Warby Parker IPO: Direct-to-Consumer Eyewear Company Files to Go Public

The Potential Return of IPOs: Warby Parker's Debut

Were opportunities to invest in initial public offerings missed earlier in the year? Many investors feel the same way. A resurgence of IPO activity may be on the horizon following a quieter summer period.

Yesterday, Warby Parker, a direct-to-consumer (D2C) eyewear company with over $500 million in private funding, submitted its initial public offering (IPO) filing. This debut represents a significant milestone for investors such as General Catalyst, Tiger Global, and Durable Capital Partners.

A Long-Awaited Public Offering

Having secured equity funding as early as 2011, investors have anticipated Warby Parker’s entry into the public market for an extended period. The company’s journey to this point has been closely watched.

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Initial analysis of the IPO filing reveals several appealing aspects of the company. However, certain elements of its business model warrant careful consideration, and the impact of the COVID-19 pandemic on its 2020 performance requires examination.

Warby Parker’s most recent publicly known private funding round occurred in August 2020, a $120 million Series G that established a post-money valuation exceeding $3 billion. This transaction was spearheaded by D1 Capital Partners, with participation from Durable Capital and Baillie Gifford.

A Second Chance for D2C Startups

The Warby Parker IPO offers a potential “do-over” for D2C startups. The IPO of Casper in early 2020 serves as a cautionary example for companies utilizing this business model. Casper lowered its IPO price range, initially pricing at $12 per share, and currently trades at just above $5.

However, Warby Parker’s IPO extends beyond the D2C category. The company operates as a public benefit corporation, prioritizing positive impact for all stakeholders, not solely shareholders, as stated in its filing.

A Hybrid Retail Approach

Furthermore, Warby Parker integrates a charitable component through its foundation and a “buy-a-pair, give-a-pair” eyewear donation program. The company also employs a hybrid sales model, combining both in-person retail locations and digital channels. These factors present numerous areas for in-depth analysis.

Therefore, let's delve into Warby Parker’s historical growth, its progress towards profitability, and its integration of physical stores with digital platforms. Finally, we will assess the company’s valuation from last year and estimate its potential worth in today’s public markets.

A Review of Warby Parker’s Growth Trajectory

An examination of Warby Parker’s financial performance throughout 2020 reveals a somewhat underwhelming outcome. From 2018 to 2019, the company demonstrated growth, increasing revenue from $272.9 million to $370.5 million – a rise of approximately 36%. While not exceptional, this rate was still respectable for a company of its maturity and scale.

However, in 2020, the company’s growth was limited to just 6%, resulting in a total revenue of $393.7 million. What factors contributed to this deceleration in the company’s growth, shifting it from a satisfactory pace to a considerably slower one? The primary cause appears to be the impact of the COVID-19 pandemic.

Analyzing Quarterly Performance

A review of the company’s quarterly results, as detailed in its S-1 filing, provides further insight:

Focus on the revenue trend over time, rather than getting lost in the detailed figures. It’s readily apparent that Warby Parker experienced a notably weak second quarter in 2020, concluding on June 30th of that year.

The company was able to mitigate potential losses by reducing Selling, General & Administrative (SG&A) expenses during this period. Nevertheless, this underperforming quarter effectively resulted in a stalled year for the company in terms of overall growth.

Positive Trends in Subsequent Quarters

Considering a more optimistic perspective, Warby Parker demonstrated growth in the following three quarters. This resulted in a near doubling of the company’s size from Q2 2020 to Q2 2021.

For investors considering an investment in IPO shares of growth-oriented companies, the recent performance of Warby Parker has been particularly encouraging.

Tracking Active Customer Growth

Another valuable metric for assessing the company’s performance is the number of “active customers” – defined as those who have made at least one purchase within the preceding 12-month period. The following chart illustrates this trend:

Please excuse the image quality, as it is similarly limited in the original S-1 filing.

Notably, the second quarter of 2020 marked the first instance in several quarters where Warby Parker’s rolling 12-month unique customer count declined. This indicates a significant constraint on the company’s ability to acquire new customers during that period.

This outcome is understandable, given the difficulties in obtaining eye exams for new glasses and the general discouragement of venturing outdoors, both of which impacted the company’s brick-and-mortar stores and subsequently affected revenue.

Strong Performance in the First Half of 2021

Despite the challenges of Q2 2020, a strong start to 2021 allowed Warby Parker to present a compelling performance comparison in its IPO filing:

From the first half of 2020 to the first half of 2021, Warby Parker achieved a growth rate of over 53%. While this figure includes the weaker second quarter of 2020, the overall comparison remains favorable.

Furthermore, the company increased its gross margins by approximately 2 percentage points over the two half-year periods, concluding H1 2021 with gross margins nearing 60%.

For a company not primarily focused on software, this represents a strong margin. Therefore, Warby Parker demonstrates both growth and sound revenue quality. The next question is how these financial attributes translate into profitability?

Profitability

The year 2020 presented challenges for Warby Parker’s growth, and consequently, hindered its ability to demonstrate decreasing losses as it expanded. Presenting a clear trajectory toward profitability is crucial for growth-oriented companies seeking investor confidence. In 2020, Warby Parker only indicated a slight reduction in losses alongside limited revenue growth, a result that wasn't particularly encouraging.

However, the initial half of 2021 shows improvement. Warby Parker’s revenue increase contributed to a reduction in net loss, moving from $10 million in the first half of 2020 to $7.3 million in the latest two quarters. While this doesn’t represent exceptional operating leverage, it is a positive trend. The company is demonstrably lessening its financial losses as it expands its operations, a factor that should influence its valuation.

