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

Good morning, everyone. And welcome to day 2 of our virtual Global Retail and Consumer Conference. Hope everyone is good. I'm Simeon Gutman, Morgan Stanley's Hardline, Broadline and Food Retail Analyst and it is my pleasure to welcome back National Vision to this conference, represented by Reade Fahs, CEO and President; Patrick Moore, SVP and CFO; and David, who is off camera, David Mann, VP of IR. My quick intro. Well, first, let me read the disclosure in an intro, and then I'll turn it to Reade for some opening remarks. First, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley's sales representative. National Vision is an overweight weighted stock in our coverage. We like this business, we've liked it since they've come public. This defensive growing business. They've proven that their legacy America's Best model has continued to take share, and they are developing Eyeglass World into a pretty formidable arrival to every other format in the industry and as good, if not better, of a business than even America's Best. The business has taken a step change higher through COVID. We think that should continue. This is a market share machine, well-run business, defensive growth. We like it. I think the stock has been mired in a little bit of, I guess, what are they going to earn in the next 12 to 18 months framework. We've seen this happen before. There's some noise, but this is a good compounding long-term business. So I will pause. I'm going to turn it to Reade for some opening remarks, and then we'll get into the Q&A.

Great. Good morning, everyone, and thank you, Simeon, thank you Morgan Stanley for hosting us today. I just want to touch on a few topics before we go into the Q&A. As Simeon mentioned, we have -- since we went public a little over 4 years ago, we've just been especially pleased with the strength and consistency of our business model, we've seen that recently. We've seen that, frankly, over the last 2 decades our business performs well in strong economic times and weak economic times. This is because we're the low-cost provider of a medical necessity. People's eyes go bad, you need to be able to see and you save money when you come to us, low-cost provider of a medical necessity. We all think we're in and going into ever more an inflationary environment. We think inflationary environments favor value in favor us. We think that people will seek out more value as they're seeing prices rise all over the place, and that's especially true for our target consumer who lives on a tight budget, often paycheck -- to paycheck and is very desirous of finding value and believe we deliver on that. In an inflationary environment though, I'd like to reinforce that pricing is something that we can take and have shown willingness to take over the years as we felt it's appropriate. We are consistently evaluating different forms of peripheral pricing options and from time to time over the years. We do pull that lever while maintaining our value proposition to our customers and maintaining sort of a nice difference between what you pay with us and what you'll pay with others. So when we do that, we don't tend to announce it in a big way for competitive reasons, but that is in our arsenal. We continue to grow market share and expect to continue to grow market share and deliver sustainable growth well into the future. We're excited by the fact that we have 2 growth brands, both with sizable white space opportunities and the ability to more than double the current store count in both those brands or to combined for those brands in the future. We would expect to open a minimum of 75 stores next year, including a modest acceleration of our Eyeglass World brand as we've been so successful in improving the return on invested capital for Eyeglass World. And new stores have been performing extremely well this year and since COVID, especially new Eyeglass World stores. While we're not looking to provide an update today, we have 3 additional weeks since our Q3 call, we can confirm our confidence in that -- with the outlook that we shared at the time of the call. Lastly, this week, we expanded our share repurchase authorization to $100 million. Our share repurchases to date and an increased authorization reflect the confidence of management and the Board in our business model and our ability to continue to generate strong cash flows and deliver sustainable growth long into the future. And with that, Simeon, and I'll turn it over to you for questions.

Thanks for that, Reade. I appreciate it. So I'm going to start with the competitive landscape and maybe then we'll transition to you and to Patrick, so we can unpack some of maybe the confusion or just the information out there in the market. But to start on the landscape, Reade, can you talk about competition in general? Is it neutral? Is it accelerating? Is it deteriorating? And then thinking about the different tiers in the market, whether it's at the lower end, the middle tier or the upper tier? Are you seeing anything changing. You're making some moves around -- that you're being strategic into next year. So I wonder are others thinking the same way? Are you already seeing that? Or this is proactive the way that you're controlling it.

Yes. So the category -- first of all, we believe the category is going to continue to grow. It's been growing just over 3% for a long time. We think that sort of in the -- as the initial surge of COVID-related business impact since we reopened our stores last June, June of 2020, we think that we will get back to a 3% ongoing growth, and we're pleased with that. That's what we're used to. We think that the independents have shut some doors. We think many independents retired. So certainly, we feel that at least 3% less independent doors out there. And in general, what we're seeing is what we've been seeing, the long-term trends that have been favorable to us for a long time, which is the traditional players and the independents. Those that are traditionally more expensive have been losing market share to value chains and that we have been the biggest beneficiary of that. That's been the wind in our sales for a great many years, especially, say, for the 5 years going into COVID, and we think that will continue, and that's the key reason -- a key reason for ongoing market share improvement.

