Q4 2022 Warby Parker Inc Earnings Call
Thank you for your patience will be Pocket, Inc. Conference call will be starting in a few moments time.
[music].
Okay.
Thank you and good morning, everyone.
Here with me today are no mental days Gilboa, our co founders and Ceos alongside alongside Steve Miller.
Senior Vice President and Chief Financial Officer.
Before we begin we have a couple of reminders.
The earnings release and slide presentation are available on our website at investors don't will be pocket don't come.
During this call and in our presentation, we will be making comments as a forward looking nature.
Actual results may differ materially from those expressed or implied as a result of various risks and I wish I could change.
More information about some of these risks please review the company's SEC filings, including the section titled Risk factors in the company's SEC filings, including its annual report on Form 10-K, which will be filed later today.
These forward looking statements are based on information as of.
February 28, 2023, and except as required by law, we assume no obligation to publicity updates.
Or revise our forward looking statements. Additionally, we will be discussing non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures.
Try not to perform at the pad in accordance with the U S. G. A a peak in reconciliation of these items to most directly comparable to U S. GAAP measures can be found in this morning's press release on our slide deck available on our IR website, and with that I'll pass over to Dave to kick off.
Welcome everyone and thank you for joining us this morning to discuss <unk> fourth quarter and full year 2022 results.
As we reflect back on our first full year as a public company, Neil and I feel a deep sense of gratitude in particular to our team for how they adjusted to the unique set of headwinds that 2022 presented.
Jim or are these decisive actions last year enabled us to delight millions of customers continue to take market share and distribute millions of pairs of glasses to people in need.
We closed the year with a strong fourth quarter and believe the actions we took in 2022 and set us up for meaningful profitability improvement in 2023.
But it was also a year, where we learned many important lessons one of our core values is learn grow repeat.
Driven by constant improvement whether that comes from areas of strength that we can further leverage or from setbacks that we want to correct.
In that sense 2022 was a great teacher.
When we set our forecast last year, we just emerged from the acute impact of on the ground and assume that demand would recover along similar curves to prior pandemic ways.
We managed our marketing and expense base, Accordingly, and plan for accelerating growth and recovery in the optical industry.
We underappreciated the unique demand tailwind that we benefited from in 2021 and the confluence of headwinds we were about to face that would continue to disrupt the normally steady and predictable consumer behavior in our category.
We subsequently made a series of adjustments in the middle of 2022, some of them difficult, which enabled us to operate in a more flexible nimble manner and drive adjusted EBITDA improvement.
The lesson for US is not that we should place less emphasis on growth, but instead that we should work to ensure that our growth is more sustainable and efficient across a range of economic and industry outlook, including the most conservative ones.
The world is not back to pre pandemic normal and May never be however, we believe that our approach for this year and beyond as Neil and Steve will talk through as one that will enable us to grow and accelerate our profitability plan, even if tepid consumer demand continues.
As a leadership team we remain as excited as ever about our long term prospects. We continue to believe in the resilience and durability of our category in spite of recent softness and remain confident in our ability to continue to take market share.
When we see demand recover and we are confident that it will we will be well positioned to take advantage of it but we're not counting on that to happen until we see evidence of it.
While our full year 2020 to topline and bottom line metrics arent, where we thought they would be at the onset of last year, what we hope youll takeaway from todays call is that we believe we have taken the necessary steps to operate in the current environment and set the business up to achieve incremental topline and bottom line growth in 2023.
We also hope that changes we made last year demonstrate the inherent flexibility in our business model that enables us to adjust your external trends.
Looking at the full year 2022 revenue increased to a record 598 million up 10, 6% a pace well above the industry's growth.
Full year adjusted EBITDA margins were four 5% with second half adjusted EBITDA margins of six 9% up 470 basis points above our first half margins shift.
Shifting to Q4 results, we are pleased to share that the quarter exceeded our most recent expectations from both a top and bottom line perspective, we delivered.
Net revenue of $146 5 million, an increase of 10, 2% over the same period last year and $2 million above the high end of our guidance range, despite reducing marketing spend by 41% year over year we.
We are encouraged by the progression of the quarter and our strong finish to the year December was particularly strong, especially the last week of the month as FSA and HSA deadlines approach.
A stronger topline resulted in higher than projected adjusted EBITDA for the quarter at $8 6 million and an adjusted EBITDA margin of five 8% in Q4. This was our most profitable Q4 to date stemming from the actions, we took to realign marketing expenses and right size, our corporate cost structure.
We believe these results alongside what we expect to deliver in 2023 will demonstrate our commitment to sustainable growth and profitability.
Q4 was another quarter, where we saw consumers shift their shopping preference back into stores as we move past the peak e-commerce period of the pandemic and our store teams did a great job of serving the increased demand.
Compared with 2019 pre pandemic levels store productivity continued to improve from Q2 and Q3 this year, reaching 88% in the fourth quarter.
