National Vision Holdings, Inc. (NASDAQ:EYE) Q3 2023 Earnings Call Transcript

National Vision Holdings, Inc. (NASDAQ:EYE) Q3 2023 Earnings Call Transcript November 9, 2023

National Vision Holdings, Inc. beats earnings expectations. Reported EPS is $0.15, expectations were $0.06.

Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2023 National Vision Holdings Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Caitlin Churchill, Investor Relations. Please go ahead.

Caitlin Churchill: Thank you, and good morning, everyone. Welcome to National Vision’s third quarter 2023 earnings call. Joining me on the call today are Reade Fahs, CEO; and Melissa Rasmussen, CFO. Patrick Moore, COO, is also with us and will be available during the Q&A portion of the call. Our earnings release issued this morning and the presentation accompanying our call are both available in the Investors section of our website, nationalvision.com. A replay of the audio webcast will be archived in the Investors section after the call. Before we begin, let me remind you that our earnings material and today’s presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and our filings with the Securities and Exchange Commission. The release and today’s presentation also include certain non-GAAP measures. Reconciliation of these measures is included in our release and the supplemental presentation. We also would like to draw your attention to Slide 2 in today’s presentation for additional information about forward-looking statements and non-GAAP measures. As a reminder, National Vision provides investor presentation and supplemental materials for investor reference in the Investors section of our website.

I will now turn the call over to Reade.

Reade Fahs: Thank you, Caitlin. Good morning, everyone. Thank you all for joining us today. This morning, we will begin with a review of highlights from our third quarter, including ongoing progress on our strategic initiatives. We will then provide an update on the upcoming end of our Walmart partnership, as well as our plans to position National Vision for long term profitable growth. As we look ahead to operating a more streamlined and less complex business model, then Melissa will review our third quarter financial results and updated outlook in more detail. Turning to our results, we are pleased with our third quarter performance which reflected ongoing strength from our managed care business, and was supported by the continued progress we’re making with expanding eye exam capacity, particularly within America’s Best.

For the quarter, we delivered net revenue growth of 6.6%, including comparable store sales growth of 4.3%, and we delivered adjusted diluted EPS of $0.15. We saw strength particularly in America’s Best which was partially offset by softness in our Eyeglass World business. While we’ve continued to contend with an exam, capacity constraints across both our growth brands, our initiatives to date have been predominantly focused on our largest brands America’s Best. Given the improvement we’ve seen in our America’s Best locations, we are applying and incorporating the learnings from that playbook to improve our Eyeglass World performance. As we discussed on our last earnings call, we were encouraged with the early trends we’re seeing with the back-to-school season, and we’re pleased to see that performance continued through the period.

In addition, we continue to see strength from our managed care business, which is one indicator of the trade down behavior that is occurring with many customers as we continue to navigate a dynamic macro environment. As I mentioned, the quarter also benefited from ongoing progress on our strategic initiatives, particularly focused in our America’s Best business. We have continued to see improvement with stores that do not have optimal coverage, which we refer to as dark and dim locations. To expand the exam capacity from our recruiting, retention and remote initiatives. We are pleased to continue to see much lower levels of dark stores compared to the peak we saw last year. And are seeing slower but steady progress addressing our dim storage as well.

As a reminder, we define dark stores, its locations that do not have doctor coverage, and dim stores of those locations that have less than three days of doctor coverage. We remain focused on executing our initiatives to continue to drive improvement across our fleet. And as I discussed last quarter, where we have the desired level of capacity stores are delivering comps more in line with our historical operating model. We remain on track to deliver a second year of record recruiting and have contracted more new graduates this year than in any previous year. In addition, we continue to expect to deliver improved retention rates this year. These trends are driven in part by the schedule flexibility options that have been made available to the doctor.

Our remote initiative is also helping us to expand exam capacity, and it’s been a major factor in improving dark and dim store performance, enabling a double-digit productivity lift in sales. As of the end of Q3, more than half of our America’s Best locations have been enabled with remote exam capabilities and electronic healthcare records. Reflecting the progress we’ve made to the initial heavy implementation phase over the past two years. We remain on track to roll remote capabilities out to at least 200 stores this year. And as we look ahead, given the work done to date, as well as the evolving state regulatory landscape, we expect the pace of our implementation of remote to slow in 2024. We continue to believe in the opportunity there is for remote exam capabilities across our stores.

