Kits Eyecare Ltd

TSX:KITS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the KITS Second Quarter 2024 Conference Call. [Operator Instructions] This call is being recorded on Wednesday, August 7, 2024.

I would now like to turn the conference over to Roger Hardy, Chairman and CEO. Please go ahead, sir.

[Roger Hardy, executive]

Thanks, operator. Good morning, everyone, and thank you for joining us. I hope everyone's been enjoying the summer spending time with friends and family and appreciating our good fortunes.

Here at KITS, we have a lot to be thankful for this summer. I'd like to start out by thanking the entire KITS team for delivering another record quarter for our shareholders, stakeholders and customers. It's been an exciting nearly 3 years as a public company, working hard to make eyecare easy and accessible.

During that short time, our business has nearly doubled from an $80 million run rate to almost $160 million run rate this coming quarter. We've built a large loyal community of almost 1 million existing customers, who returned to KITS time and time again. We have 1 of the highest retention rates in the category because we consistently deliver high-quality products at breakneck speeds.

In addition to this healthy annuity, we continue to organically expand our customer base each quarter, and customers continue to expand the amount and frequency with which they order from us, which is having a compounding network effect on our scale and market reach.

KITS operates in a large legacy $80 billion North American category where incumbents deliver marginal service levels and remain largely undisrupted, but that is starting to change, especially in Canada with our recent progress and success.

When we architected KITS, we built it specifically with the opportunity to transform this category for the benefit of consumers. As our team continues to innovate and our technology improves, we see a clear opportunity to transform the lives of our KITS community taking meaningful share from incumbents and growing the overall market, but most importantly, helping make vision care affordable and accessible for our many, many customers.

During our last call, I provided expectations for Q2 revenues of $36 million to $38 million and targeted 3% to 5% adjusted EBITDA margins for Q2 2024. Pleased to report that we delivered revenue growth at the top end of the range with Q2 quarterly revenues of nearly $38 million, equating to 26% year-over-year organic growth and an annual rate -- and run rate of $151 million.

We also achieved our adjusted EBITDA goals, exceeding 3% along with net income of $0.2 million and earnings per share $0.01. Additionally, we achieved positive cash flow and $1.1 million in the quarter while continuing to pay down $0.8 million of debt principal, leaving us with very favorable low debt outstanding balance of approximately $6 million.

Network -- key network effects helped drive their record quarterly results. First, the growth and the compounding of our annuity-like customers who continue to come back at record rates across both our contact lens and eyeglass businesses. These customers enable us to invest in category-leading product and manufacturing capabilities.

Second, the efficiency and compounding network effects of our economies of scale. As we've begun to see quarter after quarter, customers aren't just returning, they're buying more and our cost per customer user are declining. And each time they do, they drive efficiency throughout our business in terms of marketing efficiency, fulfillment efficiency and general and admin cost efficiency.

This compounds in our ability to have more and more inventory than competitors do on hand, meaning we fulfill faster than others. And once again, we generated a compounding benefit in this self-fulfilling flywheel.

And finally, as we benefit from these growing economies of scales, we generated an improved ability to innovate and invest in technology and partnerships like the one we invested in developing and integrating with more than 39 health care providers throughout the Canadian market, which helped drive our Canadian business.

Speaking of which, our Canadian business grew an impressive 47% year-over-year, and we saw meaningful growth across our key segments. Our stable annuity like contact lens business grew 24% and our eyeglasses business grew an eye-watering 42%. We're pleased with the achievement of a record near $33 million contact lens quarter, but even more impressive as a traction in our eyeglasses segment, our fastest-growing segment in the quarter, increasing 8% sequentially and as mentioned, 42% year-over-year as network effects began to accelerate, reaching $5 million.

We believe we're just starting to see the compounding effects of our returning glasses customers as well as the improvement in average order size as customers increasingly select upgrades and specialty lenses.

Overall, this was a watershed quarter for KITS as we continue to outpace the industry growth rates with declining marketing spend as a percent of revenue driven by word of mouth and customer satisfaction. Our product, marketing and customer service and fulfillment teams are all executing at the highest levels, leading the category.