We opened 10, new stores in Q4, including our 200th store, which is located around the corner for Morby Parker. Its very first New York City office and showroom in Union square.
All 10 stores opened in Q4 include eye exam capabilities, which brought the number of locations offering eye exams at year end to 150 in line with our goal.
In total across 2022, we opened our target 40 stores, bringing our total fleet to 200.
Softer industry wide traffic our stores that were opened for the full 12 months in 2022 generated approximately $2 $1 million in revenue on average with four wall margins in line with our historical target of 35%.
And our new stores are performing well our 2021 cohort of 35 stores is on track to payback under our target of 20 months.
As we've increased the number of stores offering eye exams, we've seen a nice uptick in average revenue per customer driven by both <unk> revenue and a higher penetration of progressive lenses.
We closed the quarter with $2, two 8 million active customers in our highest average revenue per customer to date at $263.
Looking at our online channels, our e-commerce three year CAGR in Q4 was 18, 6% compared to 19, 2% in Q3 and down one 6% in Q4 'twenty two versus Q4 'twenty one.
There are three factors that have impacted ecommerce trends the <unk>.
First is that this channel is more sensitive to changes in marketing spend given that our stores enjoy embedded marketing and we are comping against periods of elevated spend last year.
The second is a broader consumer shifted back to shopping in physical stores as we move past the acute periods of the pandemic.
The third is the impact of new store openings, especially in new markets, which immediately increase overall sales in that market, but create headwinds for local E. Comm sales during the stores first year of operations after which this effect updates with our mix of transactions between retail and E com roughly back to pre pandemic levels. We expect the first two factors to normalize.
The second half of this year, enabling us to return to driving positive E comm growth via sustainable levels of marketing spend.
In order to drive future growth, we're continuing to invest in our leading digital experiences and in house innovation. For example in Q4, we expanded our award winning virtual try on tool to our web platform, which has driven higher conversion alongside a better customer experience since launch.
We also continue to provide more access to remote vision care services by driving increased adoption of our telehealth App virtual vision tests.
We're also pleased with the operational improvements we made across the business to better serve our customers. We continue to scale, our new optical lab in Las Vegas, and proven fulfillment speeds and helping partially offset pressure on gross margins.
We made progress in the sustainability of our operations as well in 2022, we launched our first of its kind to demo lens recycling program in partnership with Eastman chemical and have since recycled more than 20000 pounds of lenses as a result.
And through all of this we continue to deliver exceptional customer experiences, while maintaining our industry, leading net promoter score of 80%.
We find that when people try <unk> Parker, they love the product and the experience Ah repeat purchasing behavior has remained remarkably consistent including our most recent cohorts.
While Neil and I are proud of these accomplishments. We're most proud of the work <unk> has done to execute on our mission to provide vision for all in 2022, we announced the milestone of distributing more than 10 million pairs of glasses to people in need through our <unk> program as.
As a result of this work and the work of our incredible partners 10 million more people have the tools they need to see and live more productive lives.
Before I turn it over to Neil I want to thank the entire worthy Parker team for their perseverance and focus through a tumultuous operating environment last year 2022 forced us to lean on our team's biggest strengths our ability to use data to inform strategic decisions, our agility and our commitment to deliver remarkable customer experiences.
Which we believe position us to continue to take market share in the months and years ahead.
Thanks, Dave and good morning, everyone. Our integrated Omnichannel approach is unique in the optical industry and we intend to leverage our inherent advantages to design and deliver a remarkable and remarkably priced products services and experiences that help people see.
Our commitment to delivering sustainable growth is unwavering and we expect 2023 to instill confidence in our ability to execute and fulfill this promise.
<unk> will focus on four strategic priorities.
We will continue to scale, our omnichannel presence by meeting our customers, where and how they want to shop.
We plan to open another 40, new stores this year with a continued focus on suburban expansion.
These stores 36 will be in suburban markets and more than 10 markets will be new for us.
The remaining four stores will be in urban centers, most notably in the New York market.
In Q4, our suburban stores had a retail productivity versus 2019 that was 12 points higher than our urban location.
For these 40, new stores, we will continue to target, 35% four wall margins and payback within 20 months.
We expect the productivity of our existing stores to improve from 2022 levels as traffic continues to rebound and we drive further growth in average revenue per customer.
We'll also continue to serve customers through our ecommerce channel and plans to drive innovation and enhancements throughout the year, while we're projecting ecommerce growth to be down in the first half of the year, we plan to return to ecommerce growth in H two.
Second we plan to further expand our core glasses business.
Since launching <unk> in 2010, we've intentionally maintained our core $95 price point.
Our simple affordable pricing structure has been an integral part of our value proposition and continues to attract new customers.
And while we'll continue to expand our $95 offering we plan to launch nearly 20 collection, incorporating our $145 $175 and $195 price points, while introducing innovative frame construction, new lens types and more.