Do you have any question or any doubt that the industry should or shouldn't continue to grow and compound into '22 in light of just some of the variability or volatility that's occurred with people not being able to see doctors, then you had this big surge in pent-up demand. Does that alter a trajectory or it should be smooth sailing?

I certainly think if you look over time, I mean, again, looking versus 2019, there's been sort of a growth trajectory that we might have imagined had COVID not emerged. And I think the category will continue to grow. There's -- we're benefiting from the aging of the population. We're benefiting from people's need for -- we're looking at screens more. So eyes are being more strained. And so that changes prescriptions, which means people need to buy glasses. The people are very much on board with blue light lenses and believing that with all of our additional screen time that, that's a great benefit along the way. Frankly, I know people who are buying glasses just to look good on screen that that's -- now that you spend a lot of your day looking at yourself. People are buying glasses that play well with wind screens and the like. So there are a lot of reasons why sort of ongoing category growth should continue long into the future. These are -- again, these are the trends that we've been benefiting from for a great many years, and we see no reason why they shouldn't continue and be with our sales.

Thank you. Holding in on that, not to get too specific. But first half or second half as we go into next year, again, not getting into guidance, but is there any nuance as far as lapping the end of stimulus that could make a little bit more back-end weighted. Again, I don't want to get into specific '22, but just conceptually, we should grow, but it may be lopsided.

Patrick, I'm being cautious about saying anything about 2022 because we're trying not to give any guidance on that front. But Patrick, do you want to share any piece relative to that question?

I think we -- I think on our call, we said we expect normal first half, second half of year seasonality. There could be some lumpiness that goes both ways as we move through and grow over periods where comps were not as strong this year as last or the vice versa. So I think you can kind of look at our results this year and get some sense of probably how we're planning the company. But I can tell you, we're planning for a significantly positive customer transactions. We do have to kind of see where this customer influenced average ticket ends up moderating. So that's kind of a big factor. But as we think about just the business continuing to grow and attract and retain customers, feel good about that. I do think there will be a little bit of a grow over here and there. But in general, I think a lot of things will be more of the same.

Yes. And just building on that, there is -- of course, ever since the closing of our stores and reopening of our stores, there is COVID-related noise and there are different moments where there are COVID-related moments that affect us. I do think if we keep our mind on the big picture, low-cost provider of a medical necessity, benefiting from a lot of good demographic trends, category trends, growth of value, growth of our sorts of offerings. Those are big trends that have benefited us for 20 years, especially benefited us since around 2014, more so than the years before that have benefited us since COVID, and there is no reason they shouldn't continue to benefit us years into the future.

Just to clarify 2 more points related to this question. First, you mentioned, Reade, independents, you think are down by about 3%, if I heard that right?

Well, there are 3% less independent doors as reported by the category, data collectors.

And is there any buzz about reopening and then as we get into '22, that's part 1. Oh, go ahead. I'm sorry.

I think those stores are closed permanently. Those are not -- and frankly, a lot of chains have less stores, too, hundreds of chain doors closed in 2020, hundreds.

Okay. And to frame it, no pun intended. Patrick mentioned average ticket. Can you frame how much average ticket has benefited you? I don't know if you want to look at it from '19 till now or just from 2021 in isolation.

All right. First of all, Simeon, I do think that pun was intended. And second of all, yes, I'd be happy to frame that for you. So when we reopened in June of 2020 after COVID, our customer base had been home and therefore, not out spending money. They had been home, and they had been getting a lot of government subsidy. And our business has shown that when government subsidy comes towards our customers, they come and buy a medical necessity that they need. So tax return time has always been the highest seasonality period for us. So coming out of COVID, our customers were wealthy. They were feeling good and flesh and they came in and they bought products and they bought sort of a more and better products than they had historically because they were feeling very flush. We believe that will moderate over time. Frankly, in Q3, we were sort of expecting more moderation than we have. We are so -- we plan for conservatively in that way, but we didn't see as much as we expected. It's hard to predict where it will eventually moderate. We're pretty confident it's going to moderate above 2019 levels for a variety of reasons, including such things as more people buying things like blue light lenses and the like. So we take a conservative posture in our planning for that. It is something we have seen. It's something that we plan for conservatively and think we'll find its natural rest in place above 2019 levels.

