Kits Eyecare Ltd
TSX:KITS
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Kits Eyecare Ltd
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Good morning, and welcome to the Kits Eyecare Third Quarter Results conference call. [Operator Instructions] This call is being recorded and available later for replay.Your host today are Roger Hardy, Chief Executive Officer; Sabrina Liak, Chief Financial Officer; and Joseph Thompson, Chief Operating Officer. Before we begin, I am 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 those use of words such as intend, believe, could, expect, estimate, forecast, may, would, will, and other words of similar meanings. These forward-looking information is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we currently believe are appropriate and reasonable in the circumstances.Actual results could differ materially from the conclusion, forecast, expectation, belief or projection in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making a forecast or a projection as reflected in the forward-looking information. We caution 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 the drawing a conclusion or making a forecast or projection as reflection in the forward-looking information are contained in KITS' filings with Canadian provincial securities regulators. During today's call, all figures are in Canadian dollars unless otherwise stated.And with that, I would like to turn the call over to Mr. Roger Hardy, CEO. Please go ahead.
Thanks, operator. Good afternoon, everyone, and welcome to the KITS Q3 2021 Financial Results Conference Call. Thank you for joining us today. I'm Roger Hardy, the Company's CEO. And joining me today are Sabrina Liak, our CFO and Joseph Thompson, our COO.Today, I will discuss our third quarter 2021 results and share more broadly our views and vision for the Company and trends impacting the sector. After my comments, we will review our financial results followed by a broader business update.I'd like to start out today by thanking the incredible group of people we got to come to work with each day. They motivate and inspire us all. The KITS team has been focused on building a revolutionary company over the past 3 years. And this quarter, we are really starting to see the effects of all we have been busy building behind the scenes as our glasses adoption continues to accelerate. It's a smart, engaged group of people and we're excited to get up each morning to see and tackle this adventure.As we think about the exciting company, KITS eyewear that we've been building and the meaningful growth and impact we're having, it's important to think back to our founding and what we set out to do. Our mission when we started KITS was to build the eye care brand for the consumer of today. Over the past 10 years, this customer has been more comfortable doing everything online and increasingly discerning in terms of the service and selection they require.As we thought about the eye care category, we saw brands that were built 40, 50, 60 or even 10 years ago, focused on stores and on archaic opaque model that limited selection, service and convenience for customers. And as such, we set out to build the company that would holistically serve this high value -- highly valuable customer with the tools and technology of today.We believe that health care would be the most significantly disruptive category over the next decade as customers and patients inspire technology-based solutions to more efficient and accessible health care, seeking alternatives to the old retail models focused on traditional storefronts. COVID-19 accelerated the move away from stores and offices towards online retail and telehealth and our business experienced growth from this transition that continues today, as reflected in the record number of glasses and contact lens customers we have served year-to-date.The models of the past are in transition and are changed forever. KITS uniquely built its foundation on the best and most valuable customer in the vision category, creating one of our competitive advantages. This customer is the contact lens customer, which only the best in the category truly appreciate. Once acquired, this annuity-like recurring base of contact lens customers becomes very loyal and extremely difficult to dislodge. This customer is not just highly recurring with predictable acquisition and lifetime value metrics, but also typically wears glasses and requires other optical services.There is significant untapped value in our loyal contact lens customer base that we plan to unlock over time. As this patient returns, they become someone we can introduce to our revolutionary eyeglasses offering, complemented by our online eye care tools, delivering tremendous value and convenience to our customers while improving our entrenchment and margins in the process.Additionally, we've learned that vision correction travels in families. And as we secure one happy and loyal customer, inevitably, these customer start to share the story of their experiences with friends and families, which inspired us to launch the KITS Kids collection this past quarter. As we scaled up our initial base of customers, we built the state of the art optical lab that vertically integrates with the back end of our operation so that we would not be beholden to outside providers.Through vertical integration, we own the rails of production, controlling quality and service, fulfillment times, as well quality of manufacturing. Equally important, we can provide both category-leading cost and category-leading service times, which has led to us having the highest satisfied customer review counts in the eye care.Over time, our experience is that this type of valuable disruption and customer advocacy leads to building truly disruptive brands that take meaningful market share very quickly. Our customer focus combined with our ability to consistently improve margins, creates a powerful long-term growth and profitability flywheel. We saw this spin in real-time just last week as we fulfilled nearly 5,000 glasses orders in the week, all from our KITS lab.This type of glasses volume would be the equivalent of the sales of more than 200 physical optical stores, this just 6 quarters after launching our KITS glasses offering and pulling approximately CAD 70 million a year in revenue away from stores at this run rate, reinforcing the impact of what we are building and a remarkable accomplishment by our team. And while this is compelling progress, the broader picture is even more compelling.It's exciting to be able to update shareholders that