Warby Parker: vertically integrated optical retailer with 26.6% upside potential

Reason 1. US eyewear market poised for growth driven by several factors

Warby Parker Inc. (WRBY) designs and sells eyewear directly to consumers, offering a variety of optical services both online and through physical stores. In addition to prescription glasses, its offerings include contact lenses, vision tests, eye exams, and vision insurance. As of June 30, 2024, the company operated 256 retail stores, with the majority located in the US (~98%) and a small portion in Canada (~2%). Therefore, Warby Parker’s sales are mainly generated in North America.

Warby Parker’s retail footprint; source: Q2 2024 Earnings Report

The US eyewear market is anticipated to generate $35.2 billion in revenue in 2024, according to Statista. The eyewear market includes the sales of glasses, sunglasses, contact lenses, and eyewear frames. It is projected to grow by a CAGR of 1.7% over 2024–2029, reaching $41.4 billion by 2029. Spectacle lenses are the largest segment, with an estimated value of $13.7 billion in 2024, with non-luxury glasses expected to make up 76% of sales. Moreover, in terms of global comparison, the US is the leading country in generating revenue in the eyewear market.

Eyewear market size in the US; source: Statista

The US eyewear market is currently experiencing a surge in demand driven by several key factors. One of the most significant trends is the growing health-consciousness among consumers, which is fueling the demand for eyewear products that offer both vision correction and protection from harmful UV rays. The aging population is another major driver, as the need for vision correction increases and becomes more complex as people grow older. Furthermore, longer screen time, particularly among younger generations, is raising concerns about eye health, emphasizing the importance of preventive eye care.

Additionally, technological innovations, such as smart glasses and advanced contact lenses, are expected to boost market growth over the next five years, offering consumers new functionalities and experiences. On top of that, fashion continues to play a significant role, as consumers increasingly seek eyewear that is both functional and stylish. These factors are collectively shaping the growing demand for eyewear in the US market.

The Vision Council identifies similar factors as the primary drivers of the US eyewear market:

• First, the widespread need for vision correction is significant, with around 80% of US adults, or about 208 million people, using some form of corrective eyewear. In addition, the aging population will contribute to growing demand, as the number of Americans aged 65 and older is expected to nearly double to 80 million by 2040. Approximately 93% of older adults already wear corrective lenses.
• Second, the eyewear market benefits from a consistent replenishment cycle. Glasses wearers tend to replace their frames every two years, and about 53 million people in the US use disposable contact lenses, replaced on a daily, weekly, or monthly basis. Besides, nearly 80% of contact lens users make at least one purchase each year.
• Thirdly, increasing screen time is a major factor, with smartphones, tablets, and computers contributing to digital eye strain. Around 75% of adults experience eye strain during the day, leading to growing demand for vision correction.
• Finally, the growing popularity of telemedicine is shaping the market, with more than 50% of people undergoing eye examinations expressing interest in virtual or remote options. The direct-to-consumer telehealth sector is expected to grow by nearly 50% by 2028, as consumers increasingly turn to remote medical solutions.

The Vision Council’s approach to defining the US eyewear market differs from that of Statista, estimating the market's value at approximately $66 billion as of December 2023, up from $63 billion in 2022. Independent optical retailers accounted for around 50% of all prescription optical sales in 2023, with the remainder largely dominated by optical retail chains.

Thus, the medical and non-discretionary nature of the eyewear industry makes it resilient to economic cycles. Several trends are driving its growth, including the increasing prevalence of vision problems and eye diseases, the growing popularity of eyewear as a fashion accessory, and advances in technology, particularly in telemedicine. These factors are contributing to an increased demand for vision correction, ensuring a steady influx of new customers into the market.

Reason 2. Warby Parker’s transformation to comprehensive vision care innovator

Warby Parker has transformed itself from an eyewear retailer to an innovative vision care company. The firm has significantly expanded its product and service offerings, creating a seamless shopping experience that includes not only eyeglasses and sunglasses, but also contact lenses, eye exams and other vision services. It has embraced technology to enhance the customer experience, introducing in-house innovations such as the Virtual Vision Test and Virtual Try-On apps, which allow customers to access eye care services and try on glasses from anywhere.

