Flipping Warby from $2B money pit to $10B

TL;DR

- Community Spotlight: Mike’s P&L Marketing breakdown

- Correcting Warby’s Vision for Growth

- More scale comes from faster creative testing w/ Motion

🧠 The Takeaways

We’re buying Warby Parker to instill financial discipline + partner with giants to turn Warby into the next mega DTC-medical brand.

Correct their P&L. Get Gross Margin to 60% and OPEX <50%.

Partner with Walmart to bring Warby Vision Centers to the 5k+ Walmarts in the US.

Launch Kids glasses and get into family plans to explode retention.

+ What P&L Marketing looks like.

LBAB Community - Mike Gets It

For those of you who don’t follow Mike Rome on LinkedIn you should. He’s a growth expert that has been scaling fast growing & big bizs for the past decade+. Now he’s working with startups to scale their ads technical infrastructure. + a long time LBAB! Community member.

He had a killer post this week that I want to break down more because it tactically shows how you can measure the fundamental math to scale your brand we discuss every week.

The simple overview:

You’ve heard me rant and rave for weeks about how OPEX always needs to be <  Gross Margin. And this is a good breakdown for how brands can achieve that.

The only adjustment I’d make it take out #6 and leave this as 5 key principles. For 1 simple Reason.

CP needs to be >>> Fixed for your biz to have any real profit. And that is the name of the game. The greater the delta between CP and Fixed the more wealthy you become while building a real asset.

👆is the only game that matters.

So how can we achieve this for our brands?

This is a great chart breaking it down. Essentially what you want get to the point where your Contribution Margin $$$ crosses past your Fixed costs as fast as possible.

Essentially get to the 😎 zone A$AP and stay their as long as possible. The 😎 zone is where real assets are built. Let’s take this theoretical brand as an ex.

In W1: CP is ~$7k and Fixed is ~$19k. So they lost ~$12k.

In W13: CP is ~$34k and Fixed is ~$23k. So they are making $11k.

If we extend this chart out another 13 weeks what we should see happen in the Blue line continues to grow. It won’t be a vertical line, but if you found winning ads it will keep growing at a steady pace.

If they don’t hire or scale costs too quickly this line will continue to increase but at slower small step functions you already see in the red line.

This process is what I mean by financial discipline.

Contribution Margin already includes Product + ad costs (the 2 largest costs every DTC brand should have). If a brand has tight control on the other costs (mostly not hiring too quickly) the delta will grow creating a very profitable biz. 

I’m so happy that someone else is talking about this with real data to show how this tactically gets done breaking down the framework to manage ad budgets + scaling.

Unfortunately Mike is right. <1% of brands are actually managing their biz this way. But hopefully with enough time + education more will start to adopt this P&L based approach to their marketing.

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Let’s Examine This Biz

Warby Parker is sprinting too fast at their retail future. If they don’t adjust their spending habits, they’re painting themselves into a corner with only 2 options: bankruptcy or fire sale.

Trading at $16.52/share with a $1.9B market cap, Warby is -69% since their Oct 2021 IPO.

Financial Summary

TLDR Analysis: Not Growing or Profitable

Rev has stalled out. New Store openings aren't moving the needle.

SG&A is -5% YoY but still 65% of Rev. The cuts weren’t deep enough.

Net Income is getting closer to 0, but it still has a long way to go.

COGS rising faster than Rev. SG&A marginally decreasing while the biz continues to torch capital.

I’m shocked that this biz still trades at 2.9x Rev. Candidly, with this poor performance I would have expected it to trade at <1x. Truly shows you the value of a great narrative in a huge market, with incredible retention numbers.

Let’s Scale This Biz!

Here are the 3 ways we’re turning Warby from a wannabe retailer into the omnichannel brandicorn it has always promised it would be.

1) Fix SG&A: Can’t be 65% of Rev on a 55% Gross Margin biz

I’m going to beat this drum until I’m dead. 

This is simple Math. OPEX cannot exceed Gross Margins. That’s not how bizs work. And Warby right now needs to fix both.

They need to figure out how to get Gross Margins back into the 60% range (2021 levels). In 2 years they’ve slipped into the 50s%. + get OPEX below 50%-of-Rev marker.

