Hey, great. Welcome, everybody, to the Warby Parker presentation. I'm Mark Altschwager, Senior Analyst at Baird. Warby Parker is a mission-driven vision care and lifestyle brand. It is a DTC pioneer in the eyeglasses category. Today, it operates nearly 300 stores in the U.S. and Canada. Presenting today, we have Dave Gilboa, Co-founder and Co-CEO, as well as Steve Miller, Chief Financial Officer. To start out here, welcome back, by the way. I think this is third or fourth Baird Conference for you.
Yeah, thank you.
Warby Parker has grown to nearly $800 million in revenue, the low teens growth rate over the past couple of years, taking market share in a competitive eye care category. What about the value proposition is winning with consumers? Maybe speak to Warby's key competitive advantages in today's eye care market.
Sure. We operate in a large and growing market, $68 billion in the U.S., and the majority of Americans need corrective vision care products. It is a market that has some kind of unique structural aspects that have limited competition and innovation and have maintained high prices and low customer service. We have really tried to take an approach that has been different than the rest of the category. If you look at the market, it is kind of split 50/50 between large optical chains like LensCrafters or Pearle Vision, and then 50% is independent optical shops.
On the retailer side of things, there's been a lot of consolidation that's continued where the big companies continue to get bigger and have kind of created an illusion of choice for consumers where a consumer walks into a Sunglass Hut or a LensCrafters, they see 50 different brands of glasses, don't realize that all those brands are owned by the same company or licensed, manufactured, and distributed that also owns the store they're standing in, that owns the vision insurance plan they're using to pay for those glasses. As a result, most glasses in the U.S. are marked up 10-20 times what they cost to manufacture. The concentration of power in the category is different than kind of most other consumer categories.
The other dynamic is that you have doctors that are acting as retailers, and it's the only part of human medicine where a doctor can prescribe you something and then sell you what they're prescribing and make margin on it. Right? If you go to a medical doctor and they write you a prescription for Lipitor or Adderall, you're going to independent pharmacy. The doctor's not selling you that drug and making money on it. Within this category, it's the exact opposite. 75%+ of glasses are sold at the same place at the same time. Someone gets an eye exam. Like a lot of healthcare products, there's very limited transparency around pricing.
There's kind of a doctor that's recommending certain products to their customer, and they feel kind of compelled to buy them even though they don't understand why they're all of a sudden paying hundreds of dollars for a product. We took a very different approach where we wanted to design high-quality products that we'd want to wear ourselves but offer them at prices that can convey fair value to customers. The glasses that I'm wearing today cost $95, including prescription lenses, all the coatings that you could need. It's the same price that we offered in 2010 when we launched, even though most of the category has consistently taken price at every opportunity. The value differential between the products that we offer and the rest of the category has expanded over time.
Certainly, that's been the case over the last few years where a lot of our peers, with rising inflation, have been even more liberal in taking price. When we launched, we served a very narrow kind of part of the market, selling only online, only single-vision glasses. Over the years, we've worked to dramatically expand our product assortment to include multiple kinds of progressives, contact lenses. We offer eye exams. We now have close to 300 stores. Just as we've expanded our footprint and our assortment, we're appealing to a broader part of the market and finding that customers are spending more with us over time. Our value proposition is resonating more than it ever has with the market.
That's great. On the demand backdrop, the company's guiding to 12%-14% growth in the second quarter, 13%-15% for the full year. That is a small step down from last year's growth rate, as well as a step down versus your initial expectations coming into the year. In that recent call, you spoke to expectations for moderate reduction in store productivity and e-commerce growth expectations, again, versus your initial guide. I was hoping you could just speak broadly to the demand backdrop you're seeing. What are the drivers to that revised outlook? Bigger picture, speak to your confidence in sustaining a low teens or better top-line growth algorithm longer term.
Yeah, sure. Thanks for the question, Mark. Just as a reminder, we had guided towards revenue being up 14%-16% this year, and that's versus roughly 15% revenue growth last year. Given everything that we saw happening from a macro perspective in the economy, we just decided that it made sense to dial back very moderately our perspective on growth for the back half of this year, really just baking in conservatism into our model, nothing more than that. We took down our projections for this year really by just a notch, going from 14%-16% down to up 13%-15%. We feel very confident with all of the growth drivers that we've laid out and the consistency in growth that we're seeing in the business.
As a reminder, the growth drivers that we've talked about fall into a few different categories, none of which have changed. One is opening up new stores. For this year, we plan to open up 45 new stores over the course of 2025, five of which will be a new partnership with Target, where we're opening up five stores within a store within Target's footprint. In addition to that, we continue to roll out more complex lens types, including progressive lenses, blue light lenses, photochromic lenses, all of which add an element of growth and margin to our glasses business. As a reminder, glasses still make up 85% of our business. We're also in the process of rolling out these newer parts of our vision offering, i.e., contacts and eye exams. Both of these are roughly $12 billion portions of the market.