we have now served more than 640,000 active customers over the past 2 years. Perhaps equally exciting is our glasses growth, which grew more than 500% year-over-year to over 112,000 eyeglasses, demonstrating our growing traction in the quarter.Finally, it's worth touching on NPS or Net Promoter Score, a widely quoted metric. I've been a strong advocate of Net Promoter Score since being introduced to Fred Reichheld's objective measures of a brand's likelihood of growth, back in about 2004. By pioneering the direct-to-consumer of eyeglasses business back in 2008, NPS was a little known metric that guided us as we launched innovations like vertically integrated glasses direct-to-consumer, the first glasses trial pack to consumers, and ultimately the first omnichannel glasses stores in the category.Since then, NPS has become a more widely known, but not always understood method of predicting growth in companies and categories. Things that deeply affect NPS in our category include things like wait times in store, staff availability, selection of frames and selection of brands, transit times of deliveries, availability of eye doctors, availability of lens option, other selection of well-known brands; and finally, manufacturing quality and fulfillment.At KITS, we're delighted to have the highest number of positive reviews in the category available online across the widest breadth of review sources. We comb through these reviews looking for insights and ideas on how we can better serve our customers. As we organize our internal efforts, customer comments and reviews give us great feedback on what is working and what to work on to improve our customer experience.We continue to be heads down and focused on executing on these opportunities to wow consumers. But importantly, perhaps one of the greatest insights we've gleaned from customers using NPS is that customers are telling us they are happier transacting online through KITS stores than transacting in-store through traditional optical and eyewear stores, when measured by third party.We consider this, as Fred Reichheld would have said, a strong leading indicator of things to come. Even through uncertain market conditions due to the ever-evolving COVID-19 pandemic, we continue to grow 20% year-to-date, achieving over CAD 62 million in revenues adjusted for foreign exchange and outperformed with our asset-light business model, demonstrating that the strong KITS value proposition is resonating with customers across the U.S. and Canada.Revenues increased 157% as compared to the pre-COVID 9 months ended in Q3 2019. Orders grew 30% year-to-date year-over-year to 484,000 orders delivered, giving us a material foothold in this category in only our third year of operations. As we've previously stated, the contact lens customer is the most valuable and most difficult to attract customer in the vision category. Often, the first decision you make in business is critical and ours was to target this highest value and most difficult customer to attract in the category and then vertically integrated back-end to offer that customer a revolutionary state-of-the-art solution that would inspire them to return.And finally, we kept our model asset-light so that we wouldn't spend money on fancy showrooms that ultimately do little more than add to the overheads and costs of a pair of eyeglasses. We're pleased to report that this strategy is fruitful as a full 71% of our business came from returning customers in the quarter. Moreover, we delivered 112,000 pairs of eyeglasses year-to-date, which represents a 522% increase over the prior year.According to industry data, glasses customers typically purchase a pair of glasses every 18 months. As we have only offered KITS glasses for approximately 18 months, one would expect a low number of return glasses customers at this stage. However, we are thrilled to report that a robust 20% of our eyeglasses customers were to returning customers, indicating to us that customers who have tried our offering have been inspired to return, giving us confidence in our future of our Glasses business.Given our unique strategy of offering glasses to existing customers, we had a category-leading customer acquisition cost for the quarter of CAD 21. This number is derived using the more recent methodology of dividing total marketing expense by total number of unique customers in the quarter that appears to have become commonplace in our category.Our 2-year active customer growth was 41% year-on-year to 640,000 customers, representing a new record level of return engagement and new customers served. Average revenue per customer was CAD 184 per customer, a function of mix shift as currently our average glasses order value is lower than our average contact lens order value, and we are increasing share in glasses. Increasing the AOV of glasses is a top priority for us as we -- and we continue to make strong progress on this as customers return and higher value specialty lenses become a larger part of our mix.Interestingly, when customers purchase both glasses and contact lenses, the revenue generated is roughly 40% higher than our average customer. Over time, we expect to see AOV for both contact lenses and glasses improve, and we expect to see glasses margins materially expand overall margins in the future. We are proud of the traction our KITS offering is gaining in the industry with our customers choosing our KITS brand of eyeglasses 90% of the time.We also achieved a milestone in repeat glasses purchases as 20% of eyeglasses delivered were to returning customers. Given how early we are in that launch of our eyeglasses offering, these are encouraging trends. Adding glasses purchases to an already strong recurring revenue base from our contact lens customer remains a high priority for our team that will continue to lift margins over time. We now have a brand-new automated optical lab with the capacity to produce over 4,000 eyeglasses per day and including custom digital progressives and specialty glasses.With all of our production, local and onshore, we can ship patient orders quickly and cost effectively. We reached a key milestone in the third quarter of shipping over 80% of our glasses within 48 hours. We strive to continue to improve on this metric as speed of delivery is very important for our customers. There's tremendous value in having built out this complete vertically integrated eye care solution, allowing us to ensure the highest quality of product reaches our patients in the least amount of time.I'll now turn the call over to Sabrina for the financial review. Sabrina?
