All right. Good afternoon, everybody. I hope you're all enjoying your lunch. Thanks for joining us here on the first day of the conference. I'm Alex Straton, Morgan Stanley's North America Softlines Retail and Brands Analyst. I'm super excited to welcome Warby Parker to the stage with us. Just a little bit of background on the company: $3 billion market cap, direct-to-consumer provider of holistic vision care. The brand designs and sells high-quality eyewear at lower prices than many competitors. And since its launch, it's expanded into assortments including contacts and progressives, as well as moved into vision services. So it's definitely been an evolution over the last few years here. Today, I'm joined by Warby's Co-founder and Co-CEO Dave Gilboa, as well as CFO Steve Miller. So thanks, guys, for joining me here today.
Great. Thanks for having us. Thank you.
Perfect. Just lay of the land in terms of how this is set up: fireside chat format. We'll explore some of the questions we're hearing most frequently, save some time to listen to yours at the end as well. My favorite part of all these sessions is the disclosures, so please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. With that, I am protected. We can kick it off here with you two. I do want to start with a look back. It's been about three years since you all became a public company. Maybe what's changed most compared to what you thought a few years ago? I'd love to hear it from both of your perspectives.
Sure. Yeah. That feels like a lot has changed in the world since 2021, but as we look at our business and the opportunity in front of us, we still believe that the long-term opportunity is as large and compelling as ever, and our long-term vision for how we create value for consumers and our shareholders remains largely intact, and so while there have been a couple unusual years for the optical industry that we're happy to double-click on, we've taken the opportunity over the last three years to continue to invest against our long-term strategic initiatives. We are as big believers in the long-term opportunity as ever, and so while there has been unusually low demand for a couple of years in the category, we've continued to invest across our omnichannel offering, so we've been opening 40 stores a year.
We still believe that there's an opportunity for us to open several hundred additional stores over the next few years. We've continued to invest in our leading digital experience. We operate in a large consumer category that really hasn't innovated and hasn't delivered the same type of consumer experience that consumers are used to in other categories and believe our omnichannel offering is unique, and that's an area that we continue to invest against. The second is just creating more brand awareness, so while in certain markets, among certain demographics, we have high awareness, our overall aided and unaided awareness still leaves lots of opportunity for us to continue to invest against, and over the last few quarters in particular, we've really scaled our media mix and invested in our customer awareness and have seen now six straight quarters of accelerating active customer growth.
The third area that we've been investing against over the last couple of years is around scaling the newer parts of our business, so moving from being primarily a glasses business into a holistic eye care business and in particular scaling our contact lens offering and our eye exam offering, where we're still significantly underpenetrated relative to the rest of the category, and in particular our model is unique in the eyewear industry in that the majority of our customers get their prescription elsewhere and then bring that prescription to Warby Parker to buy glasses or contacts. The vast majority of the category, people buy glasses at the same place they get their eye exam, and that is a big opportunity for us that we've been investing against. The fourth area is just expanding our glasses offering, so continuing to expand our progressive offering.
Last year, we introduced precision progressives, which is the highest price point in offering that type of product that we've offered. It starts at $395, but still offers great value relative to similar products that people can buy elsewhere that often start well over $1,000. And so we continue to believe that across all parts of the business, there's a lot of opportunity for us to invest and create value for our consumers. And so since 2021, we've continued to execute against those strategic priorities.
Super clear. Four things. Makes total sense. Maybe, Steve, what would you add? Anything there?
Yeah. I would add just a few things. The first, and this really dovetails with what Dave said about driving increased active customer growth. We continue to see top-line revenue accelerate year- over- year, so at the high end of our guidance, we'll grow 15% this year, which is appreciably faster than the rest of the optical industry, and it's an acceleration over the 12% that we grew last year, which was an acceleration of the 10% we grew the year before. From a gross margin perspective, which I'm sure we'll talk a little bit more about, we've been pleased to put up gross margins really in line with how we've guided, which is gross margins in the mid-50s last year, and that's our guidance for this year as well.