The company's product portfolio includes a wide range of eyewear options:

• Eyeglasses and sunglasses. Warby Parker designs its eyeglasses and sunglasses in-house, releasing an average of 20 new collections each year, many featuring patented designs and extended sizing options. Customers can also customize their prescription lenses, choosing from single-vision, progressive, light-responsive, blue-light-filtering, or nonprescription lenses.
• Contact lenses. In the contact lenses segment, the company offers its own brand, Scout by Warby Parker, launched in 2019. Scout lenses provide a convenient and affordable daily contact option, made from a moisture-retaining material for lasting hydration and comfort. The company also sells third-party contact lenses.
• Eye exams and vision tests. Warby Parker also offers a variety of vision services to help customers maintain their eye health. These include in-person eye exams at retail stores and telehealth options like the Virtual Vision Test app.

Warby Parker leverages several key components of its business model to drive success. At the core is its direct-to-consumer approach, which ensures a seamless in-store and online experience. This strategy has strengthened brand loyalty by providing comfortable retail environments and an easy-to-navigate website and mobile app where customers can effortlessly browse, virtually try on and purchase eyewear.

The company also benefits from sustainable and predictable growth. Because eye care is largely a non-discretionary medical necessity, Warby Parker enjoys steady demand for its products. Prescription eyewear customers typically purchase new glasses every two years, while contact lens customers reorder approximately every 12 months, ensuring a consistent revenue stream.

Vertical integration is another pillar of the company's business model. By designing and selling eyewear under its own brand, the company controls product quality and speed of fulfillment through its integrated supply chain, which includes its own optical and production labs as well as third-party manufacturing and lab partnerships. This vertical integration also gives Warby Parker access to valuable customer data across the entire end-to-end journey, enabling it to develop deep insights into customer behavior.

Warby Parker's efficient business model, supported by significant investments in a large-scale marketing campaign, has resulted in strong operating metrics. Active customers increased by 4.5% YoY, rising from 2.28 million in Q2 2023 to 2.39 million in Q2 2024. This marks a notable improvement in customer growth, with the rate rising from 1.2% YoY in Q2 2023 to 4.5% YoY in Q2 2024. Over the past six quarters, the average YoY increase in customer growth has been 2.6%, highlighting the company's ability to drive customer acquisition.

Warby Parker’s customer base; source: Q2 2024 Earnings Report

Warby Parker also benefits from strong customer economics by closely monitoring unit economics at the individual customer level. This data-driven strategy enables the company to maximize value and efficiency across the customer lifecycle. In Q2 2024, average revenue per customer reached $302, an increase of 8.8% from $277 in Q2 2023. Over the last six quarters, the average growth rate of revenue per customer has been 9.2%.

In addition, customers who purchase a full package, including glasses, contact lenses and exams, generate significantly more value for the company. After one year, their cumulative average value is 2.4 times greater than that of customers who purchase glasses only, and 1.6 times greater at the time of initial purchase. The average value per customer, which includes all sales and refunds, is calculated by dividing the cumulative order value by the total number of unique customers in each product and service category. This approach highlights the importance of cross-selling and providing a holistic vision care experience.

Cumulative average sales order value per customer; source: Q4 2023 Earnings Report

Additionally, new stores have continued to deliver solid unit economics in Q2 2024, meeting the management's targets with 35% four-wall margins and 20-month payback periods. For stores that have been open for more than 12 months, the average revenue per store was $2.2 million, consistent with Q1 2024, and aligned with the target of 35% four-wall adjusted EBITDA margins.

Over the past year, Warby Parker added 46 net new eye exam locations, bringing the total number of stores with eye exam capabilities to 215, or 84% of the total retail fleet. From a channel mix perspective, retail sales represented 69% of total business in Q2 2024, consistent with Q1 2024 and an increase of 260 basis points compared to 67% in Q2 2023.

Therefore, Warby Parker has become a full-service vision care provider with a broad range of products and services. However, it is still a growth company that prioritizes expansion over profitability, so management must continue to leverage the business model to make the company profitable.

