Hello, and welcome to today's Warby Parker’s Fourth Quarter 2024 Earnings Call. My name is Bailey, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I'd now like to pass the call over to Jaclyn Berkley, Head of Investor Relations. Please go ahead when you're ready.

Thank you, and good morning, everyone. Here with me today are Neil Blumenthal and Dave Gilboa, our Co-Founders and Co-CEOs, alongside Steve Miller, Senior Vice President and Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release and slide presentation are available on our website at investor.warbyparker.com. During this call and in our presentation, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors in the company's latest annual report on Form 10-K. These forward-looking statements are based on information as of February 27, 2025, and except as required by law, we assume no obligation to publicly update or revise our forward-looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with U.S. GAAP. A reconciliation of our non-GAAP measures to the most directly comparable U.S. GAAP measures can be found in this morning's press release and our slide deck available on our IR website. And with that, I'll pass it over to Dave to kick us off.

Thank you, Jaclyn, and good morning, everyone. In 2024, we set ambitious goals for ourselves and we're proud to report that our team delivered, punctuated by a strong Q4, our highest revenue growth quarter since 2021. For the full year, we drove revenue growth above 15% and expanded adjusted EBITDA margins by approximately 170 basis points, while making meaningful progress against our long-term strategic initiatives and delivering millions of pairs of glasses to people in need. We achieved our second consecutive year of accelerated revenue growth by opening 41 new stores and maintaining our industry-leading unit economics, while driving positive e-commerce growth for the first time since 2021. This growth was primarily driven by improved customer and glasses growth, which we expect will be the core drivers of our business for years to come. We set out to fuel brand awareness and affinity by investing in marketing spend, and we saw active customer growth accelerate in every quarter last year. We committed to expanding insurance in our holistic vision care strategy, and we significantly increased in network lives, while growing contacts and exams by 36% and 41% respectively. We accomplished all this while maintaining an unwavering focus on profitable, sustainable growth, resulting in a 40% increase in adjusted EBITDA versus 2023. We believe this execution lays a strong foundation for the years ahead and gives us confidence in our 2025 plan as we look to build on this momentum. This month, we celebrated 15 years since our founding, when we set out to demonstrate that business and impact can go hand-in-hand. From day one, we sought to provide vision for all while delivering exceptional customer experiences at great value. And today, that remains at the heart of everything we do. The Warby Parker of today is who we aspire to…

Thanks, Dave. For our third 2025 priority, we plan to further invest in scaling our industry-leading omnichannel model and delivering exceptional customer experiences. Starting first with retail, where we expect to see the majority of our growth come from in 2025. We ended 2024 with 276 stores and longer term, we believe we can open more than 900 stores in the US, highlighting a significant opportunity for further penetration of both new and existing markets for years to come, while still representing a small fraction of the approximately 45,000 optical shops in the US. In 2025, we are set to open more stores than ever before with plans for 45 new locations, including an exciting partnership with Target to open five shop-in-shops in the second half of the year. This initiative reflects our commitment to expanding access and convenience for our customers while testing new ways to engage both existing and new customers. While still in its early phases, this partnership is incremental and complimentary to our broader omnichannel strategy. We know many of our customers already shop at Target for their everyday needs, and the shop-in-shop format provides an opportunity to introduce Warby Parker to even more customers who may not have engaged with us before, while maintaining the exceptional customer experience and strong branding Warby Parker is known for. Each Warby Parker at Target shop-in-shop will be staffed by Warby Parker employees and offer products and services consistent with those across our existing channels today. We view this as a longer-term tailwind to our business and a valuable opportunity to test and learn as we explore new ways to expand reach and accessibility, while partnering with a best-in-class retailer like Target. We plan to open 40 new standalone stores this year with a continued focus on suburban expansion.…

