WRBY - NYSE

Hello, and welcome to today's Warby Parker First Quarter 2025 Earnings Call. My name is Bailey, and I will be your moderator for today. [Operator Instructions] I'd now like to pass the conference over to Jaclyn Berkley, Vice President of Investor Relations. So please go ahead when you're ready.

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 annual report on Form 10-K. These forward-looking statements are based on information as of May 8, 2025, and except as required by law, 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 U.S. GAAP. A reconciliation of our non-GAAP measures to the most directly comparable U.S. GAAP measures can be found in this morning's press release and our slide deck available on our IR website. And with that, I'll pass it over to Neil to kick us off.

Thanks, Jaclyn, and thank you all for joining us today. Our team delivered a strong start to 2025, driven by continued progress against Warby Parker's strategic priorities. We grew revenue 12% year-over-year, reflecting consistency in our 2-year stack growth and delivered profitability above guidance with an adjusted EBITDA margin of 13.1%, marking nearly 200 basis points of year-over-year expansion. We also reached a significant milestone by achieving our first quarter of positive GAAP net income as a public company. This start to the year provides a solid foundation as we execute on our strategic initiatives for the remainder of the year and beyond. Key to this is our continued focus on customers, both customer experience and customer acquisition. We are pleased to have delivered 7 straight quarters of accelerating active customer growth, and we intend to build off this momentum while continuing to benefit from strong retention, high-value repeat purchasing and the power of our brand. Looking at the remainder of the year, we plan to continue investing in marketing in the low-teens as a percent of revenue while leveraging sophisticated analytics to optimize media spend. As some other advertisers pull back, we intend to capitalize on opportunities while keeping a close eye on demand signals and adjusting spend accordingly. We're pleased with the trends we are seeing with in-network insurance customers and our Versant integration continues to ramp in line to slightly ahead of expectations. We'll also continue to lead with product innovation. So far this year, we've launched 7 collections, including our first rimless collection. Reacting to customer demand, we also introduced a new premium light responsive lens, which is exceeding expectations. We plan to drive further expansion in glasses and Progressive's growth by expanding exam coverage, designing and launching new frame collections and introducing lens enhancements. We believe glasses growth will complement continued rapid growth from contacts and exams and that our holistic range of products and services allows us to attract new customers and significantly increase their lifetime value. And finally, we'll further invest in scaling our industry-leading omnichannel model while delivering exceptional experiences. Our real estate and store teams opened more stores this quarter than in any prior Q1, a strong start to a year in which we expect to open more stores than ever. New stores are performing in line with our expectations while driving new customer acquisition and compelling returns. We are on track to open 45 new stores this year, including our previously announced shop-in-shops with Target, which will open in the second half of 2025. You'll also see us continue to innovate and invest in our online experience, which drove accelerated growth in our e-commerce channel in Q1. We are excited about early test results from our new AI-powered personalization features, which will roll out more broadly later this year. Dave and I also want to share the decisive actions we've already taken to mitigate the impact of higher tariffs before Steve discusses our financial performance and guidance in more detail. We faced dynamic environments like this before. And each time, we've proven our team's ability to adapt with speed and agility, whether it was managing through tariffs in 2019, the COVID-19 pandemic starting in 2020 or the recalibration of our cost structure in the years that followed. Our omnichannel model is resilient and has emerged stronger and more efficient each time. We are confident in the playbook that we're already leveraging as well as the tenured team that we have in place to execute it. As we look ahead, we have 3 main priorities: one, to continue to serve our customers by delivering both exceptional value and service; two, to continue investing in growth and executing on our strategic initiatives; and three, to actively mitigate the impact of tariffs and maintain a strong financial profile. Let me walk you through our plan to do so as well as the progress we've made to date. I'll start first with the adjustments we've already made to our supply chain, demonstrating its flexibility as well as the depth of our vendor relationships. For background, we operate a global diversified supply chain designed to optimize cost and speed while maintaining strict quality standards. Over the past several years, we've significantly enhanced our capabilities by expanding our supplier base and geographic reach while investing in our own U.S. optical labs. As input costs shift or disruptions arise, we're well equipped to make rapid adjustments, and we've done so in recent weeks. As we've shared last quarter, approximately 20% of our COGS originate from China, down meaningfully in the past 5 years. More recently, we've accelerated this work, which we estimate will reduce our China sourcing by over half to less than 10% of COGS by year-end. Every pair of Warby Parker glasses and sunglasses is designed in-house at our New York headquarters. We produce frames in various countries across Asia and Europe and purchase lenses from partners in Asia and the U.S. We've reallocated frame production away from our Chinese partners to other trusted partners in Europe and Asia and have a healthy balance of frame inventory in place. Many of our more complex lens types are purchased in real time, giving us the flexibility to shift production across a global network. We've already moved a significant portion of our lens sourcing out of China, primarily to U.S. partners. The speed and efficiency of this transition reflects the strength of our supplier relationships. In short, we've dramatically accelerated a multiyear supply chain diversification strategy that was already underway. Our vertically integrated direct-to-consumer model gives us enhanced control and visibility and our long-standing vendor relationships, many over a decade, enable the speed and agility that continue to serve us well. And now I'll turn it to Dave to cover off on the remainder of our plan.

