Warby Parker (WRBY) Q3 2024 Earnings Call Transcript

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Warby Parker (NYSE: WRBY)
Q3 2024 Earnings Call
Nov 07, 2024, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to today's Warby Parker third-quarter 2024 earnings call. My name is Bailey and I will be your moderator for today. [Operator instructions] I would now like to pass the conference over to our host today, Jaclyn Berkley, head of investor relations. Please go ahead when you're ready.

Jaclyn Berkley -- Head of Investor Relations

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 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 November 7th, 2024, and except as required by law, we assume no obligation to publicly update or revise our forward-looking statements.

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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.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

Thank you, Jaclyn, and good morning, everyone. We are pleased to deliver Q3 results ahead of our guidance with net revenue of $192.4 million representing 13.3% growth year over year, along with 250 basis points of adjusted EBITDA margin expansion, our highest of the year. Driving these strong results is our team's unwavering commitment to delivering on our mission while taking share in growing sustainably and accelerating growth. We're encouraged by our team's progress against the strategic initiatives we laid out at the beginning of 2024 and believe our year-to-date results in particular the momentum in active customers and glasses growth are evidence that our strategy is working.

We drove accelerating top-line and active customer growth in each month of Q3 and continue to see momentum into October, positioning us favorably as we head into our busiest months of the year. Based on our third-quarter performance, we are raising our full-year guidance and now expect to deliver approximately 14% to 15% revenue growth and approximately $73 million in adjusted EBITDA. Before Steve provides more detail on that later in the call, Dave and I will review the key drivers of our Q3 performance. Underpinning our Q3 results was our highest active customer growth of the year with strength in both new and returning customers.

We ended Q3 with 2.4 million active customers, an increase of 5.6% on a trailing 12-month basis, while average revenue per customer grew 7.5%. As expected, active customer growth has improved each quarter this year even as we've maintained marketing spend as a consistent percent of revenue and we anticipate Q4 being our highest active customer growth year over year. While our active customer count captures purchases across channels, we're seeing the highest customer growth come from our stores, which we believe remain highly efficient customer acquisition vehicles as they continue to deliver compelling unit economics. Similar to the first half of the year, we've been pleased with the efficiency of our marketing spend and the consistency in customer acquisition costs despite a dynamic media environment.

We believe our diversified media model affords us significant flexibility and the ability to stay disciplined while testing channels and marketing messages. For example, to drive greater store awareness, we've tested new creative across linear, streaming, and influencer that focuses on the in-store shopping experience. This not only helps to drive awareness with new customers but also longtime customers who think of Warby Parker as an online-only business. We're also seeing promising results from direct mail campaigns, especially as a way to highlight our eye exam capabilities, annual exam reminders and new store openings.

We continue to see consistent retention metrics and repeat purchasing patterns across cohorts. For the most recent cohort, we had a revenue retention rate of roughly 50% over 24 months and roughly 100% over 48 months. Complementary to our core marketing efforts, we've made progress in being able to serve even more customers through in-network and out-of-network insurance plans. Earlier this year, we announced an expanded in-network relationship with Versant Health, a wholly owned subsidiary of MetLife.

I'm happy to share that the integration is largely complete, bringing millions of additional lives in-network with Warby Parker. Given our experience with UnitedHealthcare and other large employer plans, we expect that average revenue per member will expand over a multiyear period as in-network awareness grows and as members realize they can use their benefits at Warby Parker. As a result, we have not incorporated this into our guidance and expect it to be a longer-term tailwind over the next several years. In parallel to our in-network insurance initiatives, we continue to leverage our Universal Eligibility Check tool to help customers easily locate their in-network insurance coverage and average out-of-network benefits across channels.

We launch an updated version of the tool for our retail teams this quarter, making it easier than ever for customers to use their benefits with us. As a reminder, most out-of-network plans cover an average of $100 reimbursement for a pair of glasses or contacts, meaning that these customers often pay $0 out of pocket for their eyewear purchase at Warby Parker. Second, we continue to see positive momentum in our glasses business. We attribute the improvement in glasses growth to many of our core strategic investments, including marketing, expanding our store fleet and our exam business, and product innovation.

