Warby Parker will set its sights on a booming initial public offering (IPO) as it looks to continue its journey to becoming a major player in the US eyewear market. Profitability, a swollen market and variant fortunes in the direct-to-consumer (DTC) model stand in its way.
This article will assess what Warby Parker going public means for the eyewear company as well as for the wider DTC retail sector.
Who owns Warby Parker?
Warby Parker was founded in 2010 in Philadelphia by university friends Neil Blumenthal, David Gilboa, Andrew Hunt and Jeffrey Raider out of a desire to create high-quality, affordable glasses by adopting a DTC process. Blumenthal and Gilboa now sit as co-CEOs of the chain; Hunt and Raider remain as directors of the company.
The owners have also built the company’s growth on the back of a social and environmentally conscious entrepreneurship model in this age of increasing ethical investment. The company adopts the ‘wear one, give one’ model made famous by Toms while also claiming to be carbon-neutral.
While the company began on a platform of online distribution, it has evolved to create 145 physical stores across the US, primarily in major cities, with 19 being built in the six months to June 2021. While contributing to significant balance-sheet damage because of Covid, the rapid growth solidified the owners’ ambition for the company to become a major US eyewear brand.
What is known about the Warby Parker IPO (29 September 2021)?
Warby Parker will announce itself publicly with a direct listing, rather than a traditional IPO, on 29 September. As of 21 September, the eyewear firm has a fully diluted share count of 124.5m shares including the common stock outstanding and all outstanding stock options and restricted stock units
The company enters the market with considerable fundraising experience in tow. Warby Parker built its empire on the back of a series of venture capital rounds, which quickly lifted it above a valuation of $1bn by 2015.
But like several high-growth firms in the age of fintech, the company’s growth has not been based on profitability, but rather on financed expansion. The Warby Parker IPO will be pivotal in determining whether the company can turn its losses into profits and become a safe bet for investors.
IPO analysis: Why is Warby Parker going public?
Why the direct listing?
The company will float with a direct listing, rather than a traditional IPO, meaning the current stakeholders will have the opportunity to convert those shares into stocks based on the market trading price.
The logistical reasoning for this move suggests a desire to reward current shareholders who tend to see diminished returns in the underwriting process prior to an IPO. The IPO is designed to see prices surge on opening day and reward the underwriters – typically investment bankers.
But on a contextual footing, the direct listing likely reflects a reticence to engage in share dilution among the company’s founders, and a confidence that the company can raise the capital without the help of investment intermediaries.
While a price boom after opening is accordingly unlikely, the direct listing is sure to reward long-term investors – including the founders and CEOs – and set the Warby Parker stock on a more stable long-term footing.
Fundamental analysis: Can rising Warby Parker revenue help plug losses?
Warby Parker released its profits and losses during its IPO announcement to the US Securities and Exchange Commission (SEC) on 24 August.
The accounts provided to SEC show a history of loss-making activities for the chain; in FY 2018, they sufferent a $22.9m net loss, followed by a heavy $55.9 contraction in 2020. Unaudited net loss for H1 2021 stood at $7.3m, a result of a combination of expansionary activities and reduced retail activity at the turn of the year.
The accounts show a history of loss-making activities for the chain; in FY 2018, they suffered a $22.9m loss, followed by a heavy $55.9m contraction in 2020, the majority of which occurred in H2 2020. Losses for H1 2021 stood at $7.3m, a result of a combination of expansionary activities and reduced retail activity at the turn of the year.
While at a slower rate, net revenue has also increased for the brand, from $272.9m in FY 2018 to $393.7m in FY 2020. Net revenue in H1 2021 was $270.5m, up 53% from the same period in 2020 as re-openings plugged the losses from their face-to-face retail brands, and suggests a record year for 2021 on the back of a capital-raising IPO.
Adjusted EBITDA grew to $20.1m from $1.2m in the prior-year period, which should give investors further heart, and may indicate the public search for funds is a temporary one.
IPO fever gripping the DTC market
But Warby Parker is not unique in looking publicly for funds. According to pwc, IPOs are occurring at a record rate this year. Globally, 1,309 IPOs in H1 2021 have raised a cumulative $334bn with 59% of those proceeds gone to the US market.
“This autumn could be a record-breaker for IPOs, with up to 110 US flotations expected during the final four months of 2021,” said Victoria Scholar, head of Investment at Interactive Investor.
“The eyewear retailer Warby Parker is one of a series of flotations in the retail sector, alongside food grocer Fresh Market and footwear brand Allbirds,” Scholar told capital.com.