Thanks, Roger. According to Euromonitor, the U.S. optical market is USD35 billion with contact lenses making up $7 billion and glasses at $28 billion. We are now nearly 1% of the contact lens market and we're making meaningful strides into the 4x larger and higher gross margin glasses market.Given our position today and the glasses manufacturing infrastructure we have built, there's a substantial growth opportunity as we continue our expansion into glasses. On a currency-adjusted basis, revenue is up 20% year-to-date and up 3.4% in Q3 versus the same period in the prior year. To gain an even greater appreciation of our top line momentum, we believe it is also insightful to look at our revenue growth on a 2-year basis. Our 2-year growth is 168% year-to-date and 73% in 3Q 2021 compared to the same periods in 2019. In addition, our retention levels have been stable throughout this 2-year period.In Q3, orders continued to grow. Orders delivered in the third quarter were up 7% versus the same quarter last year and up 86% compared to 3Q 2019. Glasses delivered grew by 522% year-over-year to 112,000 pairs of glasses as our focused execution on building out our glasses offering continues to deliver strong results. We expect this momentum to continue as our in-house manufacturing capabilities enable us to produce complex custom glasses orders at extraordinary quality and prices.The difference between our revenue growth and customer order growth reflects the initial introductory offers we've provided on both subscriptions and glasses. Going forward, we expect this delta will continue to close as our customers return and we expand our higher-priced offerings.Turning to gross margin. We made significant progress this quarter. Gross margin expanded 430 basis points to 25.9% compared to 2Q 2021. Driving this large magnitude of gross margin improvement in a challenging operating environment, fraught with supply chain disruptions, reflects our team's diligent and tireless focus on execution. As we grow our revenues, we expect to continue to benefit from scale and discipline on pricing.Further, our primary strategic focus is on building out our glasses business through leveraging our annuity-like base of loyal contact lens customers, increasing gross margin as we move upwards on the customer value chain. This expansion from our stable but lower margin contact lens business into more profitable glasses is a key inflection point for our business and anticipated to expand margins going forward and support long-term profitability.We maintain our belief that near-term margins will rise to 25% to 30%, and our goal is to generate long-term margins above 35% as our glasses business and returning Autoship customers become a larger portion of total revenue.We saw an expansion this quarter in adjusted EBITDA margin versus last quarter and versus the first quarter of 2021. As highlighted in our IPO, in the first half of 2021, a portion of the proceeds from the IPO were invested in brand-building activities to launch our Glasses business and to build out our optical facility. We are now moving past this investment phase and on the cusp of returning to EBITDA breakeven. There are significant operating leverage embedded in our business as we have built capacity ahead of anticipated demand.We generated adjusted EBITDA margin of minus 5% in the quarter versus minus 15% in the prior quarter, a margin expansion of 1,032 basis points as the benefit of our asset-light model begin to reveal. This adjusted EBITDA margin improvement reflects our gross margin extension and efforts to maintain a lean and disciplined operation. We finished the quarter with a strong balance sheet, reflecting CAD 21 million in cash and do not expect any material investments over the next 12 to 18 months as we have built significant runway for growth.I will now pass it to Joe to discuss our operating highlights.