In Q3, glasses grew approximately 10% year over year and we believe our marketing investments within channels like paid social streaming and influencer drove an acceleration in single-vision glasses, which represent the majority of our prescription eyewear business. Glasses growth also continues to benefit from progressive penetration and the adoption of more complex lens types. Progressive overall still only represents approximately 22% of our prescription glasses sold in Q3 and we believe there's a significant opportunity to increase penetration over time. Within the progressive category, we've seen strong uptake of precision progressives which start at $395 including frames, lenses, and coatings, and offer customers better visual quality and comfort at a fraction of the price of what similar products often cost elsewhere.

We also continue to expand our lens options to give customers more choices. The ability to customize lens colors polarization and anti-reflective coatings as well as enhancements like anti-fatigue, blue light, and light responsive have contributed nicely to average revenue per customer. On the frame side, our latest consumer insights indicate that customers choose to shop with Warby Parker because of our style and variety as well as our value proposition and convenient shopping experience. As a style authority, we offer a tighter, more curated assortment than our competitors, and focus on building out franchise styles with new sizes, colors, and materials.

We are also one of the few retailers to offer extended sizes in the same style. We're not only seeing customers buy more complex lens types, we're also seeing them select higher price frames with more complex constructions like those in our recently launched super concentric collection starting at $195, Handcrafted in Italy, this limited edition release brings a tri-color construction to a selection of our most sought after shapes. This quarter we launched our Editions Collection, an assortment of frames designed in partnership with seven notable fans, each of whom reimagined their favorite Warby Parker. Frames.

Collaborators included chef and restaurateur, David Chang actor writer and director, Natasha Lyonne, NBA star, Jordan Poole, and more. Our launch captured the attention of culturally relevant media outlets like Interview Magazine and garnered some of the highest engagement on our social media channels to date. Just last week, we launched our first-ever foldable sunglasses engineered for pocket-sized portability and constructed with stainless steel and premium cellulose acetate. While the response to our new frames across multiple price points has been very positive, the majority of our frames are still sold that are accessible, all-inclusive $95 price point.

And now I'll pass it over to Dave to talk about additional growth drivers.

Dave Gilboa -- Co-Founder and Co-Chief Executive Officer

Thanks, Neil. The third driver of our Q3 growth was our highly productive store base, complemented by an improving e-commerce channel. Our omnichannel experience remains unique in our category and we continue to benefit in how our channels support one. Another.

Many of our largest and most mature markets like New York, Boston, Dallas, and Chicago continue to see strong retail growth while also delivering some of our highest e-comm year-over-year growth. We believe this underscores the meaningful opportunities ahead of us to drive omnichannel growth as we see greater brand awareness and store density benefit overall market growth. In Q3, we opened 13 new stores, ten of which were expansions within existing markets including Seattle, Dallas, Milwaukee, and New York. Three new stores were in new suburban markets including Akron, Ohio; Huntsville, Alabama; and Springfield, Missouri.

Over 50% of the major metropolitan areas we operate in only have one store and we believe we have significant potential to expand our presence in existing markets while also entering new markets. Since Q3 of last year, we've added 42 net new stores and ended the quarter with 269 stores well below our longer-term 900-plus store potential, which would still represent a small fraction of 45,000 optical shops. In the U.S. Retail revenue increased approximately 20% year over year, driven by new store growth and consistent performance within our existing stores.

Steve will go into more detail on this shortly. I want to take a moment to highlight our store teams. We're fortunate to have tenured store leadership teams, approximately 60% of whom have been promoted from within the company. Just last month we brought together our store leaders, district leaders, optometrists, and more in Dallas for a three-day summit where we focused on planning, training, and team building as we prepare to serve more customers than ever this holiday and FSA season.

We believe our ability to grow and retain talent is differentiated within the market and will remain a critical component of our retail strategy going forward. Within our e-commerce channel, revenue increased approximately 1% year over year as we lapped our highest quarterly revenue growth last year. We continue to see positive momentum in our e-commerce channel as with any period, order. We received at the end of one quarter are recognized as revenue the next quarter upon delivery to the customer.

