In Chapter 9 we studied the Master Budget schedules which are summarized in Exhibit 9-5 on page 344 in our text. Read the article, Warby Parker Debuts at $6 Billion Valuation. Should You Buy? If you are the management accountant at Warby Parker, which budget in the master budget would you need to adjust to implement the issues indicated in the article? Would you need to increase or decrease the budget? Include a brief explanation.

Select the FIRST budget in the order of preparation that you would adjust.

1. Increased rent payments from new brick-and-mortar stores.

Budget:

Increase/decrease/no effect:

Explanation:

2. Sales up 35%.

Budget:

Increase/decrease/no effect:

Explanation:

3. Increase in cost of cellulose acetate.

Budget:

Increase/decrease/no effect:

Explanation

4. Adding more trained eye doctors.

Budget:

Increase/decrease/no effect:

Explanation

5. Ramping up advertising.

Budget:

Increase/decrease/no effect:

Explanation

Investing

Warby Parker Debuts at $6 Billion Valuation. Should You Buy?

The online eyewear retailer is betting on brick-and-mortar stores to boost its sales in the post-pandemic era. Heres what to consider before investing in the stock.

By Claire Ballentine and Francesca Maglione

September 29, 2021, 9:42 AM EDT Updated on September 29, 2021, 2:29 PM EDT

After spending the past 18 months of the pandemic staring at screens for both work and leisure, you might be thinking more about glasses. Warby Parker is hoping so, at least.

The eyewear retailer went public through a direct listing Wednesday, with shares trading at about $54 a share, giving the company a market value of about $6 billion. Unlike a traditional initial public offering, Warby Parker wont raise new capital, but its shares will begin trading on the New York Stock Exchange for investors to buy and sell under the ticker WRBY.

Originally a digital-first platform focused on direct-to-consumer sales, Warby Parker has since expanded to have more than 100 physical locations, with plans to open more than three dozen this year. And all that additional screen time means more people will likely need vision correction, the company said in its filing with the Securities and Exchange Commission.

Its now seeking to tap into the surge of interest in new and promising public companies like Robinhood Markets Inc. and Coinbase Global Inc. amid record gains in the equity market.

Theyve been around for a while, and theyve been very good at marketing themselves, said Sucharita Kodali, a retail analyst at Forrester. The challenge is that its an unprofitable consumer-facing company in the retail space, and the retail space isnt fundamentally growing.

Heres what you need to know about the company both the good and the bad before you invest:

How is Warby Parker doing?

Created in 2010 by four classmates at the University of Pennsylvanias Wharton School, Warby Parker started by selling glasses online for about $100 a pair. Customers could receive several frames to try on, pick the one they liked best and then give the company their prescription to get their eyewear made.

However, some people still prefer trying on glasses in-person, so the company has been boosting its brick-and-mortar locations and working to expand its presence on vision insurance plans. It also entered the contacts business in late 2019.

According to SEC filings, Warby Parker had a net loss of $7.3 million alongside revenue of $271 million in the first six months of 2021. Although that still makes the company unprofitable, its a 53% jump in revenue from the same period in 2020, when the retailer lost $10 million on revenue of $177 million.

Last week, the retailer said it expects its revenue to increase 35% for the 2021 fiscal year and 25% in 2022. It had about 2.1 million customers at the end of the second quarter, up 20% from that time last year.

The companys largest investors include some big names such as Tiger Global Management, T. Rowe Price, General Catalyst, D1 Capital Partners and Durable Capital. Warby Parker took in about $120 million in August 2020 through a series G funding round, bringing its total capital raised to more than $536 million. In April, its shares traded privately at around $24.53 each.

Whats the case for buying?

If you think phone and computer screens are taking a toll on our eyes. With more people than ever using smartphones, tablets and computers, the need for vision correction is increasing and contributing to new customer growth within the eyewear market. At least, thats what Warby Parker said in its SEC filing. About 75% of adults in the U.S. use some form of vision correction, according the Vision Council of America. As the Baby Boomer generation ages, thats likely to increase.