Gross Margins go up from 2 main factors:

Making hit products that customers can’t get enough of

Controlling supply chain and fulfillment costs

Both need to be addressed but they really have an OPEX problem. 

65% of Rev in OPEX is just ludicrous unless you have 80%+ margins and are dumping every $ into Marketing. Neither are the case here.

Their Rev/Employee is $238k. (I don’t like using Rev/Employee as an end-all-be-all, but when combining these numbers the problem becomes obvious.)

On the OPEX side, the fixes are going to come from:

RIFs

Gutting the Stock Based Compensation (SBC) program

Warby Parker is playing a bit of a P&L game with their SBC and still pretending they’re a Silicon Valley tech biz vs. a DTC brand. 

They are stuffing a considerable amount of the employee compensation in SBC, which is the total value of the shares you give to employees as a part of their pay package.

In 2021, 20% of Rev was paid in SBC. By 2023, they cut that down to 11% ($70m), but if you remove that $70m from the P&L, this biz is actually profitable. Barely, but still profitable.

Here’s the problem with so heavily compensating employees with stock vs. cash/bonuses etc.

It costs the biz the same amount. Yes it’s stock, but they still have to consider that part of their OPEX.

It also dilutes shareholders by granting more stock every year to employees.

If you’re on the management team it’s a creative way of attracting talent without needing more cash on the books. If you’re an investor you just got hammered from: dilution + the biz not being more profitable. So you aren’t seeing stock value increase or dividends.

I’m all for ESOPs + giving employees equity, but at $238k Rev/Employee, the comp model isn’t working. Are investors really getting an incredible return on that investment? For context here are some other similar size brand’s Rev/Employee:

Yeti: $1.7m

ELF: $1.12m

Chewy: $615k

Clearly, the comp packages aren’t motivating the right people to create incredible value for Warby. This is the perfect ex of how unrealistic growth expectations ruin a great biz. They’ve completely lost their discipline and are allowing bad practices to rot out the core of their biz.

It doesn’t spell death yet, but Warby needs to get back to the basics + control their key costs, so they can see the day where they grow into their lofty growth expectations.

Takeaway: Gut costs to get Gross Margin % ⬆️ and OPEX % ⬇️

2) Build WP Stores inside Walmarts

Warby is betting the farm on Retail expansion, but they’re growing costs too fast if they’re going to successfully expand into their target of 900 stores (currently <250). Rev needs to grow faster if they want to continue to expand at this pace.

What few people remember is today’s massive brands with incredible retail experiences had Retail partnerships that built their brand while they accumulated the resources + brand awareness to build their own.

Once they hit a large enough scale where the investment was worth then they pulled out to focus more on their own customer relationships.

(Everyone loves to talk about Apple’s Retail as temples to their brand, but few remember that before Apple became God's gift to electronics, they sold through plenty of retail partners. They still sell in Best Buy + Amazon today.)

The mistake Warby is making is building out this Retail empire alone, at warp speed. If they aren’t going to pump the brakes to grow at a more reasonable pace, then they really need to consider how they can be a barnacle on a whale to share the burden of expansion costs.

Walmart is the 4th-largest optical retailer at $2B sales in the US behind:

Vision Source ($2.9B)

Luxottica ($2.6B)

National Vision holdings ($2.1B)

(Warby is 9th at $659m in 2023 sales.)

Walmart is looking to build its own brand by adding more cool kid brands in their stores. They aren’t just looking for the cheapest products anymore but the hero names that get people into stores.

Warby currently has 237 Retail locations. Walmart has 4,609, with another 599 Sam’s Club locations. Getting into 10% of those stores would triple Warby’s footprint. And Walmart provides a wide avenue for Warby to expand way beyond coastal regions. 

If Walmart + Warby partner up to rebrand the Walmart Vision center, Warby could provide a cooler branded experience that isn’t just going to an opticians appointment in a Walmart. 

Warby can become the affordable but good-looking glasses provider. The Walmart-Warby co-branded products allows Walmart to extract significantly more margin. Warby gets the scale they’ve always dreamed of.

Instead of Walmart running their entire eye care process to sell 3rd-party prescription brands, Warby can become their preferred provider. Similar to how Amazon basics are actually produced by the most popular manufacturer/brand in each category.

