Warby Parker(WRBY) - 2022 Q4 - Annual Report

Part I Business Warby Parker is a direct-to-consumer eyewear brand with an omnichannel model and a social mission - Warby Parker is a direct-to-consumer brand that designs and sells its own eyewear, including glasses, sunglasses, and contact lenses, through 200 retail stores and its e-commerce platform[24][25] - The company operates in the U.S. eyewear market, estimated at approximately $76 billion, and plans to expand its retail footprint to over 900 stores in the U.S[34][41] - Key growth strategies include strengthening engagement with existing customers, growing brand awareness, expanding the retail footprint, and continuing to invest in technology and digital experiences[41] - As of December 31, 2022, the company had 200 retail stores, including 195 in the U.S. and 5 in Canada, with 150 of these stores offering in-person eye exams[32][47] - The company is a public benefit corporation with a "Buy a Pair, Give a Pair" program, having distributed over 10 million pairs of glasses to people in need[25][68] Risk Factors The company faces risks from rapid growth, supplier reliance, net losses, and material control weaknesses - The company acknowledges risks in managing its rapid growth to 200 retail stores, its vertically integrated business model, and its expansion of vision care services[82][83][84] - A significant risk is the reliance on a limited number of third-party suppliers, particularly for components from China, making the company vulnerable to supply chain disruptions[90][93][236] - The company has a history of net losses, reporting a net loss of $110.4 million in 2022 and an accumulated deficit of $603.6 million[121] - The business is subject to extensive healthcare regulations, including the corporate practice of medicine laws and FDA regulations for its products, which are classified as medical devices[163][172][193] - The multi-class stock structure gives co-founders significant voting control, which may limit other stockholders' ability to influence corporate matters[266] - Material weaknesses in internal control over financial reporting have been identified, which could adversely affect investor confidence[279][281] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[299] Properties The company leases all properties, including headquarters, optical labs, and 200 retail stores - Corporate headquarters are leased in New York, NY (79,474 sq ft), with other offices in Nashville, TN (approx. 32,941 sq ft total)[300] - The company operates two leased optical laboratories in Sloatsburg, NY (51,803 sq ft) and Las Vegas, NV (69,580 sq ft)[300] Retail Store Count by Location (as of Dec 31, 2022) | Location | Store Count | | :--- | :--- | | United States | 195 | | Canada | 5 | | Total | 200 | Legal Proceedings The company is not subject to any material pending legal proceedings - As of December 31, 2022, the Company was not subject to any pending legal matters or claims that could have a material adverse effect on its financial position[597] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[304] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE, and no dividends have been paid - Class A common stock is listed on the NYSE under the symbol "WRBY" since September 29, 2021[306] - The company has not paid dividends and has no current plans to pay them in the future[308] - No issuer purchases of equity securities were reported[309] Management's Discussion and Analysis of Financial Condition and Results of Operations Net revenue grew 10.6% in 2022, though the company incurred a net loss and identified control weaknesses Financial Highlights and Key Metrics FY2022 saw revenue growth to $598.1 million and a net loss of $110.4 million amid customer growth Key Financial and Operational Metrics (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Revenue (in millions) | $598.1 | $540.8 | $393.7 | | Gross Profit (in millions) | $341.1 | $317.7 | $231.9 | | Net Loss (in millions) | $(110.4) | $(144.3) | $(55.9) | | Adjusted EBITDA (in millions) | $27.2 | $24.9 | $7.7 | | Active Customers (in millions) | 2.28 | 2.20 | 1.81 | | Store Count | 200 | 161 | 126 | Reconciliation of Net Loss to Adjusted EBITDA (FY 2022) | Line Item | Amount (in thousands) | | :--- | :--- | | Net loss | $ (110,393) | | Interest and other income (loss), net | (1,307) | | Provision for income taxes | 497 | | Depreciation and amortization expense | 31,864 | | Asset impairment charges | 1,647 | | Stock-based compensation expense | 98,655 | | Non-cash charitable donations | 3,770 | | ERP implementation costs | 687 | | Restructuring costs | 1,535 | | Adjusted EBITDA | $ 27,202 | Results of Operations Revenue grew 10.6% in 2022, while gross margin declined and