Q1 2023 Warby Parker Inc Earnings Call
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Thank you for your patience, ladies and gentlemen, there will be pockets first quarter 'twenty earnings conference call will begin shortly joined.
During the presentation you have the opportunity to ask a question by pressing star followed by one on telephone keypad.
Thank you for our patients.
[music].
Thank you and good morning, everyone here with me today are new pool, Manta and David Google, a cofounder and co Ceos.
Alongside Steve Miller, Senior Vice President and Chief Financial Officer.
Before we begin we have a couple of reminders our earnings release and slide presentation are available on our website at investors start Robby polka Dot com.
During this call and in our presentation, we will be making bolt.
Making comments I'll make forward looking nature.
Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties.
For more information about some of these risks please see the company's SEC filings, including the session titled risk factors in the Companys latest.
Annual reports on form.
<unk> 10-K.
These forward looking statements are based on information as of May nine 2023 and.
And expect as required by law, we assume no obligation to publicly.
State or revise our forward looking statements.
We will be discussing certain non-GAAP financial measures these non-GAAP financial measures.
In addition to and not a substitute for measures of financial performance prepared in accordance with U S. GAAP.
Conciliation of these items to the most.
Direct comparable U S. GAAP measures can be found in this morning's press release and our slide deck available on our IR website.
And with that.
I'll pass it over to Neil to kick us off.
Welcome and thank you all for joining this morning to discuss <unk> Parker <unk> first quarter 2023 result.
Three is off to an encouraging start as many of the positive trends, we experienced across our business late last year accelerated in the first quarter driving operating results that surpassed expectations.
<unk> revenue increased 12% to $172 million compared to our forecasted range for revenue growth between 7% to 9% and then acceleration in growth compared to the second half of 2020 to.
Q1 results were built off of a strong December which was highlighted by the return to a more normalized FSA shopping period late in the month, while the optical industry continues to face demand pressures and our growth has been impacted by our pullback in marketing spend.
Capturing market share gains through our focus on the customer experience product innovation and store expansion.
The combination of double digit revenue growth along with the actions we took midway through last year to right size, our corporate cost structure and a more efficient use of marketing dollars fueled significant leverage and a sizeable improvement to adjusted EBITDA margins in the quarter.
Q1, adjusted EBITDA of $17 7 million represents a quarterly record for the company.
$17 million higher compared to last year, and $2 $7 million above our guidance range.
By channel stores led the way with average productivity, reaching 103% of Q1 2022 level. This solid performance helped offset expected softness in e-commerce demand compared with a year ago as we are.
We're in the final stages of realigning marketing bandwidth pre pandemic levels a process that began in the second quarter of last year.
Also opened six new stores in the first quarter, including one new market. All six stores include eye exam capability, which brought the number of locations operating eye exams at quarter end to 155 or 76% of our fleet.
As we've increased the number of stores offering items, we have seen a nice uptick in average revenue per customer driven by both IBM revenue and a higher penetration of progressive lenses.
We are also seeing positive responses to our two bundling programs, which are aimed at capitalizing on lower traffic levels in the current environment.
Promote cross product purchasing and amplifying the Bakken aspects of purchasing a pair of glasses.
On a trailing 12 month basis average revenue per customer was $270 up eight 4% from a year ago at the same time, we increased active customers two 5% to two 9 billion with strong gains in retail customers offsetting declines in ecommerce customer until we lap.
The reduction in marketing spend.
In the second half of this year.
Overall, we are pleased with our start to the year and we continue to be positive about the outlook for war be Parker and the optical industry at large while.
While inflationary pressure and recent changes in how consumers are spending their time and money and have changed the normally steady and predictable patterns in the optical industry. We continue to see a long runway for growth for war b within the $76 billion vision care market.
We expect that our attractive pricing, new and exciting products and exceptional customer experiences combined with our growing store base and greater brand awareness, while returning the business to its long term growth trajectory and continue to fuel sustained market share gain.
And with that I'll turn it over to Dave to walk through the progress we've made against our primary growth driver this quarter.
Good morning, everyone as Neil just outlined we are pleased with the positive financial results. We delivered in Q1 in light of the current demand environment.
We have seen some positive consumer trends to start the year, we remain cautious with our forecast.
Isn't council is projecting the overall optical market to contract a little less than 1% in 2023 after only growing a half a percent in 2022.
