Q2 2022 Warby Parker Inc Earnings Call
Clearances that customer's lab.
And by doing so on a smaller expense base, we expect to drive meaningful adjusted EBITDA increases even in the face of less consumer demand.
We expect that these adjusted EBITDA improvements will begin to be realized in the back half of 2022, and we are committed to driving further margin expansion in 2023 and beyond.
And with that I'll turn it over to Neil to walk through our primary growth drivers, which will enable us to continue to scale and expand market share in the months and years ahead.
Thanks, Dave.
While we navigate the current lower growth environment with an even greater commitment to margin expansion. We plan to continue to strategically invest in four key growth initiatives.
First we're continuing to scale, our omnichannel experience and open stores and.
In Q2, we opened nine new stores and remain on track to open 40 stores by year end.
Despite continuing to operate in an environment with lower retail traffic our stores are generating $2 1 million in revenue on average on an annualized basis with four wall margins in line with our historical target of 35%.
This performance is consistent across our fleet, including a cohort of stores opened in 2021.
These newer stores on average continue to remain on track to pay back within our target of 20 months.
Second we continue to expand our core glasses business.
We consistently design and introduce glasses that our customers love, whether it's our everywhere series collection, which is our first collection priced at $175 or our new anti fatigue lens, which customers can add to any optical frame for an additional $100.
Progressive has also continued to grow as a percent to total.
As a reminder, progressives are our highest price point in highest gross margin category. So as progressive penetration increases we expect to drive top line growth and gross margin expansion.
Given these and other initiatives, we continue to see ASP and <unk> without impacting customer demand.
Third we're building our contacts business.
Contacts continued to scale growing more than 100% year over year from 3% of our business in Q2, 2021% to 7% in Q2 2022.
As a reminder, contact lenses typically account for 15% to 20% of our sales are in optical retailer.
In our contract business fuels to other areas of our business, 30% of contact customers, who are new to the brand and theyre buying glasses from us. These.
These customers also tend to spend more than our glasses only customers.
Yeah.
Fourth we're investing in our eye exam business.
We continue to hire and retain incredibly talented optometrists.
We ended the quarter offering exams in more than 70% of our retail stores and remain on track to provide eye exams and more than 150 stores by year end.
In Q2, we completed our annual goal of converting 40 stores to our PC model, which gives us greater control over the customer experience and enables us to recognize exam revenue.
Not only are we expanding our in person comprehensive eye exam capacity, but our telehealth offering continues to grow in Q2, the number of prescriptions requested through our virtual vision test app increased more than 100% year over year.
These four strategic initiatives are in line with our philosophy around long term sustainable growth and are consistently supported by consumer research or surveys show that the biggest barriers to purchase for more be Parker include not having a store nearby not being able to get an eye exam and not being viewed as a place that serves.
All of their vision care needs.
While our growth this year has trended lower than our long term targets, we remain confident in the recovery of our category and in our ability to continue to gain market share in any type of economic climate.
For example, during the pandemic from 2019 to 2021, we grew revenue 46%, while the overall optical market grew sales 5%.
We offer products and services people need to see and we believe we offer unparalleled value and a superior customer experience relative to others in our industry.
When demand reaccelerate across our industry, we believe we will be well positioned to differentially benefit in.
And future growth off our newly reset expense base is expected to result in meaningful incremental margins.
And now I'll pass it over to Steve.
Thanks, Neil and Dave Good morning, everyone.
The head of getting into detail for the quarter I wanted to mention that we are pleased that our second quarter top line performance was in line with our expectations and adjusted EBITDA was slightly ahead, especially as the market environment became increasingly challenging as.
As Neil and Dave noted, we have adopted a more conservative view on the remainder of the year to reflect the current macroeconomic conditions and recent trends in our business.
Outline the specifics of our new outlook after reviewing second quarter results.
Starting with revenue the second quarter of 2022 came in at $149 6 million up 13, 7% versus the second quarter of 2021, and just below the midpoint of our guidance of up 13% to 15%.
On a three year CAGR basis versus the second quarter of 2019 revenue increased 19, 1%.
We finished the quarter with $2 $2 6 million active customers, an increase of 9% versus the same period, a year ago, and our average revenue per customer increased 8% year over year to $254.
This continued scaling and average revenue per customer reflects our ability to provide more value to our customers as we evolve from a glass is the only company into one that sells eye exams contacts and eyeglasses.
As a reminder, both active customers and average revenue per customer are measured on a trailing 12 month basis.
Our growth in topline and average revenue per customer for the quarter was driven by a number of factors, including a consistent replenishment cycle of our core prescription glasses offering as well as continued progress in growing our contact lens business, which while up 400 basis points compared with Q2 2021 still only represents.
<unk>, 7% of our business in Q2 2022.
