Margin Talks: What Warby Parker's Numbers Tell Other DTC Brands

EBITDA calculations are important, but could be misleading. Top-line revenue walks, but margins talk.

Welcome to the first edition of Margin Talks Report Card, Finaloop's new series where we dive deep into the financial metrics that matter most for DTC brands. In each installment, we'll analyze a prominent DTC company's margins to extract valuable insights for founders and operators.

For our inaugural analysis, we're examining Warby Parker - a brand that revolutionized the eyewear industry and became a blueprint for modern DTC companies. From disrupting a traditional market to scaling both digital and physical presence, Warby Parker's journey offers crucial lessons for DTC founders.

As one of the poster children of DTC success, with their stylish glasses at affordable price philosophy, they have created a "feel-good" buzz for the whole industry. Think "Buy a Pair, Give a Pair" contributing glasses to people in need, or their novel home try-on five frames for free solution.

Today, we're digging into their margins to see what's working, what's not, and what small brands can learn from their story.

But why focus on margins? While many DTC founders chase top-line growth or concentrate on vanity metrics, understanding and optimizing various margin metrics is crucial for building sustainable businesses. Whether it's a lack of real-time data access, financial expertise, or simply being caught up in the growth narrative, too many founders overlook these critical indicators of business health.

Margins, in general, refer to the amount by which one thing is different from another. When running through a P&L, we will see quite a few margins, such as the gross margin, operating margin, and net margin; with a bit of work - we will see the EBITDA. Understanding these margins is crucial to understanding your brands' profitability, unit economics, and trends. To give more visibility and context, we also included market data and comps for the various margins based on Finaloop's proprietary data.

In this report card, we'll break down four key margins from Warby Parker's latest financials. Each metric tells its own story - some impressive, others cautionary - and offers practical takeaways for DTC brands at any stage.

Let's dive right in.

The DTC Margins Report Card

1) Gross Margin

Grade: B

Definition:

Revenue minus the cost of goods sold (COGS), expressed as a percentage of revenue. Indicates how efficiently the company produces and prices its products.

Warby Parker's Numbers:

Per Warby Parker's Q3 numbers, their gross margin is just about 54.5% (which means that their COGS are approximately 45.5%).

Quick Analysis:

Warby Parker's gross margin has been pretty stable, 54.5% compared to 54.6% in the previous comps, per Q3 data. Expansion into the contact lens space (lower margins) has hurt them, although lower outbound customer shipping costs (perhaps because they are growing brick-and-mortar?) have decreased slightly.

Gross margin per category, per Finaloop data

Takeaway for DTCs:

Some analysts are talking about Warby Parker's need to start bundling (instead of 5 frames at home, try to pitch to the whole family), utilizing WP's stickiness. Another question is how much WP should be focusing on contact lenses, when other lines of their business will give them better profits. Takeaway - try to consider bundling to increase your sales, and think long and hard before going all out on low profit SKUs.

2) Operating Margin

Grade: C

Definition:

Operating income as a percentage of revenue. Reflects how efficiently the company manages its operating expenses like marketing, rent, and salaries.

Warby Parker's Numbers:

-3.5% (negative)

Quick Analysis:

Despite the fact that WP's operating margin is negative, and it really isn't cool to have 57-58% opex/net sales, especially when your gross margin is 54.5%, the positive spin here is that the Operating expenses of WP stayed more or less the same YoY, while the net revenue is up 13% in 2024 (Q3). Even after accounting for various adjustments, there still is an improvement from 55% of net revenue last year, to 52.3% of revenue in 2024. The big question here is how the opex will look going forward, especially with the planned expansion into more brick-and-mortar stores (on track to open 40 new stores in 2024, currently have 269 stores), which presumably constitute over 66% of WP's revenue.

Takeaway for DTCs:

Focus on leaner operations - gimmicks are nice, but they can drive up your opex. Keep overhead low (watch out for retail/employee costs, they can creep up on you) and test marketing spend before scaling.

3) Net Margin

Grade: C+

Definition:

Net income as a percentage of revenue. Reflects profitability after all expenses, taxes, and interest.

Warby Parker's Numbers:

-2.1% (net GAAP loss of $4.1M) (negative)

Quick Analysis:

As we noted above, the combination of 45% COGS and 57% operating expenses is going to lead to loss position (which is interesting, as WP debt position doesn't line up with this). A lot of analysts are writing that they expect profits of approximately $15M in 2025, but as noted, this will require improving COGS (which we see is a hard ask), and/or cutting operating costs, which will be difficult with the planned store expansions.

Net margin per category, per Finaloop data

Takeaway for DTCs:

Profitability (along with first order profitability) should always come first. Avoid chasing growth at the expense of financial health.

4) EBITDA Margin

Grade: B

Definition:

Earnings before interest, taxes, depreciation, and amortization as a percentage of revenue. Often used to measure core operational profitability.

Warby Parker's Numbers:

Adjusted EBITDA margin of 9%

Quick Analysis:

It is worth keeping in mind that the adjusted EBITDA (which becomes 9% positive) is mainly due to adjustment of stock-based compensation (which isn't cash, but dilutes investors), and depreciation and amortization - which is a real, big expense for WP, as they are heavily invested into brick-and-mortar shops (even if it is not cash based), so this kind of adjustment, and measure, should be taken with a grain of salt.

Takeaway for DTCs:

EBITDA really is the market gold standard for comparisons between companies, you should strive for EBITDA margins above 10-15%. However, beware adjusted EBITDA calculations and make sure you are comparing apples to apples.

Warby Parker's Overall Grade: C+

While Warby Parker's numbers have improved based on Q3 Financials, they still need to show how they will improve COGS and/or operating expenses, while planning to expand their brick-and-mortar operations.

Key Takeaways:

• Consider bundling to drive sales
• Keep on top of first-order profitability and beware of loss/razor-thin margins
• Top-line growth is nice, but profitability is more important

Summing it up

Warby Parker's story shows that even the biggest names in DTC face financial challenges. But with a closer look at your own margins, you can set your brand up for sustainable growth—without the big brand headaches.

Want to know your own margins and where to improve? Finaloop makes it easy for DTC founders to track profitability and plan for growth.