Warby Parker Inc.
Q4 2021 Earnings Call Transcript

Published: 17 Mar 2022

[Operator:]

Hello, everyone and welcome to the Warby Parker Fourth Quarter and Fiscal Year Financial Results Conference Call. My name is Victoria and I will be calling into call today. I will now pass over to your host, Tina Romani, Head of Investor Relations to begin. Please go ahead.

[Tina Romani:]

Thank you and good morning everyone. Here with me today are Neil Blumenthal and Dave Gilboa, our Co-Founders and Co-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 a 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 latest 10-Q filings and the upcoming 10-K filing. These forward-looking statements are based on information as of March 17, 2022 and we assume no obligation to publicly update 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 GAAP. A reconciliation of these items to the nearest U.S. GAAP measures can be found in this morning’s press release and our slide deck available on our IR website. With that, it’s my pleasure to turn the call over to Dave to kick things off.

[Dave Gilboa:]

Thanks, Tina and good morning everyone. Thank you for joining us bright and early to discuss Warby Parker’s fourth quarter and full year 2021 results as well as our outlook for 2022 and beyond. Before we dive in, we wanted to use this public forum to thank our Buy a Pair, Give a Pair partners and congratulate our team on surpassing 10 million pairs of glasses distributed to people in need through our Buy a Pair, Give a Pair program. That means more than 10 million people now have the glasses they need to see, to learn, to work and to provide for their families. We are incredibly proud of the impact our team and partners are having and we couldn’t be more grateful to our customers and shareholders for making it possible. This impact is hugely motivating for our team and enables us to track and retain the most passionate, curious driven employees who wake up everyday obsessed with delighting customers and helping people see and who in turn enable us to deliver strong financial results. And now turning to those results, 2021 was a record year for Warby Parker and we are proud that our team delivered another year of sustainable growth. We grew revenue 37% to $541 million, while expanding adjusted EBITDA margin 270 basis points to 4.6%, up from 1.9% in 2020. This was achieved while delivering exceptional customer experiences, resulting in another year with a net promoter score above 80%, while also making significant strides against our long-term strategic initiatives that will lead to sustainable growth for years and decades to come. We achieved these results in spite of many pandemic-related challenges and in particular, in Q4, when we saw significant impairments during our peak selling season. Team Warby thank you for your continued perseverance and resilience. As we look back on 2021, it was incredibly exciting to celebrate so many milestones alongside Team Warby. In addition to the 10 million pairs distributed, we became the first public benefit corporation to go public through a direct listing. We grew our active customer base by nearly 400,000 people, the most ever in a year to 2.2 million happy customers. We opened 35 new stores, the most we have ever opened in a year, ending 2021 with 161 stores and the performance of these 35 new stores are in line with the first year performance of stores we launched pre-COVID. As you may recall, in our S-1, we discussed best-in-class unit economics targeting four-wall margins of 35% and paybacks in under 20 months. In 2021, we opened stores in 9 new markets from Sarasota, Florida to Albuquerque, New Mexico and Richmond, Virginia and we continued to see a very consistent growth profile when entering new markets, with the entire market growing over 250 on average in the first year of opening a new store. We expanded our product assortment by launching 21 eyewear collections and introduced innovative first-to-market designs and constructions like our Tortoise Collage in SE edition, while also increasing our penetration of progressive lenses. And we made meaningful progress in our evolution from being primarily an eyewear company through a holistic vision care provider. We more than doubled the size of our contacts business and opened 36 new eye care locations while hiring dozens of optometrists. We opened our second optical lab, a 69,000 square foot facility in Las Vegas that further strengthens the vertically integrated supply chain we have built over the years and enables us to maintain the highest quality standards, exceed customer expectations and lower costs. We also continue to focus on innovation in our category leading e-commerce experience and digital tools. In 2021, we launched groundbreaking technologies like our virtual vision test telehealth app, which allows eligible users to renew both classes and contact lens prescriptions from anywhere at any time using just an iPhone in less than 10 minutes into a continued adoption of our first of its kind true-to-scale Virtual Try-On. As I mentioned, we accomplished all these milestones while maintaining an industry-leading net promoter score of more than 80. Maintaining this metric is Team Warby’s North Star and has been since day 1. It ensures we are continuing to deliver above and beyond products and experiences for our customers, which in turn fuels our growth. And those happy customers are spending more with us than ever. Our average revenue per customer for the year was $246, up $28 or 13% versus 2020, the largest increase we have ever seen in our 12 years since launch. That increase hasn’t come from raising prices. It’s come from two factors

