Warby Parker: Growth Is Thy Name (NYSE:WRBY)

Investment Thesis

Warby Parker (NYSE:WRBY) has a consistent track record of solid comp growth and has reported a stellar quarter recently continuing its momentum outpacing the overall industry as a result of strong brand resonance and customer retention. The stock is down 30% for the year amidst concerns over it sacrificing profitability over topline growth. Recent results have shown its commitment on reducing the costs including marketing spends as well as decreasing the stock based compensation which has led to expansion of its operating margins. We rate it as Buy given its nascent exposure in the overall eyewear market and growth potential along with its double digit track record of revenue growth and margin expansion potential.

Company Overview

Warby Parker (WRBY) is a lifestyle brand providing designer-quality prescription glasses (starting at $95) and contacts, to eye exams and vision tests available online in about 200+ retail stores across the U.S. and Canada. It started as a digital brand back in 2010 to provide an alternative to the higher priced optical retailers such as LensCrafters, Pearle Vision and others where price transparency is limited and lacks customer experience. Since then, it has significantly increased its store base for omnichannel fulfillment to its digital savvy young customer base, drove its revenue per customer higher and maintained its customer base driven by superior customer experience.

Robust Historical Track Record

The company has witnesses strong growth across the years including recently despite industry headwinds where peers like National Vision (EYE) have been struggling with tepid comp growth. It has consistently witnessed a double digit comp growth and revenue growth driven by robust customer base and increasing average revenue per customer.

It has aggressively expanded its store base and is on track to achieve the 240 stores by the end of this year as well as its long term target of 900 stores seems reasonable given its nascent presence currently.

WRBY has witnessed a significant improvement in its operating margins as it embarked on its journey to drive sustainable growth. It has significantly reduced its marketing spends since past 12 months and despite that has been able to witness double digit comp growth and sustain strong improvement in its operating margins.

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Strong Earnings Momentum

WRBY reported stellar Q2 earnings with revenue growth of 11% topping consensus estimates as well as outperforming the industry. The growth was driven by increase in average revenue per customer (+9%) as well as growth in total customers (+1%). Gross margins declined by 310 bps driven by the increased penetration of low margin contact lenses product as well as jump in salary and benefits to optometrists as it scaled its eye exam offering. SG&A leverage by a massive 700 bps as a result of its sustained focus on cutting costs and moving towards profitability. The 700 bps decline was led by a continued reduction in its marketing spends as well as lower salary and general corporate expenses and is further expected to go down.

This led to Adjusted EBITDA margin expanding by 450 bps to 8.5% beating consensus despite a decline in gross margins. All in, it reported Adj. EPS of $0.04 topping consensus driven by robust operating margins. It raised its full year revenue guidance to $655 mn – $664 mn vs. a prior outlook for $645 mn – $660 mn while reiterating its Adj. EBITDA margin guidance of 7.9%. However, the stock tumbled over 10% after it guided Q3 EBITDA margin of 5% – 6%vs consensus expectation of ~7.5% as it plans to launch a massive brand campaign in Q3 which will pressure margins. We believe the costs are transitory and will enable WRBY to accelerate customer growth form its 2Q low of 1.2% growth. It reiterated that it is on track to open 40 stores for the year taking the total count to 240.

Balance sheet position remains strong with WRBY being net cash as a result of cash balance of $213 mn and debt outstanding of $170 mn. Inventory position declined 13% from the yearend figures with the inventory turnover ratios continually improving over the past quarters.

Valuation

We believe WRBY is likely to at least meet the top end of its revenue target as a result of sustained momentum from H1 as well as new store openings and the brand campaign which can accelerate customer growth. We forecast EBITDA margins will likely be around 8% mark yielding up to $53 mn in Adj. EBITDA. Assuming a forward revenue growth of 15% in line with its strong track record as well as continued momentum and customer growth, we project 2024 revenue to be around $765 mn.

We forecast EBITDA margin to further expand to 11% driven by cost controls and improvement in gross margins lapping tough comps next year. It implies trading at 17x EV/ 2024E EBITDA at current levels at a discount to its historical average. We believe WRBY deserves a premium to its peers National Vision Holdings (EYE) which trades at 15x EV/ 2024E EBITDA as a result of its track record of outperformance and growth potential. We ascribe a Buy rating as a result of favorable risk reward at current levels.

Risks to Rating

Risks to rating include

1) Weaker than expected customer growth as demonstrated during this quarter with its customer growth at the lowest since pandemic which can have an impact on topline

2) WRBY’s expansion into new markets as it looks to expand stores to provide an omnichannel benefit to its customers may not be as successful as anticipated which could lead to significant risks to its expected double digit topline growth

3) Benefits from cost saving initiatives may not have further headroom while marketing spends may increase to spur customer growth and SG&A leverage may not fructify which can pressure its EBITDA margins

Conclusion

WRBY has demonstrated track record of outperformance and its recent stellar growth in spite of continued demand headwinds in the optical industry and its realignment of marketing spend serves as a testament to the robustness of its business model and its strong brand resonance. We believe its outlook of 900 stores is achievable and its brand campaign hitting in Q3 will likely create buzz and spur customer growth as its majority customers are digital savvy who are or may look for its omni channel offering. We believe with the stock down over 30% for the year, it provides a favorable risk reward to be a part of this growth journey. Initiate with a Buy.