We have no doubt that we've created the fastest-growing optical store in the world, an economic engine offering a better solution than anything else in the market. This engine is also built to scale with modern technology, no legacy infrastructure, CapEx deployed and a highly recurring model, we control product production and fulfillment, we built a true sustainable advantage into our model and look forward to the network effects continue to accelerate our growth in the quarters to come.

This quarter, we once again experienced declining competition and growing momentum in both geographies and both major segments of our business. Competitors have withdrawn from situations where the cost structures could rival our lower cost direct model. Having read about the challenges of maintaining legacy U.S. pharmacy businesses recently, I couldn't help but think of the similarities to the legacy optical model, where an outdated model of an eyecare practitioner who profits from what they prescribe is required to sustain expensive retail overheads with fast declining football numbers, and a customer who's no longer kept in the dark as to available options.

The customer today is starting their search for optical products online and isn't looking for expensive, opaque and grading. They want what KITS offers: easy, transparent and affordable.

We are happy to not be in the same-store environments, which are experiencing secular decline and [ here's ] only growth will come from investing millions in opening stores where performance is destined to decline.

At KITS our investments drive network effects. They go directly into product, technology and fulfillment as opposed to expensive, labor-heavy, high street retail locations. This differentiation is being felt in the hands of consumers as they experience our product and service firsthand. These differences are increasingly driving separation from the competition and a growing annuity of returning customers.

This quarter, we saw improved organic growth in both glasses and contact lens segments and maybe even more impressive by the declining marketing spend as a percent of sales. This indicates improved retention and word of mouth a strong sign that our value proposition is resonating with consumers, and our brand is gaining momentum, which we saw across many metrics in the business this quarter as Joe and Zhe will further discuss.

Also importantly, expanding fast-growing business like ours to maintain tight fiscal discipline, I'm pleased to report that's exactly what the team did throughout the quarter. While we made intentional moves to generate more new customer growth, with controlled operating expenses and improve long-term profitability. There's still lots more we can do and will do here to remain efficient as our business scales. But this quarter, we saw us continue our disciplined approach to execution.

Quarterly, the marketing team delivered solid results with marketing expense as a percent of sales declining year-over-year from 13.7% revenue to 13.4%. Our fulfillment team also successfully reduced fulfillment expenses as a percent of sales decreasing from 12.6% in the second quarter of 2023 to 11.2% this quarter.

Our 2-year active customer count grew to over 875,000 customers, representing an 8% year-over-year increase. And we felt one of the largest network work effects and customer confidence as year-over-year, the average order value increased by over 21% to $182. This growth is a testament to the effectiveness of our offering and a relentless focus on meeting the needs of our diverse customer base.

In addition, we generated 64% of our revenue from our loyal core customer, reflecting their strong affinity for our brand and ensuring a steady revenue stream. We achieved a record $13.8 million from 72,000 new customers during the second quarter, a 21% increase year-over-year. This influx of new customers contributed significantly to our record-breaking top line results, setting a promising trajectory for the fiscal year, made all the more impressive considering the decline in marketing expense as a percent of sales, as I've highlighted previously a few times and as I may just mention again.

One strategy of building an eyecare platform that makes -- sorry, our strategy of building an eyecare platform that makes eyecare easy and accessible for the customer of today, yielded remarkable results with overwhelmingly positive responses from new and returning customers. I'm pleased to say I read every single customer comment and survey and can see the uptick in our service

[Audio Gap]

[Operator]

[Operator Instructions] Your first question comes from the line of Luke Hannan with Canaccord Genuity.

[Luke Hannan, analyst]

Congratulations on the results. I'd like to start if we can, on your extension into the smart glasses category here. So a bit of a multipart question. First, what led you to introducing the critical angle in the first place?

Secondly, I don't know if you can share this, but how big are smart glasses, both of your own brands and then also maybe others that you sell through your site, how big are Smart Glasses as a percentage of revenue today? And then maybe lastly, how does the growth of the category compare to the growth of optical as a whole?

