Kits Eyecare Ltd

TSX:KITS

Earnings Call Analysis

Kits Eye Care Reports Record Growth and Strong Q4 Outlook

In the latest quarter, Kits Eye Care exceeded expectations with nearly $42 million in revenue, achieving 34% year-over-year growth. This success aligns with their strategy of enhancing product offerings and customer retention. Record contact lens sales approached $36 million, and eyeglasses surged by 43%. With 890,000 active customers, the brand is positioned for future growth. Looking ahead, Kits projects Q4 revenues between $43 million and $45 million, maintaining adjusted EBITDA margins of 3-5%. Their disciplined cost management continues to enhance profitability and customer satisfaction, indicating strong operational efficiency as they advance through 2024.

Record Growth and Performance

In the third quarter of 2024, Kits achieved a remarkable milestone, reporting revenue of nearly $42 million, surpassing earlier forecasts of $39 million to $41 million. This represents a 34% organic year-over-year growth, which amassed to an annual revenue run rate exceeding $167 million. Such growth is attributed to the successful execution of the company's strategy built over the years, focusing on product leadership, continuous innovation, affordability, and top-notch customer service.

Expanding Customer Base and Engagement

The company saw a record $15.9 million in revenue from new customers, reflecting a 41% year-over-year increase. This can be largely credited to strong customer engagement strategies and improving word-of-mouth referrals from satisfied customers. The total active customer count has surged to over 890,000, with the company poised to surpass the 1 million mark soon. Notably, repeat purchases from core customers accounted for 62% of revenue, underlining the firm’s robust brand loyalty.

Operational Efficiency Enhancements

Kits has continually improved its operational efficiencies, with fulfillment expenses as a percentage of revenue decreasing by 180 basis points to 10.8%. This improvement was aided by a drop in labor and shipping costs, and nearly all orders are now fulfilled the same day they are placed. Moreover, marketing expenses as a percentage of sales fell by 30 basis points year-over-year, maintaining an efficient framework that supports sustained growth.

Strong Product Offerings and Market Position

The eyeglasses segment noted a 43% yearly increase, underpinned by the introduction of premium products such as digital progressives and specialty lenses, which drove the average order value (AOV) up by over 60%. Moreover, the Kits+ membership program for eyewear is garnering traction, providing customers with added value through discounts and benefits. The commitment to innovation and product variety is clearly paying off.

Positive EBITDA and Financial Health

Kits achieved positive adjusted EBITDA of $1.6 million, marking its eighth consecutive quarter of profitability. This consistent financial performance speaks to the company's overall financial health, with net income reaching $0.1 million and a strong positive cash flow of $2.2 million from operations. Additionally, debt has been reduced by $1 million, leaving the company with a low debt principal and over $19 million in cash heading into Q4.

Forward Guidance and Market Outlook

Looking ahead, Kits expects to maintain its momentum with Q4 revenue projections ranging between $43 million and $45 million, which would mark a year-over-year growth rate of approximately 39%. The adjusted EBITDA margin is anticipated to stabilize between 3% and 5%. Management remains focused on sustainable growth driven by innovations and expanding product lines, showcasing confidence in the brand's market strategy and the potential for capturing further market share.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Kits Eye Care Third Quarter 2024 Financial Results Conference Call. This call is being recorded and available later today for a replay. Your hosts today are Roger Hardy, Chief Executive Officer; and Joseph Thompson, Chief Operating Officer; and Zhe Choo, Chief Financial 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, would 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 can differ materially from a conclusion, forecast, expectation, belief or projection in the forward-looking information. And certain material factors and assumptions were applied in drawing a conclusion or making a 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.

[Roger Hardy, executive]

Thanks, operator. Good morning, everyone, and thank you for joining us. It's been an exceptional quarter at Kits, and I'm extremely proud of our results this quarter as the team has done an incredible job filled with records and achievements across the Kits organization. I'm pleased to share several highlights that have further solidified our market-leading position and strengthened our commitment to providing accessible, high-quality eye care.

But before I jump into the numbers, I'd like to extend my thanks to our dedicated team, whose hard work has driven our performance and continued innovation across every segment of our business this quarter.

Looking back over the last 6 years, Kits has built a leader in the optical category by creating a platform focused on making eye care easy for the customer of today. Our performance over the last 2 years has further solidified our leading position as our products and service standards drove incredible customer experiences that resulted in category-leading retention and growth metrics, fueled by customer word of mouth, something that's very difficult to achieve and replicate.

