National Vision Holdings, Inc. (EYE) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you again for joining us at the Goldman Sachs' 27th Annual Global Retailing Conference. This is Kate McShane, speaking again, the Hardlines-Broadlines analyst here. It's my pleasure today to introduce the CEO -- actually the management team of National Vision Holdings and -- to our fireside chat. National Vision is one of the largest optical retail companies in the U.S. with over 1,100 stores in 44 states, plus the District of Columbia and Puerto Rico. They operate 5 retail brands, and they have several e-commerce websites. Today we have with us Reade Fahs, Chief Executive Officer of National Vision; Patrick Moore, CFO; and David Mann, Head of IR. Reade joined the company back in April 2002 as its President and Chief Operating Officer and assumed his current position in January 2003. Reade is going to kick off the fireside chat with some prepared comments, and then we will start the question-and-answer session. Thank you, Reade, and Patrick and David for joining us.

Thank you, Kate. I appreciate that. We just thought we'd start with just 4, 5 points for those who aren't as familiar with the story. We operate in a great industry. It's a $37 billion industry with real nice dynamics to it. As Kate said, we're the third largest optical retailer. And optic benefits from the aging of the population, from an increased fashionability of eyeglasses, and from the eye strain that we are all experiencing by staring at Zoom screens all day long. It's a highly fragmented industry with still independents estimated around 40% to 45% of the category, and we only operate in the value segment, the low price segment, and it's a pretty high-priced industry. So that's a smaller segment. We think of ourselves as the low-cost provider of a medical necessity. As you age, your eyes go bad, glasses and contacts are the way that, that is solved, and we only sell 3 products; eyeglasses, contact lenses and eye exams, which you need to get glasses and contact lenses. Pre-COVID, we had a really long track record of consistent growth, 72 consecutive quarters of positive comparable store sales trends from 2002 to 2019, averaging 5% per quarter across that 18-year period. We like to say it took a global pandemic to end our winning streak of positive comp quarters, and we've had consistent top line and bottom line profitability throughout that period. Regarding COVID, we are an essential retailer. We didn't have to close, but we didn't feel in late March that we could operate safely given how fast things were happening there. So we decided to lock our stores to public, keep them staffed to take the many customer calls that came in and prepare to reopen gradually and safely. We successfully reopened by the beginning of June and delivered a record 19.3% comp in June with similar momentum in July. So our financial position, liquidity is strong. We refinanced our debt and issued a convertible bond in early May to make sure that we had plenty of liquidity to survive whatever was going to be coming. Our -- we believe that COVID is going to hasten the trends that we had been benefiting from for a great many years, including the decline of the independent sector, the growth of the chain sector, the decline of the more expensive priced chain sector and the traditional part, which has been high-priced and the decline of malls. We've been benefiting from that, especially for the past 5 to 10 years, and we're -- we believe and we are seeing that, that's going to be hastened in the post-COVID period. We tend to do well in recessions and had positive comps throughout the '08-'09 recession, and we look forward to the possibility of perhaps real estate benefits and marketing cost benefits and maybe our conference cost benefits going forward. Finally, our history, although the business is really very much about the fast-growing America's Best and Eyeglass World businesses, our history has been about Walmart, and that's still 231 of our stores are operated inside Walmart, and just a few months ago, we renewed our contract with Walmart going into -- now it extends into 2024. This year is the 30th year of our partnership with Walmart, and recently, we were so pleased that they granted us 5 new stores, which they've done for the first time in 25 years. So I think that gets you up-to-date as to where we are now if you're newer to the story.

Thanks, Reade, for that. That was very helpful. And there's a lot to dig into there, I think. If we could maybe start with more recent trends in the business, you've seen some very strong growth recently. We wondered if there was a way to contextualize pent-up demand versus what you were benefiting from, from government stimulus payments. And is it right to assume that once you do play catch-up with some of your sales from when stores were closed, will you return to a pre-pandemic comp store sales level?

Yes. So, so -- yes, thank you for that, right? So June, again, was a record 19.3%. And yes, certainly, pent-up demand was a piece of that and government stimulus was a piece of that. But we also think that, that the fact that our consumer had been sort of sitting at home for 7 or so weeks without -- I think a lot of people were sitting home watching Netflix and not -- their normal consumption patterns were disturbed. So frankly, I think a lot of our consumers were feeling pretty flush by the time we reopened. Having said that, we are continuing to attract new customers, especially to America's Best and Eyeglass World and are feeling that we have reason to believe that we're building market share throughout this and are probably doing a bit better than most of our competitors. We were especially pleased with Eyeglass World. Sort of right out of the chute, Eyeglass World really just took off, and even though they were in a lot of sort of hotspots, they did very well. So that's been an especially encouraging sign. Having said that, to your point, we do believe that our comps will eventually normalize after this combination of nice things for us, pent-up demand, government stimulus and sort of dissipate. We think that they'll normalize or perhaps be a bit healthier given the market share benefits we're seeing.