[Joseph Thompson, executive]

Luke, thanks for the question. And so maybe we'll just take those one at a time. It's early days. We're a couple of weeks into the launch into our smart glasses category. But there's a number of things that we love about what we see so far.

So smart glasses really benefits the infrastructure we've already built with the addition of some componentry in audio and camera. There are some -- a number of big companies like Meta and Google building tech for the space. And from what we've heard from Meta that demand is currently outpacing their ability to supply. So it's obviously growing.

This also is a product folks really prefer to order online and lends itself to growing the online glasses market, which we love as well. But maybe most importantly for us is the biggest friction that we've heard from customers in the category so far is that it is not easy to get prescription lenses with smart glasses and it can be -- in cost-effective way. And that's something that we believe we could really help power for the whole category.

So to your question, I mean, those are really the big reasons why we're excited about this category. Whether it grows quickly or on a more measured basis, we think KITS has a lot to offer customers and a lot to gain from that growth.

How big is it currently as a percentage of revenue? It's still very small. And we're going to watch it carefully and be ready to meet that demand as it comes. And maybe the last thing to mention is the economics are really favorable that we see on it.

These are customers that are looking for some innovation in a category that hasn't seen a lot of innovation right now, and they're happy to pay a little bit more from an average order value. So we're super bullish on the category, but it is still very early days.

[Luke Hannan, analyst]

That's very helpful. And then as a follow-up here, you did mention -- you called out the growth within Canada being substantially better than that of the U.S. I'm curious if there's anything to call out there. Is that just the maturation of the brand here in Canada? Is that better brand awareness in Canada? And then maybe sort of as a follow-up on that is where would you say that the overall brand awarenesses of KITS today may be compared to, I don't know what the industry average might be for an online eyecare operator?

[Joseph Thompson, executive]

Thanks, Luke. We think that our awareness is still very small in the category, and we've got a lot of room to grow. We still feel like our awareness is in the low single digit percentage, and so that's really exciting for us. Now we certainly have pockets of markets that are strong.

Vancouver market is strong. Toronto market is building. And we think that, that construct really travels really well across 20, 30 metro areas or beyond across North America. But why is Canada growing as well as it is. I think that the value is resonating and continues to resonate. I think we're really benefiting from word of mouth.

And last quarter, we talked a little bit about our market-by-market approach, and that's been very successful for us in Vancouver. And based on that success, the team is tweaking and relaunching that in other metro areas like Toronto, Montreal and in a number of areas in the U.S. market. And so we're excited for Canada to be growing. We think it will continue to. And yes, happy to take any other questions that you have.

[Luke Hannan, analyst]

Great. Last one maybe and then I'll pass the line. On the BDC loan and the promissory note, is there any prepayment penalty that associated with that ahead of the 2026 maturity? And then maybe related to that, do you think now is a good time to potentially explore refinancing that or maybe your overall thoughts on capital allocation?

[Zhe Choo, executive]

Luke, this is Zhe here. For the BDC loans right now, there is no prepayment penalty. And definitely from a capital reallocation perspective, we are always trying to maximize value for our stakeholders and shareholders. So we -- I mean there is nothing firm on the table, but we are always exploring ways to maximize value for our shareholders and stakeholders.

[Operator]

And your next question comes from the line of Gianluca Tucci with Haywood Securities.

[Gianluca Tucci, analyst]

Very solid growth, congrats on that. First off, this 20% plus organic growth that the company is observing, how much of that can you attribute to eating into competitors' market share and attracting new customers to the category?

[Joseph Thompson, executive]

Gianluca, thanks for the question. We do think that, more broadly speaking, in the category, customers continue to move online in this category. And KITS is benefiting from that. This is not -- the online market is not something that can be easily built. And so as the market moves online, we do feel like we are gaining share.

Where we feel like we add additional value just beyond gaining share is when customers come back. And so when we're able to offer industry-leading value, we're seeing repeat profile on purchases well above the industry standard.