We also saw continued scaling of our progressive lens product, which reached nearly 22% of total prescription glasses sold in Q2 2022, it's still well below the market average of 45%.
Within our E Commerce business, we continue to see healthy growth on a three year CAGR basis in the mid Twenty's with Q2 E Commerce revenue up 24% on a three year basis versus Q2 2019.
From a business mix perspective for the second quarter E. Commerce represented 39% of our overall business versus 44% in Q2, 'twenty, one and 34% in Q2 thousand 19.
As it relates to a retail store performance. When we last spoke in May we noted that we saw retail productivity rise to approximately 90% in April which was a roughly 10 point improvement from the start of the year.
We're encouraged by the increase we had observed since the start of the year and shared our expectations for continued scaling of retail productivity the rest of the year.
Starting in the third week of May retail productivity decelerated modestly, which continued through the end of June where it has stabilized at roughly 80%.
We believe that the slowdown in retail productivity coincides with and is primarily driven by a range of factors, including a pullback in consumer spend on durable goods and secondarily, our pullback in marketing spend as we focus on profitability.
Despite the lower retail productivity percentage the unit economics of our stores remains strong as of Q2 2022, we had 141 stores opened for 12 months or more.
These stores generated on average on an annualized basis $2 $1 million in revenue and four wall margins in line with our target of 35%.
We've achieved these results by driving increased conversion rates and <unk> in store and through managing team schedules to match lower topline.
This strong performance is consistent across our store fleet, our 2020 stores a payback within 20 months and 24 of our 35 stores opened in 2021 have payback with the remaining 11 on track for similar payback.
Despite the decline in retail productivity in the back half of May and into June we were still able to deliver revenue results that were within our guidance of up 13% to 15% for the quarter.
Moving onto gross margin as we have done on each call before we dive in I would like to remind everyone that our gross margin is fully loaded and accounts for a range of costs, including frames lenses optical labs customer shipping optometrist salaries store rent and the depreciation of store build outs.
Our gross margin also includes stock based compensation expense for our optometrists and optical lab employees.
As a general note we have been pleased with the stability we've seen in the input costs of our products as we have thoughtfully managed expenses throughout our supply chain, including frames lenses and shipping costs for comparability I will be speaking to gross margin excluding stock based compensation.
Adjusted gross margin in Q2 2022 came in at 57, 9% compared to 59, 3% in Q2 2021 the.
The primary driver of the decrease in gross margin was the continued growth in contact lenses from 3% to 7% year over year as a percentage of our total business.
Expanding our contacts offering as a core part of scaling our holistic vision care offering and a key driver of increasing average revenue per customer.
While contact lenses have a lower gross margin percent versus our other product offerings. They are accretive to gross margin dollars given their higher purchase frequency and subscription like purchase cycle.
Next we saw year over year deleverage in gross margin in two areas, which are the more fixed portion of our cost of goods. These fixed elements of our Cogs stack, our retail occupancy and optometrists salaries, which generally remain the same regardless of revenue. We added 33 net new stores over the course of the last 12 months.
Going from 145 stores as of June 32021 to 178 stores as of June 32022, or an increase in our store base of 23% year over year, which naturally leads to an increase in store rent and depreciation from store build outs. There is 23% increase in store count compares.
Total revenue growth of 14% over the same period. We also saw a downward pressure on gross margin year over year from an increase in overall optometry salaries as we hired optometrists for our new stores and significantly expanded the rollout of our professional corporation or PC model.
As of the end of Q2 2022, we operated with 87 stores, where we engage directly with an optometrist and therefore recognize both revenue from exams and optometrist salaries. These 87 stores compared to 37 stores at the end of Q2 2021, all of which at the time, we have direct employment models as we did not start.
Our PC model rollout until Q4 2021 the.
The majority of our 40 PC model stores are ones, where we are converting an existing store with an independent doctor relationship to the PC model and therefore, we had already been recognizing a significant portion of product conversion sales at our stores from the independent Doctor.
As we convert these stores to the PC model, we expect a near term margin headwind given the gross margins on the exam service alone are lower than our glasses and contacts gross margins.
That said, we expect the PC model will benefit us in the long term as it gives us greater control over the customer experience enables us to recognise exam revenue and results in higher conversion rates from eye exam to product purchase.
Offsetting the items mentioned was the continued mix shift of optical lab fulfillment completed at our in house facilities in New York and Nevada.
In Q2 2022, we continue to increase the percentage of orders fulfilled through our in house labs, which has many benefits, including higher NPS lower refund rates faster turnaround time and improved gross margin overall.
We continue to scale, our Las Vegas lab, which we expect to reach scale in the back half of 2022, we expect to see more cost efficiencies that we believe will translate to improved gross margin.
Lastly, we saw a benefit to gross margin from the expansion of our higher margin progressive business, which as we mentioned has increased from 20% of our prescription business in Q2 last year to 22% in Q2 this year.
