National Vision : Q1 2024 Earnings Transcript

08-May-2024

National Vision Holdings, Inc. (EYE)

Q1 2024 Earnings Call Transcript

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CORPORATE PARTICIPANTS

Tamara Gonzalez Vice President-Investor Relations, National Vision Holdings, Inc. L. Reade Fahs Chief Executive Officer and Director, National Vision Holdings, Inc. Melissa Rasmussen Chief Financial Officer, National Vision Holdings, Inc.

Patrick R. Moore Chief Operating Officer, National Vision Holdings, Inc.

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OTHER PARTICIPANTS

Michael Lasser Analyst, UBS Securities LLC

Simeon Siegel Analyst, BMO Capital Markets Corp.

Anthony Chinonye Chukumba Analyst, Loop Capital Markets LLC

Simeon Ari Gutman Analyst, Morgan Stanley & Co. LLC

Adrienne Yih Analyst, Barclays Capital, Inc.

Brian Tanquilut Analyst, Jefferies LLC

Zachary Fadem Analyst, Wells Fargo Securities LLC

Dylan Carden Analyst, William Blair & Co. LLC

Brandon Cheatham Analyst, Citigroup Global Markets, Inc.

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PRESENTATION

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Tamara Gonzalez Vice President-Investor Relations, National Vision Holdings, Inc.

Thank you, and good morning, everyone. Welcome to National Vision's first quarter 2024 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 materials 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-GAAPmeasures. 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 presentations and supplemental materials for investor reference in the Investors section of our website.  I will now turn the call over to Reade.  Reade …   

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L. Reade Fahs Chief Executive Officer and Director, National Vision Holdings, Inc.

Thank you, Tamara and good morning, everyone. Thank you for joining us today.

As you saw in our release this morning, we delivered first quarter top line results in line with our expectations of relatively flat adjusted comparable store sales growth. And, we are pleased to report total company adjusted diluted earnings per share of $0.32, which reflects our team's continued disciplined approach to expense management.

On a continuing basis, first quarter net revenues increased 4.2% and adjusted comparable store sales increased 0.4%, primarily driven by ongoing strength in our managed care business and growth within America's Best.

On our last call we shared that the softer start to the year was related to weather during January. This, along with a slower start to the tax refund season, adversely impacted sales and transactions in the quarter as consumers remain cautious in their spending.

During the quarter we also saw higher average ticket, and higher exam revenues driven by the pricing actions we have taken. In addition, the greater percentage of managed care purchases resulted in a mix shift between our two-pair offer and single pair eyeglass sales as Melissa will discuss.

Our business remains in the midst of a transformation that we began in earnest last year and we've made significant progress over that time, thus giving us a stronger foundation for future growth. We remain keenly

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focused on our customers while maintaining a disciplined approach to expense management by closely managingour cost structure both in the stores and at the corporate level. We are continuing to adapt our model to meet the realities of our industry today and the needs of our customers.

With that, I'd like to share my thoughts on the quarter in terms of what went well, and where we see opportunities to improve.

Let's start with what went well.

Our key focus for the past year has been on ensuring that eye exams are available for our customers when they want them. To accomplish this, we have focused on retention and recruitment of Optometrists, and leveraging Remote exam technology. From this perspective, things went well in the first quarter. Our retention levels remain healthy and recruitment remains on track with our 2024 goals.

And on the Remote exam front, we made some real progress. Recall that our Remote technology allows doctors working from other locations to perform an eye exam on a patient in the store. We find that recruiting doctors is easier with the Remote model given the flexibility it offers them.

On our last call we shared that our roll out efforts were hampered by certain large states that restrict or do not permit teleoptometry. We shared that we believe the general evolution will be toward authorizing more telemedicine options but that certain states had not yet adopted the practice. We specifically mentioned Texas as a state where we could really use Remote to help improve exam capacity.

Since our last call, based on recent updates to the regulatory environment, we are pleased to say that we are moving forward with Remote in Texas this year, in addition to our original locations planned for the year.

Since we began piloting remote eye exam technology in our America's Best stores just three years ago, we have enabled over 550 locations as of the end of 2023. On our last call we shared that we planned to enable 50 additional stores with Remote this year and complete the expansion of electronic health records, or EHR, throughout America's Best. With these latest positive developments, we now expect to add Remote to at least 150 stores this year and allow the EHR rollout completion to fall into next year, therefore we anticipate ending the year with approximately 700 remote-enabled stores.

