Warby Parker Inc. (NYSE:WRBY) Q4 2022 Earnings Call Transcript

Warby Parker Inc. (NYSE:WRBY) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Thank you, and good morning, everyone. Here with me today are Neil Blumenthal and Dave Gilboa, our Co-Founders and CEOs, alongside Steve Miller, Senior Vice President and Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings release and slide presentation are available on our website at investors.warbyparker.com. During this call and in our presentation, we will be making comments of the forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company’s SEC filings, including the section titled Risk Factors in the company’s SEC filings, including its annual report on Form 10-K, which will be filed later today.

These forward-looking statements are based on information as of February 28, 2023, and except are required by law, we assume no obligation to publicity updates or revise our forward-looking statements. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with the U.S. GAAP in reconciliation of these items to most directly comparable to U.S. GAAP measures can be found in this morning’s press release on our slide deck available on our IR website. And with that, I’ll pass over to Dave to kick off.

David Gilboa: Welcome, everyone, and thank you for joining us this morning to discuss Warby Parkers Fourth Quarter and Full Year 2022 results. As we reflect back on our first full year as a public company, Neil and I feel a deep sense of gratitude in particular to our team for how they adjusted to the unique set of headwinds that 2022 presented. Team Warby’s decisive actions last year enabled us to delight millions of customers, continue to take market share, and distribute millions of pairs of losses to people in need. We closed the year with a strong fourth quarter and believe the actions we took in 2022 have set us up for meaningful profitability improvement in 2023. But it was also a year where we learned many important lessons.

One of our core values is learn, grow, repeat. We are driven by constant improvement, whether that comes from areas of strength that we can further leverage or from setbacks that we want to correct. In that sense, 2022 was a great teacher. When we set our forecast last year, we had just emerged from the acute impact of Omicron and assume that demand would recover along similar curves to prior pandemic waves. We managed our marketing and expense base accordingly and plan for accelerating growth and recovery in the optical industry. We underappreciated the unique demand tailwinds that we benefited from in 2021 and the confluence of headwinds we were about to face that would continue to disrupt the normally steady and predictable consumer behavior in our category.

We subsequently made a series of adjustments in the middle of 2022, some of them difficult, which enabled us to operate in a more flexible and nimble manner and drive adjusted EBITDA improvement. A lesson for us is not that we should place less emphasis on growth, but instead that we should work to ensure that our growth is more sustainable and efficient across a range of economic and industry outlooks, including the most conservative ones. The world is not back to pre-pandemic normal and may never be. However, we believe that our approach for this year and beyond, as Neil and Steve will talk through is one that will enable us to grow and accelerate our profitability plans even if tepid consumer demand continues. As a leadership team, we remain as excited as ever about our long-term prospects.

We continue to believe in the resilience and durability of our category in spite of recent softness and remain confident in our ability to continue to take market share. When we see demand recover, and we are confident that it will, we will be well positioned to take advantage of it, but we are not counting on that to happen until we see evidence of it. While our full year 2022 top line and bottom line metrics aren’t where we thought they would be at the onset of last year; what we hope you’ll take away from today’s call is that we believe we have taken the necessary steps to operate in the current environment and set the business up to achieve incremental top line and bottom line growth in 2023. We also hope the changes we made last year demonstrate the inherent flexibility in our business model that enables us to adjust to external trends.

Looking at the full year 2022, revenue increased to a record $598 million, up 10.6%, a pace well above the industry’s growth. Full year adjusted EBITDA margins were 4.5%, with second half-adjusted EBITDA margin of 6.9%, up 470 basis points above our first half margins. Shifting to Q4 results, we are pleased to share that the quarter exceeded our most recent expectations from both a top and bottom line perspective. We delivered net revenue of $146.5 million, an increase of 10.2% over the same period last year and $2 million above the high end of our guidance range despite reducing marketing spend by 41% year-over-year. We were encouraged by the progression of the quarter and our strong finish to the year. December was particularly strong, especially the last week of the month as FSA and HSA deadlines approach.

