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

Thank you for joining us. Today, we are happy to introduce National Vision. We have Reade Fahs, he's Chief Executive Officer; and Melissa Rasmussen, Chief Financial Officer here to answer some of our questions.

Reade, I wanted to maybe turn it over to you first. We were talking before, and I thought it might be helpful to highlight what you think is most misunderstood, the National Vision story, and we'll go into that.

Yes, thank you for that because I do think there are some that fall -- some things that fall into that category. I'd say primarily is the state and the evolution of our remote medicine program. So, so much of what we do, we are a low-cost provider of eyeglasses and eye exams and contact lenses. And our key point of value is, we bundle the cost of the glasses and the contact lenses in with the eye exam. And generally, our entry offers 2 pairs of eyeglasses for $79 with the eye exam included in that, which is just a great deal, but you've got to be able to provide the eye exam to offer that great deal. And it's been this way since the brand began, bundling of the eye exam and the glasses. And post-COVID, sort of the market for any sort of medical professional out there, call it optometrists or veterinarians or whatever, there are just less medical professionals out there. And so the market for us, for optometrists got smaller, and that's what we need to provide, the free eye exam. And we put together a sort of a program soon after that, saying, "Hey, we've got to deal with this shortage of doctors and we worked out a way whereby doctors can be at home and do an eye exam on someone in the store. We gather the data, we send it to them. They come on live in front of the patient and do the exam live synchronously, they say, deals you like #1 or #2 and the doctor presses the button, and changes the lenses in front of them." It's a very cool, neat experience. And guess what, you can hire plenty of doctors to practice from home. And so recruiting and retaining those doctors is great and easy. And this program has been great for us. It's in the stores where we're doing it, it's 12% of exams and growing, and that's pretty neat and exciting. But it has been -- it was a start-up and it's in an evolutionary state and growing in a really nice way. And I don't think people fully understand the potential of where this could eventually go in terms of really dealing with our capacity challenge. And so I'd like to talk more about that as we go in terms of the specifics of how it works. I think that's the thing that's misunderstood in our story is the role remote can play in addressing the capacity challenges post-COVID.

So yes. So maybe we'll start there with some of our questions because it's such a unique part of your story. I feel like you mobilized it very quickly as well. So could you talk maybe a little bit about how differentiated this initiative is? Are you one of the only retailers offering this as an alternative to help you, again, help with the optometrist capacity? Is there a goal of how many eye exams do you think you can get to, based on what you know today? And I know there are certain states that aren't necessarily allowing remote medicine yet and how does that play out?

Yes. So this was designed around solving a problem. We were -- we had really stupendous success for about 19 years prior to COVID. But that's now ancient history now. So we live in a post-COVID world of new realities. We said that amidst these new realities, we would have to rapidly transform and creating sort of an Uber-like eye exam experience was not in our skill set, but we did it, and we've accomplished it and it's doing the job and really helping us now. It's not that it's -- there are others that offer it, but there aren't others that offer this bundled offering in the same way we do. So our need for exam capacity is heightened. We have what we believe is the largest network of employee, doctors in America, and we are doing a huge number of exams and that is the starting point for the eyeglass and eye exam purchase. So it is differentiating for us because it solves that problem for us. It is not legal in all states yet. It's legal in 28 states. We were very pleased that Texas came on board this year, and that helps us a great deal in that way. But they're sort of 3 to 4 evolutionary paths that are important to understand here, there's getting stores as productive with a remote doctor as with a live doctor. And we have a nice collection of stores that are as productive, but not all stores are. So we have a path there for that, getting doctors, remote doctors more productive than in-store doctors, and we have a nice collection that are, and we believe evermore will be and that they should be more productive in that way. And so those are 2 key pieces and then getting the balance right between supply and demand. And we also now have a collection of stores whereby the doctor -- where a doctor in-store live, if there is a no show, a cancellation or if it's a slow day, can do exams in other stores. And thereby, we aren't hiring an extra remote doctor at home. It's a doctor we're already paying for, doing exams in places that are needed when they're not as busy, which would make the whole ecosystem all the more productive. But in the world we live in, in retail, you get a few stores right and you can eventually get all stores right. And we've got a nice collection of stores right in terms of productivity relative to live doctors. Nice collection of doctors right in terms of more productive than in-store doctors. And a collection of these hybrid doctors in-store doing exams in other places. And all of those are on a positive evolutionary path that gets better every quarter.