In Q3, we saw e-commerce velocity increase each month with a strong end to the quarter in September that has continued into Q4. Our year-over-year growth in e-commerce sales order value in Q3 was up mid-single digits. Within our e-comm channel, we continue to see an improvement in our single-vision glasses business as well as strengthened contact lenses from both new and returning customers. As we've shared previously, overall channel growth is benefiting from a positive inflection in direct glasses purchases, which is partially offset by an ongoing but diminishing headwind from home try-on-driven purchases.

We continue to invest in technologies that enhance and personalize the online customer experience, including leveraging AI to enable faster and more seamless prescription capture and transcription along with more personalized product recommendations. In Q3, in particular, we focused on personalizing and enhancing the lens shopping experience for our customers and saw promising results. The fourth and final driver I'll dive into is our effort to scale holistic vision care and expand customer lifetime value. In Q3, contact lens sales grew approximately 35% year over year to almost 11% of revenue, which remains well below the 20% industry average.

Contact lenses represent a $12 billion segment of the industry and we plan to continue growing this portion of our business. As it not only attracts new customers but also some of our highest-value customers given the replenishment nature of the product and their propensity to go on to purchase glasses. In the quarter, exam revenue grew approximately 40% year over year to over 5% of revenue, which remains well below the approximately 15% industry average. Today the majority of our customers still get their eye exams elsewhere and bring their prescriptions to Warby Parker, highlighting the opportunity in front of us to broaden awareness of the service and capture more share of this $11 billion segment of the industry.

Scaling our holistic vision care customers is a core part of our growth strategy and gives us the confidence to continue to invest in customer acquisition. As we've consistently seen across cohorts, customers who complete an eye exam with us and buy glasses and contacts spend more with us in their initial purchase than glasses-only customers and become our highest lifetime value customers over time. In quarters past we referenced our commitment to delivering best-in-class patient experiences by piloting technologies like video-assisted eye exams and retinal imaging. Our patients continue to provide great feedback about these services, so we rolled them out to several new stores throughout Q3 and will continue expanding them in Q4.

Scaling our eye exam business including exam utilization has had and we believe will continue to have a direct impact on our glasses business. We find that exam stores drive higher sales than non-exam stores and in industrywide approximately 75% of prescription glasses are purchased at the same location an eye exam takes place. As we've increased the number of stores offering eye exams, we've seen strong growth in average revenue per customer driven by eye exam revenue, a higher penetration of progressive lenses and contact lenses. And now I'll turn it over to Steve to review the details of our financial performance.

Steven Miller -- Senior Vice President, Chief Financial Officer

Thanks, Neil, and Dave. Revenue for the third quarter came in at $192.4 million, up 13.3% year over year. From a channel perspective, retail revenue increased approximately 20% year over year, while e-commerce revenue increased approximately 1% versus Q3 of 2023, As Dave mentioned, our e-commerce channel grew in the mid-single digits on a sales order value basis. Turning to our stores, we added 42 net new stores over the course of the last 12 months, ending the quarter with 269 stores, up from 227 at the end of Q3 2023.

Looking at Q3 retail performance on a blended basis, including both new stores and stores opened greater than 12 months, retail productivity was 99% as compared to the same period last year. As a reminder, we defined retail productivity as the year-over-year change in retail sales per store for the average number of stores open in the period. This metric covers all of our stores including newer stores and stores open 12 months or more. As such, this metric is impacted by a number of factors, including the timing and composition of store openings.

Year over year as well as the timing of doctor hiring for new stores for stores that have been open greater than 12 months, we continue to observe strong year-over-year growth. Our new stores continue to deliver strong unit economics performing in line with our target of 35% for wall margin and 20-month paybacks. For stores open more than 12 months, average revenue per store was $2.2 million consistent with the first half of the year and performance was in line with our target 35% for wall margin. Over the course of the past year, we added 45 net new eye exam locations, bringing our stores with eye exam capabilities to 228 stores, or 85% of our total fleet.

From a channel mix perspective, retail represented 70% of our overall business consistent with last quarter and up 365 basis points year over year versus 67% in Q3 2023. From a customer perspective, we finished Q3 with 2.43 million active customers, which we believe is more reflective of active households and represents an increase of 5.6% on a trailing 12-month basis. We have been pleased to see sequential improvements in year-over-year active customer growth for the past five quarters as we benefit from the positive returns we are seeing from our marketing investments. We anticipate Q4 will be our highest year-over-year growth in active customers.

