Kits Eyecare Ltd
TSX:KITS
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Kits Eyecare Ltd
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Good morning, and welcome to the Kits Eyecare Second Quarter 2023 Financial Results Conference Call. This call is being recorded and available later today for replay. Your hosts today are Roger Hardy, Chief Executive Officer; Sabrina Liak, the Chief Financial Officer; and Joseph Thompson, Chief Operating Officer.
Before we begin, I'm required to provide the following statement respecting forward-looking information, which is made on behalf of Kits and all of its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by the use of words such as intend, believe, could, expect, estimate, forecast, may, could, will and other words of similar meaning. This forward-looking information is based on management's opinions, estimates and assumptions in light of their experience and perception of historical trends, current conditions and expected future developments as well as factors that they currently believe are appropriate and reasonable in the circumstances.
Actual results could differ materially from a conclusion, forecast, expectations, beliefs or projection in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making the forecast or projection as reflected in the forward-looking information. Management cautions investors not to rely on the forward-looking information.
Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in Kits' filings with Canadian Provincial Security Regulators. During today's call, all figures are in Canadian dollars, unless otherwise stated. And with that, I'd like to turn the call over to Mr. Roger Hardy. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us. I'm pleased to report another impressive quarter results here at Kits as we once again had record performance across our business, reaching an annualized revenue run rate of $120 million, just 2 quarters after surpassing the $100 million run rate mark. For the fifth straight quarter, we delivered top line growth with a record $30 million in revenue, a 38% growth rate over the prior year and nearly $10 million in gross profit, another record achievement by our team.
Our 2-year active customers also reached an all-time high to over 810,000 customers, and we also served over 79,000 new customers in the second quarter. Similar to last quarter, we were able to accomplish the spectacular growth while being very intentional about pursuing higher-margin business without having to utilize as much promotional activity. This helped our continued margin profile expansion in the quarter with an increase of 80 basis points year-over-year.
Over time, we believe there are many significant opportunities to continue to expand margins as we continue to systematically grow and take share. Marketing expense as a percent of revenue was once again declined in the quarter as we continued to generate strong word of mouth and revenue momentum while generating improved efficiencies in our direct outbound marketing efforts. As a result of keeping our organization lean and maintaining an efficient cost structure, we are better able to flow through this top line growth to the bottom line as we marched closer to positive net income, reported positive adjusted EBITDA and generated positive free cash flow from operations to maintain our strong cash balance.
Today, our team is firing on all cylinders. As I've discussed at length on previous calls, we believe that our customers' experiences are the most crucial component to continuing our success and ensuring we remain a leading platform in our industry. Accordingly, we deployed CapEx in the early innings of this business to ensure we have the manufacturing capacity to sustain our growth and the digital infrastructure to continuously capture data and to understand how to best serve the customers of today.
We're doing what no other optical platform has been able to accomplish, deliver best-in-class products in a fraction of the time at a fraction of the cost of competitors. While the optical industry continues to grow steadily in the mid-single digits, our growth continues to surpass that of our peers. We're capturing significant market share gains as our 38% year-on-year growth outpaces the industry by nearly 10x. As with all industries, there are winners and their losers. We attribute our gains to our focus on the customer, our asset-light direct-to-consumer model is proving itself to be the superior model in the large and growing optical category.
We are pleased to combine this double-digit growth with a substantial improvement in adjusted EBITDA margins this quarter. Q2 adjusted EBITDA of $0.5 million is $1.1 million higher compared to last year as we continue to benefit from operating leverage and scale efficiencies. I'm incredibly proud of the entire effort of our organization and that it is put into making sure we deliver on expectations.
I also want to congratulate our team on our 2023 Great Place to Work designation in a tight labor market is a testament to our culture to be a great employer with strong benefits, compensation and advancement opportunities. This is still only just the beginning of what we believe we can accomplish, and we appreciate each and every one of you on the journey with us. With that, I'd like to pass the call over to Joe to dive into more detail on our operational performance for the second quarter. Joe?