This strong foundational base, combined with the team's continued execution, has resulted in reaching 8 consecutive quarters of positive adjusted EBITDA. And finally, this past quarter, which we are announcing today, showed growth continued to accelerate as we've achieved record performance across virtually all parts of our business, culminating in record quarterly revenue and customer engagement, building on the foundation we've carefully constructed.

Building a model that combines product leadership, constant innovation, affordability, speed and great service has taken years of insights, combined with carefully constructed strategies to serve customers, and we're now starting to see the results of the team's complex work. At our core, our focus has been on delivering ease of use along with a range of high growth and customer satisfaction initiatives.

During our last earnings call, we set our Q3 revenue expectations at $39 million to $41 million with a target adjusted EBITDA margin of 3% to 5%. I'm proud to report that we exceeded these expectations, delivering nearly $42 million in revenue for the quarter, equating to 34% organic year-over-year growth and an annual revenue run rate of over $167 million. We achieved our adjusted EBITDA goal of 3.8% or $1.6 million with net income of $0.1 million and earnings per share of $0.01. Additionally, we generated $2.2 million in positive cash flow from operations and reduced our debt principal by $1 million, leaving us with a favorable low debt balance and more than $19 million in cash as we head into the next quarter.

The complexity of executing these intentional components has been a worthwhile investment as we are seeing the benefits of these moats begin and the flywheel they create contribute. Some of these moats include, but are not limited to, our membership and subscription business, our Kits branded contact lens and eyewear branded initiatives, providing one of the largest direct billing networks in the country, our endless aisle offering with access to more than 5,000 styles of eyewear. Our tech-enabled Pangolin Smart Glasses, which quickly sold out during the quarter as well as our latest launch of what we expect will be an exciting product, our Kits PIXA collection, allowing personalization of eyewear, all of which combined to better serve our increasing base of returning customers and enable acceleration of our disciplined approach to new customer acquisition.

As these moats gain traction, we achieved a record nearly $36 million in contact lens sales this quarter, and even more impressive was our eyeglasses segment, our fastest-growing segment in the quarter, increasing 43% year-over-year. We also enjoyed great traction in both of our primary geographies where our U.S. business grew by a record 39% year-over-year in the quarter, and our Canadian business achieved a healthy 24% growth rate. These achievements are a testament to the complexity and strength of our model.

As we scale, our efficiency gains continue to improve our overall operational metrics. Quarterly, the marketing team delivered solid execution with marketing expense as a percent of sales declining year-over-year from 13.7% to 13.4% of sales. Our team continued to make strides in operational efficiency driven by streamlined production processes, allowing us to continue to maintain rapid fulfillment rates. We successfully reduced fulfillment expense as a percent of sales by 180 basis points, decreasing to 10.8% in this quarter.

This disciplined approach extends to our general administrative expenses as well, where we maintained a lean cost structure that saw G&A expenses improved to 6.2% of sales. Maintaining tight fiscal discipline is core to our strategy. This quarter, gross profit dollars grew 29% year-over-year to $13.8 million, with gross margins finishing at 32.9% for the quarter. As we identified efficiencies across our operations, we passed many of these savings directly on to our customers, focusing on retention and growing our loyal customer base.

As we continue to grow, and over time, our experience is that gross margins will trend higher as higher-margin products become a larger percent of revenues. It's a delicate balance between efficiency and taking share while staying profitable in this exciting market.

Our approach is paying off with our 2-year active customer count rising to over 890,000 customers, marking a year-over-year increase of more than 7% and underscoring our ability to serve the diverse needs of our expanding community. It's our expectation that we will soon surpass 1 million active customers, which we look forward to celebrating as an exciting milestone.

We generated over 62% of our revenue from our loyal core customers, reflecting their strong affinity for our brand and ensuring a steady revenue stream. Our team achieved a record revenue contribution of $15.9 million from our 77,600 new customers in the quarter, representing a 41% increase year-over-year. This success is a testament to the effectiveness of our value proposition and the trust our customers have in Kits as their eye care provider of choice. This robust customer loyalty forms the basis of our growth trajectory, giving us a solid recurring revenue stream to build upon.