Thanks, Neil. The second prong of our mitigation strategy is making selective price adjustments while still ensuring we deliver exceptional value to our customers. From day 1, Warby Parker was built on the belief that buying glasses should be seamless, affordable and fun. As frustrated consumers ourselves, we questioned why quality eyewear was exorbitantly expensive with opaque pricing, and we set out to change that paradigm. Our pricing model reflects that philosophy, delivering exceptional value without the hidden markups. Our entry price of $95 includes premium acetate frames and prescription polycarbonate lenses with anti-scratch, anti-reflective and anti-smudge coatings, features that are often treated as add-ons and upsells elsewhere. Over the years, we have expanded our assortment while maintaining our commitment to accessible and transparent pricing. We've introduced additional lens types and lens enhancements like progressives, blue light filtering, anti-fatigue and light responsive as well as premium frame collections using a range of materials and more complex constructions at higher price points, including $125, $175 and $195. Our customers have responded positively to these additions with no signs of price resistance, which has resulted in steady increases in average revenue per customer. While much of the industry has relied on price increases to offset soft unit volumes over the last several years, we've taken a more customer-centric approach and have rarely raised like-for-like prices. As a result, we believe our value gap today is even wider than when we started the company. Our $95 single vision prescription glasses are the same price as when we launched in 2010 compared to hundreds of dollars elsewhere. And our highest price point items like our $395 Precision progressives, rival products that often retail for well over $1,000. So while we don't take price increases lightly, a component of our tariff mitigation plan is to make targeted and strategic price adjustments to a subset of our products where the new prices still enable us to offer exceptional value relative to comparable offerings elsewhere. At the end of April, we rolled out a handful of targeted price increases across some of our lens types and accessories while maintaining pricing across most products and services, including our entry $95 price point. In aggregate, we estimate that these changes will reflect a low single-digit price increase across our glasses business. While it's still early days, we are seeing promising signs from a conversion and product mix standpoint, in line or ahead of our expectations. Importantly, our pricing model is built to support flexibility, enabling customers to select options across multiple dimensions, including frame style, lens type and enhancements. This optionality allows us to make future price adjustments as needed while still delivering compelling value and continuing to grow our market share. The third prong of our mitigation efforts are strategic expense reductions. Looking ahead, we will be taking an even more disciplined approach to expense management. We're planning to preserve investments in marketing and other growth-driving initiatives while taking a strategic approach to reducing other corporate expenses. These efforts are helped by the realization of meaningful productivity gains from our use of AI and automation, which is helping us operate more efficiently. Overall, we're tightening our operating expense management without compromising our long-term priorities. Before I hand it over to Steve, I want to thank our team for their swift and decisive action. Our ability to move quickly and deliberately has been and will continue to be a competitive advantage. This type of environment actually presents an opportunity for Warby Parker. We operate in a resilient and defensive consumer category, one that provides essential products and services, has grown through economic cycles and presents significant white space. Our brand speaks to both value-conscious and design-driven consumers with a median household income of over $100,000, and we benefit from trade down dynamics when times are uncertain. We have consistently outperformed through challenging periods in the past and believe we're well positioned to continue gaining share and expanding profitability with many levers in place to drive growth. Our strong balance sheet gives us the flexibility to keep investing and to act opportunistically when the time is right. And our vertically integrated direct-to-consumer model gives us unique advantages, control over our supply chain, real-time visibility into consumer behavior and a nimble mindset that's built to move quickly. And with that, I'll pass it over to Steve to review Q1 as well as our outlook for the remainder of the year.