Reason 3. Strong growth and expansion plans amid ongoing profitability challenges

Despite strong operating metrics and revenue growth, Warby Parker remains unprofitable. In Q2 2024, the company reported net revenue of $188.2 million, a 13.3% increase from $166.1 million the previous year, surpassing analysts' expectations of $187 million. However, since it allocates significant funds to marketing spending, resulting in SG&A expenses accounting for over 60% of total revenue, Warby Parker posted a net loss of $0.06 per diluted share, narrowing from a loss of $0.14 in Q2 2023, though slightly higher than the $0.05 loss anticipated by analysts.

For FY2024, management maintains a conservative stance on guiding the business given the broader macroeconomic environment. They expect net revenue to fall within the range between $757 million and $762 million, representing growth of 13% to 14% compared to 2023. This is an increase from the company’s previous forecast of $753 million to $761 million, aligning with analysts’ expectations of $760.1 million. Warby Parker also projects an adjusted EBITDA of $72.5 million at the midpoint of its revenue range, equating to an adjusted EBITDA margin of 9.5%.

Warby Parker’s quarterly revenue; source: Q2 2024 Earnings Report

In addition to the financial guidance, the company told investors that it is on track to open 40 new stores this year. Warby Parker continues to focus on expanding its retail footprint as a key growth driver. Its retail store count has grown from 161 in 2021 to 256 by Q2 2024, with plans to close FY2024 with 277 stores, reflecting a CAGR of 19.8% over 2021–2024. The management believes there is significant room for further expansion, with a long-term goal of growing to 900+ stores across the US, still a small fraction of the approximately 45,000 optical retail stores in the country as of December 2023.

Warby Parker’s number of store locations; source: Q2 2024 Earnings Report

Investments in store expansion are part of Warby Parker's broader strategy to drive sustainable growth and deliver value to stakeholders, which also includes:

• Growing brand awareness. The company’s brand awareness stems from a combination of organic, word-of-mouth marketing, and social media, as well as television, digital, and podcasts.
• Investments in technology. Warby Parker prioritizes innovation while developing proprietary tools in-house, whether it’s Virtual Try-On, Digital PD Tool (which measures pupillary distance), custom point of sale system, or Virtual Vision Test telehealth app.
• Expanding holistic vision care offering. The management plans to continue to build upon existing products, while selectively introducing new offerings that aim to surprise and delight both new and existing customers.
• Potential expansion into new international markets. With over 4 billion people globally in need of vision correction, there is a significant opportunity to introduce customers across the globe to Warby Parker’s brand. Expanding internationally would add approximately $120 billion to the company’s total addressable market.

Thus, Warby Parker has been able to build a comprehensive vision care company with a strong brand reputation. Its strengths lie in its innovative use of technology, a direct-to-consumer model that drives strong brand loyalty, and vertical integration that allows for greater control over product quality and customer data. With a growing retail presence and strategic investments in technology, the company is well positioned for long-term growth, making it a solid investment opportunity.

Financial performance

Warby Parker’s trailing twelve months (TTM) financial results can be summarized as follows:

• Revenue increased to $719.9 million, up by 7.5% compared to 2023.
• Gross profit increased by 9.2%, from $365.2 million in 2023 to $398.6 million TTM, with gross margin improving from 54.5% to 55.4%. The increase in gross margin was primarily driven by faster growth in eyewear, lower customer outbound shipping costs and efficiencies in Warby Parker's own optical labs.
• Operating loss decreased by 19.4% to -$51.1 million. The operating loss was due to the significant marketing spend required to support the Company's expansion and sales. SG&A expenses were $114.3 million, an increase of $5.5 million over the previous year and represented 60.8% of sales. Although lower than 65.5% in the second quarter of 2009, SG&A expenses remain the largest expense item. The main drivers for the increase in SG&A expenses were investments in marketing and higher payroll costs due to the growth in retail stores.
• Net loss improved by 27.4%, from -$63.2 million in 2023 to -$45.9 million TTM.