And if customers and eyeglasses, for example, come back every 18 to 24 months, which is a pattern really driven by the insurance industry and the premiums paid in that industry as we're able to offer customers more value, we're seeing customers come back as soon as 3 or 6 months. And then it becomes a little bit more of a treasure hunt for these customers who come back and now know the brand, KITS, and trust the brand and make incremental purchases.

And we're seeing them as you do offer value and can really showcase a lot more product online, being able to extend that selection in that portfolio into different parts of the category.

So as opposed to just a contact lens customer buying only contact lenses, we can now, in a very seamless way, introduce them to eyeglasses as well or for an eyeglasses customer that may want color contacts, we can introduce that product to them as well. So we do feel like we have been taking share. And in our view, we will continue to take share as this category moves online. And we do have the low-cost infrastructure to support that move. But in addition to that, we feel like we're creating a lot of value as we introduce customers across category.

[Gianluca Tucci, analyst]

That's great, Joseph. And I guess I'll ask a follow-up to your Canada comments in the previous question, but solid growth in Canada of over 40%. Is any of that coming from your TELUS Health partnership at all? And as a follow-up, how are the early days of that partnership rolling out?

[Joseph Thompson, executive]

Yes. Thanks for asking. We are delighted with the early results so far. It is still early days. It was a partnership introduced in Q2, but -- and we don't break down the specifics of our insurance business, but we're happy to share that in Q2, insurance revenues saw a significant growth quarter-over-quarter, and it was a contributor to both Canada growth, as you mentioned, and glasses growth and new customer growth. So very favorable economics, and from what we see on Net Promoter Score and feedback from customers, it's a great experience for them as well.

[Gianluca Tucci, analyst]

Joseph, just lastly, a quick [indiscernible]. But there's lots of chatter today in these days about the health of the consumer. I'm just wondering if like you can comment on any changes, if any, that you're seeing over the last 30 to 60 days in terms of the health of your typical buyer?

[Joseph Thompson, executive]

Sure, Gianluca. So we've not seen a slowdown. And we have pretty high conviction that in times of uncertainty, the customer will search for value. The optical category has a couple of structural benefits. It is nondiscretionary. People need to see, and for roughly half of optical customers, it is underwritten by an insurance premium, which helps as well.

But on -- and then as maybe we talked a few minutes before, we are seeing the category move more online, both in contact lenses and glasses in the U.S. and in Canada. So perhaps we're a little bit sheltered from maybe some broader market trends that we seem to be seeing in other industries and perhaps even in pockets of optical.

But on our business, we're seeing traffic up. So total sight sessions in the quarter we're up over 30% year-on-year and up quarter-on-quarter significantly as well. So traffic up slightly higher than revenue growth, much more exploration online and on the KITS website for sure. And where we're seeing the biggest changes in our revenue profile are encouraging for us in some of the more premium subcategories like daily modality contact lenses, the digital progressive line, which was up again over 50% in our eyeglasses business.

And that's helping to drive -- you see that in our average order value, which was up over 20% again in the quarter. So from our standpoint, very positive indications, and we're optimistic that we've got the offering for customers for the years ahead.

[Gianluca Tucci, analyst]

Congrats again to you and the team.

[Operator]

And I would like to turn it back to Mr. Roger Hardy. Apologies we're going to continue with the Q&A.

Your next question comes from the line of Martin Landry with Stifel.

[Martin Landry, analyst]

My first question is a bit of a segue into your last comments, Joe. You touched about your average order value reaching $182 this quarter. It's the highest level, I believe, in the last 2 years. And I understand that some of the premium offering has helped boost that. So 2 questions for our modeling. Is -- do you see this average order value as a little higher than usual? And where could your average order value go in coming quarters and then maybe next year to help us out model a little bit your growth?

[Joseph Thompson, executive]

Martin. Thanks for the questions on average order value. Yes, this is -- we were delighted on average order value of about $180. That's -- underneath that, that growth, we're happy to see both glasses and contact lenses contributing to that in both Canada and the U.S. contributing to it.

