Q3 2021 Warby Parker Inc Earnings Call

Hello, everyone and thank you for your patience there won't be Parker third quarter 'twenty touched one earnings conference call is due to begin shortly.

[music].

Good morning, My name is Bethany and I'll be your conference operator today.

This time I would like to welcome everyone to the will be Parker third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star two thank you I would now like to introduce your host Tina Romani, Vice President and Investor Relations.

Thank you and good morning, everyone here with me today are Neil Blumenthal, and David <unk>, our co founders and co CEO.

Alongside these Miller senior Vice President and Chief Financial Officer.

Before we begin we have a couple of reminders our earnings release and slide presentation are available on our website at investors <unk> Parker Dot com.

During this call and in our presentation.

We'll be making comments of a forward looking nature actual results may differ materially from those expressed or implied as a result of various risks and uncertainties for more information about some of these risks. Please review the company's SEC filings, including the section titled Risk factors in the prospectus filed by the company in connection with its direct listing.

These forward looking statements are based on information as of November 12, 2021, and we assume no obligation to publicly update or revise our forward looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with.

A reconciliation of these items to the nearest U S. GAAP measure can be found in this morning's press release and our slide deck available on our IR website with that it's my pleasure to turn the call over to Neil to kick things off.

Thanks, Tina and good morning, everyone. After 11 years as a private company. We're excited to host our first earnings call on the heels of a strong quarter and a successful direct listing.

We'd like to start by highlighting team worthy our talented and engaged team continues to thrive, while demonstrating strength and resilience during this challenging pandemic.

One of the highlights of Dave in my career with celebrating our direct listing alongside morby, both inside the New York stock exchange and virtually across the U S and Canada.

The pride that all of US felt was palpable.

Through everyone's hard work and shared commitment to doing good to more be we'll continue to have an outsized impact on our customers our shareholders and the communities we serve.

As we reflect on our business today, we're grateful to operate in a large and growing market. According to the vision counsel the U S optical market is roughly $42 billion.

With an incremental 100 billion internationally and with expectations for robust growth at a rate greater than GDP.

With over half a billion in revenue, we still represent only 1% of the U S market underscoring the tremendous opportunity we have ahead.

We started Bobby Parker in 2010, because we were frustrated consumers.

Australia by the high price of glasses, and then antiquated shopping experience.

Since our founding we've pioneered ideas designed products and develop technologies that help people say.

We design and sell prescription glasses, starting at $95 and offer a range of convenient and affordable vision care products and services like eye exams and contacts across our more than 150 retail stores, our website and our apps.

By selling directly to our customers and cutting out the middleman, we're able to deliver exceptional value and remarkable customer service, while maintaining high gross margins.

This is best reflected in our net promoter score which.

Which has remained above 80 throughout our history.

And we have not seen similar customer satisfaction industry wide.

We believe that the large incumbent players, which make up half of the total market are structurally disadvantaged and the other half of the market independent optical shops, and optimistic practices are not well positioned to make the financial and technological investment required to innovate and create the exceptional customer experiences consumers now.

<unk>.

Happy customers fuel our growth we ended the quarter with $2, one 5 million active customers, an increase of 23% versus last year and still a fraction of the nearly 200 million adults in the U S. Using some form of vision correction.

Our direct to consumer model not only enables us to better serve our customers, but also helps us manage crises like a pandemic.

Our omnichannel approach enabled us to grow last year, thanks to our robust ecommerce presence.

And our vertical integration has allowed us to avoid inventory shortages and long lead times and countered by other brands and retailers.

Of course, our ability to serve our customers is dependent on a highly engaged team.

And <unk> is deeply committed to providing vision to all.

In Q3, we publicly launched the war be Parker impacted foundation, which we created to accelerate the work of our buyer Paraguay. The pair program whereby Parker was incredibly proud to authorized up to 1% of the company's outstanding shares for future grants to the foundation or other like minded charitable organizations.

And our work providing glasses to those in need is having a dramatic impact.

We are excited to share the result of a three year clinical study highlighting the impact of our free glasses distribution program in Baltimore City public schools.

In September Jama Ophthalmology published a study from Johns Hopkins University investigating the effect glasses have on our students performance in school.

Overall gains for students, who receive glasses were equivalent to adding two to four months of education onto the school year.

And for students in the lowest quartile or those participating in special education wearing glasses had an impact that equated to a four to six months of additional learning.

The study proved what we have seen firsthand through our biotech I gave a fair program in U S. Schools that are single pair of glasses can significantly improve a child's ability to learn and succeed in school.

Our focus on mission and our stakeholder centric ethos are just two of the reasons, we're excited and proud to come to work each day.

In every decision we make we take our customers employees the community our partners, our shareholders and the environment into account and across our corporate customer experience optical lab and retail teams, we recruit and retain highly engaged highly motivated individuals.

Who are excited to connect their work back to our mission.

We view this focus on impact as a form of long term ism.

One of the examples that brings this to life with our approach to store closures in 2020 at.

At the start of the pandemic, we were one of the first national retailers to close all of our stores because it was the right thing to do to protect our employees and our customers.

Not only was it the right thing to do from a safety perspective. It was also the right business decision fast forwarding to today, we believe we arent facing the same labor shortages that many retailers are facing because of our employer brand and the goodwill we fostered over the years.

Our long term approach to building more be Parker can best be described as one of sustainable growth.