This compares the industry's historical growth rate of 3% to 5% between 2011 to 2019.
We're clearly outpacing the industry with revenue up double digits in Q1, despite reducing marketing spend by 35% year over year.
We believe our approach to balancing long term strategic investments in the business with disciplined cost management and positioning the company to accelerate growth and continues to deliver enhanced profitability as market condition normalized.
Opening new stores and advancing our Omnichannel presence remains a key focus.
The main reasons consumers, who are aware, we'll be Parker have not purchased from us because we don't have a store nearby and they can't get an IBM.
Doors remain capital efficient with compelling return even in the current demand environment, New stores continue to payback within 20 months and generate strong four wall adjusted EBITDA margin in line with our target of 35%.
The stores are integral to advancing our holistic care ecosystem, you either eye exam capability.
We find that exam stores drive higher sales the non exam stores, while operating in a more seamless experience for our customers and patients.
Industry wide nearly 80% of prescription glasses are purchased at the same location in <unk> takes place in our store channel represents the gateway to increase penetration of progressive lenses are.
Hyatt and.
And highest margin product, while attracting new and existing customers to our burgeoning contacts operated.
We continued our strategic investment in stores in Q1 opening five new stores in existing market and one in a new market, including for suburban and urban locations.
As we look to the remainder of 2023, we are on track to add a total of 40 stores this year.
Longer term, we believe we can open 900 plus stores in the U S. A significant opportunity for further penetration of new and existing markets for years to come.
Representing a small fraction of the 48000 optical shops in the U S.
In addition doors act as an accelerator of progressive.
As our store footprint has expanded.
The progressive penetration was up 210 basis points year over year to 22, 9% of prescription eyeglasses unit in Q1.
Our omnichannel experience remains unique in our category and while E. Comm growth had been disproportionately impacted by a reduction in marketing spend we are excited to continue to evolve our digital experience by increasing accessibility and capability of our virtual try on enhancing frame recommendation, making it easier than ever to reorder contacts or.
Book, an eye exam.
Along with channel expansion. We are also placing an increased emphasis on driving conversion and higher revenue per customer to help offset lower traffic trends in 2023.
In gains and in store conversion and the percentage of customers purchasing multiple products from us.
Along with our core glasses business, we are committed to growing the other vertical business.
Contact business with its more frequent order cycle represented seven 7% of <unk> revenue up 70 basis points versus a year ago.
This figure is still well below the industry average of 20% and represent significant white space opportunity for future growth.
Our growing eye exam business is another area of focus this year as we continued to add the capability to new and existing stores.
I exams now represent three 8% of revenue in Q1 versus two 1% last year and we continue to see the vast majority of our exam customers go onto purchase glasses contacts for both.
While we are pleased with the increases we've seen in average revenue per customer. We are also intently focused on driving new customer growth with a two pronged strategy.
The first is through organic growth driven by our retail expansion and new product introductions.
Larger source of new customers is word of mouth and stores are a great customer acquisition vehicles.
We expect to see retail customer acquisition scale in step with our store expansion plan, which along with the pickup in e-commerce traffic in the second half of this year. Once we are past the difficult marketing spend comparison should provide the overall business with a stronger tailwind heading into next year.
In Q1, we launched five new eyewear collection, and a new unique reversible onward collaboration with Jimmy Fallon, which generated significant breadth awareness and traffic.
Second strategic investment in marketing, we plan to strategically and judiciously invest in demand creation and brand building through different tactics, including ongoing investment in linear television and digital programs like F E M.
With our channel mix between stores and E. Comm now rebalanced the pre pandemic level, we expect marketing spend as a percent of revenue to remain in line with pre pandemic levels in the low double digits.
We are pleased with the marketing efficiency, we are seeing not these levels expect to drive steady and sustainable new customer growth.
Insurance remains a big opportunity for us both in attracting new customers and enabling us to deliver even better value.
More than 60% of our customers have vision insurance.
In line with the overall market a portion of those customers are leveraging their benefits without while others recognize that their out of pocket spend is still lower than where we partner and if they were to go to a different in network provider.
We have a number of efforts underway to make insurance reimbursement more seamless for our customers first.
First we are continuing to develop contracted reimbursement relationships with a range of managed vision care plan.
In Q1, we saw strong growth from in network insurance customers.