And so -- so we do think that there -- we haven't put any targets out there for later 2024 or 2025 average order value, but we do see more appreciation there. And that's going to come in our minds predominantly from more growth in the eyeglasses sector. So we will see some average order growth in contact lenses, but we do feel we'll see even more in -- on the glass segment and really driven by digital progressives and some of the lens upgrades that we're seeing.

We'll see how fast smart glasses picks up. It's definitely off to a strong start, but as we talked very small still in very early days, but that will be a tailwind on average order value. But I guess, overall, yes, continue to expect to see average order value edge up as it has quarter-on-quarter sequentially over the next 4 to 6 quarters.

[Martin Landry, analyst]

Great. That's good to hear. In the opening remarks, Roger talked about the decline in competition, I think he said both in Canada and in the U.S. So I was wondering if we could get a little bit more color on that and perhaps as to the timing of some of your competitors' departure from the category. Just to understand a little bit when we're going to anniversary some of those changes, if possible.

[Roger Hardy, executive]

Martin, thanks for the question. The solar flare over the interior has passed. Roger is back on the call. I would like to -- thanks for the question. I think when I'm talking about competition, we're really just seeing some of the traditional players decrease their marketing spends, move out of different marketing channels, and that's helping drive a reduced acquisition cost for us. So that's really -- we're kind of seeing that category wide. I think the consumer at traditional optical is spending less and is visiting less and those dollars aren't working as effectively as our dollars are working. So that's really the color there.

[Martin Landry, analyst]

Okay. Is there -- has this been continuous? Or is this -- has there been like a major change recently that we should be just mindful of in our modeling?

[Roger Hardy, executive]

I think we've just started to see our own momentum increase over the last couple of quarters, and I think it's kind of a combination of those 2 things, where we are taking share more effectively and then the competitor to ours just become ineffective, and they seem to go away and decline. So I'd say we've seen it really start to feel in the last couple of quarters. You can see in our Canadian results, some of the impact of that.

[Martin Landry, analyst]

Okay. And last question -- yes, last question for me. Just on customer acquisition cost. Wondering if you can talk a little bit about the dynamics how it's evolved year-to-date? And where do you see it going? And if there's a difference between Canada and U.S. would be interesting to hear?

[Roger Hardy, executive]

Yes. We haven't really spoken that out historically, Martin. We don't want to give too many very specific details on that. But I think really the key point is our marketing team, our customer service team have really done an outstanding job, and that's what's driven the some of the performance and the results.

They continue to look for more effective ways to get the message out about KITS. That message is being helped by the now almost 1 million existing customers that are sharing the experience with friends and families. So ultimately, that's the key network effect we're looking for, is that user growth or that customer growth where customers are telling customers about the experience. As I said, we're starting to see it in the numbers in some markets, and we look forward to updating as we see it expand.

[Operator]

And your next question is from Doug Cooper with Beacon Securities.

[Doug Cooper, analyst]

Terrific work. This has already been asked, but do you have an updated percentage in the industry, what percentage of contacts and glasses are now sold online?

[Joseph Thompson, executive]

We have some data, it's not perfect, but it is directional. And so what we've seen on the eyeglasses segment is pre-pandemic percentage of glasses bottom line was in the mid-single digits, around 6% to 8% of revenue. And the latest numbers that we are seeing from the industry, and this is U.S. data mostly is, that number on eyeglass is now approaching 20% in and around 18% to 19% for the category, now transacted online.

And on contact lenses is a little bit higher. So pre-pandemic, that number was around 16% to 18% of the category online and the latest numbers that we've seen from the Vision Council in the U.S. suggests that it's around 42% in the U.S. now bottom line. So growing rapidly. Numbers may not be perfect, but they're trending up.

[Doug Cooper, analyst]

So just on the contact -- let's stick to the contacts for a second. Is there any reason why you think that can't be 60% to 70% or 80%, I guess this is essentially a reorder business. Like who goes to an optician now to order, especially if you guys can deliver next day and cheaper.