We also continue to see strength in average revenue per customer, which came in at $305 in Q3, up 7.5% year over year. This was driven by a few factors including a higher mix of our premium lenses such as Progressive's continued ramping of both contact lens and eye exam sales and continued uptake of our higher-priced frames. As previously noted, we have multi-user accounts in which one person in the household places an order on behalf of others. And if we look at our customers on an individual basis, we serve 2.56 million individuals, which is up 6.2% on a trailing 12-month basis and reflects average revenue per individual of $290, up 6.8%.

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 expenses for our optometrists and optical lab employees. For comparability I will be speaking to gross margin excluding stock-based compensation, third-quarter adjusted gross margin was 54.6%, compared to 54.8% in the year-ago period, down approximately 13 basis points year over year and in line with the color we provided on our last earnings call. On a year-over-year basis, efficiencies in customer shipping and our owned optical labs driven by glasses growth offset the continued strength in contact lenses and eye exams, which have lower gross margin profiles than eyeglasses, but over the medium and long term are accretive to gross profit dollars.

Within the more fixed portion of our cost of goods, we took advantage of a strong pipeline of candidates and hired more optometrists than our original plan for the quarter. That strategic decision in addition to occupancy associated with our store rollout were the primary sources of modest deleverage on a year-over-year basis. Investing in doctors and holistic vision care is a core part of scaling our holistic vision care offering and a key driver of lifetime value and customer retention over time. On a sequential basis, Q3 Gross margin decreased by 150 basis points, reflecting anticipated deleverage in the fixed portion of our cost of goods driven by increased occupancy from opening 13 new stores and a strong hiring quarter for optometrists as well as from a higher mix of contacts and eye exams.

Representing the continued growth in these business lines. Shifting gears to SG&A, As a reminder, SG&A for our business includes three main components, salary expense for our headquarters, customer experience and retail employees, marketing spend including our home try-on program, and general corporate overhead expenses. Adjusted SG&A excludes non-cash costs. Like stock-based compensation expense.

Adjusted SG&A in the third quarter came in at $100.6 million or 52.3% of revenue. This compares to Q3 2023 adjusted SG&A of $93.4 million or 55% of revenue. Within adjusted SG&A, Marketing spend increased from $19.7 million or 11.6% of revenue to $23.7 million or 12.3% of revenue as we reinvested a portion of our revenue upside into customer acquisition given strong demand signals in September that have continued into Q4. The deleverage from marketing was offset by disciplined expense management and leverage in corporate expenses as non-marketing adjusted SG&A declined as a percent of revenue from 43.3% to 40%.

Total adjusted SG&A was up 7.8% with Non-marketing adjusted SG&A up just 4.5% year over year. Turning now to adjusted EBITDA, In the third quarter we generated adjusted EBITDA of $17.3 million representing an adjusted EBITDA margin of 9%, which compares to adjusted EBITDA of $11 million or 6.5% of revenue in the year-ago period. This represents approximately 250 basis points of adjusted EBITDA margin expansion, our highest year to date. Turning now to our balance sheet, we were free cash flow positive for the sixth consecutive quarter, generating $13 million in Q3 and ended the quarter with a strong balance sheet position reflecting approximately $251 million in cash, which we will continue to deploy deliberately to support our growth and operations.

We also have an undrawn credit facility of $120 million that we can increase to $175 million. Now to our outlook, based on our strong third-quarter performance and trends in the fourth quarter so far, we're revising our full-year 2024 guidance higher to the following revenue of $765 to $768 million, representing approximately 14% to 15% year-over-year growth. Adjusted EBITDA of approximately $73 million at the midpoint of our revenue range, which equates to an adjusted EBITDA margin of 9.5% or approximately 170 basis points of year-over-year expansion. And we are still on track to open 40 new stores this year.

As it relates to gross margin, we're still guiding to stability in gross margin in the mid-50s as a percent of revenue. Regarding Q4 gross margin, as a reminder, we typically see a seasonal sequential decline in gross margin from Q3 to Q4, driven by a significant deferral of revenue from the last two weeks of December into Q1 of the following year. We expect the pattern to look similar to last year where gross margin declined by approximately 100 basis points quarter over quarter. Similar to Q3.