Note that in the first quarter, remote exams represented over 7% of all exams provided and in Remote- enabled states they were in the low double-digit percentage range.

Recall that our rollout of remote is dependent on the state-by-state regulatory environment and we intend to continue adding select locations where feasible and advantageous.

Importantly, remote doctors now perform approximately the same number of exams as Optometrists practicing live in the store per day. Additionally, several stores are already at the point where they can perform as many exams a day with only Remote options as they do with Live Doctors, which gives us further confidence in the benefits of our Remote model.

In summary on this point, we feel quite good about how our efforts in retention, recruitment, and remote helped to drive an improvement in exam capacity in the first quarter compared to the prior year.

Moving on to where we see opportunities…

You are well aware of the challenging macroeconomic environment the retail industry is up against - especially for retailers like us who appeal to lower income consumers. As such, we've seen the kind of

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pressure on our business that you'd expect in this environment. Our comparable store sales remain below our target of mid-single digit growth - and this is our number one focus.

Last quarter we shared that we were waiting for March results as a data point for normalization in the purchase cycle following the green shoots we saw in the second half of last year. However, March did not prove to have as robust of a demand backdrop as we would have hoped. However, with much of the year still ahead, we remain focused on executing on our goals, and we are reaffirming our earnings outlook for the year. Melissa will go into more detail on our outlook in just a moment.

The data remains inconsistent, and we believe it is still too soon to declare that the optical purchase cycle has normalized -- particularly as our core uninsured customer faces ongoing macro-related headwinds.

Our lower-income consumers remain stressed given persistent high inflation. This is reflected in the lower contribution of our cash pay customers to our overall sales as this group weighs daily purchases such as groceries and gas with the necessity to see clearly.

As such, we did not see the growth in cash pay customers as we did in the fourth quarter. We did continue to see strength in managed care, which as of the end of last year represents about 35% of our business.

While we cannot control the macro factors impacting our business, we believe the actions we are taking provide us with a strong foundation for growth. I am pleased with the execution our teams are delivering against this challenging backdrop.

We also continue to tackle inflationary pressures on our business with pricing. In fact, on a continuing basis, exam net revenue fully offset doctor costs during the quarter for the first timein the past 12 months, reflecting the price increases we took at the end of the fourth quarter as well as increased doctor productivity.

We will continue to look for ways to offset inflation with pricing where we see the opportunity to do so.

As we shared last quarter, Eyeglass World is not performing to our standards. We are pleased with the actions the new leadership team is taking to improve that business and re-energize the brand. The primary focus has been to standardize operations by taking a page from our America's Best playbook, which includes improving coverage to better align days and times of coverage to meet our patient's needs. We began implementing Remote technology in select stores this quarter. Also, as we mentioned on our last call, we reallocated marketing dollars to provide Eyeglass World with higher advertising this year to improve brand awareness.

During the quarter, we largely completed the previously announced conversion of the 20 Eyeglass World California stores to America's Best. We are early in the conversion and some opportunities remain, but overall things are going well. Our training teams are doing an amazing job helping the staff and doctors transition to the new model. Additionally, we recently equipped California stores with EHR and plan to use remote in at least some of those stores for fill-in coverage.

Before closing, I'd like to share with you an update on our whitespace opportunity and some exciting AI developments at Toku.

During the quarter, we completed a detailed analysis on our whitespace opportunity. The new analysis is based on updated modeling by a third-party real estate data analytics provider, that we have used for many years. Based on these results, we increased the whitespace opportunity for America's Best by an additional 350 locations, for a new total of at least 1,650 America's Best locations. Our analysis assumes maintaining Eyeglass World's total whitespace opportunity of at least 850 locations, as we work to improve performance

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in that brand. Our total updated whitespace opportunity is now believed to be at least 2,500 stores, which is more than double that of our current store count.

As we think about opportunities and our new store opening plans, it is important to note that two thirds of the America's Best stores in our new whitespace opportunity are in currently remote-enabled states, a figure that will increase over time as we enter more states. Further, the majority of our new stores open with full doctor coverage, most with live doctors or some form of hybrid live and remote doctor coverage.

