Hello, and welcome to today's Warby Parker Inc. Third Quarter 2025 Earnings Conference Call. My name is Bailey, and I will be your moderator for today. [Operator Instructions] I'd now like to pass the conference over to Jaclyn Berkley, Vice President of Investor Relations at Warby Parker. Jaclyn, please go ahead.

Thank you, and good morning, everyone. Here with me today are: Neil Blumenthal and Dave Gilboa, our Co-Founders and Co-CEOs; alongside Josh Truppo, Vice President of Financial Planning and Analysis. Before we begin, we have a couple of reminders. Our earnings release and slide presentation are available on our website at investors.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 November 6, 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 Neil to kick us off.

Thank you, Jaclyn, and good morning, everyone. Q3 was a strong quarter on many fronts, reflecting both top line acceleration and significant progress towards our long-term profitability goals. Net revenue grew 15.2% year-over-year, driven by 20% growth in retail revenue. Adjusted gross margin was 54.2% and adjusted EBITDA grew approximately 50% to $25.7 million, representing an 11.6% adjusted EBITDA margin and 260 basis points of year-over-year expansion, our highest quarterly expansion in the last 2 years. It was also a quarter that reflected shifting consumer trends, particularly within our single vision and contacts customer base, which tends to skew younger, while we have seen more resiliency from our progressives customers. We entered the quarter with strong momentum. July and August represented the strongest 2-month period of the year before trends moderated in September and have remained consistent. We saw a mix shift within glasses that weighed on average selling price, while contacts growth decelerated as broader consumer sentiment softened. Performance remained consistent on a 2-year stack basis, even as we lapped an acceleration in growth last year. Volume growth remained healthy, and we delivered adjusted EBITDA profitability ahead of our guidance on lower-than-planned revenue, underscoring the adaptability of our business and our team's strong execution. Based on the trends we've seen since September, we are reaffirming our 2025 adjusted EBITDA outlook and raising our adjusted EBITDA margin expectations, reflecting continued operational discipline and AI-driven productivity gains even as we take a more measured view on revenue given the current macro environment. And as we look beyond 2025, we're incredibly excited about what's next. We believe we are entering Warby Parker's third act. Our first act was to establish one of the first made-on-the-Internet lifestyle brands. We launched with features in GQ and Vogue and pioneered how to sell glasses online.…

Thanks, Neil. As we move into our next act, we remain excited about the opportunities ahead in our core business. Our Q3 performance demonstrates our commitment to driving sustainable growth and steady progress toward achieving our long-term strategic goals. I will now speak to our 4 primary growth drivers this quarter, beginning with the drivers behind our ninth consecutive quarter of accelerating active customer growth. We ended Q3 with 2.7 million active customers, an increase of 9.3% on a trailing 12-month basis with average revenue per customer of $320, up 4.8% year-over-year. Our retail channel remains our primary growth engine, and we continue to see strong customer acquisition through our stores. Our marketing strategy continues to balance disciplined performance marketing with thoughtful investments that build long-term brand awareness. To drive near-term transactions, our flexible media model allows us to allocate capital in real time to where we're seeing the strongest efficiencies, such as streaming and direct mail. To build community and brand affinity at the local level, we continue to host creative localized programs like our book Report series, which brings notable authors like Nighttime Grammy Award winner, Mark Ronson, into our stores for engaging events and conversations with customers. At the same time, we continue to invest in top-of-the-funnel initiatives, including our 3-year partnership with Arch Manning, a glasses wear since age 3 and the Warby Parker customer since middle school. This partnership has allowed us to participate in national linear media and connect with a younger demographic, particularly in key markets across the Southeast. Our "It Must Be the Glasses" campaign featuring Arch has been a fun way to bring our literary focused brand personality into the sporting world and highlight Arch's authentic connection to our brand. It's been very well received, helping broaden our audience and drive…