Right. So on that, I'm going to -- maybe we'll transition to -- it's unfortunate that we're going to spend time on this near-term noise as opposed to the competitive attributes of the business. But I think it's important because the market is somehow fearing that this near-term noise should be extrapolated on the future prospects of the business. That's the only reason maybe we can explain why the stock has been behaving that way. So with that being said, I was just looking at our model. And it looks like the EBIT dollars that are being forecast not only will be lower than last year, they're going to be lower than 2019. And I think this is creating this confusion about something you're not being able to earn what you earned in 2019. And I think that's why the stock is on this pause. So can we try to unpack it, I don't know in which form or order.

I'm going to do a little opening and then Patrick, you can give more details. We are conservative folks. We're in a pretty unpredictable world. So -- and so we try to make sure we're always going to deliver what we say we're going to deliver. I will say we weren't trying to make any big statements about next year, and we were trying to guide in any way. But if you think about the time when we're planning, we're planning out our guidance for Q4 and for the rest of the year. And with the time where there was a lot of noise about mandates and the like. And -- so anyway, Patrick, you give the detailed question -- detail that Simeon actually wanted there.

Yes. I think it started with unfortunately, a noisy quarter. We're lapping the 53rd week from last year. That was about $32 million and $0.01 of EPS. We guided at a significant negative unearned revenue, and we later clarified kind of in the negative mid-teens. Those 2 things alone distort the quarter from being kind of a normal quarter. So I'll start there. There were structural things. Second, we are expecting to see that the ticket continue to moderate. It has moderated more slowly than we anticipated. And as long as that's customer desires, we wouldn't mind if that continued to moderate or maybe even completely flatten far earlier than we predicted. But I've got to tell you, Simeon, that's been the hardest thing to plan, which is what is the go-forward new version of average ticket. As Reade said, we expect it to be higher, but not super elevated. Mix is gradually returning as well. So all of those things are kind of affecting the quarter. In addition, we've made some wage investments with our doctors and with our associates. And we have a little bit of that. We talked about that in the quarter. So all of those things come into play in the quarter. As we look out to next year, we're not providing super specific guidance at this time. We did just talk a few moments ago about pacing and maybe what to expect in terms of comps and revenue growth, which will flow through, but we're still expecting to be a low-cost provider of a medical necessity, in an environment of rising inflation, in an environment where consumers are going to seek out value and maybe even some consumers were going to trade down a bit and seek out further value and still feel good about the customer-driven demand growth aspects of the business. So the last thing I would add is simply, we did some test and learn with advertising this year. I do not expect advertising. I think we've made it through kind of the [indiscernible] in advertising as I -- if I were to show you a picture of the 2022 plan, and I could at least say I don't expect to that to be a pressure. Next year, we'll probably be conservative and have it not a pressure, but I think we're going to go after even better than no pressure and see if we can releverage [ or versus ] slightly. So those are the big blocks that as I'm thinking about 2022, that's what's on my mind.

And by the way, Simeon to your topic, I know, so we're getting a lot of questions at the time of release about things like gas prices and things like that and how they were affecting our consumer. It was really interesting to me because no one in any of our internal meetings had ever mentioned gas prices at all. But it seems that the market was sort of thinking about that and the impact of our consumer. And as Patrick said, our customer when their eyes go bad, they need to fix it and they know they'll save money if they come to us. It work both that way, again, good times and bad.

I'd just clarify one more word that you're hearing us use, and that's conservative. I think you can probably -- you probably branded me and maybe medium reconservative from the get-go. We've used conservative and prudentness trying to -- that's how we've tried to set the business set out a reasonable base target and then go and do our best to beat it and deliver more. For the fourth quarter, probably the environment, probably caused us to be even more conservative. We were coming off Q3. We were frankly trying to figure out what's going to go on with vaccine mandates and how could that potentially affect labor pools of employees. And so all of that kind of came into play, and there was probably some -- a little bit of extra conservatism as we looked at the quarter. But as we stated earlier with where we sit right now in the quarter, super confident, super confident in terms of delivery of outlook.

If you'll indulge this question, I do think it's important to the market and to people looking at the stock today. The bridge, let's just look at '21 to '20, forgetting about '19 for a second. And mathematically, there's about a $60 million swing in operating income on paper, something like that. And I think it will be helpful to maybe -- to separate the pieces. There's some swings in deferred, which is uncontrollable. That's the way it is. Then there's some investments you're making, which is controllable. And then you've provided a what we would call a conservative outlook on sales, which is creating some additional pressure on the dollars of the margin because of these investments, whether it's in wages or in advertising. So is there any way to compartmentalize how you bridge that, the $60 million to that? And I'm thinking things that you're controlling versus you're not controlling, I do think it would help ease some fears if I think we understood it, and I don't think we have as clear of an understanding still on this particular topic.

