WARBY PARKER INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theSecurities and Exchange Commission ("SEC") onMarch 18, 2022 (the "Annual Report"). Data as of and for the three and nine months endedSeptember 30, 2022 and 2021 has been derived from our unaudited condensed consolidated financial statements. Results for any interim period should not be construed as an inference of what our results would be for any full fiscal year or future period. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, which involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q and in Part I, Item 1A, Risk Factors, in the Annual Report.
Overview
A pioneer of the direct-to-consumer model,
Since day one, our focus on delighting customers and doing good has created a foundation for continuous innovation:
•We aim to provide customers with the highest-quality product possible by designing glasses at our headquarters inNew York City , using custom materials, and selling direct to the customer. By cutting out the middleman, we are able to sell our products at a lower price than many of our competitors and pass the savings on to our customers. In addition to lower prices, we introduced simple, unified pricing (glasses starting at$95 , including prescription lenses) to the eyewear market. •We've built a seamless shopping experience that meets customers where and how they want to shop, whether that's on our website, on our mobile app, or in our 190 retail stores. •We've crafted a holistic vision care offering that extends beyond glasses to include contacts, vision tests and eye exams, vision insurance, and beyond. We leverage leading (and in many cases proprietary) technology to enhance our customers' experiences, whether it's to help them find a better-fitting frame using our Virtual Try-On tool, or to update their prescription from home using Virtual Vision Test, our telehealth app. •We recruit and retain highly engaged, motivated team members who are driven by our commitment to scaling a large, growing business while making an impact and are excited to connect their daily work back to our mission. •We are a public benefit corporation focused on positively impacting all stakeholders, and hope to inspire other entrepreneurs and businesses to think along the same lines. Working closely with our nonprofit partners, we distribute glasses to people in need in more than 50 countries globally and many parts ofthe United States . Over 10 million more people now have the glasses they need to learn, work, and achieve better economic outcomes through our Buy a Pair, Give a Pair program. We generate revenue through selling our wide array of prescription and non-prescription eyewear, including glasses, sunglasses, and contact lenses. We also generate revenue from providing eye exams and vision tests, and selling eyewear accessories. We maintain data across the entire customer journey that allows us to develop deep insights, informing our innovation priorities and enabling us to create a highly personalized, brand-enhancing experience for our customers. We have built an integrated, multichannel presence that we believe deepens our relationship with existing customers while broadening reach and accessibility. And while we have the ability to track where our customers transact, we're channel agnostic to where the transaction takes place and find that many of our customers engage with us across both digital and physical channels; for example, many customers who check out online also visit a store throughout their customer journey, while others choose to browse online before visiting one of our stores. 23
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Financial Highlights For the three months endedSeptember 30, 2022 andSeptember 30, 2021 : •we generated net revenue of$148.8 million and$137.4 million , respectively; •we generated gross profit of$84.4 million and$79.7 million , respectively, representing a gross profit margin of 56.7% and 58.0%, respectively; •we generated net loss of$23.8 million and$91.1 million , respectively; and •we generated adjusted EBITDA of$11.9 million and$11.2 million , respectively.