Our stronger top line resulted in higher than projected adjusted EBITDA for the quarter of $8.6 million and an adjusted EBITDA margin of 5.8% in Q4. This was our most profitable Q4 to date, stemming from the actions we took to realign marketing expenses and right size our corporate cost structure. We believe these results, alongside what we expect to deliver in 2023, will demonstrate our commitment to sustainable growth and profitability. Q4 was another quarter where we saw consumers shift their shopping preference back into stores as we move past the peak e-commerce period of the pandemic, and our store teams did a great job of serving the increased demand. Compared with 2019 pre-pandemic levels, store productivity continued to improve from Q2 and Q3 this year, reaching 88% in the fourth quarter.

We opened 10 new stores in Q4, including our 200th store, which is located around the corner from Warby Parker’s very first New York City office and showroom in Union Square. All 10 stores opened in Q4 include eye exam capabilities, which brought the number of locations offering eye exams at year-end to 150 in line with our goal. In total, across 2022, we opened our target 40 stores, bringing our total fleet to 200. Despite softer industry-wide traffic, our stores that were opened for the full 12 months in 2022 generated approximately $2.1 million in revenue on average with 4-wall margins in line with our historical target of 35%. And our new stores are performing well. Our 2021 cohort of 35 stores is on track to pay back under our target of 20 months.

As we’ve increased the number of stores offering eye exams, we’ve seen a nice uptick in average revenue per customer, driven by both exam revenue and a higher penetration of progressive lenses. We closed the quarter with 2.28 million active customers and our highest average revenue per customer to date at $263. Looking at our online channels, our e-commerce 3-year CAGR in Q4 was 18.6% compared to 19.2% in Q3 and down 1.6% in Q4 ’22 versus Q4 ’21. There are three factors that have impacted e-commerce trends. The first is that this channel is more sensitive to changes in marketing spend, given that our stores enjoy embedded marketing, and we are comping against periods of elevated spend last year. The second is a broader consumer shift back to shopping in physical stores as we move past the acute period of the pandemic.

The third is the impact of new store openings, especially in new markets, which immediately increase overall sales in that market but create headwinds for local e-com sales during the store’s first year of operations, after which this effect abates. With our mix of transactions between retail and e-com roughly back to pre-pandemic levels, we expect the first 2 factors to normalize by the second half of this year, enabling us to return to driving positive e-com growth via sustainable levels of marketing spend. In order to drive future growth, we’re continuing to invest in our leading digital experiences and in-house innovation. For example, in Q4, we expanded our award-winning virtual try-on tool to our web platform, which has driven higher conversion alongside a better customer experience since launch.

We also continue to provide more access to remote vision care services by driving increased adoption of our telehealth app, Virtual Vision Test. We’re also pleased with the operational improvements we made across the business to better serve our customers. We continue to scale our new optical lab in Las Vegas, improving fulfillment speeds and helping partially offset pressure on gross margins. We made progress in the sustainability of our operations as well. In 2022, we launched our first-of-its-kind demo lens-recycling program in partnership with Eastman Chemical and have since recycled more than 20,000 pounds of lenses as a result. And through all of this, we continue to deliver exceptional customer experiences while maintaining our industry-leading Net Promoter Score of 80.

We find that when people try Warby Parker, they love the product and the experience. Our repeat purchasing behavior has remained remarkably consistent, including our most recent cohorts. While Neil and I are proud of these accomplishments, we’re most proud of the work Team Warby has done to execute on our mission to provide vision for all. In 2022, we announced the milestone of distributing more than 10 million pairs of glasses to people and needs through our “Buy a Pair, Give a Pair” program. As a result of this work and the work of our incredible partners, 10 million more people have the tools they need to see and live more productive lives. Before I turn it over to Neil, I want to thank the entire Warby Parker team for their perseverance and focus through a tumultuous operating environment last year.

2022 forced us to lean on our team’s biggest strengths, our ability to use data to inform strategic decisions, our agility, and our commitment to deliver remarkable customer experiences, which we believe position us to continue to take market share in the months and years ahead.

Neil Blumenthal: Thanks, Dave, and good morning, everyone. Our integrated omni-channel approach is unique in the optical industry, and we intend to leverage our inherent advantages to design and deliver remarkable and remarkably priced products, services, and experiences that help people see. Our commitment to delivering sustainable growth is unwavering, and we expect 2023 to instill confidence in our ability to execute and fulfill this promise. To do so, we’ll focus on four strategic priorities. We’ll continue to scale our omni-channel presence by meeting our customers where and how they want to shop. We plan to open another 40 new stores this year with a continued focus on suburban expansion. Of these stores, 36 will be in suburban markets and more than 10 markets will be new for us.

