Warby Parker, the maker of affordable designer eyeglasses, is going public. The direct-to-consumer (DTC) upstart was founded only 11 years ago, but has already disrupted the eyewear industry with its range of styles and heavy attention to customer service that’s spawned legions of loyal fans.
But rather than an initial public offering or the more faddish special purpose acquisition company (SPAC), the trendy eyeglass and sunglass maker will use a direct listing to circumvent the financial institutions and let insiders, employees, and early backers sell their shares directly to the public.
Yet while its sales are soaring, Warby Parker hasn’t been able to turn a profit. So let’s look closer at whether the future’s so bright, the eyeglass maker will have to wear shades.
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Costly customer acquisition
The system seems to be working. Warby Parker had over 2 million active customers as of June 30, up from 1.81 million at the end of last year. Many were also attracted by the company’s buy one, give one program, where for every pair of glasses purchased, it donates a second pair to the needy. It says over 8 million pairs of glasses have been distributed through the program.
Yet, just because a company does good in the world doesn’t mean it’s a good investment, and that’s where it gets a little murkier for investors.
After breaking even in 2019, Warby Parker ended last year with a net loss of $55.9 million. The bottom-line loss resulted from advertising costs jumping 35% over the previous year to $58.5 million. And while operating losses narrowed somewhat in the first six months of this year, the company says it expects to keep posting operating losses for the foreseeable future as it tries to further expand its business.
And that’s really the difficulty many DTC brands face: the ever-expanding costs of marketing and advertising to acquire customers, which now represent almost 20% of Warby Parker’s sales at the end of 2020, up from 13% the year before. Where it cost $27 to acquire a customer in 2019, last year it jumped to $40 each.
Moreover, even though the average revenue per customer has risen to $218, the operating profit contribution per customer fell to $45. That led to direct customer-level operating margins of 21%, a decline from the 26% earned in 2019.