Good morning, welcome to the Kits Eyecare first quarter 2022 financial results conference call. This call is being recorded and available later today for replay. Your hosts today are Roger Hardy, Chief Executive Officer, Sabrina Liak, Chief Financial Officer, and Joseph Thompson, Chief Operating Officer. Before we get begin, I'm required to provide the following statement respecting forward-looking information which is made on behalf of Kits and all 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 words such as intend, believe, could, expect, estimate, forecast, may, would, will, and any other words of similar meaning.
This forward-looking information is based on management's opinions, estimates, and assumptions in light of their experience and perception of historical trends, current conditions, and expected future developments, as well as factors that they currently believe are appropriate and reasonable in the circumstances. Actual results could differ materially from a conclusion, forecast, expectation, belief, or projection 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. Management 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 the forward-looking information are contained in Kits filings with Canadian provincial security regulators.
During today's call, all figures are in Canadian dollars unless otherwise stated. With that, I'd like to turn the call over to Mr. Roger Hardy. Please go ahead.
Thanks, operator. Good morning, everyone, and thank you for joining us. I'm pleased to report that we had another outstanding quarter at Kits, marked by record performances across almost all metrics of our business. We delivered record revenue and gross profit at CAD 27.7 million and CAD 9.1 million, respectively, marking our fourth consecutive quarter of top-line growth driven by strong approaches centered around serving customers. This led to increasing our two-year active customer count to more than 800,000, and we served a record number of customers during the quarter. Not only have we been growing, but we've been doing so with higher margin orders and leveraging efficiencies as we grow our core customer base. As a result, we increased our gross profit by almost 50% year-over-year and expanded our gross margins by 250 basis points year-over-year.
The results of this quarter, along with our recent momentum, are highly intentional. As I mentioned, we believe our results are driven by approaches that center around our customer and making eyecare easy and affordable for everyone. At the center of our strategy when we started Kits was to ensure we built an experience that would serve the modern digital customer of today. Because Kits is a digitally native brand with no legacy infrastructure, including no costly underperforming retail locations, we are positioned to best serve the digital customer of today and to win the battle of the future for serving customers. We believe these customers continue to migrate to direct models which better serve their needs. Kits, perhaps more than any other eyecare brand, sits on a purely technological infrastructure that acquires enormous amounts of robust data on every customer we serve.
We believe we have more data per customer than any other business in our category, simply because of the digital infrastructure we deploy and that we interact on an almost purely digital basis with every customer we serve. This gives us yet another foundational advantage as we move into the age of AI, as data will be key as we scale to ensuring we best serve customers and deliver value to customers and shareholders. Today, it's data that matters most to ensure company success moving forward throughout this AI age. Kits has robust data on every customer, enabling us to individualize, personalize, and enhance the experience for every customer, which is already at this early stage, driving higher retention rates than anyone else in the category.
In addition, we are best positioned in the category to roll out the next generation of robust AI data tools around customers, best customers, and can use AI tools generated in-house and through partners to ensure we target and secure more customers like our best customers and continue to message and individualize experiences in a way that continues to lead the category in retention. The future is all about data, and the results at Kits have been clear and powerful. Kits is growing faster, approximately 3 times the category rate, and retains a higher percent of customers than any other in the category. We believe this will drive a higher LTP, long-term profit per customer, than anyone else in the category over the long term.
Kits strategy was built around ensuring a customer experience that wows customers and inspires them to tell friends about Kits and to become customers for life. We started out by building customer experience that's centered around category-leading products that inspires customers to try Kits and around the ability to fulfill orders in a way that inspires customers to become customers for life. The investments we made to create state-of-the-art product and a vertically integrated onshore manufacturing facility have begun to meaningfully pay off. The benefits of having category-leading product and category-leading fulfillment accrue in terms of the efficient rate of our incredible customer acquisition and retention. Kits continues to build a product that inspires in terms of quality, sustainability, and affordability. This creates customer pull around the brand that isn't fueled by expensive ad spends, but rather is driven by word of mouth and customer referrals.