Thanks, Neil and Dave. It's my pleasure to join you all today on our third quarter earnings call. I'll begin with a detailed review of our third quarter performance. Then I'll outline our updated guidance for the full year, including our outlook for the fourth quarter of 2025. Starting first with Q3. Revenue for the third quarter came in at $221.7 million, up 15.2% year-over-year. Retail revenue increased 20.2% year-over-year with store count up 16.4% and e-commerce revenue up 3.2% year-over-year. I'd like to add a bit more context around the shape of the quarter. We entered Q3 with strong momentum with July and August marking our strongest 2-month stretch of the year before trends began to moderate in September and have remained consistent. During this time, our frame mix shifted towards our entry-level $95 offering. And while higher-priced lens modifications and progressives remained strong, this had an overall impact on average selling price for glasses. Additionally, we saw slower growth in our contacts business amid broader macro dynamics. These factors coincided with stronger year-over-year comparisons given the acceleration we saw last year, though results remained stable on a 2-year stack basis. Looking at customers, we finished Q3 with 2.66 million active customers on a trailing 12-month basis, representing a consistent acceleration in growth to 9.3% year-over-year. We've now seen sequential improvements in year-over-year active customer growth for the past 9 quarters, reflecting the positive returns from both new and existing stores, marketing investments and a range of strategic initiatives. Average revenue per customer increased 4.8% year-over-year on a trailing 12-month basis to $320. This was driven by factors, including our selective price increases in glasses at the end of April, a higher mix of premium lenses like progressives and continued growth in both contact lens and eye exam sales,…

[Operator Instructions] Our first question today comes from the line of Mark Altschwager from Baird.

Was hoping you could give a bit more color on this mix shift you're seeing with single-vision versus progressives. I think you cited relative resiliency with the progressive customer, but also called out a mix shift that weighed on ASP. So just want to understand the moving pieces there. And I guess wondering just within that, are you seeing evidence that some of the price increases on the premium lenses might be driving some trade down in the frame selection?

Thanks, Mark. As you've heard from a number of other brands and retailers, it's been quite a volatile year, and we've seen meaningful swings with periods of broad strength across consumer cohorts and then other periods when consumer sentiment has taken a dip. And in those weaker periods, it's been younger and low income consumers who have been most impacted. Now as a category, we're more insulated than others because of the needs-based nature of the products and services we offer, and more specifically with Warby Parker, our customer base tends to skew higher income, but we do serve a cohort of younger customers who are increasingly feeling uncertain about their future and are being more selective in their purchasing behavior. And so if you look at this quarter, we entered Q3 with strong momentum. July and August were our strongest 2-month stretch of the year before we did see some shift in trends in September. And while we've still been driving healthy year-over-year growth and consistency on a 2-year growth basis, we've seen a moderation in average order value or basket size in categories that skew younger, like single-vision with more of a shift to $95 frames versus some of our higher price point frames, fewer multiunit orders on the glasses side, and lower quantities of contact lenses per order, including fewer customers purchasing annual supplies. Within our older demographic and our progressives customers and higher-income consumers, we're seeing consistent behavior. And in the areas that we did take some price earlier this year, including progressives and lens treatments, we really haven't seen a shift and continue to see resiliency in that cohort.

Just maybe as a follow-up, just in light of all of these shifts and some of the near-term volatility, I know you're not guiding to 2026, but could you just refresh us on how we should be thinking about the growth algorithm here? Is mid-teens still the right expectation? And how are you thinking about the balance between active customer growth versus rev per customer?

Thanks, Mark. This is Neil chiming in. We're still aligned to our long-term growth algorithm. And if anything, we continue to have more confidence in our ability to expand the EBITDA. And as part of that algorithm, we've always said 100 to 200 basis points of expansion per year. Long-term, we think we're a 20% adjusted EBITDA business. That being said, as you see in the high end of our guide, we're at 210 basis points for this year. We continue to see great leverage across our corporate expenses, including CX. For next year and for the foreseeable future, we anticipate marketing as a percent of revenue staying consistent. So we continue to have faith and confidence in the category and in our customers. We have now come to expect just volatility as I think any operator has over the last few years. And certainly, our customer is relatively wealthy. And as Dave alluded to, median income above $100,000. As we continue to open stores, they tend to be more in suburban areas. So we still are underpenetrated for that 45-year-old plus customer that buys progressives. So yes, you should still assume high growth for us next year and beyond.

