From an online disruptor to a brick-and-mortar retailer, Warby Parker (NYSE: WRBY) is in the process of a significant transition. The prescription glasses and contact lenses retailer is expanding its physical stores to become a one-stop shop for all vision-related needs. However, its recent quarterly report showed that the company might not have a 20/20 vision.
Sales growth is slowing
Warby Parker, which only recently became public, opened seven new stores in its 2021 fourth quarter -- representing a 4.5% increase from its third-quarter store count of 154. Yet, the company's total revenue declined from $137.3 million to $132.9 million, or 3.2%, during the same period. This stands in marked contrast to the same periods in 2020, when its total revenue increased from $104.0 million in Q3 to $112.8 million in Q4 -- meaning that seasonality isn't likely the cause for the recent decline in revenue. In fact, management stated that its highest sales days of the year are the week between Christmas and New Year's.
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Management called out the rise in omicron cases as the cause for the revenue drop, estimating that it lost $5 million in sales. However, even if that $5 million came into fruition, its Q4 2021 revenue growth would have only been 0.4% from Q3 2021. Worse yet, management expects $15 million in lost sales in Q1 2022 due to the COVID variant.
Its contact lenses may be stuck
As Warby Parker continues to build out its physical stores, the company aims to be a full-service retailer for vision correction. The company offers eye exams at most of its locations and began selling contact lenses through a third-party manufacturer in late 2019. However, Warby Parker's contact lenses are negatively affecting gross margins and showing signs of slowing growth. Before the company sold contact lenses, the gross margin was around 60%; in the latest quarter it was about 57%. And while the company doesn't give exact figures for its contact lens sales, management noted that they represented 5% of net revenue in Q3 but only 4% for the entire 2021 year.
Lofty expansion plans
Despite a recent slowdown in sales, management expects to grow its 2022 total net revenue by 20% to 22%, or $650 million to $660 million. In 2022, Warby Parker intends to open 40 additional stores, bringing its total to 201. With the company averaging about $2,900 in sales per square foot, it has a goal of eventually expanding to over 900 stores in the U.S.
The company recently opened a second optical lab facility in Las Vegas to scale its eyeglasses manufacturing business. Management believes it will increase its production and shipping capabilities, particularly on the West Coast. As of Q3 2021, the new facility produced 1,000 glasses per day.
What to watch going forward
Any company loved by its customers is always worth monitoring. And Warby Parker is just that with a Net Promoter Score -- a metric that measures customer experience -- above 80. A score above 50 is considered excellent, and a score above 80 represents a "world-class" brand. Still, the stock is down about 22% from its direct listing price of $40 per share in September 2021.
Look to Warby Parker's next earnings report for the latest update on its 2022 net revenue growth projections and its contact lenses business. However, until the retailer shows it can consistently maintain its high growth numbers, expect its stock to continue its disappointing performance.