At the same time, we're seeing the highest retention in the category, as I mentioned, partly because of the quality of product and partly because of the quality of the experience. Over the long term, the investments we have made will continue to serve us well in both regards. When a couple of the points that I made earlier about having category-leading data on all of our customers, we believe we continue to be best positioned in the category to grow at 3 times the category rate as we have done since COVID-19 lockdowns ended. As we continue to grow, we have plenty of manufacturing capacity at our disposal to scale to a top line that exceeds CAD 200 million. We're satisfied that our capital has been invested well and that we will grow into additional efficiencies similar to how we did this quarter.
We remain highly confident in the positive momentum we continue to create and the upward growth trajectory that we believe we are capable of accomplishing, and look forward to all our stakeholders reaping the benefits of being invested in Kits. With that, I'll like to hand the call over to Joe to dive into more detail on our financial and operational performances in the first quarter. Joe?
Thanks, Roger. In the first quarter, as growth continued, we saw the leverage on our business begin to take center stage. In Q1, we delivered a record number of optical orders to customers. Service level to customers improved both quarter-on-quarter and year-on-year, with customers receiving their orders faster than ever before, often in as little as one to two business days. Our fast-growing digital progressives business delivered a record number of orders in Q1, and net promoter score, or NPS, was an all-time high. Net promoter score is a North Star metric for us as it's a leading indicator of customers' willingness to return and to spread the word about their Kits experience to others. Thanks to this NPS growth, in Q1, Kits delivered a record number of repeat orders, over 100,000, including 37,000 to repeat glasses users.
Despite significant growth in new customers to Kits in Q1, repeat customers again contributed over 60% of our revenue in the quarter. How much did all these improvements cost? Well, in Q1, fulfillment as a percentage of revenue declined by 130 basis points year-on-year and by 70 basis points quarter-on-quarter to 12.5%. G&A also declined 390 basis points year-on-year and 100 basis points quarter-on-quarter to 7%. That's 520 basis points of improvement year-on-year while adding additional complexity to the business and improving service levels. Last quarter, we committed that with scale, we would recognize savings, and the team sure delivered.
Marketing expense was the only item that increased as a percentage of revenue, up 110 basis points year-over-year and 80 basis points quarter-over-quarter as the team made a conscious investment in the secular shift of optical customers moving online. As Roger Hardy mentioned, this prior investment in building the lowest cost manufacturing and fulfillment in the category was intentional. Investing millions of dollars in an optical lab before selling a single pair of glasses might be counterintuitive to some, but to us, it was essential in protecting the highest quality at a fair price for customers from the start. Our customers throughout North America have asked us for help to make eyecare easy. Easy to understand what they're paying for and why.
Easy to place an order, and just as importantly, easy to receive it on their doorstep 1 to 2 days later. Easy to apply your insurance dollars to your order immediately and take the guesswork out of this industry. We are gonna keep raising the bar on behalf of customers throughout 2023 and beyond. We'll continue to expand next day delivery to key metro areas throughout North America. We'll expand our selection of lenses and frames. We'll continue to expand our insurance partnerships, and importantly, we'll continue to take the waste out of the system so that we can deliver unbeatable quality at a great price. We believe that more leverage is coming in the model.
The CapEx we have deployed over the past two years in the lab design, fulfillment, and technology will enable us to scale to over CAD 200 million in revenue without requiring a big injection of cash. As we grow, our scale will continue to make our business more profitable. I'll now turn the call over to Sabrina for the financial overview.