Next I would like to talk about SG&A expenses adjusted.
SG&A, which excludes stock based compensation in the second quarter came in at $88 5 million or <unk> 59, 2% of revenue.
This compares to Q2 2021, adjusted SG&A of $72 4 million or 55% of revenue an increase of approximately 420 basis points of revenue year over year.
In terms of year over year dollar growth adjusted SG&A was up 22% compared to Q2 2021 on a sequential basis Q2, adjusted SG&A is down approximately $8 million versus Q1, a reduction of 360 basis points of revenue on a sequential basis.
And each one adjusted SG&A represented 61% of revenue as we will talk about shortly in the guidance section. We're planning for <unk> SG&A as a percentage of revenue to be in the mid <unk> on a percentage basis of revenue.
As a reminder, SG&A for our business includes three main components salary expense for our headquarters customer experience in retail employees.
Marketing spend including our home try on program and general corporate overhead expenses most of our improvement in adjusted EBITDA will come from these areas, which I'll walk through in more detail.
The primary driver of the increase in adjusted SG&A as a percentage of revenue year over year was related to an increase in corporate overhead expenses, which increased faster than revenue.
This increase was largely concentrated in two main areas public company costs and investments in our technology infrastructure.
On public company costs. We noted in Q1. These represented approximately 165% of Q1 revenue or approximately $2 $5 million in the quarter.
In Q2, we incurred approximately the same level of cost related to operating as a public company, which we did not incur a year ago.
We expect public company costs will continue to provide deleverage year over year until Q4 of this year, where we will compare to a period a year ago. When we were a public company.
On technology spend and investments we continue to invest in a number of key company initiatives to enhance both internal systems as well as customer facing platforms.
Salary expense within our SG&A category includes wages and benefits for our headquarters customer experience retail employees.
As a reminder, salary expense for our eye doctors and optical lab employees are all included in our cost of sales with.
We plan to continue to optimize retail salary expense as a percentage of revenue as we scheduled time for our retail and customer service teams and anticipate seeing consistency in these expenses throughout the remainder of this year.
As we will talk about in the guidance section and to align our cost structure with the current environment. We moved forward with a reduction in force of 63 people or approximately 15% of a full time corporate team.
As it relates to marketing spend we've highlighted previously that we maintain a highly flexible model with the only committed spend largely around linear television during competitive periods. As we discussed last quarter. We have made and expect to continue to make significant changes to marketing spend levels as needed.
Q2 marketing spend as a percent of revenue came in at 13, 8% versus 15, 6% in Q2 of 2021, almost a full two point decline in line with our targets to see marketing spend as a percent of revenue stabilized in the low teens by year end on.
On a sequential basis, we reduced marketing spend by almost seven points from Q1 to Q2 of this year.
For the second quarter of 2022, we generated adjusted EBITDA of $5 9 million, representing an adjusted EBITDA margin of 4%, which was just above the high end of our guidance range of low single digit margin.
Despite the challenges presented in the quarter, we're pleased to still be able to generate increasingly positive adjusted EBITDA and to deliver profitability on an adjusted EBITDA basis in line with the range of our guidance.
We finished the quarter with a strong balance sheet, reflecting $212 million in cash and cash equivalents, which will continue to deploy deliberately to support our growth and operations. We plan to see our cash balance remained near $200 million for the year as we manage spend across the business.
Shifting to guidance and outlook for next quarter and the full year.
We are revising top and bottomline targets in light of the challenges facing the optical industry in the U S economy and our business.
Our first talked through the changes in our topline guidance and then we'll talk through adjustments. We have made and will continue to make to ensure continued incremental adjusted EBITDA in the second half of this year that we believe will set us up for continued adjusted EBITDA margin expansion in 2023.
I'll talk through changes on both a full year basis and to highlight the differences, we anticipate to see between <unk> and <unk> two of this year.
On a full year basis, I will also be making comparisons to the high end of guidance provided earlier this year versus the high end of guidance, we're providing today.
Our prior topline annual guidance for revenue reflected growth of 20% to 22% over 2021, and a range of $650 to $660 million.
We're taking full year guidance for revenue growth down to 8% to 10% year over year, and a range of 584 million to $595 million.
I'll walk through the differences in topline to bridge. The prior guide to the current guide we continue to project top line two main ways that we've discussed the first is based on active customers and average revenue per customer. The second is based on store count store productivity and ecommerce growth I'll talk about both in how they have changed.
For the 22% case, we projected to see our store productivity returned to 100% of pre pandemic levels by Q4 and.
In mid May when we reported our Q1 results. We continued to see a bounce back of our retail business. As a reminder, our retail productivity had returned to 90% in early December of last year and dropped back to 80% of productivity by March due to one micron and then recovered to approaching 90% productivity in mid may.
