Good afternoon, and welcome to the Kits Eyecare Second Quarter 2022 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded and available later for replay. Your hosts today are Roger Hardy, Chief Executive Officer, Sabrina Liak, Chief Financial Officer, and Joseph Thompson, Chief Operating Officer. Before we begin, I am required to provide the following statement respecting forward-looking information, which is made on behalf of Kits and all of its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by the use of words such as intend, believe, could, expect, estimate, forecast, may, would, will, and other words of similar meaning.
This forward-looking information is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions, and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances. Actual results could differ materially from those conclusions, forecasts, expectations, beliefs, or projections in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. We caution investors not to rely on the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in forward-looking information is contained in Kits' filing with Canadian Provincial Securities Regulators.
During today's call, all figures are Canadian dollars unless otherwise stated. With that, I would like to turn the call over to Mr. Roger Hardy, CEO. Please go ahead.
Thank you, operator. Good afternoon, and welcome to the Kits Second Quarter 2022 Financial Conference Call. Thanks for joining us today. I'm Roger Hardy, the company's CEO. Joining me today are my two co-founders, Sabrina Liak, our CFO, and Joseph Thompson, our COO. Today, I'm pleased to share our second quarter 2022 results and discuss our vision for the company and its future. After my comments, we will review our operational results, followed by a financial summary. On our last call, we characterized the environment as volatile, a volatile one, where consumers had to make important choices against a backdrop of economic uncertainty and rising prices. When we look at our results against these consumer fundamentals that continue to persist, we are especially proud of our outcomes, including seeing our glasses revenues grow 48% and our gross profit grow 50% year-on-year in the quarter.
Our second quarter 2022 results are a testament to the resiliency and non-discretionary nature of our unique vision care platform and our competitive positioning as the go-to brand for speed, quality, and value in eyewear. It's clear that as we look out across the retail landscape, the novelty of physical retail is wearing off fast. Fighting traffic, struggling to park, and standing in lines to pay in understaffed stores that have limited inventory doesn't seem like the recipe to deliver a great customer experience. Yet that's exactly what we saw our traditional retail competition deliver this quarter. In our view, as people start returning to the office, they continue to seek the savings and convenience they have come to know and love from buying online and at Kits. We feel that this has been reinforced after customers browse brick-and-mortar stores after a year of being locked inside.
To us, it's clearer than ever that physical retail will face some significant headwinds in the quarters to come. Direct-to-consumer offerings like Kits will continue to take share as legacy companies remain encumbered by expensive store expansions, lease commitments, and build outs. Additionally, those manufacturing offshore are going to continue to see disruptions in the supply chain and are likely to face rising costs and fulfillment. We couldn't be more pleased that our asset-light model can stay focused on wowing customers with high-quality products delivered fast and affordably. This quarter, we are especially pleased that we became cash flow positive for the first time since our IPO, and we're EBITDA positive.
The growth of our glasses business was impressive against a challenging retail backdrop, but this was only the beginning, and we believe it will continue to expand in the coming quarters, having earned a meaningful place in the market. Last quarter, as we faced significant macro uncertainty, we continued to focus on the parts of our business that we could control. We delivered sequential improvements in revenue, even as we took a disciplined approach to our marketing investments, which are down 23% year-on-year. We continued to drive improved gross profit, which was up 50% year-on-year to a new quarterly record, resulting in positive cash flow and EBITDA for the quarter.
Our solid results as our company became a recurring cash-generating machine are a direct function of our customers' engagements as we spent less on acquiring new customers and saw our subscription business and repeat customer activity provide a stable, recurring base of business. We remain focused on growing the stable base of highly loyal recurring advocates and on creating lifetime loyal customers. We continue to operate at the key intersection of health and technology, allowing customers everywhere to access affordable eye care more easily and cost effectively than ever via technology without the burden of having to struggle to go into physical locations.