For the nine months ended
•we generated net revenue of$451.6 million and$407.9 million , respectively; •we generated gross profit of$260.4 million and$241.5 million , respectively, representing a gross profit margin of 57.7% and 59.2%, respectively; •we generated net loss of$90.1 million and$98.4 million , respectively; and •we generated adjusted EBITDA of$18.6 million and$31.3 million , respectively. For a definition of adjusted EBITDA, a non-GAAP measure, and a reconciliation to the most directly comparable GAAP measure, see the section titled "Key Business Metrics and Certain Non-GAAP Financial Measures." Direct Listing OnSeptember 29, 2021 , we completed a direct listing of our Class A common stock (the "Direct Listing") on theNew York Stock Exchange ("NYSE"). We incurred fees related to financial advisory services, audit, and legal expenses in connection with the Direct Listing of$23.9 million and$27.7 million for the three and nine months endedSeptember 30, 2021 , respectively, which are recorded in selling, general, and administrative expenses. Factors Affecting Our Financial Condition and Results of Operations We believe that our performance and future success depend on a variety of factors that present significant opportunities for our business but also present risks and challenges that could adversely impact our growth and profitability, including those discussed below and in Part I, Item 1A. "Risk Factors" of the Annual Report. Overall economic environment The nature of our business, which involves the sale of products and services that are a medical necessity for many consumers, provides some insulation from swings in consumer sentiment and general economic conditions. However, our performance and growth are still impacted by these factors. The current economic downturn, increased inflation and interest rates, and other negative economic factors may impact consumer spending habits as well as our cost of attracting and our ability to attract new customers. For example, during the third quarter of 2022, we continued to see lower overall sales growth rates than we have historically experienced, as well as lower retail productivity as consumer activity has not recovered to pre-pandemic levels. We believe our business model, focused on providing an exceptional value and experience to our customers, will help mitigate the impact of many of these macroeconomic factors, however the extent of such mitigation and the impact on future results is uncertain. We also continue to diversify and expand our supply chain network, both internationally with our frame manufacturers and domestically with our wholly owned and partner optical laboratories, which we believe has insulated us from supply chain disruption and allowed us to continue to meet growing customer demand over the last several years while maintaining our exceptional quality and customer satisfaction standards. Impact of COVID-19 The health and safety of our customers and employees remains our top priority, and to that end we will continue to monitor developments related to the COVID-19 pandemic and adjust policies and operations as needed. We have developed procedures to enable us to responsibly and efficiently adjust operations as needed. We have onboarded and continue to onboard new suppliers, as well as enhance inventory planning and monitoring capabilities. We have experienced minimal supply chain disruptions through the first three quarters of 2022 and we expect the actions we have taken will help to mitigate supply chain disruptions in future quarters, although the future trajectory of the COVID-19 pandemic is still unknown. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, operations, and financial condition will depend on future developments that are highly uncertain. Given the uncertainty, we cannot estimate the financial impact of the pandemic on our future results. For additional details, refer to the risks described in our Annual Report, including those described in Part I, Item 1A. "Risk Factors." 24
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Key Business Metrics and Certain Non-GAAP Financial Measures
In addition to the measures presented in our condensed consolidated financial
statements, we use the following key business metrics and certain non-GAAP
financial measures to evaluate our business, measure our performance, develop
financial forecasts, and make strategic decisions. The following table
summarizes our key performance indicators and non-GAAP financial measures for
each period presented below, which are unaudited.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Active Customers (in millions) 2.26 2.15 2.26 2.15
Store Count(1) 190 154 190 154
Adjusted EBITDA(2) (in thousands) $ 11,926 $ 11,187 $ 18,637 $ 31,263
Adjusted EBITDA margin(2) 8.0 % 8.1 % 4.1 % 7.7 %
__________________
(1)Store Count number at the end of the period indicated.
(2)Adjusted EBITDA and adjusted EBITDA margin are supplemental measures of our
performance that are not required by, or presented in accordance with, GAAP.
Adjusted EBITDA and adjusted EBITDA margin are not measurements of our financial
performance under GAAP and should not be considered as an alternative to net
loss or any other performance measure derived in accordance with GAAP.
Active Customers
The number of Active Customers is a key performance measure that we use to
assess the reach of our physical retail stores and digital platform as well as
our brand awareness. We define an Active Customer as a unique customer that has
made at least one purchase in the preceding 12-month period. We determine our
number of Active Customers by counting the total number of customers who have
made at least one purchase in the preceding 12-month period, measured from the
last date of such period. Given our definition of a customer is a unique
customer that has made at least one purchase, it can include either an
individual person or a household of more than one person utilizing a single
account.
Store Count
Store Count is a key performance measure that we use to reach consumers and
generate incremental demand for our products. We define Store Count as the total
number of retail stores open at the end of a given period. We believe our retail
stores embody our brand, drive brand awareness, and serve as efficient customer
acquisition vehicles. Our results of operations have been and will continue to
be affected by the timing and number of retail stores that we operate.
As of
Adjusted EBITDA and Adjusted EBITDA Margin We define adjusted EBITDA as net income (loss) before interest and other income, taxes, and depreciation and amortization as further adjusted for asset impairment costs, stock-based compensation expense and related employer payroll taxes, amortization of cloud-based software implementation costs, non-cash charitable donations, and non-recurring costs such as restructuring costs, major system implementation costs, and direct listing or other transaction costs. We define adjusted EBITDA margin as adjusted EBITDA divided by net revenue. We caution investors that amounts presented in accordance with our definitions of adjusted EBITDA and adjusted EBITDA margin may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate adjusted EBITDA and adjusted EBITDA margin in the same manner. We present adjusted EBITDA and adjusted EBITDA margin because we consider these metrics to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.
