A Member of Pat McKeough’s Inner Circle recently asked for his advice on Warby Parker, a popular company that sells eyewear both online and in retail stores.
Pat likes the firm’s rising revenues and expanding (and more profitable) retail presence. However, Pat warns that investors should remain wary of stocks that attract broker/media praise for their high-profile products or services and their business models. This company is very expensive at 79.3 times forecast earnings and faces formidable competition from rivals.
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WARBY PARKER (New York symbol WRBY; www.warbyparker.com) is a prescription eyewear seller founded in 2010 by four friends attending business school who planned to disrupt the traditional eyewear industry with an online-only operation.
Today, it has expanded to include 245 physical stores in the U.S. and Canada. Its product lines also now include sunglasses and children’s frames.
With the support of its venture capital investors—General Catalyst, Tiger Global Management, Forerunner Ventures, Spark Capital and Menlo Ventures—Warby Parker went public in September 2021 through a direct listing on the New York Stock Exchange. Its stock opened for trading at $54.05, well above the $40 reference price set by the exchange. With a direct listing, the company issues no new shares and raises no funds through the IPO. Warby shares have since dropped to today’s price.
Warby Parker continues to sell low-cost prescription eyeglasses and contact lenses. The company has developed a process where customers can order five potential frames to be delivered to their home, try them on, and send them back once they’ve made a selection.
It also developed a prescription check app in 2017; it lets customers extend their prescription through a telehealth checkup. In 2019, Warby launched a virtual try-on feature that uses augmented reality (AR) to let customers see their selected frames on their own face.
Warby also has a strong Buy A Pair, Give A Pair program. This is where the company works with a number of partners worldwide to ensure that for every pair of glasses it sells, a pair is distributed to someone in need.
All of this adds to its appeal with big institutional investors who are trying to build their ESG (Environmental, Social and Governance) ratings.
Inner Circle: Revenues and customer numbers are up but losses continue
In the three months ended March 31, 2024, Warby Parker’s revenue increased 16.3%, to $200.0 million from $172.0 million a year earlier. The company’s active customers rose by 3.2% to 2.36 million. Warby Parker also expanded its retail presence, ending the year with 245 stores after opening 8 new stores in the latest quarter.
The company reported a net loss of $2.7 million, or $0.02 a share, in the latest quarter. That’s compared to a loss of $10.8 million, or $0.09.
Warby Parker expects retail stores will drive most of its revenue growth this year. In fact, it now gets most of its revenue from physical stores. That shift is because retail stores are more profitable than its online business; as a result, online penetration for the eyewear market remains low.
The company faces increasing competition, not just from other bricks-and-mortar stores but also from new online entrants such as EyeBuyDirect, which is expanding quickly.
Recommendation in Pat’s Inner Circle: Warby Parker Inc. is not recommended.
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