As healthcare continues to consolidate and move towards better and more efficient direct models to serve patients, we believe we're uniquely well-positioned to capitalize on the opportunity given our asset-light, highly recurring nature. Innovating to improve the customer experience remains a pillar of our business plan, and we are pleased to have rolled out several new high-value specialty lens designs, enabling customers with more complex prescriptions to experience exceptional vision. Further innovations in routing and logistics algorithms have decreased our fulfillment costs per order, lowering our overall cost to serve each customer, an especially notable achievement for our teams as carriers are simultaneously adding escalating fuel surcharges. Onshore vertical integration is critical in today's supply chain environment. We believe we're at the forefront of that movement to onshore manufacturing, which allows us to serve customers more predictably and do so more cost effectively than those importing finished goods.
We provide speed, quality, and reliability through our own owned onshore manufacturing and fulfillment. We continue to believe that controlling the rails of production and being the low-cost manufacturer onshore is integral to our business model and provides key long-term strategic speed and cost advantages. Our efforts were validated this quarter as we saw our fulfillment cost per shipment decline in the quarter. Customer engagement and NPS continue to be key metrics for our company. Our NPS scores continue to rise as we continue to innovate and exceed customer expectations. Kits has earned over 179,000 five-star reviews, reflecting our focus on truly delivering a superior experience.
We are on track to achieve the highest real NPS in the category, a fact easily confirmed by looking at the thousands of customer comments online and by looking at the growth of our glasses business even while marketing investments declined. It's a great achievement when an offering goes viral and its growth becomes fueled by delighted customers, as we experienced this quarter. We served a record more than 740,000 customers over the past 24 months as customers are spreading the word and momentum is building. During the second quarter of 2022, we delivered CAD 21.8 million of revenue, which was consistent year-on-year, but on 23% lower marketing spend and at 1,060 basis points or 50% higher gross margin.
Revenue was up 8.6% sequentially, and gross margin expanded 175 basis points sequentially as we maintained our focus on improving margins while growing our glasses business. Some other highlights of our second quarter of 2022 included that we delivered 74,000 pairs of eyeglasses to customers, a 48% year-on-year improvement in revenue, and 72% improvement in units. Our overall revenue from our repeat or returning customers was 62% in Q2. As I mentioned, we did reduce marketing spend by 23% year-on-year, and we delivered 175,000 orders in Q2, almost 2,700 orders a day. Given our unique strategy of offering glasses to our existing vision care customers with a category-leading customer acquisition cost for the quarter of CAD 21, a 21% decline over last year.
I'll now turn the call over to Joseph with an update on operations. Joseph?
In Q2 2022, our Kits community of active customers grew 23% to 740,000 customers. Our eyeglasses business continues to lead the way. In Q2, Kits customers bought even more glasses and leveraged more of our expanded range of lenses and frames available than ever before. We continue to attract new customers with our growing selection, our unbeatable value, and our lightning-fast delivery. In Q2, we served over 50,000 new glasses customers, welcoming them to our growing Kits community across North America. Our repeat business is growing even faster, with eyeglasses delivered to returning customers increasing over 174% year-over-year in Q2. Overall, return customers accounted for 69% of our revenue this quarter, demonstrating the strength of our vision corrected community and the annuity we have begun to build.
Our investment in onshore vertically integrated eyeglass manufacturing has enabled us to cut out the middlemen, deliver predictably, and quickly become one of the leading players in the market. With our digital surfacing facility, we can produce high-quality custom digital progressives and specialty glasses in-house. With all of our production local and onshore, we can ship patient orders quickly and cost effectively. Our custom-built fulfillment model allows us to produce and ship in under two days, with the vast majority shipping out the same day. We're just getting started on our expansion into the eyeglasses market. Our team is working to manufacture and deliver even faster. Each month, we add new eyeglasses styles, colorways, and brands to the collection of over 800 styles we had at the end of the quarter. We're adding new lens designs and innovation to our fast-growing digital progressive business.