We anticipate adjusted EBITDA margin expansion in Q4 will be driven by leverage within SG&A supported by ongoing efficiencies in staffing, our store and customer experience teams, and achieving continued leverage in corporate expenses while keeping marketing spend consistent as a percent of revenue in the low teens. We're still forecasting stock-based compensation as a percentage of net revenue in 2024 to be approximately 6%, compared with 10.5% in 2023. Stock-based compensation for both periods is above our long-term forecast as a result of the multiyear equity grants to our co-CEOs. In 2021, We still anticipate stock-based compensation to normalize to a range of 2% to 4% of net revenue next year.

With respect to the fourth quarter, we're guiding to the following: revenue between 184 and 187 million, which represents growth of approximately 14% to 16% year over year. From a bottom-line perspective, we're guiding to an adjusted EBITDA margin of approximately 7.3% at the midpoint of our range. 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today comes from the line of Brooke Roach from Goldman Sachs. Please go ahead. Your line is now open.

Brooke Roach -- Analyst

Good morning and thank you for taking our question. In the prepared remarks, you commented a few times about seeing sequential momentum as you move throughout the quarter and into October. Can you elaborate on the drivers of that sequential momentum? How much of that do you attribute to the overall vision care industry versus specific actions that you're taking within your own business? And then separately, can you also provide a little bit more color on how you're thinking about marketing efficiency and marketing spend as you finish out the year and move into 2025? Thank you.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

Thanks, Brooke. We saw some softness in -- in July and as we speak to sort of other retailers that seem to be across categories and since then we've seen six sequential strengths. Building and maintaining as we sort of are going into Q4. we've continued to be disciplined in our marketing efforts as we have increased spend.

And as we think about discipline that's really focused on our acquisition cost per customer. That's always been our sort of guiding principle as we've deployed marketing dollars since the beginning of the -- of the company, how do we ensure that we're deploying the right dollars across the right channels to make sure that we're acquiring the right customers. And we're really happy with our marketing performance and our ability to scale our marketing spend, and we've been able to do that really over the last year and a and a half very effectively, which gives us confidence for the rest of the year and the future?

Dave Gilboa -- Co-Founder and Co-Chief Executive Officer

And just building off of that, Brooke, in terms of the momentum that we've seen in the business. We've really seen momentum in a few areas. That we've called out one is active customer growth and we're pleased to see sequential increases every quarter the last five quarters in active customer growth, which is a very important metric to us. And as we look ahead to Q4, we certainly expect that quarter to be the strongest for us from an active customer growth perspective.

We've also seen continued velocity in e-commerce, which we called out in some of our prepared remarks, and our stores continue to perform very strongly, certainly in line with the target that we put out there, 35% overall margins and trending toward 20-month paybacks from a marketing efficiency perspective, just building on what Neil said, we have a very disciplined approach where we want to see marketing spend as a percent of revenue be in the low teens. You've seen an increase in that year over year from 11.6% in Q3 of last year to 12.3% in Q3 of this year. I would anticipate seeing that moderately increase in Q4 as we seasonally spend into holiday demand and FSA expiration, but we'll still plan on being within that mid-teens as a percent of revenue. So I wanted to add that additional color.

Brooke Roach -- Analyst

Great. Thank you so much. I'll pass it on.

Operator

The next question today comes from the line of Dana Telsey from Telsey Group. Please go ahead. Your line is now open.

Dana Telsey -- Analyst

Hi. Good morning, everyone. As you think about the changes that are happening with the election Tariffs, how do you think about tariffs? I think you saw some components from China. What percent of goods are directly imported? How much from China and how do you think about adjusting in regard to sourcing and pricing to the consumer? And then on another note, smart glasses, I've heard a lot about it lately.

What do you see as the opportunity for Warby Parker? Thank you.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

Thanks, Dana. And we've been planning internally and have experienced sort of navigating this situation before vis a vis you know, increased tariffs from China. And it's obviously early days and not much known at this time. But over the last five years, we've materially reduced our exposure to Chinese-produced goods and will continue to do so.

And we believe we have the ability to flex even further into other regions and work with our vendors to offset tariffs as much as possible. We've been trending lower in each of the last sort of five years and this year we'll be around 20% of COGS. So we feel very confident in our ability to sort of manage the current environment.