We also plan to deepen progressive penetration within our product mix building on the momentum we saw in 2022 through store expansion increased eye exam capabilities and growing brand awareness.
As of December 2022 progresses made up 21, 7% of our total prescription glasses purchases, but approximately 40% of industry wide purchases on average, leaving significant white space for future growth.
Third we'll continue to evolve our position as a holistic vision care company by expanding our contacts eye exams and insurance offering.
Last year contact lens sales grew 84% increasing from 4% of our business in 2021, 7% in 2022.
Yet our contacts penetration remains well below the approximately 20% industry average.
In 2023, we will aim to expand this portion of our business that brings up some of our highest value customers given the replenishment nature of contact and the propensity of these customers to go on to purchase glasses.
My contact and Progressive are eye exam business grew in 2022 revenue for my exams increased 87% year over year, yet we are underpenetrated in the $15 billion market.
Industry wide nearly 80% of eyeglass sales occur where an eye exam takes place. So we view eye exams at the additive not only has its own revenue stream, but also as a key driver for eyeglasses and contacts.
In addition to the 40 new stores opening this year with eye exam capabilities, we plan to convert another six locations to our PC model, bringing a new stream of revenue to this fleet of stores.
We anticipate ending the year, providing high exams and approximately 195 stores up from the 150 stores at the end of 2022.
And we will continue to lead the way in providing access to innovative vision care services like retinal imaging, which gives our optometrists a closer look at our patients to detect early signs of either.
Our exam in contacts offerings also unlock new insurance opportunities, which will continue to pursue in order to make it easier for customers to use their vision benefits with us.
<unk> is currently in network with over 16 million lives through United Healthcare, The Blue Cross Blue Shield Federal employee program and versa through select employers such as general electric.
This number increased more than 30% year over year up from $11 9 million lives at the end of 2021.
In addition to growing that space or in network customers. In 2023, we'll also aim to make it as easy as possible for customers to use their out of network benefits with us.
And lastly, our fourth initiative in 2023 will be driving further brand awareness and new customer growth through strategic marketing investments.
Our stores not only enable us to offer great experiences for our customers. They also serve as highly efficient customer acquisition tools new.
New physical locations are very effective at driving traffic and conversion in the months following new market penetration.
We believe the combination of the 40 stores opened last year and the 40 openings. We have planned for 2023 will significantly contribute to increasing awareness.
We intentionally designed the exterior and interior of our stores to serve a striking representation of our brand and drive traffic to our spaces. For example for our Anderson they'll store in Chicago last year, we incorporated our very first sculptures created by hardest Coty Hudson, a six foot sculpsure sweet gas as they walk into the space.
Reading, a fun and memorable shopping experience.
Speaking to more traditional marketing efforts, we are continuing to invest in effective online and offline marketing programs to reach new consumers and drive traffic.
Over the back half of 2022, we purposefully broad marketing spend as a percent of revenue back to pre pandemic levels.
Since reducing marketing spend to low double digits, we've seen our customer acquisition costs come down approximately 36% for the second half of 2022 compared to the second half of 2021, driving increased leverage and while lower spend will be a headwind to top line growth in the first half of 2023, especially for our E Commerce.
Channel, we believe that's necessary as we aim to drive sustainable profitable growth over the long term.
We've proven we can drive awareness and growth in new demographics. For example, amongst consumers 45 and older who tend to wear progresses, while we plan to continue to invest in our progressive business. This year, you will see us deploy more balanced marketing mix and focus more on our younger customers.
We'll also continue to launch unique partnerships collaborations and campaigns to fuel awareness and brand affinity we.
We believe the power of our brand and our ability to surprise and delight customers continued to differentiate us within the industry.
The opportunity in front of us to tackle the large and growing highway market feels as exciting as ever.
Before handing it over to Steve.
Dave I also want to thank to more of a I continue to be inspired by their resilience flexibility and commitment to creating impacts for our stakeholders.
Alongside our leadership team I look forward to building on our current momentum to reach new milestones drive further impact and create more shareholder value in 2023.
And now I'll pass the call over to Steve.
Thank you Neil jumping.
Jumping right in revenue for the fourth quarter came in above the high end of our guidance range at $146 5 million up 10, 2% year over year.
This better than expected finish to the year 2022 revenue to $598 1 million representing growth of 10, 6% versus full year 2021 in a year marked by macroeconomic challenges that pressured industry demands.
We're encouraged by our top line performance as well as our ability to increase average revenue per customer and adjusted EBITDA over the course of the year.
From a customer perspective, we finished 2022 with 2.28 million active customers an increase of three 6% year over year and grew average revenue per customer from 246 to $263, representing an increase of six 9% year over year.
This increase in average revenue per customer was driven by a few factors, including an increase in progressive as a percentage of our business mix and continued ramping of both contact lens and eye exam sales.
<unk> represented 21, 7% of total prescription glasses sold in Q4 2022.