The next question today comes from the line of Oliver Chen from TD Securities.

Regarding the mix shift and what you're seeing, does that change the product road map or how you think about marketing and what you're thinking about the composition that you may see within the guidance? And is that still happening? Or is it resting at a point that -- where you have visibility in terms of the ASPs? And second, on the AI initiatives, what would you highlight as your favorite ones for driving productivity and scalability that's impacting many parts of the organization? And finally, on the insurance customers and opportunities, what's ahead there in terms of continuing to drive awareness as well as key goals? That would be great.

Thanks, Oliver. From a product road map perspective, some of this short-term softness that we're seeing with some of our younger customers is really not driving changes for our product road map. We continue to introduce different lens options that we find resonates with both younger and older customers. So we're very confident in the product road map, and we continue to be able to respond much faster than a lot of our competitors because of the vertical integrated nature of our business. Typically, we'll introduce 15 to 20 collections per year, and we're not beholden to the fashion calendar or the wholesale calendar and can even make adjustments midyear as necessary. As we think about efficiency gains, thanks to AI, there are a few that we're particularly excited about, whether we're using AI in our eyewear design process and even evaluating technical designs as we leverage AI as part of our customer journey flow and some of the work of our CX teams, as some of our brand and creative teams are leveraging new tools to bring down the cost of content creation, in particular, as we think about photo shoots and a lot of the production costs that go into the sheer number of shoots that we do per year, we're already seeing some savings there. The other thing that I would add is that, every corporate team member is using often multiple AI tools per day, and we're finding increased productivity right across our headquarters team.

I'd also just add that we're increasingly using AI to drive customer engagement and growth, including with features like adviser that we introduced on our app and across our site, where AI is used to recommend glasses based on a user's face shape and features and what we know about them. And we've seen just really strong adoption and increases in conversion and are excited to continue to lean into tools like that. And then on the insurance front, we continue to be pleased with the progress that we're making there. This is an area of high growth for us, where we could now offer in-network benefits to more individuals than ever, where we're seeing strong adoption from the newest members of the Versant cohorts that are using their benefits with us. But the vast majority of those members still have not shopped with Warby Parker. And so we're spending a bunch of time creating awareness around the fact that we do have these integrations in place. And then longer term, we also have several pilots underway with larger carriers that we're not in network with yet that we'd like to be and are also just making it easier for people to use their out-of-network benefits with us, understanding at the point of sale, what their exact reimbursement will be and making that purchase process as seamless as possible for our customers.

Our next question today comes from the line of Brooke Roach from Goldman Sachs.

This is Savannah Sommer on for Brooke Roach. You touched on it a bit already on the call, but I wanted to dig into the Target shop-in-shops. With 2025's cohort being open for a few months now, could you discuss how early performance has compared to your initial expectations? And as we think about the planned openings you mentioned for 2026, how are you identifying the right markets for these shop-in-shops particularly in your relation to the broader suburban densification strategy for the core Warby fleet?

It is early days in our partnership with Target, and we're excited to report that expectations --our performance are in line with expectations. The 5 shop-in-shops that we've built and opened are beautiful and deliver the same exact Warby experience as in a stand-alone Warby store. We plan to continue at this pace next year as we learn. That's just a philosophy at Warby Parker is to test, learn, expand rapidly. One of the things that we're looking at is also just even placement within a store, whether that is in line or on the pad in the center of the store. So we'll continue to learn and grow. One of our core values is learn, grow, repeat. We're very early days overall in our expansion into suburban areas. So we have our pick of the litter, so to speak, as we think about expanding within Target and even within our stand-alone stores as well.

Our next question today comes from the line of Anthony Chukumba from Loop Capital.