[Neil Blumenthal:]

Thanks, Dave and good morning, everyone. We are as excited about our business and category as when we first started 12 years ago. As many of you know, our category is different from other consumer categories. Our core product, eyewear, is a combination of a health product and a fashion accessory. We have a unique responsibility to provide vision while amplifying one’s identity and style. We are fortunate to operate in a large and growing market, $160 billion globally and $44 billion in the U.S. alone and one that provides essential products and services that are purchased in both strong and weak economic environment. Several factors contribute to this growth and durability. First, most people need vision correction, with 76% of adults using some form of vision correction in 2021. Second, there is a natural replenishment cycle as prescriptions change or as people update their fashion preferences. Further, there are several macro factors contributing to rising vision correction needs and a steady influx of new customers who expect an exceptional vision care experience from an aging population and increased screen time usage to the acceleration of e-commerce penetration and increasing prominence of telehealth. These trends support expectations that the industry will continue to grow and continue to become more favorable to our omni-channel approach. This is obviously exciting for us at Warby Parker. Despite being one of the only optical retailers to grow in 2020 and then accelerate that growth to 37% in 2021, reaching $541 million in revenue, we still just represent 1% of the U.S. market. Another optical industry dynamic that makes it particularly appealing to our vertically integrated business model is that roughly 50% of the market is served by independent eye doctors and their optical shops that purchase frames and lenses wholesale and then resell them. The other half of the market is served by retail chains. And of that 50% of the market that are chain stores, roughly one-third is owned by one company. Customers come to Warby Parker often after spending significantly more on their glasses, because they either bought them from an overpriced optical chain or an independent optometry practice. The other interesting dynamic of our industry is the prescription nature of the product. You need a valid prescription to buy glasses and contacts. Industry-wide, approximately 70% of people buy glasses and contacts in the same location they have an eye exam. This benefits us as we open up more stores with exam suites and optometrists. However, sales are negatively impacted when customers are not able to obtain prescriptions from us or their local optometrists due to Omicron or other variants. While the prescription dynamic protects incumbents by providing barriers to entry in normal times, it leads to a slower ramp up than other categories after a COVID surge. In spite of COVID, the eyewear market is poised to continue to grow faster than GDP, with an outlook of a 5.3% CAGR from 2022 to 2025. If there is one phrase that you hear repeated in the offices of Warby Parker, its sustainable growth. Our management philosophy is to drive predictable growth while expanding margins and delivering exceptional customer experiences to ensure future growth. Our long-term outlook remains the same

[Steve Miller:]

