And branded goods sector here at Goldman, and I'm very pleased to be joined with our next session with Warby Parker. Here with me today are Neil Blumenthal, co-founder and co-CEO, and Dave Gilboa, co-founder and co-CEO. Welcome, Neil and Dave.
Thanks for having us.
Let's kick it off with a discussion on where you currently see the U.S. optical industry. What is your outlook for U.S. vision care today? What is the current state of the industry, and are you seeing any changes in replenishment timelines or changes to discretionary add-ons relative to prior trends?
We remain incredibly bullish about the category. You know, soon, over 50% of the world's population is gonna need glasses, so you just have these great secular tailwinds. The last couple of years have been unusual, but if you look over, you know, a 20+ year trend, right, there were a lot of blips over the past few years in various categories. We see the rest of the year being pretty consistent, where the category has been earlier this year. From our perspective, we're gonna continue to control what we can control, and that is, deliver exceptional customer value, continue to take share, and we're gonna continue to do that. As we think about our own customer within the optical industry, we're seeing very consistent replenishment.
I mean, we have a pretty wealthy consumer, median household income, over $100,000. And if you look at our sales retention by, you know, six months, 12 months, 36 months, 48 months, and beyond, it's the cohorts are very comparable. So we're seeing, with our own customers, very traditional replenishment behavior. One of the other things that we've been able to do over the past few years, while our product, when we launched, all started at $95, inclusive of everything, right? Premium prescription lenses with all the coatings.
We've introduced other price points as well, and we've found that our customer is very amenable and excited about those additional sort of offerings that we have, which continue to provide exceptional value because they're still about 1/4 of the price of what you'd pay sort of elsewhere.
That's really helpful color. You know, as you started off the year, you spoke about a few key changes in your plan for the business, and you identified higher marketing spend, returning to e-com growth, and significant expansion in insurance. I was hoping we could dive deeper into each of these in this session today, because and how it informs your view of the future. So maybe starting with marketing. As you've stepped up your investments in marketing dollars this year, what's changed in how you're allocating those dollars, and are those investments more efficient than in prior years?
Yeah, so a couple of years ago, we were really allocating dollars to kind of two types of media: linear TV to drive top-of-the-funnel awareness, and then search to drive kind of bottom-of-the-funnel purchase intent. And we found that the most efficient message for us to kind of create awareness and drive people into the Warby Parker ecosystem was to talk about our Home Try-On program, which is a free offering. People can go to our website, select any five frames, we send them for free. It's a pretty novel offering, and we find that once people try Warby Parker, once they put glasses on their face, the conversion from that stage is very high.
Over the last couple of years, we've really worked to diversify both our media mix and the types of messages that we're putting out into the market, just given the expanded nature of our business and service and product offering. So, in addition to linear TV and search, where we're still spending money, we're also allocating dollars to streaming, influencer, paid social, direct mail, and podcast and audio, and just kind of having additional channels gives us more opportunity to target specific customer segments and drive efficiency for our overall media mix. What we also found is that a lot of consumers were not aware of some of our more recent offerings.
The fact that we have over 250 stores across the U.S. and Canada, that every one of those new stores has an eye doctor, where we offer eye exams. Lots of people don't know that we offer contact lenses, and so we found that, for some of our very happy customers that had purchased from us online over the last few years, they weren't aware that all of a sudden we have stores that are conveniently located, that we offer exams, that we can take care of their holistic eye care needs.
And we also find that of customers who are or consumers who are aware of Warby Parker but haven't purchased with us yet, the two primary reasons are, one, they don't know that there's a store nearby, and two, they need a new prescription, and our stores kind of solve both of those problems. And so increasingly we're using media dollars to educate both new consumers and existing customers around our new offerings. And we're seeing those efforts work over the last few quarters. Each quarter, we've seen an acceleration in our active customer growth. We've seen an acceleration in our overall revenue for the overall business.
We've seen an acceleration in glasses growth this year, and so we're encouraged by the returns we're seeing on those increased investments in media and expect those to continue.