Thanks, Sabrina. In Q3, we made our most significant progress to-date, building out our vertically-integrated manufacturing and fulfillment footprint while continuing to expand selection and shipping orders faster than ever at industry leading value. Importantly, we completed the move to our state-of-the-art optical lab and fulfillment center. This onshore facility offers us the capacity to produce 4,000 pairs a day and pass on the savings and convenience from this vertical integration to customers.In Q3, this allowed us to produce and ship over 80% of glasses in under 48 hours. We continue to expand selection for our customers as well. In Q3, we launched 3 additional KITS eyewear collections, Little Italy, South Beach and KITS Kids. We now offer over 600 unique styles of eyeglasses and will continue to increase our selection in Q4. We expanded our inventory on hand of frames and lens much earlier this year, which has allowed us to avoid costly airfreights or inconvenient out of stocks for customers.Finally, in Q3, we completed the launch of our digital surfacing and coating line in-house. This is an important milestone for KITS as it allows us to launch progressives at an industry-leading value to customers. Currently, progressives make up nearly half of the dollars in the eyeglasses market, owing to their high retail costs. Progressives typically sell in traditional optical retailers for over CAD 800, and many customers have told us that at this price, they're not able to afford the eye care they need.By vertically integrating this process, we are happy to offer high-quality digital Progressives to customers for only USD68. With these investments complete, we believe we now have the platform and infrastructure to support multiple years of growth. We continue to automate and optimize our consolidated state-of-the-art manufacturing and distribution center.On ESG, we continued our efforts to lead the optical industry forward through our commitment to sustainability. We recently launched our partnership with Vitamin Angel Alliance to provide life-changing vitamins and minerals to undernourished children and expectant mothers in the U.S. and around the world. With just 2 doses of Vitamin A per year, children can build a stronger immune system, healthy vision and physical growth.We are proud to contribute a donation with each pair of KITS glasses sold to this important work. When we unite to provide the sight -- to protect the sight and improve the health of children everywhere, the future looks brighter. Additionally, our key product manufacturing partner, Karun, produces sustainable eyewear recycled from fishing nets, metals and other discarded plastics, and we also plan to launch a new KITS Eco collection in Q4.Finally, we have continued our lens recycling program and have recycled or up-cycled over 12 tons of discarded lens material for manufacturing activities into eye care products and accessories. We will continue to lead efforts that helps to reduce the level of plastics that are present in our oceans. And leading these efforts in building our KITS business every day, we are fortunate to work alongside a diverse and inclusive workforce. As Roger mentioned, the entire KITS team motivates and inspires us every day.This concludes our prepared remarks. Operator, please open the line for questions.
[Operator Instructions] Your first question does come from George Doumet from Scotiabank.
I haven't seen it anywhere in the press release, but I just want to make sure that you guys were sticking with the CAD 115 million to CAD 125 million revenue guide for next year and also the return to positive EBITDA for next year as well?
Yes. Hey, George, thanks for being on today. Yes, our guidance remains unchanged. We're grateful to our customers and employees who put their trust in us. There's certainly been opportunities and challenges over the past year to overcome with the pandemic. But our view is we've quadrupled our production capacity in the past 2 years, built out the infrastructure to support the anticipated growth of our Glasses business.And with this investment in employees and equipment behind us, we're poised to benefit from significant operating leverage going forward. And our efforts are focused on growing top line, as indicated in the previous guidance of CAD 115 million to CAD 125 million in 2022.So our view is we're already seeing positive signs of this inflection in our business. This quarter's expansion of gross margin show an ongoing improvement in adjusted EBITDA and reduction of overall operating costs observed in the quarter. So it's all well within where we're expected to be.
Okay. Great. And just what was the active customer count assumption be, embedded in that kind of CAD 115 million to CAD 125 million for revenue for next year?
George, we don't actually give specific guidance on forecasting our active customer count. But we expect that the mix would be pretty similar in terms of new versus repeat customers.
Okay. Okay, and just one last one if I may. I was a little bit surprised by the material, I guess, a sequential decline in eyeglasses sold versus last quarter. I know, Roger mentioned, it seems that you guys are pretty enthusiastic about Q4 to-date or the quarter exited. But maybe any color you can kind of share in terms of what happened in eyeglasses sold this quarter versus last [ quarter ]?