At Kits, we've continuously focused on building up programs designed to serve the customer today and the highest value customers in the category. A highlight as we look across our customer segments is the emergence of a high-value hyper customer, one that uses us consistently as part of our membership or loyalty program that we've seen spends in excess of $10,000 over the 6 years we've been in business. To those of us at Kits, we take this as a strong validation that we are doing things right for this customer group. Over time, it's our expectation that more and more customers will begin to join this cohort as they discover the convenience and savings of Kits, and our many unique offerings.

Looking at the bigger picture, our presence in the optical industry still represents less than 1% of total market, with a $70 billion category still left to address and 7 out of 10 individuals who rely on Vision Care, we believe we're just beginning to scratch the surface of this opportunity that's in front of us. This market presents tremendous room for growth, and we're well positioned to capture a larger share through our unique highly differentiated platform.

As we look to Q4, we expect our momentum to continue. With revenue projections in the range of $43 million to $45 million and an adjusted EBITDA margin target between 3% and 5%, we are confident in our path forward, underpinned by our unique strategy, strong customer loyalty, streamline growth and expanded product lines. Thank you again for your continued support.

With that, I'd like to hand the call over to Joe, who will provide further details on our operational performance. Joe?

[Joseph Thompson, executive]

Thanks, Roger. In Q3 2024, we continue to demonstrate the leverage our model can deliver while improving the experience for customers and introducing innovation across our business. Our operational moat seems to grow every quarter. Fulfillment expenses as a percentage of revenue dropped to 10.8%, a reduction of 180 basis points year-on-year, led by a decrease in both labor and shipping costs as a percentage of revenue.

Inventory turns increased in Q3 versus a year ago as our team leveraged our significant data infrastructure to optimize inventory management. Our speed from order to delivery accelerated as well with the majority of orders now made and shipped the same day they are placed. Accordingly, Net Promoter Score improved again in the quarter versus Q3 2023.

On the marketing front, the team decreased marketing expense as a percentage of revenue by 30 basis points year-over-year and remaining G&A also saw leverage, declining 30 basis points year-on-year to 6.2% of overall revenue. We feel the best companies get more efficient as they grow. Our $500 million infrastructure is a key moat for Kits and leaves us ample room for continued growth and leverage in the years ahead.

The Kits team also introduced several innovations in the quarter, helping us deliver record numbers on new customer revenue and repeat customer revenue. In Q3, we expanded the Kits lineup on both glasses and contact lenses. On glasses, the team introduced 190 unique new styles this quarter. On the contact lens side, we expanded our Kits Daily Silicone Hydrogel line to include color contacts in 5 different shades, which are off to a very strong start. These new Kits additions allow us to offer greater value and selection to our customers while contributing to improved margins.

We also launched our new block-less surfacing technology for digital progressives and polarized lenses. This innovative technology increases our capacity for premium lenses while reducing labor costs and consumables usage by over 30%, underscoring our commitment to both efficiency and sustainability.

Finally, our subscription offerings also expanded this quarter beyond Autoship to include the Kits+ membership program, specifically for our eyeglasses customers. This premium membership program allows customers access to additional benefits, discounts and free shipping all year. Kits+ is off to a blazing start. Stay tuned for more innovation coming in Q4, highlighted by our PIXA line of personalized eyewear and a dramatic expansion of designer frame selection for customers.

I'll now turn the call over to our CFO, Zhe for an overview of our third quarter financial results.

[Zhe Choo, executive]

Thanks, Joe. We are very pleased with our financial performance in the third quarter, driven by strong results across all areas of our business. Q3 revenue grew 34% year-over-year, while gross profit was at $13.8 million, a 29% increase compared to the same period in 2023. Our focus on expanding our new customer segment continued to yield strong results with Q3 reaching a record of $15.9 million in revenue from new customers, a 41% year-over-year increase. This includes a notable 40% growth in revenue from new glasses customers. We achieved this milestone while maintaining a stable gross margin of 33%.

This quarter marks our eighth consecutive quarter of positive adjusted EBITDA, which increased to $1.6 million as compared to $0.6 million in prior year period. This represents 3.8% of revenue within our outlook range and reflecting a 190-basis-point increase year-over-year. We achieved this while improving efficiency across all expenses.

