Warby Parker Inc

NYSE:WRBY

Earnings Call Analysis

Raising Full-Year Guidance on Strong Performance

The company saw revenue increase to $169.8 million, a 14.2% year-over-year rise, topping their third-quarter guidance. While gross margin dipped slightly to 54.8% due to the expansion into eye exams and contacts, these areas are expected to positively impact long-term gross margin dollars. The firm ended Q3 with 140 stores, a 31% increase from the previous year, signifying growth in their exam services. Adjusted EBITDA was $11 million, or 6.5% margin, slightly down from 8% the previous year. Looking forward, the company has upped its full-year guidance to $666-669 million in net revenue, predicting about 11.5% growth, and maintains an adjusted EBITDA margin forecast of around 7.9%. For the fourth quarter, they project net revenue between $158-161 million, equating to 8-10% growth with an expected adjusted EBITDA margin of approximately 6%.

Expanding Beyond Eyewear: A Vision for Holistic Care

One significant lever driving the company's performance in Q3 was the expansion into holistic vision care, which drew in new customers and increased customer lifetime value. Contact lenses demonstrated robust growth, now accounting for 9.3% of Q3 revenue, a jump from the previous year, yet still below the industry average of 20%, suggesting room for growth. This sector, despite its lower margins, offers a recurring purchase cycle akin to subscriptions, bolstering gross margin dollars. Eye exams also saw an increase in revenue share, supporting the strategic shift towards comprehensive vision care. Such services enhance customer retention, as evidenced by customers who use the company's eye care services spending 2.2 times more in their first year compared to those purchasing solely glasses. Investments in exam technology and retinal imaging signal the company's commitment to a seamless customer experience anticipated to yield substantial long-term benefits.

Marketing Investments Yielding Sustainable Growth

The company strategically increased marketing investments in Q3, returning to year-over-year growth in marketing dollars. This shift to pre-pandemic channel mix levels is expected to maintain marketing spend at a low percentage of the revenue. Improved marketing efficiency contributed to a 1.8% growth in active customers, indicating a positive trajectory for customer growth rates. Notably, strong customer retention and repeat purchase patterns were observed, particularly with a revenue retention rate around 50% over 24 months. The launch of a brand awareness campaign across various media platforms, differing from direct customer acquisition efforts, aimed to foster long-term brand affinity. Creative partnerships, such as the collaboration with Marvel for the Spider-Man 2 video game, exemplify the company's investments in cultural alignment and community giving.

Steady Expansion and Revenue Uplift

Revenue for Q3 reached $169.8 million, a 14.2% increase year-over-year, beating the high-end of the initial guidance range. This growth was led by a 20.7% surge in retail revenue, outpacing a modest 3% uptick in e-commerce revenue. Despite e-commerce's unpredictability, the company opened 11 new stores, enhancing retail revenue and maintaining retail productivity at 101%. The continued focus on expanding the store network and integrating eye exam capabilities reinforces the importance of retail in the blended sales strategy. The addition of 2.3 million active customers, a 1.8% rise from the preceding year, and a 10% increase in average revenue per customer to $284 narrate the company's successful balance between physical and digital sales channels.

Gross Margin and Operational Efficiency

The adjusted gross margin for Q3 was slightly reduced year-over-year to 54.8%, impacted by the strategic emphasis on eye exams and contacts, which inherently have lower margins than glasses. Nonetheless, the company expects these verticals to enrich gross margin dollars over time. Meanwhile, the opening of new stores increased fixed costs such as occupancy and optometrist salaries. Adjusted Selling, General, and Administrative (SG&A) expenses, at 55% of revenue, saw a marginal decrease as a percentage of revenue, benefiting from cost structure adjustments made previously. The marketing spend, which experienced a planned increase, stood at 11.6% of revenue, supporting the new brand campaign and future brand recognition efforts. Lastly, adjusted EBITDA for Q3 amounted to $11 million or a 6.5% EBITDA margin, symbolizing a year-to-date margin improvement of 440 basis points from the previous year.

Forward-Looking Guidance and Strategic Initiatives

The company raised its full-year 2023 net revenue guidance to $666 million to $669 million, indicative of an 11.5% growth at the midpoint. The adjusted EBITDA margin is projected to stay around 7.9%, remaining consistent with prior guidance, and an EBITDA improvement of 340 basis points on an annual basis is expected compared to last year. The scope of investing continues with plans to open 40 new stores annually, aligning with the long-term vision of operating 900 stores nationwide. E-commerce, while fraught with some near-term variability, follows a promising trajectory, with the company's consumer value proposition and consistent marketing efforts expected to drive sustainable growth. The strong balance sheet, low promotional reliance, and emphasis on attracting high-quality professional talent bolster the confidence in the company's ability to navigate future challenges and leverage opportunities in the vision care marketplace.