Thanks, Neil and Dave. I'll begin with a detailed review of our first quarter performance. Then I'll outline our updated guidance for the full year and our outlook for the second quarter of 2025, reflecting the current operating environment, including tariff impacts and our mitigation plans. Starting first with Q1. Revenue for the first quarter came in at $223.8 million, up 11.9% year-over-year. As a reminder, the prior year period included an extra day of revenue due to the leap year of roughly $2 million, and we are lapping our second highest quarterly growth last year, which was up 16.3% year-over-year. Retail revenue increased 14.8% year-over-year and e-commerce revenue increased 5.5% year-over-year, its highest quarterly growth since 2021. Now looking at customers. We finished Q1 with 2.57 million active customers on a trailing 12-month basis, representing a consistent acceleration in growth to 8.7% year-over-year. We've seen sequential improvements in year-over-year active customer growth for the past 7 quarters, reflecting the positive returns from our marketing investments and strategic initiatives. We also continue to see strength in average revenue per customer, which increased 4.8% year-over-year on a trailing 12-month basis to $310. This was driven by factors, including a higher mix of premium lenses like progressives, continued growth in both contact lens and eye exam sales and uptake of our higher-priced frame collections. By product, glasses revenue grew 9.1% year-over-year, and we saw continued strength in our holistic vision care offerings with contact lens revenue growing 25.1% and eye care growing approximately 40% year-over-year. Contact increased from 9.2% of revenue in Q1 '24 to 10.3% in Q1 '25. Eye care increased from 4.7% of revenue in Q1 '24 to 5.8% in Q1 '25. Turning to our stores. We opened 11 new stores in the quarter, our highest number ever for Q1, ending the period with 287 stores. This represents 42 net new stores opened over the course of the last 12 months. Retail productivity was 99.8% versus the same period last year. As a reminder, we define retail productivity as the year-over-year change in retail sales per store for the average number of stores opened in the period. This metric covers all stores and is impacted by factors like opening cadence and doctor hiring. For stores that have been opened greater than 12 months, we observed strong year-over-year growth in Q1 in spite of the weather disruptions and closures throughout the first part of the quarter. Our new stores continue to deliver strong unit economics, performing in line with our target of 35% 4-wall margin and 20-month paybacks. For stores opened more than 12 months, average revenue per store was $2.2 million, and our performance was in line with our target 35% 4-wall margin. Overall, we continue to be pleased with the performance, growth and productivity of our fleet. Over the course of the past year, nearly every new store included an eye exam suite, bringing our total number of stores with eye exam capabilities to 247 stores or 86% of our total fleet. From a channel mix perspective, retail represented approximately 70% of our overall business in Q1, consistent with recent quarters. 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 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 speak to gross margin, excluding stock-based compensation. First quarter adjusted gross margin came in at 56.4% compared to 56.9% in the year ago period. The modest year-over-year decrease was primarily driven by the continued scaling of contact lenses and fixed cost deleverage from new store openings. These factors were partially offset by increased penetration of our higher-priced frames and lenses and lower outbound customer shipping costs as a percent of revenue. Shifting gears to SG&A. As a reminder, adjusted SG&A excludes noncash costs like stock-based compensation expense. Adjusted SG&A in the first quarter came in at $110.3 million or 49.3% of revenue. This compares to Q1 2024 adjusted SG&A of $103.4 million or 51.7% of revenue, representing 240 basis points of leverage year-over-year. Within adjusted SG&A, marketing spend was $27.9 million or 12.5% of revenue compared to $24.9 million or 12.4% of revenue in Q1 2024. With roughly consistent marketing spend as a percent of revenue, disciplined expense management drove leverage across our non-marketing adjusted SG&A categories, which include salaries for our stores and customer service employees and general corporate expenses, including our headquarter salaries and general expenses to support the business. Non-marketing adjusted SG&A declined by 250 basis points from 39.3% of revenue in Q1 2024 to 36.8% of revenue in Q1 2025. This reflects our commitment to continued cost discipline and drove our higher flow-through in Q1, above the high end of our guidance range. Turning now to adjusted EBITDA. In the first quarter, we generated adjusted EBITDA of $29.2 million, representing an adjusted EBITDA margin of 13.1%. This compares to adjusted EBITDA of $22.4 million or 11.2% of revenue in the year ago period, reflecting expansion of 190 basis points. This result was driven by relative gross margin stability paired with significant non-marketing SG&A leverage. Turning now to our balance sheet. We generated $13.2 million in free cash flow in Q1 2025 and ended the quarter with a strong cash position of $265 million. We will continue to deploy capital deliberately to support our growth and operations. We also have a credit facility of $120 million, expandable to $175 million that is undrawn other than $2 million outstanding for letters of credit. Turning to our outlook for 2025. We recognize that we continue to operate in a very dynamic macro environment concerning both global trade policies as well as the potential impact on