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

Yes, we are looking at driving average ticket at a faster pace than traffic, and by the way, gross margin percentages might depress. These are 2 things that usually throw up red alarms for folks who follow retail stocks, but for us, it's actually a really healthy position to be in. Unpack the category a bit. As you move up the premium scale on lens materials, on lens add-ons, like anti-reflective coating or transitions, and even up on more premium frames, typically what you see is higher dollar transaction, higher gross margin dollars, but those are typically dilutive to our historical business model. Um, so as we can unpack what our 5-year journey looks like, we expect to grow 50 to 150 basis points of operating margin expansion every year. You know, 100 percent if not more than 100 percent of that will come through leveraging SG&A. As we have higher value transactions come through, certainly the doctor labor, which sits in gross margin, will better leverage, but the offset on the product side is going to outpace that to a degree. And I think the simplest example that folks can digest on the frame side is, you can imagine our input cost for smart eyewear is substantially different than a typical piece of, plastic injected mold from East Asia, the price point's higher, but it's not disproportionately higher from a percentage perspective, right? And that's kind of true as you go through the entire kind of frame portfolio and also true on the lens side. So, yes, what we're telling folks, guys, expect gross margin to be flat to dilutive over the 5-year period. Look at operating margin, make sure we're expanding there because as we drive more premium transactions through, it's really not going to require any incremental SG&A to make that happen.

Great. Also in this new business model, you've highlighted managed care customers, progressive wearers, outside prescription customers as particularly attractive cohorts. So what did you discover about the customer economics that led you to prioritize these customers?

Yes, so those customers are worth multiple times more in terms of profit contribution than our historical kind of bundle consumer. The progressive wearers in particular, those progressive wearers with a managed care benefit, those transactions can be worth hundreds of dollars more than a bundle customer because generally they're choosing lenses that provide them not only a great benefit, but it's actually maximizing their managed care benefit. And that's 1 of the things that we had to work on in recalibrating our store teams to to help them understand that managed care members in particular, they're paying for that benefit out of their paycheck, and they expect that they're getting a differential out of it. So a member out of pocket on a Tier 4 progressive lens can actually still be hundreds of dollars that that person is paying out of their pocket, plus the hundreds of dollars that come from the plan, but they've paid the premium throughout the course of the year, which ultimately is also giving them a $500 to $600 differential on that product. So if you take the most premium progressive lens and the most premium frame that we sell, if you were to apply that on a total uninsured basis, that could be a $1,000 transaction. Even for a managed care transaction, that can be a $600 transaction for that managed care member. But in their minds, they're getting a $400 discount on what someone without that insurance product would pay. So that's when I talk about getting our teams competent and confident to really kind of talk to the consumers, especially. Especially that managed vision care consumer, about the benefit that they get through the virtue of their payroll contributions against the healthcare plan. It's a completely different muscle. But even in that silly example, right, you can imagine the profitability on a $600 net managed care transaction on a premium lens is far more valuable from a flow-through perspective than to pair for 95, including a free eye exam. And that doesn't even include any of the reimbursement that comes through the back-end from the health insurance plan.

I think 1 of the other cohorts you mentioned is our Outside Rx. So just unpack that. That's folks who got a prescription from a doctor outside the 4 walls of a National Vision doctor. Going back to your point on leveraging doctor payroll rate, that is a category where we've historically under-indexed in terms of our percent of our mix of that customer cohort. And I think we've got a better right to win than anyone else in the category, given our relative price points on the product side. So in terms of opportunities, for leverage. Historically, when you've spent nearly all of your marketing assets, a customer acquisition strategy that says 2-pair plus a free eye exam, a managed care consumer or an Outside Rx consumer might go, well, that offer's not for me because I either get my exam through my insurance for free or I already have my prescription in hand, so I'm not necessarily... That puts America's Best Contacts & Eyeglasses maybe not in the consideration set, when in reality, America's Best Contacts & Eyeglasses should be towards the top of that consideration set because of the value proposition that they offer for the products that we sell. Um, so that's a little bit of the, yeah, repositioning of America's Best Contacts & Eyeglasses brand assets to make sure it resonates with these consumers where we're under-indexing.