We reflected that continued recovery in retail productivity, which has not occurred but instead has leveled off at roughly 80% in July .
We are now projecting retail productivity consistent with recent trends at 80%.
We were also seeing our three year ecommerce CAGR consistent in the mid twenties and with our pullback in marketing spend combined with general softness in the category are revising our three year ecommerce CAGR targets to 21%.
Our plans for store count remain unchanged, we still plan to open 40, new stores, finishing the year with 201 unit economics for our stores remains strong despite the decline in revenue.
While we historically haven't provided specific guidance on active customer and average revenue customer growth given today's revision we want to share. Some additional details on our view for these two metrics.
We were projecting active customer growth of roughly 15% year over year and an increase in average revenue per customer of 7% year over year.
Given the trends we're seeing in the business now we're projecting a similar level of average revenue per customer growth of 6% and our reducing our projections for active customer growth to 3%. This implies that we anticipate that the total active customers for the business will increase from $2 2 million in 2021 to two.
$2 7 million, an increase of approximately 70000 customers year over year.
This compares to our prior estimate of 252 million customers or an increase of approximately 330000 active customers for the full year.
We're still projecting a full year average revenue per customer of $262 and we are on track to achieve that we've.
We've seen continued strong revenue retention from existing customers as we show in our earnings slide or 26% over the first 12 months for a cohort that purchased from us in the first half of 2021.
New customer growth has been impacted the most by some of the trends we've discussed amplified by a pullback in marketing spend.
Yeah.
We previously guided toward a gross margin of 58% to 60% on an annual basis with some fluctuations by quarter given shifts in product mix.
Our original guidance assumed full year gross margin of 58% to 59%. We're now expecting gross margin closer to 57% for the full year. We have seen continued faster than anticipated growth in our contact lens business, which we view as a positive as contact lenses have lower margins. This will continue to have a delever.
Effect on gross margin roughly 40% of our Cogs are fixed in nature. The majority of which are made up of store rent and I doctor salaries.
In an environment with slowing top line that these investments in our store fleet and Optometry will continue to have a delevering effect on margins in the medium term as eye exam offerings ramp store and E comm growth return to higher levels and as we scale high margin products like progressive.
We're modeling the effects the gross margin of approximately one five to one seven points of deleverage from the items above taking gross margin from 58% in H, one closer to 56% in <unk>.
Next we will talk about the changes made to the deployment of spend and managing our cost structure.
SG&A adjusted for stock comp expense came in at 58, 4% of our spend in 2021, we previously projected 2022 full year SG&A as a percentage of revenue to be up to 200 basis points lower driven by leverage in marketing spend and corporate overhead.
We now expect adjusted SG&A to be roughly in line with 2021 at 58%, which is primarily driven by lower revenue as we believe adjusted SG&A dollar spend will be lower than our previous expectations.
Adjusted SG&A in each one that came in at 61% of revenue with Q2 at 59, 2% of revenue. We're now projecting adjusted SG&A for the back half of the year in the mid fifties as a percent of revenue.
To manage costs in the current environment. We have moved forward with a number of actions we have brought down marketing spend as a percent of revenue.
Marketing spend in <unk> came in at 17% of revenue and we plan for this to be closer to 12% to 13% of revenue in <unk> to.
This equates to a reduction in marketing spend of roughly $12 million versus our prior plan most of which is reflected in the second half of the year.
We have also reduced our corporate cost structure to be more in line with lower top line. We anticipate that these cost savings will continue to ramp throughout the remainder of this year and into next year. These initiatives include reducing corporate headcount by 15% and taking a closer look at all the dollars, we spend with vendors to either pull back on spend or.
<unk> better economics, where possible.
We believe these cost reductions will set us up for continued adjusted EBITDA profitability next year.
In aggregate these cost reduction initiatives are expected to lead to savings of $8 million to $9 million this year and $15 million to $18 million next year.
We previously guided to adjusted EBITDA margin improvement of 100 to 200 basis points versus our 2021 adjusted EBITDA of four 6% with a range of $38 million to $44 million based on our prior topline guidance.
We are now guiding to adjusted EBITDA for the full year of 22 million to $26 million or three 8% to four 4% adjusted EBITDA margins. This.
This includes the impact of an estimated $15 million in lost revenue at the start of the year from Omicron, which we believe would've had a $7 $5 million positive impact to EBITDA in Q1.
For the first half of the year, we generated adjusted EBITDA of $6 7 million and adjusted EBITDA margin of two 2%.
In Q2, we were pleased to see a sequential step up in adjusted EBITDA margin to 4% of revenue.
At the high end of our range, we're projecting adjusted EBITDA of roughly $19 5 million in the second half of the year, reflecting an <unk> margin of six 7%.