This is a phrase youll be hearing from us a lot.

And by that we mean, our focus on scaling our business and compounding high growth rates not just for the next couple of quarters or years, but for many years and decades to come.

This is the philosophy, we use to guide our strategic investments that we believe will lead to meaningful long term growth profitability and impact.

As we look toward parkers future, we could not be more excited and now I will pass it over to my co CEO and co founder Dave to walk through some of the growth strategies, we will leverage in Q4 and beyond.

Thanks, Neil I'd like to Echo your sentiments and thanking our incredible team and also share a heartfelt. Thank you to all of our stakeholders, who have supported us in our journey into our new shareholders and those whom we are meeting for the first time on today's call. Thank you for joining we're so glad you're here.

With that in mind, and as we focus on achieving sustainable growth and look to increase our 1% market share in the U S. We're focused on four distinct but complementary growth strategies.

First scaling our omnichannel experience by expanding our retail footprint and driving innovation through our website apps an integrated digital experience.

Second expanding our core glasses business, while deepening our penetration progressive lenses.

Third evolving into a holistic vision care company as we scale contact lenses eye exams and telehealth services.

And fourth driving brand awareness using a strategic mix of organic and paid initiatives to amplify outreach.

I'm excited to share a few milestones we achieved against each of these four growth strategies during the quarter, starting with scaling our omnichannel experience.

We designed <unk> Parker from the ground up as a true omni channel brand and we're excited to continue to scale, both our store footprint and leading digital offerings.

We opened nine new stores in the quarter and entered five new markets, including San Antonio, Texas, Tucson, Arizona, and Princeton, New Jersey, bringing year to date openings to 28.

We're on track to open 35 stores. This year the most stores we've ever opened in a year, which will bring our store count to 161. This is still just a fraction of the 41000 optical shops that exist in the U S. Today as a reminder, we commissioned a third party study that concluded we can expand our footprint to over 900 stores at the same productivity.

Based on our current customer and product profile, so significant white space remains for our retail expansion.

With our unaided brand awareness at just 13% today, we deliberately designed our stores to serve as billboards and have found them to be highly effective in driving brand awareness, new customer acquisition and in serving our existing customer base. Our stores are also highly productive we have historically targeted and continue to target average sales per square foot.

$2900 four wall margins of 35% and payback in under 20 months, and we expect our stores to generate significant free cash flow over time.

Our stores serve as an integral complement to our website and apps and creating a holistic and seamless omnichannel customer experience, we describe ourselves as customer focused but channel agnostic a customer journey that starts in a store can end with a purchase online and vice versa and more than 70% of our customers interact with our website or.

Mobile app before placing an order we've also seen the adoption of digital tools like our virtual try on increasing significantly for customers purchasing both online and in store.

Next I'll talk about our efforts to expand our core glasses business, we introduced new frame styles sizes lens offerings and more through the release of over 20 eyewear collections each year to highlight two from this quarter in August we launched our fall core collection and traveled to one of our People's projects schools to photograph the collection on <unk>.

Teachers, who have done immeasurable good for their students and their communities in the face of the pandemic challenges in September we launched our tortoise collage collection. Each hand finished frame features four distinct tortoise acetate splice together a complex intricate design and construction that is completely new to the industry.

We also continue to make significant strides in scaling our progressive business and we have seen progressive make up a larger percentage of our overall unit mix each quarter. Since we reopened stores in 2020 progresses make up nearly half of the optical market, but less than 20% of our optical business as we tackle this white space in front of US we expect.

We will continue to see gross margin leverage since progressives are a higher margin product category.

To support the expansion of our glasses business, we were thrilled to open our second optical lab in the U S. This quarter and welcome our new team members to our Las Vegas facility.

We opened our first optical lab and slow to prove New York in 2017, which has expanded to a 52000 square foot facility with a team of more than 120.

We believe that the opening of our new 69000 square foot Las Vegas facility will give us the power to increase our production and shipping capabilities scalar in house manufacturing processes and more efficiently serve our west coast customers.

Thank you to all of our team members, who have supported this important milestone and a big welcome to all of our new team members in Las Vegas.

The deliberate investments we've made in our supply chain and in house optical labs enable us to maintain the highest quality standards and exceed customer delivery expectations. While also more effectively navigating challenging and dynamic environments like the one we're seeing today orders produced and shipped from our own labs have faster turnaround times lower return rates.

Higher margins and result in higher NPS scores.

Operating these labs also gives us additional control and flexibility over our inventory, which we believe will continue to insulate us from some of the supply chain and inventory challenges impacting other companies.

We also feel fortunate that we sell small and lightweight products given the high value to weight ratio. We have predominantly used airfreight for international shipments of our inventory throughout the Companys history. As a result, we have not been impacted by the global cargo shipping backlog and have not had to meaningfully change our transportation methods.

As it relates to expanding and scaling our holistic vision care offering.

Historically, the vast majority of our customers have gone to a non worby Parker doctor to get their prescription and then have come to us to buy glasses, and the 30% plus of our customers who wear contacts regularly have gone somewhere else to purchase those.

We're investing heavily to reduce these friction points to offer a holistic and seamless vision care experience for all of our customers and patients.

We saw strong customer response to our contact lens offering throughout the quarter today. The U S contact lens market is over $5 billion annually and roughly 42 million people in the U S where contact lenses with 70% of them purchasing contacts at least two times per year, many optical retailers see 20% or more of their bid.

