Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to National Vision third quarter 2019 earnings Conference call.

At this time, all participants are in listen only mode.

After the speaker presentation, there will be a question answer session to ask the question to when assessing Upul Press star one when you touched on telephone.

Please be advised to todays conference call is being recorded.

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I would now like to have the cost of de speaker for today.

Sure David Mann. Please go ahead Sir.

Thank you and good morning, everyone welcome to National Visions third quarter 2019 earnings call. Joining me on the call today or response, Chief Executive Officer, and Patrick more Chief Financial Officer earnings release issued this morning in the presentation, which will be reference during the call that's available on the Investor section.

Our website national vision Dot com and a replay of the audio webcast will be archived on the investors page. After the call before we begin let me remind you our earnings materials and today's presentation include forward looking statements as defined in the private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that.

Could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. The released in today's presentation. Also includes certain non-GAAP measures reconciliation of these measures are included in our release in the supplemental.

Presentation. We also did like to draw your attention to slide two in today's presentation for additional information about forward looking statements and non-GAAP measures as a reminder, national vision expects to provide certain supplemental materials are presentations for investor reference on our Investor section of our website now let me turn the call over to read.

Thank you David Good morning, everyone. It's a pleasure to be speaking with you today to share our third quarter results.

You turn to slide for.

Q3 was a really good quarter for US we're pleased to report our 71st consecutive quarter of positive comparable store sales growth. That's almost 18 years I've consistently healthy quarterly comp we remain quite proud of the consistency and durability that this track record reflects.

Q3, adjusted comparable store sales growth was up 6.2% comps were once again led by our growth brands with the 6.7% comp increase that America's best and 5.2% comp increase at Eyeglass World, respectively. Also I'm quite pleased with the improving performance in our legacy segment, which delivered eight.

5.7% comp increase.

We opened 17, new stores in Q3 and ended the quarter with 1145 stores for a 7.3% increase in store counts in the past year, the comparable store sales growth and unit growth combined to drive an 11.5% increase in net revenue adjusted EBITDA increased.

Nearly 25% and adjusted net income rose almost 66% we closely monitor net promoter scores as another sign of customer satisfaction and ambassadorship. Our overall npls increased year over year again. This quarter. This is a testament to the store level execution of our teams.

And their commitment to customer service everyday and every store one patient and one customer at a time.

As we noted on our last call, we improved our balance sheet with the debt refinancing in July that lowered our power our borrowing costs.

Our 14 year tenure or private equity involvement came to an end does KKR completed the sale of its remaining ownership in August . This was the final chapter in our very successful five and a half your relationship with KKR concurrent with the KCI or fail the company purchased $25 million of ice stock.

And last week, we utilize excess cash to pay down $25 million of our of our term loan death, the stock repurchase and debt pay down reflects the strong stable cash flows generated by a business model and healthy recent trends.

Based on our strong year to date performance, we are raising our fiscal 2019 outlook and a few minutes Patrick will take you through our Q3 results in 2019 outlook in more detail.

Turning to slide five.

Was another quarter of positive comps further demonstrating the consistency in store performance and comp store sales gains the graph your highlights our 71 consecutive quarters of comparable store sales growth our comps. During this nearly 18 years three have been consistent overtime and across the economic cycle, which we believe is one of the nice benefits.

Purchase tied to a medical necessity people need to see to function in this world and I glasses and contacts remain the primary way to correct for vision loss.

Comps in the quarter were driven by increases in both average forget and customer transactions our comp trend was consistently strong throughout the quarter and at 6.2% has accelerated from the first half trend of 5.3%.

We experienced continued comps strength at our growth brands and improved momentum at our legacy segment.

Legacy segment posted its strongest comps since 2015, we're encouraged by the energy in execution being delivered by the team and believed that our initiatives to engage with the customer are reflected in this performance.

Overall, our consistent positive comp results continue to reflect the benefits of operating in the growing value segment of an attractive industry, having a leadership team of optical experts focused on customers and patients.

Marketing operations, and merchandising strength, new store growth as well as comparable store sales growth in our more mature stores driven by loyal customers and positive word of mouth.

Our double digit net revenue growth year to date, we believed that we continued to gain share in the fragmented 37 billion dollar optical retail market with our local operating model.

Turning to slide six our results this quarter were fueled by solid execution across many fronts, including real estate marketing and store operations, we look to continue to execute on our core growth driver.

First new stores, our primary focus as we continued to see a sizable white space opportunity given our current footprint.

We opened another 17 locations this quarter year to date, we've opened 67 stores and expect to open about 75 stores again. This year. Following the formulaic approach is worked so well for us historically as we look out the 2020 the pipeline of location looks strong.

Tom first played key roles in our ongoing success and in our mission to deliver improved care throughout the U.S., wherein optometrists centric company and strive to be the place where the best optometrists choose to practice.

As such we continue to invest in our optometrist recruitment and retention program. We believe that these investments are paying off as our overall optometrist rich retention rate is at record levels.

This quarter, we believe that increased optometrist coverage and help to drive patient traffic as we work to fill the ever growing demand for eye exam in our stores.

Our our team is on track to deliver another year of comparable store sales growth in 2019, our key comp drivers are the comp waterfall from maturing new stores marketing envision an insurance initiative and the positive word of mouth from happy patients and customers.