And from an Adjusted EBITDA expansion perspective, at the high end of our guidance, we've guided towards 170 basis points of Adjusted EBITDA expansion this year on top of 330 basis points of expansion last year when we went public. The color we gave is that we plan to drive at least 100 to 200 basis points of Adjusted EBITDA margin expansion. And we're pleased to be able to put that up consistently. And that part of the story hasn't changed and will continue to be consistent with how we've guided.
Perfect. You both mentioned a lot of topics that we will revisit, but I'll hold off on that for now for one more bigger picture question. It's just now that we're sitting here in December, starting to look to 2025, I'm just curious how you guys are thinking about priority-wise, what's on your mind, and how it might be different than what you were prioritizing in 2024. Maybe I'll hit both of you with this one again.
Sure. So yeah, at a high level, we're expecting to build off the progress that we've made this year. At the beginning of 2024, we called out that we expected that there would be kind of three significant differences in where we were investing in 2024. The first was really reinvestment in marketing and customer acquisition. And while we wanted to keep a consistent measure of marketing as a percent of revenue, we really wanted to drive an absolute dollar increase in marketing spend across a diversified media mix and prove that as we spend more money on marketing customer acquisition, we could do so efficiently and drive an acceleration in customer growth. And we have done that and expect to continue to build off of that into 2025. The second was returning e-com to growth.
So coming out of the pandemic, where early in the pandemic, we saw our e-com growth well over 100% year- over- year. And then as the world opened up, as our stores reopened, we saw negative year- over- year e-com growth. And our goal was to return that channel to sustainable growth. And we've been able to do that and expect to see continued acceleration in e-com next year. And then the third area was a major expansion in our insurance coverage, in particular going in network with Versant Health, which is a subsidiary of MetLife, and nearly doubling the number of consumers who can use their in-network benefits with us to over 30 million people. That integration is largely complete, but most of those new consumers haven't been able to take advantage of those benefits yet.
And so we are expecting next year to see increasing contribution from our insurance orders as well. And so you'll see us continue to invest in all those areas and really start to reap the benefits in a more significant way than we did this year.
Steve, what about you? What's on your mind that differs from this year?
Yeah. So a few things. As Dave talked about, we'll maintain a focused approach to acquiring new customers. And we've reached a set point where we're spending in the low teens marketing as a percent of revenue. And so that we plan to maintain as an important part of our capital allocation story. We plan to open at least 40 new stores. And as Dave talked about, we're excited to see the maturation of our in-network insurance relationships with Versant in particular. And so I would characterize looking ahead to next year as more of the same, but more growth, more careful allocation of capital towards acquiring customers, a very consistent cadence of store rollouts, and starting to see the benefits of being in network with 33 million lives.
Maybe let's talk about the industry. I remember sitting here with you guys last year, and you gave a lot of different details around what's happened to the eye care market. You just described it as volatile in one of your earlier answers. So maybe just for the audience, give us an understanding of what's happened and how you're thinking about what the industry could look like from a growth perspective next year.
Sure. So for many years and decades leading up to the pandemic, the optical industry had very steady and predictable growth, very steady and predictable patterns around when people got eye exams, when they bought glasses. The purchase cycle was very consistent. And that was true both when the economy was in a good place and also through recessionary environments. The pandemic changed that. It changed most consumer categories. And what we saw was that in 2020, for obvious reasons, lots of people opted out of getting exams, opted out of buying glasses. We're one of the only companies at scale that was able to serve demand during that time. If you look across the optical industry, it's split roughly 50/50 between large retail chains that really haven't invested in e-com experiences or an omnichannel offering.