Thanks, Joe. We are encouraged by the progress we have made in the first quarter across our business. Revenue in the first quarter increased 38% to CAD 27.7 million, compared to CAD 20.1 million in the prior year period. The increase was attributable to growth in both our contact lens and glasses businesses. We achieved record glasses revenue of CAD 3.4 million in the first quarter, driven by an increase in eyeglasses delivered, which grew to 67,000 compared to 46,000 in the first quarter of 2022. Gross profit in the first quarter increased 49% to CAD 9.1 million, compared to CAD 6.1 million in the first quarter of 2022, while gross margin increased 250 basis points to 33%, compared to 30.5% in the prior year period.
The increase in gross margin is due to a reduction in promotions, an increased focus on attracting higher margin orders, and the benefits of scaling glasses manufacturing costs as volumes increase. In the first quarter, net loss was CAD 1 million or CAD 0.03 per share, compared to a net loss of CAD 2.3 million or CAD 0.07 per share in the first quarter of 2022. EBITDA improved by CAD 1.7 million from the prior year period to break even, and we generated positive adjusted EBITDA of CAD 0.3 million in the first quarter of 2023 compared to -CAD 0.9 million, up CAD 1.2 million from the prior year period.
This marked our second consecutive quarter of positive adjusted EBITDA. These improvements in net income and EBITDA are attributable to higher revenue and gross profit and the benefits of operating leverage, which we achieved in fulfillment and G&A, partially offset by an increase in marketing spend. We ended the quarter with a strong cash position of CAD 19.6 million compared to CAD 18.8 million at December 31, 2022, and CAD 18.3 million at March 31, 2022. In the current fiscal climate, our top priority is to fund growth using internally generated cash flow. Our asset-light, customer-focused model, combined with our onshore manufacturing facility, give us a competitive advantage, and we're excited to build on the momentum that we have generated as we continue to focus on profitable growth in the upcoming quarters. I'll now turn the floor over to questions. Operator?
Thank you. Ladies and gentlemen, we will now conduct our question and answer session. If you have a question, please press star followed by one on your touch tone phone. You will hear a 3-tone prompt acknowledging your request. If you'd like to withdraw your request, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. Your first question comes from Derek Dley. Please go ahead.
Hi, good morning everyone. Congrats on a strong quarter here. A question I had just on the free cash flow growth, which was pretty strong this quarter. It looks like it was namely due to inventory reduction. Just like how are you thinking about your inventory position, and how do you expect that line item to move over the balance of the year?
Hi, Derek. Thanks. It's, this is Joe. Yep, we did see a little moderation on the inventory number, I think, you know, in the neighborhood of about CAD 2 million quarter-over-quarter. There is some seasonality on that number, particularly at the end of the fiscal year. We tend to stock up a little bit more, particularly in December, so that we can protect for a high level of customer service over the holiday period, when some of our suppliers are closed. That number historically has gone up right at the end of the year, and then moderated down as it did again this year.
Okay. Got it. That's helpful. You know, you've mentioned a couple of times that the capacity of the manufacturing facility can support, you know, close to double the amount of sales, that you're run rating today. Can you just remind us what is the average throughput of that manufacturing facility today and what is the nameplate capacity?
Sure, Derek. We're still operating at about a third of the capacity of our fully automated optical lab. You know, we're currently in around the run rate of, you know, 800 to 1,000 pairs of glasses per day. We see the potential with the infrastructure that we've built on machines and conveyors and automation to grow that to at least 4,000 pairs a day. We see significant runway for continued growth without CapEx. You know, it's our view that, you know, that facility that we have is world-class. There's nothing like it from a manufacturing and fulfillment in anywhere in North America. It'll support our growth to at least CAD 200 million and likely just north of that.
Great. Just the last one for me, early days I recognize, but maybe just a comment on how the partnerships with the two insurance providers, GreenShield and Sun Life are progressing.
Sure. Yeah. As you mentioned, we, you know, we're continuing to ramp up both of those partnerships, and we love the economics of those partnerships. Those insurance customers tend to come in with a higher average order value, typically higher gross margin, a greater concentration of digital progressive customers, which we're excited about. Those businesses will continue to ramp. We don't break out the insurance revenue separately, but, you know, what I can share is we're, you know, very happy with the performance of those businesses. Not only are those partnerships growing, but we have a view to extend that to other insurance partnerships throughout Canada and ideally in the U.S. in the future as well.