Well, that all sounds super exciting and very controllable in terms of taking things....

Managing what you can control in a crazy world.

Exactly. So you're dealing with that. But you've also, along with the optometrist capacity, you also have some challenges with the macro and the consumer because you do cater to a lower-income consumer. And then there's the optical purchase cycle, too, that's been maybe a little....

Disrupted. Disturbed.

Disrupted. Right. So maybe can we take each one of those buckets, how can we start with the health of the consumer. The difference between what you're seeing between the managed care and the cash paying customer. And just how you see that playing out for the rest of the year?

Yes. So our customers are value-focused. They are looking to save money on their eyes exams and their glasses and their contact lenses, and we have always been a value positioned brand. In America, a little more than half of Americans have managed care benefits. They're generally employed and have nice jobs that give them good benefits. And then cash pay consumers don't have benefits. When we bought America's Best, they did 0 insured customers and we have gotten it up to over 35% of the business is insured customers, and that is growing nicely. When it's insurance money and not your money, you are more apt to have a more normalized purchase cycle because it's not your money. And that part of our business is growing at high single-digit comps. So that's pretty exciting. On the cash pay side, it improved in Q2, but it's essentially flat versus last year. And the cash pay customers who are coming in are not buying as many added-value products because they're watching their pennies as I think we're hearing throughout the day in so many businesses today. And we would expect the managed care customers to continue to improve. And we are -- all of us in the industry are saying, when will the purchase cycle normalize for the cash pay customers. So many customers bought in 2021, our generous government gave them all a lot of -- gave Americans a lot of cash. And guess what? They went out in [indiscernible], that's great. But they went out and bought the best pair of glasses they've had and the purchase cycle has not really normalized since then. .

Okay. So we talked about where you comped prior to the pandemic, which is always at a very healthy mid-single-digit rate. And while comps have been improving because of all the year initiatives, who we've not yet seen a return to mid-single-digit rate. Are you able to get back to these levels if the macro were to remain difficult with the cash pay customer? Or are you at a place with remote health, the flexible optometrist schedules, marketing investment, where you could get back to mid-single-digit comp growth?

So thanks for mentioning it. Yes, for 19 year, we had 72 consecutive quarters of positive comp store sales growth averaging 5% with the last 4 years before COVID, averaging 7%. I do like to say that even though it's ancient history, yes, we believe we can, should and will get back to mid-single-digit comps. We're very encouraged. We have had 6 consecutive quarters of positive comps. And in Q3 and Q4, we were at mid-single digits, 4.7% and 6.3% in Q3 and Q4 of last year. We thought, hey, it's starting to feel back to normal. This feels the way we like it. The first 2 quarters have not been in the same way. Q2 was 2.4% for the company, 2.9% for America's Best. And what we said was, okay, we've been doing a lot of transformation, but we have to turn up the dial on transformation, and we're doing it in a variety of ways. I've talked about the remote medicine program, helping us to get the capacity we need to address the demand that is there. We've implemented a lot of new promotions saying, all right, you value conscious, cash pay consumers come on in. We had a 40% off single pair where you did have to pay for your eye exam program. And we just have finished up something called our [indiscernible] program, where we went back from our current 2 pairs for $79 and a free eye exam back to our historical 2 pairs and an exam for $69, we said, "Hey, for a limited time, you can have that old offer that has drawn in a lot of folks." And we also had a first-time offer ever on Progressives, which we have never tried before. Two pairs of Progressives for $129 and a free eye exam. Guess what? Lots of Progressives wearers came in on that. That brought in new customers, and we think that Progressives offers are now going to be a part of our toolkit going forward. We're doing some interesting things with new products and new product news that is driving traffic. But we are really very much in the mode of continued and heightened transformation to get us back to those mid-single-digit comps, mid-single-digit comps, yield mid-single-digit operating margins, and that is our key focus, and we are bringing fresh thinking and fresh ideas to get there.