This implies a 450 basis point improvement in adjusted EBITDA from <unk> to <unk> on revenue that is roughly $10 million lower than each one.
It's important to understand that the pattern of adjusted EBITDA. This year will look different from previous years. Historically, we have seen adjusted EBITDA strong in Q1 with positivity continuing in Q2 and Q3, and then decline as we ramp spend for Q4 and the first sales we generate from Q4 into the following year.
This year in <unk>, we plan for an average adjusted EBITDA margin of six 5%. We expect this margin to be a little higher in Q3, and a little lower in Q4.
The core cost savings initiatives that we have enacted are expected to drive our ability to generate incremental profitability both in <unk> and in 2023.
With respect to the third quarter, we're guiding to net revenue of $143 million to $146 million or revenue growth of four 1% to six 3% and adjusted EBITDA of seven 9% to $9 5 million, representing adjusted EBITDA margin of approximately five 5% to six five.
Percent.
Finally, with respect to our outlook for 2022.
Forecasting stock based compensation as a percentage of net revenue to be in the mid teens compared with 20% in 2021 stock based compensation for both years is above our long term forecast of low single digits. Starting in 2024 as a result of <unk> expenses associated with our direct listing and multi year.
Equity grants to our co Ceos in 2021.
Majority of which is performance based and best based on stock price targets from $47 75 to $103 46.
Thank you for joining us this morning as we've discussed today, we are focused on what is in our control while executing on our mission to provide vision for all and by doing so off a smaller expense base moving forward, we expect to drive significant adjusted EBITDA improvements even in the face of macroeconomic and industry.
<unk> headwinds.
We look forward to keeping you updated along the way with that we'll open up the line for Q&A.
As a reminder, if you'd like to register a question you might do so by pressing star followed by one on your telephone keypad. If you change your mind. Please press star followed by two.
Please ensure you unleash it locally.
Our first question comes from all of the Chen of Cowen Oliver. Please go ahead.
Alright, Thank you very much regarding store productivity.
How much of that may be attributable to lower marketing spend and how are you thinking about.
Marketing spend and pulling back and how that's impacting your traffic would also love your thoughts on demand Reacceleration in key factors there the category is very durable.
Or just curious about what do you think happened this time.
What do you look forward to in terms of key variables to see the acceleration in the future. Thank you.
Yeah.
Okay.
Thanks for your question Oliver we will start with the demand question.
When we look at data from the vision Counsel for example, when.
When they survey.
Glasses customers have they purchased in the last six months, we've seen that significantly depressed since the onset of the pandemic and that has.
Or if not improved.
One of the things that was different with the omicron surge was the timing of it.
During FSA season in the beginning of the year when we see lots of folks get eye exam. So we think that that sort of.
Pared glasses purchasing through the first half of the year.
When we conduct surveys.
<unk> actually found some differences between younger customers and all of their customers and motivations for getting eye exams.
And what drives that behavior. So for example younger customers convenience is incredibly important older customers.
I health is more important.
And frankly, it's been very inconvenient to get an eye exam is.
During throughout the pandemic, but in particular in the first half of this year.
<unk>.
A lot of Optum metric practices in optical shops experienced temporary closures or doctors you called out.
They were sick as happened across every industry.
And every workplace.
Also we've heard anecdotally.
Some optical shops in optometry practices have permanently closed during the pandemic.
There were some early retirements of optometrists, So we believe that.
There were folks that would have normally gotten eye exams that haven't that didnt necessarily buy glasses.
We'll.
To your point this is a durable category.
And people aren't going to go long periods without them getting our exams and buying glass is certainly not our customer that has a median household income over $100000 and we've seen durability in our contact lens business as contact lenses are disposable.
That niche.
Need to be replenished so.
So we expect that to continue to be quite durable.
Yes, thanks, Thanks, Oliver and then.
<unk> got to your first question around the store productivity and how much of that is impacted by marketing spend in general.
We tend to see that our e-commerce business.
Is more highly correlated with marketing spend in performance marketing dollars.
And that's why we elevated our marketing spend as a percentage of revenue in.
In 2020 in 2021, when a higher portion of our sales are being generated from E com.
Now that our mix shift.
Is it looks more like it did in.
In 2019 in terms of where orders are being placed in stores versus online.
We do have a confidence that.
R.
Our stores serve as billboards and don't need as much marketing support and so on.
While.
We believe that a portion of the demand slowdown we've seen could certainly be attributable to us pulling back on marketing.
We really did so in response.
Two kind of softening demand lower foot traffic.
Uh huh.
That.
Started before before that pullback.
Very helpful.
July's.
Sure I was just going to say Oliver just to contextualize the magnitude of the spend we talked about spending roughly 17% of marketing as a percent of revenue in H, 120% and dropping to 13, 8% in the target really for the back half of the year is getting to that 12% level that we were at pre pandemic. So.