Thanks, Neil and Dave. Good morning, everyone. Jumping right in. Revenue for the full year 2021 came in at $540.8 million, up 37% versus 2020 and up 46% versus 2019. We finished the year with 2.2 million active customers, an increase of 22% year-over-year. The power of our financial model stems from robust customer economics, which continued to strengthen. During the year, we grew average revenue per customer by 13% to $246. Additionally, our retention rates through 2021 continue to demonstrate the long-term relationship we’re able to form with our customers, which we believe is unique in the optical industry. Despite navigating through continued uncertainty for most of the year, these results demonstrate the strength of our brand and underscore the opportunity ahead as we execute against our growth strategies. For the fourth quarter, revenue came in at $132.9 million up 18% year-over-year and up 42% compared to Q4 2019. The onset of Omicron at the end of November has had a meaningful impact on our business given the unique seasonality aspects Dave talked through. Given the importance of Q1 within the optical industry and to our business, let me take a moment to walk you through the trends we have seen since the start of the year. The disruption from Omicron in January was twofold. First, the softer end to December resulted in a lower revenue deferral than we’ve historically seen in addition to the variant continuing to dampen traffic levels into January and February in our stores. We estimate the impact of Omicron at $5 million in top line for Q4 2021 and $15 million in top line for Q1 2022, most of which we view as lost business and the lead up to the expiration of FSA dollars with the impact split across Q4 and Q1 and largely in December and January. Given the unique seasonality of optical purchases and customer FSA usage behavior, we do not expect to recapture the majority of these lost sales and have reflected this impact in our first quarter and full year outlook. With regards to e-commerce performance in the fourth quarter, while we saw an increase in e-commerce demand over the last 2 weeks of December, it did not offset the decline we experienced in retail traffic trends. For our business, the shift between retail and e-commerce may not be as natural or immediate as it is for other categories such as apparel, given the need for valid prescriptions and varying consumer comfort levels around purchasing eyewear were online for the first time. For the fourth quarter, e-commerce represented 41% of our overall business versus 56% in 2020 and 34% in 2019. For the full year, e-commerce penetration was 46% versus 60% in 2020 and 35% in 2019. E-commerce grew 96% during the fourth quarter of 2020. As such, Q4 2021 e-commerce is down 14% but up 69% versus 2019, representing a 2-year CAGR of 30%. For the full year, e-commerce grew 5% on top of 83% growth last year, representing a 2-year CAGR of 39%. Before shifting gears to gross margin and SG&A, I wanted to reiterate some of the fourth quarter seasonality dynamics that I spoke with you about last quarter. Q4 is generally our lowest margin quarter given the revenue deferral and as we make several investments to support the important holiday selling season as well as the expiry of FSA benefits. These investments include marketing to support and generate customer demand, investments in shipping as we expedite orders to meet holiday timing increasing store staffing to accommodate higher traffic and extended store hours and increasing our customer experience staff and to support higher demand as well as elevated call volume related to flexible spending benefit questions. So while we believe our long-term outlook will show consistent high growth and steadily improving profitability on an annual basis as we saw in 2021 as the quarter-to-quarter picture may fluctuate. We’ve also added to our earnings slides a historical view of revenue by quarter going back to 2016. As you can see, the revenue distribution is fairly equal across quarters in the same year with a significant step up in sequential growth from Q4 to Q1. We expect this cycle to continue post pandemic given the consistency we’ve seen in our business over many years prior. With that in mind, let’s move on to gross margin. As a reminder, our gross margin is unloaded and accounts for a range of costs, including frames, lenses, optical labs, customer shipping, eye doctors, store rents 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 57.5% compared to 57.8% and 57.0% in 2020 and 2019, respectively. For the full year, adjusted gross margin came in at 59.0% compared to 58.9% in 2020 and 60.2% in 2019. For the quarter, we have some unique costs and benefits impacting comparability as well as several operational puts and takes that I’ll talk through. First, Q4 2020 benefited from a tariff rebate of approximately 70 basis points. Excluding this benefit, adjusted gross margin would have expanded. Next, the acceleration and penetration of our contacts business as a percentage of the total was the primary driver of slight moderation in fourth quarter gross margin. As Neil mentioned, expanding our contact 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 versus our other product offerings, they are accretive to gross margin dollars given the higher purchase frequency and subscription-like purchase cycle of this product. Additionally, we typically experience higher sales retention rates for customers that purchase contacts given the ability to meet all of their eye care needs within the Warby Parker ecosystem. As we talked with you about last quarter, there was a moderate drag on gross margin as our second optical lab in Las Vegas ramps to 100% operating capacity. We expect the lab to reach scale in the back half of 2022, which will allow us to more efficiently serve our West Coast customers ultimately supporting leverage within gross margin. Lastly, we saw a benefit to gross margin from continued inventory and product strategy optimization as well as the expansion of our higher-margin progressives business. For the full year, 2020 gross margin benefited from a tariff rebate of approximately 40 basis points. Excluding this benefit in 2020, adjusted gross margin expansion would have been greater in 2021, primarily driven by leverage on retail occupancy as we lap store closures last year and leverage as we continue to scale our higher-margin progressives business, partially offset by the acceleration and penetration of our contacts business during the year. Shifting gears to SG&A. SG&A for our business includes three main components