Looking ahead, we remain focused on expanding our loyal customer base, strengthening the Kits brand and investing in product innovation to drive sustainable, profitable growth in Q4, 2025 and beyond. As we progress through the final quarter of 2024, we anticipate further leverage on our marketing and operating expenses and are dedicated to delivering long-term value to our shareholders.

I'll now turn the call over to questions.

[Operator]

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

[Luke Hannan, analyst]

I wanted to ask -- before we get into the quarter itself, I wanted to ask about the Q4 guidance. So it was well ahead of where our model is, and it seems like consensus as well. Just curious to know what it is specifically that you're seeing there? I know the holiday period tends to be a little bit more promotional than most other quarters. So I think most people look at it and figure that you should deliver revenue sort of in line to what you're seeing in Q3 in a given year, but it seems like you're well ahead of that. So just curious to know if you can point out any specific drivers of that outperformance?

[Roger Hardy, executive]

Yes. Luke, great question. It's Roger speaking. We're extremely proud of the team and our results this quarter. Underlying the results, the team has just done a great job in terms of acquisition and retention. They've really found a new level of performance in terms of acquiring customers as well. We really feel like word of mouth has been or happy customers telling friends, family and others sharing their Kits experience, that's really what's driving the performance over the past couple of quarters. And so we're really seeing the model and its strengths help us to grow.

Joe, do you want to add anything there?

[Joseph Thompson, executive]

Luke, you probably saw our note at the beginning of the quarter on another record week in October. Typically, Q4 builds gradually for us. But this quarter, we saw a strong performance right out of the gate. And given the momentum that we've built over the last 8 quarters, we're really filling the winds at our back. And what you've seen from us is just a focus on transparency. When we have news, we want to share it quickly. And that's what you see today. We're happy with October, and we're very excited about the team's plans for November, December.

[Luke Hannan, analyst]

Okay. Great. And then my second question here. The one thing that's interesting to me is you mentioned in your press release, it was a record quarter when it came to new customers, but some quick math shows that the AOV for those new customers, it seems to be a bit higher than the overall AOV that you were able to deliver in the quarter, if I have my math right there.

So one, I mean, is that actually the case? And then two, is there anything specific in your offering that seems to be resonating a little bit more with your newer customers now as opposed to that recurring base that you've built up?

[Joseph Thompson, executive]

Yes. Luke, you're right to notice the AOV increase and it was substantial, up about 22% in the quarter. We've had a lot of success with the premium segment over the last couple of quarters. That includes daily modality contact lenses and some of the premium eyeglasses lenses such as digital progressives. So we've continued to invest there as you'd expect. And really, as we step back, this makes sense because for the customer that's looking online, the value delta is much more significant in absolute dollars on some of those premium segments and the convenience can't be beat. So expect us to continue to invest there.

[Luke Hannan, analyst]

Great. Last question, and then I'll pass the line. Joe, you touched on at the end of your prepared remarks that you'd be expanding the offering of designer glasses that you guys have on the site in Q4. Just curious to know if you can share what specifically that's driving that? Because I know the branded strategy for you guys, of course, has been critical. So just curious to know how, I guess, the expansion of the designer offerings is complementary to that?

[Joseph Thompson, executive]

Sure, Luke. Yes, we've had great performance on the Kits line. And just as you heard in the prepared remarks, continue to expand over 190 new SKUs on the Kits line. As we've expanded our glasses business and had success in segments like insurance, we've been broadening the offering of branded frames. Now these frames still come with -- regardless of the brand, they still come with the Kits prescription lens. They still come in the Kits box delivered on your door in a day or 2.

But it's our view that if we want to make eye care easy for every customer, we want to provide them with the widest selection of products in the market, and that includes branded frames. So we broadened our offering starting in Q4. It's fairly substantial and you will see it build to thousands of new SKUs throughout the quarter.

[Operator]

And our next question comes from the line of Doug Cooper of Beacon Securities.

[Doug Cooper, analyst]

Congratulation on a great quarter. Just going back to the Q4 guidance, Roger and Joe, 39% year-over-year increase at the midpoint, that would by my calculation that we're looking at would be the highest growth rate in the company's history, certainly over the last 8 quarters. And coming off the higher base, obviously, significant. Do you see that momentum continuing into 2025?

[Roger Hardy, executive]

Yes. Doug, I think we've got visibility into Q4. As Joe touched on, with such a strong recurring revenue base, it gives us a lot of confidence in where we sit right now. We talked about how the team is executing across all functions. So yes, we feel good about the Q4 guide.

