Description

Warby Parker is an eyewear company that operates warbyparker.com and has ~240 stores in the US and Canada. The company was founded in 2010 and IPO’d in 2021. Warby Parker aims to be a disrupter in the eyewear space with 1) a technology driven, direct to consumer sales model, 2) more affordable price points, 3) innovative styles (namely full frame acrylics), and 4) being an impact-driven authentic brand. The company donates a pair of glasses for each pair purchased.

Warby has been successful filling a niche segment of the eyewear market but the brand and financial performance appear tapped out. BTIG estimates that 50% of people have shopped at Warby already and the brand has 60% awareness. The bull thesis was predicated on unprecedented industry share gains and improving unit economics, but neither have materialized. Warby’s disrupter ambitions are fading.

WRBY is a short because…

• Warby's continued business strategy pivots are evidence that its brand and business model are broken. Warby was first direct to consumer eyeglasses, now it focuses on brick and mortar and has optometrists and contact lenses. Moreover, Warby’s technology driven narrative is not unique. Everyone has the same virtual try on and online ordering experience.

• Warby has a structurally disadvantaged market position. With a ~$290 price point (up 50% in 5 years), WRBY is middled between low end brands like Zenni and Eyebuydirect ($50-100 price points) and higher end brands like RayBan and Oakley.  The eyewear market is hyper competitive and Warby has yet to achieve profitability in its 14 year history. The company has a $650mm accumulated deficit and customer growth has recently slowed to almost zero.

• Warby still garners a tech-like valuation despite slow growth (HSD or LDD) and consistent losses. As the company further matures, and growth and/or profits continue to miss expectations, I anticipate WRBY will trade down 50% to $7 or lower. This equates to 14x $50mm of fictional ebitda vs. current 23x fwd consensus adj ebitda. WRBY short interest peaked at 28% in June 2022 but currently sits at just 10%. The stock has been flat over that time period. In addition, long term shareholder Durable Capital sold 50% of their position throughout 2023 but could still have 7% of the company still to sell.

WRBY went public in 2021 as one of many TAM scam disrupter stories. The company had ~1% of the eyewear market, but already ~8% of the optical e-commerce market. Bulls were betting on continued ecommerce growth plus an aggressive retail expansion strategy (100 units to 900 units) to drive market share gains into the mid to high single digits. Warby claims their stores have 35% four-wall margins in 2 years and 20 month paybacks. Management targeted a long-term growth algo of 20% revenue growth and 20%+ adj ebitda margins.

The stock is down over 60% from its issue price because Warby has seen decelerating growth metrics across the board; sales, customers, etc.  Warby sells glasses at a value / mid range price point, but has a cost structure similar to others. In addition, 50% of people already have vision care coverage which significantly reduces WRBY’s TAM, especially in older demographics that are less fashion forward. Warby has recently started accepting insurance but it does not appear to have helped spark growth. 

Conversations with competitors suggest Warby fills a niche market and that Warby was helpful in inspiring/challenging legacy players to improve their technology and customer service offerings, but they do not view Warby as a disruptive threat to the market.

Without aggressive customer growth and brand adoption, Warby’s model is structurally challenged. The company reports customer retention of ~50% in 24 months, but this is what you would expect (or higher) when the average glasses replacement cycle is 2 years.

Despite Warby’s weak financial performance, management is still clinging to their stale unit economic guidance and long-term growth algo. Warby’s recent uptick in sales growth has been driven by price, not volumes or customer growth. This is a problem for the company long-term as they continue to see a decline in marketing efficiency and saturate their TAM. 

Lets look at some charts of WRBY’s financials that suggested a saturated TAM and a stalled out brand…

WRBY’s 11% 2-year growth CAGR is not evidence of a disruptive brand.

Especially when the company continues to operate with large operating losses. 2023’s unadjusted EBIT margin is -10%.

Warby’s gross margins continue to decline… 

While e-commerce sales have been in decline for 3 years…

And Warby’s LTM active customer count has dropped to <2% growth despite a recent increase in marketing and a ~20% increase in store footprint. 

Warby historically talks about its marketing spend trajectory, but the company has never specifically quantified marketing spend until this past quarter. Management said the company spent $19.7mm in 3Q23 (11.6% of sales) vs $14.9mm in 3Q22 (10% of sales) on marketing. If I assume 11% of LTM sales is marketing, vs. pre-pandemic marketing spend of 12% of sales, that is $72mm of marketing to grow net active customer count by 40k customers. This implies WRBY’s CAC is $1,800 per net new customer. Yes, I’m overlooking churn because unfortunately the company does not disclose it. The unit economics do not appear to work. 

Warby’s sales per average store has not grown in 3 years, but this is partly a result of ~20% store expansion per year that drags on total store base productivity. 

Warby has ~$430mm of LTM retail sales. If 60% of the store base is mature and is hitting the 35% four wall margin target, there should be $90mm of retail contribution, yet total company LTM adjusted EBITDA is just $50mm. The reported numbers do not support management's retail unit economic claims. In addition, most people have seen Warby Parker’s stores in nice, premium locations. It is hard to make money selling value focused products out of expensive boxes. 

Warby has not shown the ability to scale its adjusted EBITDA and WRBY is still not GAAP profitable without significant adjustments. I estimate SBC has resulted in ~2% of dilution per year. The company anticipates SBC to fall from 10% of sales in 2023 to <4% in 2024 which should help narrow the GAAP vs adjusted spread.  

Warby has generated $69mm of operating cash flow since 2020 but has spent $168mm on capex resulting in a ~$100mm FCF burn. The company still has plenty of cash to execute on its retail expansion with $216mm of cash on the balance sheet and no debt.  

WRBY’s recent improvement in adjusted EBITDA margin is a result of lower marketing expense and an increase in net sales per customer of ~10% (i.e. higher pricing). But adjusted EBITDA margin has declined each quarter this year from 10.3% in 1Q23, to 8.5% in 2Q23 to 6.5% in 3Q23 to 6% guide in 4Q23 as the company has ramped back up marketing. 

For 2024, WRBY has preliminarily guided to the long-term growth algo of 100-200 bps of adj EBITDA margin expansion per year. But they have cautioned that the forward year guide is off of 2H run rate. This would imply 2024 Adj EBITDA margin of 7.25% to 8.25%, vs 2H23 margins of 6.25%. Consensus expectations call for 9.1% margin on 12.3% growth, inline with 2023 growth. I predict that either growth or the profits disappoint. 

Comps

Despite the issues highlighted above, Warby still trades at a lofty valuation on both an absolute and relative basis. WRBY trades at 75x Adj EPS and 23x Adj EBITDA (2024). Peers trade well below. 

Conclusion

Warby Parker is not a disrupter to the hyper competitive eyewear industry. They have morphed from a unique DTC brand to a brick and mortar retailer just like their competitors. Warby has saturated its TAM and is now struggling to grow and achieve profitability. As this becomes more apparent over the next year, I anticipate WRBY will trade down 50% to inline with pears. 

Risks

Takeout by a competitor. I see this as highly unlikely due to the decelerating growth and maturation of the Warby brand. 

Raw material costs are down so they can capture a bit more margin with improvements in the supply chain. 

Catalyst

Earnings. 2024 Guide 2/28.