Our stores take several years to mature given an infrequent purchase cycle that averages two to three years. So it can take time for potential customers to find the store. After it opens this purchase cycle tied to a low price offer on a medical necessity initially attract new customers, who then become returning customers in later years, resulting in attractive.

Comp waterfall.

When our customers are in the market, we strive to deliver incredible value that's track them to our stores are introductory offer in America's best two pairs of my glasses for $69 with 95 cents, including a free comprehensive exam hasn't changed in over a decade at America's Best. This bundle includes hundreds of frames to choose from and get the perch.

Despite over 20% of our Americas best customers, who do not have vision insurance.

Last year, well over 1 million free I'd stance were provided the patients as part of it to pair bundle.

At Eyeglass World the offer up to pair of glasses for $78 along with the opportunity of same day service from our in store Labs also represents one of the best value in the industry.

Each year millions of patients and customers come to us for for the affordable care and eyewear, we believed that the combination of low prices and excellent customer service leads to satisfied repeat customers and positive word of mouth as customers tell their friends a little they spend and the great service. They received at our store as we've noted 64%.

Of customer mature stores, our existing customer.

Marketing continues to be a key factor in attracting customers and driving traffic to our story.

Television advertising remains our primary marketing vehicle and our al and Mr. World marketing campaigns continue to resonate with optical consumer the out with a particular favorite of our customers humorously reminding them that they paid too much if they didnt shop at America's Best we're quite pleased with the effectiveness of our marketing campaigns this quarter.

Overall, we believed that our investments in marketing are paying off and a factor in our market share gains.

Participating ambition insurance programs remains positive comp driver healthy net revenue growth tied to these partnerships continued in the third quarter. We believe a factor behind this growth is that vision insurance dollars tend to go further at our story, we remain underpenetrated relative to the industry for the percentage of our business coming from vision insurance.

Net revenue tied division insurance, while fast growing continues to be a minority of our revenue. Thus, we see continued opportunity for growth.

As a value retailer, we promote a low cost culture at National vision, We know we kept the everyday low price without being everyday low cost.

Our centralized lab network is a key reason that where you are everyday low cost our new states. The aren't lab in Texas continues to ramp its production and remains on schedule. The new lab is a prime example of growth investments, we're making today, we believe we will drive future performance.

We continue to progress our omni channel efforts to improve the customer experience an operating efficiency. Our focus is on all aspects of the customer journey in order to improve engagement and reduce costs are patients and customers appreciate such things as the ease of being able to schedule appointments online.

Let me take a moment to provide an update on Kara.

As previously disclosed we estimate that products imported from China represent less than 16% of cost applicable to revenues. Since September 1st these products have been subject to 15% Terra we continued our diligent efforts to mitigate the impact of these terrorists.

We've been working with our suppliers looking at all areas of our supply chain as well as reviewing our pricing and cost structures. We remain focused on operating a cost efficient supply chain and maintaining our commitment to our industry, leading low price strategy. As a result of these initiatives we are positioned to offset the impact of the 15% tariff this year.

Overall, we're very pleased with our year to date performance the momentum in the business is solid and we're raising our fiscal 2019 outlook as we look beyond 2019, we continue to believe that we're well positioned in a very attractive industry and are confident in our growth strategies to build the business for the long term.

At this point, let me hand, the call over to Patrick.

Thanks rate and good morning, everyone turning to slide eight as we've noted our business performed very well in the third quarter and year to date, we are nearly complete with our plan to open approximately 75, new stores in 2009 and.

Weve opened 67 stores year to date compared to 58 last year at this time.

For opening have been predominantly America's best locations with reminder, being eyeglass world stores for these two growth brands combined unit growth increased nearly 11% over the last 12 months, we did not close new stores. This quarter. Our 2019 store growth has been skewed towards existing markets as well as further insight.

Bill and our newer markets in these newer markets, we continue to expand our store base and best where our new stores are ramping and building awareness. We note that the majority of our new stores have historically taken approximately three to five years to mature and payback invested capital. We remain positive about these newer markets and see a lot of our.

Potential customers there.

The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis.

Same store sales increased 6.2% on top of 6.8% increase in the third quarter last year.

The comp growth was driven by increases in both average ticket and customer transactions, we experienced comp growth in both the eyeglass in contact lens categories. More importantly, fiberglass comps continue to be primarily driven by increases in customer transactions in terms of contact lenses comps were primarily due.

Given by an average ticket our contact lens customers are increasingly migrating towards newer technology lenses that have higher prices. We believe our customers are in the early stages of participation in an industry trend that has been ongoing for several years.

In the third quarter, we generated solid comps in our growth brands as America's Best and Eyeglass World produced gains of 6.7, and 5.2% respectively legacy comps increased 5.7% in the third quarter up this growth, we estimate 200 basis points to benefit from incremental.

Hi exam revenues tied to a shift in optometrist from our first five subsidiary to the legacy segment in the fourth quarter of 2018 as we noted we believed that the strong legacy performance was driven by improved store level execution property.

Overall, we're extremely pleased with the continued top line momentum in our business since our last call.

Turning to the income statement highlights on slide nine as a result, with the solid top and unit growth net revenue increased 11.5% the growth in net revenue from the AC Lance contact lens distribution business contributed approximately 160 basis points of the increase as a reminder, we added this incremental AC linzess.

Business in the third quarter last year. So this will be the last quarter in which it will have a material grow over impact on the income statement.