Management uses adjusted EBITDA and adjusted EBITDA margin:
•as a measurement of operating performance because they assist us in evaluating
the operating performance of our business on a consistent basis, as they remove
the impact of items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual
operating budget and financial projections;
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•to evaluate the performance and effectiveness of our operational strategies; and •to evaluate our capacity to expand our business. By providing these non-GAAP financial measures, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA and adjusted EBITDA margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net loss or other financial statement data presented in our condensed consolidated financial statements as indicators of financial performance. Some of the limitations are: •such measures do not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments; •such measures do not reflect changes in, or cash requirements for, our working capital needs; •such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; •such measures do not reflect our tax expense or the cash requirements to pay our taxes; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and •other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures. Due to these limitations, adjusted EBITDA and adjusted EBITDA margin should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. Each of the adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.
The following table reconciles adjusted EBITDA and adjusted EBITDA margin to the most directly comparable GAAP measure, which is net loss:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Net loss $ (23,843) $
(91,073)
183 146 75 452
Provision for income taxes (12) (1,052) 574 151
Depreciation and amortization expense 8,342 5,587 22,947 15,273
Asset impairment charges 1,097 - 1,509 137
Stock-based compensation expense(1) 24,358 65,929 78,603 77,599
Non-cash charitable donation(2) - 7,757 3,270 7,757
Transaction costs(3) - 23,893 - 28,262
Amortization of cloud-based software
implementation costs(4) 96 - 96 -
ERP implementation costs(5) 170 - 170 -
Restructuring costs(6) 1,535 - 1,535 -
Adjusted EBITDA 11,926 11,187 18,637 31,263
Adjusted EBITDA margin 8.0 % 8.1 % 4.1 % 7.7 %
__________________
(1) Represents expenses related to the Company's equity-based compensation
programs and related employer payroll taxes, which may vary significantly from
period to period depending upon various factors including the timing, number,
and the valuation of awards granted, vesting of awards including the
satisfaction of performance
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conditions, and the impact of repurchases of awards from employees. For the three and nine months endedSeptember 30, 2022 , the amount includes$0.1 million and$0.4 million , respectively, of employer payroll costs associated with releases of RSUs and option exercises. For the three and nine months endedSeptember 30, 2021 , the amount includes$1.6 million of employer payroll costs associated with releases of RSUs in connection with our direct listing. (2) Represents charitable expense recorded in connection with the donation of 178,572 shares of Class A common stock to theWarby Parker Impact Foundation in each ofAugust 2021 andMay 2022 . (3) Represents (i) costs directly attributable to the preparation for our Direct Listing and (ii) expenses incurred in connection with the cash tender offer completed inJune 2021 . (4) Represents the amortization of costs capitalized in connection with the implementation of cloud-based software. (5) Represents internal and external non-capitalized costs related to the implementation of our new Enterprise Resource Planning ("ERP") system which is expected to be live in 2023. (6) Represents employee severance and related costs for our restructuring plan that was executed inAugust 2022 . Results of Operations The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. The following tables set forth our results of operations for the periods presented in dollars and as a percentage of net revenue: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Condensed Consolidated Statements of Operations Data: Net revenue$ 148,777 $ 137,373 $ 451,619 $ 407,906 Cost of goods sold 64,359 57,709 191,208 166,407 Gross profit 84,418 79,664 260,411 241,499 Selling, general, and administrative 108,090 171,643 349,904 339,264
expenses
Loss from operations (23,672) (91,979) (89,493) (97,765)
Interest and other income (loss), net (183) (146) (75) (452)
Loss before income taxes (23,855) (92,125) (89,568) (98,217)
Provision for income taxes (12) (1,052) 574 151
Net loss (23,843) (91,073) (90,142) (98,368)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
% of Net Revenue % of Net Revenue
Condensed Consolidated Statements of
Operations Data:
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 43.3 % 42.0 % 42.3 % 40.8 %