consumer sentiment. We're paying close attention to how these factors may evolve, and we have confidence in our ability to remain flexible and make adjustments as needed. Our guidance reflects both our response to these external factors, including tariffs and a generally more conservative outlook due to increased uncertainty around consumer spending the remainder of the year. Let me specifically address the estimated impact of tariffs, assuming the current increased tariff rates of 145% for China and 10% for Rest of World. As we just discussed, we have reduced our exposure to China over the last 5 years and have accelerated our efforts to do so in this environment. As of our last earnings call, we disclosed that China made up roughly 20% of our total cost of goods sold. At that time, we expected the incremental 10% tariff announced then to account for 20 basis points to 40 basis points of gross margin deleverage for 2025, which factored in moderate geographic shifting of suppliers and savings from negotiating cost sharing with our vendors. This equaled approximately $3 million. Given that the total incremental increase on most China-sourced goods now stands at 145%, we have accelerated and expanded our mitigation efforts, as Neil and Dave shared. Assuming current tariff rates hold for the remainder of the year, we estimate that the gross impact to our business in 2025 before considering the extensive mitigation actions taken to-date would be roughly $45 million to $50 million. Due to our actions to-date across multiple areas of the business and our plan for the remainder of the year, we believe we will mitigate the substantial majority, if not all, of the potential $45 million to $50 million exposure. The actions we've taken fall into 3 main categories: one, shifting sources of supply and realigning our vendor mix globally; two, implementing strategic pricing changes without disrupting our core value proposition; and three, reducing operating expenses to support profitability and to ensure continued cost discipline. We continue to maintain a very disciplined approach to managing operating expenses as evidenced in Q1. To support our profitability goals in light of the current environment, we have slowed the pace of hiring, reduced discretionary expenses across a range of categories and are diligently managing our operating costs, such as continued labor optimization across our stores, including eye doctors and our customer experience team. Importantly, we have largely maintained our planned marketing investment and are still planning for marketing spend in the low teens as a percent of revenue for the full year, reflecting our confidence in the efficiency of our marketing programs and their role in driving longer-term growth. And as a result of these proactive measures, we have dramatically reduced our COGS exposure to China, and we estimate that by year-end, depending on where tariffs land, we expect to decrease our exposure by as much as half or from approximately 20% to less than 10%. Taking all these factors into account, the macroeconomic backdrop, the tariff impact and our mitigation efforts and our operational adjustments, we are providing the following updated outlook for the full year 2025. Net revenue between $869 million and $886 million, representing approximately 13% to 15% growth year-over-year. Adjusted EBITDA of $91 million to $97 million, representing adjusted EBITDA margin of approximately 10.5% to 11%. We are committed to delivering at least 100 basis points of year-over-year margin expansion within our long-term guidance range and up to our original guidance of approximately 11% or 150 basis points of year-over-year expansion. 45 new store openings, including the 5 previously announced shop-in-shops within Target stores slated to open in the second half of the year. As a reminder, our previous guidance range of revenue growth of approximately 14% to 16% year-over-year reflected a continuation of the trends we observed in the second half of 2024 and early Q1. It assumed customer-led growth paired with a moderation in average revenue per customer, a full year of additional in-network lives and mid-single-digit growth in e-commerce. Our updated range of 13% to 15% growth reflects a moderately more conservative outlook for the second half of the year, with the midpoint of the range representing a continuation of recent trends versus our original guidance, we are projecting a modest acceleration in average revenue per customer given our pricing actions. Our updated range now assumes a modest reduction to store productivity as well as our e-commerce channel growing low- to mid-single digits. Our store openings have been on track, including our Target shop-in-shops, and we continue to see encouraging results from our Versant integration. As it relates to gross margin, given the impact of tariffs and our mitigation efforts to-date, we're projecting a potential impact to gross margin of approximately 200 to 300 basis points for full year 2025. We continue to expect stock-based compensation as a percentage of net revenue to normalize in the 2% to 4% range for the full year. For Q2 2025, we're guiding to the following: net revenue between $211 million and $214 million, which represents growth of approximately 12% to 14% year-over-year; adjusted EBITDA of $20 million to $22 million, representing approximately 10% margin at the midpoint. This range contemplates the mitigation efforts that are already underway, which we expect to continue to phase in over the course of the year. We'll provide updates on our progress during each quarterly call. Thank you again for joining us this morning. With that, Neil, Dave and I are pleased to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] The first question today comes from the line of Mark Altschwager from Baird.

