Warby Parker‘s debut Wednesday set a good precedent for a number of online-first retailers preparing to go public.
Warby shares skyrocketed 36% Wednesday. Founded in 2010, the company started hawking its eyewear online and has avoided using wholesale partners to make a sale. Its direct listing on the NYSE has put a spotlight on a class of direct-to-consumer brands that could be heading to Wall Street, next.
Allbirds, Fabletics and Rent the Runway are among those who quickly come to mind. Other peers — including the makeup brand Glossier, luggage start-up Away, athletic apparel brand Nobull and the sustainable shoe maker Rothy’s — might not yet be eyeing the public markets, 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 more than $6 billion market cap, and investors should proceed cautiously. While Warby has a growth story to sell, it remains unprofitable, and still has a lot to prove to live up to its current valuation, according to analysts. How shares trade in the coming weeks will likely be far more telling of Wall Street’s longer-term acceptance of Warby’s direct-to-consumer business model.
“The market’s perception of Warby is very, very generous,” said Dan McCarthy, an assistant professor of marketing at Emory University, who follows brands like Peloton, Revolve and Casper that began by selling products online directly to consumers. “People are willing to give the company the benefit of the doubt.”
“The fact that they get so much value from customers so far into the future can at least allow them to plausibly talk about scenarios where — a long time in the future — they will be significantly more profitable than today,” he said.
McCarthy said a fair valuation for Warby would be closer to $2.5 billion. That’s well below where shares were changing hands on Thursday, at about $53 apiece. It’s even lower than the reference price of $40 Warby received the night before its direct listing, which equates to a $4.5 billion valuation.
“This is a very strong signal that companies looking to go public have a receptive market to sell into, if they were to,” McCarthy said.
Volatility ahead
However, companies like Warby have shown mixed performance this year. According to investment bank Renaissance Capital, 12 internet retailers including Warby have gone public so far this year, compared with 9 in 2020. Shares of the scrubs-maker Figs, for example, are up about 31% since listing. But Jessica Alba’s Honest Company has seen its stock drop more than 43%.
Warby shares pulled back a bit on Thursday, closing down about 2.6%.
Most direct listings will see the company’s stock fall below the initial listing price within the first 90 days of trading, according to Kathleen Smith, a co-founding principal at Renaissance Capital.
“They certainly deserve the attention of investors,” she said in an interview on CNBC’s “Power Lunch.” “It’s a strong brand. They’re a leader in direct-to-consumer. They’ve done a great job.”
However, she cautioned, because of the terms of the direct listing, roughly 80% of Warby’s shares outstanding are able to be sold. There’s no traditional lockup period for shareholders, as there is with a traditional IPO. That could make for rocky trading volatility in the coming weeks.
Premium valuation
“Maybe Warby has done a good job of selling today’s investors through rose-colored glasses, because this is a company that is going to have a lot of overhang,” Smith said. “It’s also being priced at a tremendous premium to anybody else in its peer group.”
At a more than $6 billion valuation, Warby is trading at a multiple of roughly 13-times trailing revenue, while Smith said some of the company’s peers trade closer to three- to four-times sales. Meantime, retailers like Yeti and Canada Goose — which also began with a direct-to-consumer approach — trade at a multiple of six-times revenue.
“There’s a big gap between what’s happening with the trading here with Warby and what the reality is and the rest of the market,” Smith said. “Warby is going to have to do a lot to prove this premium valuation.”
To be sure, some believe that Warby’s sky-high valuation might be merited. Today, the company says it only has about 1% of the total eyewear market, with bigger competitors including Vision Source and Luxottica.
“There is huge growth potential for a business like this,” said Reena Aggarwal, a professor at Georgetown University and an expert in public listings. “And another positive side to this story is they do have this ‘do good’ philosophy.”
Warby is classified as a public benefit corporation, meaning it has a legal requirement to balance the interests of shareholders and other stakeholders. The company also has a “buy one, give one” program, where for each pair of glasses purchased, it donates a pair to those in need.
“This company is getting a huge valuation based on the market price, and as long as it doesn’t somehow crash in the next few days, that sets the relative valuation,” Aggarwal said.
Over time, the public will now be watching with a close eye how Warby manages its business and chooses to spend its capital.
One analyst already isn’t sold on the company’s plans to open dozens more retail stores, viewing this as a capital-intensive endeavor that could come back to haunt Warby. Today, the company has about 145 locations. It has said it plans to open 30 to 35 shops this year and aims to expand at that pace annually.
“I honestly doubt they will ever achieve any meaningful profitability,” said David Trainer, founder and CEO of the investment research firm New Constructs. “If you scale up and don’t make money, you’re bankrupting real fast.”
