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

Okay. Hi, everyone. It's my pleasure to introduce the members of the management team for National Vision, and I will be moderating our fireside chat. Today, we have with us Reade Fahs, Chief Executive Officer and President; and Melissa Rasmussen, Chief Financial Officer. Reade and Melissa, thank you so much for joining us today.

Thanks for having us.

Thank you, Kate. And before we get started, I would like to address your attention to the cautionary and forward-looking statements, before we begin.

Give you lots of time to read them.

Okay. We are starting off with kind of a bigger picture question to get the conversation going, which is, how would you describe 2023 for National Vision so far? What have been some of the bigger challenges? And what have been some of the bigger wins?

Well, first of all, thank you all for being here, although if your rooms are as cold as ours are, you probably just came up here for the warmth, so I am not sure on that. And I also want to start by congratulating Kate. She hired a new analyst who is just a couple of months out of college, Herman Motery, who is a lifelong customer of America's Best Contact and Eyeglasses. He's wearing our contacts right now. So just wanted to point out that Kate hires very discriminatingly. So in terms of your question for this year, so every year as encouraging and discouraging bits to it. Let me talk to start with the encouraging event. I'm encouraged that even in the midst of this economy are stores that have the doctor capacity we desire are delivering comparable store sales in line with historical trends pre-COVID. And that's -- and we think that's great and it shows nice things about our model. So when we have the doctors, we're doing the business. And in 3 areas to have optometrists to perform the eye exam. You need to retain the optometrist you have. You need to recruit new optometrists, and you need to deploy them successfully. And I'm encouraged by the fact that our retention of optometrists is up again this year. So that's a positive trend for us in a tough optometric market. I'm encouraged with the fact that our recruitment efforts are going well, and we've announced that we think we're on track for record student recruitment, which is an important part for us as well. So those 2 key metrics are going in the right direction. And I'm encouraged by our remote medicine efforts. This is where you've got an optometrist sitting at home and the patient in the chair in our stores surrounded by expensive digital equipment that is sending digital information to the doctor at home. And we found that this is a way that doctors like to practice, consumers are good with it, and it allows us to very efficiently deploy the doctors to where we want them to be to where the patients are, right? And so in the 3 areas that help us to have the exam capacity that delivers the good cops, all of them are going in the right direction. So given how much of our time, we're focused on ensuring we have doctors to perform the exams we need that is all going in the right direction. I'm encouraged by managed care insured customers that, that part of the business is going very well. It's generally 2/3 of our customer base is managed care consumers, but it's been growing much, much faster than the noninsured business. Of course, when you have insurance, it's not your money you're spending. So you're more insulated from the inflationary pressures. On that front, but that is growing very, very well. So I'm encouraged by that. I'm encouraged by the closer to normal back-to-school season, we've just had closer closer to normal. While we're not ready to say that we're -- we've returned to pre-pandemic purchase cycles is encouraging that it's closer to normal and progressing in that way. But we're not we -- whereas we hope for more normal purchase cycles to return, we're not planning for that, we're planning conservatively. And I'm encouraged by new stores, new stores that we've opened over the past 12 months are performing -- delivering against their targets and the ones open this year, again, are delivering against historical norms. So we're encouraged on that front. So where we have the doctors we do the business, our recruitment retention and remote efforts are improving -- ever improving, our exam capacity, managed care, back-to-school and new stores, all encouraging. Discouraging our customer, we have a very budget conscious, lower-income customer, and that's the group that's most strapped by the inflationary pressures we're seeing. So I both have empathy for our consumer base and realize that, that puts pressure on our noninsured consumers comps. And then the other piece that would have to go in the less encouraging front is the fact that after a 33-year relationship, Walmart ended our contract or announced they were going to end our contract. They want to focus on areas such as omni-channel, which require consistency of product, consistency of systems and training and all, and we have different products, different systems, different training. So that the 33-year relationship will come to an end. We -- it was an unexpected thing, but it was not something that we we haven't been prepared for. You could look at the story of the last 20 years of my time at the National Vision as preparing for a day where Walmart could potentially walk away from us, and what's nice is that we have such strength in America's Best and Eyeglass World in terms of future potential, in terms of what percentage of their business that they represent, that Walmart is now a far smaller piece of the business than it was when I joined the company 21 years ago.