And just to add one thing here. On the promotions, we were able to get some incremental data on our customers that we hadn't seen previously. So with these promotions that we were putting in place, we were able to evaluate the customer base that was coming in and the low-income consumer that we had historically been seeing the most did come in during those promotional events that we were offering. So that tells us that they were sitting out based on macro constraints that they were facing. In addition to the Progressives offer that Reade talked about, that was a very popular offer, and we saw a lot of new Progressives wearers that we hadn't historically seen come into our stores come in as well. So we did get some incremental data from those promotions.

The promotions are working. How do you think about managing that and your margins until you do see a return to a normal optical purchasing cycle?

Yes. So with every promotion, you have to evaluate the increased traffic with the decrease in profit margins. And that's something that we monitor very closely with the promotions that we put in place. So we evaluate where we are on, and I guess, the level of increased traffic that it would take to offset the impact of the margin degradation from the promotion. And the promotions that we've put in place have been very successful so far. And so getting that customer to return during this economic period has been -- has proven to be beneficial. Now getting back to the mid-single digit to Reade's point, we have been in a period of transition or transformation, and we continue to be in that period of transformation. And to speed things up, to his point, we did get some new talent, new leadership coming in to give some fresh perspective in addition to the promotions and the new product offerings. And so we are taking some steps to speed this along as quickly as we can.

Maybe we can step back a little bit and talk about America's Best and Eyeglass World. They are 2 different banners. But maybe it would be helpful to walk us through what the key differences are between the retail banners, what they offer to the consumer. And just your thoughts about -- I think remote rollout has been focused first on AB first and then will the Eyeglass World. But what is the path for remote for Eyeglass World going forward? .

So we have 1,200 stores, just over 1,000 America's Best stores. So that's the key part of the business. And that is deep value you come to us to save money and we -- because we bundle in the eye exam. So that is all about savings. Eyeglass World, we have about 120 of those stores. Bigger store, more brand-focused, you have to pay for the eye exam and there's a lab in every store offering same-day service. So it's a little bit more brand conscious, a little bit more speed conscious, still value and still you save money versus other places, but it's more the convenience of the same-day service that is sort of driving a lot of the customers in.

With the competitive landscape, I think it's been pretty clear from your results that it's in line with what we're seeing from other competitors in the space and you're not losing share. But how do you think about the opportunities to gain share? How do your stores compete against online-only retailers, for example? And how have you been able to differentiate that experience for the customer.

Yes. So the online is certainly a factor in our category, and it's something we've monitored and even in the online category started just over 20 years ago. So even in the pre-COVID days, that was something that we were competing against. The great news is the process of purchasing a pair of eyeglasses, especially if you're a value-conscious consumer starts with an eye exam and that cannot be done online. And so that is a key source of differentiation for us on that. And once you're standing in our store, having just received an eye exam and gotten your prescription, it's a lot easier, more convenient and you realize the financial savings because you're standing right there. So that's a benefit. It is believed that all the data indicates that in -- during the COVID period, there was a spike in online purchasing. Guess what? People were at home. Of course, that happens that it then went down again and stayed relatively flat in 2022 and 2023. And you see a lot of folks who sort of are -- you see folks who came out saying, online eyeglasses are going to wait -- are going to be the way to go, saying, wait a minute, this is a product category that people buy in stores and then started opening stores. One of the pieces of new product news that we're about to launch relates to this. There is a company called Pair Eyewear, which is an online-only retailer. And what you do is you buy a base frame like this and then you can buy a lot of different tops to change your look. So it's a little magnetic thing, and you can put it on top there. You can do it with sunglasses, too, that sort of thing. And they came to us and said, "Hey, we realized that we're going to be limited because this is a category where people buy in stores." And they said, "We're not going to have field stores, that's not in our competency. Would you like to be the exclusive provider of Pair Eyewear in store?" So we will be launching that in all of our America's Best stores in October, and they'll be doing their marketing saying, "Oh, you can now go try these on and buy them at America's Best." So it's a way that sort of we can leverage some of the online traffic but knowing that consumers want to eye exam and want the convenience of what stores provide. So you can get 1 pair of these with 2 tops for $129, great deal, October, okay. Coming soon to an America's Best near you.

And then just to wrap up the competitive landscape I asked about online. But how do you differentiate yourself versus [ NAS ]? Obviously, Walmart, Costco have their Optical Solutions. So -- and that's more value based as well. So what is the differentiating factor?