[Joseph Thompson, executive]

Yes, Doug, we definitely share your optimism for how fast this category can grow. And certainly, in our experience, once the category hits around 30-plus percent online penetration, it tends to rapidly move up from there if what we've seen in other categories pertains to contact lenses and -- and certainly, what's driving that is, as you pointed out a number of times is the millennial consumer, which is now the biggest consumer in North America and the U.S. and Canada and is -- has told us very clearly in all of our focus groups and all of our contact that they have no desire to get into an Uber or InDrive to a traditional brick-and-mortar location. If they prefer they can [indiscernible] ordering online. So we share your enthusiasm. We think sky is the limit on this category and online penetration.

[Doug Cooper, analyst]

Just picking on the contact for a second. You guys recently launched a -- your own branded contacts. How is that going?

[Joseph Thompson, executive]

I think I got that question. It's just our own brand of contact lenses, if I heard you correctly, Doug?

[Doug Cooper, analyst]

Yes. Correct. Correct.

[Joseph Thompson, executive]

Oh, great. Yes, thanks. And apologies, I think some of our prepared remarks might have gotten cut out. And so -- so we did intend to talk a little bit about that in the prepared remarks. We had a fantastic launch of the KITS Silicone Hydrogel daily modality lenses, which launched in Q2. It was off to a very strong start in market. We think it's really offering customers the latest in silicon hydrogel technology at a fraction of the cost that they pay then -- or have paid in the industry.

And so thanks to this strong start. We have plans to expand this line, and we expect to have new products coming out that's very exciting in later Q3. So stay tuned for more on this. It is still a smaller percentage of the total contact lens business, but growing fast.

[Roger Hardy, executive]

And Doug, probably -- it's Roger, just to add to that, you would probably recall that in our own brand of contact lenses, our expectations of gross margins in 65% to 70% range over time. And I think Joe is referring to the silicone hydrogels in clear. And we also see a great opportunity with our younger demographic 20 to 30 somethings in the color spectrum. So as Joe hinted watch for a color lens for you and for family and friends coming this Q3.

[Doug Cooper, analyst]

And just my last one, if I could. Just on the outlook. Continued strong growth is actually maybe even accelerating your 39% to 41%. Q3 guidance represents 25% to 32% year-over-year growth versus the '26 you just did and then 3% to 5% EBITDA margin. So you are seeing obviously some operating leverage and does it look like the revenue is actually accelerating?

[Roger Hardy, executive]

I mean I could think the way to think about it is it's just -- it's been consistent growth, and we're kind of getting better at predicting where that will land. So that's why we've given kind of that $39 million to $41 million for the Q.

[Doug Cooper, analyst]

Okay, great. Well, great, terrific work, keep it up.

[Operator]

And your next question comes from the line of Matt Koranda with ROTH Capital.

[Matt Koranda, analyst]

Just wanted to see if we could unpack the third quarter guidance a little bit more. Any -- I noted the acceleration in growth, any breakout between the glasses and contacts category, you can provide either qualitative or quantitative. And then how much have we sort of built in to the glasses category, the impact of the smart lens or the smart glasses strategy? Would that impact AOVs in the third quarter or the back half of the year here?

[Roger Hardy, executive]

Yes. For now, Matt, it's -- we're just doing the blended guidance for the Q. We're seeing continued momentum in both contacts and glasses. And I think as Joe touched on, the smart glasses are very small, part of our business today. We think it's an interesting category. We've had great experience with smart eyeglasses personally and like and find interesting in the category, but it's -- it's at the very earliest of stages and not something we've modeled extensively in.

Having said that, we are seeing good traction on a smaller scale in that sector. So we'll look for that to build, but it's not a next Q thing. It's a much more of a -- over the next 3 or 4 quarters, we'll expect to see that building and we'll invest accordingly as it builds.

[Matt Koranda, analyst]

Okay. Got it. And then maybe just if I could spin back to glasses growth in the second quarter. Maybe, Joe, if you want to unpack for us just the AUR trends that you saw, it looks like they were up substantially, but maybe just speak to the growth in revenue between AUR and unit growth that you're seeing on the glasses side? And maybe what's helping you out on the AUR front?