SG&A expenses decreased Net Revenue Comparison (2022 vs. 2021) | Year | Net Revenue (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | | 2022 | $ 598,112 | $ 57,314 | 10.6% | | 2021 | $ 540,798 | | | - The 10.6% revenue growth in 2022 was driven by a 3.6% increase in Active Customers to 2.28 million and a 6.9% increase in average revenue per customer to $263[345][346] - Gross margin decreased from 58.8% in 2021 to 57.0% in 2022, primarily due to increased sales of lower-margin contact lenses and higher store occupancy costs[347][349] - SG&A expenses decreased by $9.1 million (2.0%) in 2022, mainly due to the absence of 2021's one-time Direct Listing and tender offer costs[350] Liquidity and Capital Resources The company holds $208.6 million in cash and believes its liquidity is sufficient for the next year - As of December 31, 2022, the company held $208.6 million in cash and cash equivalents[362] Summary of Cash Flows (in thousands) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $ 10,370 | $ (31,994) | $ 32,758 | | Net cash used in investing activities | $ (60,181) | $ (48,513) | $ (20,070) | | Net cash provided by financing activities | $ 3,291 | $ 22,999 | $ 245,936 | - The company has a $100 million revolving credit facility established in September 2022, which was undrawn except for $4.2 million in letters of credit[366][370] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include foreign exchange, interest rates, and inflation, all deemed not material - The company is exposed to foreign exchange risk from its Canadian operations and purchases in Japanese yen and euros, but does not believe the effect is material[404] - Interest rate risk is minimal due to the short-term nature of its $208.6 million in cash and cash equivalents[405] - Inflation is acknowledged as a risk that could increase operating costs, but the company believes it has had a limited impact on results to date[406] Financial Statements and Supplementary Data The audited financial statements show a net loss of $110.4 million and an adverse opinion on internal controls Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $ 568,707 | $ 440,646 | | Cash and cash equivalents | $ 208,585 | $ 256,416 | | Inventory | $ 68,848 | $ 57,095 | | Right-of-use lease assets | $ 127,014 | $ — | | Total Liabilities | $ 282,061 | $ 154,648 | | Total lease liabilities | $ 173,378 | $ — | | Total Stockholders' Equity | $ 286,646 | $ 285,998 | Consolidated Statement of Operations Data (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenue | $ 598,112 | $ 540,798 | $ 393,719 | | Gross profit | $ 341,062 | $ 317,749 | $ 231,935 | | Loss from operations | $ (111,203) | $ (143,661) | $ (55,632) | | Net loss | $ (110,393) | $ (144,271) | $ (55,919) | | Net loss per share, basic and diluted | $ (0.96) | $ (2.21) | $ (1.05) | - The independent auditor, Ernst & Young LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2022, due to material weaknesses[413][425][426] - Effective January 1, 2022, the company adopted the new lease accounting standard (ASC 842), resulting in the recognition of $109.4 million in right-of-use assets and $146.2 million in lease liabilities[512][514] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[608] Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in IT and financial reporting - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses[609] - Two material weaknesses were identified: (1) IT general controls related to user access and change management, and (2) financial reporting process controls for segregation of duties and data validation[612] - Remediation measures are underway, including implementing a new ERP system and hiring more accounting staff, but the weaknesses were not fully remediated by year-end[613][614] Other Information The company reports no other information for this item - None[618] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Required disclosures are incorporated by reference from the company's 2023 Proxy Statement - Information for Items 10 through 14 is incorporated by reference from the forthcoming 2023 Proxy Statement[620][622][623] - The company has adopted a Code of Conduct applicable to all directors, officers, and employees, which is available on its investor relations website[621] Part IV Exhibits and Financial Statement Schedules This section lists filed exhibits and omits financial schedules as they are not applicable - All financial statement schedules are omitted because the required information is not applicable or is included in the consolidated financial statements or notes[626] - A list of exhibits filed as part of the Annual Report on Form 10-K is provided[627] Form 10-K Summary The company provides no Form 10-K summary - None[631]