More customers than ever can seamlessly apply their benefits with us paying just their net price at checkout and those who do spend more than those who don't apply their benefits at checkout.
In parallel we plan to introduce new features this quarter that will make it faster and easier for all of our customers to look up their benefits, regardless, if they are in or out of network.
And lastly, we are maintaining a healthy balance between driving growth and expanding adjusted EBITDA margin.
We continue to carefully monitor expense levels, both at headquarters in stores to align with current traffic trends and we expect to benefit from lower media rates and more efficient marketing spend going forward.
While a portion of these savings will flow through to our bottom line evidenced by our adjusted EBITDA margin guidance for 2023, we are being flexible and plan to reinvest a portion of these savings back into the business in support of our long term growth objectives.
And now I'll pass the call over to Steve to cover our financial performance in more detail.
Thanks, Neil and Dave Good morning, everyone.
Starting with revenue, we generated revenue of $172 million up 12, 2% year over year and above the high end of our guidance range of $164 million to $167 million.
Deferred revenue recognized in January from the strong FSA exploration period in late December combined with improving store performance contributed to our strong start to 2023.
From a channel perspective retail revenue increased approximately 28% while e-commerce revenue declined approximately 8% versus Q1 of 2022.
For the first quarter E Commerce represented 36% of our overall business compared to 44% in 2022 and in line with our pre pandemic channel mix.
The decline in E. Commerce revenue was in line with our expectations and driven by an intentional reduction in marketing spend by 35% year over year as we bring marketing spend as a percent of revenue back to pre pandemic levels in the low teens.
We expect e-commerce revenue to begin Comping positive in H two of this year as we anniversary. The pullbacks, we have made in marketing spend and begin to increase marketing spend dollars year over year.
We finished Q1 'twenty three with 204 stores, an increase of 35 stores and an increase in our store count of approximately 21%, which compares favorably to a retail revenue about 28% year over year.
Retail productivity in Q1 was 103% versus the same period last year.
From a customer perspective, we finished the quarter with $2 two 9 million active customers an increase of two 5% versus the same period, a year ago and our average revenue per customer increased eight 4% year over year to $270.
It's worth noting that our revenue growth followed a similar pattern to our growth in active customers active customers are increasing in retail driven by new store openings and decreasing in our ecommerce channel as we rebalanced our marketing spend.
We're pleased with our increase in average revenue per customer, which 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.
Progressive represented 22, 9% of total prescription glasses. So in Q1 2023 up from 28% when compared to the first quarter of 2022.
This is still well below the market average of approximately 40%, leaving a substantial runway for product category growth.
<unk> are also our highest gross margin and highest price point product starting at $295.
We continue to make progress on our move into holistic vision care as we evolved from a glass is the only brand into one that offers glasses contact and eye exams to customers.
From Q1, 'twenty to Q1, 'twenty three contact lenses have increased from 7% to seven 7% of our business mix.
Over the same period Eyecare has increased from approximately 2% to three 8% of our business mix.
Contacts and eye exams, both represent large opportunities for future growth and we remain well underpenetrated for sales of these products as a percent of revenue versus other national optical retailers.
As a reminder, contact lenses and <unk> each represent $10 billion plus portions of the $76 billion U S optical industry.
Moving on to gross margin as a reminder, our gross margin accounts for a range of costs, including claims lenses optical lab customer shipping optometrist salary store rent and the depreciation of store build outs are gross margin also includes stock based compensation expense for our optometrists and optic.
Lab employees for comparability I'll be speaking to gross margin excluding stock based compensation.
First quarter adjusted gross margin was 55, 2%.
Compared to 58, 7% in the year ago period.
The year over year decrease was driven by strong growth of eye exams and contact lenses as we evolve into a holistic vision care company and expand into these large segments of the optical industry.
As a reminder, eye exams and contacts have lower gross margin profile and eyeglasses, but over the medium and long term are accretive to gross margin dollars and allow us to serve all of our customers eye care needs.
Expanding our contact offering as a core part of scaling our holistic vision care offering and a key driver of growing average revenue per customer while contact lenses have a lower gross margin percentage compared to our other offerings. They are higher purchase frequency and subscription like purchase cycle are accretive to gross margin.
As a reminder, contact lenses represented an estimated $17 $8 billion market in 2023 and account for approximately 20% of a typical optical retailer sales.