And I'd just like to clarify that the managed care portion of our business is roughly 1/3 of our business, and the uninsured consumer is about 2/3.

Yes.

Okay. So maybe to start with some of challenges that you've seen in the comp this year. You talked about optometrist capacity. You talked about the strapped lower-end consumer, perhaps may be simple forward when there was stimulus, I don't know if that's still coming into play.

It's still coming into play, yes.

So could you -- is there a way to bucket maybe what is having the bigger impact on your comp? How you're thinking about those few things?

Well, both in the genre of control what you can control because I can't really control purchase cycles, I can't get really control inflation more than I could. But it's the optometric capacity piece is the control what you can control. And the fact that where we have the capacity we desire, the stores are delivering healthier comps. That's -- that's the piece that I think is the biggest factor for us. And as we improve our exam capacity, it just -- it should continue to pay off in that way.

So maybe you could talk about optometrist capacity first, then because we have a few questions about that. With the help of your improving retention and the hiring initiatives that you just walked through, it does seem that optometrist capacity is set to improve sequentially throughout the remainder of the year. But when do you see the company returning to a more normalized capacity, and if I could just sneak in before that, you had introduced the idea or not the idea, but that there are dark and dim stores that are currently having no or little optometrist help. Can you talk about if these stores existed before the pandemic?

Lissy, you want to talk about the dark and dim stores?

Sure. Yes. So dark and dim stores have always been around. However, the dark stores were at their highest level in second quarter of '22 at about mid-single digits of our AV fleet. As we moved forward to last quarter, we were less than half of that amount as dark stores. When we define a dark store is a store that has no optometrist coverage, so they don't have remote coverage, and they don't have in-person coverage, which makes it a little more complicated to purchase glasses if you don't have a prescription. You can go in if you have a prescription, but it does make things a little more complicated, and that's how we define our dark stores. And then our dim stores are stores that don't have the optimal coverage, but they do have at least part-time coverage for optometrists.

On the first part of your question. So when we went public in 2017, we had a sort of a phrase we use, which was, "We don't have all the optometrists we want, we've never had all the optometrists we want, and we frankly never expect to have all the optometrists we want." And frankly, we said that almost every quarter from the time we went public in 2017. Early last year, we stepped forward and said, hear us now, although we've been saying that a lot, you might be done to it, it's worse now. That's what we said in early '22. But we are very steadily making progress towards getting back to where we were.

Okay. And I know remote medicine, again, you mentioned in your opening comments is one of the ways that you're looking to alleviate some of this optometrist capacity headwind while also improving productivity at the stores. So can you talk a little bit about the pace of remote medicine rollout over the next year? And how do you decide which stores to introduce that capability to?

Sure. We started our remote rollout last year, and we enabled over 300 of our America's Best stores with remote capabilities. This year, we've committed to rolling out to an additional 200 stores. And as of July 1, which was the end of our second quarter, we were over halfway there. As we think about beyond '23, we haven't disclosed specifically what we plan to do with the number of stores that we're going to enable. However, we started with stores where the state regulatory environment was favorable to remote medicine. And as we continue to expand, we'll navigate the less favorable states in future years.

Okay. So that kind of goes to my next question about obstacles. Just any obstacles to rolling out remote medicine across your entire chain? And what are maybe some of the advantages of having a large-scale remote medicine network when it comes to remote?

Yes. Having the advantages of a large-scale remote network means that you can have ability to have an exam in a store that's enabled with remote. So if a doctor calls in sick or if there's not optometrist coverage in a store, for example, you always have the ability to turn on remote and be able to light up that store to perform exams and service our customers where they need to be seen. And as the technology expands, we expect productivity to increase. It takes a little bit of time for coming up that learning curve on understanding it for both the doctor and the store SaaS. But once they're at that learning curve, we expect them to be productive and able to perform exams as needed.