Gross profit 56.7 % 58.0 % 57.7 % 59.2 %
Selling, general, and administrative 72.6 % 124.9 % 77.5 % 83.2 %
expenses
Loss from operations (15.9) % (66.9) % (19.8) % (24.0) %
Interest and other income (loss), net (0.1) % (0.1) % - % (0.1) %
Loss before income taxes (16.0) % (67.0) % (19.8) % (24.1) %
Provision for income taxes - % (0.7) % 0.2 % - %
Net loss (16.0) % (66.3) % (20.0) % (24.1) %
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Components of Results of Operations
Net Revenue
We primarily derive revenue from the sales of eyewear products, optical
services, and accessories. We sell products and services through our retail
stores, website, and mobile apps. Revenue generated from eyewear products
includes the sales of prescription and non-prescription optical glasses and
sunglasses, contact lenses, eyewear accessories, and expedited shipping charges,
which are charged to the customer, associated with these purchases. Revenue is
recognized when the customer takes possession of the product, either at the
point of delivery or in-store pickup, and is recorded net of returns and
discounts. Revenue generated from services consists of both in-person eye exams
in cases where we directly employ the optometrist, and prescriptions issued
through the Virtual Vision Test app. Revenue is recognized when the service is
rendered and is recorded net of discounts.
Cost of Goods Sold
Cost of goods sold includes the costs incurred to acquire materials, assemble,
and sell our finished products. Such costs include (i) product costs held at the
lesser of cost and net realizable value, (ii) freight and import costs, (iii)
optical laboratory costs, (iv) customer shipping, (v) occupancy and depreciation
costs of retail stores, and (vi) employee-related costs associated with our
prescription services and optical laboratories, which includes salaries,
benefits, bonuses, and stock-based compensation. We expect our cost of goods
sold to fluctuate as a percentage of net revenue primarily due to product mix,
customer preferences and resulting demand, customer shipping costs, and
management of our inventory and merchandise mix. Cost of goods sold also may
change as we open or close retail stores because of the resulting change in
related occupancy and depreciation costs. Over time we expect our cost of goods
sold to increase with revenue due to an increased number of orders and with the
opening of new retail stores driven by the resulting occupancy and depreciation
costs and employee-related costs associated with prescription services offerings
at our retail stores.
Gross Profit and Gross Margin
We define gross profit as net revenues less cost of goods sold. Gross margin is
gross profit expressed as a percentage of net revenues. Our gross margin has
remained steady historically, but may fluctuate in the future based on a number
of factors, including the cost at which we can obtain, transport, and assemble
our inventory, the rate at which we open new retail stores, and how effective we
can be at controlling costs, in any given period.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, or SG&A, primarily consist of
employee-related costs including salaries, benefits, bonuses, and stock-based
compensation for our corporate and retail employees, marketing, information
technology, credit card processing fees, donations in connection with our Buy a
Pair, Give a Pair program, facilities, legal, and other administrative costs
associated with operating the business. Marketing costs, which consist of both
online and offline advertising, include sponsored search, online advertising,
marketing and retail events, and other initiatives. SG&A also includes
administrative costs associated with our Home Try-On program, which provides
customers the opportunity to sample eyewear at home prior to purchase. SG&A is
expensed in the period in which it is incurred. During the second half of 2022
we implemented a headcount reduction in our corporate offices and anticipate
executing on certain other cost control actions, including reducing marketing
spend and other variable costs. We expect these actions to reduce costs included
in SG&A, however, the changing prices of goods and services caused by inflation
and other macroeconomic factors may cause unforeseen fluctuations in SG&A
expenses.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest generated from
our cash and cash equivalents balances net of interest incurred on borrowings
and fees on our undrawn line of credit, and are recognized as incurred. We
expect our interest and other income costs to fluctuate based on our future bank
balances, credit line utilization, and the interest rate environment.
Provision for Income Taxes
Provision for income taxes consists of income taxes related to foreign and
domestic federal and state jurisdictions in which we conduct business, adjusted
for allowable credits, deductions, and valuation allowance against deferred tax
assets.
