had 111.4 million common shares outstanding at quarter-end; its multi-class structure gives Class B shares ten votes per share.
- Management expects operating losses could continue as it invests in growth, but believes cash, credit-facility availability and operating cash flows will fund operations for at least the next 12 months. No specific revenue or earnings guidance is provided.
- Stock-based compensation was unusually high: $64.3 million in Q3 and $76.0 million for the nine months. Q3 also included a $7.8 million non-cash charitable contribution of shares. Adjusted EBITDA excludes stock compensation, the donation and transaction costs; it is a non-GAAP measure and should not be treated as cash available for investment.
- Management cited COVID-19 and Delta-variant uncertainty, supply constraints and shipping costs, inflation and wage pressures, competition, inventory management, customer-acquisition costs, and regulatory requirements for vision care as risks. The company relies on a limited supplier and manufacturing/logistics base.
- Disclosure controls were deemed ineffective due to material weaknesses in IT access and change controls and financial-reporting controls, including segregation of duties, reconciliations and journal-entry review. Remediation is underway but not yet complete.
- The FDA has taken the position that the Virtual Vision Test app requires 510(k) clearance. The company plans to submit a notification and continued marketing is subject to the FDA’s stated enforcement policy during the COVID-19 public health emergency. The company also reported an ongoing OCR investigation concerning a 2018 credential-stuffing incident and HIPAA compliance; outcome and potential costs are uncertain.
- The company expects adoption of lease accounting guidance to result in a material right-of-use asset and liability. Four retail leases entered after quarter-end carry approximately $2.3 million of commitments.
Investor verification priorities
- Assess underlying profitability and margin trends after separating direct-listing costs, unusually elevated stock compensation and the charitable contribution; review the reconciliation and limitations of adjusted EBITDA.
- Track operating cash generation, inventory growth, capital spending and cash depletion against management’s stated 12-month liquidity assessment.
- Monitor whether supply-chain and shipping pressures, contact-lens mix and store expansion affect gross margin and fulfillment.
- Review progress in remediating material weaknesses and the status and potential consequences of the OCR matter and FDA clearance process.
- Evaluate dilution and voting control from equity awards, share issuance and the Class A/Class B structure, as well as the costs and balance-sheet effect of lease adoption.
*Adjusted EBITDA is a non-GAAP measure.