Boosting Brand Value and Avoiding Promotions

The organization has managed to maintain its brand value by avoiding the introduction of extensive promotions, relying instead on an 'Add-a-Pair and Save' offer to encourage higher purchases. This strategy reinforces the company's commitment to exceptional value without sacrificing margins. The avoidance of significant promotions, particularly during the holiday season, accentuates the company's ability to deliver quality at competitive prices, which is expected to further customer loyalty and brand strength.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to today's Warby Parker Inc. 3Q '23 Earnings Conference Call. My name is Bailey, and I'll 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 conference over to our host, Jaclyn Berkley, Head of Investor Relations. Please go ahead when you're ready.

[Jaclyn Berkley, executive]

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 investors.warbyparker.com. During this call and in our presentation, we will be making comments on the 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 8, 2023 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.

[Neil Blumenthal, executive]

Thank you, Jaclyn, and good morning, everyone. Today, we look forward to discussing the drivers of our Q3 performance and our updated outlook for fiscal 2023. Our net revenue of $169.8 million was up 14.2% year-over-year, our strongest quarterly revenue growth this year; and our adjusted EBITDA of $11 million represents a 6.5% margin. We're particularly pleased to report our results within the backdrop of the broader optical industry during a time when industry growth has been lower than historical norms. Regardless of the environment, we believe our unmatched value proposition and innovation, our multichannel approach and our strategic investments in both holistic vision care and marketing position us for long-term sustainable growth. Based on our recent outperformance and outlook for Q4, we're raising our full-year guidance. With that, Dave and I will go through how each of these drivers contributed to our strong Q3 results and our outlook for the remainder of the year. Starting with the first driver, our unmatched value proposition and customer-centric innovation, because of our direct relationship with consumers, we have the ability to quickly incorporate customer data and feedback into every aspect of our business, from eyewear design to manufacturing to the overall shopping experience. On the product side, our consumer-centric approach to innovation has led to novel frame constructions and a broad lens portfolio that support average revenue per customer. On our Q2 call, we shared that we introduced a premium progressives offering called Precision Progressives. We introduced this lens in response to customer demand, particularly from the retail channel, where Progressive's penetration is higher. Our Precision Progressives start at $395 and, like all of our glasses, that price is all-in, including the frame, lenses and all coatings. Precision Progressives provide lift to both average order value and gross margin while delivering superior quality and exceptional value to our customers, given similar products often cost more than $1,000 elsewhere. In Q3, overall Progressives made up 22.5% of our total prescription glasses sold, up from 21.4% in Q3 of last year. We believe there is significant white space for future growth as Progressives represent approximately 40% of the eyewear market overall. In September, we launched our Memory Metal collection, which starts at $195 and was developed in response to customer demand for lighter weight and more flexible frames. We use a titanium alloy for these frames and innovative material that allows the nose bridge and arms of the frames to bend and return to their original shape. In addition to Memory Metal, we launched 3 other collections this quarter, including our Circa collection, our Fall collection and a second collaboration with LA-based artist Geoff McFetridge, a longtime friend of the brand whose already you can find in several of our stores. Our customers have come to trust Warby Parker's innovative designs and exceptional quality. We're encouraged that, as we've introduced more complex constructions at higher price points, we've seen little price resistance, and now our customers are spending more with us than ever. In Q3, average revenue per customer was up 10% year-over-year to $284. And while we have expanded our assortment, we've maintained our core pricing of $95 for single-vision frames, lenses and coatings, and we currently offer more assortment at that price than ever before. Since day 1, our simple, affordable pricing structure has been an integral part of our value proposition, and we believe it continues to attract new customers. In addition to product innovation, we continually make technology investments to enhance our customer experience. This quarter, we focused on 3 key areas. The first was leveraging in-house technology to enhance optician efficiency, which in turn drives higher in-store conversion and productivity. One example is the tool our opticians can use that automates optical measurements that previously required time-consuming manual processes. We've heard great feedback from our pilot stores about the efficiency gains they've seen and plan to roll this out more broadly in the coming quarters. Another tool that we are in the early stage of rolling out uses AI to facilitate the transcription of prescriptions with improved speed and accuracy. Second, in Q3, we incorporated our virtual try-on tool into additional parts of the customer journey. As a reminder, our virtual try-on leverages first-of-its-kind technology developed in-house to help customers find the perfect fitting frame. We find that, if e-commerce customers see a pair of process on their face, they are more likely to convert. We are excited to introduce our virtual try-on to more customers than ever and to continue to invest in its future capabilities. Third, we improved the online experience of booking eye exams and finding nearby Warby Parker retail stores. We've already seen these improvements generate more eye exam bookings online, which we expect to lead to higher conversion and support average revenue per customer, over time. The second driver of our growth was expanding our highly productive store base, coupled with an improving e-commerce channel. In Q3, we continued to invest in our stores, which have consistently delivered strong unit economics even in the current demand environment. Retail revenue increased 21% year-over-year, driven by the addition of 40 new stores since Q3 of last year, including 11 in the most recent quarter. We entered new markets, including Grand Rapids, Michigan and Gainesville, Florida, and we expanded further in states like Tennessee, with the additions of our Franklin and Knoxville stores. We also continue to infill some more suburban locations just outside our largest markets like New York, Northern New Jersey and Philadelphia. Our new stores continue to pay back within 20 months and generate strong 4-wall adjusted EBITDA margins in line with our target of 35%, so we plan to continue investing in store growth. In addition to being highly efficient customer acquisition vehicles, our stores are integral in advancing our goal of providing holistic eye care. Every new store that we've opened in 2023 includes eye exam capabilities. We find that exam stores drive higher sales than non-exam stores and, industry-wide, nearly 80% of prescription glasses are purchased at the same location an exam takes place. Stores are also a gateway to continued scaling Progressives, our highest ASP and the highest margin product. In Q3, we saw retail productivity of 101% versus Q3 2022, consistent with the trends we shared in early August. In spite of recent traffic and other macro headwinds, our store leaders have been successful in driving in-store conversion and higher revenue per customer. As we look to the remainder of the year, we are on track to add a total of 40 stores in 2023, having already opened 30 year-to-date. Longer-term, we believe we can open at least 900 stores in the U.S., a significant opportunity for further penetration of new and existing markets for years to come while still representing a small fraction of the 48,000 optical shops in the U.S. Last quarter, we shared that we expected to see our e-commerce channel return to growth at some point in H2. In Q3, we're pleased to report that e-commerce revenue was up 3% year-over-year, driven by marketing comping positive and the growth of our contacts business, the majority of which is online. While we are encouraged by the growth we saw in Q3, we don't expect e-commerce recovery to be linear, and we may see periods of higher or lower growth in the near-term, including in Q4. Looking ahead, we believe that the overall trend line is positive and our e-commerce business is on the path towards sustainable growth. And now, I'll hand it over to Dave to take us through some of our other product categories and customer metrics.