I guess, first, I was hoping you could give a little bit more color on the change in your revenue outlook for the year and what's driving that slight downward revisions? What's the change in consumer behavior that you've seen recently here? And what is incorporated in that related to price increases specifically?

Great. Thanks, Mark. I can start and then Steve can provide a little more color on the specific guidance. But I think at a high level, we're taking just a more cautious and conservative approach to guidance for the rest of the year, given that we know that consumers have a lot on their minds these days with unusually high volatility in terms of news cycles and financial markets and eroding customer sentiment and confidence. And what we found during COVID and kind of other periods of uncertainty and low consumer confidence that, that can impact shopping behavior and could create more volatility in traffic. And that doesn't necessarily mean that our customers would go elsewhere, but that there is some potential for the elongation in the purchase cycle. And so we've seen relatively consistent consumer behavior over the last few months, but did want to build in some conservatism just given the potential risk to the broader economy.

Yes, that's exactly right. And at a high level, we think given some of the uncertainties still evident in the macro environment, we thought that it would be prudent just to maintain a conservative position on how we project the rest of the year. So we made a moderate change to how we're projecting full year growth. Originally, we were projecting up 14% to 16%. We took that down a notch to up 13% to 15%. And at the midpoint of our guidance, we wanted to be very transparent to call out that, that represents really a continuation of recent trends that we're seeing in the business, which implies the high-end would imply an increase or acceleration in some of the recent trends that we're seeing and at the low-end, a deceleration. So we try to set up an architecture that just provides transparency into the current velocity of the business, bearing in mind that we are operating in a more uncertain environment. And so we wanted to take that as an opportunity to notch our projections moderately more conservative.

And then a follow-up, I appreciate all the detail on tariffs. In light of the changes in the mitigation playbook, anything else we should consider regarding the shape of the year from a gross margin, EBITDA margin perspective? And then, bigger picture, the margin guide, EBITDA margin guide now a bit below the 100 to 200 basis point annual target at the midpoint, still quite reassuring given what you're dealing with on tariffs. But as we think beyond 2025, is that still the right framework?