We are normalizing back to a level that we observed pre pandemic that we think matches the business mix.
Thank you very much Steve a follow up on occupancy and up how much to celebrate what should we know about.
The revenue growth to leverage you know those those items.
In terms of how we should model that in.
From a gross margin. Thank you very much.
Yeah for sure Great question. So the color that we've given is roughly 40% of our Cogs stack is fixed.
And that fixed component is really made up of three pieces. The majority of which you just mentioned there's store occupancy which is store rent the depreciation of store build outs. There is optimistic costs and then there are the costs of our two optical labs, which we embed in cost of goods as well most of those costs come from optometrists.
Salaries and store rents as.
As we think about scaling our optimistic business, we have 50 more stores this quarter versus last quarter, where we have an employer like relationship with Vod, we either employed directly or through our PC model.
We're happy with the pace of growth that we're seeing in our eye exam business eye exams still represent 2% to 3% of our overall business, but from a dollar perspective that amount is up over 50% year over year. It takes time to ramp and eye exam practice and we've got a number of new both employed.
In PC I doctors coming online so while we anticipate this will continue to provide the deleverage from a gross margin perspective in the near term and the long term. It will set us up to do two things one is to tap into the $6 5 billion.
I exam market and the second is to better serve our customers. What we've observed is a higher conversion rate from stores, where we appoint an eye doctor to customers than making a product purchase and we've also seen an increased mix of products at those stores like progressive and anti fatigue lenses, where.
Input from an eye Doctor is tremendously helpful to a customer's purchase decision.
Thank you best regards.
Our next question comes from Mark out Shrugging off of that Mark. Please go ahead.
Thank you good morning.
Neil maybe just following up on your comments a moment ago on the drivers to the more depressed conditions. This year.
I mean, it does sound like some.
Perhaps some temporary factors related to the pandemic and consumer behavior and not necessarily lower spending power lower intention to spend so just curious there. If you think that sets up some pent up demand at some point or maybe this is just reflective of the consumer pulling back a little bit more and then Steve.
I think you said you expect adjusted EBITDA profitability next year would you expect adjusted EBITDA growth and margin expansion or just maybe any more thoughts on how we should be thinking about the medium term.
Gross margin algorithm relative to the prior targets you've outlined.
Yeah.
Okay.
Okay.
Sure. Thanks. This is Neil I'll take the first part of the question.
Yes.
What I think we've seen over the course of the first half of the year is that the beginning.
We had.
Sure depressed eye exams and behavior, a lot due to overcrowding in the pandemic, but.
Towards the back half.
The first half of the year.
We believe that.
Some of the inflation pressures and other sort of dips in consumer spending did impact the category.
When we spoke to you a rise in mid May.
The trend was looking quite positive April we had 90% retail productivity compared to 2019, the first half of may with continuing that trend.
And then we saw sort of depths.
We don't know how long enough period.
<unk>.
As we look at guidance for the rest of the year.
The high end of the range 10%.
<unk> assumes.
Consistent retail productivity at 80%.
The low end of the range of 8% full year growth assumes 75% reach.
Our retail productivity, so a deterioration.
And at this point.
We felt that it was prudent to sort of look at our current trends and then look at if there continues to be a deterioration in the macro environment.
What we've always known.
<unk> become.
Quite clear this year is that a portion of customer behavior in spending in this category is due to necessity in acute in nature, but a portion is also discretionary from a temporal perspective than we.
We're seeing some of those discretionary purchases being delayed but.
But we do remain confident that at some point that demand will begin to flow back through the system as Neil mentioned were.
Im really being conservative in our assumptions around when we might see that and we're not counting on.
On that pent up demand to show up in our forecast.
And Mark on your question as it relates to adjusted EBITDA margin profitability I'll first talk a little bit about <unk> versus H, two and then can provide a little bit of color as to how we're thinking about setting ourselves up for further incremental profitability next year, we'll provide more color and.
And guidance on that at a future time, but in the context of adjusted EBITDA margin. As a reminder, we generated two 2% adjusted EBITDA margins in the first half of this year.
Roughly 4% in Q2 and.
Half a percent or so in Q1, we are projecting six 7% and adjusted EBITDA margin. The second half of the year and that's really driven by a few factors.
Which we talked about one is a reduction in expenditures within SG&A, we've talked about the difficult decision, we made to reduce head count by 15% and then we've taken a thorough look across our cost structure to understand what are more permanent changes, we can make to our G&A spend in.
In terms of renegotiating contracts with vendors.
Pulling back on consulting spend adjusting policies related to <unk>, taking a look at virtually every line.
That's embedded within SG&A and those changes equate to roughly $8 million to $9 million in spend this year and roughly $15 million to $17 million in expenditures next year. So we have a high degree of confidence in the numbers that we put out there for <unk> in terms of our long term.
