Warby Parker Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Warby Parker sells eyewear and optical services through e-commerce and retail stores; it reported 204 stores at quarter-end, up from 169.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $172.0 million | $153.2 million |
| Gross profit / margin | $94.8 million / 55.1% | $89.6 million / 58.5% |
| Operating loss | $12.4 million | $33.7 million |
| Net loss | $10.8 million | $34.1 million |
| Adjusted EBITDA / margin | $17.7 million / 10.3% | $0.8 million / 0.5% |
| Operating cash flow | $8.6 million provided | $10.3 million used |
| Capital expenditures | $12.4 million | $16.1 million |
Cash and cash equivalents were $204.3 million at March 31, 2023, versus $208.6 million at year-end 2022. Total liabilities were $261.5 million, including $170.6 million of lease liabilities. No borrowings were outstanding under the $100 million revolving credit facility; $4.2 million of letters of credit were outstanding. The facility can be increased by up to $75 million, subject to conditions. The leverage covenant applies if borrowings exceed $60 million.
Revenue comprised $162.3 million of eyewear products and $9.6 million of services and other. Retail revenue was $110.2 million, up from $86.2 million; e-commerce revenue was $61.8 million, down from $67.0 million. Active customers were 2.29 million, compared with 2.23 million.
Changes versus prior period
- Revenue grew 12.2%, attributed to higher average order value and a larger active-customer base.
- Gross margin fell 3.4 percentage points. The company cited store occupancy and depreciation, prescription-service costs, and growth in lower-margin contact lenses.
- SG&A declined 13.1% to $107.2 million, partly due to lower marketing costs and $7.4 million less stock-based compensation, mainly related to the Founders Grant. SG&A remained 62.3% of revenue.
- Management-reported adjusted EBITDA improved to $17.7 million from $0.8 million. This non-GAAP measure excludes, among other items, stock compensation, depreciation, impairment, and ERP implementation costs.
- Operating cash flow improved to positive $8.6 million, though cash declined by $4.3 million after investing outflows and foreign-exchange effects.
Outlook, risks, and notable items
The filing gives no specific numerical revenue or earnings guidance. Management expects operating losses could continue while it invests in expansion, but believes cash, available credit, and operating cash flows will fund operations for at least the next 12 months. It cited subdued optical-industry growth and consumer spending uncertainty amid inflation, higher interest rates, and other economic pressures. Store expansion, product and channel mix, supply-chain and input costs, customer acquisition, and execution of technology systems are additional risks.
Two material weaknesses in internal control over financial reporting remained unresolved as of March 31: IT access and program-change controls, and financial-reporting process and review controls. Management said remediation is underway, including ERP implementation and additional controls and personnel, but could not estimate the remediation cost. Disclosure controls and procedures were therefore concluded to be ineffective at the reasonable-assurance level.
The company reported no pending legal matter expected to have a material adverse effect and no material changes to the risk factors in its 2022 Form 10-K. Subsequent to quarter-end, it entered three retail leases with approximately $1.6 million of total commitments and approved employee RSU grants with $2.0 million of grant-date fair value.
Important facts for investors to verify
- Whether revenue growth and active-customer gains continue, particularly as e-commerce revenue declined year over year.
- Whether gross-margin pressure from store expansion, services, and product mix persists or moderates.
- How much adjusted EBITDA improvement translates into sustainable GAAP profitability and cash generation; review the non-GAAP reconciliation and excluded costs.
- Progress and cost of remediating the material weaknesses, including whether controls operate effectively for a sufficient period.
- Liquidity and capital needs as the company expands stores and invests in systems; monitor lease commitments and any use of the revolving facility.
- Potential share dilution: outstanding awards include 4.4 million PSUs tied to the co-CEOs and stock-price hurdles, in addition to other options and RSUs.