Dynamics of annual financial results; source: compiled by author

Warby Parker has managed to significantly improve its cash flows over the past several years, with free cash flow turning positive in 2023. Its TTM operating cash flow (FFO) accounted for $85.2 million, up by 39.6% compared to 2023, driven by decreased net loss and an increase in accrued expenses. Free cash flow (FCF) amounted to $24.0 million, up by 3.28 times compared to 2023, due to lower capital expenditure growth rates.

Dynamics of annual financial results; source: compiled by author

The company's financial performance for Q2 2024 is presented below:

• Revenue increased by 13.3% YoY, from $166.1 million to $188.2 million.
• Gross profit grew by 16.3% YoY, from $90.6 million to $105.4 million.
• Operating loss improved by 49.0% YoY, from -$17.5 million to -$8.9 million.
• Net loss decreased by 57.5% YoY, from -$15.9 million to -$6.8 million.

Dynamics of quarterly financial results; source: compiled by author

Warby Parker maintains a robust balance:

• The leverage ratio, defined as the ratio of total debt to assets, stands at 31%, which is better than the industry average of 35%.
• As of June 30, 2024, Warby Parker did not have debt at all, only current and non-current lease liabilities of $192.2 million in total. The company also had $237.9 million in cash and cash equivalents.
• Although the company is currently debt-free, a $120.0 million five-year revolving credit facility with sub limits of $15.0 million for letters of credit and $10.0 million for swingline loans is available to Warby Parker, according to a Credit Agreement, concluded with JPMorgan Chase in February 2024. It also includes an option to increase the available amount by up to $55.0 million, for a maximum borrowing capacity of $175.0 million. Proceeds of the borrowings are expected to be used for working capital and other general corporate purposes.
• Inventory turnover ratio for 2023 constituted 4,65x, which implies that the company turned over its inventory every 79 days on average during the year. Over the past five years, the average inventory turnover ratio was 79 days. Besides, Warby Parker’s TTM inventory turnover ratio decreased to 66 days, which may be a sign of strong sales and healthy inventory levels.

Stock valuation

There are few public eyewear retailers that directly compete with Warby Parker. EssilorLuxottica and National Vision Holdings appear to be Warby Parker's closest public competitors, while the remaining companies in the table below have only some similarities to Warby Parker. As Warby Parker is not yet profitable, it trades at a premium to average multiples: EV/Sales — 2.62x, EV/EBITDA — N/A, P/FFO — 22.71x, P/E — N/A. However, the company is showing strong growth in operating metrics and is leveraging its business model to improve margins. As such, it offers a better return per unit of risk taken.

Comparable valuation; source: compiled by author

The minimum price target set by Stifel, Nicolaus & Company is $15.0 per share, while JMP Securities values Warby Parker at $20.0 per share. According to the Wall Street consensus, the stock’s fair market value stands at $20.0, implying a 26.6% upside potential.

Price targets of investment banks; source: compiled by author

Key risks

• Increases in component costs, shipping costs, long lead times, supply shortages and changes in supply could disrupt Warby Parker's supply chain, and factors such as wage rate increases and inflation could have a material adverse effect on its business and financial results.
• The growth of the company's business depends on its ability to continue to grow by cost-effectively retaining existing customers, increasing their average order size and attracting new customers. If Warby Parker is unable to continue to expand its customer base and increase their AOV, its revenues may grow more slowly than expected or may decline.
• The optical industry is highly competitive. Although Warby Parker has a differentiated distribution and service business model, it continues to compete with large, integrated optical companies such as EssilorLuxottica and VSP.
• Efficient inventory management is a key component of Warby Parker's profitability. It must maintain sufficient inventory levels to meet customer demand without allowing those levels to grow to the point where costs negatively impact financial results.
• Maintaining and enhancing its reputation as a stylish and innovative brand is critical to attracting and retaining customers. The successful promotion of the Warby Parker brand will depend on a number of factors, including fashion trends, marketing efforts and the ability to continue to develop products and services.
• Warby Parker faces risks related to the suppliers from which its products are sourced and is dependent on a limited number of suppliers. For example, more than half of the cellulose acetate used to manufacture many of the company's frames is provided by a single supplier.

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