That's really helpful color. Yeah, last quarter on your public call, you mentioned that you saw an opportunity to actually increase marketing dollars from here, given some of the success that you're seeing. Can you elaborate on what you meant there and how you're thinking about this? Would this be an increase in dollars spent or a percent of sales? And where do you feel like you're underspending relative to the opportunity?
Yeah. So, really thinking about it as continuing to increase media dollars over time. And again, we're seeing a very strong efficiency. We're finding that once customers try Warby Parker, they tend to be very happy. We have industry-leading NPS. Those customers tend to repurchase, it's very consistent timelines. And so we have very high value customers once we get them into the ecosystem, and now we're just focused on driving more awareness to generate more customer growth. And even in a period where there's been less than usual demand in the category, we continue to outperform, continue to gain market share.
We believe that, you know, continuing to drive awareness around Warby Parker and our increased offering is a core part of that strategy over the next few years.
And where are you gonna see, right? Our marketing line item includes media, includes, right, Home Try-On expenses. As we've been opening up more stores, as we've been introducing more sort of industry-leading technologies, right? We were the first to introduce a true-to-scale Virtual Try-On. And then most recently, we had our tech team develop an AI-powered glasses eraser as part of the Virtual Try-On . So now you can do a Virtual Try-On while wearing your existing glasses, because there's a lot of people, right, who need their glasses in order to see. So they put it on, right? We erase the glasses and put on the virtual ones. So as Home Try-On expenses sort of lower or decrease as a percent of revenue, we're able to redeploy those dollars into media.
But you should expect marketing to continue to be in sort of the low teens as a percent of revenue, where we continue to have leverage across the business as SG&A, excluding marketing. So that's our, you know, customer service expenses, it's corporate overhead, that we're at a sort of critical mass here. We don't need to make many investments there, and we'll continue to sort of expand profitability. But this additional marketing is also sort of leading to strength in our e-commerce business, which we continue to be excited about.
Let's shift to the e-commerce strength, which was, you know, the second kind of big change that we saw in the business this year, was a return to e-commerce growth. How do you plan to sustain the growth in that business now that you have normalized your marketing dollars? What initiatives or actions are you taking here?
Yeah, so some of them are those, you know, new features like our glasses eraser. The other is just continuing to raise awareness. There's still the majority of the country doesn't know that Warby Parker exists. And actually finding some of our highest growth in e-commerce in some of our most mature markets, where we have the highest number of stores, and that gives us confidence that we'll be able to grow sort of our e-commerce channel for the foreseeable future.
Glasses momentum, specifically the spectacles, have been something that have improved this year. And that's something that also correlates with your e-com business. How are you thinking about what's driving that increased momentum of the glasses business specifically, especially given that it drives better gross margin?
Yeah, a lot of it is really due to our marketing efforts that are working, our increased points of distribution. The fact that we've opened 40 stores a year for the last couple of years. We've been hiring lots of eye doctors, making it easier for people to get their prescription and then buy glasses from us. Industry-wide, almost 80% of people buy glasses from the same place that they get an eye exam. And if you ask kind of the, you know, industry insiders, they would tell you that we've built our business completely backwards by selling glasses without offering an ability for people to get their exams from us.
Historically, the vast majority of our customers have gone to a non-Warby Parker doctor to get their eye exam. They have to have the awkward conversation with them about why they're not buying glasses from their shop, fight for their prescription information, then come to one of our stores or go to our website, order glasses from us. They also, if they wore contacts, they had to go somewhere else. Over the last few years, we've really been investing to make it as easy as possible to reduce friction around the entire purchasing process for our patients and customers. We're seeing that start to drive strong returns for the overall business.
But also, as expected, it's providing a lift to our core glasses business.
As you think about the customer health, are you seeing any changes or degree of economic sensitivity or macro pressure within your e-com customer relative to your store customer?
... We haven't seen big differences in behavior, but between the two. You know, this back-to-school season, we're seeing pretty traditional trends right at the start in the South and the West Coast, and you know, where today is the first day of school for New York City schools, for example, I dropped my kids off this morning. They were surprisingly excited, so that's great, but we were just visiting two of our newer stores here in New York City and Long Island City and Queens Center yesterday, and the streets and the malls were busy, and our stores are doing strong, sort of back to school.