Okay, great. Thank you very much.
Thanks, Derek.
Your next question comes from Matt Koranda from ROTH. Please go ahead.
Hey, guys. Good morning. You mentioned category growth, and your outperformance a couple times in the prepared remarks. I was just wondering if you could maybe discuss some of the dynamics at play that are enabling your outperformance versus the category, maybe just in terms of new versus repeat customers, AURs in glasses and whatnot. Would love to hear your thoughts there.
Sure, Matt. Hey, this is Joe. Yeah, we've been really encouraged and you know, what we see is a real secular shift in this optical market of the customer moving online from traditional brick and mortar. That, you know, that started in the pandemic and, you know, has just continued, has continued onwards. In our view, what, you know, what we're hearing from customers is they just want this industry to be easier. They want it to make more sense in terms of, you know, why are they paying the price that they're paying? Why are they waiting a week or two to get their product?
You know, where we've been successful is by offering a very high quality of product in stock, and eyeglasses manufactured same day and delivered to their home in a day or two. Really the wow for customers, and why we're encouraged to continue to invest in growth is, you know, when a customer places an order on kits.com or kits.ca, and a day or two later, that order of prescription glasses arrives at their doorstep, and it's a very fair price, and the glasses fit and look perfect. They, you know, they ask us, you know, "How could this be so?" You know, we've made the investments to scale that experience in our view, to double our revenue within our existing infrastructure.
We're just, you know, we're just super encouraged at the number of customers that are continuing to come online.
Okay, that's great. Just the glasses revenue looks encouraging in terms of progress there. Wondering if you could maybe speak to AUR trends in the quarter? In particular, just curious about how the mix of the newer products that you have available, like progressives are helping AUR, and then just any promotions offsetting, any way to think about sort of the offsets to the benefit that you get from the mix change?
Sure. Yeah. It's Maybe a couple points on the glasses side. Digital progressives are driving up average order size, as you mentioned, and they still are relatively small part of our overall business. We see lots of upside there, and we'll continue to grow that business even more substantially in the coming quarters, in our view. The big growth this past quarter on glasses was from repeat customers. Those repeat customers tend to have a higher average order value and even better economics than first-time customers that came in. Those are really the customers, you know, that we invested in the second half of 2022.
That's given us the confidence to continue that investment in new customers and particularly in glasses and throughout 2023.
Okay, great. Just on gross margins, just curious if you could speak to sort of, go forward expectations on that line, as we kind of move through the year? You made a lot of progress on gross margins over the last couple of years. You know, what are the next legs, I guess, to get sort of above the 33% mark that you hit in the first quarter? Is it just more of the same in terms of mix of glasses benefiting gross margins? Maybe speak to sort of how we think about it, how it moves through the rest of the year here?
Sure. Yeah. No, thanks, Matt, for that question. You know, there, we have been really encouraged as we look year-on-year, of the progress, up to about 250 basis points of gross margin Q1 versus Q1 of last year. You know, there can be a little seasonality quarter-to-quarter on revenue or gross margin. You know, for us, we tend to compare to the quarter relative or the quarter relative to the prior year. The key drivers remain the same for our business growing gross margin. It's growing our base of repeat customers.
Again, even though we're onboarding a lot of new customers, repeat customers, continue to represent over 60% of our revenue profile, particularly on glasses, and then more digital progressives and more glasses customers on the path, to a 40% gross margin.
Okay, great. one more if I could sneak one in, just on the marketing line. It looks like you are leaning back in on the marketing spend, which I think is encouraging. Maybe just speak to kind of where you are finding opportunity to spend those dollars, and is that focused more on sort of re-engaging some of the large, existing customer pool that you have? Or is that sort of new acquisition, maybe any area of focus that you can call out on the marketing front?