[David Gilboa, executive]

Thanks, Neil. The third key driver of our strong Q3 results was our expanded holistic vision care offering, which is attracting new customers and driving higher customer lifetime value. Our contacts business had a record quarter, delivering strong growth and representing 9.3% of Q3 revenue, up 240 basis points versus a year ago. This is still well below the industry average of 20% and represents a meaningful opportunity for future growth. While contact lenses have a lower gross margin percentage compared to our other product offerings, their higher purchase frequency and subscription-like purchase cycle are accretive to gross margin dollars. Contacts have also been a key driver of new customers and, looking forward, provide additional upside for our e-commerce business, given purchases tend to skew more online.Eye exams, which are the gateway to prescription eyewear and contacts purchases, represented 4.4% of revenue in Q3 versus 3.2% last year. Scaling exams and contacts continues to be a strategic priority in order to deliver a seamless, holistic customer experience and drive higher customer lifetime value. On average, customers that get an eye exam with us and buy glasses and contacts spend 2.2x with us in their first year versus glasses-only customers and continue to purchase more frequently and spend more in subsequent years. To support our holistic vision care business, we added 57 net new optometrists to our team this quarter, and we continue to invest in their professional development, their engagement and their ability to provide exceptional patient care. In October, we brought our optometrists and store leaders together for our first-ever One Vision Summit, where these leaders spent time discussing how to continue to deliver best-in-class customer and patient experiences. In addition to opening stores with physical exam suites and hiring optometrists, we continue to be excited by the opportunity to use telehealth to make eye care more accessible, more convenient and more efficient. Our virtual vision test telehealth app enables patients to renew their prescriptions from home in under 10 minutes, and we continue to see strong engagement and exam growth through this channel. In a small number of stores, we are also testing video-assisted exams that offer comprehensive eye health evaluations using live doctors who remotely engage with patients sitting in our exam suites. We believe this technology offers the opportunity to scale examine capacity efficiently in combination with our efforts to add optometrists to our stores directly or through our PC model. Finally, we continue to roll out retinal imaging in more exam suites, enabling advanced disease diagnostics without pupil dilation, resulting in a better patient experience, which we expect to drive loyalty and retention. We are pleased with the progress we are seeing on both the contacts and exam front and expect these long-term investments to deliver significant value over time. We also continue to invest in efforts to make it easier for customers to use their vision insurance benefits with us. More than 60% of our customers have vision insurance. And in Q3, we saw higher utilization of in-network insurance benefits across our customer base in addition to the continued usage of out-of-network benefits. While our customers recognize that, even without reimbursement, their out-of-pocket spend at Warby Parker is lower than purchasing in-network elsewhere, we want to ensure that our products and services are as affordable as possible. Looking ahead, we continue to explore additional partnerships and capabilities to make it easier for our customers to leverage their in-network and out-of-network benefits with us. The fourth driver was our reinvestment in marketing while making longer-term investments in our brand. As Neil highlighted, the third quarter marked our return to a year-over-year increase in marketing dollars following the rebalance of this expense that began in the second quarter of 2022. With our channel mix between stores and e-commerce back to pre-pandemic levels, we expect marketing spend as a percent of revenue to remain in the low teens. We are pleased with the marketing efficiency we are seeing and expect these levels to drive steady and sustainable new customer growth. In Q3, we saw a trailing 12-month active customer growth of 1.8%, up from 1.2% at the end of Q2 and in line with our expectation that active customer growth would positively inflect as our marketing spend comped up year-over-year in Q3. As a reminder, this is a trailing 12-month metric, and our marketing spend is still down 21% on a LTM basis. As marketing spend further increases on a year-over-year and trailing 12-month basis, we expect to see active customer growth rates continue to improve from current levels. Importantly, we continue to see strong customer retention metrics and repeat purchasing patterns across cohorts, including a revenue retention rate of roughly 50% over 24 months and 105% over 48 months for the most recent cohort with 4 years of purchase history. In addition to our core customer acquisition efforts, during the third quarter we launched a brand campaign to boost awareness across different media platforms and demographics. This campaign is distinct from our primary customer acquisition efforts in that it is designed to drive top-of-funnel awareness to fuel future growth, not necessarily near-term transactions, and represents our commitment to investing in our brands to drive long-term growth. We've seen strong engagement throughout the campaign and look forward to updating you more in the coming quarters. In addition to the brand campaign, we've continued to strategically align the brand with unique cultural moments to expand our audience, an exciting example of which was our recent collaboration with Marvel, Insomniac Games and Sony Interactive Entertainment tied to the release of the highly-anticipated Marvel Spider-Man 2 video game. Warby Parker was 1 of 3 brands, and the only optical brand, that Marvel worked with to launch in-game and real-world products, supporting our long-time commitment to giving back and helping others, a mission that fits perfectly with Spiderman. Working with Marvel, we launched a capsule collection of character-inspired frames. And working further with Insomniac Games and Sony Interactive Entertainment, Select Warby Parker frames, billboards and a Warby Parker storefront are featured in the game itself. Finally, one of the most rewarding outcomes of our recent performance is the broader impact we're having through our Buy a Pair, Give a Pair program. As a reminder, for every pair of Warby Parker glasses sold, a pair is distributed to someone in need. We're now proud to share that 15 million pairs of glasses have been distributed globally via the program, meaning that 15 million more people now have the glasses they need to learn, work and achieve better economic outcomes. Across Team Warby, we continue to be excited that, as our business scales, our impact grows and feels more meaningful than ever. And now I'll turn it over to Steve to review the details of our financial performance.