Many of the large chains don't enable you to even check out to buy prescription glasses online, and then the other half of the industry is made up of independent optometry practices, where they also don't have engineers. Many of those independent practices don't have e-commerce sites, and so there was just a significant decline in the category for the first time ever in 2020, then 2021, the world opened up. People got vaccines. Essentially, everyone that needed an eye exam or needed glasses got that demand filled in 2021, and then the next couple of years have seen lower than expected demand, where there was some element of pull forward, where most people don't need to get an exam every year. Most people don't need to buy glasses every year.
And we saw a couple of years, 2022 and 2023, where the category demand was just lower than any time in recent memory. We were able to continue to grow and take share during that category. We continued to invest in the long term. But we do believe that the opportunity in front of us is as big as ever. The biology of the human eye doesn't change through cycles. And those people who haven't bought glasses over the last couple of years will be due for exams, will be due to get new prescriptions in the coming months and years. And we noted that in Q3, we saw acceleration throughout the quarter. We continue to see that in early Q4, as we noted on our call.
We remain optimistic that we'll see kind of more stability and some pent-up demand start to flow through the system in the coming months and years. We haven't seen a long enough consistent time period where there's evidence of pent-up demand. But we do believe that the fact that we sell products that people need to see that we will benefit from increased demand going forward relative to the last couple of years.
Perfect. So if I were to sum that up message-wise, it sounds like next year, maybe there's a pent-up demand type of dynamic that could happen in the industry. Is that fair?
We believe at some point we will see that. We don't have a great crystal ball given that this is a unique period in our category over the last 100 years. And so we're not sure exactly when those dynamics will resolve. But we do remain optimistic that on a go-forward basis, there will be more demand in the category than we saw over the last couple of years.
You're certainly not alone in terms of this normalization type of dynamic. So I feel for you. I hear it from some of my other businesses as well. Maybe it makes for a nice segue into revenue growth in total now that we have a sense for how you're thinking about the industry. Maybe, Steve, I'll go to you. I know when you originally went public, there was this kind of 20% type of growth goal that you had put out there. You've made nice progress each year, stepping up closer, closer, closer. Is that still the right level, or how do you think about what this business should grow at over time?
Yeah. So when we went public, we'd never grown less than really 30% in a given year, and so we viewed 20% as our long-term algo, as a fairly safe long-term algo to put out there for revenue growth, and then, as Dave talked about, the onset of COVID and spiking inflation affected what turned out to be a very predictable industry for many years and turned it into a bit of an unpredictable industry where repurchase cycles became quite elongated, and so the way that we've handled our top-line guidance is to guide revenue on an annual basis and make sure that we're guiding thoughtfully and conservatively, and as I spoke about earlier, last year, we grew 12% at the high end of our guidance. This year, we'll be up 15%, and so to the extent we can, we'd like to continue to see accelerating revenue growth each year.
We'll give guidance on our Q4 call next year, which we'll get at how much we plan to grow next year. But our real focus has been accelerating top-line growth while making meaningful strides to becoming more and more profitable. And so this year, again, we plan to grow Adjusted EBITDA margin by roughly 170 basis points year- over- year. And we've been really laser-focused, certainly the back half of this year, in making sure that our SG&A, our Adjusted SG&A as a percent of revenue, continues to drop. Q3 of this year versus Q3 of last year, we dropped our Adjusted SG&A as a percent of revenue by about 270 basis points.
Most of that was really driven by leveraging investments we've made in corporate overhead and optimizing the salaries that we deploy towards our store teams and customer experience teams, while we've seen some moderate deleverage from marketing spend as a percent of revenue. Try to touch on the top of the P&L, the bottom of the P&L.
I promise I'll get into that a little bit more after a couple more revenue questions. I did want to unpack something Dave said about e-commerce, that return to growth. I know you're really proud of that this year. So how do you think about the right penetration of stores versus e-commerce, not only longer term, but also in the near term as we're thinking about next year?