[Operator:]

Thank you. And our first question comes from Mark Altschwager from Baird. Please go ahead. Your line is open.

[Mark Altschwager:]

Great. Good morning. Thanks for taking my questions here. I guess to start off, I was hoping you could give us a bit of an update on how you’re thinking about the competitive backdrop and maybe more specifically, competition at the lower end and some of the increasing inflationary pressures on the consumers. And then related there, you talked a lot about the opportunities on the progressive front. Can you remind us how Warby’s price point on progressive compares to the competition? And how does your – do you have that same pricing gap that you see with the single vision glasses. Thank you.

[Dave Gilboa:]

Thanks so much for your question. And First, as you mentioned, our progressive glasses start at $295, which is a $200 step-up from our single vision product at $95. When we price this product, the intent was to provide the same level of exceptional value, so we frequently see customers per spending $800 to $1,000 or more on a pair of progressives and then they come and from us are able to get glasses still at a fraction of what they would typically cost. Similarly, in the competitive dynamic, we still find that our customers tend to skew more affluent and are coming to us from high-end optical shops from optometric practices. We have not seen significant competitive pressure from the lower end of the market. We think in this inflationary environment, our pricing power just becomes more and more competitive and compelling to our customers.

[Mark Altschwager:]

That’s great. Thank you. A quick follow-up for Steve. If you could just give us a little bit more color on the bridge between the prior 25% plus outlook in the current 20% to 23%, even adjusting for the Omicron disruption, the $15 million, the midpoint, maybe a couple of points below the prior outlook. If you could give us a little bit more detail there, that would be great? Thanks again.

[Steve Miller:]

Sure. Thanks for the question, Mark. And just on the last part, of your question on our progressive pricing versus the competition. So if our average price is $295, for a similarly quality progressive frame and lens, you’re talking anywhere from $600 to $1,200, depending on the retailer. So we believe that there still continues to be a tremendous pricing advantage that we offer based on the specific quality of our lens type and frame. In terms of the question regarding full guide for 2022, so we attribute roughly $15 million of lost business in Q1 to Omicron, which accounts for roughly 3 full points of growth, which gets you from our 25% guide down to 22%. We’ve also modeled in some conservative assumptions as it relates to recovery of our stores to 100% productivity. And so that would account for the incremental 2 point of flexibility that we’ve built in our model. There is still a level of uncertainty in the environment. And although we are all optimistic that we’re through the COVID era, it is not officially done yet. And while our stores are on their path to recovery and we’re optimistic they will get back to 100% before year-end and 90% in Q2, we wanted to build in a level of conservatism just that we think is prudent.

[Mark Altschwager:]

Great. Best of luck.

[Steve Miller:]

Thank you.

[Operator:]

Thank you so much for your question. Our next question comes from Kimberly Greenberger from Morgan Stanley. Please go ahead.

[Kimberly Greenberger:]

Thank you so much. Good morning. Steve, I just wanted to follow-up on your answer to Mark, Mark’s question there, if we could just start there. On the recovery in your urban store productivity, I’m wondering if you can help us understand if, first of all, the suburban stores have improved their productivity back to 2019 levels? In other words, have you seen post the original onset of COVID in the spring of 2020, have you seen you’re the urban stores retrace back and recover the full productivity? And then on the urban store recovery embedded in your revenue guidance for 2022, are you assuming that office workers go back to their in-office habits of 2019 in order to get you back to that pre pandemic level of productivity in your urban stores?