They're very small portions of our business today. Contacts makes up a little under 11% of our business, and eye exams a little under 6% of our business. In the context of the various growth drivers that we've laid out, the demand signals that we're seeing in the business, we feel very confident in our ability to grow in the mid-teens and really chose to dial back very moderately based on some of the macroeconomic uncertainty in front of us.
You recently had a very exciting announcement. You're partnering with Google to offer smart glasses. Can you give us a bit of an overview there?
Sure. Yeah, we're really excited. We announced a partnership a couple of weeks ago with Google to develop AI-powered glasses. These are going to be really incredible, mind-blowing products that are going to really change the way that all of us interface with AI and with technology. We sometimes joke that glasses are the original wearable technology, and they're perfectly designed to help correct vision. We also believe that glasses are the perfect form factor for AI. Just like the power of the internet was not really evident when everyone was using desktop computers, mobile phones had to come along as a new form factor. We believe that the same is about to happen with glasses, where you have products that can know what you're looking at and can understand what you're hearing. As a result, can process information in real time.
They have context around you as an individual. They know what's on your calendar. They know everything about you and can provide real-time contextual information. As you're kind of anything that you're looking at in the world that you have questions about, it can help you answer those questions, whether it's how to install a car seat or how to fix a broken coffee machine or what plant am I looking at or what shoes is that guy wearing and where can I buy them to can you recommend a great restaurant for me to get lunch after this meeting and how long is it going to take me to walk there?
Partnering with Google, which their team not only invented all the models that are used by all the generative AI platforms, including ChatGPT and others, and they have incredible engineering with DeepMind, but they also just have such scale in their other products from Maps to Android, which powers billions of devices, Search, YouTube, Docs, Calendar. They have kind of such depth of data around their individual users that being able to tap into that with a smart glasses product is what we think is going to be really transformative in a number of ways to the world, but also to our business. For the first time, these products are going to be able to look good on your face with a battery that lasts all day. We expect them to be replacements for traditional optical glasses.
For the first time, that people will really want to adopt smart glasses for all-day, everyday use because they look good and have so much utility.
How should investors think about the timing of product releases here and just anything you're willing to frame up in terms of revenue opportunity over the next few years, anything on the economics of the partnership? I know there's not a lot you're sharing at this stage on those points, but just have to ask the question.
Yeah, so we haven't really shared too many details about the products themselves or the timing. This was announced at Google I/O, which is their developer conference, really to get developers excited to start developing apps and features for kind of this new form factor. We'll share a lot more in the coming months. The one thing we noted is that they won't be for sale in this calendar year, but we have been working hand in glove with the Google team and are really excited about the products themselves. We'll be excited to share more in the coming months.
Let's abruptly shift from an exciting topic to one that I'm sure has been a thorn in your side for the last couple of months, Steve, tariffs. You entered the year with 20% of your cost of goods sourced from China. On the recent call, you outlined mitigation strategies to effectively offset the 145% China tariffs. Those were since reduced to 30%, at least temporarily. How has your strategy on mitigation evolved from there?
Sure. Mark, I will admit it has been a little bit more fun chatting with you about the Google partnership over the past week or so than the evolving tariff landscape. As you called out on our last earnings call, the tariff rates then in effect were quite different than the ones in effect as of today, and who knows how that might change tomorrow or next week. We wanted to be very clear that at 145% China tariff and 10% rest of world, if we were to not mitigate any of our exposure, that would equal a cost of roughly $40 million-$45 million.
On our earnings call, we talked through really three mitigation actions that we have taken in various degrees that will, even at that really high rate, which has changed, we wanted to reassure investors that we have a path to mitigating all or substantially all of that $40 million-$45 million. The three levers that we talked about, two of them really focus on the gross margin line. One is reallocating supply globally across a network of vendors that we have developed long-term relationships with over time. We are in the process of doing that to varying degrees based on the specific product type. By the end of this year, we called out our run rate will be less than 10% in terms of products sourced from China. We have brought that number down significantly over time. That is kind of mitigation lever number one.
As trade deals settle out, we'll continue to make intelligent and fast decisions about where to reallocate products. Some of it could be in China based on what we think is best from a cost, quality, and customer perspective. The second tactic that we talked about is one we have rarely ever done. Our peers in the optical market have tended to take price every single year, as Dave talked about. The situation, we took it as an opportunity to take a look at our pricing architecture, and we decided to roll out really a handful of price increases where we took price on a set number of really lens types. We introduced one new premium lens that goes light to dark in the sun, even in your car. We believe that that will continue to have positive impact on the business.