And it's interesting that, you know, when we talk about reinvention, you know, reinventing the brand components, reinventing the supply chain, reinventing the mechanical stuff. That's what like, you know, Chris and I and Ana, our Chief Merchant, do. We also have a, our President of America's Best Contacts & Eyeglasses, his name is Mark Banner. Mark's leading the to reinvent the experience in the store. And historically, if you were to walk in an America's Best Contacts & Eyeglasses store, you were greeted with the following, hi, welcome to America's Best Contacts & Eyeglasses, what time is your eye exam? Because there was always this assumption that the eye exam was the part that was bundled in with the purchase. So Mark and his team have been leading even the, the kind of orchestration and the retail theater, if you will, within the stores to just not start like that. To start with, welcome to America's Best Contacts & Eyeglasses. How can we help you? And if you have a prescription from an outside doctor, let me go ahead and show you the frame board. Our pricing architecture, if you were an Outside Rx customer, was really hard to understand because you're like, I already got a prescription, this thing has value, don't understand it in context of your pricing so as we've taken pricing decisions and got more sophisticated there it wasn't just and hasn't been about rising AUR through pricing it is around creating a pricing architecture that makes sense in a broader ecosystem of consumers and how to engage with our brands. I think, Adrian, when you and I first met in New York a couple years ago, we were at, the chat in some restaurant. And I think I said, you know, our first step on pricing was no regrets pricing. Our second step was how do we begin to optimize pricing around managed care transactions? And phase 3 on pricing is, you know, how do we evolve our pricing architecture to make sense for all customer cohorts including being more shoppable for that Outside Rx customer, we're now entering that kind of phase 3 of pricing evolution.

Great. So it sounds like all of these are um ways to create a moat, right? So, um, you know, generally barriers to entry to retail are pretty low, but you're creating a lot of long-term infrastructure, human capital investments that make it really hard to to kind of penetrate. So, talk to you talk to us about what you think the moat is if we gave somebody, you know, an open-ended capital, what could they do what couldn't they do to replicate your model?

Immediately finding 2,000 optometrists and wrapping them under all of the dozens of legal entities that you have to have in 40 different states that all have different flavors of regulation is really, really hard. We have built that out. And again, we have this asset that's now going to be pointed at this unified commerce vision. That's certainly a moat. The infrastructure that we've built, great real estate positioning, well-maintained stores. I do want to give a huge amount of credit to the prior management team. It was always a sense of pride that we had well-maintained, clean stores with great doctors and the most up-to-date doctor equipment.

Amazing. But they weren't necessarily joyful. If you haven't been to 1, I can totally attest to that. I did my exam 3 months ago, and they were some of the cleanest stores I've ever been in and most up-to-date.

Okay. It was very functional, very prideful, but not necessarily very joyful from a merchandising and from an experience perspective. So that's kind of the pieces we're bringing in. But that's part of our moat, too. So it's the doctors, our positioning, our supply chain, and our domestic labs, where we produce lenses. I mean, we buy the pucks and then all the value-added components are generated in our labs. We have a lab and supply chain network that just this year as we introduced product segmentation, we could do it really, really fast because in our model, we run a showroom model. So when you buy glasses, you don't actually walk out of the store with the glasses you tried on. They go back on the shelf, and you get a brand new pair of glasses from our central lab. That also allowed us to be super efficient from an, from an inventory perspective. So when we're making inventory change-outs, we don't have to sell through 2, 3 pieces of back stock per store. We have 1 piece per store and then we have less than, as you can imagine, 1 piece per store in central inventory. As we make inventory changes, as we've moved into segmentation, we can be highly efficient from an inventory and inventory investment perspective on our balance sheet. That was also something that was historically built. So I really love this story because we're taking the best of what was built over 20 years during this analog replica phase and overlaying digitization and segmentation and just a greater sophistication of the business model. And, and that's, I think, some of the strength that you've seen from this management team deliver, Owen. Over the past 6 quarters. Elizabeth Pettis - Great.

So we've kind of touched on pockets of this unified commerce, uh, and building this ecosystem. So I want to give you the opportunity to kind of bring it all together. What becomes possible under the new platform? And so just to level set, unified commerce is omnichannel, plus the doctors, plus the healthcare ecosystem. I just want to make sure that we understand the definition of that, the contact, I'm sorry, connecting the eye exams, the prescriptions, the doctors, the manage care, the retail locations and digital. So tell us what becomes possible.