Thanks, Roger. As we grow, we believe our scale will continue to make our business more profitable, while also improving value, selection and speed of delivery for customers. This productive cycle certainly played out in our Q2 results. With growth in Q2 2023 came leveraged with combined operational expenses across marketing, fulfillment and G&A declining 494 basis points versus Q2 2022. With the investments we've made in infrastructure and technology, this business is built to scale, and it's our view that there is still more leverage to come.
Additionally, thanks to the previous capital invested, we will only require modest investments to support a doubling of our current manufacturing capacity and revenue. As a result, we are prepared to serve millions more customers profitably in the years to come. As the North American customer base continues to move online for their optical needs, we are continuously innovating to meet the high standards they expect. One example is our custom-built fulfillment network, which continues to expand next-day delivery to key metro markets. In Q2, we again reduced overall shipment time to customers, both quarter-on-quarter and year-on-year. Combined, our onshore optical lab and direct-to-consumer fulfillment network are the perfect pair, helping us to achieve glasses made in a day and shipping faster than ever. The optical customers told us that they want their glasses and contact lenses in 1 to 2 days, not the industry standard of 1 to 2 weeks. It's up to us to raise the bar for customers even further in this area.
Importantly, we delivered these improvements in Q2 while also reducing the cost to serve at the order level. Looking ahead, we will also continue to innovate on the product side. In Q2, we launched over 130 new models of eyeglasses while welcoming new brands to the Kits store, including Nike, Spy, Smith, Michael Kors and more. Customers can expect to see even more new-to-the-world product launches from us in the quarters ahead.
In Q3, we will introduce a revolutionary new rimless product line as well as a breakthrough new line of progressives and readers. Also in Q3, we are introducing [ Spectra ], a new premium lens technology available exclusively at Kits. In Q2, we grew our glasses revenue by 22% to $3.5 million. We fulfilled a record 39,000 glasses to repeat glasses customers for a total of approximately 72,000 in the quarter. We're also seeing success with our premium lens offering as the number of orders increased 56% year-over-year in Q2. In our view, continued progress here will deliver higher gross margins on our business and help to support the growth of gross margins towards our target of over 40%.
Overall, we believe our Eyeglasses segment will be a significant future growth driver of our business, and we are still in the early innings of our work and our potential here. Anchoring our business again this quarter were our repeat customers. In Q2, we reported another quarter of repeat -- record repeat revenue of $18.6 million. This figure included over 120,000 repeat orders. While we added 79,000 new customers in the quarter, revenue from repeat customers was again over 60% of our total revenue.
We believe we have amongst the highest retention levels in the category. For us, the trust metric of customer satisfaction, Net Promoter Score comes down to how many customers return. We don't take this responsibility lightly. Our customers have asked us for help to make eye care easy, easy to understand what they're paying for and why, easy to place an order and just as importantly, easy to receive it on their doorstep 1 to 2 days later. We look forward to updating you as we continue to grow profitably and innovate on behalf of optical customers in the quarters to come. I'll now turn the call over to Sabrina for an overview of our full second quarter financials.
Thanks, Joe. As Roger mentioned, revenue increased 38% year-over-year to $30 million. We are encouraged by the strength in our reported revenue, which reinforces our belief that our offering is resonating with customers. We continue to see growing demand for our eyeglasses, both through returning customers and first-time customers as we roll out continued enhancements to our offering. During the quarter, we outperformed our peers as customers are continually seeking the value and convenience Kits provide.
Our customers are center of focus. And over the last several quarters, we have continued to make meaningful improvements in gross margin, while simultaneously delivering more to customers. Specifically, we continue to benefit from scale efficiencies in purchasing and manufacturing. We are pleased to pass these savings along to customers through enhancements in delivery speed, selection, vision tools and products. This is a virtuous cycle we plan to continue to cultivate.