[Steve Miller, executive]

Thanks, Neil and Dave. Starting with revenue, we generated revenue of $169.8 million, up 14.2% year-over-year and above the high end of our Q3 guidance range of $163 million to $165 million, or up 10% to 11%. From a channel perspective, retail revenue increased 20.7% year-over-year while e-commerce revenue increased 3% versus Q3 of 2022. For the third quarter, e-commerce represented 33% of our overall business compared to 37% in 2022 and in line with our pre-pandemic channel mix. As Neil mentioned, the positive inflection in e-commerce revenue was driven by marketing spend, returning to growth, and the continued scaling of our contact business, the majority of which is online. As Neil mentioned, while we were encouraged by the growth we saw in Q3, we don't expect the e-commerce recovery to be linear and may see some periods of higher or lower growth in the near-term, including in Q4. Looking ahead, we believe that the overall trend line is positive and our e-commerce business is on a path towards sustainable growth. We opened 11 new stores in Q3 and 40 over the past 12 months, finishing Q3 with 227 stores. Retail productivity in Q3 was 101% versus the same period last year. As a reminder, we define retail productivity as sales per average number of stores opened in the period. So even as we continue to add an average of 40 stores per year, our more mature cohorts continue to perform as those newer stores ramp. 7 of the new stores in Q3 were expansions within existing markets and four were entries into new markets. All 11 new stores include eye exam capabilities, which brought the number of locations offering eye exams in the quarter to 183, or 81% of our total fleet of 227 locations. From a customer perspective, we finished the quarter with 2.3 million active customers, an increase of 1.8% versus the same period a year ago, and our average revenue per customer increased 10% year-over-year to $284. As Neil mentioned, we're pleased with our increase in average revenue per customer, which was driven by a few factors, including an increase in Progressives as a percentage of our business mix and continued ramping of both contact lens and eye exam sales. Progressives represented 22.5% of total prescription glasses sold in Q3 2023, up from 21.4% when compared to the third quarter of 2022. This is still well below the market average of approximately 40%, leaving a substantial runway for product category growth. Progressives are also our highest gross margin and highest price point product, starting at $295. We also continue to make progress on our move into holistic vision care as we evolve from a glasses-only brand into one that offers glasses, contacts and eye exams to customers. From Q3 '22 to Q3 '23, contact lenses have increased from 6.9% to 9.3% of our business mix. Over the same period, eye care has increased from 3.2% to 4.4% of our business mix. Contacts and eye exams both represent large opportunities for future growth, each accounting for $15 billion-plus portions of the $76 billion U.S. optical industry. We remain well-underpenetrated for sales of these products as a percent of revenue versus other national optical retailers. Moving on to gross margin. As a reminder, our gross margin accounts for a range of costs, including frames, lenses, optical labs, customer shipping, optometrist salaries, store rents and the depreciation of store build-outs. Our gross margin also includes stock-based compensation expense for our optometrists and optical lab employees. For comparability, I will be speaking to adjusted gross margin, which excludes stock-based compensation. Third quarter adjusted gross margin was 54.8% compared to 54.7% in Q2 of this year and 56.9% in Q3 of last year. The year-over-year decrease was driven by strong growth of eye exams and contact lenses as we evolve into a holistic vision care company and expand into these large segments of the optical industry. Eye exams and contacts have lower gross margin profiles than eyeglasses but, over the medium and long-term, are accretive to gross margin dollars and allow us to serve all of our customers' eye care needs. Furthermore, expanding our contacts offering is a core part of scaling our holistic vision care offering and a key driver of growing average revenue per customer. In addition, contact lenses have a higher purchase frequency and subscription-like purchase cycle. We also experienced continued year-over-year gross margin deleverage in 2 areas that represent the more fixed portion of our cost of goods, retail occupancy and optometrist salaries, which are directly linked to our expansion into eye care. Our growth in store count has naturally led to an increase in store rents and depreciation from store build-outs. In Q3 specifically, we opened 11 new stores. As of the end of Q3 2023, we operated with 140 stores where we