<unk> made up from contacts for US. This is still a new part of our business last year was the first full year, we offered contacts to our customers and today contacts make up only 5% of our business.

As we look to the future we see a significant opportunity to scale. This part of our business both to attract new customers to <unk> Parker and to sell contacts to our existing glasses customers.

We also see significant opportunities and scaling our eye exam envision testing offerings. The U S eye exam market is over $6 billion annually, many optical retailers see 10% to 15% of their business coming from exam revenue and the majority of their sales coming from exam customers for US both of these percentages are quite small.

We now have 99 stores with doctors, where customers can get a comprehensive eye exam up from 49 stores with doctors as of Q3 2019, and we expect this number to grow significantly in the coming quarters and years.

We're also investing heavily into telehealth and are excited by its potential to increase access to vision tests across our customer base.

This quarter, we introduced virtual vision test, an app that makes it significantly easier and faster to renew glasses and contacts prescriptions from home since launching in July we've seen the number of vision tests performed via telehealth nearly double with limited promotion and we plan to introduce new features to continue to enhance the customer experience in the coming months.

Now onto our fourth growth strategy driving brand awareness.

We leverage a number of approaches to increase brand awareness and attract new customers from unique collaborations and partnerships to creative TV campaigns to ensuring every one of our customers has a remarkable customer experience.

Our customers have been and remain our best marketing channel to this day more than half of our customers still learn about us via word of mouth.

Throughout the quarter, we successfully executed on several initiatives to drive awareness and growth, resulting in growth in orders from new customers and an increase in average order value.

In response to the Delta variant and potential shifts in consumer behavior. As a result, we moderated paid marketing spend throughout Q3, even so we ended the third quarter with $2. One 5 million active customers, an increase of 23% versus last year.

One of our core values is to pursue new and creative ideas, we love, creating fun and engaging collaborations with interesting partners. In this quarter, we were thrilled to partner with Searchlight pictures to celebrate Wes Anderson's newest film the French dispatch.

Readers writers film lovers, and more were invited to an experiential pop up in Soho, where there were lines around the block throughout the opening weekend.

What gets US excited is that each of these initiatives will help us both attract new customers and make our existing customers more valuable.

Now I'll hand, it over to Steve to review, our Q3 financial results and outlook for fiscal 2021.

Thanks, Neil and Dave I wanted to start by sharing just how excited I am to welcome all of you to our first earnings call. As you know the company went public through a direct listing roughly six weeks ago, and we couldnt have done that without the support of all of our team members customers partners and investors both existing and new.

I also wanted to thank all the sell side analysts covering our stock who've taken the time to get to know the company dig into our numbers and share their perspectives on the business as David Neal mentioned earlier, the vision counsel measures the size of the optical market at roughly $42 billion.

Including prescription and nonprescription glasses contact lenses and eye exams and warranty Parker accounts for just 1% of this market representing tremendous room for growth ahead.

I'll start by talking about top line trends, we're very happy with the top line momentum were seeing measured by revenue and customer growth. We've seen continued top line growth throughout each quarter. This year and we're very pleased to report strong top line growth for Q3, 2021, as well and these remarks I'll make comparisons were relevant to <unk>.

In 2020 in 2019 to address topline and bottom line trends versus periods pre pandemic in 2019 and versus the same period last year for Q3 2021 revenue came in at $137 4 million up 32% over last year and up 45.

5% versus Q3 2019.

Active customers increased to $2, one 5 million up 23% versus last year. This growth in top line was driven by a number of factors, including a consistent replenishment cycle of our core prescription glasses offering as well as impressive progress in our contact lens business, which still only represents.

5% of our business overall.

We're also happy to report continued increases in average revenue per customer, we generated $242 and average revenue per customer on an LTM basis as of September 32021.

This represents a 14% increase over $213 measured as of the end of the same period last year.

This growth in average revenue per customer illustrates our ability to execute on our holistic vision care strategy, where we are evolving from a glass is the only company to one that meets the holistic vision care needs of all of our customers.

And as we do so we believe our customers will become even more loyal over time customers that purchase exams contacts and glasses from us generate roughly two two times the revenue after one year from initial purchase and glass is the only customers and yet holistic vision care purchasers continued to represent.

Less than 1% of our active customers underscoring the continued long term upside here.

As Neil and Dave said, we very much view ourselves as an omnichannel brand customer journeys are nuanced and complex purchases that start online might end up in store and vice versa, and given that we strive to make customer experiences as seamless as possible across our stores website and apps.

For Q3, 'twenty, one ecommerce represented 42% of our overall business versus 63% in 2020 and 34% in 2019 today, our E Commerce mix from a channel perspective still remains moderately elevated versus 2019 E. Commerce grew at 102% in Q2.

Three of last year compared to that period E. Commerce was down 11% year over year, but up 80% versus 2019, representing a two year CAGR of 34%.

We're very pleased with our retail store performance, we've seen a strong recovery at our existing stores since the onset of the pandemic and new stores are performing in line with the targets, we've outlined including revenue per selling square foot four wall margin and payback we.

We finished the quarter with 154 stores versus 123 stores opened at the same time last year, representing 31, new stores opened over the period.