We also experienced continued year over year gross margin deleverage in two areas that represent the most fixed portion of our cost of goods.
Retail occupancy and optometrists salaries, which are directly linked to our expansion into eyecare.
Our growth in store count has naturally led to an increase in store rent and depreciation from store build outs. We also saw downward pressure on gross margin year over year from an increase in overall optometry salaries as we hired optometrists, where our new stores and continued the rollout of our professional corporation or PC model.
As of the end of Q1 2023, we operated with a 120 stores, where we engage directly with an optometrist and therefore recognized both revenue from exam and optometrists salaries.
This represents a 74% year over year increase from 69 employed in PC exam stores at the end of the first quarter last year.
Many of our 64 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.
We believe this ongoing investment in eye exam capabilities will benefit the business long term as we benefit from greater control over the customer experience, new eye exam revenue and higher in store conversion.
There are a few accretive tailwind to margin that act to partially offset these diluting effects.
First we continue to scale, our highest priced and highest gross margin progressive business in the first quarter progressive accounted for approximately 22, 9% of our prescription business, which is up from 28% a year ago Secondly.
Secondly, we continue to scale the portion of our prescription glasses orders that we in source at our two owned optical lab in New York and Nevada, We expect our continued scaling of these facilities to result in continued gross margin benefits along with higher net promoter scores lower refund rates and faster turnaround times.
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 adjusted.
SG&A excludes noncash costs like stock based compensation expense.
Adjusted SG&A in the first quarter was $87 2 million or 57% of revenue down nine 4% when compared to Q1 2022, adjusted SG&A of $96 2 million or <unk> 62, 8% of revenue.
Primary drivers of the decrease in adjusted SG&A as a percentage of revenue the lower marketing costs and benefits from the adjustments to our cost structure, we implemented in August of last year.
Marketing spend for the quarter came in at $20 1 million or 11, 7% of revenue. This.
This is down from $31 1 million and 23% of revenue in the same period last year marketing spend in Q1, 'twenty, three or 35% lower year over year, which compares to revenue growth of 12, 2% year over year.
Turning now to adjusted EBITDA in the first quarter, we generated adjusted EBITDA of $17 7 million, representing an adjusted EBITDA margin of 10, 3%, which compares to adjusted EBITDA zero point $8 million or 0.5% of revenue in the year ago period.
This significant year over year improvement underscores our commitment and ability to drive profitable growth even in a lower demand environment.
Turning now to our balance sheet.
We finished the quarter with a strong balance sheet position, reflecting $204 $3 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 other.
Other than 4 million for letters of credit that we can upsize to $175 million.
Now to our outlook at this time, we're maintaining the full year guidance, we outlined on our Q4 earnings call on February 28.
For 2023, we still expect net 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.
The midpoint of our topline guidance range.
Gross margin in the midst of fees as a percent of revenue.
New store openings, bringing our total store count to approximately 240 by year end.
We are still forecasting stock based compensation as a percentage of net revenue in 2023 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. As the result of the multi year equity grants to our co Ceos in 2021, the majority of which is performance based and <unk> based on stock price targets from $47 75.
$103 46.
We still anticipate stock based compensation to normalize to a range of 2% to 4% of net revenue late in 2024.
With respect to the second quarter, we're guiding to the following.
Net revenue of 160 to $162 5 million or.
Our revenue growth of approximately 7% to 9% for.
For Q2 to date, we have observed trailing 28 day retail productivity versus 2022 between 99 and 102%.
From a bottomline perspective, we're guiding to adjusted EBITDA of 11% to $12 $5 million, representing adjusted EBITDA margin of approximately 7% to 8%.
As noted on our last call we expected 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 2022, where we generated the majority of our adjusted EBITDA in the second half.
With that Neil Dave and I are pleased to take your questions. Operator. Please open the line for Q&A.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on tax on key pad now.
I plan to ask a question. Please ensure your phone on mute locally.
With our first question comes from Dana Telsey Telsey Group Dana Your line is now open.
Thank you good morning, everyone and very nice to see the progress when you're seeing the opportunity with contact lenses.
The exams Progressive how do you see.
You gave the guidance Steve on the revenue reaffirmed for the year guidance for the second quarter, what percentage of the business do you expect progressive and contacts to get too given the improvement this quarter and how do you see the impact on gross margin going forward and lastly, with the improvement in growth rate above the industry.