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Comparison of the Three Months Ended
Net Revenue
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Net revenue $ 148,777 $ 137,373 $ 11,404 8.3 %
Net revenue increased $11.4 million , or 8.3%, for the three months ended
September 30, 2022 compared to the same period in 2021. The growth in net
revenue was driven by an increase in orders from our larger Active Customer
base, as well as an increase in Average Order Value ("AOV"), which is defined as
net revenue for a given period divided by the number of orders during the same
period. The increase in AOV was driven primarily by a higher mix of purchases of
glasses with progressive lenses which increased our average price per unit sold,
while our average units per order remained stable year-over-year.
Cost of Goods Sold, Gross Profit, and Gross Margin
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Cost of goods sold $ 64,359 $ 57,709 $ 6,650 11.5 %
Gross profit 84,418 79,664 4,754 6.0 %
Gross margin 56.7 % 58.0 % (1.3) %
Cost of goods sold increased by $6.7 million , or 11.5%, for the three months
ended September 30, 2022 compared to the same period in 2021, and increased as a
percentage of revenue over the same period by 130 basis points, from 42.0% of
revenue to 43.3% of revenue. The increase in cost of goods sold was primarily
driven by an increase in store occupancy, store depreciation, and prescription
services expenses due to new retail stores opened in 2022 and a full period of
expense from new retail stores opened throughout 2021, as well as increased
product and fulfillment costs associated with the growth in our contact lens
offering.
Gross profit, calculated as net revenue less cost of goods sold, increased by
$4.8 million , or 6.0%, for the three months ended September 30, 2022 compared to
the same period in 2021, primarily due to the increase in net revenue over the
same period.
Gross margin, expressed as a percentage and calculated as gross profit divided
by net revenue, decreased by 130 basis points for the three months ended
September 30, 2022 compared to the same period in 2021. The decrease in gross
margin was primarily a result of increases in store occupancy costs as a percent
of revenue primarily due to increased depreciation and rent charges as we grew
our store base from 154 stores as of September 30, 2021 to 190 stores as of
September 30, 2022 , the sales growth of contact lenses which are sold at a lower
margin than our other eyewear, and increased prescription services costs as the
number of stores with optical examination rooms grew. These impacts were
partially offset by the growth in sales of higher margin progressive lenses and
leverage from the scaling of our in-house optical laboratory network, including
our Las Vegas laboratory which opened in the fourth quarter of 2021.
Selling, General, and Administrative Expenses
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Selling, general, and administrative
expenses $ 108,090 $ 171,643 $ (63,553) (37.0) %
As a percentage of net revenue 72.6 % 124.9 % (52.3) %
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Selling, general, and administrative expenses decreased$63.6 million , or 37.0%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. This decrease was primarily driven by$79.5 million of costs we incurred in 2021 related to our Direct Listing, including$55.6 million of stock-based compensation and related payroll taxes incurred as a result of the satisfaction of a performance obligation with the Direct Listing and$23.9 million of professional costs. Also contributing to the decrease were lower charitable expense related to the donation of stock to theWarby Parker Foundation which was completed in the second quarter in 2022 as compared to the third quarter in 2021 and lower marketing costs. The decrease was partially offset by higher compensation costs, mainly from growth in our retail workforce, increased insurance costs related to operating as a public company, increased technology costs to support business growth, and increased depreciation and amortization costs, mainly related to capitalized software and office build outs.
Interest and Other Income, Net
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Interest and other income (loss), net $ (183) $ (146) $ (37) 25.3 %
As a percentage of net revenue (0.1) % (0.1) % - %
Interest and other income, net was flat for the three months ended September 30,
2022 compared to the same period in 2021 primarily due to the impact of changes
in foreign exchange rates, offset by the impact of higher interest rates on our
cash balance.
Provision for Income Taxes
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Provision for income taxes $ (12) $ (1,052) $ 1,040 (98.9) %
As a percentage of net revenue - % (0.7) % 0.7 %
Provision for income taxes increased $1.0 million , or 98.9%, for the three
months ended September 30, 2022 compared to the same period in 2021 primarily
due to the change in pre-tax loss in addition to the tax effects of stock-based
compensation expense.
Comparison of the Nine Months Ended
Net Revenue
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Net revenue $ 451,619 $ 407,906 $ 43,713 10.7 %
Net revenue increased $43.7 million , or 10.7%, for the nine months ended
September 30, 2022 compared to the same period in 2021. The growth in net
revenue was driven by an increase in orders from our larger Active Customer
base, as well as an increase in AOV. The increase in AOV was driven primarily by
a higher mix of purchases of glasses with progressive lenses which increased our
average price per unit sold, while our average units per order remained stable
year-over-year.
