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Can Warby Parker break the DTC curse?

Can Warby Parker break the DTC curse?

Good morning! This Thursday, Warby Parker proves that growth does not equal profits, the NFL is getting in on NFTs, and YouTube cracked down on anti-vax content.

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What to watch today

The endless parade of tech hearings is ... mostly a giant waste of time. But today's might be different. Antigone Davis, Facebook's global head of safety, will testify to the Senate Commerce Subcommittee on Consumer Protection, Product Safety, and Data Security today at 10:30 a.m. ET about Facebook's effects on children, and what the company is doing (or not doing) to keep kids safe online.

  • Last night, ahead of the hearing, Facebook attempted to throw the Facebook Files — and its researchers — under the bus. The company released annotated results from some of the internal research that featured in the Facebook Files investigation, though The Wall Street Journal countered with documents of its own.
  • And the fun's not over. Facebook's whistleblower will appear on "60 Minutes" on Sunday, and will also testify before the Senate next week.
You'll likely see Davis hold the company line today, which is that the experience of a few people on Instagram is not indicative of the platform's overall effect. That's what Facebook tried to argue with its document dump, and it didn't seem to land. We'll see how Davis does, and we'll have more on all of this tomorrow.

The Big Story

Warby Parker and the end of the DTC boom

Warby Parker went public via direct listing on the NYSE yesterday. The glasses retailer saw its shares jump to more than 35% above the reference price of $40 per share. That put its market cap at nearly $7 billion, more than double the $3 billion valuation it garnered from a private funding round in the summer of 2020.

Warby Parker's S-1 tells an important story, of a company struggling to turn growth into profits. It generated $393.7 million in revenue in 2020, and it's on track to have an even better year in 2021: The company recorded $270.5 million in the first half of the year, up 34.7% from the same period in 2020.

  • Over 1.81 million active customers purchased something from Warby Parker in 2020.
  • Warby Parker's business model looks great on a per-customer basis. Its customers are exceptionally loyal, which has translated into a net retention rate of nearly 100% within 24 months of a customers' first purchase. In 2020 it generated $218 in revenue per active customer, with a healthy profit margin of 21%.
  • You'd think this leaves plenty of room for Warby Parker to turn an overall profit, but the company has never managed to do so. It recorded a net loss of $55.9 million in 2020 and $20.4 million in the first half of 2021.

The biggest hurdle in the way of its profitability are SG&A costs. The line item, which includes employee salaries and marketing costs, was equal to 73% of net revenue in 2020 and 62% in the first half of 2021. While Warby Parker is on track to continue growing, its path to profitability still isn't clear.

Tech investors are often willing to accept sustained losses in a company's growth stage, but Warby Parker isn't necessarily a tech company. By its own account, Warby Parker purports to be a "founder-led, mission-driven lifestyle brand that sits at the intersection of technology, design, healthcare, and social enterprise."

  • Regardless of how Warby Parker brands itself, its financials still look very much like those of a retailer. Eyewear product sales accounted for 97% of total revenue in the first half of 2021.
  • It's also surprisingly reliant on brick-and-mortar retail sales. In the first half of 2021, Warby Parker generated 49% of total revenue from retail stores and the rest from ecommerce. Its retail footprint has grown in recent years, rising from 88 stores at the end of 2018 to 145 stores in mid-2021.

Still, it cites "continuous innovation" as a differentiator in the optical sector, and as something that provides "a strong competitive moat." For evidence, Warby Parker points to the launches of a telehealth app and blue-light glasses in 2018, and virtual try-on and private-label contact lenses in 2019. Some of these are really a stretch to categorize as tech.

  • For instance, how much of a competitive moat does Warby Parker have around blue-light glasses when you can buy a three-pack on Amazon for $13.95?
  • And private-label contact lenses are more an exercise in branding than breakthrough technology.

Warby Parker has established itself as a VC darling of the early DTC era since its launch in 2008. That funding has helped build it into a household name, but might not translate into a sustainably profitable business in the long term. At a time when just about every sizable retailer has an online presence, it's worth asking why the public tends to view companies like Warby Parker and Casper as tech and just not regular retailers. This is especially true when those DTC darlings are shifting in the opposite direction and rapidly scaling up their brick-and-mortar footprints.