We opened nine new stores in Q3, 21, and 28 stores. So far this year. We're on track to open 35, new stores. This year and we feel confident that our new store pipeline is stronger than ever.

Next I'll shift gears to gross margin our gross margin is fully loaded and accounts for a range of costs, including frames lenses optical labs customer shipping eye doctors store rent and depreciation of store build outs.

As we talk about gross margin will continue to try and lay out the puts and takes that are reflected in changes to gross margin as.

As we discussed at our Investor Day in September we expect our gross margins to fluctuate between quarters. As a result of various puts and takes which includes seasonality and product mix, but on an annual basis, we've seen consistency of strong gross margins of 58% to 60%.

We have some costs and benefits impacting comparability, which I'll reference as well as a number of operating factors to bear in mind that reflect changes in gross margin.

Gross margin for Q3 2021 came in at 58%. This compares to 61, 5% for the same quarter in 2020 and 60% in Q3 2019 Q.

Q3, 2021 cost of goods sold include stock compensation expense associated with our direct listing of 70 basis points related to our optometrists and optical lab employees.

Excluding this gross margin totaled 58, 7%.

In addition, Q3 2020 benefited from a tariff rebate of approximately 9% of revenue.

With regards to the various operational puts and takes to gross margin increase.

Increased contact lens penetration accounted for the majority of the decrease we saw during the quarter.

We saw contact lenses accelerate as a percentage of our business mix as we've driven brand awareness around that product offering as Dave mentioned contacts are a $5 billion plus market and represents approximately 5% of our business today versus just 2% of our business for the full year of 2020.

Contact lenses have a lower margin profile than our core glasses offering, but also have a higher purchase frequency that elevates gross margin dollars, particularly given the subscription like nature of this product line.

We also saw a moderate increases in the cost of airfreight.

We have little exposure to ocean freight trends as we use air for most of the products. We directly purchase from oversees our product is lightweight and low volume. So these product costs make up a small minority of our overall costs.

It's also worth noting the impact of product mix on margin in Q3 2021, we were pleased to see sales of non prescription sunglasses returned to pre pandemic levels of 10% plus of our business. During 2020, we saw sales of this product line dropped to half of pre pandemic levels given sunglasses hut.

Moderately lower margins. This ultimately elevated gross margin in Q3 2020, we also opened our second optical lab in Las Vegas. This quarter as this new optical lab ramps to 100% operating capacity, we expect that it will continue to have a moderate drag on gross margin until the lab reach and scale in the latter part of <unk>.

Next year once online similar to results we sold our first optical lab in <unk>, we expect to more efficiently serve our west coast customers, resulting in higher NPS lower refund rates faster turnaround time and improved gross margin overall.

Next wed like to provide more visibility into SG&A for the quarter. The three main components of our SG&A line includes salary expense for our headquarters customer experience in retail employees.

Marketing spend which includes our home high on program and general corporate overhead expenses.

First we had a number of unique expenses associated with our direct listing recorded in SG&A.

During the quarter, we recognized stock based compensation expense of $65 million transaction costs of $24 million and a cost of $7 8 million, reflecting the start of our stock donations for charitable purposes to nonprofit organizations, including the warranty Parker impact Foundation.

As we expressed in connection with our long term model, we expect to see leverage across our SG&A spend as the driver of incremental adjusted EBITDA margin over time.

In line with this framework, we maintained a very focused approach that enabled us to make continued investments in the business, while generating leverage excluding stock compensation expense and the one time costs associated with our direct listing we saw SG&A as a percentage of revenue improved nearly six full points from 60.

5% to 54, 6%. This improvement was driven by two main factors first a thoughtful approach to hiring making sure that incremental hires have clear alignment to supporting growth and infrastructure and second is a disciplined deployment of marketing dollars.

As it relates to marketing, we maintain a highly flexible model with the only committed spend largely around linear television during competitive periods due to a range of factors, including uncertainty in the broader economic environment as it related to Covid and some elevation of media rates that we wanted to see subtle we maintained a conservative approach.

Approach to the deployment of marketing spend as we leverage the flexibility of our model in.

In addition, we saw expense for our home try on program decrease as the mix between E Commerce and stores is normalized closer to pre pandemic levels. We were extremely pleased with our top line performance given our marketing spend growth was just mid single digits year over year in Q3.

As we look ahead to Q4, we plan to redeploy some of those dollars from Q3 into Q4, as we drive brand awareness and demand during the holiday season and year end exploration of flexible spending.

As it relates to adjusted EBITDA, we saw an expansion of adjusted EBITDA margin in the quarter versus the same periods in 2020 in 2019.

We generated adjusted EBITDA margin of eight 1% in the quarter versus five 2% last year and six 7% in 2019.

This adjusted EBITDA margin is really a reflection of maintaining strong growth, while continuing to see leverage in SG&A as just described.

We finished the quarter with a strong balance sheet, reflecting 200.

Continue to deploy to make deliberate investments in both growth and infrastructure.

Turning to our outlook for the remainder of the year for the full year 2021, we now expect net revenue to be in the range of $539 5 million to $542 million representing growth of 37% to 38% versus 2020 and growth of 46% versus 2019.

Adjusted EBITDA margin of approximately 4% to 5% in line with prior guidance and we are on track to open 35 stores this year, which will bring our store count to 161 as.

As we look ahead. It is important to note that there are a number of unknowns related to the macro environment as.