Gross profit in the second quarter increased 41% to $9.9 million, while gross margin increased 80 basis points to 33% compared to the year ago period. Moving a bit further down the income statement. Our fulfillment expense as a percentage of revenue improved to 12.6% compared to 14.7% in the previous year. While our G&A as a percentage of revenue improved year-over-year by 120 basis points to 6.6% as we continue to leverage efficiencies of scale. Our marketing expenses as a percentage of revenue improved from 15.3% to 13.7% as we continue to capitalize on organic word-of-mouth brand awareness.
In the second quarter, net loss was $1.2 million, and we generated positive adjusted EBITDA of $0.5 million, an improvement of $1.1 million year-over-year. Our financial focus remains on growing profitably, and we are well positioned to execute on this objective with our growing customer base and continually improving customer experience. We ended the quarter with a strong cash balance of $19.8 million compared to $18.8 million at December 31, 2022, and $18.9 million at June 30, 2022. Overall, we expect to sustain the momentum in our growth in the coming quarters and look forward to delivering upon shareholder expectations. Thank you. And now we will take your questions. Operator, please open the line for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Luke Hannan of Canaccord.
I just wanted to start with a quick question on what you're seeing as far as consumer behavior goes. I know that's optical care, eyeglasses, et cetera. It's a very stable category overall. I'm just curious to know if you're seeing any changes as far as within either demographics of your average customer, maybe certain things that are being added to the basket, not being added to the basket, et cetera? Anything to call out there?
Luke, thanks for the question. This is Joe. We continue -- we continue to be encouraged by the trends we're seeing from our customers. I think overall, maybe a couple of comments to your question, the category, the optical category continues to move online, both on glasses and contact lenses. And so we're very encouraged by the business model that we've built, which will allow us to capitalize on that. I think the second thing that I'd mention is the millennial customer continues to be a focus for us. The millennial customer is the biggest customer segment in terms of people and dollars in North America. And as of this year, is an age range of about 26 to 42 years old, which is really prime age to enter the optical category, the single vision level for glasses and contact lenses and is also starting to come into the Digital Progressive and Reader segment.
So we're continuing to see strong consumer behavior overall. And in particular, in the last couple of quarters, lots of growth in the contact lens segment as customers continue to get back to work and continue to go out post-pandemic. And just a continued tailwind from the millennial customer is coming into the optical category in single vision and contact lenses and then encouragingly starting to come in more in progressives and readers.
Understood. And then my second question here is on fulfillment costs. I know you guys benefited with those costs being lower as a percentage of revenue just because of the scaling in terms of revenue that you guys have been able to realize. But when it comes to negotiating lower rates going forward, I guess I'm curious to know how much visibility do you have into those transportation costs going forward? Like is it fair to say that you're fairly confident for the balance of the year that you'll be able to maintain the low cost that you've been seeing of late?
Yes. Luke, this is Joe again. On fulfillment and specific to carrier costs, we are confident with the momentum that we've built and with the partnerships that we have across both Canada and the U.S. And we continue to see faster delivery to customers. And either flat or declining costs. And part of that is scale, as you mentioned, and part of it is our use of data in being able to predict where customers are ordering from, where the order needs to get to and just winding up the partners to deliver that. So while there continues to be a lot of volatility in the greater carrier market, in particular in the U.S., we've been very happy with stable to declining costs and we're going to keep -- we're going to hold the line on those on behalf of customers.
Okay. And then my last question here, and then I'll pass the line. Just on your mix of marketing dollars. Where exactly are they being allocated now in terms of -- is it mostly focusing on top-of-funnel stuff? Are you focused more now on reengaging active customers? I would imagine it's probably a little bit more so the latter than the former, but curious to know how exactly you're targeting that right now?
Yes, Luke. So our -- while we don't break out some of the specifics of marketing, I think it's fair to say we've been really encouraged by our continued repeat profile of customers. So repeat -- we believe we have the highest repeat rates in the category in contact lenses and in glasses, in particular, this quarter. And so that gives us confidence to go and invest in acquiring new customers.