Up from 21% when compared to the fourth quarter of 2021.
This is still well below the market average of approximately 40%, leaving a substantial runway for product category growth.
Aggressive are also our highest gross margin and highest price point product starting at $295 an.
On our Q3 earnings call in November we called out that for Q4, we anticipated store productivity levels to be in the mid <unk> versus the same period in 2019 and that we expected the three year CAGR for our e-commerce business to be in the high teens consistent with trends observed at the end of Q3 2022.
We're pleased to report that store productivity for Q4 came in moderately higher than anticipated at 88% of 2019 levels.
This was above the 82% we achieved in the third quarter and also higher than our September exit rate of approximately 85%.
We're pleased with the retail productivity improvement we saw over the back half of 2022 and look forward to continued progress on this front in 2023.
In 2022, our stores that opened 12 months or more generated $2 1 million in revenue with four wall margins in line with our target of 35%.
In Q4, we saw e-commerce down one 6% in 2022 versus Q4, 2021, which coincides with a 41% drop in marketing spend from $29 6 million to $17 6 million and grew 22, 3% of revenue to 12% of revenue in the quarter.
From a business mix perspective for the fourth quarter E. Commerce represented 37% of our overall business in line with pre pandemic levels. This compares to 41% in Q4, 2021 and 34% in Q4 2019.
On a three year CAGR our E Commerce business came in at 18, 6% in line with expectations and down from 19, 2% observed in Q3 for the full year store productivity reached 84% of 2019 levels and we observed a three year CAGR of approximately 22% and our ecommerce business.
In 2023, we plan to stop reporting on both store productivity relative to 2019, and our three year E. Commerce CAGR instead, we plan to speak to store productivity versus last year and e-commerce and retail revenue versus last year.
Moving on to gross margin.
As a reminder, 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 are gross margin also includes stock based compensation expense for our optometrists and optical lab employees.
For comparability I will be speaking to gross margin excluding stock based compensation.
Fourth quarter adjusted gross margin came in at 55, 2% compared to 57, 5% in the year ago period.
There are a number of drivers of this deleverage in gross margin that I'll walk through.
The primary driver of the decrease in gross margin was the continued growth in contact lenses from 6% in Q4, 21% to 8% in Q4 'twenty two as a percentage of our total business.
Expanding our content offering is 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 categories. They are accretive to gross margin dollars given their higher purchase frequency and subscription like purchase cycle.
Contact lenses represents a $17 $9 billion market and accounts for approximately 20% of the optical market.
Next we saw year over year deleverage in gross margin in two areas, which represent the more fixed portion of our cost of goods is fixed elements of our Cogs stack, our retail occupancy in optometry salaries, which generally remain the same regardless of revenue.
We added 39 net new stores over the course of the last 12 months going from 161 stores as of December 31, 2021 to.
The 200 stores as of December 31, 2022, or an increase in our store base of 24, 2% year over year, which naturally leads to an increase in store rent and depreciation from store build outs. This 24, 2% increase in store count compares to full year 2022 total company revenue.
Growth of 10, 6% and retail revenue growth of 25% 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 2022, we operated with a 150 stores, where we engage directly with an optometrist and therefore recognize both revenue from exams and expense from optometrist salaries.
These 150 stores compared to 102 stores at the end of 2021. The majority of our 60 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 <unk>.
<unk> Doctor.
As we convert these stores to the PC model, we expect a near term margin headwinds given the gross margins on the exam service alone are lower than our glasses and contacts gross margins.
We expect that our investment in eye exam capabilities in store will benefit us in the long term as it gives us greater control of the customer experience enables us to recognise eye exam revenue and results in higher conversion rates from high exempt product purchase.
Offsetting a portion of these dilutive factors are a few accretive tailwind to margins first we continue to scale, our progressive business, which is our highest priced and highest gross margin offering.
Progressive accounts for 21, 7% of our prescription glasses business up from 21% a year ago.
As we've discussed progressive lenses account for approximately 40% of all lenses sold and will be further penetration of progressive as a continued source of growth for years to come.
Secondly, we continue to scale the portion of prescription glasses orders that we in source at our two owned optical labs in New York and Nevada.
As discussed there are many benefits we see from in sourcing orders at our labs, including higher NPS lower refund rates faster turnaround time and improved gross margin.
For the full year adjusted gross margin came in at 57, 2% compared to 59% in 2021 and in line with guidance provided on our Q2 and Q3 calls last year.
Shifting gears to SG&A as a reminder, SG&A for our business includes three main components salary expense covering our headquarters customer experience in retail employees marketing spend including our home try on program and general corporate overhead expenses adjust.
Adjusted SG&A exclude the noncash costs like stock based compensation expense and also excludes one time costs like those associated with our direct listing.
Adjusted SG&A in the fourth quarter came in at $81 5 million or 55, 6% of revenue.
This compares to Q4 2021, adjusted SG&A of $89 4 million or 67, 3% of revenue a drop of 11 seven points year over year.