And this is '21 to '20?

Yes. And mostly, if we take the guidance at heart, we're looking at a flat to slightly negative EBIT versus a $60 million and trying to parse one to the other.

So I don't have a waterfall to put up as a graphic, but I'll kind of talk you through the major things. Let's start with '20 over '19, which is the beginning of '21 over '20. '19 was a lighter advertising fourth quarter. '19 had a few other, frankly, nonrecurring good guys in it, vendor rebates that really served to depress '19. And so '20 over '19 started out with a leg up to the tune of low mid-single-digit millions. As I think about '21 over '20, we're heavier this year in terms of wages. And I provided some scaling of that. We're a little heavier this year in terms of advertising. We have -- we said mid-teen millions of negative impact from unearned Simeon, that's going to flow through at a super high margin. That's going to flow through with the Eyeglass margin. We have the $32 million in revenue, call it, $0.01 of EPS in 53rd week. So those 2 structural things if I put kind of a margin on the $32 million in the mid-teens million is getting us close to half of that amount. And then some of the rest is some of the things we talked about. And again, pretty conservative position is where we ended up communicating to The Street a few weeks ago, ranges. So I think that the full $60 million we're not going to probably see that materialize exactly. But those are some of the big factors to take into account. And I will tell you, it is a really difficult time to forecast. I'm so proud of the forecasting team here. We've done a good job. This is -- we are in unprecedented times with what is Delta variant do, how long does that last, what's the next variant do, what's the average ticket, where the consumers -- because they drive those decisions that lead to average ticket. We don't do that. And so it's difficult time to plan, and that includes how I approach the quarter in terms of guidance, left in leeway.

And we have been giving guidance when a lot of folks aren't.

No, that was extremely helpful. Thank you, Patrick. Reade, I want to ask you, and then I'll be done with this topic. More on -- versus 2019, the business is also supposed to earn a little less in EBIT this coming quarter, just that's on paper. And not to look at bridging any gaps here. But structurally, right, the fact that we are having inflation. And -- but there is more volume in the business. So your business has a lot more volume. You've taken a lot of share. Is there anything around your positioning now as far as wanting to take a lot of share, so you're going to run the margin -- run the business at a lower margin to really be in that share taking mode. Has anything temporarily change in how you plan to run the business.

I think we've always tried to -- we try to get the balance right between driving share and margin. And we're -- we don't have a highly different principle towards that. It's just getting that balance right.

I would just add that, yes, margins were aided significantly by a very elevated ticket, a mix different shifting to glasses from contacts that lasted for a while. But that's -- we're not going to revert back to 2019 or I'm not going to have a job. We have been very focused on margin expansion in '19 over '18, I forget the exact amount, but we had pretty nice margin expansion in '19 over '18. And when we start talking about '22 over '19, you're going to see that a portion of the uptick that we took in margin across the pandemic is going to be permanent. I can't give you a scale on that exactly today, but margin still matters a lot.

Yes. Does the fact that you run so prominently with this opening price point in both businesses and we've had continued inflationary pressures. Does that preclude you, Patrick or Reade, from achieving the level of margin expansion that the business was really capturing right before COVID, obviously, it went much faster than that. But does that preclude you? And how do you think about the price point -- the opening price points?

We have had the same headline opening price point in America's Best for 15 years, maybe more. And so that has been a consistent thing. As we said earlier, there's an ability to take peripheral pricing, which means outside of that and around that, and that can be on different price tiers above that. That could be on whatever combination of lenses and lens offerings since we have a lot of different lens options for people to choose from in that. And nothing is cast in stone. Everything can be evaluated there. We have like the headline price point. There is a certain consumer for whom that is a very, very meaningful price point. And then there are certain consumers who come in with their insurance and know that their insurance goes further with us than any place else and are buying fancy brand name product with lots of fancy lens options on it, and that's good, too. And sort of it's the mix of customers we get between insurance and non-insurance between real hardcore price shoppers who really just have a certain amount and they can't go beyond that. And those who are seeking value who are sort of the T.J. Maxx customer, who has money in their pocket, but is a bargain hunter and is a value seeker, but they can often -- they can get higher price things. And it's the mix of the pricing that makes it work. Some people are leaving, having paid $69 to 2 pairs of glasses and a free eye exam and some are getting fancy designer frames and then eye exam and contacts and all this. And it's the mix that makes the margin work, not the fixation on the entry price point, but the entry price point is a helpful lead.