I think we're not in a position where we want to start thinking too much into 2025. As a management team, we're heads down focused on executing this Q. And that's how I think about it. But the model is gaining momentum over the past couple of quarters. It is driven by both returning and it's driven by new. It's driven by execution of all of our teams. It's not just a marketing exercise. It's also the fulfillment, the teams in customer service and the teams in fulfillment, as Joe talked about, getting products out very quickly, manufacturing high quality in less than a day and getting them out to customers. So all those things are resonating. And yes, we're seeing a lot of momentum right now. We feel pretty good about the model itself right now. We think there's still lots of flex in it. And we're looking forward to what 2025 and beyond is going to bring.

[Doug Cooper, analyst]

Great. Just getting into various categories, can we just talk about glasses, $5.7 million, up 43%, but also the largest absolute dollar jump. Maybe you can just talk about a little bit what's driving this recent success in glasses.

[Joseph Thompson, executive]

Yes, sure, Doug. And as you've heard from us, each quarter is a little different. The one thing on the glasses side, we have seen quite a bit of growth and less reliance on promotion in the quarter, and an expansion of average order value. So for a number of quarters in a row now, we've seen a build. And the one thing that we mentioned a few quarters ago that we were looking for as we originally seeded glasses in the marketplace was the repeat profile. That's very key to our business model, and we've been delighted to see customers in the eyeglass segment coming back.

So we think that, that's a further tailwind for us into 2025. The repeat profile and really almost this treasure hunt atmosphere of repeat customers as they come back to the site where they've been delighted with their first purchase. They often still have insurance dollars left to spend that will expire. And now it becomes a discovery game. They've always wanted a pair of prescription sunglasses or maybe a bigger pair of glasses. So we're delighted to see the repeat profile. We're delighted to see the growth on our premium lens business, digital progressives and specialty lenses, and we think much more growth is coming in 2025.

[Doug Cooper, analyst]

Okay. Just on the contact side quickly, how is your own branded line, new line coming?

[Roger Hardy, executive]

Yes. Doug. Yes, the new line on contact lenses is -- we're pleased with where it started almost out of the gate. Now a couple of quarters in, we're up to about 5% of revenue. From an average order value, it actually brings down the average order value a little, but it's quite margin accretive. So we're excited about that.

Probably worth noting again, more than 890,000 customers today, approaching almost 1 million active customers with so many of them repeating, I think that's part of the exercise over the next couple of quarters is to keep introducing great products that customers get really excited about and that help us from a margin standpoint, but also take great care of customers.

Anything you want to throw in Joe?

[Doug Cooper, analyst]

And just the last one guys, quickly, just in line with the election today in terms of tariff law potential. Can you comment about if you're -- what your thoughts are around the eyeglass industry and any potential tariffs that might [indiscernible].

[Joseph Thompson, executive]

Yes, sure, Doug. So we source raw materials from different parts of the world, including Asia, and that includes some component assembly. We don't know what government action will come, if any. But for every source channel and component that we buy, we've identified clear alternatives, and we're ready to execute those alternatives as necessary.

As we reviewed it, moving to an alternative channel for any component, we think can be done within a single quarter and with a very minimal cost impact. And I guess stepping back, fortunately, we really benefit from this onshore manufacturing facility that you've seen. And we make every pair of glasses right here versus the balance of the optical market, where a number outsource total manufacturing overseas.

So we feel like we've got an advantage here, and we do have, as you've seen on inventory, months of inventory on hand. So overall, expect us to be on top of any change, and our goal is to be well ahead of the market on this.

[Operator]

Our next question comes from the line of Martin Landry of Stifel.

[Martin Landry, analyst]

Congrats on your great Q3 results and impressive Q4 guidance. I'm also trying to understand the performance and what's leading to such a rapid growth rate in Q4? And I'm trying to understand, you're obviously gaining share, you're growing faster than the market. I would think you're gaining share away from brick-and-mortar, but do you think you're also gaining share against other online competitors?