The primary driver of the decrease in adjusted SG&A as a percentage of revenue for the quarter was driven by dropping marketing spend as a percentage of revenue by 10 three points from 22, 3% to 12% of revenue.
The remaining one five points of leverage was driven by the changes to our cost structure that we implemented in August of last year, which included the difficult decision to reduce our headquarters head count and decreased operating spend across a range of categories. We believe these changes has set us up for continued adjusted EBITDA margin improvement.
Then I will discuss later.
As previously outlined we have made and expect to continue to make changes to marketing spend levels to optimize to the current demand environment.
Marketing spend for the quarter came in at $17 6 million or 12% of revenue.
This is down from $29 6 million and 22, 3% of revenue in the same period last year.
Marketing spend in Q4 dollars 22 was 41% lower year over year, which compares to revenue growth of 10, 2% year over year over the same period.
Since the first quarter of 2022, we reduced marketing spend by nearly eight points as a percent of revenue and expected to remain in the low double digits. This year as a percentage of revenue.
For the full year on an adjusted basis SG&A came in at $348 5 million or <unk> 58, 3% as a percentage of net revenue versus 58, 4% in 2021.
Our 2022 results included a full year of public company costs, which accounted for approximately one 7% of revenue versus 2021, which included just a quarter of public company costs, which accounted for less than half of 1% of revenue.
And each one 2022 adjusted SG&A represented 61% of revenue versus 55, 5% in <unk> 2022, an improvement of over 500 basis points.
At the end of the third quarter, we took several steps to realign our cost structure with the current environment, including taking the difficult, but necessary step to reduce our full time corporate team by 63 people or approximately 15% and pullback on a range of operating spend items. These actions generated savings of approximately nine.
Million in 2022, and we expect these actions to lead to $15 million to $18 million in savings this year.
We believe these operating spend reductions along with bringing marketing spend as a percent of revenue back down closer to the low teens position us well for increased profitability. This year.
Turning now to adjusted EBITDA.
In the fourth quarter, we generated adjusted EBITDA of $8 6 million, representing an adjusted EBITDA margin of five 8%, which compares to adjusted EBITDA of negative $6 4 million or negative four 8% of revenue in the year ago period.
Full year 2022, we generated adjusted EBITDA of $27 2 million, representing an adjusted EBITDA margin of four 5%, which compares to adjusted EBITDA of $24 9 million or four 6% of revenue for the full year 2021.
Adjusted EBITDA in 2022 was a tale of two halves second half adjusted EBITDA margins of six 9% or 470 basis points higher than the first half driven by the actions we took to adjust our marketing expense and corporate cost structure midway through the year.
Turning now to our balance sheet, we finished the year with a strong balance sheet position, reflecting approximately $209 million in cash, which we will continue to deploy deliberately to support our growth and operations. We also have an undrawn credit facility of $100 million that we can upsize to $175 million.
Turning to 2023 before I get into the specifics of our outlook I want to point out that we expect the quarterly cadence of our results to look similar to 2021, which was in line with the shape of our business prior to the pandemic. Therefore in 2023, we project that Q1, and Q2 will again be our most.
Ratable quarters with Q3 modestly lower than each one in Q4, our least profitable quarter as we spend into holiday and FSA demands.
We expect a quarterly revenue will be more consistent than adjusted EBITDA. As a reminder, we historically have seen a sequential step up from Q4 to Q1 in revenue driven by a higher volume of orders generated during the FSA exploration period in late December the majority of which are fulfilled in January and then relative.
Parity in quarterly revenue across Q2, Q3, and Q4 until the cycle repeats.
Now to guidance, while we were encouraged by our momentum entering this year the broader economic landscape and its impact on consumer behavior continues to be challenging to predict for the optical industry.
Therefore, we're planning for a range of scenarios for the full year 2023, we're guiding to the following.
Revenue growth of approximately 8% to 10% representing a revenue range of $645 million to $660 million.
Adjusted EBITDA margin of approximately seven 9%, which equates to adjusted EBITDA of approximately $51 5 million at the midpoint of our topline guidance range.
Gross margin in the mid <unk> as a percentage of revenue.
40, new store openings, bringing our total store count to approximately 240 by year end.
Looking at our retail channel our revenue guidance at both the low and high end is based on our plan to open 40, new stores in 2023 with an opening cadence similar to 2022.
At the low end of our range, we anticipate store productivity versus 2022 to be flat.
At the high end of our range, we anticipate store productivity to increase one to two points.
As Youll recall, we began aligning our marketing spend as a percent of revenue with pre pandemic levels Midway through 2022 for 2023, we expect marketing spend to be in the low teens as a percentage of revenue, which compares to approximately 20% in the first quarter last year and 17% for the <unk>.
First half of 2022.
Therefore, we expect e-commerce sales to be down in the first half of 2023 before returning to growth in the second half after we anniversary the marketing spend adjustment in the third quarter.