And we’ll continue to monitor the regulatory landscape and assess our plans accordingly. With respect to our EHR rollout, we remain on pace to have EHR installed at all America’s Best locations by the end of 2024. Turning next to our digitization plans for our corporate office, we have begun to implement the first phase of our ERP project focused on finance system upgrades. We are taking a measured approach to this project and plan to evaluate each phase appropriately to mitigate risk and maintain our focus on disciplined capital allocation. Finally, with respect to our whitespace opportunity, we remain on track to open 65 to 70 new stores this year and opened 21 new stores in the third quarter. Now let me provide an update on our transition plans with the pending end of our Walmart partnership beginning early next year.

We are committed to ensuring the continuity of our Walmart business to the end of our contracts and actions have been taken to support the retention of the associates and doctors during this time. I’m very appreciative of how our teams have continued to operate with discipline and focus on customer care amidst this transition. As we previously discussed, the Walmart business has continued to become a smaller piece of our overall performance over the last decade, and carries a much lower margin than our larger growth brands. Moving beyond the termination dates of the contracts, we will operate a far more streamlined and less complex model. As detailed in our press release this morning, in conjunction with the termination of our Walmart partnership, we will be winding down our remaining AC Lens operations.

In doing so, we will be closing our Ohio distribution center, which largely supports the wholesale distribution and ecommerce contact lens services that we provide to Walmart and Sam’s Club. While this is a difficult decision, it is a prudent one for our organization. We are continuing to work with Walmart on the transition of the Vision Center associates and ODs and currently expect approximately 7% of our total associate headcount to be impacted by this decision, and termination of the Walmart partnership. The vast majority of whom will be Walmart Vision Center, and AC Lens roles. In addition, given the changes in our go forward operating model, we have conducted a comprehensive review of our cost structure. And we’ll be implementing expense savings initiatives focused on streamlining corporate overhead, as well as reducing travel expenses and third party spend.

We believe these decisions combined with benefits from repricing actions we plan to take on the heels of the pricing study completed earlier this year, will more than offset the profitability gap created by the termination of the Walmart partnership. To this work and our ongoing execution of our strategic initiatives focused on driving revenue and enhancing performance in our two strategic growth brands. We are well positioned to deliver operating margin expansion and thus drive increased shareholder value. Melissa will discuss details of these actions and anticipated financial impact in a moment. In closing, we remain committed to our mission of making quality eye care and eyewear more affordable and accessible. While we continue to maintain a conservative approach to our outlook.

Given the ongoing challenging macro environment that just continued to pressure our core uninsured customer. We remain on track to deliver on our objectives for this year, as reflected in the narrowing of our guidance. I will now turn it over to Melissa.

Melissa Rasmussen : Thank you, Reade. And good morning, everyone. As we discussed, we are pleased with our third quarter performance in the ongoing progress we were making on our strategic initiatives where the third quarter net revenue increased 6.6% compared to the prior year, driven by adjusted comparable store sales growth and growth for new store sales. The timing of unearned revenue negatively impacted revenue in the period by 30 basis points. We opened 70 new America’s Best and for Eyeglass World stores in the third quarter. Unit growth in our America’s Best in Eyeglass World brands increased 5.3% on a combined basis over the total store base last year, and we ended the quarter with 1402 stores. As Reade mentioned, we are still on track to open between 65 stores and 70 stores in 2023.

Consistent with our previous guidance. Adjusted comparable store sales grew 4.3% compared to the third quarter of 2022 driven by an increase in customer transactions into a lesser degree and increase in average ticket. As Reade mentioned, we saw strength particularly in America’s Best, which was partially offset by softness in our Eyeglass World business. As Reade discussed, our initiatives continue to address our dark and dim store population. Well we have always contended with dark and dim stores. However, the combination of post COVID doctor availability issues and a more challenged lower end consumer has exacerbated the impact of dark and dim on our revenue performance. On average, a dark store is approximately 80% less productive than a store with full coverage, which we define as having five to six days of in store doctor coverage.