“It is expected, however, that IPO activity will remain high throughout the second half as current supportive market backdrop, low volatility and attractive valuations provide an appealing environment for issuers,” Scholar concluded.
Among the companies dipping their toes in the market are comparator DTC retail brands. For example, Poshmark, a secondhand clothing trading platform, raised $277m when it went public on 13 January, as its price rose by 142% to close on opening day at $101.50 per share. This was short-lived, with the share price now sitting at $23.94.
Thredup, another DTC online retail brand, launched in April to similar fanfare, jumping 30% above its IPO price on its debut and raising $168m. But like Poshmark, its price has levelled out at a lower current rate of $20.68 per share.
Poshmark currently holds a market cap of $1.82bn, while Thredup’s market cap stands slightly higher at $1.96bn. These figures provide potentially comparable indicators for a Warby Parker valuation, if at the lower end, particularly given the lack of share dilution through the company’s direct listing.
Selling points of Warby Parker IPO
Warby Parker is entering the NYSE with much hype, which it hopes will make up for underwhelming fundamentals.
In at the ground floor of the DTC revolution
Warby Parker’s appeal rests on its DTC model, a currently untapped market in the eyewear industry, with a revenue share of 21% for online eyewear commerce, according to Grand View Research. They project this share to propel through to 2028 – with its online natives like Warby Parker should surely profit.
The company has also built resolve through its expansion into the physical retail space. The ‘click-to-brick’ transition risks ignoring the inherent success of remote DTC models in the past five years, while increasing costs in a brand that still yearns for profitability.
But the company could argue the consumer preference for trying on glasses in person is a market that can’t be ignored – with retail results of $2,900 per square foot reflecting a section of the business that quickly records profitability, according to SEC reporting. Whether the movement away from simplicity allows the business to maintain low prices remains to be seen.
The fortunes of National Vision Holdings, the third-biggest seller of eyewear in the US market, might offer a glimpse at the potential movement of Warby Parker (WRBY) stock. The group is trading at a record high of $60.97 since going public in October 2018, realising a market cap of $4.9bn.
The market has maintained a bullish form since the Covid-related bottoming-out in March 2020. Buoyed by strong fundamentals, including a $82.3m profit in H1 2021, the company may offer a mainstream template for Warby Parker, and act as a reminder that profitability is key.
Risks and competitors
A history of losses
In a mandatory risk assessment of its Class A shares for the SEC, the company outlined the variant risks that could confound the company through its ambitious expansion. Chief among those concerns was the company’s history of loss-making activity.
Warby Parker said: “We had a net loss of $55.9m for the year ended 31 December 2020 and $7.3m for the six months ended 30 June 2021, and have in the past had net losses. As of 30 June 2021, we had an accumulated deficit of $356.3m.
“Because we have a short operating history at scale, it is difficult for us to predict our future operating results. We will need to generate and sustain increased revenue and manage our costs to achieve profitability. Even if we do, we may not be able to sustain or increase our profitability.”
The company accepted that its costs would increase as it continues its expansion of operations, though revenue was less certain.
The downsides of DTC?
Growth may also be inhibited by an inability to scale up, the company admitted to the SEC. The company’s rejection of the middleman in pursuit of a DTC has enveloped its vertically integrated supply chain, possibly to its detriment.
They said: “The vertically integrated nature of our business, where we design all of our own glasses in our New York headquarters; contract manufacture all of our glass frames; fulfil the glasses we sell at our own optical and fulfilment laboratories, as well as at third-party contract laboratories; sell our products exclusively through our own retail stores, e-commerce site and mobile application; and service our products, exposes us to risk and disruption at many points that are critical to successfully operating our business, and may make it more difficult for us to scale our business.”
A sustained loss-busting revenue increase also rests on disrupting a behemoth wholesale market – a daunting task. Each metric of tangible success reinforces the company’s position as a minnow in a field of giants. The company’s $7.3m loss in H1 2021 contrasted with an $82.3m profit for National Vision Holdings is just one example of their lagging performance, with Vision Source – the US’s biggest seller – operating 3,150 bricks-and-mortar stores to Warby Parker’s 145.
According to Statista, sales of $500m in 2020 put Warby Parker ninth among US eyewear chains, with a gap of almost $400m to its closest competitor, Visionworks of America. More broadly, sales are concentrated in the wholesale market, with superstores Walmart, Costco and Target accounting for $3.1bn in eyewear sales in 2020.
Whether Warby Parker can catch up will rely on the company coming good on its profitability promise while circumnavigating the myriad risks it has encompassed so far. Yet progress has been in the right direction, and Wednesday’s direct listing should be viewed with excitement, if not a degree of curiosity.
Edited by Jekaterina Drozdovica
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