With respect to 2023, adjusted EBITDA margin, we're guiding to approximately seven 9% for the full year as noted.
This represents a 340 basis point improvement versus 2022, and the 130 basis points of improvement versus the midpoint of our second half 2022 guidance of six 3% to six 9%.
As a reminder, we indicated on our last earnings call that we would use our second half 2022 guidance range as the baseline on which we would base projected 2023 profitability.
We expect gross margins in 2023 to remain below our long term target range as topline growth remains below our long term target of 20% and as we continue to open new stores and higher optometrist to meet the holistic vision care needs of our customers.
Finally, with respect to our outlook for 2023, we're forecasting stock based compensation as a percentage of net revenue to be roughly 10% compared with 16% in 2022.
Stock based compensation for both years is above our long term forecast of low single digits starting in 2024.
As a result of the multi year equity grants to our co Ceos in 2021, the majority of which is performance based and best based on stock price targets from $47 75.
$103 46.
We'll anticipate stock based compensation to normalize to approximately 2% to 4% of net revenue beginning in 2024.
For Q1 2023, we are guiding to the following revenue growth between $163 9 million to $167 million, which represents growth of 7% to 9% year over year. This represents sequential topline growth of approximately 12% to 14% from Q4 2012.
<unk> Q1 2023.
Through mid February we've observed 102% productivity in our retail stores on a trailing 20 day basis as compared to 2022.
From a bottomline perspective in Q1 2023, we're guiding to an adjusted EBITDA margin of 8% to 9% or 13% to $15 million, we expect the quarterly progression of our profitability to be more in line with pre pandemic trends with more of our adjusted EBITDA generated in the first half of the year versus 2000.
'twenty, two where we generated the majority of our adjusted EBITDA in the second half of the year.
With that Neil Dave and I are pleased to take your questions. Operator. Please open the line for Q&A.
Okay.
If you would like to ask a question. Please press Star then one on your telephone keypad.
If you change your mind, Please press star two.
The first question we have today from the phone lines comes from Dennis Kessler of Tesla Great. You May proceed.
Hi, good morning, everyone and nice to see the progress.
Do you think about the first half and second half of the year that you mentioned, Steve how do you think about.
The go forward is it can continue to be in this type of balance with adjusted EBITDA, and then Dave and Neil as you think about store openings and reopened.
Dean's Weststar right near my House it looks like it's doing terrific do you think about new store openings markets that youre going in new versus existing markets and how do you think of the return profile given the spend on new stores from what it had been in the past. Thank you.
Thanks for the question, Dan I will take the first part and then we'll kick it over to Neil and Dave for the second part in terms of your question as it relates to the cadence of adjusted EBITDA for this year, we believe that the cadence will look more similar to 2021 and to pre.
Pandemic years, so last year due to some of the cost adjustments, we made to the business. We generated the majority of our adjusted EBITDA in the second half of the year.
That story will be different this year, where we expect to recognize more adjusted EBITDA in the first half of this year than in the second half of this year. So we're projecting strong profitability in Q1, and Q2, a little bit less so in Q3, and our lowest profitability quarter will be Q4.
Consistent with prior years, where we spend into FSA demand and holiday buying so thats, how we would.
Describe the shape of our adjusted EBITDA curve this year versus last year with the main change really being due to the cost adjustments, we made to the business in August which really allowed us to generate incremental EBITDA. We saw adjusted EBITDA H. One go from approximately 2% to almost 7% in the second.
Half of the year.
Yeah.
This is neill I'll touch a little bit on how we're allocating capital towards our store fleet and we're going to open another 40 stores this year.
We found that we're able to open these stores within sort of our targets paybacks.
Less than 20 months and four wall margins of 35%. So excited about you have a chance to visit our union square location.
This is an example of a store that does high volume.
Has great metrics, but also sort of a brand accretive way.
We were able to get a corner location with exterior flag.
And this is an example of.
Our real estate strategy, where we look at the entire run of lower theft for example.
While there is slightly higher foot traffic, maybe three blocks farther north there's real significant differences and rent so here.
Real estate committee, we sort of make that trade off and know that for our category people are willing to walk that extra block and this is as a neighborhood store.
That.
Has a very deliberate customer base. So we continue to be very disciplined in our retail rollout. This year. As we are opening will continue to sort of fill in existing markets, but open up a bunch of new markets.
<unk> really focused a lot more on suburban locations.
As we look at sort of Q4 and 2022.
The Delta.
Tween, our suburban and urban locations was about nine percentage points, when we compare to retail productivity in 2019, and we expect that to continue to narrow over time.
Given our journey into retail is very focused on urban locations, we have lots of opportunity in suburban locations that will take advantage of this.
This year.
Got it.
And then just lastly, any update on contacts and progressive and pricing, how you're thinking about it for 2023. Thank you.
