Q4 2019 Earnings Call
[music].
Ladies and gentlemen think you're standing by welcome to National Vision fourth quarter 2019 earnings Conference call.
At this time, all participants are in listen only mode.
After speak a presentation will be a question answer session.
That's a question on just how should we need to press star one on you've touched on call Uh Huh.
Please be advised today's conference call is being recorded.
If you acquire any further questions. Please press star zero.
Now I'd like to hand, the call somebody else Mr. David Mann.
Thank you and good morning, everyone welcome to National patients fourth quarter 2019 earnings call joining me on the call today or read pause Chief Executive Officer.
And Patrick more Chief Financial Officer earnings release, this morning, and the presentation, which will be reference during the call are both available on the Investor section of our website National vision Dotcom and a replay of the audio webcast will be archived on the investors page. After the call before we begin let me remind you that our earnings materials and today.
This 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.
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 like to draw your attention to slide two in today's presentation for additional information about forward looking statements non.
GAAP measures as a reminder, national vision expects to provide certain supplemental materials for presentation for investor reference on the 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 sharing our fourth quarter results with you today if you.
Turning to slide for Q4 was a strong quarter for us capping off another record year for net revenue and adjusted EBITDA. We're pleased to report our 72nd consecutive quarter of positive comparable store sales growth. That's 18 years I've consistently healthy quarterly comp we remain pleased with the consistency and drew.
Our ability that this track record reflects.
Q4, adjusted comparable store sales growth was up 8.1% comps were once again led by our growth brand with a 9% comp increase at Americas, Bath, and a 6.4% comp increase in eyeglass World also I'm quite pleased with another solid quarter at our legacy segment, which delivered a five.
0.1% come in comp increase for the second consecutive quarterly increase over 5% note that our legacy locations averaged 24 years of age. So it's nice to see such strong performance from such established story.
We opened eight new stores in Q4 and ended the quarter with 1151 stores for a 6.4% increase in store count in the past year, the comparable store sales growth and unit growth combined to drive a 12.9% increase in net revenue.
Adjusted EBITDA increased nearly 38% and adjusted EPS increased to 11 cents versus one penny last year.
An important sign of customer satisfaction in ambassadorship isn't net promoter scores, which we tracked closely our NPS for each of our brands remained at or near record levels. This year.
With our 10-K filing today, we're pleased to shared that the previously reported material weakness has been remediated.
Appreciate all the hard work from our accounting and finance team to deliver this accomplishment.
Since yearend, we have two additional noteworthy achievements to share as a result of expanding partnerships.
First we announced an amendment to our existing contract with Walmart our strategic partner for the past 30 years. This amendment added five additional vision centers in Walmart stores to our contract to bring our total to 231. This marked the first time in 26 years at Walmart gave us more vision center locations to operate.
We're excited by this opportunity and are working closely with Walmart regarding the logistics takeover. The operations of these vision centers as soon as its profitable.
The amendment also extended our existing contract for six months to February 20, Threerd 2021.
Overall this agreement further strengthens our relationship with Walmart and grows our footprint given conversations with Walmart or ongoing will not be commenting further on the contract or relationship on this call.
Second our merchandising team continued to work delivering assortments that exceed customer expectations, Oh, great values.
Last month, we expanded our relationship with the affordable celebrity eyewear brand for Baybrook, though to all our Americas best locations. The expansion comes after a successful pilot program I'd like to America's best stores last year.
With our strong Q4 performance, we're pleased to have exceeded our fiscal 2019 outlook and enter fiscal 2020 with good operating momentum.
And a few minutes Patrick will take you through our Q4 results and our 2020 outlook in more detail.
Turning to slide five.
2019 was again filled with a number of highlights at National vision, we expanded our for footprint increased market share and continued to reinvest in our business towards future growth.
The optical retail market remains highly fragmented and we continued to see a large opportunity in front of.
We expanded our centralized lab network and our with our new Texas facility, which has ramped on schedule and added capacity to support our growth.
Our management team has continued to evolve over the last couple of years. Many of the senior executives that came together to build the company in the early 2000 have reached retirement age. We're pleased that this transition continues to go smoothly as demonstrated by our consistent performance.
We are fortunate to have attracted new executives with strong skill sets and fresh perspective, while continuing to foster the same vibrant culture that has served us quite well.
We continue to enhance our balance sheet with the successful debt refinancing. This summer followed by a 25 million dollar debt pay down in Q4.