A dim store on average is approximately 50% less productive than a store with full coverage. By enabling remote we have significantly improved this productivity drag and while there is still more progress to be made. We are making nice headway with dark and dim stores. As a percentage of net revenue costs applicable to revenue increased 70 basis points compared with the prior year quarter driven primarily by the deleverage of optometrists related costs, as well as other components of service revenue, including warranty play revenue. These costs were partially offset by ongoing strength in exam revenue and a decrease in product costs attributable to higher eyeglass margin and decreased freight expenses. As we discussed last quarter, the pricing actions taken with respect to exam has helped to partially mitigate the increase in optometrist related costs.

For the quarter, the net impact from deleverages of optometrists related costs and the increase in exam revenue was approximately 50 basis points. Adjusted SG&A expense as a percentage of revenue increased 90 basis points compared with a third quarter of 2022. The increase in adjusted SG&A as a percentage of net revenue was primarily driven by performance-based incentive compensation, as we expected. Depreciation and amortization expense was $24.4 million, compared to $24.9 million in the prior year period. Adjusted operating income was $15.7 million, compared to $21.5 million in the prior year period. Adjusted operating margin decreased 130 basis points to 3%, due primarily to the same factors I just reviewed. Net interest expense was $3.7 million dollars, which includes mark-to-market gains and losses on derivative instruments, and changes related to amortization of debt discount and deferred financing costs of $3.5 million.

The year-over-year change was primarily a result of lower derivative income and higher interest expense on our term loan partially offset by higher income on cash balances. Our effective tax rate in third quarter was 5.8%, primarily due to legacy segment impairment losses. We expect our tax rate on ordinary income items be in line with our original guidance. Adjusted diluted EPS was $0.15 per share compared to $0.15 per share in the prior year period. Turning to our financial results for the nine months to date, as compared with the prior year period, net revenue increased approximately 5% driven by new stores and adjusted comparable store sales growth of 2%. Adjusted operating margin declined 180 basis points compared to the prior year period, driven primarily by the same factors I just reviewed, which impacted the third quarter.

Please note our adjusted results for the third quarter in nine months year-to-date period exclude the impact associated with one-time charges related to the termination of our Walmart partnership, including $2 million in retention bonuses and termination benefits for certain employees supporting the Walmart Vision centers, and the AC Lens distribution center and $79.4 million of non-cash impairment charges related to impairment of goodwill, intangible assets and fixed assets. Turning next to our balance sheet, we ended the quarter with a cash balance of approximately $266 million and total liquidity of $559 million, including available capacity from our revolving credit facility. As of September 30th, our total debt outstanding was $563 million.

And for the trailing 12 months we ended the period with net debt to adjusted EBITDA of 1.9 times. Year-to-date, we generated operating cash flow of $153 million. In addition, the first nine months of fiscal 2023, we invested $82 million in capital expenditures, primarily driven by investments in new stores, our labs and distribution center and our remote medicine technology. We remain on track for capital expenditures to be in the range of $115 million to $120 million in 2023 to support our key growth initiatives. Our balance sheet and liquidity remained strong, enabling our robust and disciplined capital allocation plan, which is designed for continued growth balanced with opportunistically returning capital to our shareholders. Earlier this summer, we refinanced our term loan A and extended our revolving credit facility and we are continuing to evaluate options with respect to our convertible note which mature in May of 2025.

Given the current environment and our focus on continuing to fortify our balance sheet, our share repurchase activity to date was focused on the first quarter of this year. And as of the end of Q3, we have $25 million of share repurchase authorization remaining. We will continue to deploy capital to ensure we are making prudent decisions that are financially responsible for the company. Moving now to the discussion of our 2023 outlook, year-to-date, we remain on track with our expectations for this year. And as we move into the fourth quarter, our seasonally lowest quarter, from a profitability perspective, we are narrowing our full year guidance range. We now expect revenue to be in the range of $2.115 billion to $2.125 billion supported by adjusted comparable store sales growth of approximately 2% for fiscal 2023.

Our revenue guidance incorporates ongoing execution of our strategic initiatives focused on expanding exam capacity and contemplates current business trends. We continue to expect depreciation and amortization to be in the range of $99 million to $101 million. We expect adjusted operating income and adjusted diluted EPS to be in the range of $60 million to $65 million to $0.53 to $0.58 per share, respectively. Our guidance for adjusted diluted EPS as soon as approximately $78 million weighted average diluted shares outstanding. As a reminder, our adjusted results as well as our outlook excludes the one-time charges related to the termination of our Walmart partnership I reviewed as well as the expected costs associated with the first phase of our ERP implementation.