Cost applicable to revenue increased 12% or an increase of 20 basis points as a percentage over net revenue versus last year, which was better than the range of expectations that we provided last quarter. The contact lens distribution business growth negatively impacted cost applicable to revenue by 70 basis points.

The remainder of our business generated a 50 basis point improvement in cost applicable to revenue, which primarily reflected higher eyeglass margin and a higher mix of reimbursed eye exams sales they were partially offset by higher optometrist cost.

The higher optometrists costs resulted from planned increases in store coverage and to a lesser extent wage inflation in certain markets.

Yes, you know you expenses increased 2.8% or a decrease of 370 basis points as a percentage of net revenue versus last year.

Adjusted EPS DNA expenses increased 7.7% in the third quarter versus last year or a decrease of 140 basis points as a percentage of net revenue.

We're pleased with the leverage of store payroll and advertising expenses that we achieved this quarter.

Adjusted EBITDA increased nearly 25% and adjusted EBITDA margin increased 120 basis points to 11.1% in the quarter. The increase in adjusted EBITDA margin was primarily due to our improved on glass margins and expense leverage you, partially offset by the impact from the contact lens.

Producing growth and the net change in margins on earn revenue the change in unearned revenue negatively impacted adjusted EBITDA growth by 650 basis points in the quarter.

Adjusted net income increased almost 66% in the quarter adjusted diluted EPS increased 62% to 18 cents versus 11 cents last year.

The flow through this quarter was excellent as we generated strong incremental margins on higher sales overall, we're very pleased to have delivered more to the bottom line from our solid topline growth.

Still investing in the business for the future.

Turning to slide 10, and year to date results our year to date results reflect the consistency and predictability of our business model with adjusted comparable store sales growth of 5.6% net revenues up 12% and adjusted EBITDA growth about 11% adjusted EBITDA growth was negatively.

Impacted by 350 basis points due to the net change in margin from unearned revenue.

Adjusted EBITDA margins slightly declined by 10 basis points to 12.2%.

Our adjusted EBITDA grew at a slower rate the net revenue due to the impact from the contact lens distribution business growth and the net change in margin on revenue. In addition, adjusted EBITDA margin includes a 20 basis point headwind from an approximately $40 million plant increase in cyber security investment year to date.

Similar to recent quarters, we have again included in explanatory slide on revenue, which you will find in the appendix section. This illustration is intended to help unpack how unearned revenue is somewhat unique to our service based business model versus more traditional retailers as well as the typical seasonal impact on our.

Segment.

I also want to take a moment to comment on our adjusted comparable store sales growth metric, which is connected to the topic of unearned revenue. This quarter. We've added an additional explanatory slide about this metric in the appendix section.

Tested comps reflect our same store sales growth on a cash basis, which adjusts for the impact of unearned and deferred revenues. This is how the management team has always reviewed business performance and our comp methodology has been consistently applied in most quarters adjusted comps will be less than GAAP comps as it has.

Than lower or equal for 10 of our 13 reported quarters in the third quarter adjusted comps were higher than GAAP comps, primarily due to the year over year change in unearned revenue that I referenced earlier as well as continued growth in our business.

Turning to slide 11 at the end of the third quarter. Our total debt was 598 million. Our cash balance was 94 million were up over 45 million year over year net debt to adjusted EBITDA was 2.6 times an improvement from 3.1 times in the third quarter last year with our pre IPO.

<unk> ratio at six times the substantial progress in the last few years indicates our commitment to deleveraging our balance sheet.

Year to date, we invested 76 million and capital expenditures with the majority of the Capex focused on growth initiatives. We've tightened our 2019 Capex plan to the high end of our previous range or 102 to 105 million, which would be equal to or below our 2018 capital investment level of 104.

5 million with our current outlook for topline growth and relatively stable Capex, we will reduce our in capital intensity in 2019, which is an ongoing strategic focus we are encouraged with the improving cash flow characteristics of our business cash flow provided by operating activities increased 50.

5 million versus last year during the quarter, we repurchased 25 million in stock concurrent with the final secondary offering also as we noted we made a voluntary 25 million prepayment on our term loan last week in total we have redeployed 50 million in cash towards stock repurchase and.

Debt Paydown during 2019, even following these actions we expect to end the year with ample cash balance.

As a reminder, from our last call and noted on slide 12, we completed the refinancing of our debt in July which lowered our borrowing costs on approximately 360 million in debt by 100 basis points and increased our overall borrowing capacity by approximately 60 million.

We're pleased with our continued efforts to enhance and strengthen our capital structure. While we will look to achieve continued improvements in our leverage ratios. We remain very comfortable leverage levels, given our health services business begins performed well across the economic cycle.

Turning now to our outlook on slide 13 based on our year to date for payments and our expectations for the fourth quarter, we're raising our fiscal 2019 outlook as you saw from our press release, we now expect adjusted same store sales growth in the range of 5% to 5.5% consistent with prior gone.

Since we believe it is prudent to continue to plan the business in the 3% to 5% range for the fourth quarter.

One factor to consider relates to the final week of the year, which is a high volume period for optical shoppers, who wants to use expiring benefits. The final week of the fiscal 2019 calendar has one less day between Christmas and year end and this calendar shift historically has had a negative impact on comps and net revenue.

Growth.

