Warby Parker, the maker of affordable designer eyeglasses, is going public. The direct-to-consumer (DTC) upstart was founded only 11 years ago, but has already disrupted the eyewear industry with its range of styles and heavy attention to customer service that's spawned legions of loyal fans.
But rather than an initial public offering or the more faddish special purpose acquisition company (SPAC), the trendy eyeglass and sunglass maker will use a direct listing to circumvent the financial institutions and let insiders, employees, and early backers sell their shares directly to the public.
Yet while its sales are soaring, Warby Parker hasn't been able to turn a profit. So let's look closer at whether the future's so bright, the eyeglass maker will have to wear shades.
A unique way to sell glasses
Eyewear sales are soaring. Warby Parker ended 2020 with over $393 million in revenue. Over the last 12 months, revenue jumped 33% higher to $487 million. Moreover, sales keep accelerating: Over the first half of 2021, they've risen another 58% to more than $270 million, indicating it still has plenty of runway for further expansion.
Warby Parker isn't your typical mall kiosk sunglass retailer, or even a LensCrafters type of store (though it does have 145 retail locations). Instead, it is an online retailer of eyewear, which means it needed to overcome the reluctance consumers have for buying something sight unseen that reflects considerable individuality.
To do so, it ships up to five styles to customers, who can try them on at home to see which fits best and matches their personality (it also offers an iPhone app to try on frames virtually).
Buyers then upload their prescriptions to Warby Parker or use its prescription check app to get a new one, and then wait for their new eyeglasses to arrive. It's also helpful that it has partnered with a number of insurance companies, including Aetna, Cigna, Humana, and UnitedHeath Group, for in-network coverage.
Costly customer acquisition
The system seems to be working. Warby Parker had over 2 million active customers as of June 30, up from 1.81 million at the end of last year. Many were also attracted by the company's buy one, give one program, where for every pair of glasses purchased, it donates a second pair to the needy. It says over 8 million pairs of glasses have been distributed through the program.
Yet, just because a company does good in the world doesn't mean it's a good investment, and that's where it gets a little murkier for investors.
After breaking even in 2019, Warby Parker ended last year with a net loss of $55.9 million. The bottom-line loss resulted from advertising costs jumping 35% over the previous year to $58.5 million. And while operating losses narrowed somewhat in the first six months of this year, the company says it expects to keep posting operating losses for the foreseeable future as it tries to further expand its business.
And that's really the difficulty many DTC brands face: the ever-expanding costs of marketing and advertising to acquire customers, which now represent almost 20% of Warby Parker's sales at the end of 2020, up from 13% the year before. Where it cost $27 to acquire a customer in 2019, last year it jumped to $40 each.
Moreover, even though the average revenue per customer has risen to $218, the operating profit contribution per customer fell to $45. That led to direct customer-level operating margins of 21%, a decline from the 26% earned in 2019.
A growing brick-and-mortar presence
What investors need to be wary of is that Warby Parker seems to be padding its customer acquisition numbers to soften the blow. Rather than just dividing the number of customers acquired by the amount it cost to acquire them, as most companies do, it includes all active customers, which it defines as someone who's made a purchase over the past year.
So its figures include a mix of new and existing customers, muddying the waters and indicating its chances of becoming profitable might not be easily achieved.
However, Warby Parker has turned to stores as its primary revenue contributor (at least they were before the pandemic). In 2019, the stores represented 65% of total revenue, but that fell to 40% after the COVID-19 outbreak shuttered them for a period. Retail outlets have risen back to 50% this year as the stores reopened, but we may see the company continue to build out its physical footprint in a bid to lower some of those customer acquisition costs.
But stores are not cost-free, either, and were actually a hindrance during the pandemic to retailers that still had to pay rent on their closed stores. Look for Warby Parker's expenses to keep rising in the future.
Put on your green eyeshades
Warby Parker intends to list its shares on the New York Stock Exchange under the ticker symbol WRBY, but an investor might want to wait before jumping into the stock.
As more consumers shop online, a DTC brand like Warby Parker should experience more growth, but the eyeglass retailer hasn't indicated it will be profitable growth anytime soon. For that reason, any initial euphoria over its debut could quickly fade under the harsh glare of close market scrutiny.