Examining adjusted profitability provides further insight. The following figures represent adjusted EBITDA, as detailed in the company’s S-1 filing:

• 2018: $8.6 million.
• 2019: $21.9 million.
• 2020: $7.7 million.
• 2020 H1: $1.2 million.
• 2021 H1: $20.1 million.

The impact of the COVID-19 pandemic on 2020 remains a notable factor in Warby Parker’s performance history. Nevertheless, the substantial gains in adjusted profitability during the first half of 2021 – positioning the company for a potentially record-breaking year – coupled with renewed growth and enhanced gross margins, could be a compelling offering during pricing.

While unadjusted profits are always preferable, current market conditions in 2021 necessitate a more flexible perspective.

Having reviewed these key financial figures, let's now explore specific aspects of Warby Parker’s business model to gain a deeper understanding of its current operations.

Frequently Asked Questions About Warby

To provide clarity and efficiency, the following information is presented in a bulleted format:

• What is the expense associated with donating glasses? It is likely substantial. Warby’s “Buy a Pair, Give a Pair” program costs are incorporated into its Selling, General & Administrative (SG&A) expenses. Essentially, it functions as a marketing expenditure. Examining recent financial reports, Warby indicated that while overall SG&A costs as a percentage of revenue decreased in the first half of 2021, “advertising and marketing costs grew in line with net revenue.” Our interpretation suggests that reducing marketing expenses as a proportion of revenue will become increasingly challenging for Warby due to its charitable contributions. This is not inherently negative; we simply wish to highlight the data.
• How significant is Warby’s physical retail presence? It is very important. The number of Warby stores increased from 88 in 2018 to 119 in 2019, then to 126 in 2020, and reached 145 by the end of Q2 2021. One of us personally observed the construction and opening of a store in his local area, and it presented a pleasing aesthetic. However, the company’s revenue distribution experienced a notable shift last year, affecting the performance of its stores. The following chart illustrates this:

Further discussion of physical retail: This represents a significant change in the revenue mix. However, if one anticipates further expansion of Warby’s store network, there is reason for optimism regarding the company’s future performance. Despite store closures in 2020, the company still achieved modest growth and adjusted profitability. With a greater number of stores now than ever before, those who favor physical retail may expect stronger growth in the future. Conversely, those focused on digital retail might anticipate the opposite.

What is the trend in customer acquisition costs? They are increasing. Customer Acquisition Cost (CAC) at Warby rose from $26 in 2018 to $27 in 2019 and then to $40 in 2020. This may not seem concerning, particularly considering that Warby customers are placing larger orders over time. However, the company’s reported CAC figures are somewhat misleading. Warby defines CAC as “acquisition costs for a given period divided by the number of Active Customers during that same period.” This means that existing customers are included in the CAC calculation, which appears questionable. The company’s actual customer acquisition costs are therefore higher.

Are Warby’s customers increasing their spending? Yes. The company’s average order value increased from $158 in 2018 to $176 in 2019 and to $184 in 2020. This is a positive indicator for a company experiencing rising customer acquisition costs.

What can be said about customer retention? It is improving. Warby has demonstrated a growing percentage of active customers who are repeat purchasers. Rising customer retention rates, combined with increasing average order sizes, suggest that Warby’s increasing CAC may be justifiable, although insufficient data prevents a definitive conclusion.

In conclusion, Warby Parker is a consumer hardware business operating through two primary sales channels, exhibiting generally favorable economics, decreasing losses, and improving adjusted profitability. The company even demonstrated resilience during the pandemic, despite the negative effects of COVID-19 on its operations. Therefore, the question remains: what is its valuation?

Determining Company Valuation

EssilorLuxottica represents a significant player in the eyewear industry. Many are likely familiar with the brand. Fortunately, as a publicly traded company, its financial data is readily available for analysis.

Here's a review of EssilorLuxottica’s financial performance for the first half of 2021:

• Revenue: €8.8 billion.
• Revenue growth (H1 2021): +5.7%.
• Gross margin: 61.4%.
• Net profit: €854 million.

Valuation Multiple

Currently, EssilorLuxottica’s market capitalization stands at $82.5 billion. Projecting the company’s H1 2021 revenue to a full-year figure results in a valuation of 4.7 times its revenue. For comparison, YCharts reports a trailing 12-month revenue multiple of 5.0x.

Considering Warby Parker, while less profitable, demonstrates a faster growth rate and comparable gross margins. Acknowledging current market trends favoring growth, a 50% multiple premium seems reasonable, resulting in a 7.1x multiple.

Warby Parker’s revenue for the first half of 2021 totaled $270.5 million. Applying the 7.1x multiple initially yielded a valuation of $1.92 billion. This was lower than the company’s pre-money valuation established in August.

Correction and Revised Valuation

Updated: An error was identified in the previous calculation. The initial analysis failed to account for annualizing the revenue figure. Correcting this, Warby Parker’s projected annual revenue run rate is $541 million.

Applying the 7.1x multiple to this corrected revenue figure results in a valuation of $3.84 billion. This revised figure significantly improves the likelihood of Warby Parker sustaining its previous private valuation.

While not guaranteed, the valuation outlook has shifted from highly improbable to moderately optimistic.

Please accept our apologies for the initial inaccuracy. We prioritize accuracy and diligently fact-check our work, but errors can occur. This oversight was particularly regrettable.