Thanks, Neil and Dave. I'll begin with a detailed review of our fourth quarter and full year 2024 performance. Then I'll outline our guidance for the full year and first quarter of 2025. Let's jump into Q4 and full year results. Revenue for the fourth quarter came in above the high end of our guidance at $190.6 million up 17.8% year-over-year, with retail revenue increasing 23.9% year-over-year and e-commerce revenue increasing 5.3% year-over-year. On a full year basis, revenue was $771.3 million, up 15.2% year-over-year, with retail revenue increasing 21.4% year-over-year, and e-commerce increasing 3% year-over-year, its first full year of positive growth since 2021. Starting first with customers, we finished 2024 with 2.51 million active customers, representing an increase of 7.8% on a trailing 12 month basis. We've been pleased to see sequential improvements in year-over-year active customer growth for the past six quarters as we benefit from the positive returns we are seeing from our marketing investments. As Dave mentioned, we anticipate seeing more customer-led growth throughout 2025. We also continued to see strength in average revenue per customer, which came in at $307 in 2024, up 6.8% year-over-year. This was driven by a few factors, including a higher mix of our premium lenses, such as progressives, continued ramping of both contact lens and eye exam sales, and continued uptake of our higher-priced frames. By products, glasses grew approximately 15% year-over-year in Q4 2024, up from 7% in Q4 2023, and approximately 12% year-over-year in 2024, up from 8% in 2023. In addition to the acceleration in glasses growth, we saw continued strength in contacts and exams, which grew 30% and 45% year-over-year in Q4, respectively. On a full year basis, contacts grew 36% year-over-year and exams grew 41%. Turning to our stores, we added 39 net new…

Thank you. [Operator Instructions] Our first question today comes from the line of Mark Altschwager from Baird. Please go ahead, your line is now open.

Good morning, thank you for taking my question. I guess to start off, lots of customer acquisition initiatives in the hopper here with marketing, new stores, you're announcing the Target partnership. Last year, the revenue growth algo was fairly balanced between customer growth and revenue per customer. Just can you speak a bit more on how you're thinking about that algo moving forward?

Sure. Thanks, Mark. Yes, we have made an intentional effort to invest in customer acquisition across a variety of activities, including store openings, our insurance integrations, hiring more doctors, scaling our contacts business, investing in additional media dollars. And we've seen the benefit of that over the last few quarters. Q4 was our sixth straight quarter of accelerating active customer growth. And we expect those positive trends will continue. And we did see more balance, as you noted last year, between customer growth and average revenue per customer. We expect that for this year and going forward that a significant portion of our growth will come from customer growth and that you'll see -- continue to see strong active customer growth from us in 2025.

Thank you. And then following up on the insurance partnership, the Versant piece. How is that affecting your outlook for customer acquisition in 2025? I think you mentioned in the prepared remarks that it's tracking similar to or slightly above other carrier integrations. Maybe you could expand on that and just give us a sense of what that maturity curve has looked like in the past and what you're expecting this time around. Thank you.

Yes. So what we've seen with prior integrations is that once a population is able to use their in-network benefits with us that the contribution on a per member basis continues to increase over a multiyear period. So there's an awareness factor where certain populations may not be immediately aware that they can use their in-network benefits with us. And then there's the effect of sometimes multiyear cycles between when people get the exams and buy glasses and contacts. And so, what we've seen is that the longer that we've been integrated with carriers, the more customers and the more revenue they generate from the same population, and we're expecting to see that with Versant. I'd say the early trends are positive and are tracking in line or ahead of what we've seen with previous carriers. And so, we're encouraged by the results so far, and we expect that it will drive some performance in 2025 but really look at this as a longer multiyear opportunity.

And Mark, as we've discussed some of the benefits that we see as it relates to insurance customers from a mix perspective, insurance customers tend to skew newer versus returning versus the rest of our business. And in addition, insurance is oftentimes just viewed as another source of customer acquisitions. So, we believe in the long term, this will help strengthen our ability to acquire customers in a more efficient way. And then some of the economic benefits that we've talked about include not just newer customers who will come back and repeat purchase, but buying a higher basket of goods where more complex lenses, which cost more like progressives are part of the package.

Thanks again.

Thank you. Our next question today comes from the line of Oliver Chen from TD Cowen. Please go ahead, your line is now open.