And depends -- the percentage of consumers who are opting for the entry price point, is that roughly the same over time? Is it changing?

We -- at 1 point, I think we had disclosed it was a little less than 1 in 5. That's temporarily through kind of pandemic, stimulus chapter linked a little more. We expect that to return, but it's in the teens.

Thank you. So we actually have 2 questions from the webcast. I'll ask the first one, and then we'll go to the next one. What does labor retention look like now versus historically?

I'm glad that you asked that because -- and actually, there are 2 points I'd like to make. When I think of the macro environment right now, I think of 3 things: I think of inflation, I think of supply chain and I think of labor. Those are big things. I think I talked to you about. We think inflation, it could be another wind in our sales, and we have lots of options to navigate through inflation. In terms of supply chain, that is not our drama. Our supply chain is under control. So that's -- I have my empathy to those for whom there's a problem and my kudos to our supply chain team and our product team and our appreciation for our long-term vendor relations, not our problem. And then on labor, we are pleased with our ability to staff our stores amid this more difficult labor environment. Sure, we're paying attention to it, but it's not something we're talking about every day in our meetings. It's not a key focus of our discussion. We are staffing our stores well and appropriately now.

And then the next question from the webcast. What has changed relative to the last, I guess, time in Eyeglass World for that business to earn comparable returns to America's Best.

Yes. So I would say that from afar, you'd sit there and say, oh, is it this, isn't this great. When we reopened, Eyeglass World exploded. And you might sit there and say, oh, during COVID, a larger store, same-day service, all those things would be more price. And I think that was a little bit of it. But we really tightened our marketing message, really with a real focus on the same-day service and the lab in the store, which is a much more differentiated piece. And frankly, our operations group really got their act together and with -- it's so much getting all the right people in the right positions and keeping stability of the right people in the right positions. And frankly, that was starting right before. So I would say we were -- our marketing was tighter and better, our operations was the best it had ever been. And finally, sort of it all came together. And the COVID piece was sort of the cherry on top in terms of the larger stores and the same-day service there, but there were just the cherry on top. There are just a few things that have to come together and stay together for an optical store to work well. They all came together and they're staying together at Eyeglass World. So we have great belief in our prospects for the future there. And again, we're seeing that we'll be building more -- modestly more of those in the future, and we love the fact that we have 2 growth brands now to drive ever more market share, both in value one differentiator. You get that free eye exam when you buy 2 pairs on the America's Best side and same-day service from an in-store lab with a really great selection of branding products from Eyeglass World.

I would just say because it's football season Simeon. I thought we'd get there from kind of a defensive coordinator position, so I have been -- we've been talking about working on the denominator, like get the invested capital down lower, maybe shrink the store a bit, how can we put a little less capital in it. And then we just blew through it on the numerator with good offense. It really ended up being an offensive story where even pre-COVID, EGW was starting to bump into AB in terms of comp performance around the office, and it's really been a growth story.

Yes. And do you think the perception and the way I introduced it, that Eyeglass World is becoming even more and more formidable, isn't on a track to even eclipse that of America's Best at some point? I mean, you seem to be growing the brand successfully.

We're growing it successfully. I'm not sure what you mean when you say eclipse? We're going to be building both these stores for a decade plus in big ways. These are -- we think we have the content that America wants, and we think they're highly differentiated from one another. But this is -- the consumers are voting and these are the concepts they want.

So in the last, I guess, 60 seconds, I wanted to mention the word Telemedicine. Reade, you've had, I guess, a good way of framing it, sorry about the pun again for us. And how you think about it? Is it additive to the business? Does it become a challenge? And how does it interplay in the growth?

Telemedicine is an opportunity for us in a lot of good ways. You've heard me say that although we have over 2,000 optometrists, 6% to 7% of all optometrists practicing in America are practicing with us. Ever since we met Simeon, you've heard me say, but I never have enough optometrist. You're never going to hear me say, well, we did it today. We got to the point where we have all the optometrists we want for right now. I've never been in that position in my 30 years in this industry, and I never expect to be. I find that Telemedicine in its many forms will offer opportunities to get closer to that place, I've always wanted to be of being able to provide every -- all the customers, all the patients who want to get an exam from us to get an exam from us. So it is all opportunities. There are many forms of it. We are working on a variety of fronts in this area. But this is all going to be good for us.

On that note, thank you very much. That's been a great session. I think we hit the key topics. Appreciate it, Reade, Patrick and David, if you're out there, happy holidays. Continued success this quarter and into next year.

Simeon, thanks for the time. We appreciate it.

Thanks so much. Enjoyed it.

Bye.