Incremental profitability algorithm, what we have talked about historically is adding 100 to 200 basis points of adjusted EBITDA margin improvement each year until we hit 20% long term target of 20% plus.
If you take a look at the high end of our EBITDA Guide, which is $19 5 million in <unk> and <unk>.
Assume what that averages across the quarters, it's roughly a six 5% adjusted EBITDA margin in both quarters, there won't be some variation and so we are still refining our model and we will provide more transparency later in the year, but we would think about that six 5% as the baseline off of which we're adding one to two.
100 basis points of profitability into 2013, and we feel like we're set up to do that based on the changes and adjustments we've made to the business.
Our next question comes from Edward <unk> of Piper Sandler. Please go ahead.
Hey, good morning, Thanks for taking the questions guys first just a quick modeling question the lower bounds of the revenue increase guidance does that imply that the efficiency go below that 80% level, you've observed or kind of help me understand the upper and lower bounds. There and then just as a bigger picture question.
As you've seen some of the softer productivity trend how does that impact your view on kind of 'twenty three 'twenty four from a store perspective are there tweaks you can make to the store footprint are sized to maybe give you a higher level of efficiency out of the gate. Thank you.
Sure.
Just I'll address the first part of the question in terms of the lower range of our guidance, which is up.
<unk>, 8% for the full year and implies back half growth of roughly 4% year over year per quarter that assumes.
A decline in store productivity from 80%, which is where we are today down to 75%.
We baked in a full five point decline.
And on the second part of the question I'll hand, it over to Neil and so we.
We continue to believe that it makes sense to open up stores and it is a good use of capital.
Our stores irrespective of the cohort right if the stores that we've been opening up.
Recently for example continue to payback within 20 months.
So even at a depressed retail productivity, so 80% of <unk>.
<unk> thousand 19 levels.
$2 $1 million per store.
We're still.
Achieving our historical target of.
35% four wall margins, so over $730000 per store.
We.
We anticipate that we'll be able to.
Grow the revenue per store over time give.
Given the macro environment, we don't know when that will be but even at these levels.
We believe that the store performance is strong and we're going to continue to open up lots of stores going forward.
Maybe one other quick follow up if I can.
You guys gave some great color on the gross margin impact of contacts and PC.
Wanted to understand the other side of the coin I know you've highlighted the opportunity in progressive I know you even called out here that they were higher margin how much of a lift was progresses to the business in the quarter and how much is baked in in the back half. Thank you.
Sure the color we've given as it relates to progressive is that they are certainly our highest gross margin products and a category, where we continue to be significantly underpenetrated versus the rest of the market. So progressive for us in Q2 represented roughly 22% of our product mix up.
Almost two points from Q2 of last year.
In terms of the puts and takes in gross margin, we haven't broken out the specific.
Gross margin percent impact from progressive beyond giving the color that we're underpenetrated and they're our highest margin products in terms of the deleverage that we've seen as it relates to the two categories that we've talked about a lot contact lenses and the fixed portion of our Cogs stack being occupancy in <unk>.
Doctors, it's split roughly evenly between the two and we've certainly seen an offset through selling higher margin products like progressive. So that has certainly been a nice point of leverage to offset some of the margin deleverage.
Thank you.
Our next question comes from Roche of Goldman Sachs. Please go ahead.
Good morning, and thank you so much for taking our question can you talk to the recent demand trends that youre seeing in your stores business with a little bit more detail any split that you can provide between ticket traffic results that youre seeing in suburban versus urban locations and then maybe as a follow up can you help us understand what's.
Store metrics are embedded in your second half outlook given the increased benefits that you have from that from the PC model conversion additional optometrists in the stores and higher price point collections and progressive that should be driving increased store mix.
Kim.
Sure.
Thanks for asking the thoughtful question Brook, I will talk a little bit about some of the differences that we're seeing from our product.
From a productivity perspective across our store fleet, what we've talked about previously is productivity levels.
Urban versus suburban stores and in the quarter, we saw a roughly 10 point spread gain productivity between those two main types of stores.
Roughly 10 points of urban stores.
73 ish percent and suburban stores, 83% to 84% and that's consistent with what we've described on prior calls where we've seen the spread anywhere from seven to 10 points.
So that is certainly one dimension that that we talk about our suburban stores continue to have a higher productivity than our urban stores. We also have the newer suburban fleet as we got our start opening stores in urban areas in the early days, we are still seeing traffic more depressed to urban areas driven by our.
A number of macro factors, whether it's people having relocated to the suburbs.
Are people spending less time in densely urban populated areas in office buildings in terms of what we've seen.
Store specific in regards to ticket and traffic, while we have seen.