Yes, George, I would think of really just a reduction in promotional pairs as a driver of that. And actually, I think we're pretty happy with the number of glasses sold in the Q because we're seeing those original customers returning at a higher average order size and higher average order value. So it was really more about reducing the level of promotion. And you also saw marketing expense down as well Q-on-Q, right?So obviously, marketing will be tied to first-time customers. Our view was that we have a nice base of customers now that are starting to return. And that's -- that word-of-mouth is starting to propel us forward. And like I touched on, as recently as last week, I think it was 4,900 some number of glasses last week over a 5-day period. We're starting to see that type of sharing and customer-driven revenue, driven from word of mouth.So super positive. I think less about the sort of [ sawtooth ] of new customer in glasses promotional pair and more about, as we start to see returning customers and the average order sizes that those customers are coming to us with. So the units may have been different, but the revenues were heading in the right direction.
Your next question comes from Thomas Forte from D.A. Davidson.
Great. One question and one follow-up. So the question I had is on marketing expenses. There's been talk about challenges for marketing, given Apple's changes to privacy. I wanted to see if you're noticing anything there if your digital marketing efforts are any more or less effective and impacted?
Yes, Tom, thanks for joining. Great question. We've been hearing that. I guess, 2 points on that; #1, so much of our business, again, was built around having this strong annuity base of contact lens customers who are all vision corrected, who all require pair of eyeglasses somewhere in their lives. And so we set out with a business plan that would inoculated us, to some extent, against kind of some of the evil empires, as that's called in Facebook and Google that have -- that weld so much power in terms of media.And yes -- so what we've experienced is that existing customers are really helping us tell the story. And so it's much less about the effect of the Google algorithm or the -- or apple changing the privacy settings. And it's been much more about getting -- inspiring customers to try glasses and then getting their feedback on improving the offering. And as that's played out over the last 3 or 4 quarters here, we're really starting to achieve, I would say, a material number of happy customers that seem to be telling a great story for us.So the 5,000 pairs of glasses as I mentioned last week was driven largely by an influencer who was unpaid, who shared on her post that she's gotten a great pair of glasses from us, and that alone really drove the business. So I think we're in a time and place where social can have such an effect, and it can really rise above just the algorithm driven marketing expenses.And so that's really what we're hoping to achieve, is reach that sort of point where it's word-of-mouth that's driving our business. And I think we're heading in that direction.
Great. And then my follow-up, Roger, is, at a high level, if I wanted to think about customer acquisition costs and lifetime value of a customer for 3 different customer types, one being someone who just purchases contacts from you, one for someone who purchases contacts and glasses from you, and then the third, the customer just buys glasses.
Yes, okay, great. And Tom, a couple of moving pieces in there, but we -- when we think about lifetime value, what we've been seeing is, we start with that contact lens customer that has a predictable acquisition cost and we have that LTV. As we layered in eyeglasses and online eye exams, we saw that LTV start to expand in the early cohorts. And we're 6 quarters in now, and that trend continues.So the LTV continues to expand. We touched on it in -- a little bit in one of Sabrina slides. We also touched on acquisition cost at about -- if we just take the straight customers acquired divide it by the marketing expense, we will get a number of about CAD 21. And so that number, to us, doesn't tell the whole story, but it's the number that seems to be the category chosen metric around acquisition costs to which we think ours is very strong when calculated in this way.So we've got a good acquisition cost. We know the LTV. The LTV is trending up. And at this point, we don't share the total road map to execute the exact same plan, but we're confident in the spend we're making and confident in the direction we're going. And it seems like it's trending in the right way.
Your next question comes from Matt Koranda from ROTH Capital.
Just wanted to kind of continue on the line of questioning on glasses. It sounds like you're alluding to some strength sequentially in glasses volume, Roger. And obviously, like sort of the latest promotion or I guess it wouldn't be a promotion, but the influencer driving good volume for you last week, sounds like encouraging news. Should we expect volumes to be up in the fourth quarter relative to the third quarter in glasses?And then maybe also, if you could just talk about the mix of progressives and other specialty lenses within the glasses mix and how that's trending? Maybe how we expect it to trend over the next quarter or 2, that'd be really helpful for kind of getting confidence in the gross margin trajectory you guys highlighted.