The remaining four stores will be in urban centers, most notably in the New York market. In Q4, our suburban stores had a retail productivity versus 2019 that was 12 points higher than our urban locations. For these 40 new stores, we’ll continue to target 35% 4-wall margins and paybacks within 20 months. We expect the productivity of our existing stores to improve from 2022 levels as traffic continues to rebound, and we drive further growth in average revenue per customer. We’ll also continue to serve customers through our e-commerce channel and plan to drive innovation and enhancements throughout the year. While we’re projecting e-commerce growth to be down in the first half of the year, we plan to return to e-commerce growth in H2. Second, we plan to further expand our core glasses business.

Since launching Warby Parker in 2010, we’ve intentionally maintained our core $95 price point. Our simple, affordable pricing structure has been an integral part of our value proposition and continues to attract new customers. And while we’ll continue to expand our $95 offering, we plan to launch nearly 20 collections incorporating our $145, our $175, and our $195 price points while introducing innovative frame constructions, new lens types, and more. We also plan to deepen Progressives’ penetration within our product mix, building on the momentum we saw in 2022 through store expansion, increased eye exam capabilities, and growing brand awareness. As of December 2022, Progressives’ made up 21.7% of our total prescription glasses purchases but approximately 40% of industry-wide purchases on average, leaving significant white space for future growth.

Third, we’ll continue to evolve our position as a holistic vision care company by expanding our contacts, eye exams, and insurance offering. Last year, contact lens sales grew 84%, increasing from 4% of our business in 2021 to 7% in 2022. Yet our contact penetration remains well below the approximately 20% industry average. In 2023, we’ll aim to expand this portion of our business that brings us some of our highest value customers given the replenishment nature of contact and the propensity of these customers to go on to purchase glasses. Like contacts and Progressives, our eye exam business grew in 2022. Revenue from eye exams increased 87% year-over-year, yet we are underpenetrated in the $15 billion eye exam market. Industry-wide, nearly 80% of eyeglasses sales occur where an eye exam takes place.

So we view eye exams as additive, not only has its own revenue stream, but also as a key driver for eyeglasses and contacts. In addition to the 40 new stores opening this year with eye exam capabilities, we plan to convert another six locations to our PC model, bringing a new stream of revenue to this fleet of stores. We anticipate ending the year providing eye exams in approximately 195 stores, up from the 150 stores at the end of 2022 We’ll continue to lead the way in providing access to innovative vision care services like retinal imaging, which gives our optometrists a closer look at a patient’s eye to detect early signs of eye disease. Our exam and contacts offerings also unlock new insurance opportunities, which we’ll continue to pursue in order to make it easier for customers to use their vision benefits with us.

Warby Parker is currently in network with over 16 million lives through UnitedHealthcare, the Blue Cross Blue Shield Federal Employee Program, and Visions through select employers such as General Electric. This number increased more than 30% year-over-year, up from 11.9 million lives at the end of 2021. In addition to growing this base of in-network customers in 2023, we’ll also aim to make it as easy as possible for customers to use their out-of-network benefits with us. And lastly, our fourth initiative in 2023 will be driving further brand awareness and new customer growth through strategic marketing investments. Our stores not only enable us to offer great experiences for our customers. They also serve as highly efficient customer acquisition tool.

New physical locations are very effective at driving traffic and conversion in the month following new market penetration. We believe the combination of the 40 stores opened last year and the 40 openings we have planned for 2023 will significantly contribute to increasing awareness. We intentionally designed the exterior and interior of our stores to serve our striking representations of our brand and draw traffic to our spaces. For example, for our Andersonville store in Chicago last year, we incorporated our very first sculptures. Created by artist Cody Hudson, the 6-foot sculptures greet guests as they walk into the space, creating a fun and memorable shopping experience. Speaking to more traditional marketing efforts. We are continuing to invest in effective online and off-line marketing programs to reach new consumers and drive traffic.