[Joseph Thompson, executive]

Martin. Yes, so maybe a couple of comments on that. From the data that we've seen from the U.S. market and the Vision Council is good. It's not perfect data. So we try to triangulate in on it. Overall, it looks like the market continues to grow as a whole around in the 3% to 4% range. So we're about 10x the growth rate of the industry. And from the best of our ability to see the data in the market, online tends to be growing around 10% to 15% depending on the quarter. So I think you'd be right to say that at the growth rate that we're seeing that we might be taking share in online as well as in the total market.

We see the data as it comes up, but we're pretty focused just on the expansion of the online channel overall. And we see just continued, especially with this millennial consumer 28 to 43 years old, now the biggest demographic in the U.S. and Canada, and will be the optical market for the next 10 to 20 years. And what she's told us that -- what this customer has told us is, she's very interested in shopping for all her optical needs online, and she wants value, selection and convenience.

And so what we're monitoring is less the overall market data and more the indications that she's giving us. And so traffic is up in the quarter pretty substantially, well ahead of revenue. And so we're seeing more browsing and even more opportunity for higher conversion in quarters to come. And virtual try-on continues to be the top use feature on the site. And so we think it's a great category regardless of the market. We think it continues to move online, and we are full steam ahead to build more tools and more selection to meet that demand.

[Martin Landry, analyst]

Okay. That's helpful. I was looking at your customer acquisition costs. And according to rough math, your customer acquisition costs would be up around 20% year-over-year and the highest level so far this year.

So first question, does that make sense? Does that math make sense? And then second question, where do you see your customer acquisition costs evolve in the coming quarters?

[Joseph Thompson, executive]

Sure, Martin. Yes. I think you've noted a bit of an absolute dollar increase on CAC, and I think you're right to note that. That is correct. Each quarter is a bit different. And what we saw in this quarter was a record amount of new customer revenue, up over 40% year-on-year. And so the growth of new customers well out distancing our increase in CAC. And so our team continues to be focused.

We now have 2 great businesses, glasses and contact lenses, in 2 great markets, the U.S. and Canada. And so we have a very nimble model that allows us to focus on where we're seeing results and expect that to just continue to pivot and focus on acquiring these premium optical customers that we feel are well suited to become high lifetime value customers for years to come on the Kits platform.

[Martin Landry, analyst]

Okay. So your customer acquisition cost has increased a little bit year-over-year. Where do you see it evolve from here? Is there room to move it up? Or do you want it to bring it down? How is the strategy? I know you're trying to balance profitability and growth. But I'm trying to understand a little bit where we are in the cycle with your customer acquisition costs?

[Joseph Thompson, executive]

Yes. I think as we looked over the last couple of quarters, it's been fairly consistent, Q2 and Q3, and we're continuing to see expansion. So to your question, where are we focused?

We are focused on continuing growth in and around somewhere between 5 and 10x the pace of the market. Of course, we could always deploy more cash into the market, but the team has a very high threshold on return. And we're happy with the cash position that we have. It's a great market to have a strong cash position and to continually be paying off debt. Our debt principal down to $4.6 million, expect to be paid off in Q2 2026. So with 25% to 35% growth rate over the last number of quarters, we certainly could deploy more marketing dollars, but we're happy with the return on investment that we've been seeing.

[Roger Hardy, executive]

Yes. Yes, Martin, it's Roger. I'd just probably add to what Joe is saying that we continue to look for efficiency of our marketing spend. So we're trying to think of it in terms that continues to drive efficiency. So as a percent of sales, it's been consistent, but it's also been measured and declining.

And probably the last thing to note is that in that marketing, what you called an acquisition category or an acquisition attribution, from time to time, we do undertake sort of longer-term brand initiatives, something that may not be as direct response as pay for click or something like that. So you see the variance that Joe is talking about when we do branding activities that we think of as being a little bit longer term.

You've also heard us talk about a market-by-market strategy. So all of that is mixed into that bucket where not necessarily every marketing dollar will come back in the exact quarter that it's attributable to. So we hope to see some long-term benefits of that. And so far, like I said, I think the team has done just an incredible job becoming more and more efficient, even though that acquisition cost may be looking like it's headed up in the Q.

You've got, like I said, some brand activities in there, some tests, some other things that are going on. So there are moving parts in there, but from our standpoint and what we're seeing at the line of scrimmage, it's just great execution.

[Martin Landry, analyst]

Okay. That's fair. And maybe just last quick question for me. You've -- in your opening remarks or in an answer to a previous question, you talked about insured customers trying to spend their insured dollars and benefiting you guys. Have you -- or I may have missed this, but have you ever shared what's the percentage of your customers that are insured or how has that fluctuated recently?

