Proactive Investors - Analysts at UBS have initiated coverage on Warby Parker with a ‘Neutral’ rating on their view that the eyewear brand has a lot of potential but faces challenges ahead.
The analysts wrote in a note to clients that Warby Parker is poised to benefit from favorable demographic trends, including an ageing population and societal changes such as increased screen time.
“That said, its revenue growth has pulled back recently, and it currently faces a combination of competition from other low-cost players and challenges in growing managed care penetration,” they wrote.
“Plus, uneven consumer demand post-COVID and a lack of clear short-term catalysts are likely to weigh on the stock.”
The analysts wrote that it was tough to see the direct-to-consumer retailer returning to 20%-plus revenue growth.
“Our reverse discounted cash flow [model] suggests the market is pricing in an about 13% five-year sales compound annual growth rate,” they wrote.
They gave the stock a US$13 price target. Shares of Warby Parker traded up 3% at US$12.72 on Monday afternoon.
“We think its valuation balances its top line potential and the current uncertainty,” they explained.
They wrote that they would become more bullish if Warby Parker were able to narrow the gap between active customer and store growth, boosted managed care penetration, and show meaningful traction on returning to its original earnings algorithm.
“In this case, we estimate $858 million in sales two years out. Applying a three times enterprise value (EV)/sales multiple would imply a $20 upside valuation,” the analysts wrote.
They also said they could become more bearish if Warby Parker has to increase its marketing spend as a percentage of sales from current levels to improve active customer growth and underperforms in higher margin progressive lenses.
“In this case, we estimate $715 million in sales two years out. An about one times EV/sales multiple would imply a $5 downside valuation,” they wrote.
“We use EV/Sales due to WRBY's relatively brief history (it was founded in 2010), high growth profile, and path to sustainable profitability in the future.”