Sure, Matt. We, you know, we have seen marketing spend as a percentage of revenue in that, you know, about 13%-14% range over the past few quarters. You know, on this one, there can be a little seasonality quarter to quarter. With this quarter's level of growth, which is, as Roger mentioned, you know, many times what the market is seeing, what the competitive set is seeing, you know, we're comfortable with this number. We, you know, where's the investment going, and predominantly investment is going to onboard new customers as we continue to see this secular shift of optical customers coming online in parts of the category. It's 27% of the category that's, you know, that is online.
What's encouraging us on the investment is really two things. Over the, you know, over the last year in particular, we've seen the retention of customers has sustained, on both contact lenses and very important for us on eyeglasses. You know, we've seen our business model continue to leverage and, the improvements, on fulfillment and on G&A just continue to offer more profitability with more scale. Based on those two, we're comfortable, with the number, from the last quarter. You know, we do expect it, you know, probably to stay in that, you know, 12-14 range. There will be a little bit of seasonality quarter on quarter, but we're happy with the growth that delivered this past quarter.
Okay, super helpful. Nice job this quarter, guys, I'll turn it back in queue.
Thanks, Matt.
Again, if you'd like to ask a question, please press Star, followed by one on your touch tone keypad. Your next question comes from Doug Cooper from Beacon. Please go ahead.
Hey, good morning, guys. Thanks for getting up so early on the West Coast and nice quarter. I just wanted to dig in to the glasses a little bit. I just wanna make sure the numbers I have are right. 67,000 pairs of glasses delivered in the quarter. That's correct?
Yes.
Okay. 37,000 of those were to repeat customers?
Correct.
That implies, obviously, that 30,000 pairs to new customers.
Yeah.
Okay. The revenue, CAD 3.4 million of glasses in the quarter, how do you see the cadence of that over the next 3, 4, 5 quarters? Contacts still, I guess, was 88% of revenue, which was, like, I guess the same as it was last year. You're seeing great growth in the contacts still. Let me just talk about the cadence of the glasses itself and then, you know, the potential still to grow the contact business.
Yeah. Doug, thanks for that. We have been encouraged on both sides of the business, and this particularly over the last couple quarters, and you've seen the growth follow on contact lenses. You know, contact lens business is really driven by taking great care of customers and having them return. You know, with the end of the pandemic, we are seeing more growth in the category. That's encouraging. We know how to deliver a very high level of customer service on a high net promoter score in that business, and we know how to retain those customers. We'll continue to invest in that growth.
You know, really the future business, and the future growth drivers for us continue to be the glasses business. That will come in a couple of different ways in the quarters ahead. There are existing contact lens customers that we will expand our offering and base of business with by having them purchase prescription glasses. That's been an exciting part of our growth story over the last couple of quarters and that, you know, we expect to continue.
You know, with the millennial consumer, you know, coming into the core prescription glasses age range, you know, this is a customer base that, you know, represents the, you know, the biggest segment of consumers in North America and is very comfortable buying everything online. From what we've heard from that customer, Doug, it's, you know, the customer is surprised that they can find virtually every category online with the convenient selection and value that they expect it, with the exception of optical.
So we're, you know, we're delighted to, you know, to be able to fill that gap, that seems to still, you know, unbelievably exist, and prevent, you know, the customer the hassle of, you know, driving to a brick-and-mortar store, waiting a week or two, then driving back and, you know, paying CAD 300, CAD 400, CAD 500 for a pair of single vision progressive glasses. You know, we think by taking the waste out of the system, and as Roger mentioned, you know, with an asset-light model, with the asset-light model that we have, being able to pass that quality and savings on to customers is just gonna continue to yield more growth in the quarters ahead.
I mean, it's interesting, I find, I totally agree with everything you just said. One of your competitors, I guess, seems to have gone the opposite route and, is talking about, you know, quadrupling its, store base over the next, I don't know, several years. Just Roger or Joe, any comments on that?