[Neil Blumenthal:]

Thanks, Kimberly. This Is Neil. So our suburban stores have not yet reached full productivity. And again, our urban stores are more than 15 points below that. We are assuming sort of what we’re seeing in our own business, which is we’re calling back our New York headquarters starting April 5. And we are also returning to the office mandatory 3 out of 5 days a week. So we are assuming a ramp to full productivity, but not necessarily full traffic to pre pandemic levels. And part of our increases in productivity continued to be driven by increased progressive penetration eye exams, contact sales, our urban stores have been impaired, not just because of reduced office worker traffic but in many neighborhoods reduce tourism as well that we anticipate will rebound. So we do anticipate that the urban stores will return to full productivity at a slightly slower pace than our suburban locations.

[Kimberly Greenberger:]

Okay. Great, Neil, that’s great color. Thank you so much. And I just wanted to step back for a second and talk about the strategies that you might have in place either in 2022 or 2023 to enhance the Warby Parker proposition to consumers who have vision insurance. Any sort of incremental strategies or new ways of really tackling that insured market? Thank you.

[Neil Blumenthal:]

Sure. Thanks for the question, Kimberly. We believe insurance remains a massive opportunity for us. And within that, really think of it as three distinct opportunities. So the first is expanding our in-network relationships. We are currently in-network with UnitedHealthcare, which covers roughly 20 million lives as well as being offering in network benefits to large employers like GE and Boeing and you will see us continue to deepen relationships like this and we will have more news to share on that front later this year. The second category within the world of insurance is building awareness about out-of-network benefits. And we did a recent survey of a couple of thousand consumers and found that industry-wide, most consumers are spending $130 out of pocket when they use their in-network benefits. But if those same consumers came to Warby Parker, they would have – they would spend zero dollars out of pocket to purchase single-vision glasses. And we believe that there is a massive opportunity here to create education, both online and in our stores around how consumers can use those out-of-network benefits to pay even less at Warby Parker. And then the third is really rethinking vision insurance and continuing to innovate as we have in other parts of the industry. And all the aspects of our expansion into a holistic vision care provider continuing to open exam rooms throughout the country, continuing to hire optometrists investing in telehealth, expanding our contacts business, all create the foundation that we believe will enable us to create more innovation in the category over a longer time period.

[Kimberly Greenberger:]

Thank you so much. That’s very clear.

[Operator:]

Thank you very much for your question. Our next question comes from Paul Lejuez from Citigroup. Please go ahead. Your line is open.

[Paul Lejuez:]

Hi. Thanks guys. Curious if you could talk about the drivers of your sales assumption for F ‘22, just in terms of active customer growth versus spend per average customer? And then also curious about any bottlenecks that you are running into getting stores open on the construction front or staffing front. And then last, just the number of stores that you are growing in new markets versus existing markets in ‘22. Thanks guys.

[Dave Gilboa:]

Cool. Thanks for the question, Paul. I will answer the first part of the question and then turn it over to Neil. In terms of sales drivers and assumptions around active customer growth, one of the nice consistent aspects of our financial model really has been the consistency around which we have grown active customers really in the 22% zone, so call it the low-20s. And coupled with that, we have seen our ability to increase average revenue per customer on a consistent basis. We have talked about how that’s up 13% year-over-year to $246. And so we believe that we will continue to be able to deliver active customer growth in a very consistent way in line with how we have done that. And we also believe that we will continue to drive increases in average revenue per customer, maybe not as high as 13%, but certainly consistent with how we have done so in the past. From a demand generation perspective, there are a few factors to keep in mind that really underpin our ability to acquire customers. So, one is opening up new stores. We plan to open up 40 new stores this year. 25 of them are in Q2 and Q3, which really underpin our accelerating growth targets over the course of the year. And we plan to continue to deploy very disciplined marketing spend. We are very conscious of the equation between revenue growth and CAC and similar to this year and previous years, we want to make sure that our revenue growth is growing appreciably faster than CAC. And so ultimately, we are increasing contribution profit and contribution margin on a per customer basis. So, those are some of the factors and drivers that go into our customer acquisition model.