Even if they dont have impaired vision, some people might turn to blue light blocking glasses, including the line offered by Warby Parker. The spectacles are designed to reduce eye strain from screens and can help improve sleep. A lot of people interested in buying Warby Parker glasses dont have a medical conditions, said Daniel McCarthy, assistant professor of marketing at Emory University. The reason Im getting them is I want the blue light filter. You have all these people with all these different needs for glasses, some of which are related to vision, and some of which may not be.

If you like their name recognition. Unlike some new startups that have gone public recently, Warby Parker has been around for a while and built up a following in the past decade. Their customers really like them, McCarthy said. Thats evidenced through the very regular repeat business they get. This is an item that people will buy with very high frequency. For customers acquired between 2015 and 2019, the company saw 50% sales retention rate in the first year and 100% sales retention rate over two years.

If you think theres life left in brick-and-mortar stores. Although the company started as an online retailer, it now has 145 physical locations, including 142 in the U.S. and three in Canada. Before the pandemic, in-person stores accounted for 65% of the companys net revenue, with their online shop generating the remainder. This year, Warby Parker plans to open 30 to 35 more stores. To Kodali at Forrester, that makes sense because its really hard to acquire customers online, she said. The way you get in front of people is that you resort to traditional tactics like being in places where people gather.

The stores also serve as an advertisement for the company. I think they have been really smart at maximizing the visual impact that fits in with their strategy of doing anything they can to generate word of mouth, said Brad Brinegar, marketing expert at the Duke Innovation & Entrepreneurship Initiative.

If you buy into the companys ESG story. For every pair of glasses Warby Parker sells, it distributes a pair to someone in need through its Buy a Pair, Give a Pair program. The company has been able to distribute more than eight million glasses in over 50 countries and is also carbon-neutral. Those types of factors are really well-structured in the current market environment to make it compelling and make it something that can be desirable to a growing flock of retail investors, said Matt Weller, global head of market research at Forex.com.

...and what are reasons to steer clear?

If youre worried about supply chain issues. As Warby Parkers business grows, the global supply chain might not be able to keep up. The components that go into manufacturing its products come from a limited number of third parties in the U.S., China, Italy, Vietnam and Japan. More worrisome is that more than half of the cellulose acetate the material used to produce many of the glasses frames comes from a single supplier. Were seeing a lot of the supply chain costs ramp up. Everybody is complaining about how expensive chemicals are, said Kim Forrest, founder and chief investment officer at Bokeh Capital Partners. No doubt theyre going to be impacted by supply chain woes.

If youre not thrilled by the company's finances. Despite debuting in 2010, Warby Parker is still unprofitable, and its expenses will likely increase as it opens new stores, ramps up advertising and adds more trained eye doctors. The company has stated that its more focused on growing its business instead of allocating funds to increase net revenue growth.

Mike Bailey, director of research at FBB Capital Partners, is worried about how the pandemic may have skewed the companys sales figures. Their numbers are going into and out of Covid, he said. You cant really look at their calendar 2020 growth, and you cant look at trailing revenue. Thats kind of a negative for investors. We dont have a clean growth quarter and year.

Bottom of Form

If youre wary of the competition. Eyeglasses arent exactly a new product. Lots of other firms are vying for a slice of the market, including online brands such as Zenni and more traditional companies including Pearle Vision and EssilorLuxottica. The latter is already public and its stock has gained more than 40% in the past year. Then there are eye doctors, who often sell glasses and contacts directly from their offices. Its not easy to compete with that trusting relationship between a doctor and patient, often built up over decades.

If you think the pandemic will curtail retail spending. The company is relying on in-person foot traffic as part of its growth strategy, and the pandemic might get in the way of that yet. The future of retail stores will depend on health regulations, along with consumers willingness to shop in-person. Warby Parker does have a strong digital strategy, but it risks losing the visibility and new customers that physical locations could provide, particularly if the pandemic takes longer than expected to abate.

Anyone who is in e-commerce is well-positioned to thrive regardless of whether the pandemic continues or doesnt, said Forresters Kodali. So long as their marketing doesnt stop, they should be able to maintain the share they have and maybe even grow it.

With assistance by Michael Hytha

(Updates with price after trading began.)