Yes, so we continue to see lots of strength in.
The.
Contacts and progressive category, we noted that we saw in north of 80% year over year growth in our contacts business and.
I'm really excited by the trends in the feedback that we're seeing there both in converting existing worthy partner customers, who wear contacts to enable them to buy those contacts from us.
And also in attracting.
New customers to <unk>, where their first purchase is contacts that as a product category that has very different purchase dynamics than.
Argos is only customers and we're really encouraged.
To see not only strong repeat.
Purchasing behavior from those contacts customers, but also.
To see a substantial portion of those customers then go on to purchase classes and also get exams.
From us and we are finding that.
Holistic customers, who buy classes getting exam and buy contacts from us are not only more valuable with that first transaction.
But over time, they become even more valuable so.
One of the slides in our materials is that after 12 months.
They spend more than two two times as much as our glasses only customers.
We continue to be.
Excited by that product category progressive Similarly.
We continue to increase the percentage of our overall prescription mix that was progressive customers.
This past year.
And I expect that to continue as we roll out more stores, we tend to see a higher percentage progressive transactions in our retail stores versus online.
And.
Excited to be able to serve more of that demographic.
Thank you.
Thank you. Your next question comes from.
Mark <unk> from Bank you May proceed with your question.
Good morning, Thank you for taking my question.
So youre guiding to about a 15% sequential lift in sales for the first quarter.
I think a bit below the seasonality from pre COVID-19. It does look more like last year.
But that's when you had the omicron disruption through that key FSA period. So I was wondering if you could talk a bit more about what you saw in terms of customer engagement around that key FSA period. This year, how that affected your approach I think you called out some strong productivity numbers in February if I heard that correctly.
And then more broadly has the expansion of the holistic offering and other initiatives.
<unk> the seasonality of the business versus what you've seen historically thank you.
Alright. Thanks for your question, it's a little early to see sort of impacts on seasonality, especially given sort of the disruptions over the last few years.
We believe that we're entering a period.
Where there should be some more consistency.
And more predictability more similar to sort of years pre pandemic and that's exciting to us that being said when we look at projections by the vision counsel.
They are projecting that the industry overall will be down approximately <unk>, 6% in.
2023, so we're approaching sort of our guidance with.
With some cautiousness.
As we want to continue to grow under our philosophy of sustainable growth, while expanding margins as well.
One of the nice things about building out sort of our eye care business.
Is that it does support increased predictability as we see eye exam schedule in advance.
And we did see some great strength and more predictable behavior around FX.
FSA exploration to close the year, which was encouraging but.
But if we learned anything last year that we shouldn't read too much into short term trends and so were proceeding with caution in the short term.
And Mark the other factor to keep in mind the.
The other factor to keep in mind as it relates to the sequential change year over year is just a rebalancing of marketing spend as a percent of revenue.
In the quarter, our marketing spend in Q4 is down approximately 40% year over year.
When we report on Q1, we will see a similar level of trend downward and marketing spend year over year and that is having a direct impact on our E Com channel and so that's what we're baking into our results as well.
Thank you and a quick follow up on the product front youre expanding the core collection and was wondering if you could contextualize that a bit more how many unique styles do you have today, where do you expect that to go you currently have that nice balance between the $95 price point and the higher price points I am curious how are you.
That price mix to evolve as you expand the core.
Yes.
So as you know, we're sort of known for that $95 price point and our general.
Philosophy around pricing for frames and lenses, how can we deliver exceptional values.
Charge, a fraction of what our competitors charge and we find we're able to do that whether it's at $95 145, 175, 195 Youll continue to see.
For.
More of a distribution across those price points.
Now have roughly 1000, skus and continued to launch new collections.
We anticipate launching 20, new collections this year and one of the nice things about having direct relationships with our customers is that we're not beholden to the fashion calendar.
So we're able to sort of launch collections. When we think it will have the biggest impact on our customers.
And similarly.
Having sort of central fulfillment.
Across our two labs in <unk>, New York and Las Vegas also enables us to be really thoughtful around inventory given that we don't need to maintain large inventories in our optical shops for our customers to takeaway products like an apparel retailer.
So we'll continue to introduce newness and when we think about newness is about the new styles, but also new color ways.
And sort of existing sort of beloved styles that we've created over the years.
And our merchandising and planning team.
It's just focus every single day.
The customer data that we have at our disposal all thanks to our direct to consumer model.
Thanks again.
Okay.
Thank you, we now have Oliver Chen from Cowen.
Hi, Neil David and Steve Nice quarter regarding the marketing spend it's been remarkable in terms of the efficiency you've driven there as we look forward what do you.
Are you seeing in terms of marketing effectiveness and performance marketing and things that you're monitoring that enter place with what youre getting out of customer acquisition when you grow stores our.
Second question, you mentioned an opportunity to increase our younger customers would love you to elaborate on that and what you see ahead and why.