Melissa, could you maybe talk a little bit about the cost of this initiative when it comes to CapEx and SG&A. Is this something that will weigh on margins now as you continue to roll it out over the next few years, or will we reach a point where your comps will benefit from this that you'll be able to leverage some of the expense?

Yes. What we talked about in March was that we expect to get through the initial heavy implementation cycle of our remote rollout in mid to late '24, and we would expect about 100 basis point improvement once we have that heavy implementation cycle behind us. That will come from both productivity on the revenue side as well as cost reduction on the expense side. We'll have, for example, teams that no longer need to travel around and implement this technology and do training as well as a more digitized store base because as we roll out , we have to roll out the electronic health records as well. So with all of those together, we would expect a 100 basis point improvement as we finish that implementation.

Okay. If I could maybe pivot a little bit to the competitive landscape. Over the past year or so, there -- we're wondering if there's been any significant developments or changes regarding big box or smaller independent competitors when it comes to the competitive landscape. Are you seeing more opportunities to gain share, or are the headwinds there may be a little bit tougher as you see more digital options emerge? How are you seeing that evolve?

Yes, yes. So in terms of market share, it's a challenging category in terms of market share of roll. There's not really great data out there. We are able to sort of triangulate a lot of different inputs, both quantitative and qualitative. And we believe that we are maintaining share in this environment, which we feel pretty good about given that we are -- have amongst the lowest penetration of managed care of any of the larger chains out there. Again, managed care is growing very nicely for us, but we're still significantly underdeveloped relative the category, and that's the part of the category that is the healthiest with our part of the category and our consumer base, the least healthy part. As to the digital entrants, of course, online eyeglasses have been with us for about 20 years, like they've been -- people have been selling classes online for about 20 years. And it is steadily -- has increased market share through the pandemic. And then frankly, the best data out there was saying that in 2022, there was a decline in the online category as people return to stores because this is a category which begins with an eye exam and and that needs to be done physically in almost all cases. And people do still like to try on this product a lot along the way. So the competitive environment, I do think the broader trend of more expensive traditional players and more mall-based players continue to erode share. The value segment overall we see as going to be sort of continuing to grow from here as the purchase cycle returns.

And how are you thinking about pricing then, given this competitive dynamic? I think Melissa and Reade you both talked about opportunities in pricing. Can you talk to us where you've taken price recently and where you think there's an opportunity to still take price? And is this opportunity big enough where you could see a lift in your comps as a result?

Do you want to? I am happy to. So we like to differentiate between headline pricing and non-headline pricing. So our headline price is 2 pairs of eyeglasses with the eye exam included for $79. Last year, after 15 years of it being $69, we made a change to the headline price and brought it up to $79. I think a big change for us since it had been 15 years. But that is not hugely impactful given the variety of different things that people buy from us in terms of beneficial lenses or better frames in our collection. So that's headline pricing. Non-headline pricing, there are a great many different alternatives of where we can take price, on lens options, on higher-tier frames, on different services our doctors provide, and we have taken various price initiatives and have others that are in flight and in test along the way. And I think we mentioned that we brought in some outside groups. We've been sort of looking at this a lot ourselves, we brought in some outside groups to help us with our overall pricing architecture, and they have some ideas that we will be testing also along the way. We like to be very careful because we are a value-based retailer. We like there to be a nice moat between us and the rest of the category. We like our customers to leave on having said, "Oh, I either spent less than I expected?" Or "I save money versus other alternatives I know are out there." So we are very conscious of maintaining our value proposition, but we do believe there are pricing levers there that can help us with our comps and our margins.