The growth rate.
Do you expect to see more collaborations how big a part of it was those the Jimmy Fallon that seem to drive sales.
Seem to drive sales and traffic. Thank you.
Sure.
Hi, Dana this is Steve Thanks for the question I'll take the first part of the question and then we'll.
David Neal respond to the second part of the question related to collaboration as it relates to how we think about projecting contacts and progressive for Q2.
Haven't given specific guidance around <unk>.
Projected business mix for specific product categories, we have reported on contract as a percent of our revenue progressive as a percent of our prescription glasses units <unk> as a percent of revenue. After the fact, so it's possible to understand what proportion and what growing proportion of our business. These growth drivers account.
Sure.
It's possible to understand the growth rates and the percentages, we continue to see very positive uptake both in contact lenses eye exams.
Which are relatively newer products to us as well as from progressive lenses, which we've offered for quite some time, but where we've typically seen improvement on a year over year basis anywhere in the one to two percentage zone or 1% to two zone and so I would anticipate to see consistency in our business mix.
As we continue to report on these numbers and so we can provide color.
And amplify how excited we are about the strong runway for growth in all of these categories Progressives account for 44% roughly 40% of the market.
And just 22% of our business contact lenses, Likewise, 17, plus billion dollar market and a very small portion of our business eye exams at $12 billion plus market.
Very small portion of our business. So we remain excited about the tailwind that.
From a growth perspective that will accrue to us across these product categories and so that's the color that we would provide versus providing specific guidance in Q2 across these product categories.
And then on the collaboration front you can expect to continue to see us do thoughtful and interesting collaborations that help elevate and energize. The brand we've always viewed more be Parker as a lifestyle brand.
Are you able to have our second collaboration with Jimmy Fallon and the first one whats beneath and then the second one was flipped.
Fun reversible sunglasses.
And while this gained a lot of attention and drove the excitement.
Wouldn't categorize it as one that has sort of a meaningful impact on our sales trajectory.
That being said Youll continue to see us do things to activate and energize the brand. So this path.
Quarter, We also had a collaboration with asos math.
What is that fashion icon in hip hop artist part of the Ace up through.
<unk> also.
Really exciting spring 2023 launch.
How to campaign that featured Christina Ricci Henry I can vary in radar Jeremy O'hara.
So youll continue to see us to sort of really fun thing to elevate the brand and we also launched.
Store in New York that we call the museum of the Blue for their boobie.
It is right across the street from the museum of natural history on the upper West side there in Manhattan.
But for the booby it sort of unofficial mascot and has been.
Sort of.
A component of the brand and sort of you walk into the store.
We believe sort of the most fun.
Optical store.
We're sort of in the world. So I encourage everyone to come and check it out.
Thank you.
Okay.
Thank you.
With our next question comes from Oliver Chen from TD colon.
Your line is now open.
Hi, Neil Dave and Steve Nice quarter wanted to know what were some of the aspects that led to the better than expected quarter.
Also as we look as we look at April and May we're seeing a more cautious environment.
Was curious about what you expect within your guidance for our store productivity and some assumptions there.
Second question on the optical market more broadly.
What do you think might be the catalyst for re acceleration back to long term trends.
And lastly, the third question active customer growth just given the.
The lapping of the marketing spend do you expect it to still be.
Low single digit growth and then reaccelerate after that in the back half thanks a lot.
Sure. Thanks, Oliver I'll take the first part of the question in.
In terms of our performance above expectations in the first quarter. It was largely driven by retail productivity coming in moderately higher than we projected and we were able to maintain E. Com declines relatively in line with expectations. Despite the fact that we pulled back on Mark.
Hitting spend by 35% plus year over year would point to those as as the drivers. We also saw a nice increase in active revenue per customer.
Over 8% year over year, which has been part of our growth story for quite some time, we provide new products additional products and services to customers, which are either introduced at the larger price or theres, a bundling effect, where a customer gets an eye exam <unk> contact lenses and glasses from us, which all of which elevate.
As it relates to store activity store productivity trends that we've seen quarter to date.
The number that we gave as part of our prepared remarks is quarter to date, we've seen store productivity versus the same period last year in the range of 99% to 102% as a reminder, on our Q2 earnings call. We called out. The fact that April we saw store productivity as we recovered out of <unk>.