Our 14 your ownership by private equity came to an end is KKR and Berkshire partners. Both exited their remaining ownership position I last summer. This concluded the chapter of our very successful relationship with both group.
We wish this bank, both Berkshire partners and KKR for the important role they play than our growth.
We strengthened our board of directors with the addition of another independent Board member Heather San Francisco, who has provided valuable managed healthcare insights and other stewardship since joining in 2019.
Lastly, we also made considerable strides in our social Michigan and our growth brands. During the month of November and December our Americas Best team launched a holiday give back initiative and donated free eye exams, and I glasses to over 8100 children in need.
During 2019 eyeglass world rolled out it made locally given globally program and made free prescription eye glasses that are going to 50000 underprivileged people around the world.
Turning to slide six it was another quarter positive comp further demonstrating the consistency in store performance and comp store sales gains.
The graph highlights our 72 consecutive quarters of comparable store sales growth our comps. During this 18 years three have been consistent overtime and across the economic cycle, which we believe is one of the nice benefit a purchase tied to a medical necessity.
People need to see to get through the day and eyeglasses and contacts remain the primary way to correct revision law.
Comps in the quarter were driven primarily by increases in customer transactions as traffic trends accelerated from the third quarter, our comp trend with consistently strong throughout the quarter. We experienced continued comp strength at our growth brands continued momentum at our legacy segment and positive trend at our house brands.
Legacy segment posted its second consecutive quarterly comp increase in excess of 5%. We're encouraged by the energy and execution being delivered by the team and believed that our patient in customer engagement initiatives are the key factor driving this performance.
Overall, our consistent positive comp results continue to reflect the benefit 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.
With our double digit net revenue growth in 2019, we believed that we continue to gain share in this highly fragmented 36 billion dollar U.S. optical retail market with our low cost operating model of course, our performance is at its core a testament to the store level execution of our team and their commitment to customer service.
Every day in and every store one patient and one customer at a time.
Turning to slide seven our strong results were fueled by another quarter of solid operational performance, we look to continue to execute against each of our corporate initiative.
First new stores, our primary focus as we continue to see a sizable white space opportunity. We plan to open approximately 75 stores in 2020 following the Formula based approach that has worked so well for us historically.
We have a solid pipeline of specific locations for this year and into 2021.
He to our ongoing success is our ability to attract and retain upon mitra.
We're in the Optometrists centric company and wanted to be the place of choice for optometrists, whether it be new graduates paying off their student loans for spirits optometrists looking for the ability to focus on pure optometry without the burden of running their own stores.
As such we continue to invest in our optometrist recruitment and retention program. We believe these investments are paying off as our overall optometrist retention rate remains at record levels.
This quarter, we believe that are healthy optometrists coverage helped to drive patient traffic as we work to fill the ever growing demand for eye exams in our store.
Second we believe we're well positioned to deliver another year of comparable store sales growth in 2020.
Key comp drivers remain the comp waterfall from maturing new stores marketing envision insurance initiative.
Our stores takes several years to mature as the patients in customers awareness built it can take time for potential patients and customers to find the store given an infrequent purchase cycle that averages two to three years.
When our patients and customers are in a market, we strive to deliver incredible value that attracted to our store. We have maintained our introductory offer in America's best two pairs of my glasses for 69, 95, including a free comprehensive eye exam for over a decade.
Another Great example is our new line to pervade revoke glasses, which are also available at an attractive value. We're pleased to offer this fun and stylish celebrity endorsed assortment to our Americas best customer and given we have exclusivity for prescription optical products. We're the only U.S. optical retail chain it can offer them.
I glass world the offer to pair of glasses for $78 along with the opportunity of same day service from our in store lab also represents one of the best values in the industry.
We believe that the combination of low prices an excellent customer service leads the satisfied repeat customers and positive word of mouth as customers tell their friends, how little they spend and the great service they received at our story.
In 2019, approximately 65% of customers and mature stores were existing customers.
We continue to invest in marketing to attract new customers as well as remind existing customers to come back for another great experience.
Television advertising remains our primary marketing vehicle and our marketing team continues to come up with khaki new versions of our al and Mr. World advertising campaign.
In particular, our our campaign has played for years and continues to resonate with customers by humorously reminding them that they pay too much if they didn't stop America's best.
We provided a linked to our web site at the end of the presentation, where you can watch the newest commercials for our brands.