Yes. Great questions, Matt. Thank you. So, just to start off on the glasses, we are seeing great traction. And I think, as I said, the traction is coming now from returning customer and starting to pick up some word-of-mouth and some net new customers. So what we kind of referred to as the flywheel starting to spin to some extent. It's obviously taken a while to get that base level of customers and that base level of service that is, I would say, enough of a wow that drives people to really tell others about it.So pardon me, we seem to be sort of cresting that first sort of milestone. So yes, I would expect Q4 glasses numbers will increase on a unit number. And we're also seeing that those dollars from glasses increase. So if you recall, earlier, when we talked, we had glasses units at kind of a lower average order size because they were promotion driven. Now we're starting to see customers return. We're starting to see them look for upgrades in terms of lenses, whether that be blue light or Rx sun or others.And then more specifically around progressives, just again, feeding back into last week's results, the number -- we were somewhere around 10% of orders, about 500 pairs of progressives went out in the week. And that's a digital progressive. It's a highly complex prescription to make. You've taken the time to come to Vancouver and see that manufacturing facility. And I think you'll agree, there's some complexity there to put that together. And so when you see, you kind of get a sense of making that custom progressive, digital progressive, those typically would retail anywhere from CAD 800 to CAD 1,000, and we've got kind of what we think is category disruptive pricing at around CAD 68 for that frame.So we are starting to see some pickup there. We've really only been started that in the end of Q3 and Q4, where we started to kind of head towards some kind of momentum there. It's early days, but yes, we've got good traction for Q4 progresses and other value-added lenses are going up. And we're starting to think of the glasses business now as we look forward into '22 as being a more meaningful contributor on revenue and a more meaningful accretive contributor on gross margin.So, as you know, on those progressives, the gross margins will be significantly higher than what we are in contact lenses. And that's really one of the beauties of our model is we're taking this highly recurring customer, this highly annuity-like business, and then we're adding in the possibility of significant margin expansion with this glasses business. So -- and this holistic approach of covering not just contacts, not just glasses, but a broader picture of eye care, eye health and vision test. So hopefully, that answers your question, Matt. Thank you.
Yes. Very helpful. And just one follow-up on that, if I could. Wondered if you could maybe just speak to pricing trends within the Glasses segment, why not push a bit more on price? I mean, just given the differential you have on your progressives and the average sort of revenue versus the conventional pair of progressives, which suffer quite a bit of a premium relative to your pricing. Why not push a bit more on price and get a better mix in terms of AOVs, which would certainly help you on the margin front. Maybe you could just help touch on that.And then just directionally, you said AOVs are increasing. I'm just wondering if maybe we could put a little bit more of a number behind either AUR or AOV in Glasses and how that kind of trends into 2022?
Yes. Okay. So from the standpoint of how we've derived pricing in Glasses, I think we've touched on, we feel like we've got a very unique model. It's CapEx light. We haven't invested in expensive storefronts. Customers are telling us that they would rather have high-quality glasses at category-leading prices. And so that's how we envision executing the plan.And within progressives, we've obviously designed the model so that it's margin accretive and will lift, on average, our overall margins. And I think as you and I have talked about longer-term margins we'd like to see in the Glasses business up around 50%, and that continues to be the thinking at about year 3 -- between year 3 and year 4, Glasses will have margins in the 50% range. So we're comfortable with that pricing. We think it's disruptive.I think if you want to take meaningful market share in a category, we should be looking to do things that are somewhere around 10x what the competition is doing. And so 50% of the market today is at mom-and-pop optical. Those 41,000 eye care shops, and their price is CAD 800 for a pair of progressive. I think we think of ourselves as trying to be 10x better than what is out there from a pricing standpoint. And equal -- at least equal or better quality in terms of the frame we're delivering. So that's kind of where we sit on that.And sorry if I missed, was there another part of that?
I think you covered it pretty comprehensively, Roger. I appreciate all the detail there. Maybe just one more for Sabrina if I could. I think you mentioned in the prepared remarks, no other significant investments needed in the business. And it sounded like you guys flushed a little bit of cash from working capital this last quarter as well. Could you just speak to sort of how we should think about working capital needs for the business? And as we head into 2022, any large inventory builds or any other items needed there? It seem like you guys are pretty well set on inventory, but maybe you could put a finer point on that for us. And then just talk about sort of capital equipment and spending for next year, so we can get a better sense for uses of cash.