Yeah. So we still believe that the majority of our growth will come from our stores. And if you look at our mix between channels now, it's roughly the same as it was pre-pandemic, with some topsy-turvy years in between. And now we have around 270 stores. We opened 40 this year. We'll open at least 40 next year and expect that those new stores, in combination with increasing contributions from our existing store fleet, will drive the majority of our growth. But we do expect that e-com will be a more significant driver of growth than it has been over the last couple of years and this year and expect to see continued acceleration in that channel.
We are excited about some of the new features that we've added around e-com and that we will introduce, in particular the ability to use AI around product recommendations and make it easier for people to find frames and lenses that serve their particular needs. And we've always been kind of a leader in terms of the digital experience in our category and expect that to continue. And ultimately, we believe that the best way to serve consumers in our category and every category is through an omnichannel experience. And we are unique in our category in that we enable that offering. And we find that customers that start their shopping journey online and then go into our store or vice versa tend to have the best experience and tend to be some of our stickiest and most valuable customers.
And if you look in some of our biggest and most mature retail markets, like New York, Boston, Dallas, Chicago, those are the same markets where we're seeing the strongest year-over-year e-com growth. And I think that really just underscores the opportunity in front of us, where we have the ability to open lots of stores, continue to build a strong retail footprint. And once we have strong kind of market share in those markets, we tend to see more of those customers translate into higher e-com growth and vice versa and really find synergies between having a leading digital experience and an increasing number of stores across the country.
So I think that's very helpful in terms of how you think about revenue by channel. I also want to pivot to category. Both of you in your answers so far have talked about the business evolving into contacts and progressives and more service-oriented types of offerings. Can you just walk us through what those are and what else is next compared to where you guys have been?
Sure. Yeah. So the largest part of our business is still glasses and will continue to be glasses. And within that, there are some subcategories: single vision versus progressives, sun, and other lens categories. This year, we have been focused on using customer acquisition across a variety of channels, including streaming, paid social, display, direct mail, to drive an acceleration in glasses growth and, in particular, in single vision, which is our largest category within the glasses space. And those glasses, like the ones I'm wearing, start at $95, including prescription lenses, where we offer really significant value differentiation relative to most other places that people can buy single vision glasses that would cost several hundred dollars. And I believe that there's still a really significant opportunity for us to expand that largest category. Then within progressives, our progressives start at $295, including frames and lenses.
And that compares to several hundred dollars most other places. We've seen a really significant uptake in customers opting into precision progressives, which is an incremental $100. Our customers, even though we offer great value, tend to be high-income with a median household income of over $100,000 and really haven't seen any price resistance as we've introduced new price points for our consumers. We also believe that there is a large opportunity for us to offer additional lens options. Over the last few years, we've introduced blue light lenses, anti-fatigue lenses, polarized sun lenses. And we continue to hear from our customers that they'd be interested in additional add-ons and customization options. And so over the next couple of years, you'll see us continue to introduce some new lens options. And then a couple of the other categories that we've been investing significant resources in are around eye exams.
So now every one of our new stores, we're building out an eye exam suite and hiring our own eye doctors or working with PCs in states where we can't employ those doctors directly and really want to make it as easy and convenient for our customers to get their eye exam through a Warby doctor. We've also been investing in telemedicine, both through what we call Video-assisted exams, where a patient goes and sits in one of our eye exam suites and gets a comprehensive eye health exam, but the doctor is controlling the exam equipment remotely and interacting with the patient live through video, and it enables us to more efficiently schedule and provide more access to patients. We also have our Virtual Vision Test, which is an app that you can download and renew your prescription from home in less than 10 minutes.
And we continue to believe that there's a really significant opportunity for us to expand our eye exam offering. And then the last category is contact lenses, which is over a $10 billion category. Over 40% of our glasses-wearing customers also wear contacts. Historically, they had to go somewhere else to buy those contacts. And now we want to make it as easy as possible for Warby to be a one-stop shop where you can get your exam, you can get your glasses, you can get your contacts, and choose every part of that journey, whether you want to engage with us online or offline. And I have seen very significant growth in both that exam and contact lens business.