Our marketing efforts also utilize our robust CRM system and we believe that are yeah, CRM initiatives helped to enhance our relationships with existing customers to drive retention.
We're quite pleased with the effectiveness of our marketing campaigns. This quarter overall, we believe that our investments in marketing are paying off and a factor in our strong gains in customer traffic and market share.
Participation in vision churns programs remains a positive comp driver healthy net revenue growth tied to these partnership continued in the fourth quarter. We believe a factor behind this growth is that vision insurance dollar in general tend to go further at our store.
We remain underpenetrated relative to the industry for the percentage of our business coming from vision insurance.
Net revenue tied division insurance wealth fast growing remains a minority of our net revenue. Thus, we see continued opportunity for growth.
As a value retailer, we promote a low cost culture at National vision, We know we can't be everyday low price without everyday low call. As we've noted in the past our centralized lab network is a key reason that we are everyday low call. Our newest state of the art lab in Texas continues to ramp its production on schedule and we're pleased to have.
This added capacity support to support our future growth.
We continue to progress our omni channel efforts to improve the customer experience and operating efficiency. We appreciate important data science and are focusing on optimizing the usage of our data.
Our focus is on all aspects of the customer journey in order to improve engagement and reduce costs.
Okay and customers appreciate such things as the ease of being able to schedule appointments online.
I'd like to take a moment to provide a brief update on two issues tied to products that we import from China tariff and the new Corona Barbara.
Regarding camera with the phase one trade deals signed in January the tariffs on live for a products, which represents most of our exposure were reduced from 15% to 7.5% effective in mid February. We're pleased with this development, we continue to monitor ongoing developments as well as can be.
And your progress are.
Eric mitigation efforts.
In terms of the Corona virus, we'd like everyone else are monitoring be ongoing situation closely.
Most importantly, I first want to acknowledge our concern for all the people, including employees of our lab partner and suppliers, who whose lives are affected by the recent outbreak in China.
Our hearts go out for them.
To date, we've not observed any significant impact our business and we're well inventory the first half, including our peak season.
But this is of course, they fluid situation, which we will continue to monitor.
Overall, we're we're real pleased with our Q4 in 2019 performance as we looked at 2020, we continue to believe that we're well positioned in a very attractive industry and are confident in our growth strategy to build the business for the long term.
At this point I will hand, the call over to Patrick.
Thanks rate and good morning, everyone turning to slide nine as read noted our business performed very well in the fourth quarter and full year of 2019.
During the quarter, we opened eight stores and closed two stores for the year, we successfully achieve our plan to open 75 stores, while closing six location.
Store openings have been predominantly America's best locations with the remainder being eyeglass world stores.
For these two growth brands combined unit growth increased 9.1% over the last 12 months.
We're pleased with our 2019 store additions these stores were both in existing markets as well as infill in newer markets and our newer markets. We continue to expand our store base and invest for our new stores are ramping and building awareness. We note that the majority of our new stores have historically taken approximately reader.
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 comp calculated on a cash basis same store sales increased 8.1% during the quarter. Once again, we experience comp growth in both our glass in contact lens categories. The comp growth was driven primarily by increasing.
Customer transactions more importantly, eyeglass comps were driven entirely by the increase in customer transactions in terms of contact lenses comps were primarily driven by average ticket as our contact lens customers are increasingly adopting newer technology lenses that have higher prices, which is a.
Trend that we expect will continue.
In the fourth quarter, we generated robust comps in our growth brands as America's best and Eyeglass World produced gains of 9% and 6.4% respectively.
Legacy comps increased 5.1% in the fourth quarter of this growth, we estimate 140 basis points benefit from incremental exam revenues tied to a shift in our comments because from our first subsidiary to the legacy segment. As a reminder, this will be the final quarter and.
Which this shift will have an impact from legacy comp as it was completed in the fourth quarter of 2018.
Overall, we are extremely pleased with the continued topline momentum in our business.
Turning to the income statement highlights on slide 10, as a result of the solid comp and unit growth net revenue increased 12.9% cost applicable to revenue increased 8.1% or a decrease of 200 basis points as a percentage of net revenue versus last year.
Which was favorable as compared to the range. We provided last quarter. The improvement primarily reflected higher eyeglass margin a higher mix of reimbursed eye exams sales and lower growth in optometrists related cost despite increases in store coverage levels.
SGN, a expenses increased 7.2% or a decrease of 240 basis points as a percentage of net revenue versus last year.
