Price action in Warby Parker (NYSE:WRBY) has been trending lower ever since the highs set just after the IPO. The downtrend is due to the stock's high valuation, concerns about profitability, inflation/economic change, and no small amount of short selling. The short-sellers have their interest up to over 33% of the shares outstanding which we consider to be incredibly high. With a third of the shares sold short, there is a great risk for the bears of a short-squeeze and the institutional activity has been equally high.
The institutional activity in Warby Parker shares has been falling off over the past three quarters but there are several facts in support of higher share prices. The first and foremost is that total ownership is close to 98.6% of the stock, and growing, which suggests to us the institutions see value in the name. Assuming they keep buying the market will reach a tipping point in which the bears have no choice but to cover their positions. As for the insiders and large shareholders? They own about 18% of the stock making Warby Parker one tightly held asset. The Q1 results weren’t enough to spark a short-squeeze but they weren’t enough to give the bears firm control of the stock either.
There has been no analyst coverage since the earnings release but it’s coming. Until then, the 9 analysts rating the stock have it a weak Buy with a price target roughly 140% above the current price action. The Marketbeat.com consensus price target is moving lower in the 90-day comparison but the trend flattened over the past 30 days due to new coverage. If the outlook for 2022 can be believed, we think the trend will reverse (perhaps over the summer) and the stock will begin moving higher.
Warby Parker Misses Estimates But Gives Optimistic Outlook
Warby Parker had a good Q1 from what we can tell. The company reported $153.22 million in net revenue for a gain of 10.3% over last year. The revenue missed the consensus by 50 basis points but is offset by the impact of Omicron and the guidance. The company says Omicron cost it about $15 million in lost sales which is more than enough to offset the revenue shortfall and the guidance is favorable. The company maintained its guidance for the full year including new store openings despite the weakness in Q1.
Moving on to the earnings, the company reported a slight 180 basis point contraction in the gross margin but this was expected. The margin contraction is due to mix, contacts have weaker margins, and it is known the company was pushing sales of contacts to help grow the top line. As it is, sales of contacts are up more than 100% and gross margin came in at a strong 58.5%. The bad news is that SG&A and operating expenses increased at chopped 620 basis points off of the adjusted operating margin. The good news is that much of that decline is due to stock-based compensation, related taxes, IPO costs, and investment in technology which are either non-recurring or one-off expenses not related to company performance.
The Technical Outlook: Warby Parker Is Ripe For A Rebound
Short-interest aside, price action in Warby Parker looks ripe for a rebound. The price action is at a record low and looks overextended due to divergences in both the MACD and stochastic. The caveat is that a rebound may be met by resistance at the short-term moving average. If price action can not get above that level we see it entering a range until the next quarter’s results are in. If it can get above that level we see a short-covering rally beginning if not a short-squeeze. On the other hand, a move back to test support is possible because the stock is still very early in its bottoming if it is bottoming. In that scenario, a move below the current low of $15.02 would be bearish.