Okay. You mentioned one of the challenges this year was the change in the Walmart partnership. However, I think when we talked about it post the event, you had highlighted as maybe an opportunity, where there are certain costs related to the partnership that might remain for a period of time, but then you'll have some alleviation from that, and you can focus on those costs on other areas or investments in other areas of your business. So could you maybe talk about that opportunity a little bit more? And you plan to maybe fill the gap?

I'm going to take the first half of that and you provide the quantitative answer that she's probably looking for. So the first half of that is -- so when we walked in, you were talking to the container store, okay? The leadership team of the container store wakes up every day and says, how are we going to make the container store better? We were waking up every day saying how are we going to make America's Best better and Eyeglass World better and Walmart better in all Walmart various arms and legs for us. We had the stores. We do much of the distribution for their contact lens business. We provide doctors for them in California. And so -- and frankly, as you can imagine, as an outside group, Walmart, you want to make sure they're happy all the time. So it actually is rather defocusing to have that. And I've always envied people who like the container store who wake up and get to just think about one thing, all day long. And we will be much closer to that with our focus on America's Best and Eyeglass World. So that is good. And we're also a simpler business, more focused leadership team. And perhaps the opportunity of some partnerships down the road that we might not have been able to explore given sort of the dance with the one that brought you sort of philosophy of always being with Walmart there. So now give her probably the information she wanted about on the quantitative impact.

Yes. So when the relationship with Walmart initially, again, it was about 95% of our revenue. And over the course of this arrangement. We have now -- the store section of Walmart is about 8% of our revenue. So we've been preparing for the end of this contract, as Reade had said previously we had expected this contract to end in 2012. So we had it last about 11 years longer than we had originally anticipated. With that, we were able to build our growth brands, America's Best and Eyeglass World and America's Best and Eyeglass World, that's where the margin comes from. Those are our stronger brands, our brands that we can focus on entirely and they carry much higher margins than the Walmart relationship carries. So with that, exiting a business with low margins to focus on our core business with higher margins is something that will be a benefit for us in the future.

Can I just reinforce that. So I joined the company 21 years ago, 2002. And within my first few months, Walmart said, "Hey, we're not renewing any of your leases. The business is going away. It was 95% of the sales and profits at that period of time. Then they said to us a few years later, not really. But this year, we're going away in 2012, really. We're going away in 2012. So I think the fact that we went from 95% of our sales were attributable to Walmart to 8% of our store sales attributable to Walmart and got either a 21-year or an 11-year reprieve depending on how you want to look at it. I'm pretty pleased with that, yes.

Thank you for that. We wanted to ask about your long-term unit growth story. Can you talk about where you see the growth potential? I think America's Best obviously, has been where the most openings have been. But it seems like maybe Eyeglass World is now going to see a few more store openings we've seen in the past. How do you balance this unit growth story with some of these optometrist challenge -- capacity challenges that you're having? And is there any risk that we can see maybe a pullback as you try to balance the capacity there?

Yes. So with the expansion, we have a considerable white space for America's Best and Eyeglass World. 2,150 stores is what we were last analyzing as we did our last white space analysis, and we currently have 1,380 stores as of July 1. So we continue to expect that we'll expand and have similar economics to the store base that we've previously opened with that America's Best and Eyeglass World, it is roughly the investment, the 2 are closer together than they once were as far as when we -- with the IPO versus where we were in our '22 10-K. The investment pays back in 3 to 5 years, depending upon the market that we're opening it in. And as we continue to think about expansion, those are the brands that carry the highest margin. And so while there's a little bit of a headwind when you first open a store, the growth potential outweighs the initial investment. And so we'll continue to expand into that white space.

And what about return -- oh sorry, go ahead.

Also trying to point out one thing because our Q2 Eyeglass World comps were not up to our standard or desires. And frankly, guess what, it's [Indiscernible] capacity. Who knew? You're getting a consistent story from me [Indiscernible] aren't you? And we had decided to focus our remote medicine efforts first on America's Best because that bigger brand, a bigger opportunity, more stores for state. But we will be, I expect, improving our Eyeglass World exam capacity going forward.