engage directly with an optometrist and, therefore, recognized both revenue from exams and optometrist salaries. This represents an increase of 31%, or 33 additional locations from 107 employed and PC exam stores at the end of the third quarter last year. We believe this ongoing investment in exam capabilities will benefit the business long-term as a result of greater control over the customer experience, new eye exam revenue and higher in-store conversion rates. There are a few accretive tailwinds to margin that act to partially offset these effects. First, we continue to scale our highest priced and highest gross margin Progressives business. In the third quarter, Progressives accounted for 22.5% of our prescription eyeglass units, which is up 110 basis points versus a year ago. Secondly, we continue to scale the portion of prescription glasses orders that we in-source at our 2 owned optical labs in New York and Nevada. We expect our continued scaling at these facilities to result in continued gross margin benefits along with higher Net Promoter Scores, lower refund rates and faster turnaround times. Shifting gears to SG&A. As a reminder, SG&A for our business includes 3 main components: salary expense, covering our headquarters, customer experience and retail employees; marketing spend, including our home try-on program; and general corporate overhead expenses. Adjusted SG&A excludes noncash costs like stock-based compensation expense, depreciation and charitable equity donations. Adjusted SG&A in the quarter was $93.4 million, or 55% of revenue compared to Q3 2022 adjusted SG&A of $82.3 million, or 55.3% of revenue. The 30 basis point decrease in adjusted SG&A as a percentage of revenue was primarily due to adjustments to our cost structure we made in August of last year, including lower salary and general corporate expenses, partially offset by a planned increase in marketing spend. In Q3 of this year, we began anniversary-ing these pullbacks in SG&A spend driven by reductions in marketing and salary spend in particular. For the first 9 months of this year, adjusted SG&A spend as a percent of revenue was 52.6% versus 59.1% for the same period last year, a decrease of 650 basis points. Marketing spend for the quarter came in at $19.7 million, or 11.6% of revenue. This is up from $14.9 million and 10% of revenue in the same period last year, driven in part by our new brand campaign aimed at driving longer-term awareness of Warby Parker. Turning now to adjusted EBITDA. In the third quarter, we generated adjusted EBITDA of $11 million, representing an adjusted EBITDA margin of 6.5%, which compares to adjusted EBITDA of $11.9 million, or 8% of revenue in the year-ago period. For the 9 months ended September of this year, we generated adjusted EBITDA of $42.9 million and adjusted EBITDA margin of 8.5% compared to adjusted EBITDA of $18.6 million and adjusted EBITDA margin of 4.1% for the same period last year. On a year-to-date basis, we increased adjusted EBITDA margin by 440 basis points compared to last year. Turning now to our balance sheet. We finished the quarter with a strong balance sheet position, reflecting $216 million in cash, which we will continue to deploy deliberately to support our growth and operations. We also have an undrawn credit facility of $100 million, other than $4 million for letters of credit that we can upsize to $175 million. Now to our outlook. Based on our strong year-to-date performance and updated view of the rest of 2023, we're raising the full-year guidance we outlined on our Q2 call in August. For 2023, we now expect net revenue of $666 million to $669 million, representing approximately 11.5% growth at the midpoint of our range. Adjusted EBITDA margin of approximately 7.9%, in line with prior guidance, which equates to adjusted EBITDA of $52.7 million, at the midpoint of our top line guidance range. We still expect gross margin in the mid-50s as a percent of revenue and to open 40 new stores this year. We're still forecasting stock-based compensation as a percentage of net revenue in 2023 to be roughly 10% compared with 16% in 2022. Stock-based compensation for both years is above our long-term forecast as the result of the multiyear equity grants to our co-CEOs in 2021. We still anticipate stock-based compensation to normalize to a range of 2% to 4% of net revenue late in 2024. With respect to the fourth quarter, we're guiding to the following: net revenue of $158 million to $161 million, or revenue growth of approximately 8% to 10%. Through the first week of November, we've observed trailing 28-day retail productivity versus 2022 of 100%. From a bottom line perspective, we're guiding to an adjusted EBITDA margin of approximately 6% at the midpoint of our revenue guidance. With that, Neil, Dave and I are pleased to take your questions. Operator, please open the line for Q&A.