So, you know, we feel, you know, confident that we're gonna continue to be able to sort of take share in the category, continue to, you know, build these sort of newer categories for us. As Dave was mentioning, sort of, eye exams, it's 5% in Q2, it's 5% of our business. For a typical optical retailer, it's 10%-15%. So we just have a long runway there. And also contacts, right? That tends to have an even sort of higher replenishment rate than glasses, right? Because you're wearing those every single day. So that continues to be a tailwind in our business.
Just to put a finer point on this macro comment, and then we can move on to some of the other strategic initiatives here. One of the questions we're asking all companies that are at our conference today is, their expectations for the macro outlook in the second half relative to recent trends. Do you expect things to be the same, better, or worse?
I think we can think it'll be the same. I mean, one thing to know about our business in particular is there's not as much seasonality as there is for apparel or other accessories. Where you do see some seasonality is around back to school, at the very end of the year for FSA season, between Christmas and New Year's. And that's always the same number of days, irrespective of an election or other dynamics. And a lot of that revenue is recognized in Q1 for us, in January. And then you also have some FSA expiration dates in March as well.
You know, we're coming up in Q4 off an easier comp than usual, because of the fact that this year we had a larger revenue deferral from Q4 to Q1, 2024. We feel calm and confident for the rest of the year.
That's great to hear. One of the other big unlocks for your business this year has been insurance, and you've been gaining momentum in the last two years with some incremental in-network providers. But this year, you announced a bigger expansion. Can you talk about how you're thinking about the opportunity to, you know, nearly double your in-network insurance customers? What's your strategy for marketing to those customers, and how should we be thinking about the path and cadence of potential tailwinds that we could see to your customer count over the next few years?
Yeah, we're pretty excited about vision insurance. You know, it's a, it's kind of an interesting part of the kind of overall insurance landscape. In a lot of ways, it's not really insurance. It doesn't cover any catastrophic risk. But it's a you know, prepaid plan that gives people defined discounts around exams, glasses, and contacts, and the majority of Americans have vision insurance benefits, and they love using them, and they feel like they get really good value when they leverage those benefits. We serve lots of insurance customers, so over 60% of the customers that we serve have vision insurance today.
Some of those customers, a small percentage, are using their in-network benefits with us through some of the relationships that we have with UnitedHealthcare and some large employers. Others are submitting on their own out-of-network reimbursement claims. What we found is that our customers realize that the value that we offer is much greater than if they go in-network, even if we're out-of-network, and even if they're paying completely out of pocket, the value we offer is much greater than if they go in-network somewhere else. If customers have VSP or EyeMed, and they go in-network, they tend to spend over $250 out of pocket on purchasing a pair of eyeglasses.
They can come to Warby Parker and buy a pair of glasses with prescription lenses, all the coatings, for $95, and so most people have out-of-network benefits that can pay for the majority, or even 100% of that purchase. That being said, we know that people still prefer using in-network benefits, and it's easier for them, and they feel like they get more value, and so we have been focused on expanding the relationships that we have with insurance carriers, and so the tone of the conversation is dramatically different than it was a few years ago when we were primarily an online business really only selling glasses.
Now that we have over 250 stores, we have a couple hundred eye doctors. We offer contact lenses. We offer progressive, multiple, you know, options of progressive and different lens types.
... We look much more similar to the types of providers that vision insurance carriers are used to partnering with, and those carriers are increasingly hearing from large employers that are either existing customers or prospective customers for the carriers that their employees want to use their benefits at Warby Parker, and so we were excited earlier this year to announce an integration with Versant, which is a wholly owned subsidiary of MetLife, to nearly double the number of insurance customers that can use their in-network benefits with us, and we've been working hard at that integration and are expecting all those lives to be fully integrated by the end of the year.
And are continuing conversations with kind of the other large carriers, and believe that over time, we'll have the ability to serve tens of millions, if not more, of consumers with in-network benefits. And those dollars will go further with Warby Parker than any other in-network option for them.
One of the big unlocks of insurance has been your new store fleet expansion, and you've densified a lot of markets. You've expanded into a lot of new markets with 40 stores opened per year. How do you think about the decision to densify the markets that you're already in as you look ahead, relative to further additional market expansion? And should we continue to expect 40 stores per year?