Walmart can provide unmatched scale that will take Warby 3 decades to build themselves. With that scale, Warby can offer Walmart special prices that’d make it a no-brainer for Walmart Vision centers to sell Warby’s products instead of popular 3P brands.

Both bizs can unlock new margin through the immense scale that Walmart can provide. In addition to the sales, Warby will get the level of brand awareness they won’t be able to buy themselves.

Takeaway: Key partnerships takes your brand into the stratosphere.

3) Get into Kids’ glasses 

The beauty of Warby is its incredibly high retention biz. At the same time, they aren’t profitable or growing quickly, and they want their narrative to still be all about growth. I agree with their long term play here (to penetrate a huge market by providing incredibly affordable eyewear that doesn’t look like a bargain brand). But…

The problem is their incremental growth is becoming too expensive. The combo of best-in-class DTC tech/talent + massive CAPEX to conquer the retail world is driving this biz directly to bankruptcy court. 

They need to: 

Short term: Get profitable

Long term: Find a deeper ocean to fish in

The next most obvious market to jump into is Kids’ eyewear. Considering vision issues are hereditary, and everyone's screen usage is skyrocketing, extending into family plans / kids’ products is the natural evolution for the brand.

They can be the affordable option that provides the same level of benefits to kids as they do for their parents.

But the most important part is to capture the consumer even younger. If the typical eyewear purchase happens every 2 years, imagine the value of capturing a customer at 8 vs. 28. (That’s 10 more purchases over the customer lifetime.)

Also, when you add in that kids grow + will need to replace their glasses more frequently than adults (size changes, breakage, losing them), their parents will buy more frequently + will be more likely to buy add-ons (Blue light protection/filters, insurance etc).

What this really opens up for Warby is the opportunity to offer a Wireless phone-style family plan. For $XX/mo, get unlimited upgrades, eye exams, and all other values for your whole family. 

They can:

Break out the cost of glasses/contacts over 24 mo contracts.

Bundle Insurance + other service offerings (eye exams)

Offer upgrades based on a variety of products (Style, color, prescription changes)

Both steps (kids eyewear + family plans) will greatly increase the LTV + stickiness of the customer. But more importantly, they will explode what customers are currently paying and drive more household loyalty. 

Few people probably remember when individuals in a household had different wireless phone providers, but in the early days of cell phones, it wasn’t uncommon for a couple to be on 2 different carriers. Now, with the bundles + offers, it’s unheard of. Warby can do the same in eyecare. Then sunglasses.

But there’s a massive market opportunity for Warby here, by just consolidating couples + their kids to all become Warby customers.

Takeaway: Create the Family eyewear bundle. Retention explodes.

Final Thought

Warby is at a moment where they need to take stock of what got them here and what it will take to get them to the next level. This is another brand that’s outgrown its DTC roots and now needs to evolve into the next iteration of its biz.

From a strategy perspective they are there, but aren’t from a cost perspective.

It needs to figure out which parts of the biz it will keep and which it will need to leave behind as part of the brand journey. The cash commitments to scale to 500 then 900 stores is going to require most/all the cash it has. 

In this new reality, is Warby really going to be able to continue running?

The Try 5 at home program

Donate a pair for every pair purchased

Free eye exams

Owning the entire supply chain

Offering low cost (virtually fixed price) entry glasses

A custom-built tech stack

These are all crucial elements that built the brand into what it is today, but moving forward, they won’t be able to continue to support all of these initiatives + scale their retail presence at the same time. They’ll have to charge for or cut something on this list.

The DTC -> Retail heavy evolution will hit all of these DTC brands as hard as Netflix was hit by the DVDs -> Streaming wave. Eventually, they’ll need to decide and stop making major investments in the old DTC model.

1 of the few DTC sacred cows we haven’t properly analyzed is how many value props we’ve added to the buying journey because when these DTC brands were scaling they didn’t have the legitimacy of a retail footprint. 

The majority of consumers still aren’t confident that independent online brands aren’t scams. Warby blazed the path to bust their objections with some of the most innovative value-based marketing tactics of the last 20 years.

But the flip side today is: how many people will buy affordable, stylish glasses without the 15 other value props that Warby is providing, because they can go in store? 

It’s going to be a messy, difficult unwinding for brands to find the fine line between their brand core ethos and fluffy value props that customers will take advantage of but aren’t the real drivers of why they buy.