The differentiator is the eye exam is free and bundled in with our costs. And most of those models are an independent lease optometrist who gets to decide what pricing they're going to charge and you can generally get 2 pairs of glasses for an eye exam for us where often what the independent doctor is going to charge just for the eye exams in other places.

Got it. So speaking of pricing, obviously, pricing compared to peers, there is a value equation here. I wondered how you thought about pricing gap. And if there are any areas of your business where you feel like you can take more price without impacting demand?

So with pricing, it's something that we look at all the time. That is top of mind. However, it is something that is not a broad stroke price increase with our industry. It's more of a scalpel precision that goes into it. And so when we do pricing increases, we monitor them closely to make sure that what we are increasing prices on isn't driving new customer behavior. What we've seen recently is when we do have customers coming in, they're being a little bit choosier with the dollars they spend. So they're not upgrading to some of the items historically upgraded too. So they're not purchasing the nicer lenses, the add-ons, such as warranties and things like that. But we do monitor how closely the spend is. And as we put in place in December to offset some of the Walmart profit gap with our exam pricing. So we increased exam pricing, and that was a sticky price increase where we've had continued increased traffic in addition to the increased revenue for overall pricing increase. So it is something that we monitor and we evaluate where we are in the market versus our competitors. Because we still do want to be able to provide a quality product for a good value, but at the same time, we need to make sure that we're offsetting cost increases that we're receiving and being as profitable as we can be.

Just given some of the softness we've seen in the last couple of quarters with your comp, I think some people are asking about just if it's still the right time to grow stores. And so I wondered if you could maybe talk about how you're viewing unit growth in the short term. But then also, I think you recently did a white space analysis that noted that you could add even more stores than what you originally thought. So could you maybe walk us through the kind of the shorter view on unit growth in the longer term?

So we -- listen -- sorry. We did update our white space. We've talked about that earlier this year. And while we're going through and evaluating our white space, we're also at the same time doing a fleet optimization. The fleet optimization is a separate endeavor than the white space that doesn't impact the white space opportunity. However, pruning our fleet is something that we're looking to make sure that we do on an ongoing basis. It is something that we have historically done. However, some of stores have not met our profitability metrics. So we're looking to take action on those. The pandemic period, the tolerance coming out of that for how long we would wait for a store to turn around has certainly changed. And with that, we're taking action on the less than 5% stores that we talked about. As we think about filling incremental white space. Moving into 2025, we had talked about opening stores. We'll still be a unit grower. However, we are going to look at opening a little bit fewer stores in '25 versus what we historically have between to 65 and 75 stores. And when we're doing that, we're going to certainly be evaluating and scrutinizing each and every real estate site very closely so that we can make sure that these are the best sites that we do open as we go through and do this fleet optimization.

And that leads us to one of our last questions here about margins. You recently modified the operating margin outlook for fiscal year '25, from mid-single digits to flat with '24 , so closer to 3%. And we wondered if you could back up a little bit and just talk about your cost structure and how it compares versus 2019? And how long do you think it could take you to get back to normalized margins in the context of this higher cost structure?

Yes. So the cost structure, if you're looking at 2019 versus 2024, very different time periods. In 2019, we didn't have the remote capabilities. So we didn't have the increased structure that goes along with managing that. In addition, there have been increases in occupancy, there's been wage increases. And so there have been a lot of cost pressures throughout the years between those 2 periods. And we are -- as we go through and mitigate those cost pressures, we're looking to put in place various initiatives, including digitization of our stores, digitization of our back office so that we can be ever more efficient at executing these processes to be able to get to the margin level that we had historically operated at even if we aren't at mid-single-digit comps. However, mid-single-digit comps is where we've historically leveraged our cost structure because it is a high structure -- or a high cost structure with the manufacturing facilities, with the fleet, with all of the retail associates and back office. And so as we go through that, when we talked about 2025, with the revision downward in our outlook for the back half of '24, we had also talked about '25 would be in line with '24. And part of that is, as we go through '24, we are not performing where we had expected to be this year, meaning that we're getting a tailwind from incentive compensation because of the performance we are getting a tailwind currently from that. Next year, we would look to reinstate that incentive compensation. So we'll be facing a headwind next year as we roll into 2025. With that, there are plenty of puts and takes. We've got the fleet optimization that we're working through, which we expect to be accretive to overall margins. And that with the headwind of compensation plus we've got -- or yes, the incentive compensation. And we've got other puts and takes that we'll talk about as we release our '25 guidance, but those are really the big drivers.