With the investments we've made, we are competitively advantaged to capture the higher AOV and margin segment within eyeglasses. At the core of our Kits focus is building happy, loyal, vision corrected customers for a lifetime. We measure our success by whether customers come back, and how often they return is reflected in retention. We earn the retention of our customers by continually raising the bar in selection, quality, value, and convenience with every customer and with every order. As we look back at the performance of our retention rates by customer cohort, it's clear we're building something special for customers and for shareholders. We evaluate the strength of our retention by measuring the purchase behavior of our customers over time.
For example, within a 24-month period, we have 100% retention rate on our 2019 cohort, meaning that customers from that cohort have matched their initial purchase within 24 months. As we review this across 12 months, 24 months, 36 and 48 months, we are encouraged to see we're doing a better and better job of retaining customers. Particularly when compared to other publicly traded eye care companies. We believe this favorable trend gives us a sustainable and valuable annuity and positions us well for growth and to weather uncertainty. I'll now turn the call over to Sabrina for the financial review.
Thanks, Joe. Second quarter of 2022 revenue was 21.8 million, up slightly year-on-year and up 8.6% sequentially, as gross margins and profitability improved materially. Gross profit was at 50% or up CAD 2.3 million to CAD 7 million year-on-year. Our gross margin expansion reflects improved product margins driven by pricing strength throughout the first quarter that continued into the second quarter. This was achieved through disciplined execution around promotions as we focused on investing in loyal customers and retaining them. We also made significant progress on growing our glasses business, where revenue was up 48% year-on-year.
The Kits Eyecare brand continues to build momentum and loyalty, and our pricing power improved as seen in our 23% lower marketing expense and the tremendous gains in gross margin, which expanded 1,060 basis points from 21.6% to 32.2% compared to the second quarter of 2021. This quarter, we generated positive EBITDA of CAD 141 thousand, up CAD 5.6 million year-over-year. Operating cash flow was also strong as we generated CAD 2.3 million of cash from operations, which contributed to the strong cash flow position we ended the quarter with of CAD 18.9 million.
Given the macro environment, we moved up our targets for growth margin growth, returning to EBITDA positive and returning to operating cash flow positive, achieving all three in the second quarter of 2022, ahead of our original forecast to achieve all three milestones. In terms of guidance, there are no changes to our long-term goal to generate margins above 35%-40% as our glasses business and returning customers become a larger portion of total revenue, driving revenue and improving EBITDA, as demonstrated by our second quarter results. We expect the broader macro economy and supply chain environment to remain volatile and as a result, will not be providing a revenue forecast at this time. In this environment, we will prioritize funding our growth from internally generated cash flow. In the second quarter of 2022, cash on hand increased to CAD 18.9 million.
As always, we are prepared to react as conditions change or new challenges emerge. We believe our asset-light customer model, coupled with our onshore manufacturing facilities, position us well competitively, and we expect to continue to outperform our peers during the uncertain times ahead. I'll now turn the floor over to questions. Operator?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your question will be put in the order they are received. Should you wish to decline from the polling process, please press star followed by number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. The first question comes from George Doumet from Scotiabank. Please go ahead.
Yeah. Hi, guys. Good afternoon. I guess you've, Sabrina, you've officially kind of removed your revenue guidance for the year. I was just hoping maybe you can give us a little bit of context around that. I understand that supply chains have been tight and there's uncertainty. Can you maybe give us a little bit of color in terms of maybe prior expectations to maybe revised view or anything you can provide there that can help us maybe get a sense of the growth trajectory in the second half of the year?
Yeah. Thanks for the question, George. I think, you know, the shift in strategy, I think, which we tried to communicate was really around instead of having a revenue target, having an EBITDA and cash flow positive target for the rest of the year. We just in this current environment with the uncertainty that, you know, companies are facing kind of across the spectrum, we're prioritizing profitability and the ability to generate cash flow internally to fund our operations. While we do expect growth, it will really be a function of maximizing kind of across all three factors.
If I understand correctly, you are expecting second half growth compared to the first half of the year?