Yeah. I mean, we probably won't comment on, you know, on anybody else's strategy, Doug, but from our standpoint, you know, it's pretty clear that the offering we have is resonating with customers. You know, we launched the eyeglasses just over 2 years ago. It's already gotten, as you noted, you know, pretty substantial traction on the new customer. To see such a high rate of retention in eyeglasses is basically unheard of in the category. To see this many customers return at 18 months, at 24 months, you know, it shows that the method that we're using of fulfilling orders, of serving customers, it is wowing customers. It's retaining them at higher levels than anybody else in the category. It's clear that that's a great experience for customers.
You know, I think it's a balance. We need to be disciplined, we need to be intentional as we go forward in terms of how many customers do we wanna acquire on the front end, and then, and make sure we continue to serve them in a way that wows them and inspires them to return and tell friends and family the story. You know, that's really what we're focused on, is making sure we're creating these wow experiences for people. There's still lots of work to do in that regard. You know, we're continuing to keep our heads down, work, you know, intentionally on improved fulfillment, on improved product. The team here just came off a very intense session thinking about how we can make our business better for customers.
You know, those are the types of things I think that are gonna make us continue to be successful. The glasses business is growing well, and, you know, we think it's gonna continue. I think one last thing to note, you know, the category is 5 times the size of the contact lens business, so we continue to be very interested in it. The margin opportunity is quite
You know, is quite large. Yeah, I think we're heads down focused on serving that customer and look forward to continuing to update, you know, shareholders as we move forward.
Great. Thanks for that, Roger. Just one final one for me, just on the gross margin. Maybe getting back to Matt's question. You guys had, I think in the past quarter, given a guidance, not guidance, target of reaching, you know, sort of 40%-ish level. What's your thoughts? Any change in your thoughts there or when we might expect to see... Is that a 2 on 2020, mid-2020, late 2024 thing, or what are your thoughts there would be helpful.
Yeah, I mean, I think just again, to be focused on the current business, well, we do see margin expansion continuing over time. I think Joe touched on a little bit that, you know, there is some seasonality if you think of a Q4, where you've got sort of holiday period, and then you come into Q1, traditionally, you know, lots of optical in the early quarter. I think there's some seasonality in that. Year on year, we're impressed and pleased with the continued progress. That's kinda how we think about it, is we're gonna just continue to progress, as glasses return customers continue to grow. You know, you'll see that margin number go up. We're really not seeing a lot of price.
You know, I think the market's quite rational in the contact lens business, so, you know, we're pleased to see that continue as a rational contact lens business and, you know, where margins are continuing to expand. I think our customer is much less price sensitive, Doug, as the business kinda grows and as kind of the brand continues to expand. That's really what we're seeing is customers be less price sensitive as the business matures. That's kinda how we're thinking about it, and no change in the outward forecast, you know, as glasses becomes a bigger part of the mix, as a return glasses customer, as Joe touched on, the progressive customer, specialty lens customer, all that, you know, all those interesting buckets have much higher margins than our core business.
As we look out, you know, there's a bunch of different margin buckets that we're gonna systematically progress and target moving forward. To the extent those serve customers, I guess we'll continue to see margins expand. Thank you.
Great. That's helpful. Thanks, Roger. That's it for me.
Thanks, Doug.
Ladies and gentlemen, there are no further questions. Please proceed.
Thanks, operator. Thank you everyone for joining us today. At Kits, we're making eye care easy for everyone. At Kits we believe we go big, we act fast, we own it, we do good, and we're one team. Congratulations to the Kits team for their exceptional work this quarter. Your rigorous execution and commitment to excellence has propelled us forward and enabled us to achieve these outstanding results. Looking ahead, we're excited to continue building on this momentum and delivering value to our customers and shareholders. To our shareholders, we appreciate your participation in today's conference call and look forward to updating you on our progress in the coming quarters. Thank you.
Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you disconnect your lines.