Okay. That's helpful. In the same context, we have to ask about market share gains, and a number of retailers we've talked to today, and we've heard from over the last quarter or so, have noted new customers in this new world. And so we just wondered, have you seen a notable increase in new customers? If you have, is it pointing to a customer that is trading down? Or is there some other dynamic that's making them seek out your banners?

We traditionally, in the sort of 2 recessions I've sort of been through, have found that the absolute poorest customers tend to drop out of the category, but they are well more than made up for by sort of a little bit wealthier customers dropping into our segment. And again, we said new customers -- in the last recession, I'd be talking to stores and ask them, why is it you're doing so well? And I generally would get some combination of lines involving nicer cars in the parking lot, again, as an expression of the trade down component piece. But I think beyond that, there are other things. I think there are just less doors, optical doors, than there were before everything from independents, who are run by people sort of in their 60s, saying "you know, I think I'm just going to retire rather than sort of go through all the work to get all the PPE and do all that," so I think independent doors. But also, the malls, the decline of malls really helps us a lot. Sears Optical shut down in February after sort of a long decline. But there are still hundreds of optical stores inside JCPenney's. There are optical stores in Macy's. There're optical stores in -- in sort of throughout the malls or freestanding route throughout the malls. And those other groups, who reported recent trends, your public groups, were citing declines, whereas we were citing record comp. So new customers are certainly a piece of that.

Truly -- I'm sorry, go ahead.

Yes, I was just going to say, especially at Eyeglass World, which is just another shining spot. It's -- Eyeglass World has always done better than most other retailers, but always was sort of trying to catch up with America's Best. And since COVID, it's sort of outshining America's Best, even though America's Best is doing fantastic.

Yes. So that was actually my next question, with regards to the positioning of your 2 banners, America's Best and Eyeglass World. Traditionally, America's Best is considered more resilient, I guess, is the word for it. And lately, it seems like you've seen better trends out of Eyeglass World. And so we were wondering if you could reconcile the difference there and the drivers. And if there -- if this was to continue would you consider accelerating the pace of new store growth for Eyeglass World?

Yes. So America's Best is rock bottom, best value, save money, 2 pairs for $69, eye exam thrown in for free. Eyeglass World still really low entry price, really low average sale. You walk out there having saved money, but there's a lab in every store and the same-day service. So -- and there's a bit broader selection, a bit more brand conscious. So if you want a little bit more fashionability, speed matters to you, and you're just a little bit more flush, but still deep, deep value, then you choose Eyeglass World. And again, I know that every now and then we publish the Eyeglass World comps back historically, and they are the envy of most of retail, but they did pop nicely since then. And I think the same-day service has even more resonance post-COVID than pre-COVID. We've always sort of favored America's Best, a, because we have more stories, and thus, a network effect. We're on network TV. And so it's just a bigger brand. Eyeglass World still is regional. And b, because it's cheaper to build an America's Best store, because it doesn't have a lab in it. And therefore -- and therefore, the return is a bit better because of that. But when we went public, we said we're going to give America at least 1,000 America's Best stores. And as we sort of get close to the 1,000, we're going to start shifting over and building a lot more Eyeglass World stores, and that is still the plan.

Okay. Great. One thing that you mentioned in your prepared comments, Reade, was your decision to -- even though you were essential retailer, your decision to close the stores just because you're managing a very difficult environment. Your -- just a matter of your business is being in close proximity to people. So given that, that's still the case, high proximity between patients and doctors and just customers in general that walk into your store, can you talk about the efforts to manage the dynamic in the current environment? And is there an accelerated opportunity now, in your opinion, for telemedicine and other technologies such as virtual eye exams?

