Shares of eyewear products company Warby Parker(NYSE: WRBY) plunged 23% in Wednesday trading, as of 3 p.m. ET.
Warby announced third-quarter results today, which beat on the top line. However, this loss-making growth company missed on profitability. In today's market of higher interest rates and fears over recession, a bottom-line miss for a loss-making company isn't going to please nervous investors.
Furthermore, while management raised guidance for the full year, its outlook actually implies a quarter-over-quarter decline.
Revenue up, but margins pressured
In the quarter, Warby Parker saw its revenue climb 14.2% to $169.8 million, ahead of expectations of $164.6 million. However, its net loss per share of ($0.15) was lower than the ($0.12) loss per share expected.
Warby is growing, but it may have some margin problems in the near term. Gross margin was about two percentage points below last year's. While the company is investing in its newer contact lens and branded eye examination business, those investments are increasing its fixed costs. So, investors may not have appreciated going from a relatively asset-light business in eyewear to a higher fixed-cost business that leases more retail space and has to pay optometrists.
Warby did raise full-year guidance, but that was really just accounting for the beat in the third quarter. Meanwhile, the company's fourth-quarter guidance was for $158 million to $161 million in revenue, which would signal growth of 8% to 10% over the prior year, decelerating from Q3 and actually down by 5% from third-quarter numbers.
With so much investment in new products and services, investors were likely hoping for a bit more on the top line.
Consumer stocks are tough right now
Warby Parker is probably right to give conservative guidance, given the high uncertainty in the consumer economy as the Federal Reserve has sharply raised interest rates. However, it appears that conservatism is what's causing the sell-off today.
On the plus side, Warby has $216 million in cash and no debt, so it can continue to invest without the threat of financial constraints by the capital markets. But investors need to hope it spends that largesse wisely and doesn't squander it on less-profitable, low-quality growth ventures.
Like many consumer stocks, it's hard to gain conviction on the name, even as the company now trades at a reasonable valuation at less than 2 times sales following today's plunge.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