Dave Gilboa -- Co-Founder and Co-Chief Executive Officer

And then on smart glasses on smart glasses, we're pretty excited about the potential that smart glasses have to really transform how we engage with technology and enable us to stop staring at our phones all day. And over the last decade plus, we've been in discussions with various companies and researchers that have been. Working to miniaturize batteries, speakers, cameras, and other hardware components and all those technologies are advancing. But what we believe will be a bigger catalyst for the adoption of smart glasses in the coming years is the opportunity to embed always available AI that can provide context and useful information.

To the wearer in real time and I. And smart classes are uniquely complementary to each other given the amount and complexity of information. Available and so we've been particularly excited to see how quickly AI capabilities are advancing, but we also know that regardless of how good any of this tech is, any form of smart glasses still need to look good on people's faces. Consumers will continue to have a very high bar for the look, feel, and weight of anything they put on their faces.

They're only willing to wear prescription glasses. The original wearable because they provide so much utility by enabling sight. And so as we look ahead, we believe the investments that we've made over the last 14 plus years in our brand design capabilities, distribution across hundreds of stores and our digital properties, our hundreds of doctors, optical lab, and supply chain ability to deliver our best in class customer experience in the category enable us to be a very strong partner to large tech companies that have been making sizable investments in AI and some of the hardware components I just mentioned. And so we expect that the next few years will usher in the first wave of smart glasses that are consumer ready for all-day wear and believe we have an important role to play in this emerging category.

Dana Telsey -- Analyst

Thank you.

Operator

Our next question today comes from the line of Oliver Chen from TD Cowen. Please go ahead. Your line is now open.

Oliver Chen -- Analyst

Hi, Neal, Dave, and Steve. Regarding the prudent investments and doctors, what will happen longer term as we think about the gross margin modeling? Also as you think about you've had a lot of great momentum in store, I just would love thoughts on if October was fairly volatile and how you see the consumer and also related to that store traffic relative to e-commerce traffic? Your plus one looked like the complexion was driven by the order value. So we'd love thoughts on modeling that going forward as well. Thank you.

Steven Miller -- Senior Vice President, Chief Financial Officer

Sure. This is Steve. Thanks for the question, Oliver. So as we've talked about, we view hiring doctors really as a strategic investment in serving and acquiring new customers.

Roughly 75% of all prescription glasses are purchased at the same time and at the same location where an individual got an eye exam. It's why we have increased eye doctor coverage across our fleet such that 228 of our 269 stores have eye doctors or roughly 85% coverage. And so when we talk about gross margin, we are very comfortable seeing gross margin continue to settle out in the mid-50s. This year on our Q4 earnings call next year, we'll provide color as to where we expect gross margin to land for next year.

As we think about some of the puts and takes within our cost of goods, there's a lot that we put in cost of goods including store rent, the depreciation of store build outs, our eye doctor salaries, which you talked about in addition to all of our product costs like frames our two optical labs third party lenses. We've been able to manage all of these various factors in our cost of goods such that we've still been able to maintain our mid-50s guidance while we've been scaling to relatively new portions of our business, eye exams, and contacts. As we've talked about eye exams and contacts, both have lowered gross margin profiles but are accretive to gross margin dollars longer term. Eye doctors in particular, which is the category you talked about is particularly strategic in our ability to serve and acquire the customer.

So I would look for us to continue to make opportunistic hires in this area because the earlier that we hire eye doctors, the more we can issue prescriptions which leads to higher exam-generated sales, which is a metric that we're keenly focused on.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

And then as we think about sort of e-commerce growth, Q3 was the channel's toughest comp from last year as we lapped, you know, higher quarterly growth last year, which was the beginning of marketing dollars or comping positive last year. We continue to see positive momentum in our e-commerce channel. And as with any period orders that we receive at the end of one quarter are recognized as revenue in the next quarter upon delivery to customers. So just as we think about sort of the channel performance, we have seen great momentum and in sort of if we look at e-commerce velocity, it increased each month in Q3 with a strong end to the quarter in September and that's continued into Q4.