[Neil Blumenthal:]

And Paul this is Neil. We are not seeing any bottlenecks or inabilities for us to complete construction and maintain sort of our store opening timeline. And these new stores are performing in line with expectations and in line with first year performance at the stores that we launched pre-COVID, so trending towards our targeted 20 month paybacks and our 35% four wall EBITDA.

[Dave Gilboa:]

And the other thing is in 2021, we opened nine stores in new markets, added 35 stores that we opened and new plan to sort of continue to open up in new markets in sort of a similar proportion. The rough split this year Paul is of the 30 markets we are opening in ‘25 will be existing markets and five will be new markets. So as Neil indicated very similar to the split as to last year that will this year indexing a little more towards existing.

[Paul Lejuez:]

Got it. Thank you, guys. Good luck.

[Dave Gilboa:]

Thank you.

[Operator:]

Thank you very much for your question. Our next question comes from Brooke Roach from Goldman Sachs. Please go ahead.

[Brooke Roach:]

Good morning and thank you so much for taking our question. Neil, Dave, I would love to hear a little bit more about your plans for Warby’s brand awareness campaigns and marketing strategy to drive that new customer growth into 2022 and beyond. Are there any insights that you can share on the marketing efficiency that you are seeing and any noticeable differences between existing markets or new markets for the brand?

[Neil Blumenthal:]

Sure. This is Neil. I will start. I think first, we should probably just talk a little bit about our marketing efficiency. And we know that a lot of companies are seeing challenges because of the IDFA changes. We have not and that’s because we made a very deliberate decision several years ago to reduce our dependency on social media platforms, and it now represents less than 5% of our media spend. We did see CAC in Q4 was elevated due to increased spend really in anticipation of our peak sales season, and we believe that CAC was indeed impacted by the decrease in sales due to Omicron. That being said, if we believe the fundamentals related to our customer acquisition model remains strong. Having average revenue, it’s growing faster than CAC. Also increased retail productivity to benefit our CAC as stores are marketing vehicles, and we tend to see a higher percentage of new customers in our stores, vis-à-vis our e-commerce channel. And one of the ways that we raise awareness is by opening these stores and making them super beautiful. And this week, we are opening up a store in Hyde Park Village in Tampa. It’s our second location in Tampa – I’m sorry, our third location in Tampa. And it’s just starting the exterior. It is already sort of generating, I think a lot of attention in that community. So, you will continue to see a good mix of performance and brand marketing that enables our customers to fall in love with us. And of course, just know that we exist.

[Dave Gilboa:]

And I would just add that from a marketing standpoint, we have never been overly dependent on paid marketing. Our customers have been and remain our best marketing channel and we are excited to maintain our industry-leading Net Promoter Score. And into this day, the majority of our customers continue to learn about us through word of mouth, and we expect that to continue to be the case.

[Brooke Roach:]

Thank you. And if I could just ask one quick follow-up to some of the prior questions regarding the Omicron impact. Thanks for all of the color that you have provided so far. But I would love to hear a little bit more about the signals that you are seeing in the business. Maybe in the suburban stores versus the urban stores that give you confidence that the lower store productivity that you are seeing through the end of February is truly a function of just Omicron relative to maybe a more challenging consumer backdrop given the inflationary pressures on the consumer’s wallet. Thank you.

[Neil Blumenthal:]

One thing to add we continue to see is increased sort of conversion in our stores and again, increase or sort of stable Net Promoter Score. And we are not seeing sort of any concern or hearing from our customers necessarily about pricing. If anything, we are hearing sort of reinforcement around sort of the value that we continue to provide. This is also – we have now lived through multiple ways of the pandemic, and we have seen similar patterns where when there are COVID outbreaks in a certain geography, there is an immediate drop in retail traffic. And then because of the prescription and nature of our product, there is not an immediate bounce back like you might see in some other consumer categories. And so we have seen multi-month recovery curves, and we are seeing consistent patterns coming out of Omicron that give us confidence that store productivity will continue to increase.