Yes. So we closed because we didn't feel we could sleep well at night knowing we had associates interacting with customers in an unprotected manner while we were still trying to understand what the heck this disease was. And once we in partnership with our doctors developed the protocols, then we felt very, very good about it. And we are -- and so we have -- masks are required. We clean every frame after an associate -- after a customer touches it. We screen associates, do the temperatures. We sort of -- and we clean and disinfect sort of anything a customer comes in and touch with. And I actually think some of our benefit, some of our good results since COVID relates to the positive word-of-mouth that comes of taking your protocol seriously. I bet we've all had an experience where we've been at -- where we've been some place out in public and you thought, "Oh my gosh, this place really is not taken seriously. I'm never coming back here until everyone in America is vaccinated." And I think that our diligence in taking care of the -- in sort of executing this protocol so well caused positive word-of-mouth that people said it's safe to be there. Having said that, let's go to your -- to the part of your question about telemedicine. And I think the telemedicine word is a very broad word. And I think when people think about the advance of telemedicine in a COVID lockdown or post-lockdown world, what most people think about is, "Oh, let's see, I have a rash on my skin, rather than going to the dermatologist, I take a picture of it with my camera. I send it to the dermatologist. And in many cases, they can diagnose it. I don't have to be there, isn't that great." That's a little different than an eye exam where you are working with a patient or customer to make sure you've got their refraction right, which is a lot of -- we have all been through this, right, which looks better, #1 or #2. Now which looks better, #1 or #2. What we're doing is we're putting a variety of lenses in front of somebody's eyes to get to what is the exact prescription for them. And then we go on to a health exam where we are using sort of this thing called the slit lamp to look deep into the patient's eyes to make sure that they have -- that their eye is healthy, and frankly, their body is healthy. We are often the first people to tell someone they have diabetes or hypertension. There are 260 nonoptical diseases that you can detect using -- from an eye exam. And so that is harder to do via telemedicine. There are things that we use online and others use online to extend the prescriptions, to extend current prescriptions, so that's out there. But in terms of new prescriptions, there is not a great technology out there that does that. And what we talk about when we talk about telemedicine, we actually internally refer to it as remote medicine. And that is a patient in our exam room in our store sitting amidst the very expensive equipment we have all around them with the optometrist getting the data from -- in a remote location and refracting there with the optometrist sort of pressing a button that changes the lenses when they're picking between #1 and #2, with the optometrist looking into the eye in similar ways. We have been interested in remote medicine. We're interested before COVID, are still interested in it, and it's not a COVID response. It's a productivity. It's a white space enhancement. It has a lot of benefits to it as a second lane to a store where we have -- let's have the first doctor there in person, but a second lane for a doctor where the doctor is remote. We think there are a lot of doctors, who love to do this. So it expands our pool of doctors. So we've been piloting remote medicine. We have -- we are continuing to expand our pilot, and we see that as part of our future, but it's not really a COVID-related thing.

My next question is centered around real estate. I'm jumping around here a bunch on you, Reade, I'm sorry. But I wondered if you could kind of level set and tell us what your ideal location is. We wonder just because you do cater to perhaps a lower-income customer, has your co-tenancy risk increased as the pandemic -- as we kind of emerge from the pandemic? And how do you think about that going forward?

Yes. Co-tenancy risk is not really a factor for us. First of all, to be clear, we have no stores in malls or anything like that. We like to be near Dollar stores, Dollar Tree and all. We like to be near TJ Maxx and Marshalls, and we like to be in Walmart ship centers. And those places where we are continues to thrive. And so we feel pretty good about that. And you also have to remember, we are a destination location. You need to get -- you need to be able to see it because, again, it's a medical necessity, you need to be able to see, you need to get an eye exam. And so you have to go -- you have to go to our exam room to get that done. If you're ever out here visiting us, we could take you to our nearest store, which -- usually the nearest store to our corporate offices, it's like Taj Mahal. If you went to our nearest store, it's in a total retail graveyard. You've got the closed Toys "R" Us, the closed Barnes & Noble, closed -- I mean it's -- you can look around and say, "Oh, look, that used to be there, I guess." And now it's like Halloween stores and one-off restaurants that aren't -- but you're in a dead place and our store is doing great because people need to find us.

Okay. That's great. And you did mention Walmart. So I'm going to switch gears to Walmart quickly. You mentioned in your prepared comments that you recently extended your contract with them and also converted 5 new vision centers, which was a new development. And so I wondered if you could talk about the new vision centers and how they're going to look versus your existing vision centers? And if they are going to be different? Is there an opportunity to remodel under this renewed contract for your existing centers?

Right. So first reminder, this year is our 30th year of partnership with Walmart, and it's -- we just -- it is part of our DNA. If you -- when Walmart people come to visit us here in our office, they feel very much at home. It feels a lot like their offices. So the 5 stores are in Georgia, and Georgia is where Walmart is doing a lot of their health and wellness testing. It's sort of their test ground for that. And these 5 stores, it's the first time we've converted an existing vision center that they have operated. It's the first time that's ever happened in our 30-year period. And quite honestly, we have sort of a method of operating that is a combination of sort of just operating methodologies that tends to make our Walmart Vision Centers do quite well. And we are not doing a big bold remodel. We'd sort of like to say to them, "Hey, look, we didn't invest a lot in the remodel. We just took it over and brought our focus as a group that only does optics. You know, we're a very specialty oriented group, but in the same-store environment, these are the sorts of results that we were able to achieve, but it wasn't through some big elaborate store remodeling, it was -- we came in and did things the way we do things and look how that worked out." And thus far, we have been very encouraged by the initial results of these stores.

That's great. The last question I have is around your margin outlook. I think as you look at Q3 and Q4 with perhaps the top line normalizing a little bit from what we've seen more recently, can you talk about the key puts and takes with regards to margin and costs? And how can we think about your ability to manage optometrist's costs throughout this somewhat volatile backdrop?

I think Patrick is going to take that.