Regarding our ERP project, as Reade noted, we are taking a disciplined and phased approach. The first phase which kicked off late in third quarter, we’ll focus primarily on finance system upgrades, it is expected to be substantially complete in 2024. We expect to incur one-time expenses associated with the first phase of this project to be between $11 million is $13 million of which we expect to incur between $2 million and $3 million in fiscal 2023. Now, let me provide an update on the work underway as we plan for the upcoming termination of our Walmart partnership. As we previously announced, as of February 23rd, 2024, we will transition the operations of the 229 Vision Centers, as well as the related optometric services for Walmart in California to Walmart.

And as of Jun 30, 2024, we will see the wholesale distribution and ecommerce contact lens services that we provide to Walmart and Sam’s Club through our AC Lens business. And we’ll wind down the remaining AC Lens operations. For fiscal 2023, we expect our Walmart store operations and the wholesale distribution and related services to Walmart and Sam’s Club included in our corporate other segments to account for approximately $355 million of revenue. The remaining portion of our AC Lens operations, which generates approximately $45 million in sales and immaterial from an earnings perspective will be wound down in conjunction with the overall Walmart and Sam’s Club exit. Combined, the Walmart store operations in the AC Lens operations are expected to generate approximately $400 million in revenue and earnings before income tax of approximately $15 million.

The annualized direct and indirect costs associated with these operations for fiscal 2023 are expected to be approximately $385 million. We expect costs associated with these operations, including our Ohio distribution center to be wound down in conjunction with the contract termination date. While we expect to provide our full 2024 outlook as part of our year-end earnings call in 2024. Due to the Walmart contracts staggered end date in 2024. We want to provide some additional details now to help with modeling. Using 2023 as our guide, we expect revenue related to the Vision Center Operations and the AC Lens operations in fiscal 2024 to range between $140 million to $150 million with a margin profile similar to 2023. Assuming no material degradation in the Walmart operation.

As we look ahead, with an enhanced focus on our largest growth brands, we are taking actions that will further optimize our cost structure and position us to advance our long-term strategy and strengthen our competitive position. As Reade noted, beginning in 2024, we will be implementing an expense reduction program, targeting annualized savings of $10 million to $12 million focused on streamlining corporate overhead as well as reducing travel expenses in third party spend. As Reade noted, we are also planning to take additional non headline pricing actions, which we believe will continue to enable us to deliver on our mission to provide affordable eye care and eyewear while maintaining a competitive position in the marketplace, and leveraging our costs more effectively.

We expect the combined impact of the non-headline pricing increases in the cost savings program to more than offset the profitability gap created by the termination of the Walmart partnership. We believe these actions combined with gross margin tailwind from the exit of the lower margin Walmart operations. And the ongoing progress of our strategic initiatives, including the completion of the large initial implementation phase of our remote and EHR capabilities. Position as well to return to mid-single digit adjusted comparable store sales growth and operating margin by fiscal 2025. In summary, we are pleased with ongoing progress and expanding exam capacity and expect to continue to build on this momentum as we move forward with an even greater focus on our strategic growth brands.

We believe the actions we have announced today will further support our plans to drive long term success and shareholder value. Thank you for your time today. I will now turn the call over to Reade for closing remarks before we open the call for your questions. Reade.

Reade Fahs : Thank you, Melissa. To summarize, we’re pleased with our third quarter results and the ongoing improvement we are making regarding the strategic initiatives we’ve put in place this year, particularly with expanding exam capacity. While we continue to navigate an ever-changing macro environment, we remain focused on the aspects of the business we can control. With respect to profitability, we are taking actions to mitigate the impact of the termination of the Walmart partnership, and streamlining our organization to align with our go forward operating model. As we look ahead, I’m confident that we will continue to build on the progress we’ve made throughout this year, positioning us well to deliver on our long-term objectives. Now we’ll open it up for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Anthony Chukumba from Loop Capital Markets. Your line is open.