Yes, we are.
Can you maybe talk about the decline in the contact business this year. I guess you probably would need to have that business stable to have any meaningful growth in the back half. Can you maybe talk a little bit about initiatives for that business or for that part of the business that you hope to implement?
Yeah, sure. Quarter-over-quarter, we were up sequentially. Like, over the last six quarters, we've been really focused on expanding growth margin, and that means really triaging out customers that were not profitable long-term, you know, value customers. You did see, you know, a decline in the contact lens business over the last, you know, period for that. I think the outlook is positive on that. Also, we expect to grow that business. It did grow sequentially, quarter-over-quarter, and we expect that trajectory to continue in the back half.
Okay. Just so I understand correctly, you guys expect to maintain EBITDA positive trajectory in the next couple of quarters. Just wondering if that's number one, if that's the case, and number two, do you feel like you need to maybe invest more in marketing or in customer acquisition than you have in the first half of the year?
Yeah, we do expect to continue our expansion of EBITDA and to be EBITDA positive in the back half of the year. In terms of the marketing expense that we put behind it, we don't expect the ratio of marketing expense to increase materially, if at all. To Roger's point, at this point, the growth is really being primarily funded by repeat customers and people telling the story.
Okay. Awesome, guys. Thanks. Good luck.
Thank you. Your next question comes from Derek Lee from Canaccord Genuity. Please go ahead.
Good afternoon. This is. Just a couple of questions from me. I'm just trying to assess what you're seeing in terms of inflationary pressures currently. Any impact on your long-term growth margin target in terms of timing or any more color on that would be appreciated.
Sure.
Sure. So a couple questions in there. Maybe we'll start with gross margin improvement. You know, we have seen gross margin improvement, and it's really the result of a couple factors. First, you've seen us demonstrate more pricing discipline, particularly in the U.S. You know, we were encouraged that we're able to sustain our results and grow our active customer base, even with that price discipline because of the service levels that you heard Roger describe. High customer service ratings, over 179,000 five-star ratings, and an NPS north of 80. On glasses, you know, we're continuing to see the market, and you saw a 72% increase in glasses units. The team is doing a better and better job of introducing customers to premium upgrades.
Of course, on repeat business, our glasses continue to grow at a higher gross margin level. Really, this was our plan to invest in the onshore infrastructure, not investing in more retail locations. It allows us to serve customers more efficiently than the market. As our glasses business continues to grow, you know, we're seeing the potential for even more gross margin expansion. You mentioned, you know, some, maybe some raw material increases I think was the second part of your question. You know, I guess what I would share on that is, you know, we've been fortunate to have some long-standing partnerships with, you know, nearly all of our vendors.
In large part, you know, we've been able to offset potential cost increases with the benefits of more scale, and the growth of our glasses business by 72% really helps with that.
Okay. That's very helpful. Thanks a lot. Just in terms of consumer behavior, with inflationary backdrop right now, have you seen any changes in the behavior at all?
On the cost side, or on the consumer side? On the retail side or on the cost side?
On the consumer side.
Yeah. On the consumer side, you know, we continue to see customers who are looking for, you know, great quality products. These are so, you know, we're continuing to invest in a broader selection. You know, we ended the quarter at over 800 styles across a variety of brands across a variety of price points. Because what we hear for the customer is they're looking for convenience, they're looking for selection, and but they wanna pay a fair price for it. You know, so we're happy that our vertically integrated model allows us to pass the.
You know, we feel we've got the most efficient, manufacturing, cost in the market, and we're able to pass that scale and savings on to customers. They're still able to get a high quality pair of glasses, superior lens, but for a fair price. We feel that's what's driving the growth on the glasses side.
Okay. That helps. Just maybe one last one. I know you touched upon marketing spend earlier and how you're targeting the loyal customers. I'm just wondering, any plans on increasing marketing activity or promotional spending at all?