As such we continue to be thoughtful and prudent in setting our financial outlook for the balance of the year.

Let me give you some color on the assumptions embedded within our guidance as it relates to topline we observed moderately higher seasonal demand during the month of December due in part to customer usage of health and flexible spending benefits in the final weeks of the year, given we recognize revenue upon delivery of product to the customer we recognize <unk>.

Revenue in Q1 for most orders placed in the final week of the year from a seasonality perspective Q4 is generally our lowest margin quarter as we made several investments to support the important holiday selling season. These investments include marketing to support and generate customer demand.

Investments in shipping as we expedite orders to meet holiday timing <unk>.

Increasing store staffing to accommodate higher traffic and extended store hours and increasing our customer experienced staffing to support higher demand as well as elevated call volume related to flexible spending benefit questions.

For additional context. This demand from December continued into January in Q1, which sets the stage for growth for the full year.

Lastly to be helpful ahead of our direct listing we provided a framework for 2022 net revenue growth and adjusted EBITDA margin improvement, we look forward to providing our formal 2022 outlook with our fourth quarter call in March.

In closing, we've built our business model with a focus on generating sustainable growth, while driving incremental profitability of one to two points of adjusted EBITDA margin each year until we reach our long term adjusted EBITDA margin target of 20% plus.

We couldnt be more excited about what lies ahead. Thank you for welcoming us to the public markets, we're thrilled to be here and with that I'm excited to open the call up to Q&A.

Thank you at this time I would like to remind everyone and we'll just we'll ask a question press Star then the number one on your telephone keypad as a reminder, please limit your questions to one per participant.

Our first question comes from the line of Oliver Chen of Cowen. Your line is open.

Hi, Thank you congrats on your first public call Neil and David We see telehealth at Cowen is a big opportunity what are some of the key aspects in your roadmap there and your competitive advantages as you as you think about employing technology and embracing this holistic vision care model.

Would also love your thoughts on sustainability as it applies to your supply chain you have a comprehensive impact report, where we as one of our top ESG ideas, So would love thoughts around that as well. Thank you.

Great.

Thanks, Oliver for joining in for the questions.

I'll tackle the telehealth piece, and then hand it to Neil.

To talk about.

Sustainability and.

We are extremely excited about the prospect of leveraging telehealth to make it easier faster cheaper for our customers and patients to renew prescriptions.

And increase access.

Two doctors and this quarter, we introduced our virtual vision test, which is an app that you can download do envision test from home in just a few minutes in an ophthalmologist who has licensed in your state can write a prescription remotely.

Seeing.

Very positive response from our customers.

With limited promotion, so far and really feel like we're in the top of the first inning and if theres been any silver lining from the pandemic.

That a lot of the barriers to telehealth adoption.

Have been lowered both from a consumer adoption standpoint, and from a regulatory standpoint, and so where.

We're excited to continue to invest.

In this area and some of the near term items that we have are going to make it easier for our customers to use one vision tests to renew both glasses and contacts prescriptions.

To scan their contacts box.

To make it even easier and faster for for our customers and patients to renew their contacts prescriptions.

With respect to ESG, you did mentioned our impact report and I would encourage everyone to take a look if they haven't already worry Parker dot com slash impact US report, but since 2018, we've been publishing a thorough annual impact report based on the GI framework and recently also started pre.

<unk> SaaS be summary, and we think that's critical to be transparent in our efforts to make the world a better place for us to create lasting impact and one of the ways. It really impacts our business besides making us feel good at night as leaders.

Is that it helps us recruit and retain the absolute best talent.

And we have talent across the U S and Canada, but we also have talent base, where our frame factories are based that are constantly.

Monitoring our factories with respect social practices, but also ensuring that.

We're actively measuring carbon emissions and working with our social innovation team to purchase.

The best carbon offsets.

<unk> will continue to explore ways to reduce water use and reduce carbon emissions one of the nice things about opening up.

Our second optical lab facility in Las Vegas, as we did in Q3 is that the more control that we have in the further that we vertically integrate.

The more that we can do to reduce carbon emissions and it's something that we're really excited about that perhaps the thing that we're best known for is providing a pair of glasses for every pair that we sell and in the early days of <unk> Parker, we thought should we commit to a percent of revenue or percent of profits.

And we thought that was important to focus on impact right. The pair of glasses on someone's face dramatically change as their ability to learn their ability to work.

And as we saw with this Johns Hopkins University study there is no better intervention in school, then providing a pair of glasses not extending the school day, not providing private tutoring not providing computers in classrooms, giving a pair of glasses effectively extend the school year by two to four.

And we're super proud to have provided over 8 million pairs of glasses to people in need around the world in the U S and with 1 billion people in need of glasses that don't currently have access we think that this is solvable and we're going to lead the charge in solving this large intractable problem.

Thanks Oliver.

Thank you.

The next question comes from the line of quote Lashway.

Your line is open.

Hey, Thanks, guys.

Curious if you can share what your customer growth.

Expectations are for <unk>, and if thats something that you will be sharing with us.

In the future and then just second and as you look to bring more doctors on.

On staff and open stores with doctors and where are you sourcing. The majority from are they coming from schools are fresh out of schools are they coming from places other retailers that may have closed up shop or are they sort of independence.

Slide to come work for you and shut down their own practice.

Okay.

Great. Thanks, so much for the question Paul I'll answer the first part of the question.