Adjusted SGN, a expenses increased 12.1% in the fourth quarter versus last year or a decrease of 30 basis points as a percentage of net revenue.
We are pleased with the leverage of store payroll that we achieved this quarter, which was partially offset by higher performance based incentive compensation.
Adjusted EBITDA increased 37.9% and adjusted EBITDA margin increased 180 basis points to nine 9% in the quarter.
The increase in adjusted EBITDA margin was primarily due to our higher onquest margin.
Store payroll expense leverage and the net change in margin on unearned revenue.
The net change in margin on unearned revenue lifted adjusted EBITDA growth by 14.6% and we would expect that this timing benefit will reverse to some extent in the first quarter of 2020.
Adjusted net income increased to 8.7 million in the quarter adjusted diluted EPS increased to 11 cents versus ones that last year.
Bottom line, we achieved solid flow through again this quarter as we generated strong incremental margin on higher sales. In addition, while the fourth quarter is our seasonally low period for sales and profitability. We're very pleased by the strong level earnings that were generated.
Turning to slide 11 in 2019 results.
Our full year 19 results reflect the consistency and predictability of our business model with adjusted comparable store sales growth of 6.2% net revenue up over 12% and adjusted EBITDA growth up 15% adjusted EBITDA growth was negatively impacted by.
5% due to net change in margin from unearned revenue.
Adjusted EBITDA margin increased 30 basis points to 11.6% and improved despite two factors.
First the incremental AC lands contact lens distribution business growth resulted in an approximate 30 basis point headwind. In addition, adjusted EBITDA margins included a 25 basis point impact from the significant cyber security investments we made.
National Vision has now completed its second full year as a public company compared to our 2017 results net revenue and adjusted EBITDA have risen at a compound average growth rate of 12, and 12.5% respectively. As we have said our businesses performed consistently over time.
Before shifting to the balance sheet. Please note. We have again included explanatory slide on unearned revenue 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 income statement.
Now turning to slide 12 at the ended the fourth quarter. Our total debt was 570 million. Our cash balance was 39 million were up over 22 million year over year during the quarter, we used cash on hand to make a voluntary 25 million prepayment on our term loan.
Net debt to adjusted EBITDA was 2.6 times, an improvement from 3.2 times in the fourth quarter last year, and our pre IPO ratio of approximately six times.
We remain committed to further deleveraging our balance sheet and are targeting the 2.0 times range overtime organically and with future potential debt repayments.
In 2019, we invested 101 million in capital expenditures slightly below the 2018 level. The majority of the Capex was focused on growth initiatives with our 12% topline growth and stable Capex, we reduced our capital intensity to five.
0.9% in 2019 from 6.8% during 2018, which remains an ongoing strategic focus.
Another 2019 highlight was the accelerating free cash flow characteristics of our business, which reflect our consistent performance and reduced capital intensity cash flow provided by operating activities increased 58 million versus last year during the year we deployed.
50 million in cash towards stock repurchase and debt pay down while ending the year with a higher cash balance versus the prior year.
Overall, we made tremendous progress and enhancing our balance sheet and debt profile this year, including the term loan refinancing in July which lowered our borrowing costs.
While we look to achieve continued improvements in our leverage ratios, we remain comfortable with our leverage levels today, given our hopes services business tends to performed well across the economic cycle.
Before I discuss 2020 outlook, please turn to slide 13.
As noted in today's earnings release, we're making several changes to our key non-GAAP financial measures that are incorporated in our 2020 outlook.
And we'll be effective in our reporting during the first quarter of 2020.
Let me take just a moment to unpack these changes.
First we're introducing two new non-GAAP measures adjusted operating income and adjusted operating margin you can see that adjusted operating income is included in our 2020 outlook as we continue our evolution as a public company will be transitioning in 2020, placing more emphasis on.
Adjusted operating income in lieu of adjusted EBITDA with adjusted EBITDA being a measure that is more commonly use in the private equity sector for consistency and transparency. We will continue to provide adjusted EBITDA as a reported measure and our 2020 outlook.
Similarly, we are also transition this year to emphasize adjusted diluted EPS in lieu of adjusted net income.
Second we are presenting new definitions of certain non-GAAP measures that include fewer adjustments, specifically and 2020, we will no longer adjusts for new store Preopening expense and non cash rent and adjusted EBITDA or adjusted diluted EPS. These.