And third question on the product assortment it sounds like you're offering a lot more value to the earlier question.
It happened with customer lifetime value and Dor acquisition relative to retention.
<unk>.
Yeah.
Thanks Oliver.
And yes, we've been excited to see some of the efficiency gains that we.
We've achieved on the marketing front.
Really coming from.
A few areas so.
One is that we've as we've pulled back on spend we've allocated those dollars to the most efficient channels and.
As a direct to consumer brand, we get immediate signals from our customers around what's working.
What's not and we can constantly optimize.
Our tactics and strategies.
Is that media rates have declined and so.
For the same dollars that we're spending.
Four.
Video ads or.
Sure.
Or display or SCM, where we're reaching more customers for the same dollars.
And then I think our team has just done a great job on the creative front.
With.
New interesting collections new collaborations.
That generate.
A lot of excitement and ensure that we are.
We're finding efficiency.
We're spending dollars to promote those new products and clubs.
One recent example, which.
It also fits in the vein of reaching younger customers. We just did a collab with the rapper ASF Nast.
That just generated lots of excitement amongst younger demo that's got a lot of great press.
And enabled us to amplify our messaging around that collection in a really capital efficient way.
Thank you.
We now have.
Sachin <unk> with Morgan Stanley . Please go ahead.
Great. Thanks, so much for taking my question I just wanted to.
To get your input on kind of the divergence between the recent store growth I think it's sitting at over 20% versus the active customer growth and the revenue per customer is sitting at about 4% and seven and then total revenue I think at 11, I'm trying to understand that gap and kind of how you guys are thinking about a potential path.
Back to 'twenty. Thank you.
Okay.
Sure. Thank you for your question the.
Difference in terms of growth at.
The total company level of up 10% versus store growth of up 24% is really explained by growth at the channel level and channel mix. So if we were to double click into that 10, 6% revenue growth. We have a business split that's approximately at this 0.2 thirds retail.
<unk> e-commerce with our retail channel up 25%.
Growing in line with store growth, while E. Com revenue was down 6% really in many ways driven by the fact that over the course of the full year, we've dropped marketing spend by 15% in the most recent quarter by 40% year over year. So the way to understand the bridge between total company growth is if you.
Look at the growth in both of our channels retail growth very healthy E comm growth under pressure directly related to our rebalancing of marketing spend in line with pre pandemic levels.
In terms of how we're thinking about that in terms of active customer growth.
Customers were up roughly three 6% year over year and average revenue per customer up almost 7% so more of our growth being driven by price appreciation versus customers. We expect to see that thematic trend to continue this year, although we are projecting a moderate up.
Tick in growth coming from active customers and a very consistent profile in terms of our year over year growth in terms of average revenue per customer.
Hope that helps kind of walk through how that bridge growth.
Across channels and some commentary as it relates to how we're thinking about growth from active customers versus average revenue per customer.
Mmm.
These offerings will become more important than ever overtime myopia is.
Is growing around the world in a recent study estimated that on average 30% of the World is currently myopic, but that's gonna grow to 50 per cent by 2050.
And so we remain energized by our our mission to provide <unk> for all and believe the foundation that we're building now to enable omnichannel holistic care.
We will set us up for long term growth and are expecting that at some period. This abnormal behavior, we see in our category.
Will will abate, but.
But we're we're not counting on that in terms of a guidance and our expectations for 2023.
Thank you.
Have a final question on the line comes from Paul.
<unk>. Please go ahead when you're ready.
Hey, everyone. This branch you demand for Paul Thanks for squeezing out so I just wanted to give them a little bit on the estimated expenses.
I was wondering you know if you're pre quantify how much do you think.
The impact to top line growth from reduced marketing spend and then a additional tweaks that you're thinking of making some marketing experiment.
Or other Austrian expenses pay more <unk>.
Sure Uhm, there's certainly an impact the top line growth as it relates to to marketing spend it's tough to quantify with specific science dollar for dollar what that is what we do know is this year, we dropped total marketing spend by 15%.
But we still grew revenue by 10.6% year over year and our focus is to really make sure that we're driving incremental profitability, while we're bringing marketing spend back to pre pandemic levels closer to the low teens from where it had been at almost 20% in terms of.
What we're seeing reflected in our customer acquisition costs as Neil talked about previously we've seen a nice.
Deleverage or drop in our customer acquisition costs, that's coincided with our drop in marketing spend and what we're focused on is making sure that we can continue to grow but while we're growing growing profitably and a big part of our incremental adjusted EBITDA story really is bringing marketing spend in line with the pre.
Pandemic levels to that low teams percentage basis.
Got it thank you and good luck.
Thank you.
I would like to turn it back today for any finally relax.
Thank you all for listening in this morning and for the thoughtful questions. We continue to be excited about the opportunity in front of us and look forward to sharing progress against our strategic priorities on our next call.
Thank you for joining that does complete today's crew you may now disconnect your line.
Okay.
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