We now expect net revenue of 1.75 to 1.712 billion, we're increasing our expectations for adjusted EBITDA onto a range of 189 to 192 million and adjusted net income to 56.5 to 58 5 million. We also expect a slightly lower arrangement.

Appreciation of 87 to 88 million, our fiscal 2019 outlook for store openings interest and effective tax rate remained unchanged.

As a reminder outlook includes the impact from several items that we've outlined previously first we've now lapped. The addition of the incremental AC land contact lens distribution business. The impact of this business growth dampen our adjusted EBITDA margin by increasing our cost of applicable to revenue and leveraging our eschewing expenses.

For fiscal 2019, we now expect our GAAP cost applicable to revenue to increase 90 to 100 basis points compared to fiscal 2018, a slight tightening of the range that we provided last quarter for Q4, we expect cost applicable to revenue to increase about 30 to 40 basis points.

Second we continue to expect to spend approximately 4 million in incremental investment in cyber security this year.

Lastly, let me briefly revisit the China tariffs in the context of our 2019 outlook products that we import in China are now subject to 15% tariffs versus the 10% tariffs that we expected when we last spoke in August our increased to 2019 outlook takes into account the incremental headwinds, but these 15%.

Sure as read highlighted we have been working diligently on initiatives to mitigate the impact of Pira.

We are focused on executing our 2019 strategic growth initiatives to finish the year and look forward delivering another year of consistent growth in terms of 2020. We are currently in the planning process consistent with last year, we look forward to providing a full fiscal 2020 outlook on our yearend conference call.

In late February at this point I'll turn the call back to read.

Thank you Patrick turning to slide 13 in closing I'd like to share some of the efforts. We've been involved in just the last couple of weeks regarding helping to get exams and glasses to lower income kids as part of National vision active special mission.

Two weeks ago, a group of US joined our partners at SLR transitions and Essilor Vision Foundation in Dallas to provide eye exams, and free eyeglasses to elementary and Middle School Kids in need it was a great day of industry partnership and support of a worthy cause but I'm confident headed trajectory setting impact on a great. Many young people's lives.

This past weekend, we have a lead sponsor of an annual fundraiser for Salus University Graduate Health Sciences School that grew out of the Pennsylvania College of Optometry. The fund raisers in support of the schools vision Vanda provide screenings eye exams, and I glasses to thousands of kids in the Philadelphia public schools as well other school districts.

Via environments.

And finally going on as we speak nearly 40 America's best the National Vision Associates, and six optometrists in partnership with up Lantus West at West side future Fund our on site at the holiday Innovation Academy, an elementary and Middle Middle School in downtown Atlanta, we're providing fee pre.

Asian screenings eye exams and glasses to all how students.

And expect to help more than 500 people at this event.

These are just a few of our most recent efforts to make eye care and eyewear accessible for all.

In summary, I'm extremely pleased with our third quarter results and increased guidance I want to thank our entire team at national vision, including the over 2000, optometrists, who provide much needed medical services patients at our over 1100 storefront every day.

We continue to strive to be the best of providing low price exam glasses and contact lenses, while both at home and abroad and this week in our hometown of Atlanta, we work to bring glasses, and consequently fight and improved quality of life to those who would be unable to see well otherwise.

As I've noted in the past. This is why we believe optical retailing is a noble profession.

With that I'd like to turn the call back to the operator to start to question and answer portion of the call.

Thank you as a reminder to ask the question do you want me to press Star one on your telephone switch all your question. Please press the pound <unk>. Please standby well, we compile the county roster.

Our first question comes from Robert.

Bank of America. Your line is now open.

Good morning, guys and congrats on a great quarter.

I have actually two questions. The first is can you can you remind us or maybe help us understand the.

How much the average ticket growth is benefiting from contacts and you're maybe how much that is helping the comps and.

The maybe maybe some help on penetration of contact lenses versus eyeglasses just in why this is not sort of a onetime ticket benefit in you know just just maybe a little math to help us understand how sustainable that is and then the other question is just remind us what's driving the higher.

Hi, glass margins in how sustainable that as well thanks.

Thank you Robert yet I appreciate that and and yeah. We're pleased with both the ticket and transaction growth overall, you know transaction count overall company was up 3.9% and ticket growth 1.9%.

So on that on the contact lens side, if you got to remember contact lenses are about.

20% of our business overall, and so although although they are growing ticket wise and going transactions thats more sort of Dr and customer driven it's not something we drive it's not something that that's a that's more sort of what the doctor feels isn't the best interest of the.

Patient and what sort of modality, the patient out once but really our comps are related to the growth in our I glass.

Our glass business, not our contact lens business and again transactions were up for eye glasses, 3% been growing.

Faster than ticket, which is the way we like it and have done it historically and Patrick you want to talk about the margin piece of that yes, I'll follow me on eyeglass margins.

Robbie there's a few things going coming into play there I think we've mentioned a couple of quarters. This year that we have a new wins pride on new wins contract going into effect.

At mid year and that has obviously occurred second we've also mentioned peripheral pricing action would have also affected.

Of our frame mixed our frame board mix. So both of those are are factors in helping NIE glass margins a bit is at this time.

Again sort of when I when I look at the transaction and ticket thus I see it. It's just part of the consistent story that we've been palace talking about for a real long time that.

It's in line with how we like it and it feels very.

Similar to what we've been talking about even since our road show.