Over the back half of 2022, we purposefully brought marketing spend as a percent of revenue back to pre-pandemic levels. Since reducing marketing spend to low double digits, we’ve seen our customer acquisition costs come down approximately 36% for the second half of 2022 compared to the second half of 2021, driving increased leverage. And while lower spend will be a headwind to top line growth in the first half of 2023, especially for our e-commerce channel, we believe it’s necessary as we aim to drive sustainable, profitable growth over the long term. We have proven we can drive awareness and growth in new demographics, for example, amongst consumers 45 and older who tend to wear Progressives. While we plan to continue to invest in our Progressive business, this year, you’ll see us deploy a more balanced marketing mix and focus more on our younger customers.

We’ll also continue to launch unique partnerships, collaborations, and campaigns to fuel awareness and brand affinity. We believe the power of our brand and our ability to surprise and delight customers continue to differentiate us within the industry. The opportunity in front of us to tackle the large and growing eyewear market feels as exciting as ever. Before handing it over to Steve, like Dave, I also want to thank Team Warby. I continue to be inspired by their resilience, flexibility, and commitment to creating impacts for our stakeholders. Alongside our leadership team, I look forward to building on our current momentum to reach new milestones drive further impact and create more shareholder value in 2023. And now I’ll pass the call over to Steve.

Steve Miller: Thank you, Neil. Jumping right in. Revenue for the fourth quarter came in above the high end of our guidance range at $146.5 million, up 10.2% year-over-year. This better-than-expected finish to the year brought 2022 revenue to $598.1 million, representing growth of 10.6% versus full year 2021 in a year marked by macroeconomic challenges that pressured industry demand. We’re encouraged by our top line performance as well as our ability to increase average revenue per customer and adjusted EBITDA over the course of the year. From a customer perspective, we finished 2022 with 2.28 million active customers, an increase of 3.6% year-over-year and grew average revenue per customer from $246 to $263, representing an increase of 6.9% year-over-year.

This increase in average revenue per customer was driven by a few factors, including an increase in Progressive as a percentage of our business mix and continued ramping of both contact lens and eye exam sales. Progressives represented 21.7% of total prescription glasses sold in Q4 2022, up from 20.1% when compared to the fourth quarter of 2021. This is still well below the market average of approximately 40%, leaving a substantial runway for product category growth. Progressives are also our highest gross margin and highest price point products starting at $295. On our Q3 earnings call in November, we called out that for Q4, we anticipated store productivity levels to be in the mid-80s versus the same period in 2019 and that we expected the 3-year CAGR for our e-commerce business to be in the high ‘teens, consistent with trends observed at the end of Q3 2022.

We’re pleased to report that store productivity for Q4 came in moderately higher than anticipated at 88% of 2019 levels. This was above the 82% we achieved in the third quarter and also higher than our September exit rate of approximately 85%. We’re pleased with the retail productivity improvement we saw over the back half of 2022 and look forward to continued progress on this front in 2023. In 2022, our stores opened 12 months or more generated $2.1 million in revenue with 4-wall margins in line with our target of 35%. In Q4, we saw e-commerce down 1.6% in 2022 versus Q4 2021, which coincides with a 41% drop in marketing spend from $29.6 million to $17.6 million and from 22.3% of revenue to 12% of revenue in the quarter. From a business mix perspective, for the fourth quarter, e-commerce represented 37% of our overall business in line with pre-pandemic levels.

This compares to 41% in Q4 2021, and 34% in Q4 2019. On a 3-year CAGR, our e-commerce business came in at 18.6%, in line with expectations and down from 19.2% observed in Q3. For the full year, store productivity reached 84% of 2019 levels, and we observed a 3-year CAGR of approximately 22% in our e-commerce business. In 2023, we plan to stop reporting on both store productivity relative to 2019 and our 3-year e-commerce CAGR. Instead, we plan to speak to store productivity versus last year and e-commerce and retail revenue versus last year. Moving on to gross margin. As a reminder, our gross margin is fully loaded and accounts for a range of costs, including frames, lenses, optical labs, customer shipping, optometrist salaries, store rent, and the depreciation of store build-outs.