[Operator]

[Operator Instructions] Our first question today comes from the line of Mark Mahaney from Evercore.

[Mark Stephen Mahaney, analyst]

Okay. Two questions, please. I think Dave, you referred in the end of your comments to active customer growth rates should continue to improve from current levels. Could you just double-click on that a little bit, maybe either quantify that or qualify that a little bit? What's the pace of active customer growth we saw in the September quarter? Is that a good proxy for how we should think about it, going forward? And then, Steve, on the EBITDA margins, is the business set up so that you'll continue to have this 100 to 200 bps of EBITDA margin expansion, going forward? Is that still the cadence that we should expect?

[David Gilboa, executive]

This is Dave. Just touching on the active customer growth first. As a reminder, this is a trailing 12-month metric. And so, as we noted in our Q2 call, we expected that to be the low point, given the 30% 12-month trailing marketing cuts that we had made at that point. And we have seen active customer growth trends the way that we expected. And as our marketing investments will continue to increase on a year-over-year basis over the next few quarters, we're expecting active customer growth to continue to trend positively. We're pleased with the returns that we're seeing from our marketing spend and marketing efficiency and expect that to continue into Q4 and beyond.The other kind of factor that's impacting our active customer count that we report on, as we mentioned in our Q2 call is that, in the back half of last year, we introduced new functionality to make it easier for multiple members of the household to transact with us under a single customer account. And as a result, we're seeing more multi-person customer accounts where a family might walk into the store and purchase classes for a husband, wife and 2 kids under the same account. Right now, even though we're serving multiple people under one account, what we're reporting on is the number of accounts. And so, as we see more of these households purchasing together, that's also impacting the metric in general. But in spite of that, we are expecting to see continued positive growth in the coming quarters

[Steve Miller, executive]

And Mark, as it relates to your question on adjusted EBITDA margin improvement. At this time, we're still planning for an annual increase of 100 to 200 basis points in incremental adjusted EBITDA each year. We'll provide an updated perspective on what that number should be on our Q4 call early next year.I just wanted to point out the level of increase that we guided to for this year really used H2 of last year as the benchmark, off of which we add an incremental 100 basis points of adjusted EBITDA margins going from 6.9% H2 of last year to 7.9% H2 of this year. If we were to look at that on an annual basis, the improvement would be from 4.5% adjusted EBITDA margins last year to the 7.9% this year. So on an annual basis, the improvement is roughly 340 basis points versus the 100 basis points, which is just benchmarked against H2.

[Operator]

The next question today comes from the line of Edward Yruma from Pipa Sandler.

[Edward Yruma, analyst]

I know you guys have some pretty interesting growth vehicles within the product assortment. I'd like to click down a little bit. I know you spent a lot of time talking about contacts. I guess what's the success of the private label product? Understand that maybe that will help offset some of the gross margin drag. And then, second, on some of the higher price point frames, the mixed materials that you've introduced in recent quarters, I guess kind of where does that stand in terms of percent of mix? And has that been a gross margin driver?

[Neil Blumenthal, executive]

This is Neil. When we first launched contacts, which was just a couple of years ago, we thought it was important to launch with our own brand, with, Scout because we're known as a direct-to-consumer lifestyle brand and thought that that was the right way to sort of introduce contacts to customers and our (indiscernible) world. That being said, we always knew that it would be a relatively small percent of our overall contact sales as we just look at the overall market and the fact that third-party contact lens constitute the that vast majority of the overall market. And the fact that, when you purchase contacts, you need to use a valid prescription, and those prescriptions have the brand and contracts written on the prescription.So we'll continue to have a private label option, and it is a higher gross margin than our other contacts that we sell. But the vast majority of contacts that we sell will generally be other brands, particularly the big ones from J&J or Alcon and others. You are right to point out that our sort of higher-priced frames are higher margin, and you'll continue to see us invest in a broader sort of frame assortment. We have not seen price resistance from our customers, and it's really important to us that we're delivering exceptional value. So while we now have frames at $145 or starting at $175 or $195, they would be sold for in other locations for several hundred, if not over $1,000. And that's just core to our ethos and our pricing strategies to always deliver exceptional value.