I guess my question is, what are you seeing in terms of optometrist retention and also compensation? How is that in line with [ doctors ] and I guess, recruitment as well. So retention, recruitment, and compensation, how is that tracking in line with your expectations?

Thanks, Anthony. While it's generally more challenging to hire eye doctors than folks with different backgrounds. across the board, I think you're probably hearing this from a lot of other companies as well. It's generally an employer's market right now. One of the nice things is that over the last few years, as we've expanded into primary eye care and have been building eye exam suites in all of our new stores and hiring more and more optometrists, our reputation as a great employer for doctors has only grown. And we hear from our doctors that they love working at Warby Parker because of the culture, because of the technology. One of the -- just as we've developed a lot of our own retail technology, like our own point of sale that we call a Point of Everything, that really empowers our retail advisers. We similarly build software for our optometrists so that way they can focus on clinical care and focus on the patient rather than be bogged down with lots of administrative tasks. So we find that draws a lot of optometrists to come to work at Warby Parker. So we would say at this moment, it's -- while it's never easy, it's never been easier for us to hire and retain great doctors. Dave and I just returned from Denver, where we had our One Vision Summit. Once a year, we bring all of our store leaders together and all of our optometrists, where we focus on the strategy for the next year. We provide learning opportunities, including continuing education for our optometrists. We share best practices. And it is just both a joyful and a productive time, and we just got so much incredible feedback from our doctors about what we're doing as a company and how we continue to invest in them. And even having an event like this that brings together all of our doctors annually, a lot of our competitors, we know have canceled events like this, but we find that it's important. And our doctors also tend to be pretty tech-forward. So they're very excited about some of the advancements that we're making in AI, whether that's from a systems perspective or from a product perspective, which with the eventual launch of AI glasses coming.

Our next question today comes from the line of Paul Lejuez from Citi.

Sorry, I was on mute. This is Brandon Cheatham on for Paul. Hello, can you all hear me?

Please go ahead.

This is Brandon Cheatham on for Paul. Sorry about that. I was just wondering how you all are thinking about your active customer growth and sales per customer in fourth quarter. Guidance would seem to imply that at least one of those metrics decelerates. I'm just curious with some of the comments you made on consumers gravitating to your lower-priced frames. If you saw sales per customer roll over in September-October, or if there's maybe a little more pressure on the active customer side? How should we think about that for 4Q?

The primary shift that we saw was in basket size amongst the younger demographic that we serve and single-vision glasses and contact lenses. And just given the uncertainty around the economic environment and what we're hearing from some other brands and retailers, we thought it was prudent just to take a more conservative view into the fourth quarter. We are still seeing strong year-over-year growth and healthy growth in terms of active customers and average revenue per customer, in particular, relative to the rest of the category where we continue to take share. But we just thought it would be prudent to take a more conservative view.

And I wanted to follow up with future store growth plans. I know you're leaning in a little bit more to existing markets where you only have 1 or 2 stores. Is that something that we can expect from you all going forward? And do you see a different customer response in markets where you already have a couple of stores and then are able to densify that marketplace?

We tend to be in most major markets. So we are in a period primarily of densification. We generally don't see much difference in customer behavior. But when we add a second or a third store to a market, it just gives us more flexibility from a team perspective, whether that's scheduling or building a cohort of tenured team members that we can promote from within. So the majority of our store managers, whom we call store leaders, are promoted from within, which is great because they understand our systems, they understand our commitment to exceptional customer experiences. Typically, they've received a bunch of training around optics and opticianry and some of the more technical aspects of selling glasses and delivering eye care and understand the importance of that relationship with our doctors. So that's the real advantage to us having multiple stores in a given market.

The next question today comes from the line of Janine Stichter from BTIG.

Want to ask about the at-home sunset impact. Just curious if you've seen the impact to e-commerce be in line with your expectations. And has there been any noticeable benefit to the stores business since you've sunset that. And then maybe on Scout, just how meaningful is that? Maybe you can help us square up how big it is in terms of sales? And any impact to margins as we see the mix of contact lenses go more towards third-party branded?