Our gross margin also includes stock-based compensation expense for our optometrists and optical lab employees. For comparability, I will be speaking to gross margin, excluding stock-based compensation. Fourth quarter adjusted gross margin came in at 55.2% compared to 57.5% in the year-ago period. There were a number of drivers of this deleverage in gross margin that I’ll walk through. The primary driver of the decrease in gross margin was the continued growth in contact lenses from 6% in Q4 ’21 to 8% in Q4 ’22 as a percentage of our total business. Expanding our contacts offering is a core part of scaling our holistic vision care offering and a key driver of increasing average revenue per customer. While contact lenses have a lower gross margin percent versus our other product categories, they are accretive to gross margin dollars given their higher purchase frequency and subscription-like purchase cycle.

Contact lenses represent a $17.9 billion market and accounts for approximately 20% of the optical market. Next, we saw year-over-year deleverage in the gross margin in two areas, which represent the more fixed portion of our cost of goods. The six elements of our COG stock are retail occupancy and optometry salaries, which generally remain the same regardless of revenue. We added 39 net new stores over the course of the last 12 months, going from 161 stores as of December 31, 2021, and to 200 stores as of December 31, 2020, or an increase in our store base of 24.2% year-over-year, which naturally leads to an increase in store rent and depreciation from store build-outs. This 24.2% increase in store count compares to full year 2022 total company revenue growth of 10.6% and retail revenue growth of 25% over the same period.

We also saw downward pressure on gross margin year-over-year from an increase in overall optometry salaries as we hired optometrists for our new stores and significantly expanded the rollout of our Professional Corporation, or PC model. As of the end of 2022, we operated with 150 stores where we engage directly with an optometrist and therefore, recognize both revenue from exams and expense from optometrist salaries. These 150 stores compared to 102 stores at the end of 2021. The majority of our 60 PC model stores are ones where we are converting an existing store with an independent doctor relationship to the PC model, and therefore, we had already been recognizing a significant portion of product conversion sales at our stores from the independent doctor.

As we convert these stores to the PC model, we expect a near-term margin headwind given the gross margins on the exam service alone are lower than our glasses and contact gross margins. We expect that our investment in eye exam capabilities in-store will benefit us in the long term as it gives us creative control of the customer experience, enables us to recognize eye exam revenue, and result in higher conversion rates from eye exam to product purchase. Offsetting a portion of these dilutive factors are a few accretive tailwinds to margins. First, we continue to scale our Progressives business, which is our highest priced and highest gross margin offering. Progressives accounted for 21.7% of our prescription glasses business, up from 20.1% a year ago.

As we’ve discussed, progressive lenses account for approximately 40% of all lenses sold and we view further penetration of Progressives as a continued source of growth for years to come. Secondly, we continue to scale the portion of prescription glasses orders that we in-sourced at our two owned optical labs in New York and Nevada. As discussed, there are many benefits we see from in-sourcing orders at our labs, including higher NPS, lower refund rates, faster turnaround time, and improved gross margin. For the full year, adjusted gross margin came in at 57.2% compared to 59% in 2021 and in line with guidance provided on our Q2 and Q3 calls last year. Shifting gears to SG&A. As a reminder, SG&A for our business includes three main components: salary expense covering our headquarters, customer experience and retail employees, marketing spend, including our Home Try-on program, and general corporate overhead expenses.

Adjusted SG&A excludes the noncash costs like stock-based compensation expense and also excludes onetime costs like those associated with our direct listing. Adjusted SG&A in the fourth quarter came in at $81.5 million or 55.6% of revenue. This compares to Q4 2021 adjusted SG&A of $89.4 million or 67.3% of revenue, a drop of 11.7 points year-over-year. The primary driver of the decrease in adjusted SG&A as a percentage of revenue for the quarter was driven by dropping marketing spend as a percent of revenue by 10.3 points from 22.3% to 12% of revenue. The remaining 1.5 points of leverage was driven by the changes to our cost structure that we implemented in August of last year, which included the difficult decision to reduce our headquarters’ headcount and decrease operating spend across a range of categories.

We believe these changes have set us up for continued adjusted EBITDA margin improvement that I will discuss later. As previously outlined, we’ve made and expect to continue to make changes to marketing spend levels to optimize to the current demand environment. Marketing spend for the quarter came in at $17.6 million or 12% of revenue. This is down from $29.6 million and 22.3% of revenue in the same period last year. Marketing spend in Q4 ’22 was 41% lower year-over-year, which compares to revenue growth of 10.2% year-over-year over the same period. Since the first quarter of 2022, we reduced marketing spend by nearly 8 points as a percent of revenue and expect it to remain in the low double digits this year as a percent of revenue. For the full year, on an adjusted basis, SG&A came in at $348.5 million or 58.3% as a percentage of net revenue versus 58.4% in 2021.