Great. I'll ask you one more question on revenue, not to beat a dead horse here, but the active customer growth metric has seen some nice uptick this year. I know you mentioned it, Dave, in one of your prior answers. And you've been able to do that without increasing marketing meaningfully. So can you talk about the secret sauce to how you've been able to lift that metric this year?
Sure. Yeah. We continue to see the number one source of new customers is word of mouth. And I believe that the best way that we can drive a larger and larger customer base is by delivering exceptional value to our existing customers and having them talk about it. And we believe we are able to achieve that by offering great products at great price points and offering exceptional service around the delivery of that customer experience. We also believe our stores serve as great billboards for customer acquisition. Every one of our stores is uniquely designed. We often work with local artists, often have unique storefronts with murals that in our stores are in prominent places in major cities. And I believe that there's embedded marketing within our store rollout.
We've also been really focused on diversifying our media mix, so moving beyond just TV ads and search spend, which is where we're primarily spending over the last couple of years, into additional channels like streaming, paid social, direct mail in particular. We've seen lots of success and believe that there is lots of opportunity for us to amplify our message through paid media, and then we also continue to get great earned media, where we invest in whether it's topical events like the eclipse that took place last year, where we offered free eclipse glasses to customers at our stores and got a ton of great press and drove a lot of foot traffic into our stores, or more recently, a collaboration we did with Emma Chamberlain, who's a 23-year-old YouTube and social media influencer. She's been wearing our glasses since she was 12 years old.
She loves our brand. She has a super engaged audience and is beloved by the fashion press, and those types of collaborations that are possible because of the brand that we built also just drive a lot of awareness and make customer acquisition quite efficient.
Super comprehensive. Maybe moving down the income statement and over to you, Steve, perhaps on gross margin. It's been a little bit of a volatile line item over the last 12 months. Can you just talk about the puts and takes there and how you see the trajectory going forward?
Sure. Sure. So as a reminder, there's a lot that we put in our cost of goods line. So it's our frames, our lenses, our two factories. So our two optical labs, one in New York, one in Las Vegas, shipping, store rent, the depreciation of store buildouts, and eye doctor salaries. And given all of that we include, we actually are happy with gross margin settling out last year and this year in the mid-50s. I'll talk a little bit about the puts and takes across our gross margin and where we see some deleverage and some leverage. So the three main products that we offer: glasses, contacts, and exams. Glasses are the highest gross margin product that we offer. Dave gave a little bit of color.
Some of the puts and takes within glasses, i.e., progressive lenses, which are just 22% of our prescription business, are our most profitable glasses products. Contacts and eye exams have a lower gross margin profile, but they're actually accretive to gross margin dollars, and it becomes nuanced to try and actually pull apart eye exam margin from glasses margin because there's a very high attach rate, so we view getting an eye exam really as a gateway to becoming a product customer, a glasses customer in particular, so roughly 75% of all glasses wearers in the U.S. buy their prescription glasses at the same place where they got their eye exam. We see numbers within our fleet of stores very similar to that number.
While scaling eye exams, certainly in the initial stages before there's brand awareness that we actually offer eye exam at a store or in a location, will be moderately dilutive to our gross margin rate. Given that increased brand awareness of eye exams leads to higher glasses sales, that will be a nice put in the other direction. So there are a whole range of different factors affecting margin. What we talked about in Q3, for example, was some of the sequential deleverage we saw in Q3 versus Q2 due to the fact that we opened our largest number of stores for the year, 13 new stores. We had a concentration of new stores that opened up in urban markets, which from an occupancy expense perspective cost a little bit more.
And that was reflected in some of the deleverage we saw on a sequential basis, which was actually right in line with how we framed up our gross margin guidance for the quarter, which was to be roughly in line with what we saw Q3 of last year, so a 13 basis point difference. So hopefully that addresses some of your questions on the puts and takes and coloring gross margin.