And by the way, there's nothing wrong with being a retailer! I'll still buy my next pair of glasses from Warby Parker, even if unsubscribing from their email list was one of the better decisions I made in 2021.

— Hirsh Chitkara (email | twitter)

A MESSAGE FROM PHILIP MORRIS INTERNATIONAL

By scrutinizing facts and including all voices, we can achieve public consensus faster and take well-informed collective action against the many challenges our world is facing. Embracing facts, new technologies, and science is our shared responsibility and the least we can do to drive positive change for the world.

Learn more

People Are Talking

Shortly after John Carreyrou began covering Theranos, Elizabeth Holmes wrote a note to herself:

  • "Fearless transparent nothing to hide"
On Protocol | Fintech: Gavin Wood, a co-founder of Ethereum, is over the crypto in-fighting:
  • "We didn't have any ill will towards bitcoin. We were just technologists. But we got a lot of hate from the bitcoin world, a lot of unneeded, unreasonable skepticism and sometimes worse. It was almost like the crypto version of nationalism."

Money manager Jeff McCroy is pushing Apple to address child sex abuse in videos:

  • "The longer it takes for action, the more children that are at risk of exposure and harm."

Sen. Cynthia Lummis said stablecoins should be issued through money market funds or a similar approach:

  • "Stablecoins must be 100% backed by cash and cash equivalents, and this should be audited regularly."

Making Moves

The NFL is getting into NFTs. Dapper Labs is partnering with the football league to make NFTs of digital-video highlights from games.

Twitch is adding security features to help stop hate raids, including a tool that lets creators require phone verification before viewers can chat with them.

Gary Wipfler retired from Apple, sources told Bloomberg. The company's corporate treasurer had been with Apple for decades.

Bruce Vaughn is joining Airbnb as VP of experiential creative product. The former Disney exec will oversee a new team focused on the company's offline products.

Amelia Generalis is heading to Opendoor as chief people officer. She's held top jobs at companies like Anaplan and Electronic Arts.

In Other News

  • YouTube is cracking down on antivax content. The platform is taking down videos that claim vaccines are ineffective or harmful and will remove channels tied to anti-vaccine activists like Robert F. Kennedy Jr.
  • On Protocol: Nreal is making big moves in AR. The Chinese startup released a surprisingly advanced set of AR glasses, raised $100 million, and is planning a big global expansion.
  • Russia isn't happy with YouTube's antivax rules. The country threatened to block the platform after it took down RT's German-language channels, which YouTube said violated its COVID-19 misinformation policy.
  • Google will add more context to search engine results, like details of listed websites and information about third-party sources. The company is also using one of its new AI models to improve Google Lens image-recognition results.
  • On Protocol | Policy: Maybe we should stop asking Facebook to keep kids safe online. Because that doesn't seem to be going very well. Instead, some argue device makers and app store providers could be a better answer.
  • AT&T is expanding its vaccine mandate to include union workers represented by the Communications Workers of America. The move follows a vaccine requirement set for most of its management employees last month.
  • Jeff Bezos and Elon Musk are fighting again. After Musk accused Bezos and his companies of using litigation to set back SpaceX, Amazon handed The Verge a list of lawsuits and other legal actions that Musk's space company has taken over the years.

One More Thing

TikTok's social media takeover

Everyone loves TikTok, but there's always been some speculation around it. Pakistan has raised concerns about its content, India banned the app, and even former President Trump threatened to ban it. But it's still doing well regardless, and Chris Stokel-Walker gets into that success story in the book "TikTok Boom."

Stokel-Walker talks about whether concerns around the app are warranted, and how TikTok has dominated the social media world in just a few years based on interviews with people connected to the app. The book was already released in the U.K., but it's available in the U.S. today.

(Editor's note: Stokel-Walker has also written for this publication.)

A MESSAGE FROM PHILIP MORRIS INTERNATIONAL

By scrutinizing facts and including all voices, we can achieve public consensus faster and take well-informed collective action against the many challenges our world is facing. Embracing facts, new technologies, and science is our shared responsibility and the least we can do to drive positive change for the world.

Learn more

Thoughts, questions, tips? Send them to sourcecode@protocol.com, or our tips line, tips@protocol.com. Enjoy your day, see you tomorrow.

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