[Dave Gilboa:]

And just adding to that with some of the numbers that we shared in our investor slides, where we are trying to spotlight on the recovery curve at the onset of Omicron. I think one of the interesting things we have all seen from Omicron is how quickly the impact occurred. And you can see that our stores at the beginning of December, we are at 90% of productivity and pretty quickly dropped to 75% by year-end. And they have rebounded now rather rapidly to the mid-80s and as we project our recovery curve over the course of the year. And as a reminder, we believe that our stores will be at 90% by Q2, 100% by the full year. That is informed by how our stores have rebounded and recovered through the various timeframes of the pandemic, the original onset of curve, the onset of Delta and now the onset of Omicron and the recovery through it.

[Brooke Roach:]

Thanks so much. I will pass it on.

[Operator:]

Thank you very much for your questions. Our next question comes from Oliver Chen from Cowen. Please go ahead.

[Oliver Chen:]

Hi. Regarding holistic vision care, would love your thoughts on the virtual vision testing telehealth app ahead and key catalysts there. And how the customer profile looks as well as the technology roadmap. And then as we think more near-term, with FSA and some changes in FSA in terms of the legislation, what should we be to monitoring and how that may impact your business and what’s embedded in guidance? And you also mentioned macro factors, which are – many of them are out of your control, but I was curious about which ones are most sensitive to store traffic and other factors? Thank you.

[Neil Blumenthal:]

Thanks, Oliver, for the questions. I will start with the telehealth one. So, we remain incredibly excited about the prospect of telehealth making it easier, faster, cheaper for our customers and patients to renew prescriptions and get new prescriptions. And we believe that we are uniquely positioned to bring some of this technology to market. And we are seeing very positive results from our virtual vision test. It’s still a new product. We introduced it a few months ago, but are getting incredible feedback from customers who use it to renew their prescriptions in just a few minutes for glasses and contacts from home. And you will see us this year introduce new capabilities and new features that will make it even easier for us to prescribe additional products and extend the reach of our doctors. We also are excited about the potential of using other forms of telehealth, including in our stores. And continuing to invest in technology that make it easier for our eye doctors to serve more patients and drive efficiency in that part of our business.

[Dave Gilboa:]

I think from an FSA perspective, sort of we welcome legislation that makes the use of those funds more flexible. That being said, we found that customers tend to be pretty uninformed on changing legislation or even if their expiration date is not December 31st. There is just a perception of that. So, while these changes may immediately take effect. We think that it will take several years for it to significantly influence customer behavior is almost a similar dynamic, but even vision insurance, where many customers don’t fully understand how their vision insurance works and the fact that it doesn’t protect against catastrophic risk. And that’s effectively a prepayment plan often with a high deductible – so the FSA changes may impact some seasonality in years ahead, but we don’t expect it to significantly impact sort of our plans this year.

[Oliver Chen:]

Okay. Thank you. And on the macro side, just would love your take. And lastly, hopefully, there are no really scale new variants, but there is always news about things happening. As you think longer term, are there ways to the future proof of your business with respect to this dynamic? Would love your thoughts as you evaluate long-term strategy? Thank you.

[Neil Blumenthal:]

Thanks. One of the things that we did see in our business as our traffic declined in our stores, conversion increased significantly. So, as we think about retail productivity and our plans, in ‘22, in particular, we feel like we don’t need to model to get back to 100% or even higher traffic in order to reach full productivity and achieve our plans. We think the macro environment tends to impact other categories more than the optical industry. Historically, the optical industry grows at a rate higher than GDP. On the same token, decreased traffic to neighboring stores, right, increases traffic into our stores. So, that’s something that we will continue to monitor. I think that we – when it comes to the variant and managing through the pandemic, we were an early mover and implemented health and safety protocols quickly. That earned us goodwill with our customers and our employees, and we continue to benefit from that today in our ability to recruit and retain top talent. And that’s seen in our employee engagement scores. That’s seen in our turnover rates think all businesses saw lower than usual churn, employee turnover in 2020 and then elevated in 2021. Ours was relatively stable. So, we feel really great about that. And we continue to be just a preferred employer because of our culture, because of our social innovation.