And as we just think about volatility in October in general, we didn't see that. What we did see was continued strength into Q4 that we experienced at the end of Q3.

Oliver Chen -- Analyst

Thank you. Are you encouraged by store traffic, How has that been going, and what strategies and or the backdrop for how the consumer is behaving?

Dave Gilboa -- Co-Founder and Co-Chief Executive Officer

Yeah. In general, we have been encouraged by traffic and order velocity across both e-com and stores And yeah, we saw that tick-up kind of midway through Q3. And has -- has sustained early into Q4 as Neil just mentioned, I'd say it's probably too early for us to call a sustained recovery in the category or a pent up demand. Um, as we look at industry data and speak to peers, there are some data points that have improved and others that have not, but in our business we're seeing better demand trends and we believe that our team is doing a great job at driving traffic across channels, and expect that will continue to to outperform category growth, but this quarter and for many years to come.

Oliver Chen -- Analyst

Thanks, Dave, Niel, and Steve. Best regards.

Operator

The next question today comes from the line of Mark Altschwager from Baird. Please go ahead. Your line is now open.

Amy Teske -- Analyst

Hi. This is Amy Teske on for Mark. Thank you for taking our question. I wanted to ask about gross margin and modest pressure that you saw in the quarter.

It sounds like an optometrist hiring was more than expected, but overall gross margin was in line with your expectations. Can you just walk us through the moving pieces that shifted here versus the first half? And if any of those components were different than you expected? And then could you also speak to your perception of the overall health of the optical industry? I know you said different data sources showing different things, but any early thoughts you can provide on your expectations for 2025? Thank you.

Steven Miller -- Senior Vice President, Chief Financial Officer

Sure. This is Steve, I'll take the first part of the question as it relates to gross margin. So gross margin at 54.6% really came in, in line with our expectations. As we talked about on our last call, we guided folks to really Q3 last year as a reference point in line with where we thought we would end up.

We ended up 13 basis points different if I were to talk about on a sequential basis. The main moving pieces, where we saw a shift from Q2 to Q3 really falls into the following categories. So one is occupancy expense. We opened up the highest number of new stores in Q3 that we've opened this year.

We opened up 13 new stores with a concentration of new stores in urban areas, which are moderately higher from an occupancy expense perspective within New York in particular. We also continue to see some deleverage from scaling of contacts and eye exams, which are relatively newer businesses. As we discussed earlier, contacts and exams have a lower margin profile but are important in enabling us to serve the customer in a holistic way. Holistic customers who get an eye exam purchase a pair of glasses and contacts are roughly one and a half times more valuable at initial purchase and over two times more valuable over the course of a year.

And lastly, we had a strong hiring season for optometrists. We view an eye exam really in many ways as a gateway to an individual becoming a customer of Warby Parker. And so investments in hiring, which we believe will pay off in the long term, is another important part of the story. In terms of speaking to the perception of health of the optical industry, I will turn it over to Neil.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

So as Dave mentioned, it's too early to say if there's been significant Begin change and demand. We continue to manage the business in a way that is not dependent on sort of industry trends for us to grow. We continue to deploy more marketing dollars across more diverse channels to ensure efficiency and drive that traffic to our stores and to our website and apps. And we believe if we continue to control what we can control, if we can continue to deliver exceptional value.

You know, $95 products with everything included, which is a fraction of the price of what you typically find elsewhere. And that goes for all of our products and services, and we continue to deliver exceptional customer experiences that will continue to win. We'll continue to gain market share, we'll continue to outperform the market and that's as true as it is today as it was when we launched in 2010.

Amy Teske -- Analyst

Thank you. I'll pass it on.

Operator

The next question today comes from the line of Janine Stichter from BTIG. Please go ahead. Your line is now open.

Janine Stichter -- Analyst

Hi. Good morning. Thanks for taking my question. I want to ask about the e-commerce business.

I know there's a lot of moving pieces in that 1% number and you mentioned the deferral. So maybe just some perspective on how you think about the medium term growth of the channel and then curious what you see as you open new stores if you typically see you acquire new customers through those stores, if you typically see those customers come back to the e-commerce channel later in their lifetime. Thank you.