Thanks, guys and just one follow up if I may just the the improvement in the the legacy business company.

Anything you can highlight what happened there and is that sustainable.

Yes. So so we're pleased with that as well again that was that was yes. That's the there is nice momentum that we're seeing in that business too we have sort of new leadership team key people in place there and we're feeling like.

Our legacy Division really has its mojo going there so I think its its leadership focus.

Energy, Yeah, we're feeling good about that.

Terrific. Thanks, so much guys.

Thank you and our next question comes from Simeon Gutman of Morgan Stanley . Your line is open.

Hi, This is Josh Kevin with John facility and Thanks for taking question as you look towards 2020 can you maybe remind us with some of the key margin buckets.

That will help and what your expense.

Structure like for example, you spoken about optometrist optometrist wage headwinds for a long time, there's a lot to talk about broader wage inflation are you worrying about the potential for your store associate wages to rise as advertising and then become.

Well when just in general some of the buckets. So we should think about.

Hey, Josh it's it's Patrick.

Ill take that one in terms of 2020 I'd say at the at the outset, we're still working diligently on that plan, we look to share specific outlook in February .

Tariffs kind of come into play and we continued to make great strides towards the being prepared for those however that that may fall.

There are some key items that affected us in 19 that that will not continue those fiber investment of 4 million on the year.

The Plano lab drag I think we disclosed about one to one and a half of EBITDA on about same amount on depreciation and then obviously, we've now lapped the AC lands content wins distribution bolt on that we've talked about over the past 12 months.

As I kind of look out and think about overall margin expansion and not just for 2020, but in general.

We've had these factors that I've just discussed and then yes, we expect to see some continued wage inflation I think we're managing through that very well in our stores as evidenced by.

Leveraging associate wages in the quarter.

We continue to support managed care growth and look at some other key investments that we think drive.

Market share gains next year, we should see some lap productivity improvements.

We're also working to leverage those fixed costs in the business.

Can be leveraged so.

Today, I'm not ready to kind of call. It in terms of which way that goes for 2020, our intent is to remain a very consistent grower.

In continued to deliver what you all have been accustomed to and and obviously, we'll go into much more specificity on our next call.

Thanks, Patrick and then just a quick follow up can you remind us maybe what your overall business leverage point is for comps is at the 5% level is that 6% level because of wage inflation now.

Just any color on that would be helpful.

Yes, I think we've kind of said something in that 4% to 5% range and.

We have we're working very hard to what we can with fixed cost to continue to improve that.

Great. Thank you.

Thank you know as our next question comes from Bob thermal of Guggenheim Securities. Your line is now open.

Hi, guys stood two questions for me. The first one is I guess two years now independent public company you can just maybe talk about the environment sort of how much change over the last couple of years in sort of how you see a changing and you sort of tying that one together can you just give us an update on the Walmart relationship I think you have a renewal coming up and.

Just sort of how we should think about.

Where that relationship vision and the future prospects there. Thanks.

Bob I'm I'm happy to do this so yeah. We just had our two year anniversary a few weeks ago as a public company and I would say that trends we laid out on our road show have have continued to add there. There is a an audio is ongoing consolidation.

In the industry, there seems to be an ongoing shift to the the value segment that we are benefiting from that consolidation is making it I think ever more challenging to be an independent Dr. And doctors are still 40% of the industry and we're finding we're finding a lot of doctors are saying.

I think I'd rather be in your employed model than in the independent models, though have folks coming to us like that but hi, there I guess sort of the Essilor Luxottica thing came together in the in the past.

Two years, but that really hasn't affected us a great deal, but we were always saying that categories growing up a bit and it's continued to do that but the chains are growing at the expense of the of the independent we see that continuing and the value segment is growing at the expense.

A lot of the traditional more expensive.

Hi.

Of the of the chain. So that's all continuing and consistent with the vision, we had two years ago and what we.

Expected there on the on the Walmart side first of all we're real pleased with our Walmart results there and we've always considered it a great honor to get to operate within Walmart with no work. That's we're just ending our 29 years for next year will be our thirtyth year of partnership so.

Walmart, we feel that the relationship remains quite strong and and we're sort of in touch with them on a frequent basis on a variety of topics, we talk to them about all sorts of things all the time as as we have.

So so things are good there I think we don't have anything to report right now relative to that but when we do well, we'll let you know.

Got it and if I'm can you just sneak in one more and when you look at the inventory levels. Throughout this year I was just 100 and can you just tell us how you think youre entered 2020 from an inventory perspective.

Hey, Bob its Patrick.

Yes inventory levels.

The conditional on where where things are currently trending on and tear up there.

We get opportunities to do forward bonds.

And you've probably seen us to that a couple of times in fourth quarter, I think I think levels of work down through a reasonable level now and I think we're just going on at this stage two to various suite.

To kind of see how that's looking and those will adjust the inventories accordingly, but turned states terms are fairly consistent for us there.

Very high.

Contact lens business and reasonable on glasses when frames as well so we'll be monitoring that over the next month and a half or so and take is so it's wise of actions. We can broadly inventory increases relate to things that are opportunistic and favorable for us.

Okay. Thank you very much.

Thank you and our next question comes from Michael Lasser of U.S. Your line is open to.