Then we will kick it over to Neil to answer the second part in terms of providing guidance around active customers we.

Projects active customers that we expressed externally to investors and analysts as you think about our model the way that we have talked about growth. Its really a function of two factors. One is consistent growth in terms of average revenue per customer, which you've seen has increased to $242 or <unk> <unk>.

14% year over year, and our active customer growth is up 23% year over year. The way that we have built our model is very consistent around how we think about customer economics and customer growth and growth in <unk>.

And what we will do is just draw your attention to the consistency that we've seen on a historical basis.

And the sustainable growth around those metrics as opposed to giving you a fixed active customer number for the next quarter.

And with respect to our hiring and retention of optometrists.

As we mentioned, we now have 99 stores with I'd doctors, that's up from 49 stores in Q3 of 2019, we have found that we've become a preferred employer about Tom interest and that's because of the work environment.

Our stores are fun, our team members are friendly and warm our stores and our eye exam suites are beautiful and new and use the latest technology, we invest a lot to ensure that our optometrists our focus on clinical care rather than administrative tasks and then even the location of our stores tend to be in close proximity.

Similarly to where our doctors lip.

And I forgot what the details, but there was a study that came out not too long ago that showed that actually commuting time is the biggest indicator of happiness.

But we tend to hire doctors.

That have several years' experience often coming from other optical retailers or opt metric practices, we do see some shifts happening in the industry.

Is that.

More and more.

Graduates of Optometry school are graduating with increased debt loads.

Versus perhaps a decade or two ago, and that's making it difficult for recent graduates to buy into a private practices. For example, so more and more are looking to work at a stable employer like Bob Parker. We've also found that we've earned a lot of goodwill within the.

To metric community because of our ratio of equity strategy.

Last year, we laid out a plan.

The increase lack representation in the field of optometry less than 3% of Optometrists in America are black and we want to change that.

We're working with other groups to increase awareness.

Awareness about the field of Optometry and <unk>.

Sponsor career fairs at historically black colleges and universities and have created scholarships for black students at the New England College of Optometry.

Thanks again for your question.

Thanks, Tom and good luck.

The next question comes from the line of Brooks at.

Goldman Sachs. Your line is open.

Good morning, and thank you so much for taking.

Today's call really highlighted the momentum that you have across the business and in particular in some of those newer emerging product categories, such as contact lenses progressive and sunglasses I was hoping it.

You could provide a little bit more detail about how you expect each of those categories to trend maybe through the remainder of 2021 and 2022 and then the puts and takes on the margin impact that you're anticipating as a result of those changes. Thank you.

Sure. Thanks for the thoughtful questions Brook.

Talk a little bit about product mix in our three core categories of products, our eyeglasses contact lenses and eye exams were predominantly a glass is only business today and as you heard in the remarks, we've made some remarkable strides as it relates to increases in our contact lens business as it relates to progressive what we do.

Is that we continue to be highly underpenetrated versus.

The rest of our optical peers progressives make up approximately 45% of all prescription eyeglasses sold in the U S. Today, and Thats still just 20% of our business.

I exams also a minority of our business today make up less than 3% of our business and almost 10% to 15% of the typical optical retailers sales.

So we actually view at our growth drivers around those three product lines for next year as tremendous, particularly when we talk about the attach rate of turning a customer from a glass is the only customer into a holistic vision care customer that is purchasing a pair of glasses contact lenses and an eye exam and we found that the value.

Those customers after a year from initial purchase or over two times more valuable than that of our glasses only customer. So we will continue to focus on evolving into a holistic vision care company that really relies upon growing each of those three product lines and what we do here is make.

Sure that folks understand the amount of white space that is ahead of us and the starting point for us versus the remainder of the industry and we do anticipate growth in eyeglasses or contact lenses and exams, we do not provide guidance around product mix for those three categories.

As it relates to gross margin as a reminder.

We have what we like to refer to as a fully loaded gross margin line. So we include in there just as a reminder, frames lenses customer shipping.

Consumables store rent the depreciation of store build outs I doctor costs.

So as we talk about some of the fluctuations in our gross margin what we want to do is make sure that we're providing the broad picture of whats in gross margin and then where relevant as we've done this quarter and as we'll continue to do is provide color.

Excuse me on the puts and takes and what has resulted in some of the changes that that youll see on our financial statements in the context of this quarter gross margin in Q3 of last year.

As a reminder, the pandemic year was 61, 5% gross margin this year in the face of our financial statements, 58%. We did have one time stock comp expense related to our direct listing we record stock comp expense for our eye Doctor as an optical lab employees within cost of sales and so if not for that expenditure gross.

<unk> would have been at 58, 7%.

The back end comparable quarter, we also called out a unique tariff rebate that we received that accounted for roughly <unk> nine points of revenue. So there were some one timers in the quarter that we wanted to call out.

And then as we talk about some of the operational factors that impacted the changes the biggest one really is contact lenses accounting for the majority of the change in gross margin percentage as a reminder, contact lenses have.

Moderately lower gross margin than eyeglasses, but they have a much higher repeat frequency rate repeat purchase rate and that product line amplifies our gross margin dollars.

So we wanted to call that out as the biggest change from a percentage perspective, but really as a positive because it helps us propel our holistic vision care strategy. The next factor that we talk about is just a shift in product mix.