For the year, we continue to expect to open 65-70 new stores and will continue to provide details on our annual new store opening plans at the beginning of each year.

Looking ahead, we are excited about the many opportunities AI brings to the optical industry.

While still early stage, we are pleased with the progress being made by Toku Inc., the AI start-up we have invested in.

This quarter we were excited to be the first retailer in the U.S. to launch a pilot of BioAge, Toku's wellness product that utilizes retinal images to determine a person's biological age, which can give an indication of their overall health. We are currently piloting this in a handful of stores.

Toku was also granted its second Breakthrough designation by the FDA, this time for its chronic kidney disease assessment AI, which follows the designation granted for its cardiovascular assessment AI late last year.

Both of these products can use retinal images collected at routine eye exams which further demonstrate that the eye offers a window into broader health.

And with that, I will turn the call over to Melissa to review our results in more detail.

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Melissa Rasmussen Chief Financial Officer, National Vision Holdings, Inc.

Thank you, Reade, and good morning, everyone.

As Reade noted, we delivered first quarter adjusted comparable store sales in line with our expectations on both a total company and a continuing operations perspective, and we have continued to progress our initiatives including expanding exam capacity by addressing both dark and dim stores. Given the termination of the Walmart management and services agreement in the first quarter, our historical Legacy segment is now presented as discontinued operations for the current and prior year periods. As you review our financial statements, note that the earnings impact from the termination of the Walmart management and services agreement can be found in one line item entitled discontinued operations. Today, my review of first quarter results will be focused on continuing operations unless otherwise noted.

Now moving on to our first quarter results in more detail...

For the first quarter, net revenue increased 4.2% compared to the prior year, driven primarily by growth from new store sales, which was partially offset by a slight drag from the conversion of the 20 Eyeglass World stores in California. The converted stores were closed for a short period of time prior to re-opening as America's Best locations. These stores will continue to be reflected in total net revenue performance and

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will be added to the comp base in the 13th full fiscal month following the completion of the conversion, which is consistent with our comp methodology. Adjusted Comparable Store Sales Growth for the quarter was 0.4% driven by an increase in average ticket supported by the pricing actions taken at the end of last year, partially offset by a decrease in customer transactions.

The timing of unearned revenue benefited revenue in the period by 50 basis points. We opened 14 new America's Best and converted 20 Eyeglass World stores to America's Best in the first quarter. Unit growth in our America's Best and Eyeglass World brands increased 6.5% on a combined basis over the total store base last year, and we ended the quarter with 1,201 stores.

As a percentage of net revenue, costs applicable to revenue increased approximately 60 basis points compared with the prior year quarter, driven primarily by a 110 basis points decrease in product gross margin, offset by a 50-bpsexpansion in service gross margin. The decrease in product gross margin was largely attributable to the mix shift in revenues given the strength in managed care and the underutilization of the two pair offer, as the cash pay consumer remains stressed. The 50-bpsexpansion in service gross margin was driven by increased exam revenue due to pricing actions and growth in exam count, which more than offset the deleverage in optometrist related costs. This is detailed on slide 8 in our presentation.

Adjusted SG&A expense as a percentage of revenue decreased 70 basis points compared with the first quarter of 2023. The decrease in adjusted SG&A as a percentage of net revenue was primarily driven by a decrease in performance-based incentive compensation, partially offset by increased occupancy and other operating expenses. We continue to be very disciplined with expense management and have implemented efficiencies to streamline processes and reduce costs. For example, during the quarter, we modified our store staffing program to better align store performance and demand, without sacrificing customer service.

Depreciation and amortization expense was $23.6 million, compared to $22.7 million in the prior year period.

Adjusted operating income was $35.8 million compared to $33.9 million in the prior year period. Adjusted operating margin increased 10 basis points to 6.6% compared to the prior period due primarily to the factors previously discussed.

Net interest expense was $4.3 million, compared to $4.9 million in the prior year period. As a reminder, our interest guidance excludes non-cashmark-to-market and deferred financing costs which totaled $3.3 million for the period. Excluding these costs, interest expense was $1.0 million.

Adjusted diluted EPS increased to $0.30 per share in the first quarter of fiscal 2024 from $0.27 per share a year ago and reflects an effective tax rate of approximately 31%.