Good morning, and smart card on for Michael today. Thanks, a lot for taking my questions. When you think about the Walmart business. It's Walmart did ultimately for any reason decides it would prefer to bring his eye care operations in house, how would it impact your free cash flow. Thanks.

Hey, Mark Thanks for the question so.

You can look at our our legacy segment. Our legacy segment is the store level TNL for those 226, Walmart stores. So that that kind of gives you our profitability at the store level. There are some other costs for the dinner or in our corporate and other related to all the.

Field management personnel the district managers, the regional VP brand leadership as well as corporate support and so you have to be a little careful with that segment number in terms of translating it down to one.

Through free cash flow, we've not provided that kind of the extended segment, but as you think about moving down from 20 something percent for owned and host and Walmart combined to lower teens 11, 12% for EBITDA theres going to be a similar margins there. So.

It would be it would be something far less than segment.

And we obviously our intent is to not have to think about that we continue to do our best to be the best Spartans.

But if that in order for coffee.

Frankly, we could managed through it and it'd be an impact I think we could manage through and grow through it for them.

Appear to Tom but again.

We're not ready to really make that a project.

Okay. That's helpful. And then you mention that managed care continues to be an opportunity can you quantify where your current penetration is relative to overall industry levels and then how much that's changed over the past few years. Thanks, yes. So so we don't give an exact number.

I think when we went public two years ago, we are saying it was between 45 and 30% them. We are saying it was it was growing up it faster than the rest of the business. So that could give a sense of dimension and we continue to say that it is less than half of our business and that.

We.

Our and remain under developed.

Relative to the category overall, we think that we're under developed for a couple of of reasons. One when we bought America's best Bakken well five they didnt, except any managed care. So we're starting at zero. There were they had no plans that they they're with US. So we started at zero. So we're playing a bit about.

A catch up game, there, but but alternatively, if you don't have vision insurance, you're more likely to come to us. So when it's all all your money and you're not a youre not factoring in the various factors that go into the decision. If your managed care buyer that's all your money.

And your seeking out through value you generally find up and so I think we'll always be a bit.

Up over developed in the non managed care business fourth for that reason, but it continues to grow nicely.

As a piece of our business and we're we're happy with it in spend time cultivating.

Great. Thanks very much.

Yeah, and our next question comes from stuff with Bank of Jefferies. Your line is open.

Thanks, Good morning, everyone at most of my questions have been yeah, but one thing I wanted to just break down maybe read the question for you in your prepared remarks, you mentioned that you had stronger optometrist coverage, but you are used as a way to drive incremental utilization and comp can you talk a little bit about how you think about investing.

Optometrists to make available appointments are availability of appointments improved and ultimately benefiting the overall sales take rate.

Yes for the business down it would be helpful.

Thats as one of my favorite topics something I spend a lot of time on as I said in the prepared remarks, we are and optometrist centric organization.

One of the phrases I repeat most frequently is that we are creating environments, where optometrists will want to spend their entire career and I'd say environments. Both because we have multiple brands and we have multiple different relationships with with optometrists and.

Terms of how we interact with them some lease from US some are employed via some work for professional corporations. Some work for our California, Hmm, though is it I I broadly say that that's I, if theres a relationship and have within Odeon America, we we havent and frankly, that's a barrier to entry.

The in in our favor. The fact that that is one of our competencies key is we see very strong demand for our services and the odysseys in our stores help us to be able to serve this ever growing demand, so where we have more eau de kalb coverage it tends to correspond to higher sales and.

That's why when we when we refer to the fact that are our retention of optometrists is at an all time high it really is a a key barometer of the health of our business.

Great just one follow up on marketing I think you mentioned that you did lover advertising in the quarter Im wondering if you can talk a little bit about what we should look for over the course of the next one to two years in terms of your marketing investment you'd had great success with some of your campaigns and what are you looking forward to in terms of either further activating some of those assets.

Or adding on new mediums, the or ways to reach the consumer.

We're always looking for ways to make our marketing more efficient.

And I believe we get ever smarter with the years, where both traditional marketer and spend a lot of on TV and we do a variety of different digital marketing programs that we're always testing and quantifying and learning about the media market and the enemy.

Eric a both both both on the television side of things and on the.

Digital side of things is ever changing so you are foolish, if you're not always testing and learning and the great thing about the digital means is it's very quantifiable as opposed to the the traditional ways. So where do we believe we're going to be a consistent marketer for a long time.

And we think that it's a a key way to help us grow our share and sort of fees the opportunity and continue the demand for our products.

I would just to add its Patrick.

Recurring due to encourage off of talking through both being traditional and digital.

I think that as is this continues to equalize. Some shift we also have an opportunity to see some degree of advertising leverage over time, we've not kind of made that call yet, but I do think in today's world you really haven't do invest in both sides and I do expect that to transition a little more over time and gives us a better off.

From leverage yes.

We get smarter.

Thank you and then next question comes from Paul Luxuries of Citi. Your line is now open.

Hey, guys you mentioned offsetting tariffs this year I'm just curious if that happened strictly on the cost side, just negotiating better price or did you also take prices up anywhere.

So curious if you believe you'll be able to offset the impact from tariffs next year as well and then secondly, I was just wanted to talk a little bit more about the optometrist costs. All the drag that you saw this quarter, maybe if you can quantify it compared to prior quarters and what you expect then for Q and any early.

The thoughts about next year on that side of the gross margin equation. Thanks.