And so the majority of the spend continues to go to new customers. On the contact lenses side, maybe a bit more traditional channels. And on the glasses side, really investing in the experience and promoting word of mouth of customers. What customers have told us is when they order a pair of glasses online and those glasses arrive in 1 to 2 business days and they look great, the value is incredible and their prescription is perfect, they're going to tell everyone that they know about the experience that they've had.
And so that's really -- the investment is really on the overall experience of selection, value convenience, getting that product to them in a day or 2, and then the word of mouth that comes from that. And so -- and of course, the repeat business off the back of that. So that's really where we've been focused over the last 1 to 2 quarters.
Your next question comes from the line of Matt Koranda of ROTH.
Just wondered if you could maybe level-set us on revenue growth in the second half of the year? Obviously, you guys are nicely outgrowing the industry overall and outperforming the category by a pretty healthy margin. But you do have some tougher comparisons going forward in the back half of the year. So can we still assume sort of a high-teens to low-20s growth rate in the back half of the year? Or maybe if you could just unpack it by how to think about growth between the contacts category and then glasses, that would be super helpful?
Thanks, Matt. Yes, this is Joe. We've been -- as you heard this morning, we've been very happy with the growth, 38% 2 quarters in a row, roughly 10x the rate of the industry. And so moving forward, we see strong tailwinds on our repeat customers. We see continued progress of customers moving online which is the rate of online penetration in this category has roughly doubled, pre-pandemic to post-pandemic.
And when we think with the millennial customer base, it's likely to continue. So some of the numbers you described, we haven't put out any formal guidance for the second half. But certainly, we're hoping to keep this growth trend going. And the rates that you mentioned are definitely comfortable for us.
On the mix of glasses and contact lenses, which I believe is your second question, we've been very excited about the growth of contact lenses. It's definitely overperformed this year on our business. And on glasses, in a category that's growing low single digits, we believe about 3% to 4%, we grew 22% while meaningfully reducing the marketing spend level. So we think that there is a great pull in this category, which continues to move online on glasses. And we're particularly happy with our repeat rate on both glasses and contact lenses. So that's going to be our focus is profitable growth. And while we haven't set a number for that growth, we're seeing great momentum into Q3.
Okay. Very helpful, Joe. And then maybe just more specifically on glasses. I may have missed it in the MD&A, but any commentary on unit growth there? Just curious to kind of get the dynamic on the drivers of the 22% between units and AOV.
Sure. So we've been -- in the MD&A, we noted that we did grow the glasses business 22% on top of meaningfully reducing marketing spend. We -- the notable point on our glasses growth was the repeat profile, part 1. We had 39 -- we have about 72,000 units overall totaling about $3.5 million in sales and a record 39,000 of those glasses went to repeat glasses customers, which you'll see in the detail.
So some of the things that we were very happy about in the category was the repeat profile. We've seen this repeat profile on our contact lens business, and we're encouraged to see it also continue on the glasses side. Some of the previous investments we've made in acquiring glasses customers. And then we're also seeing success in growth of our premium lens offering as the number of orders increased over 50% year-over-year in Q2.
So on top of that, we still see lots of potential in this market. We think we're in the early innings. We've got a lot of product new lines coming to market. I mentioned our new rimless line was launched in Q3; our new line of progressives and readers coming also in Q3; and a new lens offering called [ Spectra ] available exclusively at Kits. So lots more to come and happy with the progress that we made in Q2.
Okay. Great to hear. Just last one from me. On the gross margin line, you guys have done a nice job reaching the low 30% sort of range for the last several quarters. Just wondered if you could maybe just speak to the drivers to get into the mid- to high 30s. I know you have in the past, but any changes there? Is it just sort of a better mix of glasses, higher AOVs from progressives? Maybe speak to some of the key levers you have at your disposal to get to that higher level and then sort of how do we think about timing of when we get there?
You bet, Matt. So we are committed to our target in the mid- to -- 3- to 5-year range of 40-plus percent gross margin. We made some progress in Q2, I think, 80 basis points improvement on gross margin while also demonstrating 38% growth. So what's next for gross margin growth?