As a reminder, our adjusted results exclude the impacts associated with one-time charges including the wind down of AC Lens, cost savings initiatives, charges related to our ERP and CRM implementations among other items as detailed in the reconciliation tables in our earnings release for our adjusted results on both a total company and continuing operations basis.

As it relates to the ERP project, workstreams are progressing well and we are on track to substantially complete the first phase of the project by the end of fiscal 2024.

Turning next to our balance sheet.

We ended the quarter with a cash balance of approximately $150 million and total liquidity of $444 million, including available capacity from our revolving credit facility. As of March 30th, our total debt outstanding

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was $459 million, net of unamortized discounts, and for the trailing 12 months, we ended the year with net debt-to-adjusted EBITDA of 2.0 times.

During the quarter, we generated operating cash flow of $24.0 million and invested $20.0 million in capital expenditures primarily focused on new store openings and investments in technology. We continue to maintain a strong balance sheet and healthy cash flow to support our growth and capital allocation priorities as detailed on slide 10 of our earnings presentation.

Moving now to the discussion of our 2024 outlook for the total company which includes the impact from discontinued operations as well as our continuing operations for the full year.

As stated in our press release, we are reaffirming our outlook for the fiscal year 2024.

The expected effect of Walmart and AC Lens operations on fiscal 2024 results are reflected on slide 13 of our earnings presentation. Walmart store operations, now reflected in discontinued operations, delivered $18 million in revenue and an adjusted operating loss of $800 thousand for the first quarter of fiscal 2024. These results include $3 million from unearned revenue and the impact of additional costs incurred after the contract termination not assumed in our original outlook. As a reminder, our AC Lens operations will remain in continuing operations results through June 30th. We now expect AC Lens to deliver approximately $122 million of revenue and $2 million of Adjusted Operating Income in the first half of the year, half of which was achieved in the first quarter.

In addition, our outlook for fiscal 2024 assumes a range of scenarios with respect to consumer sentiment, ongoing success with our America's Best brand, and performance improvement in our Eyeglass World brand.

As Reade noted, we experienced a less than robust tax refund season. While March and April both comped positively in the low single digit range, we would need to see a greater improvement in adjusted comparable store sales growth trends as we progress through the year to achieve topline results toward the higher end of our guidance range. That said, it is still early in the year, and we are controlling all aspects of performance that we can control. We remain acutely focused on executing our strategic initiatives to drive topline growth, which includes expanding our remote exam capabilities into Texas. We believe expanding remote exam

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In addition, we continue to believe that the pricing actions we took at the end of last year, as well as our ongoing focus on disciplined expense management will support our profitability objectives. As I mentioned, we have evolved our store staffing guidelines to better adapt to changing consumer trends, and we are continuing to benefit from the cost savings actions we implemented late last year.

As a reminder, at the midpoint of our guidance, we would expect operating income margin relatively in line with fiscal 2023 driven by gross margin expansion of approximately 200 basis points, which is expected to be entirely weighted to the second half of the year, given the timing of the transition out of the lower margin Walmart and AC Lens businesses. Adjusted SG&A as a percentage of revenue is expected to deleverage by approximately 150 basis points, primarily driven by the year-over-year decline in revenue in the second half of the year given the termination of the Walmart and AC Lens businesses.

Looking further ahead, as we have previously discussed, fiscal 2024 results and a return to mid-single-digit adjusted comparable store sales growth are critical steps in achieving our fiscal 2025 target of a mid-single- digit adjusted operating margin. While we cannot control the macro environment which continues to pressure our core uninsured consumer, as reflected in our slower start to 2024, we remain committed to controlling all aspects of business performance within our control by taking the appropriate actions to

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improve productivity while driving gross margin expansion and expense leverage. We remain focused on achieving our objectives and delivering value to our shareholders.

Thank you for your time today. I will now turn the call over to Reade for closing remarks before we open the call for questions. Reade?

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L. Reade Fahs Chief Executive Officer and Director, National Vision Holdings, Inc.

Thank you, Melissa.

To summarize, we are pleased to have delivered sales in line with our guidance on our last call. We remain intently focused on disciplined expense management which led to stronger than expected profits in the first quarter.

Our doctor retention and recruitment levels during the quarter remain on track, and we are excited to move forward with enabling our stores in Texas with remote technology which will allow us to improve coverage in that important state.

And our EGW Team is making progress to improve and re-energize the brand.