Oh, thank you.

And by the way, we're very encouraged by the news. This morning, we'll see epic definitive or not but there was an encouraging Honda terrified.

This morning.

There are a variety of different levers that one can pull to to help mitigate these things.

And and we look at all of them. We study all them, we don't provide too much guidance overall for competitive reasons. We're the only public company really pure play in our in our category so we'd like to too.

Not not share in detail.

Exactly how we're doing that I will say that over the years, we have periodically an episodic lead taken peripheral pricing pricing action.

We never we don't change our core offer of our banner offer but we have over the years they've done that here in there and that is one of the levers that that is available.

And the second question about owed the could you repeat the question you had on total comp Thats for sure just just a drag this quarter versus previous quarters of what you expect in Fourq to next year outlook.

I'll take that.

Yeah.

As we think about coming out of the year in into fourth quarter.

Overall, we're expecting gross margin to have probably 32 basis points of pressure and we expect that to be impacted by tariff system. That's continuing our lab trials as well as a little bit ability wage inflation not ready to make a statement on that.

For 2020, because we're still.

On a very focused on putting together a great plan that continues to consistent growth momentum, but we've established.

But we are we're really not seen that get.

Yes.

The other thing on comeback in mentioned Paul when we say, we talk about where the inflation is really couple of things going there one is the coverage topic that.

I think it was.

Yes that kind of broader for Threed earlier, that's a factor of kind of wage as well as just we occasionally get markets, where there is a subtle supply demand imbalance and and we are respond there but.

That should give you a little color on how I'm thinking about gross margin in Q4, and then in February I'll give you loss of color on 2020.

Thanks, Patrick just one follow up.

This quarter I think gross margin just said we're off to excluding the AC blends drag that goes away in Fourq. So just curious what else what changes that would hurt your margins and fourk compared to the underlying and three Q.

Yes, so you're right.

Q3 gross was up about 50% if you put the AC lens business was signed and that was.

That was so.

Better on glass margin reimbursed exams also the hydro de calls little higher R&D costs I think the biggest change going into Fourq is the chronic timing of the inventory in the tariff assumptions as they exist today.

So Paul we.

For the tariffs went into effect, we had some existing inventory at pre tariff costs.

Those we are working those down as time progresses. So I do expect fuel a little more of that impacts in Q4, and that's the that's kind of the main reason on the guy there.

And again for 2020, we're still very focused on coming up with this is much mitigation is possible should they remain in place.

As you guys. Good luck.

Useful.

Thanks, Yeah, and then next question comes from Anthony Chukumba Capital markets. Your line is open.

Good morning, Thanks for taking my question and congrats on the strong quarter.

So my first question is there anything noteworthy that you would point out in terms of the competitive landscape in any changes with the independents some of the bigger changes some of the online only.

Retailers I've ever just anything that you might want to point out there.

You know over overall I'm, finding it pretty consistent and it's still sort of the value segment is growing and we think thats part of our momentum we think that yeah. So.

We're not seeing dramatic things out there that are changes versus either our expectations or what we've been seeing on an ongoing basis in terms of offerings.

Oh, the consumer offerings.

Got it that's helpful. And then just my follow up I'm going to pose a bit and advance because was really shouldn't be somewhat calls like this because of sort of force, but it's been Britain about so just wanted to see if you would address that there's been a couple still southern ports that have basically said that.

The FTC is going to come after you guys because of your 246 done any five mystery eye exam.

Offer at America's Best.

I mean, that's patent ridiculous price, but I just wanted to see if you. If you were distress that at all or maybe they are right and the fccs knocking measured all right now.

I'm happy to address that I feel that totally appropriate and actually appreciate that you asked on the Oh, we have had never had an interaction with the FTC on on this topic at all odd that varies so that it is not a topic area. It is not.

Conversation.

We are a company that takes abiding by all laws very seriously and the key is that that as if people are getting the offered that you are are communicating a and then bend. It is legitimate offer and large numbers of people get our offer and we.

Actively encourage yet we have hundreds of frames available at that and non.

Insured customers answered customers that come in they have and whatever their insurance path, but the majority of our customers 20% stake the offer Jim and Weve, you know, we've given away well over a million pairs of.

Well over a million.

Exams at no cost in the past year and now it's a it's an offer we hang our hat on so no no no FTC dramas out there a occurring never never had an interaction on the topic and would be surprised by it given given the legitimacy of the offer.

Got it that's very helpful keep with good work guys. Thanks.

Thanks, Yeah, and then next question comes from that's being of Wells Fargo. Your line is that okay.

Hi, This is Eric going on for Zack. Thanks for taking my question are you I shouldn't really nice even margin expansion in Q3, I'm, just saying how that compared to expectations and sort of what the puts and takes where if there any timing in shifting of expenses between Q3 in Q4 that we should be aware of.

Hey, Eric Thanks for the question.

We were very pleased with gross margin and as well as.

As she leverage and resulting EBITDA on EBIT margin expansion in the quarter.

Started with good good topline comp performance.

We did only have to.

Month of the key wins content wins distribution. So we started.

We move beyond the lapping of that as we've talked in the call we had.

Really good on glass margins, we have more exams being reimbursed now.

Those were all.

Some margins and and frankly, we leveraged both advertising and store associate payroll, so and that was a function of just really good focus and execution I am not aware of any kind of timing thing that benefited threeq you more of it.