<unk> approach almost 90%. So we view April as one of our tougher retail comps from last year and so we wanted to give color on what we're seeing over the course of the quarter as we're starting to lap that strong April into early may comp and the numbers were seeing theyre going to range from 90, 99% to 102% in that <unk>.
<unk> that is informing our guidance for Q2.
Indeed.
Thanks Oliver.
Your second question about the industry data and what is going to provide catalysts.
As we look at the category data, it's clear that last year.
Was it really abnormal year for the optical industry and those trends have largely continued into 2023.
We have seen some signs of more regular consumer behavior in the category.
Are they spending.
This past year.
<unk> was a bit more in line with expectations and maybe a sign of more expected consumer behavior in the category. We have also seen higher utilization vision insurance benefits.
But if we learned anything over the last couple of years, it's not to place too much weight on the short term trends.
Nope that's it.
We do expect that consumers in our category cant delayed exams or glasses purchases indefinitely, and we expect that many people who got exams and glasses in 2021.
When there was a lot of activity in the category, we will cycle back.
At some point in the future on average people.
Prior to the pandemic bought a new period losses every two two years.
And we have seen kind of needed activity.
In the category for well over a year now.
We're not counting on a major rebound this year and Thats certainly not what vision counsel is projecting but.
But we aren't confident in the resilience and the durability of our category.
And do you expect to disproportionately benefit when some of the industry headwinds turn search as a tailwind.
And as that relates to kind of active customer growth this year.
We are maintaining a fairly cautious outlook.
Until we see signs.
A major rebound.
And.
I believe that kind of level of caution is reflected in.
Our.
Guidance for Q2 and for the rest of the year.
And just to add a little more of this is Neil.
On the active customer growth, but this is <unk>.
Where we've been historically more where we expect to be in the future.
We are seeing more strength in our retail channel retail revenue up 28% euro per year off of an increase in store count of 21%.
With our E Commerce channel down 8%.
Which we think is.
Quite strong given everything that's been happening both at across E Commerce.
Across all categories.
In U S retail right.
It sort of real adjustment in alignment from the highs of 2020 that seemed to continue through most categories.
You probably know better than may and in particular, if you look at optical if you look at the vision counsel data they projected last year that the eyewear market online eyewear market contracted 17%.
From a sales force perspective.
26% from a units perspective.
So.
We believe that we continue to outperform from both channels perspective, and then.
Given that.
Our marketing spend our demand creation spend is down 35% in this quarter, but will.
And comping positive on the back half of the year, we should see.
Active customer growth and our e-commerce channel sort of accelerate in the back half of the year.
Very helpful and nice job on the club's best regards.
Thank you.
Yeah.
Thank you.
Our next question comes from Alex <unk> from Piper Sandler.
Your line is now open.
Hey, good morning, guys. Thanks for taking the questions I guess first I know in the last call you.
We announced that Youre going to have some higher price point more premium frames I noticed you've started to roll some of those out I guess kind of any early impressions from a sales perspective, and maybe more importantly, given all the moving pieces on the gross margin line kind of any context as to how much. Some of these higher price point frames may have helped the gross margin and then I guess second on the E com.
Environment I know you guys are obviously deliberately pulled back marketing spend but kind of how would you assess the competitive environment, particularly for kind of the value price point frames. Thanks.
Yeah.
Thanks, So much for your question on some of our higher price point frames and lenses options we've seen.
This uptick I mean, it's one of the reasons why we're confident in our full year gross margin guidance.
As you know.
There are some puts and takes has contacts and I've been sort of increase but similarly.
Continue to drive.
Our sales and higher Asps.
For those products, which tend to have higher margins.
Well.
And then on the question around the E com environment.
As Neil mentioned as we look at category data.
There has been a real shift.
The pandemic highs.
E Commerce shopping in the category back into stores.
And if anything we believe that our.
E Comm business is.
Holding up pretty well against.
The kind of other other sites that are selling classes online.
Certainly our.
Places where.
Consumers can shop for.
Lower priced frames Thats always been the case.
But we believe that the quality and the customer experience and the Omnichannel offering.
We have is unparalleled in the category and we really.
Havent seen.
Competitive impact.
From.
<unk>.
From the other.
Right.
Thank you.
Thank you.