[Dave Gilboa:]

And also just the digital capabilities that we have that are unique to our business in our category, will continue to ensure that we have flexibility to serve customers regardless of kind of what happens in terms of future variants or other surprises and has enabled us to continue to take meaningful market share throughout the course of the pandemic and it enabled us to serve customers when we had to close all of our stores. And so kind of the omnichannel model that we have in those investments will continue to ensure that we are better positioned to serve customers regardless of kind of unexpected events that they pop up.

[Oliver Chen:]

Very helpful. Thank you. Best regards.

[Operator:]

Thank you very much. And our final question for today comes from Mark Mahaney from Evercore. Please go ahead.

[Mark Mahaney:]

Thank you. You mentioned the 40 new stores you are rolling out this year are all going to have eye exam capability. Can you just remind us how many of your existing stores have that? And what the difference is and the productivity of the stores that have eye exam capability versus those that don’t. And if it’s a large gap, the possibility or the appealing feasible idea of retrofitting all stores to have that is? Thank you.

[Steve Miller:]

Sure. Hi Mark. Thanks for the question. Approximately 107 of our stores today have eye exam capabilities. Roughly 40 of those we refer to as employed ODs, where we employ the doctor and recognize the revenue from the doctor. We have got another 60 or so independent ODs where we lease the doctor a small amount of space, typically adjacent to our store. We do not recognize the revenue from those eye exams, but we are optimistic, although we can’t track it that the customer gets an examine and places an order in our store. As a reminder, roughly 70% of all prescription eyewear is purchased at the same place where an individual gets an eye exam. That number is higher for our stores. So, we are optimistic as we continue to roll out eye exam capabilities everywhere. There will be an elevated conversion rate where we are benefiting not just from the eye exam revenue, but from a conversion of that exam into a sale. And roughly just 2% of our business today, as a reminder, comes from the sale of eye exams. The PC model that Neil talked about in his prepared remarks, we are planning to roll out roughly another 30 to 40 PC model stores this year, and that will enable us in a market where we needed to partner with an independent OD will be able to, for all intents and purposes have an employer like relationship with that OD and recognize the revenue from those eye exams and have a bit more control over the customer experience. In terms of the incremental costs to add an eye doctor, the eye doctor, him or herself, more than pays for him or herself by virtue of the fact that we sell eye exams and our eye appointment slots are generally books. We tend to book in 20-minute increments versus 10-minute increments. So, we do believe that, that in and of itself is a factor that makes our work environment a bit more pleasant and manageable for an eye doctor at a Warby store versus at a competitor store. The cost to build out the space is negligible. It’s well south of $100,000 and accounts for approximately 200 square feet to 250 square feet. Stores with eye doctors generate moderately more revenue than stores without for the understandable reason. In terms of payback, we have seen very consistent paybacks for our stores at 20 months or below, and that also applies to stores where we add this eye doctor capability.

[Mark Mahaney:]

Thank you, Steve.

[Operator:]

Thank you very much. And this brings us to the end of our Q&A session today. I would now like to pass the call back over to Neil for any final remarks.

[Neil Blumenthal:]

Great. Thank you all for your great questions today. Dave, Steve and I are so proud of what he and the team have accomplished in 2021, and we are incredibly excited for the months and years ahead. If you have any additional questions or follow-ups, please feel free to reach out to Tina or our Investor Relations inbox at [e-mail], and we look forward to chatting with you all again in May. Thank you.

[Tina Romani:]

Everyone else have left the call.

[Operator:]

Thank you everybody for joining today’s call. You may now disconnect your lines.