I need to talk about in Q4 would be on my comments regarding that that last week at the year, having one less day for us between Christmas Holiday Inn Saturday the 28 in our.

Fiscal year, so I.

I know you can you can count as the our guidance and we talked a little better gross margins earlier, but there's nothing significant to kind of call out as we head out of Q3 into Q4.

Excluding excluding those couple of things.

Great I, just can't Occassionally basis chain nice cash so this year and now let's see pressing the processing. We have now behind you. So how are you prioritizing that uses of cash between opening stores investing that business and paying down debt.

Well one of the benefits of this business model is that it gives us ample cash flows to used to do all that.

We have been building 75 stores per year and the associated with distribution center in infrastructure capacity to do that for quite a while we feel like we've got a nice machine there that the works really well and we're happy about.

The white space.

In terms of the cash flow for that that's kind of a kind of a given.

This year, we have in.

I have.

Redeployed 50 million of cash $25 million in the stock repurchase.

Commensurate with the launch last secondary in August and then last week.

Voluntary debt pay down so.

In the past I've talked about directing cash towards improving balance sheet.

It was really happy to put some action in place the last week to do that and so we'll continue to I think you can expect us to continue to deploy cash to growth and as cash flows are increasing now continued to improve the balance sheet.

We've moved from a high number.

Uhhuh to.

Down to 2.6, this would come out third quarter, and we're very pleased with that I'd like to see that number get down to the 2.0 range organically and the future potential debt pay downs.

Thanks, a lot but time.

Thank you and our next question comes from Alex Berenberg. Your line is open.

Hey, Good morning, guys. So my first question is on the managed care business and its impact on sales and margins. It looks like you had some growth there and the owned and host segment, but there was a decline in legacy. It can you just expand on how these managed care trends are affecting average ticket prices and optometrist utilization as it relates to margins.

I will talk a little bit about margins and then read can chime in on kind of.

Our professional optometrist utilization. So you don't from a margin standpoint, there a little different in terms of weather a.

Patient using insurance or patient using.

Cash and without insurance comes in we are absolutely in different to that we were happy that these patients showed up and take advantage of our health care services and offers.

So from a margin standpoint, there's not a huge difference there.

The customers with insurance do have a tendency to spend a little more a little more in terms of average ticket because they're leveraging what they view as other people's money, which is really there's as well as their own. So we see up a little ticket lift there, but again our store associates.

Theres no coaching whatsoever, others and trying to help maximize.

So insurance benefits, Yeah, I guess I, just add that lots of managed care customers is the that they are managed care benefits go a little farther with us so they come in and sometimes they they.

They often by I better things goes.

Because they can and they have to help them to those.

Insurance offset.

Okay got it and then just a quick clarification pointed on a previous question you Shouldnt two times leverage ratio is that a long term target or for ended this year.

Oh, I don't want to put a timeline on that you could probably take a.

Look at a line of what we've been accomplishing organically since the IPO.

And come up with a reasonable guess on that we haven't announced specific future debt pay downs, but again.

Our intent is to get this companies were really good.

Stable position in terms is capital structure as compared to other.

More traditional retailers I would also say I've been comfortable all along what the predictability and dependability that business factored, it's tied to health services in a medical necessity.

Gives us a lot of confidence to operate even higher leverage is but just because on a really conservative Guyana I do like the notion that we'll get that down even closer to two.

Okay. That's all helpful. Thanks, a lot guys.

Thank you and then next question comes from doing Carton of William Blair. Your line is open.

Thank you very much just curious sort of looking into two primary banners and sort of further store expansion.

Generate really nice to consumer attraction. So we're we're still yeah. So we think there's great opportunities for for both where we have not updated our our white space guidance since since we did the I.P.O. of believing that there is a place for over a thousand America's best or.

Over 850, I got the world's stores, the the R.O. I see a stronger on America's best So that's why we've been focusing on that first and because we've got network T.V., we're getting sort of a network effect of you know more you see the stores the more the brand it more and more you see the national advertising it sort of it it builds on on itself.

The the network effect, there and and to your question Yeah, We actually I think there's probably a opportunity to improve the R.O. I see on the eye glass World and we are are.

Paying attention to that also so.

Oh, good so love both both both both brands.

Okay, and then sort of a smaller point I was just curious where on the Spanish language advertise on other sort of a relatively newer endeavour in any sort of anything to add there as far as newer customer or attraction, maybe in some markets you otherwise sort of thing you weren't penetrating.

We we have nice development amongst the Hispanic consumer our offerings are appealing we have enough. Hispanic AD agency and are working on different ways of building that customers segment. It sort of you know you you you build on the strength you already have when we have strength there and so on the other consumers like that will Oh.

Make a stronger.

Okay. Thank you very much.

Thank you and leasing element Miss testing cleaner question answer session, our knowledge trying to call back over to read for pleasure Mac.

Thank you very much on in closing I'd I'd like to congratulate our our entire team on the milestone 71 consecutive positive <unk> quarters were were feeling solid momentum in our business and are we are pleased to be raising our 2019 outlook, we'd like to thank you all for joining us today and for your.

Continued interest in in support of National Vision, We look forward to speaking you again in February when we report our our fourth quarter results.

You all very much.

Well, ladies and gentlemen, <unk> conference call thing he's participating we now just kidding.

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