The shape of the year from an EBITDA perspective, if we look at what our EBITDA pattern was last year, Q1 was the highest and Q4 was the lowest, and it was roughly a step down from Q1 to Q2 to Q3 to Q4. I would anticipate the shape of this year to look not dissimilar, but there might be more parity in the middle of the year given some of the changes that we're in the process of phasing in as it relates to tariff mitigation. But I think it would be safe to say that same pattern of highest margin first quarter, lowest margin on a relative basis from an EBITDA perspective, final quarter of the year would still hold for our business. As we thought through all of the mitigation actions that we're taking, again, which involves strategically shifting our vendor mix across the globe; number two, taking very selective price increases across our glasses business; and three, maintaining a very disciplined approach to operating spend, which you saw reflect very positively in our Q1 financials, where we had a higher degree of flow-through from managing non-marketing SG&A in particular. We feel very confident still being within range of our long-term adjusted EBITDA margin improvement, which is up 100 to 200 basis points a year. Our original guidance called for up 150 basis points. We're ranging that now at up 100 to 150 basis points depending on a range of factors, including where tariffs ultimately land. So that element of our long-term guidance is certainly intact. And as it relates to gross margin beyond 2025 toward the end of this year, once some of the dust has settled around all of these trade actions that are in the process of being worked out, we'll provide updated perspective on where gross margin, we believe, will settle.

The next question today comes from the line of Oliver Chen from TD Cowen.

Neil, Dave and Steve, we're seeing so much market and financial volatility. Are you seeing a similar amount in relation to your customer traffic and your thoughts on consumer confidence so far? And then as we think about the e-commerce guidance, what's happening there with traffic relative to conversion and any details you can share?

Thanks, Oliver. This is Neil. We are seeing pockets of strength and pockets of volatility as it pertains to sort of customer behavior. As we look at Q1, some of the pockets of volatility were from typical causes like weather. We actually lost more operational hours due to weather in Q1 this year than last year, it was actually up 68%, so significant. And when there have been announcements out of Washington, we've also seen at times changes in traffic patterns and customer behavior. That being said, we tend to be a benefactor of disruption in the markets because of our value proposition, right? Most of our customers are coming from more expensive optical shops, whether those are chains or independent. And when there are drops in consumer sentiment, that just puts us in an even greater sort of competitive positioning. So we are confident that we'll continue to emerge stronger from the current environment, just as we did during COVID and during other times of volatility. But in general, we're seeing consumer traffic hold up and conversion and consumer behavior hold as well.

And then as it relates to e-com, we continue to be pleased with the progress that we're seeing in serving customers across channels and having digital capabilities that are unique in the category. And as a result, we saw the highest quarterly growth in Q1 since 2021 and continue to benefit from strength in our contact lens business that is primarily online and a lot of our newer tools that make it easy for people to purchase glasses without having to do a home try-on. So leveraging our virtual try-on capabilities and increasingly AI-driven recommendations -- and so continue to see both traffic and conversion head in the direction that we'd like to see.

Okay. A follow-up, Target is very exciting. So I would love your thoughts on how you thought about the stores and locations that you're choosing and the key hurdles that you'll be looking for in terms of goals nearer and longer term and how that will impact the model longer term?

Sure. Well, we're super excited about our partnership with Target. We're in the process of designing our stores, and we're going to learn a lot of this initial cohort of 5 stores that are strategically sort of positioned. As we think about opening stores across a range of dimensions, such as store design, hiring, our assortment. This is -- strategy is really going to be a continuation of what we do every single day. There are going to be aspects that are actually easier in that, right, the formats are going to be very consistent, but feel just like any other Warby store. So that could make a rollout easier, for example, for our store design team. The stores are going to be staffed with Warby employees, right, in markets where we already are present, right? The point of sale that we're using is Warby. So it's the same training protocols and systems that our team has grown to love and that enables us to provide these exceptional experiences. So we're excited. We're going to learn a lot in the first frame -- the first 5 stores, and that will help us grow going forward. We view this as complementary to our stand-alone store growth and be evaluated similar to a new store, it expands the overall white space and access to a broader set of consumers.

The next question today comes from the line of Brooke Roach from Goldman Sachs.

This is Savannah Sommer on for Brooke Roach. Can you discuss what you've been seeing in regards to marketing spend efficiency? Should you see increased efficiency on that line item? How much, if any, should we expect to drop to the bottom line for the full year?