Hi, Neil, David and Steve. Regarding your guidance, what are your thoughts on traffic? We're still seeing a choiceful consumer and winners and losers in the industry at large. So, I would love your thoughts on what's embedded in terms of traffic. Also, the new store plan sounds exciting. Steve, as we model new stores in the year, what's the contribution to the total revenue growth that you expect based on productivity rates of new stores? And finally, the Target deal sounds quite exciting. That's a very customer-centric retailer. What are your thoughts in terms of what we should know regarding the margin structure of that and any modeling knowledge we should know about? And also more strategically, why it makes sense, how you're picking the initial stores and the vision for medium to longer term in terms of possible scenarios? Thank you.

Thanks for the questions, Oliver. From a guidance perspective as it relates to traffic, we've provided color on this metric over time, and we'll continue to do so. We haven't embedded a specific guide as it relates to traffic, but in the context of our retail performance and store productivity, we are modeling in, depending on whether you're looking at the low end or the high end of our range, but let's stick with the high-end. We are modeling a moderate improvement in store productivity that dovetails nicely with our low single-digit growth in e-com. We have seen periods of strength for traffic, and we have seen some periods of challenges for traffic. Overall, the trend line is positive, and we're baking that into our guidance at the high end for the full year. As it relates to your questions regarding the Target partnership, I think Neil and Dave will talk more about that. But the five stores that we're opening are in the back half of this year, and they're adding a moderate amount of top line and cost into our overall performance for the year. So, we view that as negligible. It's really a five store test, and we expect to see more of the contribution next year versus this year, particularly depending on the degree to which we plan to roll-out and expand the partnership. And as it relates to any other color on the partnership, we'll turn it over to Neil and Dave, who can provide a little bit more insight as to why Target and the overall level of excitement that we feel with this test.

Yes. Thanks, Steve. Oliver, as you mentioned, Target is renowned for its customer centricity, and we've known the team for many years now. And we tend to look at everything through a strategic lens, and we love optical tons, but a strategic lens of what's best for the customer and Target being guest focused and sharing that commitment to always doing right by their customers and creating exceptional value and great customer experiences made it a perfect fit for us. Culturally, there's a lot of alignment around that. So, we feel through these shop-in-shops, which will be managed and run by Warby employees will continue to deliver the specialized customer experiences that we're known for across our typical fleet. So, we're quite excited. We're going to learn a lot in this first year as we open 5 stores. So, we're looking forward to this. One other thought just on traffic in general for the category. We made a commitment that we're going to grow irrespective of what's happening in the category, and we're going to do that by continuing to provide great products that people love and that they covet and that they seek out. We're going to continue to invest in marketing to acquire those new customers. 2024 was our first full year of marketing spend comping positive since 2021, and we saw that drive customers and glasses sales and across our channels. And we're excited for the year ahead. As you've seen from a lot of retailers, there has been sort of some weather and some traffic challenges in the towards the middle of Q1, and you'll see that in our guide, but we're confident that we'll continue to deliver great growth and that healthy growth by drawing in sort of customers.

And then just your last question. And then Oliver was just rounding out on your last question regarding new store...

Good. Perfect. Oh, yeah. That would be helpful. Thank you. Well, what are -- any parameters you should -- we should think about with these new stores and the nature of them different from prior and/or productivity levels that you expect?

Yes. Very consistent productivity levels with what we expect. Our targets are 35% 4-wall margins and payback within 20 months, all very similar formats. The majority of our stores will be opened in existing markets versus new markets, so roughly nine new markets and 16 existing markets. And most of our openings will be suburban as opposed to urban. So very consistent with what you saw last year and happy to provide more color as part of our call back, but that's how we describe our new store plan for this year, really pointing to consistency in terms of format, location and economics.

Thank you very much.

Thank you. The next question today comes from the line of Brooke Roach from Goldman Sachs. Please go ahead, your line is now open.

Good morning and thank you for taking our question. I was hoping you could speak to the drivers of non-marketing SG&A expense leverage that's contributing to the 150 basis points of adjusted EBITDA margin expansion this year. What do those non-marketing SG&A opportunities look like on a multiyear basis? And is the 1 to 2 points of adjusted EBITDA margin expansion per year sustainable on a multiyear horizon?