We saw a nonprescription sun dropped to roughly half half of our typical product mix in the back a comparable quarter of the period that we're discussing and we saw that product line recover to roughly 10% of the product mix in Q3 of this year non prescription sunglasses have a moderately low.

Our gross margin thus.

Moderately reducing gross margin this quarter and elevating gross margin in the comparable quarter. In addition, we saw some very moderate increases in air freight as a reminder, our products that we receive from overseas eyeglass frames is very low weight low volume and accounts for <unk>.

Minority of our overall cost of sales, but did want to call out in the context of some of the supply chain disruptions that the world is experiencing we feel that we're largely insulated in the context of airfreight have just seen a very moderate increase that has that has had a very minor impact on our gross margin and last is we're excited that we continue with our.

Our path toward vertical integration, we opened up our second optical lab in Las Vegas.

And it'll take some time for that ramp to scale, we expect that lab to reach full scale by the latter part of next year, we opened up a similar facility in early 2017 and the ramp that we're now seeing in Vegas really mirrors the ramp that we saw with that New York facility.

And so I wanted to address your question on gross margin realizing that there are lots of different puts and takes in there but given this is our first earnings call. We wanted to make sure that we set the stage painted the picture and then provided some detail behind some of the fluctuations.

Thank you I'll pass it on.

The next question comes from the line of Mark Mahaney.

Cool ISI your line is open.

Okay. Thanks.

<unk>.

I think the key data point that you haven't seen some of the <unk>.

<unk> shortage issues or employee.

Wage inflation issues of other companies, perhaps because of the strength of your brand can you just double click on that a little bit.

This is a.

Not unprecedented but it is a pretty.

Pretty glaring market in terms of wage inflation kind of across the board.

So just to spend a little bit more time on and how you were able to avoid some of those.

Challenges and then.

Steve could you talk a little bit more about the gross margin outlook, you're right in the middle of this kind of long term gross margin range, you're talking about a bunch of puts and takes and I guess.

I would think about the mix shift of your products would make you sort of rise above that gross margin range. So I guess talk to the negative like what are the factors that would actually cause your gross margins to over there.

Next several years to actually go below that range like hypothetically what would cause that thanks a lot.

Sure. Thanks for your question with respect to our.

Our team in our stores and in our optical lab.

We have not seen.

<unk> from a hiring or a retention standpoint, and similarly, we haven't seen major wage pressures now that may be due to the fact of where we started and the fact that it's important to us too.

Dave.

Fair and appropriate wages all team members at <unk> Parker and to create a culture, where people can learn and grow and thrive.

Where we've seen labor shortages is not at war be Parker, but at times at the stores adjacent to us that sometimes make.

<unk> two centers for example, a little less predictable.

And it's.

One of the reasons why we pulled back marketing a bit in Q3 is just with the increase in Covid right. There was less predictability and more uncertainty and we continue to see.

Some uncertainty and we continue to see a little less predictability and traffic patterns to our stores, particularly urban stores that are reliant on office workers are tourism. For example, as those patterns have not returned to the same level of consistency as we saw pre pandemic.

That being said, our urban stores continue to perform well and continue to.

Improved versus last year and sort of the in the depths of the pandemic, but we don't foresee any labor shortages or.

Or wage challenges going forward.

Out of our stores.

And Mark on your second point as it relates to gross margins. So Q3.

We're close to the middle of the annual range that we've guided toward as a reminder, the annual long term guidance that we provided around gross margin is to be in the range of 58% to 60% on an annual basis not on a quarterly basis.

We know that there will be some fluctuations on a quarterly basis, particularly given how certain product lines perform.

And we've certainly seen this first quarter, we've seen this in previous quarters, but if you look at the consistency in our gross margin line, it's really been within that 58% to 60% zone in terms of talking about some of the questions. You asked about the risks to gross margin.

I would say one of the risks is really just around product mix. So.

Our three core products have different gross margin profiles glasses contacts and eye exams, and so hypothetically, we could see something similar to what we saw this quarter, where our product line really takes off much faster than anticipated and becomes a larger mix of our overall product mix I E contact lenses as a percent.

<unk> eyewear.

Glasses contacts and eye exams that we sell so that is certainly one factor another factor would really be on the cost side. So we in source and outsource optical lab services.

And we built one optical lab, we've now built another and we feel that having our own vertically integrated optical lab infrastructure really helps mitigate some of the external pressures that we might feel in addition to that we work with a network of third party labs.

Throughout the U S and we have long term contracts that are very defined and include pricing really at the product level and we feel we have very very good visibility into that.

Ponant of our pricing architecture, and other customer shipping costs again.

Done a very thoughtful job of negotiating long term shipping rates with various carriers some national some on a regional basis and the last component to talk about and as a retailer. There is a level of fixed cost that we sign up for when we negotiate leases, but I would say we have a best in class real estate development team.

A tremendously experienced head of real estate and all of the deals that we've put in place the feedback that we continue to get before we sign a single deal is that the rent per square foot and the level of concessions based on what we bring to the retail environment. Our best in class and so there are always going to be risks and challenges, but what we have.

Done.

Is trying to figure out what we can clearly control and what we can we will go to the extent of vertically integrating like building, an optical lab and where we rely on third parties. The way, we mitigate and manage that as just through long term sales and supply contracts.

And Mark this is Neal again.

It just.