So yes, we continue to be pleased with the efficiency of our marketing investments, and we've seen consistency in our acquisition costs as we've ramped up spend over the last couple of years. And while we have seen some fluctuation in media pricing with costs rising on some platforms, we've been able to find efficiency on other platforms. And I think that just underscores the fluid and diversified media mix that our team employs to optimize spend, ranging from more traditional channels like TV and direct mail to real-time auctions across digital channels to working closely with creators on bespoke content. And increasingly, we're using AI-based models and sophisticated methods to allocate and analyze spend. We also have the advantage of a direct-to-consumer brand that we have access to so much real-time data around what's working and what's not so that we can optimize. And we are hearing that in light of tariffs and the current environment that some advertisers are pulling back on spend. And so we are opportunistically looking for areas that we can lean in and continue to highlight our differentiated value proposition and are increasingly kind of spending time through paid media, promoting not only our e-com business, but also our nearly 300 stores. And in the current environment are also really focused on highlighting our advantaged pricing and value proposition given that the rest of the category has and will continue to take price more than we have.

The next question today comes from the line of Janine Stichter from BTIG.

I was hoping you could just comment on what you're seeing out of your insurance paying customers versus your noninsurance customers? And then can you update us on the penetration of customers who have insurance versus those who use it at Warby Parker and maybe elaborate on some of the initiatives you're working on to bridge that gap?

So we continue to be pleased with the progress. We're in making it easier for customers to use their insurance benefits with us and are seeing positive early signs from our Versant integration. The vast majority of those Versant members still haven't used their benefits with us, and we view all of these partnerships as multiyear tailwinds that will ramp over time rather than a step function increase at the time of integration. And we see for our longest-standing insurance relationships that utilization continues to increase over many years alongside increasing revenue per member per year, and we expect that same behavior with Versant and are seeing early positive signs there. We continue to find that our insurance customers spend more with us in each transaction and also repeat more frequently. So people like using their benefits, and they know that they can get even more value coming to Warby Parker than going other places. And it's still an area where we're underpenetrated relative to the rest of the category and remains a really big opportunity for us, but we're pleased with the progress that we've made, especially over the last couple of years.

The next question today comes from the line of [David Yu] from Evercore ISI.

Two for me, please. Could you please break down the expected sources of leverage in EBITDA, especially with regard to gross margin and SG&A in the second half? And how might these be impacted by tariffs and demand trends? And then number two, can you also quantify each of the tariff mitigation buckets among supply chain reallocation, selective pricing and expense control?

Yes, sure. Starting with the first question in terms of sources of leverage across our P&L. If you look at Q1 for a good example, we saw a very moderate deleverage in gross margin year-over-year from 56.9% to 56.4%. And yet we increased adjusted EBITDA margin by 190 basis points, largely by maintaining a very disciplined approach to the non-marketing elements within SG&A. Marketing spend as a percent of revenue, which is within SG&A was really flat at roughly 12.5% in both periods. And so that 190 basis points of leverage was really concentrated within our non-marketing SG&A elements. We're planning for significant leverage to continue to come from non-marketing SG&A. And as we pack -- unpack what is in that category, if we think about Q1 of this year as a frame of reference, roughly 25% of that is marketing spend, 75% are the non-marketing elements, which include salaries for our store employees; salaries for our customer experience employees; and then all of our corporate expenses, including HQ salaries; and all of the dollars that we deploy toward vendors. And so we'll continue to make sure that we're driving cost savings and leverage from those elements within our SG&A cost stack. In addition to that, in response to this tariff environment, there are 2 actions that we're taking that will directly impact gross profit to the positive to offset some of the impacts that we expect to continue to see from tariffs in the short term, and that is: one, shifting our vendor mix globally; and two, very selected price increases. We have not broken out the specific mitigation associated with each of our actions. So from price increases, from reorienting our supply chain across the globe and from operating expense reductions. But we have communicated that in aggregate, we plan to mitigate all, if not $50 million in tariff exposures at the current 145% China rate and 10% rest of world that persists for now. If those rates change, and we're optimistic that they will, we'll continue to evolve our plans just to take into account the reality of the current new environment.

The next question today comes from the line of Dylan Carden from William Blair.

I guess that answers my question. The language around success in mitigating tariffs, I guess, you kind of answered it. I am curious what you're seeing as a countervailing force as far as the repurchase cycle. I know you're less exposed to managed care. That's part of the strategy, which it seems to be recovering faster. But how do you think about the latent demand for this category through this year?