While the macroeconomic environment remains uncertain, the National Vision culture remains strong. It gives me great joy to see the passion associates and doctors bring to our stores each day to serve our customers. We are keenly focused on the areas of our business that we can control and are committed to continuing to make progress on our strategic initiatives to drive shareholder value.

And with that, we'll will now turn the call over to the operator for questions.

QUESTION AND ANSWER SECTION

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Michael Lasser Analyst, UBS Securities LLC

Good morning. Thank you so much for taking my question. Given the underperformance of the Eyeglass World segment, which tends to cater to a slightly higher income demographic, it does seem like you are seeing different trends by your class of income demographic. So, are there other factors at play that are weighing on sales outside of just the macro, in your view?

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L. Reade Fahs Chief Executive Officer and Director, National Vision Holdings, Inc.

Michael, thank you for that. Yes, and you are right, the Eyeglass World does appeal to a slightly higher demographic, but we don't really think that that's what is the key challenge for our Eyeglass World business. We really think that we've got a few things that aren't quite in alignment there, that the coverage situation in Eyeglass World has not been as strong. We have a few different models there that we're trying to get to the point of the - of having the coverage we need to handle the consumer demand there, where we think that we've been under-marketing that and we're returning to healthier marketing levels. And we think that there is some operational crispness that we can improve also. And so, we really would think there are more internal factors associated with this than really the external - than the consumer segments that they appeal to. I will say we are adding remote to a number of Eyeglass World stores now, so that's going to - should be helpful to us in the near future.

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Michael Lasser Analyst, UBS Securities LLC

Okay. Thank you very much for that. And my follow-up question is, you just - you discussed the low- single-digit comps that you've been seeing in March and April. And if that continues, it would take out the high end of the comp range for the year. How should we think about the flow-through or where you would land on the profitability side if you come in at the lower end of your sales range for the year?

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Melissa Rasmussen Chief Financial Officer, National Vision Holdings, Inc.

Hi, Michael. The way that we were considering the guidance with the comp trajectory that we've seen so far, while the March and April comps came in, in the low-single-digit, that's more in line with the bottom end of our range. And we were hoping for a more robust March than what we saw. That being said, there are some levers that we're planning to pull related to revenue, one of which being the rollout of remote into Texas. Texas is the largest state with America's Best presence in it. So, we do expect a meaningful impact to the back half of the year related to the remote enablement there. In addition, we're looking to implement some patient access initiatives in the coming weeks that we also expect will be a benefit to revenue. With both of those factors, we were confident in reaffirming the guidance range.

Now, Texas, we're expecting to make up some lost ground from the slower start of the year. And with the overall performance at the bottom line, we did see some benefit from disciplined expense management, but we also had an impact related to incentive compensation. Year-over-year, we're accruing lower incentive compensation that was built into the plan to some extent. However, based on the slower start of performance, you did see a bigger benefit of that this quarter than you'll see in subsequent quarters. We do expect that we'll continue to mitigate expenses to the extent possible and are continuously looking for efficiencies to implement and will maintain our disciplined expense management.

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Simeon Siegel Analyst, BMO Capital Markets Corp.

Thanks. Good morning, everyone. So, could you - just back on the March, April for a second, how was ticket versus transaction in that period? And maybe how are you thinking about the transactions playing out over the course of the year? And then, I know this is early, but just any early learnings you can share on the performance of the converted stores? Like, how are their openings or even the ramps you're seeing, how they compare to new store openings? Thanks.

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L. Reade Fahs Chief Executive Officer and Director, National Vision Holdings, Inc.

So, there are three parts there. So, the March and April period is a little bit more transaction-driven than ticket driven. [ph] We think it's (00:30:56), I think, a little different in the two quarters there. We're going to check that for sure right now. The converted stores are transitioning well. This is the 20 Eyeglass World. Converted stores are -they are transitioning. We're teaching the new model. We - just at the end of the quarter, we got to the point where they got to the new model. But now, we're training all the stores on how to do the new model and it is a very different model. So that's coming along as we had expected.

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Simeon Siegel Analyst, BMO Capital Markets Corp.

Just thinking through how you would expect transactions to progress over the year within the high or low end range?

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L. Reade Fahs Chief Executive Officer and Director, National Vision Holdings, Inc.

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