Great question. Thanks, Brooke. So yes, the 100 to 200 basis points of margin expansion, we believe is sustainable on a multiyear basis. So this past year, 2024, we expanded adjusted EBITDA margin by 170 basis points, the year before by 330 basis points. The number that we're projecting for this year is 150 basis points, right in the middle of the 100 to 200 basis points long-term ago that we've talked about frequently. If we unpack what's in non-marketing SG&A, so for now, we're not planning to see any leverage as it relates to our marketing spend, but the categories of spend in there are salaries across our retail stores, customer experience teams and headquarters in addition to general corporate expenses that cover the rest of the company, all of the vendors that we pay, all of the third-party consultants that we might use. And we believe that there's a really strong degree of future leverage that will come from finding efficiencies in each of those categories. So as we continue to staff more efficiently at our retail stores, as we continue to staff more efficiently across our customer experience and customer service teams, and as we certainly continue to leverage what we view as more of a fixed cost within corporate expenses that we're only adding to on a very selective basis, whether it relates to onboarding a new vendor or hiring incremental employees for the team. And so I would really describe the sources of leverage within non-marketing SG&A in that order. We certainly plan to benefit from all of that leverage as we hit our 150 basis point target for adjusted EBITDA margin this year.

Great. And then in the prepared remarks, you spoke about AI and personalization investments. The other technology trend in the industry is smart glasses. Can you talk about your strategy here?

Sure. Yes, we've certainly been staying close to the latest movement in wearables and the smart glasses market. And as hardware components continue to shrink and battery life improves and most importantly, as real-time always-on AI begins to offer meaningful utility to wearers in a form factor that looks similar to existing glasses, we expect adoption will grow quickly, and we believe we'll have an important role to play. We believe we have highly complementary capabilities and assets to some of the companies that have been investing to bring leading AI models to the market. And just given the strength of our brand, design capabilities, omnichannel distribution, prescription lens supply chain, doctor network, our ability to deliver exceptional customer experiences, we believe puts us in a strong position to enter this space if we choose to do so. And we look forward to sharing more as this market develops.

Great. Thank you so much. I'll pass it on.

Thank you. The next question today comes from the line of Dana Telsey from Telsey Group. Please go ahead, your line is now open.

Hi, good morning everyone. As you think about the price point architecture and whether it's the $125, $150, the prices that are being expanded from the $95 and the average revenue per customer, what are you seeing within the different price points? How is it moving along? And then with the Target partnership, how do you think of the price points that you'll be offering there? What's the square footage of the in-store shop that you'll have? And how do you think of the ability to scale that? Does it go potentially from five to 20 in the next year? What markers do you have to see to expand it? Thank you.

Thanks. When we started the company, we were frustrated consumers, right, walking into an optical shop where the glasses were treated like precious jewelry and glass displays are behind the counter out of reach for hundreds of dollars. And we wanted to provide a seamless shopping experience, but more importantly, be able to provide exceptional value, effectively quarter of the cost. So that's why we started with $95, right, all-in with anti-reflective, anti-scratch prescription lenses. As we've expanded our assortment, we follow that same principle on how can we provide exceptional value. And we've introduced these new price points at $125, $145, $175, $195. As we've introduced more complex constructions, different materials into our frames and continuing that promise of exceptional value where comparable quality, right, would cost hundreds of dollars elsewhere. So what we found is similar adoption and similar success with these higher price points where customers continue to view us as providing great value, and they go on to tell their friends about us. Our customers continue to be our best source of marketing and customer acquisition. As we think of our partnership with Target and launch these first five shop-in-shops, we're going to have the same assortment that we have in our regular stores and our vertically integrated supply chain enables us to do that rather easily, right, where we can display frames and manage inventory out of our top-of-the-line optical labs outside of New York and outside of Las Vegas. And we think that those price points will continue to resonate as we've seen, thanks to sort of our consumer insights work that we've done.

Thank you.

Thank you. Our next question today comes from the line of Nick Jones from Citizens. Please go ahead. Your line is now open.