Yes, you should anticipate at least 40, sort of, in next year and beyond. You know, we continue to have great success in existing markets. You know, if you all are around later this week, we have a couple new stores in Manhattan. This weekend, we have sort of the grand opening of our location at Hudson Yards. And then also we have 69th and Third Avenue. But if we look at Q2, we opened 11 stores, six in existing markets, five in new markets. That split going forward, it will be more towards existing markets, just because we're, you know, now, over 250 stores and in most major markets.
And we tended to start in sort of urban street locations and then expand, you know, into lifestyle centers and malls. We're going sort of deeper into suburbs. You know, those customers tend to spend a bit more because they tend to be slightly older. So you have more progressive dispensing, for example. But we continue to see great sort of metrics out of our stores. They continue to be very efficient uses of capital, well under $1 million to sort of build out a store, paying back at our targets of 20 months. So, yeah, we'll continue to invest there.
As you densify into current markets, such as the New York City market, which you've mentioned a few times today, are you seeing higher levels of overall profitability for the entire fleet? And with each incremental store being added, is that additive to customer counts to the same degree that you would have seen somewhere else?
Yeah, one of the nice things that we see with a new store within an existing market is that, often we're pulling from existing sort of our team. So we're often starting that store with a more experienced team. So often you'll see a faster ramp and you'll see efficient uses of capital across the entire market. Again, because we're able to leverage a lot of labor that we have and scheduling and dynamically reschedule across the entire fleet. So yeah, we continue to see sort of increased profitability across an existing market.
One of the opportunities that you've seen this year is in efficiency initiatives, and one aspect of that is doctor utilization. You've added a lot of new optometrists to your fleet the last few years. Keeping them busy is a key part of keeping your fleet profitable. What is current utilization? How is that trending versus your expectations, and are you changing the staffing model to optometrists at all?
Sure. So one of the things that we've been focused a lot on is also the timing of doctor hiring. So what we've been doing when we build a new store, right, we build out the capacity to have at least one exam room, sometimes multiple, and with pre-screening rooms as well. And then we time sort of bringing in the doctor based on sort of the ramp of the store and the awareness and our projections for those stores. So within an existing market, like, let's take New York City, for example, we have a very good perspective of demand and how quickly we should staff that exam suite with one, several eye doctors, technicians, for example, to increase the productivity of those doctors.
Yeah, as we've sort of introduced this new area of business for us, over time, it's gotten more profitable for us as we sort of time the hiring of doctors to coincide with raising awareness that we offer eye exams.
And one of the ongoing questions that we get from investors frequently is just availability of optometrists. Have you seen any change in optometrists hiring availability, ease of hiring?
... So there's only 1,800 graduates from optometry schools every year, and there's over 45,000 optical shops across the U.S. So there has been, and there will continue to be a labor shortage of optometrists. We haven't seen, you know, any changes in our ability to recruit and retain optometrists. And part of that is our fleet, frankly, just the absolute numbers are not as big as some of the other folks in the category. But the second is that we're a preferred employer for a lot of eye doctors. We have top-of-the-line technology, and that includes the software that enables doctors to focus on clinical care rather than administrative tasks.
It also is sort of top-of-the-line equipment that they're using to treat patients that are just easy to use and a joy to use. We find that optometrists are very sort of tech-centric. As you were to sort of look, I think in all areas of healthcare, optometrists tend to be very excited about emerging technologies, and that's to our favor, being a tech-forward brand. The stores and the work environment is super pleasant. Both just the culture at Warby Parker is just kind and friendly and the team dynamic, but also that the stores are beautiful, and they're located close to where our optometrists live.
So that continues to sort of put us in a position to win as we're recruiting and retaining eye doctors.
One other area that we're investing in is telemedicine, that you know helps alleviate some of the pressure around optometrist shortages. We offer kind of a couple different forms of telemedicine. Our team built something called a Virtual V ision Test, where you can download an app, and in 28 states you can do a visual acuity test, and an ophthalmologist who's licensed in that state can write a prescription remotely. It takes less than 10 minutes and solves a problem for customers and patients whose vision hasn't changed, and they don't have concerns around eye health conditions.