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Cost of Goods Sold, Gross Profit, and Gross Margin
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Cost of goods sold $ 191,208 $ 166,407 $ 24,801 14.9 %
Gross profit 260,411 241,499 18,912 7.8 %
Gross margin 57.7 % 59.2 % (1.5) %
Cost of goods sold increased by $24.8 million , or 14.9%, for the nine months
ended September 30, 2022 compared to the same period in 2021, and increased as a
percentage of revenue over the same period by 150 basis points, from 40.8% of
revenue to 42.3% of revenue. The increase in cost of goods sold was primarily
driven by increased product and fulfillment costs associated with the growth in
our contact lens offering, as well as an increase in store occupancy, store
depreciation, and prescription services expenses due to new retail stores opened
in 2022 and a full period of expense from new retail stores opened throughout
2021.
Gross profit, calculated as net revenue less cost of goods sold, increased by
$18.9 million , or 7.8%, for the nine months ended September 30, 2022 compared to
the same period in 2021, primarily due to the increase in net revenue over the
same period.
Gross margin, expressed as a percentage and calculated as gross profit divided
by net revenue, decreased by 150 basis points for the nine months ended
September 30, 2022 compared to the same period in 2021. The decrease in gross
margin was primarily a result of the sales growth of contact lenses which are
sold at a lower margin than our other eyewear, increases in store occupancy
costs as a percent of revenue primarily due to increased depreciation and rent
charges as we grew our store base from 154 stores as of September 30, 2021 to
190 stores as of September 30, 2022 , and increased prescription services costs
as the number of stores with optical examination rooms grew. These impacts were
partially offset by the growth in sales of higher margin progressive lenses and
leverage from the scaling of our in-house optical laboratory network, including
our Las Vegas laboratory which opened in the fourth quarter of 2021.
Selling, General, and Administrative Expenses
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Selling, general, and administrative
expenses $ 349,904 $ 339,264 $ 10,640 3.1 %
As a percentage of net revenue 77.5 % 83.2 % (5.7) %
Selling, general, and administrative expenses increased $10.6 million , or 3.1%,
for the nine months ended September 30, 2022 compared to the same period in
2021. This increase was primarily driven by higher compensation costs, mainly
from growth in our retail workforce, increased insurance costs related to
operating as a public company, increased technology costs to support business
growth, and increased depreciation and amortization costs, mainly related to
capitalized software and office build outs. The increase was partially offset by
$28.3 million of professional fees related to our Direct Listing and tender
offer in 2021 that were not recurring in 2022, reduced costs for our Home Try-On
program from decreased utilization as the COVID-19 pandemic has progressed and
customers have returned to stores in larger numbers, and a reduced charitable
expense related to donations of stock to the Warby Parker Impact Foundation .
Interest and Other Income, Net
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands)
Interest and other income (loss), net $ (75) $ (452) $ 377 (83.4) %
As a percentage of net revenue - % (0.1) % 0.1 %
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Interest and other income, net increased$0.4 million , or 83.4%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to the impact of fair value adjustments to outstanding warrants that were exercised in 2021 that was not repeated in 2022 and the impact of higher interest rates on our cash balance, partially offset by the impact of changes in foreign exchange rates. Provision for Income Taxes Nine Months Ended September 30, 2022 2021 $ Change % Change (in thousands) Provision for income taxes $ 574$ 151 $ 423 280.1 % As a percentage of net revenue 0.2 % - % 0.2 % Provision for income taxes increased$0.4 million , or 280.1%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to the change in pre-tax loss in addition to the tax effects of stock-based compensation expense.
