Warby Parker soared in its market debut, setting the bar high for online retailers

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Co-CEOs Neil Blumenthal and Dave Gilboa of Warby Parker at NYSE, September 29, 2021.

Source: NYSE

Warby Parker’s debut on Wednesday set a good precedent for a number of online retailers gearing up to go public.

Warby shares climbed 36% on Wednesday. Founded in 2010, the company began selling its eyewear online and avoided relying on wholesale partners to make a sale. Its direct listing on the NYSE has shed light on a class of direct-to-consumer brands that may be the next to head to Wall Street.

Allbirds, Fabletics, and Rent the Runway are among those that quickly come to mind. Other peers – including makeup brand Glossier, luggage startup Away, sportswear brand Nobull, and sustainable shoemaker Rothy’s – may not be eyeing public markets just yet, but they’ve long followed. Warby’s so-called direct-to-consumer playbook. .

Even with the strong performance, some experts say Warby’s stock is overvalued, at a market cap of over $ 6 billion, and investors should proceed with caution. While Warby has a history of growth to sell, it remains unprofitable and still has a lot to prove to live up to its current valuation, analysts say. The way stocks trade in the coming weeks will likely be much more indicative of Wall Street’s longer-term acceptance of Warby’s direct-to-consumer business model.

“The market perception of Warby is very, very generous,” said Dan McCarthy, assistant professor of marketing at Emory University, who tracks brands like Peloton, Revolve and Casper who started selling products online. directly to consumers. “People are prepared to give the company the benefit of the doubt.”

“The fact that they derive so much value from their customers so far into the future may at least allow them to plausibly talk about scenarios where – long into the future – they will be significantly more profitable than they are today,” he said. he declared.

McCarthy said a fair valuation for Warby would be closer to $ 2.5 billion. That’s well below the level where stocks changed hands on Thursday, at around $ 53 apiece. It’s even lower than the benchmark price of $ 40 that Warby received the day before its direct listing, which equates to a valuation of $ 4.5 billion.

“This is a very strong signal that companies looking to go public have a receptive market to sell in, should they have to,” said McCarthy.

Future volatility

However, companies such as Warby have shown mixed performance this year. According to investment bank Renaissance Capital, 12 online retailers, including Warby, have gone public so far this year, up from nine in 2020. Shares of scrub maker Figs, for example, are up about 31%. since its listing. But Jessica Alba’s honest company has seen its shares fall by more than 43%.

Warby shares edged down on Thursday, closing at around 2.6%.

Most direct listings will see the company’s shares drop below the initial listing price within the first 90 days of trading, according to Kathleen Smith, co-founder of Renaissance Capital.

“They certainly deserve the attention of investors,” she said in an interview with CNBC’s “Power Lunch”. “It’s a strong brand. It’s a leader in selling direct to consumers. They’ve done a great job.”

However, she warned, due to the conditions of direct listing, around 80% of Warby’s outstanding shares can be sold. There is no traditional lock-in period for shareholders like there is with a traditional IPO. This could lead to difficult trade volatility in the coming weeks.

Premium valuation

“Maybe Warby has done a good job selling today’s investors through rose-colored glasses because it’s a business that’s going to have a lot of overhang,” Smith said. “He is also billed at an extremely high price compared to anyone else in his peer group.”

With its valuation of over $ 6 billion, Warby is trading at a multiple of around 13 times its revenue, while, Smith said, some of the company’s peers are trading closer to three to four times its revenue. the sales. Meanwhile, retailers like Yeti and Canada Goose – which also started with a direct-to-consumer approach – are trading at a multiple of six times their revenue.

“There’s a big gap between what’s going on with the trade here with Warby and the reality and the rest of the market,” Smith said. “Warby is going to have to do a lot to prove this premium valuation.”

Some believe, however, that Warby’s dizzying valuation could be deserved. The company says it only has around 1% of the total eyewear market, with bigger competitors such as Vision Source and Luxottica.

“There is enormous growth potential for a company like this,” said Reena Aggarwal, professor at Georgetown University and expert in public listings. “And another positive side of this story is that they have this ‘do good’ philosophy.”

Warby is classified as a public benefit corporation, which means that it has a legal obligation to balance the interests of shareholders and other stakeholders. The company also has a “Buy One, Give One” program, where for every pair of glasses purchased, it donates it to those in need.

“This company gets a huge valuation based on the market price, and as long as it doesn’t collapse somehow in the next few days, that defines the relative valuation,” Aggarwal said.

Over time, the public will now closely follow how Warby runs his business and chooses to spend his capital.

One analyst is already not convinced by the company’s plans to open dozens of additional retail stores, seeing it as a capital-intensive business that could come back to haunt Warby. Today, the company has approximately 145 locations. He said he plans to open 30 to 35 stores this year and aims to grow at that rate every year.

“I sincerely doubt that they will ever achieve significant profitability,” said David Trainer, founder and CEO of investment research firm New Constructs. “If you grow and don’t make money, you go bankrupt very quickly.”


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