Our next question comes from Brook Road from Goldman Sachs.
Book Your line is now open.
Good morning, and thank you for taking our question.
Again, just cycle the profit improvement initiatives from last year can you speak to the opportunity to improve adjusted EBITDA margin in the back half of the year and then into early 2024.
We need to see Reacceleration in top line growth to the long term algorithm to get back to the pace of one to 200 basis points of margin expansion per year now that these initiatives are in the rearview mirror.
Yeah.
I broke this is Steve. Thank you for your question.
In terms of the first part of the question, we anticipate the pattern of adjusted EBITDA. This year to look more similar to previous years, So last year.
We generated the majority of our adjusted EBITDA in the back half of the year in H two directly attributable to.
The cost reductions, we made to our corporate cost structure built on top of some of the pullback in marketing spend.
That we began really in the April may timeframe as we think about this year. The color that we've given is that will generate the majority of our adjusted EBITDA in each one versus <unk>, but we plan to be profitable.
Every quarter this year as we add.
Incremental adjusted EBITDA margin this year versus last year to certainly be in line with our guide of seven 9% adjusted EBITDA margins up from the mid fours last year as it relates to continuing to drive adjusted EBITDA margin improvement.
We'd certainly certainly like to see top line get back to that 20% growth level. We're confident we'll get back there at some point, it's unclear when that will actually be but regardless of the timeframe for that we are committed to maintain our ability to add an incremental 100 to 200 basis points of adjusted EBITDA margin improvement.
The year, so I would expect to see that continue beyond this year.
Thanks, Stephen if I could just ask one follow up can you provide some more context on the insurance initiatives that you're implementing in this quarter. One revenue benefit are you anticipating as a result of that.
And how will that help the out of network insurance patients.
<unk> be Parker. Thank you.
Sure Hey.
Hey, Brett.
We're focused on both growing our managed vision care direct integrations and enabling broader usage of insurance benefits, whether we're in or out of network.
And we find that as we expand our retail footprint and our network of doctors, we become a more attractive partner both to insurance carriers and large employers.
Last year, we expanded the number of consumers who can use the word parker's through their in network insurance by 30% and we have a pipeline of additional integrations that will go live this year that we'll be able to speak to that.
In subsequent calls.
And then.
We're also focused on making it easier for.
Consumers, who are out of network to still use their benefits.
With us and have been piloting some direct out of network integrations that enable customers to only pay their net out of pocket costs at checkout.
Also a simpler eligibility checks for customers to understand.
There are benefits and.
So we we do find that.
Our customers who use.
Insurance, we tend to see a higher percentage of new customers.
Are using their insurance benefits.
With us and so it's a.
Wait.
Attract.
New people to wear be Parker.
Then also enable customers who are already shopping with us to get even more value and so.
We are.
Cited by some of the initiatives that we have in place and really to speak to the impact that those are having later this year.
Thank you very much I'll pass it on.
Okay.
Thank you.
With our next question comes from Mark <unk> from Baird. Your line is now open.
Great. Good morning, Thanks for taking my question a couple of quick ones from me.
Steve you outlined a number of the puts and takes on gross margin.
Do you see any of the factors that impacted the gross margin this quarter changing materially as we progress through the year or is this roughly 55% range a good run rate to think about kind of short to medium term.
Question.
So the guidance that we've given for full year gross margin to be in the mid <unk>.
And I think from a modeling perspective, it would be safe to assume relative consistency across quarters going forward. There are various puts and takes which can always change the picture I E. The acceleration contact lens sales the acceleration of eye exam sales.
We are experimenting with a couple of offers that Neil referenced which involved.
<unk> people to bundle purchases to view the purchase of eyeglasses more as a fashion accessory versus versus a medical device, depending on the degree to which we see consumer adoption that could affect the picture.
We are also continuing to add capacity to our optical lab network, which we're very excited about as it relates to the gross margin improvement that insourcing versus outsourcing brings to our overall cost structure and so we might see some continued leverage there over the course of the year.
But absent any one of those items.
Providing meaningful inflection points I think it would be a safe assumption.
<unk> gross margin as consistent with the number that we reported this quarter. So in the low fifties in the mid in the mid fifties.
Yeah.
Very helpful. Thank you and then just one other point of clarification believe you opened six stores this quarter, but it looks like that was for on a net basis.