More traffic than we would like certainly lower than the productivity number of 80% that we published we have seen an increase in two factors. One is an increase in conversion rate and a continued increase in <unk>, which ends up bridging the gap, we're seeing between traffic levels, which we haven't necessarily reported on other than <unk>.
Indicating their appreciably lower than our 80% productivity lever, but we're bridging that with higher conversion given theres more intentional traffic and a higher <unk> as.
As customers are buying progressive and buying eye exams contacts and glasses together.
Yes, I would just also note that with.
The addition by doctors in the conversion.
PC doctors, we have seen strong benefit it's still early days and a number of those doors, but even within the first 30 days, we tend to see an increase in traffic conversion.
In sales and so.
We while we are taking a cautious outlook, we do believe that.
These investments will benefit us.
In the near term.
And.
It will enable us to.
Great.
A better experience for our customers and drives longer term sales and.
And profitability.
Thank you so much I'll pass it on.
Our next question comes from Paul <unk> of Citi. Please go ahead.
Okay.
Everyone. This Brandon Cheatham on for Paul Thanks for taking our question I wanted to dig in a little bit on active customers per store and thank you for providing the guidance that's very helpful.
That indicates the active customers per store.
18%. So I was wondering if you could maybe parse that out a little bit what youre seeing there is it broad based.
Are your legacy stores, performing similarly to new stores and new stores ramping a little bit slower and then as you think about that going forward.
Would you say.
Exit costs per should kind of grow in line with.
Average store growth. Thanks.
Yeah.
Yeah for sure I'll talk about some of the.
Metrics that we continue to see.
At our stores.
In a few different ways. The first is.
Just to reiterate that.
For the 141 stores that had been opened 12 months or more of this is a metric we talk about a lot.
Our four wall target margins are in line with a 35% target that.
We've consistently maintained over the years. In addition, our stores payback in 20 months or less and we called out some of the activity. We've seen from our most recent cohorts of new stores in 2020 in 2021, where all the stores. We opened in 2000 2010 of them have paid back in 24 of the <unk>.
35, we opened last year have paid back with the rest on track for that 20 months payback as we think about active customers for the business, it's active customers really which we blend across both.
Our E Commerce channel and our stores and so active customers.
Were up roughly 9% and revenue per customer up 8% and that's a blend across both channels we don't.
Split that out and report on it separately and we will continue to.
Provide those metrics just to help for modeling purposes, where we've certainly seen a lot of strength.
Isn't returning customers both online and stores.
We included an updated view on our revenue retention, which is a slide in our earnings.
Earnings deck that we posted to our website, which shows that for the cohort of customers that purchased the first half of 2021, we've retained a 26% of their revenue in Q2. This year, which is actually the highest we've observed at this point in time from any of our cohorts that have <unk>.
Across our business. So we will continue to provide transparency as it relates to active customers active customer growth Avenue average revenue per customer and average revenue per customer growth, we'll do that in the aggregate as opposed to at the channel level.
Okay.
Got it.
Our final question comes from Mark Mahaney of Evercore Mark. Please go ahead.
Yeah.
Okay. Thanks, two questions. Please.
Did you talk about this relatively low brand awareness that you still have it's roughly 15% just talk about long term your thoughts just remind us what the trend has been like what was that brand awareness a year or two ago, maybe pre pandemic and then where would you like it to go and how do you get it higher and then the second thing I want to ask is just Steve you just meant.
And that cohort data it was wonderful disclosure the one outlier in that cohort data is that class of 2019 on a 12 month basis or on a 24 month basis.
I can't tell whether that's well it's a little odd so just any thoughts on what happened what was wrong with those people.
But if you look at that cohort why do this.
<unk> stick out in terms of their retention rate. Thanks.
Yes.
Can address the second question that was really due to the pandemic effect in.
2021.
Most people are we're not thinking about getting exams or buying glasses.
<unk> seen a rebound as you can see in our most recent cohorts and so.
That's really kind of a specific.
Okay.
The more depressed.
<unk> that you see.
I really specific to coincide with <unk> with 2020 activity.
And on the awareness front, we continue to see awareness tick upward.
Our.
Marketing activities as well as store growth, we anticipate we will continue to raise awareness significantly.
Believe that the new categories that we're expanding into at a meaningful rate contacts.
And I exams enable us to be perceived as a holistic vision care company and a one stop shop and just leads to even further word of mouth a lot of our growth.
Over the last 12 years is driven by word of mouth, because our customers.
Recognize the exceptional value in the great experiences that.
They have and we expect that to continue going forward.
Okay. Thank you very much.
Yeah.
I'll hand back for any closing remarks.
Okay.
Thank you all we want to thank you all for your questions today and spending time with US. This remains a challenging macro environment, but we're grateful for the leadership team and the entirety of war be Parker that works tirelessly.
To make customers happy every single day. Thank you.
This concludes today's call. Thank you for joining you may now disconnect Julien.