Okay. One question that we get a fair amount, Melissa, is about your debt. And so we wanted to make sure we asked about how you're thinking about current leverage levels? And what options do you have for the convertible notes that mature in 2025?

Sure. We have been historically paying down our debt levels. over the past several years. And we just refinanced our Term Loan A and extended our revolving credit facility. And with that extension, we're coming up on our convertible note maturity, which matures in May of 25. We are continuing to evaluate the environment. The debt markets are a little bit tighter than they once were. But we do have some ability, and we'll continue to think about the best way to disposition those notes and look for opportunistic path to settle those notes. We'll continue to look at our overall capital structure in supporting our business and share repurchases. As it makes sense, we do have $25 million of share repurchase authorization remaining. And so with all of that combined, we'll continue to evaluate. We have some time, and we'll make sure that we make the most prudent decision that's financially responsible for our company.

Okay. We're asking 4 questions of every company that sits up here. So I wanted to start with just your views on the health of the consumer. Obviously, you've talked a little bit about how you touch some of the lower end consumers, but just how do you see the health of the consumer in '24? Will they be facing more headwinds, less headwinds, about the same?

So I think we said our budget conscious lower income, consumer is very stacked most hard hit by inflation of any consumer segment out there. For us, the question is about the timing on the return of the purchase cycle. It's been about 2 years since the absolute boom in buying glasses and people who run optical companies sit around and say, it's about time they came back. But again, these are very unprecedented times that we're in. So it's hard for me to meet the strength of the purchase cycle return is a bigger factor to next year than the then the economic piece and a bigger factor than all of it is improved capacity and deployment of optometry.

And then Part B of that question is the potential for trade down in 2024, which also kind of goes to the health of consumer.

We believe that as long as the economy is similar to as it is now that we will see continued trade down some in the form of managed care and some otherwise. And again, the majority of our consumers are making under $100,000. So we consider anyone with a household income of $100,000 or more as a trade down for us.

Okay. The second question is on share of wallet, I don't think anyone would describe what you're selling as discretionary, but we've definitely seen a prioritization, right? You mentioned it before, inflation, people prioritizing consumables, maybe if they have money to play with, they're going to services versus goods. Is there one more important factor you think that has to happen to drive higher spending to your business in '24?

I mean, I see the higher spending coming with the growth of the managed care piece and coming with the return of the purchase cycle. But those are the biggest pieces in my mind for that.

Okay. The third question is on pricing. I know we already talked about pricing, and it seems like maybe it's surgical, if that's the right way to determine it. But overall, will pricing be up or the same in '24?

We expect there will still be pricing levers pulled in '24.

We continuously monitor pricing. And I would say as most companies do when you're putting together your next year's plan, you equate in there some pricing increases that you would expect that you'll need to offset cost increases that will be coming as well. Those are actions that we take that we look at frequently. And to read the earlier point, when we implement pricing initiatives, we try to test those to make sure that it's not something that's going to price us out of the market in various areas, and we look at non-headline pricing and pull that lever quicker than we do on our headline pricing.

Okay. And then our fourth question is specifically on destocking, which doesn't really apply here. But maybe if you could talk a little bit about inventory levels and how you feel about in-stocks, and how inventory is shaping up with this?

Let me just start on the big side and you can decide if you want to add anything there. I am so proud of our merchandising team because despite the way they manage the tariff situation, the way they manage the global supply chain disruption, it was just elegant and never a drama for us. On contact lenses where most of the contact lens manufacturers had trouble on their side, and they don't let you stock up on them. That was a different piece. But overall, I thought we just managed the frame inventory situation very elegantly and very well, and it was never a source of stress for us. So that is that? And then anything else on inventory levels in the absolute or...

No. The destocking phenomenon that most of the retail industry is experiencing isn't something that really applies to our business.

Okay. And with that, we are done with our fireside chat. Thank you for joining us today.

Thanks for your time.

Thank you very much.