Yes, sure. And thanks for the question, Matt. In terms of CapEx, this year was a big investment year for us. So we doubled capacity relative to the last year and also invested in the infrastructure for the digital progressives and more complex lenses. And just to follow-up on that discussion point with Roger, I mean, really, this investment has enabled us to fulfill with better service times and better quality, and that's really given us the confidence to invest behind our Glasses business as of today. And so we certainly do expect that this is a key inflection point for us.In terms of continued CapEx; next year, we don't anticipate any material CapEx as it relates to the optical lab. So yes, no significant amounts there. And then the first part of your question was around -- sorry, I've forgotten Matt.
Yes. It was just working capital needs, inventory levels, comfort there and sort of do we need to build additional kind of buffer inventory as we head into next year, just given supply chain disruptions?
Yes. So I think we've been fortunate in that Joe's team has done a really good job of planning out the glasses and contact lens needs for the next 6 to 12 months. So we've been fortunate, we've not airfreighted anything over. We've not been really impacted by a lot of the supply chain and logistics issues that have been hampering some of our competition. And so we're in a very good position from an inventory perspective. Don't expect that we will be building that up. And so I think that if anything, we'll be trying to pull that number down and generate more positive working capital.
And your last question comes from Derek Dley from Canaccord.
I just wanted to ask about the marketing spend. We saw it come down quite notably versus -- sequentially versus Q2 as a percentage of revenue. And is the focus looking ahead for the next couple of quarters going to be more on bringing down that marketing spend and focusing on margin growth ahead of revenue growth as you build up your customer base?
Hi, Derek. So, no, I mean, I think what we had said in the prospectus really clearly a year ago was that we would do an initial marketing and branding spend, and we feel good about the marketing and branding spend we did in Q1 and Q2. We were, I think, quite transparent in telegraphing those ecstatic events would be in there.And so I think KITS now, we kind of feel like the flywheel has started to spin. People know the brand. They have comfort with it. When someone tells them, they've got their glasses at KITS, they know what that person is talking about. We're starting to see brand awareness uptick. And so I think we feel good about the marketing investment. As we've always said, the key to our business is in that difficult to attract and retain contact lens customer becoming also a more holistic vision category, customer and advocate, where they get their contacts, their glasses, their eye exams through us.And so that's kind of how we see the next year playing out. So there's not going to be -- I think our marketing spend maybe to be a bit more finer point would be probably about the right level last Q, somewhere in the double digits, low double digits as it relates to revenue and then relying on existing customers to help us tell the story.
Right. That makes sense. So I guess what I was getting at was Q1, Q2, it was closer to 20%, but it sounds like the more normalized range going forward is in that low-to-mid double-digit range that we saw here in Q3. Is that correct?
Yes, correct, low-to-mid double-digit range is about the right way to think of it. Yes.
Okay. Perfect. And then second question, one of your competitors, obviously, which recently IPO-ed pointed to some seasonality in Q4, particularly as it relates to gross margin. Is there anything within KITS to suggest we would see something similar?
From a gross margin standpoint, we are on a pretty steady gross margin expansion plan. And so again, always important when you think of KITS business to think of -- the first piece is the underlying contact lens business that has a steady and stable #1 annuity-like revenue stream. And #2, annuity-like margin stream. And so that business remains kind of Steady Eddie as we go through Q4. That business always has a profit core built into it accordingly.As we think about what's been happening in our business now, Glasses has gone from heavily promotional to less promotional, and with margins expanding as customers return and buy full priced pairs of glasses. So what we've seen there is margin expansion as well.So, I'd say we're looking to continue the progress of Q2 to Q3 and continue that margin expansion into Q4, driven primarily by, like I said, less promotion on glasses and contact lens business continuing to be stable and steady. As you note, it's 71% of our contact lens -- 71% of our business was returning, and a big part of that was driven by returning contact lens customers. So that's that nice annuity I'm speaking to.
Thank you. There are no further questions at this time. You may please proceed.
Thanks, operator, and thanks to everyone for joining us today. It's been an exciting quarter at KITS. We're looking forward to updating shareholders in the New Year as to the progress we're making in Q4. Please feel free to reach out to myself or Sabrina here at KITS or E-mail us at ir@kits.com. If you have any questions or anything we could follow up on. Thanks so much, everybody, for joining. Have a great day.
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