[Joseph Thompson, executive]

Sure, Martin. We don't break out the specifics of our insurance business, but we can confirm that Q3 insurance revenue saw significant growth quarter-on-quarter, year-on-year. And you see it as a contributor to the growth we're seeing on glasses, AOV expansion on glasses up over 50% -- over 60% in new customer growth. So we think insurance is just going to continue to be a steady build each quarter of new customers and favorable economics. And that's part of the reason why we're broadening the offering, adding more branded frames in Q4.

So we'll have more to update each quarter as the insurance part of our business continues to grow. To your question, typically, the market data that we've seen suggests that about half of customers, just under half in the U.S., just over half in Canada, utilize vision insurance. And from what we've seen, that's comparable for us as well.

[Operator]

Our next question comes from the line of Gianluca Tucci of Haywood Securities.

[Gianluca Tucci, analyst]

Congrats on solid growth and guidance. Most of my questions have been asked. But in terms of average order values, are you seeing any uplift yet from your TELUS Health channel? Any color there is helpful.

[Joseph Thompson, executive]

Gianluca, great to hear from you this morning. We've insurance -- the insurance category, including TELUS Health and a number of other initiatives, just continues to perform for us, seeing significant growth quarter-on-quarter and year-on-year. We don't break it out specifically, but you really see it come through in the numbers. Glasses growth up over 40%, average order value on glasses up over 60% and the new customer revenue that we saw. So it's not going to be a onetime build of revenue. It will be a steady drip of new customers and favorable economics. So we just continue to be bullish on it and look forward to updating each quarter.

[Gianluca Tucci, analyst]

Okay. That's great, Joe. And just lastly, on your cash flow statement, it does look like you had some CapEx spend in the quarter. Is that to facilitate capacity expansion? Or is that for something else?

[Joseph Thompson, executive]

Sure, Gianluca. So we were delighted with the growth of our premium lens lineup, including digital progressives and other premium lenses like Sun Rx, continuing to grow this quarter at and above 60%. So accordingly, we did make an investment in the surfacing and expanding our surfacing and coating line. That increased capacity and efficiency, our new machinery requires about 30% less labor and expands capacity significantly.

So that was really in response to higher-than-expected demand on that line. We're delighted to have the machinery installed and already yielding results for us. Moving forward, though, CapEx will continue to remain stable, similar to 2023 levels. It's our view that, that's in around or below 1% of total revenue.

[Operator]

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

[Matt Koranda, analyst]

Nicely done in the third quarter here. Wanted to see if we could get at the fourth quarter acceleration and growth in maybe a different way. Are there any tactics that you can share around the record week that you saw during customer appreciation month? I'm just curious sort of any color around that and then how replicable those tactics are that you use to drive the growth?

And I guess the follow-on to that is, is it fair to assume that October was a bit better than the 39% growth that you guys are guiding for the full quarter for the fourth quarter?

[Roger Hardy, executive]

Matt, I think, it's interesting that everyone is kind of keen on this point. I think from what we're seeing, we think about the strength in the business, it's really the recurring, the returning customer returning at a higher AOV. We talked a bit about that hyper customer where we've got a cohort, something like more than 10,000 customers who spent more than $10,000 with us over the past 6 years. And so we're seeing a customer that's returning at a healthy average order size, that's really kind of underpinning the growth initiatives, and that's allowing us to be, I think, pretty flexible in terms of acquisition strategies.

We're seeing lots of, like we said, word of mouth. And so -- yes, hopefully, that gives you some color as to the strength of the record week really fueled by that return customer and how we think about Q4 that there's just a large build of a recurring annuity underlying. Anything else, Joe or Zhe? Anything Zhe? Okay.

[Matt Koranda, analyst]

Okay. In terms of the -- like I didn't hear, I guess, too much on the own town -- sorry, own-this-town strategy. Maybe any update there in terms of rollout, where we stand in terms of MSAs that we've entered? How that sort of informs the marketing budget for the remainder of the year and then into '25?

[Joseph Thompson, executive]

Yes. You bet, Matt. This is an important part of our expansion. And we expect our next market to activate and come live in the near term. So we're excited to update you when that happens. There's absolutely no change to our plan here.