Dave Gilboa -- Co-Founder and Co-Chief Executive Officer

Yeah. So at the beginning of this year, we stated that our goal was to return our e-commerce e-com channel to growth and we believe that we're on a strong path to do that. Yeah, we -- while we typically don't comment on channel dynamics as it relates to deferred revenue, we wanted to just call out that Q3 recognized revenue for e-com doesn't necessarily reflect the momentum that that we've seen and continue to see in that channel. And in particular we're encouraged by the growth that we're seeing in customers purchasing classes directly without doing a home, try on and leveraging our best in class capabilities and tools like our virtual try on and some of the sophisticated recommendations that we're now offering customers and will continue to do so and as a result, we're seeing meaningful positive growth in those customers and also continue to see very strong growth on the contact lens side in the e-com channel as it relates to customers shopping in Stores first and then coming back to e-com.

We do see that take place we find that customers tend to repeat in the channel where they made their first purchase. They tend to have a great experience there and and want to replicate that experience. But we do see a fair number of customers after they make their initial purchase in a retail store, then go on and make subsequent purchases online.

Janine Stichter -- Analyst

Great. And then maybe just a follow-up on the Versant Health partnership, understanding that it's not in the guidance for this year and there's multiyear benefits, but just how to think about potentially the benefits next year and what that typically looks like when you add on a new Insurance partner.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

Yeah. So we're excited about this partnership and the number of lives that we've been able to integrate this year and enable a much larger population of our customers to be able to use their in-network benefits with us. What we see is that it takes time for those patients and customers to leverage their benefits depending on where they are in the purchase cycle when they need their next eye exam. And with our previous integrations, we see that as more time passes from the point of integration, the revenue that we generate per member tends to steadily increase over a multi-year period.

And so we're expecting that to take place. With these new lives as well. And so we're pleased with the integration this year but have yet to benefit meaningfully from -- from those lives and expect that will be kind of a multiyear tailwind that that we can benefit from starting, you know, starting toward the end of this year

Janine Stichter -- Analyst

Great. Thanks so much.

Operator

Our final question today comes from the line of Nick Jones from Citizens JMP. Please go ahead. Your line is now open.

Nick Jones -- Analyst

Great. Thank you for taking the questions. Two if I can. First, you know, I think you've kind of communicated plans to open around 40 stores a year.

Can you maybe speak to the puts and takes, particularly as you get back bigger And clearly you have a playbook that works as you open source? What are the puts and takes and maybe taking that higher or maybe what would make you want to take that lower on an annual basis. And then the second question is around kind of the insurance integrations. Is there anything you can do to kind of accelerate awareness to in-network folks or is that somewhat of the challenge of getting, you know, it's kind of organic as the awareness comes on? Just trying to understand maybe if there's anything in your control that could accelerate awareness for in-network folks? Thanks.

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

Thanks so much for your for your question. We plan to open at least 40 stores a year sort of going going forward and we don't anticipate opening fewer than than those. Our stores continue to perform in line with expectations, sort of offerings for best-in-class metrics, not only within the optical industry but across all retail categories. So we're really happy with our store performance and store rollout and that will continue.

These would be insurance and how might we further raise awareness, about in-network options. There's a few ways that we do this. One is through training our teams, given that we have sort of outsized traffic to our stores and site and apps relative to others in the category, but we also tend to partner with our in-network insurance carriers. And we do things such as inviting brokers in for events in our stores now that we have 270 plus stores across the country, so we'll do in-person events.

We tend to get highlighted in a lot of our insurance partners' materials as they kind of view us as a preferred partner and a, frankly, a sexy partner with which they used to try to attract new business and something that benefits managers within companies can speak to on how they're providing great benefits to their employees and co-workers. So it is something that we do think a lot about and it is a portion -- a focus of our marketing teams.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jaclyn Berkley -- Head of Investor Relations

Neil Blumenthal -- Co-Founder and Co-Chief Executive Officer

Dave Gilboa -- Co-Founder and Co-Chief Executive Officer

Steven Miller -- Senior Vice President, Chief Financial Officer

Brooke Roach -- Analyst

Dana Telsey -- Analyst

Oliver Chen -- Analyst

Steve Miller -- Senior Vice President, Chief Financial Officer

Amy Teske -- Analyst

Janine Stichter -- Analyst

Nick Jones -- Analyst

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