Our 2022 results included a full year of public company costs, which accounted for approximately 1.7% of revenue versus 2021, which included just 1/4 of public company costs, which accounted for less than half of 1% of revenue. In H1 2022, adjusted SG&A represented 61% of revenue versus 55.5% in H2 2022, an improvement of over 500 basis points. At the end of the third quarter, we took several steps to realign our cost structure with the current environment, including taking the difficult but necessary steps to reduce our full-time corporate team by 63 people or approximately 15% and pulled back on a range of operating spend items. These actions generated savings of approximately $9 million in 2022, and we expect these actions to lead to $15 million to $18 million in savings this year.

We believe these operating spend reductions, along with bringing marketing spend as a percent of revenue back down closer to the low ‘teens, position us well for increased profitability this year. Turning now to adjusted EBITDA. In the fourth quarter, we generated adjusted EBITDA of $8.6 million, representing an adjusted EBITDA margin of 5.8%, which compares to adjusted EBITDA of negative $6.4 million or negative 4.8% of revenue in the year ago had. Second half adjusted EBITDA margins of 6.9% or 470 basis points higher than the first half, driven by the actions we took to adjust our marketing expense and corporate cost structure midway through the year. Turning now to our balance sheet. We finished the year with a strong balance sheet position, reflecting approximately $209 million in cash, which we will continue to deploy deliberately to support our growth in operations.

We also have an undrawn credit facility of $100 million that we can upsize to $175 million. Turning to 2023. Before I get into the specifics of our outlook, I want to point out that we expect the quarterly cadence of our results to look similar to 2021, which was in line with the shape of our business prior to the pandemic. Therefore, in 2023, we project that Q1 and Q2 will again be our most profitable quarters with Q3 modestly lower than H1 and Q4 our least profitable quarter as we spend into holiday and FSA demand. We expect that quarterly revenue will be more consistent than adjusted EBITDA. As a reminder, we historically have seen a sequential step up from Q4 to Q1 in revenue driven by the higher volume of orders generated during the FSA expiration period in late December, the majority of which are fulfilled in January, and then relative parity in quarterly revenue across Q2, Q3, and Q4 until the cycle repeats.

Now to guidance. While we are encouraged by our momentum entering this year, the broader economic landscape, and its impact on consumer behavior continues to be challenging to predict for the optical industry. Therefore, we’re planning for a range of scenarios for the full year 2023, we’re guiding to the following: revenue growth of approximately 8% to 10%, representing a revenue range of $645 million to $660 million, adjusted EBITDA margin of approximately 7.9%, which equates to adjusted EBITDA of approximately $51.5 million at the midpoint of our top line guidance range. Gross margin in the mid-50s as a percent of revenue, 40 new store openings, bringing our total store count to approximately 240 by year-end. Looking at our retail channel.

Our revenue guidance at both the low and high end is based on our plan to open 40 new stores in 2023 with an opening cadence similar to 2022. At the low end of our range, we anticipate store productivity versus 2022 to be flat. At the high end of our range, we anticipate store productivity to increase 1 to 2 points. As you’ll recall, we began aligning our marketing spend as a percent of revenue with pre-pandemic levels midway through 2022. For 2023, we expect marketing spend to be in the low ‘teens as a percent of revenue, which compares to approximately 20% in the first quarter last year and 17% for the first half of 2022. Therefore, we expect e-commerce sales to be down in the first half of 2023 before returning to growth in the second half after we anniversary the marketing spend adjustment in the third quarter.

With respect to 2023 adjusted EBITDA margin, we are guiding to approximately 7.9% for the full year as noted. This represents a 340 basis point improvement versus 2022 and 130 basis points of improvement versus the midpoint of our second half 2022 guidance of 6.3% to 6.9%. As a reminder, we indicated on our last earnings call that we would use our second half 2022 guidance range as the baseline on which we would base projected 2023 profitability. We expect gross margins in 2023 to remain below our long-term target range as top line growth remains below our long-term target of 20%, and as we continue to open new stores and hire optometrists to meet the holistic vision care needs of our customers. Finally, with respect to our outlook for 2023, we are forecasting stock-based compensation as a percentage of net revenue to be roughly 10% compared with 16% in 2022.