Well, as you mentioned, glass is going to be a big contributor, both on the progressive and reader side. And we've been very happy with the progress and much more to come on that. And that's gross margin accretive, as you can imagine. But we've also been impressed at the profile of our single-vision customers with some of the premium lens offerings that we've introduced. And so we think lots of gross margin expansion opportunity in glasses where -- that's really the next frontier and the next focus for us.
We demonstrated growth, I think, 5 straight quarters and a number of quarters of adjusted EBITDA profitability, and we'll continue to see leverage on the model, and that will help on the operating expense. But we will -- you can expect continued progress on gross margins in the quarters ahead.
Our next question comes from the line of Doug Cooper of Beacon Securities.
Congratulations on the quarter. Matt sort of was touched on what I wanted to go down. So maybe I'll just sort of continue the route that he was going down. Just on the mix, contacts were up 40% year-over-year in revenue and glasses were up 32%. Is there a point where you see, I think, kind of a breakout quarter for glasses as a percentage of overall revenue? Because given the growth of contacts, glasses' revenue contribution is actually down about 100 basis points year-over-year. And as you mentioned, that's a sort of a key driver of gross margin, I guess, greater utilization of the optical lab and so forth. So when do you see that sort of real breakout quarter in the glasses?
Thanks, Doug. This is Joe. I appreciate the question. We love to talk about glasses. It's definitely a focus area for our whole team here. So maybe a couple of things on that. So we did -- we've been looking very closely at a couple of trends. One, to make sure that the rate of growth of online penetration on glasses continues. It has, in our view. So a checkmark there.
And then two, just making sure that we enjoy tremendous retention rates on our contact lens business and making sure that, that repeat trend continues on the glasses side given the investments we've made in previous quarters. And so this quarter, in particular, we're really delighted with the repeat -- with 39,000 glasses of repeat customers over half of total glasses delivered in the quarter.
So with the category moving online, demonstrating strong repeat as we see and as we know how to do in contact lenses, really, the last piece was just building out our lens offering and our product offering. And the lens offering is close to there and the product offering is really going to take a step forward in the next 1 to 2 quarters, in particular.
So while we haven't -- all of this while keeping a very close eye on marketing spend and continuing to get leverage out of that marketing spend helped by these repeat customers coming back, we haven't put a specific quarter on when we expect this real breakout to occur, but we're really encouraged that the progress it's making and in particular, on product for glasses and lenses in the next 1 to 2 quarters.
Good. That's great color. Can you give us an idea of what the capacity utilization of the plant is now just so we can get an idea maybe of the operating leverage you guys are talking about, obviously, targeting 40%-odd gross margin? But from an industry perspective, obviously, the gross margins are actually much higher. So there seems to be a lot of headroom potential.
We agree with you, Doug. There's a lot of expansion potential, if we continue to execute on glasses. So gross margin, we see as a big driver. We have a lot of room to grow there into the category while still offering great value for customers.
In terms of capacity. On the glasses line, we're still roughly about 1/3 -- just over 1/3 of -- using about 1/3 of the capacity. Overall revenue for the company, we think, can double with only minimal capital investment. So very encouraged that this growth in -- that we're anticipating in future years, both on glasses and contact lenses, will continue to be profitable growth.
[Operator Instructions] And there are no further questions at this time. Please proceed.
Thank you, [ Jerry ], and thank you, everyone, for joining us today. We're on a mission to make eye care easy for everyone, and I believe that we are well on our way to accomplishing that. It has been incredible to see this platform really take hold and resonate with the digital consumers of today. Our team is filled with exceptional people who all strongly believe in our long-term vision and have put in an incredible amount of work to make this vision come to life.
We believe that this is only the beginning, and we appreciate the support of all stakeholders as we continue to move forward in our journey. We'll speak with you all in a few months when we report our Q3 results. Until then, we're getting back to work. Thanks so much for joining today, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for your participating and ask that you please disconnect your lines.