Seasonality
Historically, our business has not experienced material seasonal fluctuations in net revenue. We do observe moderately higher seasonal demand during the month of December due in part to customer usage of health and flexible spending benefits in the final week of the year. Consistent with our policy to recognize revenue upon order delivery, any orders placed at the end of December are recognized as revenue upon delivery, which may occur in the following year, and as such we typically see revenue decrease sequentially from the first quarter to the second quarter. Our business has historically experienced a higher proportion of costs in each subsequent quarter as a year progresses due to the overall growth of the business and operating costs to support that growth, including costs related to the opening of new retail stores and employee-related compensation to support growth. The fourth quarter, in particular, has historically experienced the highest amount of costs in a year to support the business demand in the quarter, even though a portion of the net revenue from that demand is not recognized until January of the following year (see above for more details). In the future, seasonal trends may cause fluctuations in our quarterly results, which may impact the predictability of our business and operating results. Liquidity and Capital Resources Since inception, we have financed our operations primarily from net proceeds from the sale of redeemable convertible preferred stock and cash flows from operating activities. As ofSeptember 30, 2022 , we had cash and cash equivalents of$197.9 million , which was primarily held for working capital purposes, and an accumulated deficit of$583.4 million . As ofDecember 31, 2021 , we had cash and cash equivalents of$256.4 million , which was primarily held for working capital purposes, and an accumulated deficit of$493.2 million . We expect that operating losses could continue in the foreseeable future as we continue to invest in the expansion of our business. We believe our existing cash and cash equivalents, funds available under our existing credit facility, and cash flows from operating activities will be sufficient to fund our operations for at least the next 12 months. However, our future capital requirements will depend on many factors, including, but not limited to, growth in the number of retail stores, the needs of our optical laboratories and distribution network, expansion of our product offerings or service capabilities, and the timing of investments in technology and personnel to support the overall growth in our business. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. In particular, the recent COVID-19 pandemic, rising interest and inflation rates, and other macroeconomic factors have caused disruption in the global financial markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected. 32
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Table of Contents Credit Facility 2013 Credit Facility InAugust 2013 , the Company entered into a Loan and Security Agreement withComerica Bank (as amended, the "2013 Credit Facility"), which consisted of a revolving credit line of up to$50.0 million with a sub-limit of$15.0 million for the issuance of letters of credit. Borrowings under the revolving credit line bore interest on the principal amount outstanding at a variable interest rate based on either LIBOR or the bank's prime rate, with no additional margin. The Company was charged fees on the uncommitted portion of the credit line of approximately 0.2% as long as total borrowings were less than$15.0 million . The 2013 Credit Facility was replaced by the 2022 Credit Facility. 2022 Credit Facility InSeptember 2022 , the Company and its wholly owned subsidiary,Warby Parker Retail, Inc. , entered into the 2022 Credit Facility, which replaced the 2013 Credit Facility. The 2022 Credit Facility consists of a$100.0 million five-year revolving credit facility with sublimits of$15.0 million for letters of credit and$5.0 million for swing line notes. The 2022 Credit Facility includes an option for the Company to increase the available amount by up to$75.0 million , for a maximum borrowing capacity of$175.0 million , subject to the consent of the lenders funding the increase and certain other conditions. Proceeds of the borrowings under the 2022 Credit Facility are expected to be used for working capital and other general corporate purposes in the ordinary course of business. The Company is permitted to repay borrowings under the 2022 Credit Facility at any time, in whole or in part, without penalty. Under the 2022 Credit Facility, borrowings under the revolving credit facility bear interest on the principal amount outstanding at a variable interest rate either (a) based on the greater of (1) the prime rate (as defined in the credit agreement), (2) the federal funds rate plus 1%, and (3) the Bloomberg Short-Term Bank Yield Index rate ("BSBY Rate") for a one month tenor plus 1%, in each case plus an applicable margin of 0.5% - 0.8% depending on the Company's leverage ratio, or (b) the BSBY Rate plus an applicable margin of 1.5 - 1.8% depending on the Company's leverage ratio. The Company is charged commitment fees of 0.15% whether or not amounts have been borrowed. Both interest on principal and commitment fees are included in interest expense on the condensed consolidated statements of operations. The 2022 Credit Facility contains a financial maintenance covenant which takes effect once total borrowings first exceed$60.0 million , and at all times thereafter, which requires the Company to maintain a maximum consolidated senior net leverage ratio of 3:1. The 2022 Credit Facility contains customary affirmative and negative covenants, including limits on indebtedness, liens, capital expenditures, asset sales, investments and restricted payments, in each case subject to negotiated exceptions and