Great. Thanks for taking the questions. I guess could you just talk about how you're thinking about marketing this year? We're hearing a lot of other kind of online platforms across commerce, travel, et cetera, talk about deeper integrations across social media platforms and other kind of mid-funnel opportunities. Could you kind of at a high level, discuss how you're thinking about marketing and where you're kind of seeing opportunities across the various channels?

Yes. We've invested in a pretty broad range of media channels, and we'll continue to do so. Over the years, we've seen and including recently over the last few quarters, we've seen strong performance from channels ranging from linear TV and direct mail to digital advertising search and social media, and we'll continue to invest in those assets. We believe that awareness is still kind of a critical aspect that we need to invest against as we open new stores, as we hire new doctors, as we have new capabilities. We still have around 1% market share in a massive category. And we have lots of customers who know us as an online company that sells glasses and aren't as aware of a lot of our recent capabilities. And so we're creating that awareness around many of our new stores, our eye exam capabilities, our contact lens business, the various lens offerings that we have. And we're seeing positive results in terms of driving both online traffic and awareness, but also using those media channels to drive traffic into stores, leveraging channels like direct -- localized direct mail, localized social media campaigns. And as we noted, we've seen very positive results in driving active customer growth as a result of some of those efforts, and we'll continue to invest this year across that broad variety of channels.

Got it. And then maybe asking a separate question on the kind of Target partnership. As we wait to kind of see the first five stores and see how that progresses, is there any sense or any kind of direction you can give us on how to think about the pace of opening a location in Target versus opening a stand-alone store? Is it about the same time line? Is it faster, slower? Any color you can kind of help provide there? Thank you.

We've developed a lot of this capability in-house where we're sort of confident that we can move quickly and design spaces that customers love, and it's been great partnering with the Target team on this and are confident that we'll be able to roll out sort of these shop-in-shops in a manner that sort of fits both our strategies.

Thank you. Our next question today comes from the line of Janine Stichter from BTIG. Please go ahead. Your line is now open.

Hey, good morning. I was hoping you could expand on the comment on e-commerce growth and awareness being stronger in markets with more density. Can you speak to more of the halo effect that you see with e-commerce as you open stores as you get to a point of density in the market? And then just curious how you view the interplay between store growth and e-commerce growth.

There was a time early in our retail journey, our bricks-and-mortar journey, where when we would open a store, a first store or even a second store in a market, and we would see cannibalization of e-commerce sales. And that was really because there was a certain level of awareness and there were folks that wanted to purchase in person, but could only sort of shop online. And right, that sort of reflects the broader market. We think online penetration of the category is roughly 12% or so. So what tended to happen was the stores, those first few stores would increase overall awareness, grow the overall pie. And after a year or two of initial cannibalization, e-commerce would return to growth in that geography. Now as we already hit a critical mass of awareness and these incremental stores can help drive even deeper awareness and we start to see more and more returning customers as we've also introduced sort of these adjacent product categories like contacts and eye exams. That has helped us, right, continue to grow exams as we've -- sorry, continue to grow our e-commerce channel, right, as we've started to open up more and more stores in a given geography. Our locations tend to be centrally located with high visibility with beautiful facades. We leverage a lot of our work in our stores, not only on the inside of the stores, but on the facades and those act as great billboards that help drive awareness, driving sales for both channels. And again, the reason why we love being a vertically integrated omnichannel brand is that we can create great experiences and seamless experiences as people go back and forth between both channels.

I said the one point just to round out, Janine, I know we've talked a little bit about this new stores are very efficient customer acquisition vehicles. And so customer mix might skew a little newer at store and a little bit more returning online. So once a market densifies, i.e., New York is our densest market with 34 stores, we'll see e-com in New York growing faster than e-com in our e-commerce-only markets. And part of the reason for that is the two channels really support each other during the purchase process, but also afterwards, when it comes time for a customer to repeat purchase, you'll see we have a very, very strong revenue retention rate. Our e-commerce channel really helps to support bringing repeat purchasers back to the store given they found a style that they like, they're comfortable with the purchasing process and it's very easy for them to, instead of going into the store, go online to make the next purchase.

Thank you. This concludes today's call. Thank you all for your participation. You may now disconnect your lines.