We rolled those out end of April. We've seen some elevation to our average selling price for a pair of glasses. As a reminder, the number that we talked about on our earnings call was we expect the price changes to maybe account for a low single-digit price increase across our glasses business. The last category, it's really just a continuation of how we've been operating as a company, which is just maintaining a real focus on expense discipline and on the SG&A line in particular. If you look at our Q1 results, for example, we generated 13.1% in adjusted EBITDA margin, almost 200 basis points increased on a year-over-year basis. We had marketing spend flat as a percent of revenue.
All of that leverage really within SG&A was driven by controlling store labor, customer experience labor, corporate overhead costs, including the salaries we pay to headquarters employees and our vendors. It is really in that vein that we plan to continue with expense discipline and expense management just to make sure that heading into the back half of this year, we're maintaining a very focused approach to deploying spend.
Excellent. Just double-clicking a bit on the supply chain, this is a question I have had frequently as this is all evolving, but where are you sourcing the raw materials? What are the key countries there? After you have the raw materials, it moves to a lab where you are producing the product. Some of those labs are owned. Some of those labs are third-party. I guess where are those labs? How do you balance the mix between owned and third-party?
Yeah, so we operate a global diversified supply chain. Yeah, some of those nodes include countries like China, Vietnam, Thailand, Japan, Italy, and the U.S. Over the last few years, we've built and developed two of our own optical labs, one in Las Vegas and one in Sloatsburg, New York, about an hour north of the city. The majority of our frames or our glasses are kind of produced with final assembly in those optical labs where our team is able to do all the quality control and inspection, and then they ship them out directly to customers. The vast majority of product before it gets to the customers is touched by a Warby Parker employee as that last step. We have a fair amount of flexibility in the model where we look to optimize cost and speed.
If there are certain factors like tariffs that change part of that equation, then we're in a position to make some rapid adjustments. We've done that over the last several weeks. In general, we find that the more control we have over the product and the customer experience, the better the results are. We have continued to invest in expanding our capabilities in our optical labs and see us continue to do that in the coming years.
Back to the topic of price, as you alluded to, we are seeing planned price increases from others in the sector that would seem to give you room to raise that $95 opening price point. Maybe just speak a little bit more to your thoughts overall on price. How important is that $95 opening price point for the brand?
Yeah, so philosophically, we are very strong believers that we should offer fair prices and great value to our customers. If we do that, it's going to build brand loyalty and customer satisfaction. Those happy customers are going to tell other people about the brand, and they're going to come back. We see that to this day, the number one source of new customers is our existing customers. We tend to see very healthy and consistent revenue retention. Once someone tries Warby Parker, they tend to tell other people about it and then come back for their next purchase. Philosophically, that will remain consistent for years and decades to come. In terms of the $95 price point, we don't think there's any kind of real magic to that number itself.
Over the years, we've introduced a number of additional products at different price points, including frames that cost $125, $145, or $195. Some of those are made in Italy or handmade with Japanese titanium, where there is justification for us to charge higher prices. We sometimes do that. We still offer great value. Those products would cost hundreds of dollars somewhere else. As we've introduced additional lens offerings, those come at different price points, including our progressives or premium progressives, which start at $395. We haven't seen really any price resistance from customers as we've introduced those higher price point items. We tend to serve a high-income customer where we are the lowest-cost pair of glasses they've ever bought. They're coming to us because the brand resonates with them, the designs resonate, the customer experience, and they know that their dollar goes further.
They kind of feel good about their purchase. We do believe we have opportunity to continue to introduce products at different price points, which will continue to lead to the strong growth and average revenue per customer that we've seen over the last several years.
New store growth has also been a very important element of the growth strategy. Could you talk a bit more about your approach to expansion in terms of locations you're targeting? What's the right pace of growth? You mentioned Target earlier, five shop-in-shops. Maybe speak to the strategic rationale of doing a partnership and what the financial implications are there versus your own stores.
Yeah, sure. We have announced that we're going to be opening up 45 new stores this year, a notch above the number of new stores that we opened last year. Last year, we opened approximately 40 new stores. We will selectively take that number up over time once we reach a point where we feel like our North Star number is kept intact, which is really our net promoter score. Working backwards from that, the other two numbers that we talk about that we use to manage the success of our store rollout, they're really two metrics. One is 35% four-wall margins. We want to see our stores achieve 35% four-wall margins within 24 months. We typically see that happen quite sooner in the 12-18 month time zone. The other is store paybacks of 20 months or less.