baskets, as well as representations, warranties and event of default provisions. The obligations of the Borrowers under the Credit Agreement are secured by first-lien security interests in substantially all of the assets of the Borrowers. In addition, the obligations are required to be guaranteed in the future by certain additional domestic subsidiaries of the Company. Other than letters of credit outstanding of$4.2 million and$4.0 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, used to secure certain leases in lieu of a cash security deposit, there were no other borrowings outstanding under the 2022 Credit Facility or 2013 Credit Facility. Cash Flows The following table summarizes our cash flows for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 (in thousands) Net cash used in operating activities$ (13,469) $ (135) Net cash used in investing activities (45,966) (34,018) Net cash provided by (used in) financing activities 2,094 (13,575) Effect of exchange rates on cash (1,190) (120) Net decrease in cash and cash equivalents$ (58,531) $ (47,848) 33
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Cash Flows from Operating Activities Net cash used in operating activities was$13.5 million for the nine months endedSeptember 30, 2022 , consisting of a net loss of$90.1 million adjusted for$105.9 million of non-cash expenses and$29.3 million of net cash used as a result of changes in operating assets and liabilities. The non-cash charges included$78.2 million of stock-based compensation,$22.9 million of depreciation and amortization,$3.3 million of non-cash charitable contributions, and$1.5 million of asset impairment charges. The changes in operating assets and liabilities were primarily driven by an increase in net inventory to support the growth of our business and an increase in other non-current assets related to investments in the implementation of our new enterprise resource planning system and other technology infrastructure, and decreases in accounts payable, accrued expenses and deferred revenue, partially offset by an increase in net lease liabilities in connection with new retail location leases entered into in 2022. Net cash used in operating activities was$0.1 million for the nine months endedSeptember 30, 2021 , consisting of a net loss of$98.4 million , adjusted for$99.1 million of non-cash expenses and$0.8 million of net cash used as a result of changes in operating assets and liabilities. The non-cash charges included$76.0 million of stock-based compensation,$15.2 million of depreciation and amortization,$7.8 million of non-cash charitable contributions, and$0.1 million of asset impairment charges. The changes in operating assets and liabilities were primarily driven by increases in accrued expenses, accounts payable, and deferred rent, partially offset by an increase in net inventory to support the growth of our business and decreases in deferred revenue. Cash Flows from Investing Activities For the nine months endedSeptember 30, 2022 , net cash used in investing activities was$46.0 million related to purchases of property and equipment to support our growth, primarily related to the build-out of new retail stores, as well as investments in capitalized software development costs. For the nine months endedSeptember 30, 2021 , net cash used in investing activities was$34.0 million related to purchases of property and equipment to support our growth, primarily related to the build-out of new retail stores, as well as investments in our supply chain infrastructure and capitalized software development costs. Cash Flows from Financing Activities For the nine months endedSeptember 30, 2022 , net cash provided by financing activities was$2.1 million , which was primarily related to proceeds from shares issued in connection with our ESPP and stock option exercises. For the nine months endedSeptember 30, 2021 , net cash used in financing activities was$13.6 million , which was primarily related to tax withholdings on exercises and releases of employee equity awards and repurchases of stock during the period, including shares repurchased in connection with our tender offer, partially offset by repayments of related party loans and proceeds from stock option exercises. Contractual Obligations and Commitments There have been no material changes to our contractual obligations from those described in the Annual Report. Critical Accounting Policies and Estimates Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Annual Report and the notes to the audited consolidated financial statements appearing elsewhere in the Annual Report, and in Note 2 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Except for the adoption of new accounting pronouncements as described in Note 2 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q, there were no significant changes to our critical accounting policies as reported in the Annual Report. 34
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Recent Accounting Pronouncements See Note 2 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for more information regarding recent accounting pronouncements. JOBS Act We currently qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act. Based on our public float as ofJune 30, 2022 , we will qualify as a "large accelerated filer" as ofDecember 31, 2022 , at which point we will no longer qualify as an emerging growth company. As a result, commencingJanuary 1, 2023 , we will be subject to certain requirements that apply to other public companies but did not previously apply to us due to our status as an emerging growth company, such as the auditor attestation requirements under Section 404 of the Sarbanes Oxley Act of 2002, as amended. Compliance with these enhanced disclosure requirements will increase our costs and could negatively affect our results of operations and financial condition. 35
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