So we are constantly evaluating the products and services that we're offering our customers and making sure that we're delivering exceptional value and exceptional experiences. And as part of that evaluation, we decided to sunset both the Home-Try On program and Scout, and we've done so in a thoughtful way over an extended period of time where both the parts of those business have intentionally scaled down over time. And if you look at starting with Home-Try On, we've invested in our in-store experiences and also our AI-driven features online like adviser where we are seeing strong benefit and are able to serve those customers that otherwise would have used a Home-Try On in different and better ways and are highlighting the stores nearby more prominently for those customers. We found that the vast majority of people that were ordering Home-Try Ons lived within 30 minutes of a store. And now we can be more directive around where to drive them. We're also seeing strong year-over-year growth in direct e-comm glasses purchases. So people ordering glasses without doing a Home-Try On. And that growth has been partially offset by a declining Home-Try On business. But the decision to sunset this program will enable us to get back to higher e-comm growth rates faster over time. We also have to send one less message for customers and can more effectively reallocate those resources to driving customers to the newer parts of our business that are driving higher incremental returns. And with Scout, it's been a small part of our overall contacts business. It was a really innovative products that we introduced that offered really great value to customers. But we found that in terms of both customer, patient, and doctor preferences that there are third-party brands that people are happy with. And we've found benefits in offering a broad assortment of third-party brands, and don't expect the retirement of Scout to have a material impact on our P&L. I think the nice part about retiring both of these offerings is having less inventory and enabling us to be more nimble going forward.

Our final question today comes from the line of Matt Koranda from ROTH Capital.

Just wanted to maybe understand a little bit more about the pricing philosophy here. I guess a lot of competitors have been taking steady price increases each year in the category in some form or another. And I guess a lot of the category growth is probably coming from price. But it seems like you guys have been a little bit more selective in the ways that you're taking price. The price gaps probably have widened over the last few years. I guess why not take more price intentionally to close that gap?

Thanks for your question, Matt. We have seen competitors take price. And when we look at a lot of the growth in the category, it tends to be from price. We view that as less healthy and less sustainable growth, and we're committed to sustainable growth. That's been our philosophy since we launched the company in 2010. And we believe that if we make customers happy, they'll stay with us for years and decades. And we've seen that in our repeat purchase behavior, in our retention now over many years where our cohorts have performed remarkably consistent. And we think that's in large part due to the great customer experience and the incredible value that they get from us. So it's something that were highly considered whenever we think about a price increase. One of the things that we're proud of in this quarter, even though we're very disappointed that we missed our bottom end of top line guidance, is that we had healthy customer growth. So you can anticipate that we will continue to grow in a healthy manner next quarter and beyond because we'll continue to treat customers well. Our opening price point of $95 with anti-reflective, anti-scratch, single-vision prescription lenses has remained consistent since 2010. Of course, since then, we've also introduced frames at higher price points. We've introduced different lens options, whether it's different tints or high index or other ultrathin options. We've gone beyond our signature progressive and now offer precision progressives. So what you'll see from us in the short and midterm is continue to have more options for our customers to choose from, but we'll ensure that it's always exceptional value, and our hope and intent is that, that value gap continues to increase as our competitors raise prices.

Maybe just for my follow-up. Curious to hear a little bit more about AI smart glasses, if you can say anything, just any updated thinking around how new products might be rolled out next year and just any thoughts on the AOV and benefits there?

We believe we're best positioned to win here because of our brand. We pioneered lifestyle brand made on the Internet and technology has always been at the heart of Warby Parker. Our stores and our digital experience is second to none in the category. So when introducing a new complex product like AI glasses, having very knowledgeable, tenured, and tech-forward teams that are able to sell this and explain this product to the customer and serve the customer is going to put us in a position to win here. We're very excited about our partners who we engage with on a daily basis at Google and Samsung, 2 of the most world-class technology innovators on the planet. And we'll have more to share in the coming months. But we're excited about this new product category for us.

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