[Operator]

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

[Brooke Roach, analyst]

I was hoping you could elaborate on the trends you're seeing in the market in terms of traffic and conversion as you've moved through 3Q and into 4Q that's driving the more conservative outlook that you've provided today in your fourth quarter guide. How does this inform your view of future total marketplace growth on a comparable basis?

[Steve Miller, executive]

thanks for the question. We're seeing consistent trends thus far as it relates to traffic and conversion. The metric that we report each quarter is our trailing 28-day store productivity as of the most recent week before our earnings call, and that number for store productivity is 100% on a trailing 28-day basis. That number now will fluctuate over the course of the quarter. So it's not necessarily that's the number that we'll see on a consistent trailing 28-day basis as the quarter evolves and as we ramp up for the busy holiday period.And so that's the color we've given from a quantification perspective as it relates to store productivity. What I will say is we've seen consistent trends as it relates to higher conversion and higher AOV and higher average revenue per customer in our stores that have offset lower traffic trends that the industry has been experiencing for several quarters.

[David Gilboa, executive]

And at a high level, we've seen some signs of stability over the last few months in the category and more predictable customer behavior around periods like back-to-school than we've seen over the last couple of years. But we have yet to see evidence of significant pent-up demand flowing through the category. In-store traffic still remains below 2019 levels. And as we've seen throughout the last couple of years, there's been some choppiness in trends, including from weather disruption and continued macro uncertainty. And so while we're encouraged by some of the recent trends, we're maintaining a conservative outlook in general.

[Brooke Roach, analyst]

And if I could just ask one follow-up on the insurance industry dynamics. Can you provide an update on the amount of new wins that you have recently had on getting more customers to be in network with Warby Parker?

[David Gilboa, executive]

Yes. We are encouraged by the progress that we're making on the insurance front. In Q3, we saw higher utilization of insurance usage, both from our in-network customers and continued strong usage of out-of-network reimbursement. Some of the new functionality that we've introduced, like our universal eligibility check, makes it easier for customers to understand their benefits and how to use them at Warby Parker and some of the relationships with large employers and carriers that we've introduced over the last year. We're seeing a stronger utilization there, so that's encouraging. And then we also believe that, as we continue to scale, as we expand our store footprint, as we hire more doctors, we continue to position ourselves to be a better partner to large employers and large carriers and are encouraged by the potential for us to unlock much bigger relationships over time.

[Operator]

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

[Oliver Chen, analyst]

Neil, Dave and Steve, regarding your guidance and what's ahead and sort of the mixed consumer picture, what are you forecasting in terms of promotions? And how are you thinking about promotions on a year-over-year basis in this environment? And then second, as we zoom out longer-term on the 900-store target, lots of opportunity ahead. What role will opticians play? And also, how is new store productivity helping inform that longer-term target? And why is that the right number, 900 in terms of what you see?

[Neil Blumenthal, executive]

This is Neil. On the consumer front and promotions in general, we've tried to run the business to always provide exceptional value, right, whether that's a $95 pair of glasses all-in that would typically cost $400 elsewhere, or our Progressives offering, whether that's our standard Progressives at $295 or our Precision Progressive at $395 that would cost over $1,000 elsewhere.And given that sort of exceptional value, we haven't felt the need to offer tons of promotions. So you shouldn't expect to see us introducing promotions during the holiday season. We do have an Add-a-Pair and Save promotion. That's currently been running now for a while, and that encourages folks to buy more from us, and that drives UPT and AOV, and sort of the more you spend with us, the more you save. But we'll continue to ensure that everything that we're selling is exceptional value, and that price-to-quality ratio will continue to be unmatched. As we think about sort of our retail rollout, we continue to be on track to open 40 stores this year, and we plan to continue on a similar trend next year. As we've sort of done analysis and worked with third parties, right, we've identified that 900 number. There's over 48,000 optical shops in the U.S., and there's plenty of white space ahead of us. We continue to have no challenges hiring and training opticians. Opticianry is a license profession in most states, and we've been able to develop a lot of talent internally. So not only do they have the competency and skill set around fitting glasses and expertise around lenses, but also are ingrained with our sort of culture around great customer experiences and making sure that every customer and patient feels amazing walking in and walking out a Warby Parker store. And as we think about hiring optometrists, we still continue to be a preferred employer of optometrists. And while only 1,800 or so optometrists graduate every year, we're not finding the challenges hiring optometrists that some other companies often speak to. So we'll continue to create an amazing work environment for optometrists so, that way, we continue to hire the best and the brightest in the field. And we'll continue to invest in technology that leverages their expertise so they can focus on clinical care rather than administrative tasks. And that also helps us on recruitment and retention of optometrists.