Dawn on me another reason why.

I believe we're not facing the same wage or labor shortages as other retailers and thats.

Sort of how we manage the Pan American putting the health and safety of our team members.

Our head one of the first things that we did was engaged with.

<unk> and infectious disease experts in hiring folks that had been on the White House Covid Task Force for example to advise us on best practices and when we're making hires today and Dave and I are still part of the interview process for every store manager that we hire because we know that those stores.

Are so critical to our long term success, it's important to <unk>.

Great.

Proper culture around performance.

That when we're speaking to the store managers that we're hiring they're excited to come toward the Parker because they had a really difficult last 18 months and did not necessarily feel supported by their corporate teams as they would've expected I mean, they have heard at war be Parker.

That the field teams get the support that they need to be successful.

Thank you Neil Thank you Steve.

Okay.

Thank you Mark.

The next question comes from the line of Mark <unk> from Baird. Your line is open.

Good morning. This is Sarah Goldberg on for Mark. Thanks for taking my question and congrats on your first quarter.

Wanted to dig in a little bit further on the margin guidance for the full year and Q3 came in nicely ahead of.

Your guide from late September 4% to 5%, so you're holding the full year guide, which implies a little bit more cost pressure in Q4 than we had previously anticipated can you speak to some of the puts and takes here and maybe how that breaks down between gross margin and SG&A.

Okay.

Yeah for sure for sure. So on an annual basis I'll just start with gross margin, we're still maintaining our long term guidance for the full year of being in the 58% to 60% zone as it relates to some of the other puts and takes it's worth spending a little bit of time talking about some of the seasonal patterns, we see in buying towards the end of.

Of the year.

And what we experienced is some increased demand during the holiday season and increased demand with the exploration of flex spend and there were two explorations of flex spend there is sort of the big one which is December 31, and there is another one march 15th of the following year and what we do to prepare for this demand as we make certain investments ahead of the COO.

<unk>, which I'll talk about in a moment, but the demand that we drive the latter two weeks of December the last week in December in particular, we generate revenue from those orders into January. So there was a revenue deferral aspect, where the investments were making to staff up our retail.

Stores' staff up our optical lab expedite orders to customers as they get them in time for the holiday staff up our customer experience team to deal with questions on the phone as it relates to flex spend and invest in marketing a lot of those investments really bear fruit in January and into Q1, and so I just wanted to call that out we've typically.

<unk> seen moderately less profit in Q4 of every single year since inception than.

And then we do in the other quarters. It certainly was true last year. It was true the year before and were protect projecting consistency as it relates to to that number.

Also as we put together our financial model as a general rule given that there is still some level of uncertainty in the areas as it relates to the pandemic, we do want to be prudent and conservative where appropriate in projecting our business and our costs. So we feel very confident simply maintaining the adjusted EBITDA margin.

<unk> that we gave and as we think about where that puts us as a starting point for next year reiterating the incremental one to two points of adjusted EBITDA margin that we'll plan to add on top of that.

So I hope that helps provide some additional color as to how we're thinking about the quarter and adjusted EBITDA in particular.

Yes, thanks for all the detail.

The next question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open.

Good morning, and congratulations first quarter.

Thank you thank you Bob.

Okay.

Thank you.

Hey, guys. Good luck.

Do you see targeted to come from millennials.

Margins are our returns on products from.

I mean high margin returns from those.

Can you produce.

Jim.

Thank you.

Thanks, Dana and we're incredibly excited to have opened our second lab in Las Vegas.

<unk> seen really meaningful benefits of operating our lab in fluids Berg over the last few years and we do see that.

Glasses that are produced in our own labs.

Have faster turnaround times higher quality higher net promoter scores.

And higher margins and so we are excited too.

And more.

Higher percentage of our orders through our own optical labs over time today, we're already producing more than half of the classes that we shipped out to customers through our own labs, and we see substantial opportunity to increase that that percentage.

And.

Both scale our operations at <unk> Berg in addition to our Las Vegas facility, which is already well ahead of.

Schedule on producing.

Over 1000 pairs of glasses per day.

Thank you and just a follow up on the doctors in your stores.

Would you see from those sales as you add more doctors do you see the attachment rate on sales being higher for multiple purchases.

Anything in terms of attracting those customers.

Customers, who go to existing doctors to your stores.

So the optical attach rate and the industry is quite high we see that roughly 70% of prescription eyewear is purchased at the same place where the individual.

The eye exam as you think about our model.

We employ doctors directly we also have an independent o'dea model, where we can't employ directly yet.

We will leave some incremental space next door as part of our store to call. It 250 square feet.

That doctor is an independent practitioner so for eye exams from those independent practitioners, we don't have visibility into the attach rate, we do hope that the client or customer after getting that exam walks over to warming and gets a pair of glasses for the doctors that we do employ.

Where we can employ them, we do have visibility into that data and I can indicate that our attach rate.

Is at or above the industry benchmark that I just mentioned.

Thank you.

Okay.

Yes.

Great.

The last question. So thank you all for the great questions today, and thank you to everyone who joined US for our first earnings call. We're incredibly excited for the quarters and years to come if you have any additional questions or follow ups. Please feel free to reach out to ciena or our investor relations inbox that investors at will be Parker and we look forward to seeing you all again soon.

This concludes today's conference call. Thank you for joining you may now disconnect your lines.

Okay.