You know, I'm glad you've asked. This is an important question. You know, we really hit the inflection point of, in particular on the glasses business this quarter. You know, to see glasses grow that significantly with a 23% decrease on marketing year-over-year, means that word is getting out. The best marketing that we could have is one of our customers telling, you know, three, four, five, 10 friends about the experience that they had at Kits. You know, we're gonna continue to fuel that and invest in that. We were happy, in particular in this quarter, that we did not need to fund the growth in glasses with more marketing. In fact, it was just the opposite.
Just probably just to add one last thought. You know, I think Sabrina touched on that we will forecast staying disciplined in the back half, and keep marketing investment consistent as a percent of sales, to where you've seen over the last couple of quarters.
Okay. That really helps. Thanks a lot, guys. Appreciate it.
Thank you. Your next question comes from Matt Koranda from ROTH Capital Partners. Please go ahead.
Hey guys, this is Ryan for Matt Koranda. I just wanted to know if you guys can explain some key factors in the decline of the contacts revenue. Are we seeing more, I guess, similar traffic and lower conversion, or are we seeing lower traffic and a somewhat stable conversion? If you could talk a little bit about that.
I think, so as Joe noted, you know, sequentially, the contact lens business did improve. Year-on-year, we shifted some of the marketing investment from contacts into glasses and so, you know, we've kinda seen a more efficient use of spend in glasses. I think that's kind of the, you know, the contact lens business did sequentially grow. I think probably Q1 was a sort of, you know, there was a bit of a decline there, but it's recovered and turned in Q2, and that's what we'd forecast continuing for the rest of the year, sequential growth in contacts, and then glasses becoming a larger, more meaningful part of the business.
You know, in many cases, we've taken a contact lens order that's significantly higher AOV and put that customer into a pair of glasses, which is a lower AOV, which is, you know, in a sense why the top line hasn't really moved even though glasses continues to grow so impressively. I think over the next couple of quarters, glasses will become a bigger and bigger part of our mix, and the growth rate there is gonna be what really drives the top line while we've seen margins improving, you know, as glasses becomes a bigger part of the mix. I think that's kind of where we're focused. We're pleased with the contact lens business, kind of, you know, even staying consistent.
We'll be happy with that and continue to grow the glasses business. Thank you.
Okay, thanks. That was helpful. Also just one more question. In terms of working capital, it's good to see some, a little bit of reduction in inventory. I was just wondering where days of inventory on hand might end up or normalize for the rest of the year.
Sure thing. This is Joe. You know, as you said, our inventory level was stable. It was down marginally quarter-over-quarter. You know, with inventory planning on this business, you know, we have the advantage of the direct-to-consumer model, which really gives us excellent visibility of traffic and purchases and where that traffic and purchases are headed. We also don't need to seed hundreds or thousands of retail stores with various inventory levels, which helps us as well. Of course, you know, we've got great partners to work with on planning and on delivery. There's, you know, different parts of our business, I think on the contact lens side, you'll continue to get, you know, tighter and tighter on inventory on hand.
With the data that's available to us, we're seeing improved performance as you've noted. On glasses, you know, we're just aware of the macro environment, and so there's times where, you know, if we think raw materials will be a little bit longer to arrive, we'll occasionally increase our inventory position marginally. You know, really, we've got great data and great partners and so we've seen a lot of stability and some improvement over the last quarter.
Thanks, guys.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the number one.
Okay, thanks, operator.
Mr. Hardy, there are no further questions at this time. Please proceed. Sorry to interrupt.
No, no, great. Thank you. Thanks, operator. Overall, it was an impressive quarter of execution by the team. Our group managed the complexity of a fast-growing glasses business while improving gross margins and while reducing marketing expenses, manufacturing, and fulfillment expenses amidst a volatile backdrop of rising costs all around us. We became a cash-generating machine and generated positive EBITDA, which demonstrates clearly the predictable recurring nature of our growing revenues. We look forward to updating shareholders on the many exciting developments in our business in the quarters to come. Thank you to all those who attended the call today, and thank you, operator. Have a great day.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.