We're seeing these types of results from our newer store cohorts in line with the targets that we set for our older store cohorts. As we think about our store rollout strategy, last year and this year, we'll be focused more on densifying existing markets versus opening new markets, given that we've opened up beachheads in a number of markets already. Our city count stands at approximately 220 cities where we have a store presence. It's only roughly 30 of those cities where we've got more than one store. We see this as a really interesting opportunity to build off of the initial brand awareness that a store helps create in a market combined with our e-com channel and then to layer in a second store, a third store, a fourth store. If you think about our real estate strategy, this is kind of rough numbers.
50% or so of our store fleet today, a little bit under 50%, is based inside lifestyle shopping centers, 25% street location, the other 25% indoor malls. We find no dearth of opportunities, no lack of opportunities for us to find stores within the centers that we want to be in. We're typically viewed as a traffic generator and a sought-after brand, given that eyewear purchasing is an intentional purchase where you have to come in to get an eye exam. The deals that we've been able to strike with landlords at scale have generally been very favorable in terms of tenant allowance and concessions. From where we sit today, I would characterize our store rollout strategy as consistent. We're taking that up moderately today from 40 stores to 45 stores.
That incremental five that we're opening the back half of this year are through a partnership with Target. We're going to be opening up freestanding stores within a store within five suburban markets where Target operates stores.
Thank you. Switching gears, I want to ask about vision insurance. Vision insurance used for, I think, around half of eyeglass purchases in the broader market, I think represent just about 7% of your revenue last year, though that's doubled from three to four a few years ago. Maybe just speak to your approach to vision insurance and the opportunity ahead.
Yeah, kind of going back to our pricing philosophy, we wanted our prices to feel fair regardless of whether people are paying out of pocket or using insurance benefits. If you look across the category, people who use their in-network benefits going to a LensCrafters or independent optical shop tend to pay $250 out of pocket. Even kind of after those benefits are applied, they can come to Warby Parker and buy a full pair of prescription glasses for $95. We have always wanted to deliver that value regardless of how people are paying. We recognize that a lot of people have vision insurance benefits, and we have worked hard to make it easier for people to use those benefits and have those dollars go even further when they come to Warby Parker.
We announced our partnership with VSP and MetLife last year, which nearly doubled the number of people that can use their in-network benefits with us to over 30 million. We are seeing kind of early positive signs. The vast majority of those kind of new members have not used their benefits with us yet. Some of them might not be aware that we are a new in-network option or have not kind of reached their point in the purchasing cycle where they need an exam or to buy a new pair of glasses. What we found with prior carrier integrations like this is that each year we see a higher incremental revenue per member per year as awareness increases that we are an in-network option. We tend to find that our insurance customers tend to be some of our most valuable customers. They spend more in their initial purchase.
They repeat more frequently. As we're able to serve a larger population of insured customers, we view that as kind of a multi-year tailwind that we'll continue to benefit from.
Okay. Kind of a two-parter here related to services and margins, but you've made big investments in optometrists over the last couple of years. Now nearly 90% of your stores offer eye exams. Vision care, only about 5% of your revenue, but it's growing rapidly, over 40% last year. I guess number one, how should we think about the growth potential of these services? Then two, it would seem there is an opportunity to drive some really healthy incremental margins as the utilization increases. How should we think about each of those?
Sure. We view eye exams and holistic vision care more broadly as critical to serving the eyewear customer in the U.S. Just as a reminder, Warby Parker got its start as a glasses-only business, and glasses are still the majority of our business today. Roughly 85% of our business is selling prescription and non-prescription eyewear. Roughly 15% in total comes from the sale of these newer additions to our product portfolio. There is eye exams, which is a little bit under 6% of our business, and contact lenses a little bit under 10% of our business. These are rapidly growing newer portions of our business. In Q1, contacts were up roughly 25%. Eye exams were up 40%. It is interesting to really note the interconnectivity of purchasing eye exams.
In the industry, it's roughly 75% of all prescription glasses are purchased at the same time and at the same location as you got an eye exam. We really view eye exams as a strategic pivot point around which we can truly serve the customer and also capture that higher margin glasses business. As it relates to eye exams, market-wise, eye exams are roughly an $11 billion market. It's a big new piece of TAM that we can access now that we have roughly 90% coverage across our stores that offer eye exams. From a margin perspective, it does take time for an eye exam practice to ramp.
We have become very adept at understanding how to match labor supply of eye doctors with demand and brand awareness generated around eye exams and stores such that we are minimizing the dilutive effects on gross margin until an eye doctor has, one, developed a following of customers, or, two, until Warby Parker has actually developed brand awareness in a new geography that we offer eye exams. We have been very pleased with how we have seen eye exam brand awareness and utilization ramp. As that utilization ramps, the sale of the eye exam itself becomes more profitable, but we then also are able to capture that prescription glasses sale, which the eye exam leads to.
Great. Thank you. I think we're going to have to wrap it there, but please everyone join me in thanking Dave and Steve.