And then, we've also more recently been investing in what we call video-assisted exams, where a patient can be sitting in one of our exam suites, and they get a comprehensive eye health exam using all the same equipment as if a doctor was in that room with them. But a doctor can operate the equipment remotely. It's a live interaction with that patient, but the doctor can be located in a different city, in a different state. And that enables us to just have much more efficient scheduling around, you know, both doctor time and patient time.
Let's talk a moment about pricing, because Warby Parker has kept with the $95 opening price point for quite some time now, since launch. Almost a Costco hot dog, if you give it another 20 years. I guess I'm just curious, are you seeing any change in customer affinity for your opening price point at $95 relative to some of the newer pricing add-ons that you've had, such as, the Diamond Cut line?
Yep. One thing that we're excited about is just the competitive dynamic, where glasses inflation has outstripped, you know, regular overall inflation. So, all of our competitors have been taking price pretty significantly, to the point where we expect to actually see some promotional activity. I don't know if it'll sort of go back down. We don't expect it to go back down to where it was, but we think folks raised prices too much. But that just makes our offering even more compelling, and it demonstrates that we're, you know, providing even sort of more value to our customers. We are seeing, right, every single quarter, a higher percent of, right, sales coming from our, you know, higher price point products.
And they are differentiated, like you're saying, like our Diamond Cut, right? We continue to come up with innovative constructions and work with our producers and our own manufacturing facilities to make sure that we're still delivering these at exceptional value and great margins for ourselves.
You mentioned promotions, and that is something that we're asking all companies at our conference. What is your expectation for your own promotions this holiday season relative to last year, and how does that compare to the industry?
We don't expect any change to our traditional strategy. We've never been overly promotional and aren't expecting that to change. You know, we believe in offering great value and transparent pricing to our customers. That was one of the things that attracted us to the category in the first place, and was one of the reasons that we founded the company and offered all-in $95 pricing. That has stayed consistent now nearly 15 years later, and we don't expect that to change.
As Neil mentioned, we have seen the rest of the category take price pretty meaningfully, in particular over the last couple of years, where volume kind of unit volume for the category has been challenged and has been kind of flat to down over the last couple of years. And so we've seen a lot of folks really take price to try to make up for that, and any industry growth has you know come from price taking.
... I think that worked in an environment where there was lots of stimulus and people had you know lots of dollars in their bank account. Now I think what we're hearing and seeing is that people are being a bit more judicious around where they spend and are fed up with really high prices. We expect that as a category there will be probably more promotion but that's not gonna impact our pricing strategy.
That's really helpful. Let's round out the discussion with a conversation on margins. Gross margins have been positive for each of the last two quarters, which has been a big step function change relative to the trend we had seen before. How should we be thinking about the path for gross margins from here and those inputs and takes? And then conversely, how should we be thinking about the path for EBITDA margin expansion? Is one-to-two points of annual expansion still the right rate? And what is the opportunity longer term?
Yeah, so we think that 100-200 basis points is still the right rate for us as we continue to expand EBITDA. You know, that will continue to come from leverage over corporate expenses and overall SG&A. As we mentioned earlier, we're gonna continue to invest in marketing, and that will continue to be sort of low teens as a percent of marketing. So where the leverage is gonna continue to come from is over our corporate overhead. And we continue to build efficiencies throughout the business, whether it's from a CX customer service perspective.
On the gross margin, we have been having some success around shipping, but also just as glasses continue to grow from a unit perspective, that's our highest volume, our highest gross margin product. And as we grow contacts, right, those two things tend to balance each other. You know, the past few years, we made a big investment in our eye care business and hiring a lot of doctors, but also converting a lot of our, you know, independent optometrists who we're leasing space to, to be part of the PC model or as employed optometrists. And that was sort of a one-time thing that we did a couple of years ago.
Right, that's now completely stabilized, so you'll continue to see gross margins be stable and strong in the mid-50s.
Excellent. Thank you so much. With that, I'm afraid we're out of time. Thank you, Neil, thank you, Dave, and thank you to all of those in the audience for joining in.
Great. Thank you.
Thank you.