[Joseph Thompson, executive]

Sure, Matt. Yes. No, in Q2 and really the last 2 quarters, they're the best 2 quarters we feel we've seen in our glasses business. So -- and that's why you're hearing the confidence that we have in the plans ahead. So overall, average order value or AOV growth was really a key driver.

And within that digital progressives are a big contributor to that. And so we feel like we've really reshaped the landscape for what value looks like for customers on digital progressive. And we just continue to see tremendous growth there, again, up over 50% in the quarter.

But even beyond that, on our overall glasses business, just looking at Q2, the business is growing rapidly, 42% this quarter growth. Now at over $5 million revenue a quarter, a higher-end fast-growing average order value, higher gross margin percentage and in a very high repeat level. So -- and then maybe what we can see in this quarter and in Q4 is the most robust product pipeline that we've ever seen. And so we're super excited about what's coming down the line.

And so for us, these are many of the ingredients of a great business, and we're super happy to have this glasses business performing at the level it's at. Obviously, the CapEx has been invested already to support much more profitable growth on glasses. So delighted with the results this quarter on glasses and even more optimistic on what's to come in the years ahead.

[Matt Koranda, analyst]

Okay. No, it's really great to see the digital progressive strategy playing out for you guys. I guess last one for me. So the higher revenue run rate in the third quarter, but it looks like you're kind of guiding to a similar margin range to where you were in the second. I guess that maybe implies that we're leaning into some reinvestment in the business, either in the form of gross margins or certain OpEx line item.

So just curious to hear you guys speak to sort of where we see opportunity to invest in the P&L. And especially curious, maybe if Roger wants to take this portion of it, but like -- if you could speak to marketing and just the opportunities for top-up funnel, bottom-up funnel spend, where you are with your influencer strategy. Just an update on that would be great.

[Joseph Thompson, executive]

Sure, Matt. Maybe -- this is Joe. I'll start off and then pass it on to Roger and Zhe for more thoughts on it. So I think maybe 2 questions in there. First, we'll talk a little bit about gross margin and overall growth and then we can touch on influencers. We -- and so in Q2 as was mentioned earlier in the call, higher growth on new customer revenue which, in some cases, can come at a slight degradation to gross margin percentage.

These decisions had a very favorable impact on revenue and EBITDA in the quarter. And importantly, we have a very high conviction that we're going to convert these customers to become long-term actives.

Looking forward, though, we'll just continue to reiterate that we have a very clear path and a very clear view on the path to a 40% gross margin in a 10-plus percent EBITDA business. And there's a number of things that we feel are going to contribute to that. We mentioned our KITS contact lens business, which is a very gross margin accretive business for us and growing rapidly. We have branded frames, which are growing rapidly. Those are fitted with a KITS prescription lens.

Digital Progressive has been talked, the insurance business is very gross margin accretive, and then new growth glasses categories such as smart glasses also fitted with the KITS prescription lens. We think these are some of the ingredients that are going to go into our steady build to a 40% gross margin business. But as you've said, we'll keep focused on growing revenue at industry-leading rates, 25%, 26% this quarter and tracking for similar in Q3 and stay focused on a strong and growing EBITDA business as well.

[Roger Hardy, executive]

Yes. I mean I think I would just echo those comments. If we think back, Matt, over the last 3 years, doubling the size of the business with that type of growth rate. I think that's the right way to think about our expectations and our target is to continue to grow the top line while building consistently gross margins and bottom line, all while doing an exceptional job serving customers.

And so I think that's the way to think about it, not so much. We're not -- obviously, we are disciplined and paying close attention to every line item, but also with a long-term view in mind of continuing to build significant value, not just looking to optimize margin in the next quarter.

And I guess, yes, just to echo Joe's comments, gross margins get more and more interesting as our own products become a bigger part of the mix and specifically in glasses or specialty lenses become a bigger part of the mix. So we're seeing all those things happen across the board. And we don't really see a -- there's not really a cap on average order size.