[Operator]

The next question today comes from the line of Mark Altschwager from Baird.

[Mark Altschwager, analyst]

I guess, first off, was hoping you could talk a little bit more about some of the takeaways from the new marketing campaign and just the broader re-ramp in marketing spend. I guess are you seeing the demand [lift] you would expect there? You also mentioned that you would not expect the e-commerce growth line to be linear. Wondering if that signals maybe some more choppiness quarter-to-date and kind of what your readings are there.

[David Gilboa, executive]

Yes. In general, we've been pleased with the returns and the response that we've seen from investing more in marketing in general. As we noted last quarter, our marketing efforts have kind of fallen into 2 categories in this last quarter, and that's extended into Q4, where there's kind of the core marketing effort designed to drive transactions, and then there's a separate effort that is our brand awareness campaign, where that really reflects the commitment to long-term investment in our brand and in increasing brand awareness.And we're pleased with the engagement and the response that we're seeing from that campaign. The goal there really to move some of our brand awareness metrics and not necessarily convert in the current period. And so we need to wait a few months to look back at our brand awareness and see how much we've moved it. But in general, the engagement that we've seen on some platforms that we haven't been doing much marketing on previously, like YouTube and TikTok, we've achieved kind of all our engagement goals there, and so are pleased with the returns that we've seen so far. And then as it relates to e-com, we're confident in the overall trend line for e-comm continuing to go up and to the right, but I do expect there to be some volatility from quarter-to-quarter. And so there may be some acceleration or deceleration when looking at year-over-year growth from one period to another. That part of our business is more sensitive to marketing spend and media rates and, as we've started to allocate more of our budget to experimentation in new channels, recognize that some of those things will work, some won't, and we plan to take more shots on goal over the next few quarters than we did in the prior few quarters, and so that may be reflected in kind of some near-term volatility there, but overall are focus on ensuring that our e-com business is returning to long-term sustainable growth, and we certainly believe we're on a path to that.

[Steve Miller, executive]

And Mark, this is Steve. We talked a little bit about this before. The other factor impacting e-com growth, and this occurs every year as we talk about making sure that we're capturing consumer demand during the busy holiday season. There's a fair amount of orders that we take in December, the back half of December, in particular. And some of those we recognized as revenue in Q4 in December, but there are a number of them, the vast majority actually, that we'll actually deliver and recognize revenue on in January and Q1 of the following year. So there's also that element of timing involved in the pace of e-commerce growth and orders over the course of Q4 within December in particular.

[Mark Altschwager, analyst]

And Steve, that actually dovetails nicely into my follow-up. I guess I'm wondering if there's any initial views you can share on sales growth plans for 2024. And I guess, typically, as you called out, you do see your biggest quarter-over-quarter revenue gain from Q4 to Q1. Any reason we shouldn't expect that same typical seasonality as we look at the next few months here?

[Steve Miller, executive]

It's safe to assume that we should assume the step-up from Q4 to Q1 will follow a similar trend line to what we've seen in previous years. That's just the pattern that our business has exhibited for many, many years, and we expect the same step-up from Q4 to Q1 looking ahead to next year.

[Operator]

The next question today comes from the line of Paul Lejuez from Citigroup.

[Brandon Cheatham, analyst]

This is Brandon Cheatham on for Paul. I was wondering, now that we've lapped the reduction in marketing spend, can we assume active customer growth to accelerate over the next couple of quarters? And then I was also wondering, could you quantify just how much of a drag on active customer growth is the change to multiple people ordering from one household account? And how should we think about that, going forward?

[David Gilboa, executive]

To start, yes, we do expect that active customer growth will continue to accelerate. As I mentioned, this is a trailing 12-month metric. And so we're currently comping against a period where 3 of the quarters we were spending materially less on marketing, and then one quarter where we've seen marketing spend return to year-over-year growth. And we have seen that metric move positively as we've reintroduced some marketing investment and expect that to continue in the coming quarters.And right now, we [can't] provide any additional color on kind of the multi-person accounts, but it is a factor that is moderately impacting that metric and one that we may be able to provide some additional visibility into in the coming quarters.

[Brandon Cheatham, analyst]

And if I can, just a quick follow-up. The direct business returned to growth. I'm just wondering, can you help frame that, ex-contacts, if my understanding is that's almost entirely online and your penetration has increased there? So I guess what is the core direct business? And what is your outlook for that?

[David Gilboa, executive]

Haven't broken out the split online of contacts versus glasses, and we'll continue to report on e-com really as a blended channel. Suffice it to say that we're excited about the progress we're making selling contact online and seeing that account for a greater portion of our business. We're also excited at how customers are using our e-commerce channel, both to purchase new glasses and to, more importantly, return to purchase a second or third pair of glasses.

[Operator]

This concludes today's question-and-answer session, and this concludes today's call. Thank you all for your participation. You may now disconnect your lines.