[Matt Koranda, analyst]

Okay. Great. I noticed glasses seems to have a pretty large AUR improvement. Curious, maybe if you can unpack a few of the drivers there. Is it the more premium lens strategy, the digital progressives where you're seeing good attach. I know -- Roger, you already mentioned sort of return customers at a higher AOV, but just anything on the mix of specifically in glasses. And then how should we think about AURs for glasses on a go-forward basis?

[Joseph Thompson, executive]

Sure, Matt. Yes. And in our business, each quarter is a little different. In this quarter, we really saw an uptick on the premium lens side. And we saw less of a need for promotion in this quarter. And over Q3, you see it's a heavier Sun Rx mix that comes in. And so we did see -- you're right to note that glasses' average order value or AUR was up over 60% year-on-year. And so it's digital progressives up over 60%. It's Sun Rx. And then just overall, in the quarter, less promotional volume.

[Matt Koranda, analyst]

Okay. Great. And then maybe just last one. So we used the midpoint of the revenue guide for the fourth quarter. It's obviously a step-up from the rest of the year, but we're keeping the EBITDA margin guidance kind of the same zone as you had it in the third quarter. So I guess that implies a decent amount of reinvestment through the P&L. So I'm just wondering, maybe, if you're willing to kind of speak to, where you think that's going to come from, whether that's in the form of maybe giving away a little bit more upfront on the gross margin side or incremental investments in marketing? How should we just think about sort of the appetite to reinvest through the P&L there?

[Roger Hardy, executive]

I think I would stay consistent in terms of looking for marketing efficiency to continue, looking to be efficient in fulfillment, keeping SG&A tight and really investment to be consistent with prior periods.

[Operator]

And our last question comes from the line of Devin Schilling of Ventum Financial.

[Devin Schilling, analyst]

Congrats on the very strong quarter. Most of my questions have been asked already, but maybe if you can just comment on strong U.S.A. growth during the quarter. Was there any new promotions focused in the U.S. market? Or any other color you can add?

[Joseph Thompson, executive]

Devin, great to hear from you. And I think each quarter just is a little bit different. We're very fortunate to have a model that's nimble and allows us to tweak the dials to be flexible. And we saw great response to -- or the team saw a great response to marketing efforts in the U.S. market and really invested accordingly.

We did continue to have growth in the Canadian market at the top line, quarter-on-quarter growth over 10%, 2 quarters in a row. We had a strong base in the Canadian market a year ago. So it makes the Canadian numbers look a little bit smaller, but the top line just continues to be very strong.

But really, the focus comes back to Roger's point on allocating dollars. And as we get results, we invest more, and our model allows us to be nimble and go where the results are. So 2 strong businesses, glasses and contact lenses, and 2 strong markets, U.S. and Canada. And a little bit more than we even expected in the U.S. market as you mentioned in Q3.

[Devin Schilling, analyst]

So was there more dollars spent on marketing in the U.S. during the quarter? Or again, it was just more of a timing thing?

[Joseph Thompson, executive]

Yes. We -- as you saw on the overall marketing spend, holding very consistent as a percentage of revenue, and that's just a continued theme you'll see from us. So we really look -- if you kind of look under the hood of our business, you'll hear from us the same thing again and again. We're looking for category-leading growth. We're looking to continue to deliver that category-leading growth at adjusted EBITDA positive levels. And we'd like to maintain marketing as a percentage of revenue in the 12% to 14% range. And we saw it again. And we were just delighted by the response in both Canada and the U.S., but saw even more growth than we expected in the U.S. market.

[Operator]

And there are no further questions at this time. I would like to turn the call over to Roger Hardy for any closing remarks.

[Roger Hardy, executive]

Great. Thanks, operator, and thanks, everyone, for joining us today. We're grateful for the ongoing support from all our stakeholders as we work to make Kits the leader in the optical industry. I'm confident that our strategy, combined with the exceptional talent across our team, positions us well to continue our strong growth momentum.

The foundation we've built gives us a unique platform to drive innovation, expand our reach and deliver meaningful value to our customers and shareholders. 2024 is shaping up to be another milestone year, and we remain focused on executing our profitable growth initiatives as we continue to create long-term value. Thank you all for being with us today, and have a great day ahead.

[Operator]

Thank you so much presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Have a good day.