Is it possible you can see some kind of improvement in op margin once you do have your store optimization strategy -- I'm sorry, evaluation completed? Or is that 3% more taking into account what could happen with the store fleet optimization?

There are several puts and takes. And so we do expect the fleet optimization to be accretive. That being said, the incentive compensation headwind coming next year is going to be substantial headwinds that we'll have to offset through other measures.

Okay. Okay. We're asking 5 questions of each company that is presenting at the conference. We've touched upon some of them already. But we wanted to start out asking about just the expectations for the consumer environment in the second half of '24 relative to what we saw in the first half. Do you expect things for the consumer to be the same, better or worse?

We're expecting continuation of same.

And then on the topic of margins, which we just kind of talked about, there are other costs, such as like materials and labor and tariffs that I feel like has been a little bit more of a tailwind for the industry, at least for the last year. Do you expect this to be the same, better or worse in '25?

We're expecting basically the same in '25. That's been our planning assumption.

And we've made some nice progress in diversifying our supply chain outside of China as well over the past few years. .

And while we did see the recent information that you all just put out about '25, we're taking the conservative approach and until we see things turn around for operating conservatively.

But we're hoping you're right. .

Maybe if I could sneak in kind of a Part A on the topic of cost pressures. Tariffs. I do think you felt this a little bit in 2018 and 2019. Can you just quickly remind us how much of your materials were impacted by that? And what kind of response -- pricing response was the result of tariffs in 2018, 2019? .

It was about 10% that was impacted by the tariffs in 2018 and 2019. And what we did with that, we had diversified our supply chain and reduced as much as we could coming out of China. And so we expect to be in a better place if we end up in a place where we're having to navigate those tariffs again in the future.

Okay. Our third question that we're asking is just about consumer behavior of looking for value. And again, you cater more towards a lower income consumer who's probably always looking for some kind of value. But we were wondering just your view on, is this a cyclical trend, a testament to the macro? Or do you think there's been some secular trend to how the consumer looks towards value?

For us, we have always been a valued consumer. Our consumer base has always been seeking that are -- we believe our category is evolving more towards value in a good way. But for us, that's just going to be consistent over time. That's why people -- that's why we exist, to provide better value than the majority of the industry. .

And there are #4 question we talked about more or less, points of distribution. You guys are growing still. So there'll be more points of distribution next year. And then promotionality, we've talked about a little bit as well. I guess relative, do you expect your company being more or less promotional this year versus last year? And what's your expectation for the industry when it comes to promotions.

With promotions in the second quarter this year, we started running more promotions than we had historically been running. And that was in large part to try to determine what was going on with our consumer. Was it that they were sitting out? Was it that they were going somewhere else? Was it that they were just purchasing different things? And so with the promotions, we were able to get some incremental data points. And so as we go forward, we'll continue to run some promotions. I think, as Reade said, with the Progressives' offer, that was something that spoke to a customer that we had not seen as significantly in our stores. And so we'll continue to run something with the Progressives offer going forward. But the 2 [indiscernible] offers that we were running did end in August and going forward, we'll figure out a new promotion to run. .

All right. That's all we had.

Well, I have 2 things. One, as you know, we give out company socks to everyone in our company so that we don't get too focused on this part of the body. And I noticed you aren't wearing socks, and I think these will go really well with the shoes of yours. And two, if I had to just summarize since we have a minute or two left here. Remarkably successful for 19 years. The world changed. We realized we had to transform and adapt to the new realities of the market. Champions adapt. We did big hard things like remote. It is in its early innings and is going to continue to get better and better for us. We are trying different -- new and different promotions that are driving traffic, although still sometimes not quite the average sale we want because people aren't buying as many of the higher value lens add-ons as normal. And we're trying to meet new product offerings like payer to leverage some pieces of the online category and get in new and different customers to us. And we think the combination of those things are on the road to help us get back to mid-single-digit comps, which deliver mid-single-digit operating margins. And if your economic forecast come through, that should come through for us. We're remaining conservative until we see it really take off, but the transformation continues at National Vision.

All right. Thank you so much for joining us today. .

Thank you.

Thank you.