Anthony Chukumba: Good morning. Thank you so much for taking my question. Congrats on the strong results. I found the cost savings opportunities. Interesting, I have to imagine you’re going to save a ton of money, just not having Reade having to fly to Bentonville all the time. So, so there’s that. So, but seriously, so my first question, you’ve talked in the past about the comp differential between manage vision care, versus out of pocket was just wondering if you can just give any commentary, particularly on the out of pocket. And whether you’re seeing any improvement in the comp trend there?

Reade Fahs: Yeah. So as you pointed out there, our managed care business has been really great. Year-to-date, aren’t we — our managed care? Demonstration started strong and just strengthened throughout the year. The great thing about our managed care business is that it’s not our customers’ money. So, that’s good. And also, I think that the managed care customers have realized that their money goes further with us than it has than it does otherwise.

Anthony Chukumba: Got it. And then you’ve talked in the past anecdotally about, seeing better cars in the parking lot is, evidence of the trade down impact and sounds like you got some impact from that. I mean, is that, sequentially getting better? I’m just trying to think about, the sequential comp acceleration, how much of that was, remote eye exams versus normalization of purchase patterns versus like, trade down? So, that’s when we kind of think about that.

Melissa Rasmussen : Yes, so trade down continues, and we’re seeing a greater percent of our customers coming from over $100,000 households. And managed care is part of that. But some relates to the non-managed care as well.

Anthony Chukumba: Got it. That’s helpful. Keep up the good work. Thanks.

Reade Fahs: So thank you, Anthony. And, and yes, I will be saving money by not going to Bentonville, that was very good.

Operator: [Operator Instructions]. Our next question will come from the line of Michael Lasser from UBS. Your line is open.

Michael Lasser: Good morning. Thank you so much for taking my question. Your expectation that you can get to a mid-single digit operating margin by 2025? Can you give us a bridge on the components that are going to drive that? And as part of it? How much is going to be driven by pricing? What are you finding about your ability to pass through additional price increases without disrupting the value proposition to your customer?

Reade Fahs: I’ll take the pricing side of that first, Michael. So, we’ve been taking some peripheral pricing action throughout the year non headlined pricing action. And I think we mentioned two calls ago that, that we’re doing a deeper dive study. We’re always monitoring price scores, but that we’re doing a deeper dive study in our server pricing architecture relative to competition and based on that we have some programs that we’re going to be putting in place at the very end of this year. That as Melissa said, we think you’re going to play a nice role in improving our margins next year.

Melissa Rasmussen : Hey, Michael. This is Melissa. So, we’re expecting that we will have some benefit in 2025, as we complete the remote implementation phase, we spoke about that earlier in the year. And with that, we’ll save on rollout expenses, we’ll expect to see some gross margin improvements as we, as we move past the Walmart, lower margin business, and the AC Lens distribution lower margin business. With that we’ll see some operating margins benefit as we roll into 2025.

Reade Fahs: And, Michael, can I just follow up on one other thing relative to the pricing side of that, we are putting in the pricing actions that we refer to I think ever since we met, you’ve heard us say that we like to grow by transaction count more than by average fail. And we’re very pleased that Q3 showed a positive comp transaction for the quarter. And that’s the way we like to grow. That’s — that was the primary focus of the growth in the quarter.

Michael Lasser: Without a doubt Reade that being said your implied fourth quarter guidance does suggest that your comp is going to slow, though. A, is that what you’ve seen already thus far this quarter. And then B, why do you think it would be slower?

Melissa Rasmussen : Yeah, so Michael, we do expect some deceleration in the implied Q4 comp. And we believe that’s pretty good given the uncertain environment we have factored in the current trends that we’re seeing in the business. And something to keep in mind is that our talk has always factored in two key drivers, first being the health of the consumer. And second being the success that we have as we expand exam capacity. We are gaining traction with respect to that and controlling the factors of the business that we can control. We’re pleased with the performance to date and expect to have positive constant 4Q and full year.

Michael Lasser: Thank you very much. Good luck.

Reade Fahs: Thank you.

Operator: Next question offline of Zach Fadem from Wells Fargo. Your line is open.

Zach Fadem: Hey, good morning. So when you look at your 4% comp in the quarter and nearly 6% at America’s Best, could you parse out the comp impact from fully staffed stores relative to the drag of understaffed and dark stores? And then maybe talk about how these metrics each of them have been tracking throughout the course of the year?