I think somebody Martin asked earlier about average order size. I think our average order size is good. But as the basket builds, as people get older, they tend to have more pairs of glasses. They tend to need more specialty lenses. They want one for Sun, 1 for -- 1 digital progressive, a pair of transitions. They need a couple of different fashion accessories that are accessible. And they also sometimes want to wear contact lenses, whether for sport or also for fashion to not be wearing their eyeglasses. So there's scenarios in which the basket size doubles over the next 3 or 4 years.

So that's kind of how we think about existing customer. And then I think as we talked about in terms of new customer growth, we think we're doing quite well in terms of new customers, and we'll just continue to acquire through our existing channels and then lean on word of mouth, customers telling friends and family about the experience. So that's kind of how we're thinking about it.

[Operator]

And your next question comes from the line of Devin Schilling with Ventum Financial.

[Devin Schilling, analyst]

Just first off on your fulfillment expenses. We've seen a very nice decrease here as a percentage of revenue this quarter. Maybe if you can just comment on the drivers here and if we should expect this to continue?

[Joseph Thompson, executive]

Devin, yes, thanks for the question. Very happy to see continued leverage on fulfillment. It's coming from 2 areas. We're continuing to see more efficiency and more benefits of scale with our carrier partners. We're able to deliver faster and at a lower cost per order delivered. And really digging into that, that comes from scale. It also comes from really having a strong data footprint and understanding where our customers are and being able to predict where those orders are going to come from in the next week and the next month and the next quarter.

And so -- so very happy with the performance of -- with our carrier partners. And then we're also seeing leverage on labor as we grow -- and particularly -- well, both in glasses and contact lenses, each order gets more efficient in the facility that we have here, the onshore facility here in Vancouver. And so -- so those are the 2 key drivers.

To your question on how much further can it grow? And can we see leverage. We think maybe there's a little bit more, but I think, as Roger had mentioned, we're going to keep very focused on delivering very quickly, often next day throughout Canada and within 1 to 2 days anywhere in North America. And so in and around the 11% to 11.5% range is fulfillment as a percentage of revenue feels like a comfortable short-term place for us.

[Devin Schilling, analyst]

Okay. Yes. No, that's very helpful. I guess just the last one for me here. Just do you guys have any new promotions planned for Q3 outside of what was typically done at this time last year that we should be keeping an eye out for?

[Joseph Thompson, executive]

Yes, maybe I'll jump in to start on that. I think we're -- the team is excited to expand in a bunch of different areas here. We've got -- I probably won't talk too much about what's coming because I don't want to steal anyone's thunder on launches coming in the next 1 to 2 quarters.

But just broadly, expect more product innovation. So what the pace of innovation you've seen on the glasses release, cadence over the last quarter, expect that to continue and accelerate in Q3 and Q4. Very excited about the product pipeline.

On the glasses side. Roger mentioned the expansion of our KITS daily modality contact lens lineup. So that also is coming in Q3. And -- maybe the last thing that I would touch on and a little foreshadowing on what's to come, we have a very strong Autoship business, and it continues to grow this past quarter, over 20% growth year-on-year.

And it's a great product for customers, and it's a great product for us. And so it's probably worth sharing that the team also sees potential for other membership offerings to complement our Autoship program and are testing some in market now with very encouraging results. So expect to see more expansion here in Q3 and Q4.

[Devin Schilling, analyst]

That's everything for me. And yes, congrats on the sale in Q2.

[Operator]

Thank you. And that is all the time we have for questions. I would like to turn it back to Roger Hardy for closing remarks.

[Roger Hardy, executive]

Great. Thanks, operator. Thanks, everybody, for joining today. Thanks to all our stakeholders that continue to support our business quarter after quarter. We believe that we've created the best platform in the optical category and are nearing an escape velocity as we move into this next phase of growth.

We have an exceptionally talented team across our organization that is highly aligned on our long-term vision for the company, and we look forward to continuing to lead KITS to new heights.

2024 looks to be on track for another record year. and we remain committed as ever to execute on our profitable growth initiatives and delivering shareholder value. Thanks again to everyone for joining us today, and have a great day.

[Operator]

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.