Thanks for the question. We're seeing similar trends as we have over the past few years in customer behavior. One of the things that we're very focused on is controlling what we can control. So as an example of that, as we think about tariff mitigation, we know that tariffs are likely going to shift. So how do we construct systems that are adaptable? And what we mean by that is how can we quickly, strategically change pricing in a selective way when that makes sense? How can we strategically shift aspects of our supply chain when that makes sense? And we view speed as a competitive advantage as we -- and this is in line with our belief that we have to control what we can control. And when it comes to the consumer, if we continue to deliver best-in-class service, if we continue to provide incredible value, and we think that the value that we're providing, that price-to-quality ratio is actually only increasing as we look at competitors raising prices that we're going to see consistent to improve repurchase cycles relative to the category. So we continue to see strong AOV, strong conversion, and we've continued to demonstrate category growth irrespective of what our -- what's happening in the market writ large.

And price, I mean, take tariffs aside for a second. You mentioned there that -- or you mentioned in the prepared remarks that you haven't really taken price on the opening or the entry-level offering since founding. I mean, is price a broader opportunity here? I know that you introduced newer pricing with newer launches, but is there a tariff -- ex-tariff price opportunity in this model more broadly?

Yes. We do believe so, but we're also conscious that we operate in an industry that has historically taken price liberally at every opportunity, and that's continued in this current environment. And frankly, that's created a price umbrella that has enabled us to offer better value and take market share since we launched. And we plan to continue to do that for many years to come. And really, our focus has been on building long-term sustainable growth. And in order to do that, the most important factors are building consumer trust around our brand and ensuring that our customers are delighted and offering exceptional value and great pricing is a core part of that customer promise, and we don't plan to deviate from that approach. But that said, there is a very big umbrella here. And we found that when we do introduce higher price point products, our customers are willing to spend more with us, and we tend to primarily serve high-income customers. And so as we launch products like Precision Progressives, starting at $395, we've seen a very strong uptake and lots of customer satisfaction from those products. And so in this environment where some of our input costs are going up, we have selectively adjusted pricing on some of our products, and we're seeing positive early signals in terms of customer response. And so I do believe that there's more opportunity over time to introduce products at a variety of price points. And I think you'll see us continue to drive increases in average revenue per customer for many years to come.

Dylan, I was just adding on Dave's comments, just as context. We've selectively taken price actions like this very rarely. The last time that we did something like this was at the end of 2021 where we rolled out a small handful of price increases across 2 thinner lens types, which we increased pricing for by roughly $10 and a prescription sun lens where we increased pricing by $20. The handful of changes that we're making here are a little broader, but not much, and certainly informed by what we've done in the past. We'll continue to really focus on price through offering new products and seeing price evolve through mix. But selectively, we've done this before, and the process that we went through here was certainly informed by some of the results and success of the actions that we have taken on a selective basis in the past. And we're expecting a similar type of trajectory for these increases as well.

The next question today comes from the line of Anna Andreeva from Piper Sandler.

This is Paul Nawalany on for Anna. I'm curious if you could speak to the consumer behavior of the new cohorts you're seeing, given the acceleration in active customers, if that's mostly coming from existing markets or new ones. And then secondly, I'm curious if you could confirm whether you've seen an acceleration in March versus February that's generally maintained into April. And if you've seen any evidence of a pull forward in consumer demand.

Sure, thanks for your question. We're seeing very consistent consumer behavior across new and existing cohorts. As we continue to expand across the U.S., and we have lots of opportunity, there's 45,000 optical shops in the U.S. Most of our new stores have been in existing markets just because we're now in all the large markets. And again, where we tend to gain market share is from optical shops that are charging often 2x to 3x to 4x as much as we are. So the beauty of having this large market, having these 45,000 optical shops across the U.S., it's just we have a massive opportunity in front of us, and we still think that we're in the first innings here.

And then as it relates to March and any color on April. So March was our strongest month in Q1. And so we did finish the quarter on a very strong note. As it relates to April, we saw pockets of variability in the first part of April, and then we have finished April with a very strong exit rate that has continued into May. And so that's how we would describe the color of the end of the quarter, heading into the current environment in which we find ourselves now.