Stock-based compensation for both years is above our long-term forecast of low single digits starting in 2024. As a result of the multiyear equity grants to our co-CEOs in 2021, the majority of which is performance-based and best based on stock price targets from $47.75 to $103.46. We still anticipate stock-based compensation to normalize to approximately 2% to 4% of net revenue beginning in 2024. For Q1 2023, we’re guiding to the following: revenue growth between $163.9 million to $167 million, which represents growth of 7% to 9% year-over-year. This represents sequential top line growth of approximately 12% to 14% from Q4 2022 to Q1 2023. Through mid-February, we’ve observed 102% productivity in our retail stores on a trailing 28-day basis as compared to 2022.

From a bottom line perspective, in Q1 2023, we’re guiding to an adjusted EBITDA margin of 8% to 9%, or $13 million to $15 million. We expect the quarterly progression of our profitability to be more in line with pre-pandemic trends with more of our adjusted EBITDA generated in the first half of the year versus 2022, where we generated the majority of our adjusted EBITDA in the second half of the year. With that, Neil, Dave, and I are pleased to take your questions. Operator, please open the line for Q&A.

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Q&A Session

Operator: . The first question we have today from the phone lines comes from Dana Tesley of Tesley Group. You may proceed.

Dana Telsey: Nice to see the progress. As you think about the first half and second half of the year that you mentioned, Steve, how do you think about the go forward? Is it going to continue to be in this type of balance with adjusted EBITDA? And then Dave and Neil, as you think about store openings and you opened the Union Square store right near my house, it looks like it’s doing terrific. As you think about new store openings, markets that you’re going in new versus existing markets? And how do you think of the return profile given the spend on new stores from what it had been in the past?

Steve Miller: Thanks for the question, Dana. I’ll take the first part and then we’ll kick it over to Neil and Dave for the second part. In terms of your question as it relates to the cadence of adjusted EBITDA — for this year, we believe that the cadence will look more similar to 2021 and to pre-pandemic years. So last year, due to some of the cost adjustments we made to the business, we generated the majority of our adjusted EBITDA in the second half of the year. That story will be different this year, where we expect to recognize more adjusted EBITDA in the first half of this year than in the second half of this year. So we’re projecting strong profitability in Q1 and Q2, a little bit less so in Q3 and our lowest profitability quarter will be Q4, consistent with prior years where we spend into FSA demand and holiday buying.

So that’s how we would describe the shape of our adjusted EBITDA curve this year versus last year, with the main change really being due to the cost adjustments we made to the business in August, which really allowed us to generate incremental EBITDA. We saw adjusted EBITDA H1 go from approximately 2% to almost 7% in the second half of the year.

Neil Blumenthal: Dana, this is Neil. I’ll touch a little bit on how we’re allocating capital towards our store fleet, and we’re going to open another 40 stores this year because we found that we’re able to open these stores within sort of our targets of paybacks of less than 20 months and 4-wall margins of 35%. I’m so excited that you have a chance to visit our Union Square location. This is an example of a store that does high volume, has great metrics, but also sort of brand accretive, where we were able to get a corner location with exterior flag. And this is an example of a real estate strategy where, we look at the entire run of Lower Fifth, for example. And while there’s slightly higher foot traffic, maybe three blocks further north, there’s real significant differences in rent.

So here at Real Estate Committee, we sort of make that trade-off and know that for our category, people are willing to walk that extra block, and this is a neighborhood store that has a very deliberate customer base. We continue to be very disciplined in our retail rollout this year. As we’re opening, we’ll continue to sort of fill in existing markets but open up a bunch of new markets and really focus a lot more on suburban locations. As we look at sort of Q4 and 2022, the delta between our suburban and urban locations was about 9 percentage points when we compare to retail productivity in 2019. We expect that to continue to narrow over time. But given our journey into retail was very focused on urban locations, we have lots of opportunity in suburban locations that will take advantage this year.