I guess, if I have that right could you give us some additional color on the two stores that you closed in the quarter.
And just more generally targeting 40 for the year is that gross versus net and I think it does imply a pretty healthy acceleration in the pace of openings over the course of the year. So just any more color on your plans there would be helpful. Thank you.
Sure. Thanks, so much for the question.
On the 40, new stores is on a gross basis.
The two stores that we closed this quarter are very much sort of in line with our real estate strategy and frankly are.
Full osophy on bricks and mortar in general.
One of the stores closed.
The lease ended.
We didn't renew because the rent was going to increase really substantially. This was an experimental store that was a short term lease in which the.
Landlord cover the build out and we were on a percentage rent deal. So it was an experiment.
Which we often do.
For us we view that as a low risk low capital investment with potential for very high rewards and it's paid off in a lot of places in this case it didn't make sense to continue.
The other store that we closed on the landlord was in violation.
The lease.
Mainly that there.
It was.
Order and flooding damage.
That wasn't going to be repaired in a timely manner.
But in general our retail rollout continues to.
Proceed on plan when we opened 40 stores last year will open 40. This year store cohort performance continues to be consistent and in line with our target, 35% four wall margins in 20 months payback.
Thanks again.
Okay.
Thank you.
We have our last question from Mark Mahaney from Epic call Mark Your line is now open.
I'm sorry can you hear me.
Hello.
Now we can hear you two questions. Please.
And then the overall environment of Super low.
Unemployment levels are at record lows. So could you just talk about any challenges <unk> had in terms of being able to hire for the stores both for the general people within the store and for them eye exam specialists and then secondly, the rolling out of eye exam capability seems to be such a great unlock for your business in terms of.
Revenue productivity and in terms of gross margins as you've done more and more of this have you figured out learnings have allowed you to accelerate.
The build out either the retrofit or the rollout of eye exam capabilities within stores. Thank you.
Thanks, so much for the question.
So.
One of the things that we pride ourselves on.
Is the work environment at worthy Parker and invest a lot in our employer brand.
Found that we continue to be able to attract and retain great talent.
And we've actually seen.
Attrition decline across the company.
More recently, so even though we're in this super low unemployment.
Unemployment environment, we are able to staff every part of our business from corporate to our manufacturing facilities to our stores.
Were this low unemployment environment actually impacts us most is that sometimes our next door neighbors and shopping centers may be poorly staffed and.
And sometimes need to close early and then we think that that impacts overall traffic to a shopping center for example.
Although we are seeing that a little bit less than we did sort of last year and the year before.
We agree that the opportunity to continue to expand our eye care business.
It is really exciting.
All of our new stores, we tend to build at least one exam sweep if not additional rooms for contact lens.
The insertion and removal of training.
Sure.
Areas for retinal imaging.
And <unk>.
Similarly, we continue to sort of go back to some of our existing fleet and see how we can.
Retrofit add exam. So for an example, this past weekend I was down in Miami and was visiting our Wynwood store and that was a store that we recently.
And I exam, and our Doctor Dr. Tina Thomas there it's fantastic.
Out there before the store open.
And the 10, a M sort of patient.
Also arrived right before the store opened and it was just a great example.
How we can leverage.
This is Sam offering to help drive additional business to our existing stores.
And then also done thank you very much.
It also dovetails with some of the commentary that we've given as it relates to gross margin for stores, where we offer eye exams versus non eye exams, we do see some differences in product mix, which are margin accretive.
Tours that have eye exams have a higher mix of progressive glasses, which are our highest starting price point and highest gross margin products.
There is also a higher penetration of photochromic lenses, which we charge more for those are the lenses that go from like the dark in the Sun and Theres also a higher penetration of Blue light lenses.
Which help protect.
At certain times of the date and so in addition to being able to serve the customer and capture the order because theres a high conversion rate from getting an eye exam.
Actually making a product purchase if you look at the basket of what customers actually purchased there are elements, which are quite higher margin and would callout progressive photochromic and blue light.
Just three examples of that effect.
Okay. Thank you Steve.
Thank you Mark Thank you.
I will now hand to fall back to the management team for closing remarks.
Just want to thank you all for participating this morning.
Forward to speaking with you all on our next earnings call. Thanks, So much.
Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for China, you May now disconnect your lines.
Yeah.
[music].
Okay.