It does perfectly, Steve. Similar type of question on SG&A. That's obviously a key part of the story in terms of lifting profitability over time. So can you talk similarly about the puts and takes there as we think about next year or any dynamics that are impacting it from this year?
Yes, for sure. So some of the setting the stage a little bit with what's in cost of goods. SG&A really has three main components. There are the more selling and service-related costs of our store teams, our customer experience teams, the G&A to support our store base. There is marketing spend, which is media and the cost of our Home Try-On program. And the third category is corporate expenses. We've talked a lot about marketing expense as a percent of revenue. We saw some moderate deleverage from that line item in Q3 from 11.6% last year to 12.3% this year. So if we put marketing off to the side, where we really are seeing leverage, it's within the elements of our SG&A that are non-marketing related.
So how we schedule our store teams, how we schedule our customer experience teams, and also the leverage that we're seeing from the investments that we've made in our corporate overhead, where we're only very selectively adding new headquarters employees and new vendors. And if we look at how we measured that in Q3 of this year, our adjusted SG&A was down by about 270 basis points, including marketing spend. But if we put marketing off to the side and just look at our non-marketing SG&A, so what we pay to our store and customer experience teams and what we spend on corporate overhead expenses, we saw that drop from 43.3% of revenue to 40% of revenue, so roughly 330 basis points of improvement.
And so as we look ahead to Q4 and to next year, I would look to non-marketing SG&A as a continued source of leverage and upside that we'll talk about and that we'll see reflect positively on our EBITDA.
Great. I do want to zoom in near term here since we just hit December, just past Black Friday. Can you guys just remind me of your holiday view? What were the key things that were on your mind as you entered the season? And has your view changed at all with whatever you're permitted to say?
Sure. Yeah. In our Q3 call, we noted that we'd seen an acceleration every month of Q3, and those strong trends had continued into early Q4. Our business isn't quite as dependent on holiday shopping as most other consumer categories. We certainly see an increase in demand over Q4, but we see unique seasonality in that by far our largest shopping days of the year are between Christmas and New Year's as people leverage their remaining FSA dollars and their vision insurance benefits that are due to expire, and so our biggest days are still ahead of us, but as we noted in our Q3 call, we were encouraged by the trends that we were seeing, and that caused us to increase guidance for the year and guide to an acceleration in our growth.
Great. I do have another more topical question for you on the new administration implications. How does that change how you're thinking about next year? What's most top of mind for you as it relates to operating under this new regime?
Sure. So tariffs are certainly top of mind for everyone. We do not have any exposure to Canada or Mexico. We do have some exposure to China, as we talked about on our Q3 earnings call. China-sourced products equate to roughly 20% of our overall COGS. And we've seen that number reduce materially over time. And so the way that we plan to manage through what could be a dynamic tariff environment, which we've managed through in the past with some success, is we'll continue to diversify our sources of supply. Where possible, we've looked to shift costs toward other suppliers. So instead of passing costs on to consumers, we've really focused on solving the issue through diversification of suppliers and some expense sharing. We'll maintain a very open mind based on what the new administration indicates new tariffs could be and respond from there.
But we've got experience operating in a dynamic tariff environment and feel that we're better positioned now than we had before, given how we've reduced some of our exposure to China and have a much more diversified supplier base.
That's great. I know we're perfectly up on time. So if there's any questions we have from the audience, we could take those now. Typically shy, so I'll leave it to you guys. What's a key message or topic you'd like the group to take from this?
Yeah. I think the primary message is that it's been a challenging couple of years for the optical industry, which is unusual, and we believe we have weathered the storm at this point and have continued to invest for the long term and are expecting that demand in our category to return to more normal levels going forward, and we've been able to take share over the last couple of years. We believe we're very well positioned to continue to take share and benefit differentially as demand returns to the category and are generally quite optimistic about our future prospects.
Great. Thank you so much for joining me today, guys. Really appreciate it.
Thank you.
Thank you.