That's perfect. I'm going to take you on the road with me. That's a better articulation than I think I've given. That's exactly right. Possibility of having consumers who shop in-store and then make subsequent purchases online, knowing that if they ever need to see that doctor, if they ever need to go in-store, giving them that confidence that we got their back on a medical device purchase. Whether we like it or not category, 80 percent of consumers view optical as a medically necessitated purchase. Yes, there are those 20 percent who buy for fashion, but the vast majority view this as a medically necessitated category. That doesn't mean that we shouldn't be able to serve them through a lot of different things. A lower touch channel in a much more efficient and joyful way. So this idea of being able to serve a consumer with a doctor and then allowing them to make repeat purchases to stay connected to our brand. But knowing that they always have our brand and brick-and-mortar locations to rely on when they need us most. Uh, we think that is a powerful differentiator. We think the ability to attract consumers who might want to make purchases online, but again with this idea of if you need to come to see us in store, we got your back. It is, as you know, generally a longer cycle purchase category. Lens customers call it, you know, maybe once every 12 months, spectacle wearers every 2 years, the managed care members somewhere in between. It's a really long time between purchase. There's a lot that happens in your eyes and with your eyes during that time frame. So unlocking the ability for more frequent interactions, be it online, be it in-store, that's what unified commerce gives us, is a way to always stay kind of top-of-mind as a trusted destination for eye care, no matter how you want to engage with a brand. And again, we think we're really unique in that regard because we are the only ones to have the assets of 1,200 points of physical distribution, a truly advanced leading e-commerce platform now that we have kind of stood that up, and our employed doctor network. So that's what we're, um, that's what we're working to in the next year or so like get that platform up and running. Pulled together, get all those use cases running, and get the consumer to think about us in those regards.

Fantastic. So with our final few minutes, um, all of that in a nutshell. I'm going to have Chris tell us what vectors of top line, right, so customer acquisition, TAM expansion, retained customers spending more, wallet share, drivers of the top line, drivers of the structural drivers of the margin expansion. Explain to us how all that flows through the P&L and what's the future look like, the model?

Absolutely, so I think you nailed the, the top line expansion opportunities. Well, 1 thing we have not unpacked a ton here today, just yet is the white space still available for us across the country. So we today operate just under about 1,280 stores in 40 states. The lovely state we're sitting in today, we do not operate in yet, uh. So there's still significant expansion opportunities for us from a pure 4-wall perspective. I, we've made an intentional decision to slow down on new store growth. We've still been a net grower of stores for last couple of years, but we needed to get the operating model right. We needed to get the new store concepts designed and ready to go with the new brand assets to then re-accelerate store growth. So as we think about long-term drivers of growth, and particularly on traffic, as we re-accelerate store growth, we certainly expect to see some positive tailwinds from a traffic perspective. But look, I think in aggregate, the things we're doing are going to drive higher average transaction value, more... with the addition of our unified commerce approach, again, tailwinds to overall transaction growth. But we do expect to see gross margin dilution from a percentage perspective, significant leverage in SG&A. You know, we've been very focused in the last 2 years on SG&A and cost out, and that's largely come through, I'd say, some optimization of our home office, but largely on the backs of just professionalizing our procurement and sourcing processes and really leaning into our strategic partners who want to be part of this new growth trajectory for the business. And we're very, very glad that the partners met us where we needed them to. As you look in out years, right, I think there's still more, let's say, internal optimization to be done in terms of better matching supply and demand, ultimately yielding to 50 to 150 basis points of operating margin expansion on average for the next 5 years. So it's just a really exciting time to be part of the business when I came in. We finished 2024 around 3.5 percent operating margin. The midpoint of our guide for this year is going to double our operating margin dollars from 2024 through 2026. And like, how many opportunities do you get to say that when you join a company? We still feel great about the operating margin expansion. It's something that Alex has brought in a great team that's truly uniquely focused on doing what's right for the customer, but putting NVI first as well and making sure that we're driving operating margin as a key priority for the business. Yes, we think over the 5-year period we expect.

Can you just remind us what your longer-term goals are in terms of sort of an algorithm?

Kind of an average of high-single-digit revenue growth, mid-single-digit comps and operating margin expansion from 50 to 150 basis points. We're expecting to re-accelerate new store growth in 2028 back up to like the 60+ range. Whereas last year, this year, um, what we projected for next year was closer to like the 30-35 range.

And I think learnings from this year has been, as we stay really focused on driving the right type of traffic, that we've actually seen acceleration of our operating income growth even beyond our original expectations. Because I think that is also 1 of the nuances of this business versus traditional retail. It's like, your mix of traffic type matters a lot. And just where we kind of started the conversation was, we are much more focused on the quality of our traffic mix versus the kind of aggregate traffic number because of the significant delta in profit contribution depending on the type of traffic you're driving in.

With that. We're at the end of time, but it's just, to wrap it all up in very simple economic terms, every marginal revenue dollar is creating more marginal profit dollar. So, you know, thank you so much for having me, Chris. Thank you so much. Thanks for having us. Thank you. Thank you so much. Thanks for having us. Thank you. This live transcript is auto-generated without human intervention or review.