Changes are being implemented as a result of our ongoing review of our reporting measures as well as to enhance comparability with our peers.
Finally to assist for modeling purposes. We have included supplemental tables that provides historical reconciliations of these measures to the 2020 definition for the last eight quarters in the appendix of today's presentation. This supplemental information was included an 8-K filed this morning and is also.
Available on our website.
Turning now to our 2020 outlook on Slide 14, let me begin by pointing out that fiscal 2020 is a 53 week year for National vision, we estimate that the 50 Threerd week will add approximately 35 million to net revenue within approximately breakeven impact to.
Adjusted diluted EPS, the projected minimal profitability is due to the expected net change in margin on unearned revenue in the 50 Threerd week.
As we included in todays earnings release, our 2020 outlook is as follows net revenue of 1.875 to 1.95 billion.
Adjusted comparable store sales growth in the range of 3% to 5% opening approximately 75, new stores adjusted EBITDA between 210, and 215 million adjusted operating income between 120, and 25 million and adjusted diluted EPS for two.
80, 85 cents, assuming a diluted share count of approximately 82.4 million shares.
We project another year, our 19th consecutive year of positive same store sales growth in 2020. It is important to remember that while we expect our growth brands to continue to perform well we will be facing challenging comparisons from the strong comp trend for the last five years, especially for.
For our growth brands as a result, we believe it is responsible to plan the business in the 3% to 5% comp range as reflected in our outlook.
Store openings. This year, we'll continue to be predominantly America's best locations with the remainder being eyeglass world stores, most of our store growth will be in existing markets and continued infill and newer markets similar to last year openings are also expected to be skewed towards the first half of the year.
We project a few closings as is typical each year.
We estimate a slight decline in adjusted operating margin at the midpoint of our guidance range for full year 2020, as a percentage of net revenue, we expect cost applicable to revenue to increase 20 to 40 basis points as compared to fiscal 2019.
For Q1, we expect cost applicable to revenue to be flat to down 10 basis points as read noted products that we import from China are now subject to 7.5% tariffs are 2020 outlook takes into account these tariffs.
We would expect adjusted SGN eight to be relatively flat to slightly leverage as a percentage of net revenue in our outlook. We expect continued wage inflation as well as investments in marketing this year, while looking to tightly managed growth in corporate expenses.
We project depreciation and amortization in the range 97 to 98 million, including amortization of acquisition intangibles of approximately 7.5 million depreciation and amortization in 2020 is expected to grow more in line with the rate of revenue growth.
Unlike recent years as capital intensity has improved in recent years. Finally, we estimate annual interest expense of 29 to 30 million and 2020 capital expenditures in the range of $100 million to $105 million.
Regarding the Corona virus, we have not included any impact in our 2020 outlook.
As a reminder, as we enter our peak selling season, the timing of tax refunds of variable that can affect our performance between our first and second quarters. Consequently, we like to look at our business on a semi annual annual basis.
We would also remind everyone that unearned revenue can affect our quarter to quarter comparisons on earn revenue had a favorable benefit to the fourth quarter results and we expect the favorable shift to reverse in the first quarter, while the net change in unearned revenue is typically a headwind in the first quarter, we estimate a greater impact.
This year with net change in margin on revenue projected to impact Q1, adjusted operating income by approximately 3 million or three cents and adjusted diluted EPS.
Turning to slide 15, we've included a supplemental table that allows investors to see our 2020 adjusted EBITDA guidance and 2019 results on a comparable basis under the 2020 definition.
Adjusted EBITDA of $200.7 million in 2019 that we reported today would have been $194 million under the new 2020 definition.
Thus our outlook projects 2020, adjusted EBITDA to grow between eight and 11% on a comparable basis.
In summary, we are extremely pleased with our consistent performance in 2019, we are focused on executing our 2020 strategic growth initiatives and look forward to delivering another year of consistent growth at this point I'll turn the call back over to read.
Thank you Patrick.
Turning to slide six team and our moment of mission, let me introduce Dr., Frank attack and optometrist, who practices inside the Americas best in Fort Worth Texas.
Got to protect recently.
A male patient had been released from the hospital two days earlier with the diagnosis of a concussion and high blood pressure.
The patient his sister came to Dr. tax office straight from a three hour visit with his primary care physician, who confirmed the concussion in high blood pressure diagnosis and set the pace of business was because he had for some reason been wearing his sisters classes.
During the eye exam Dr. Patel confirmed the patient that he had or was having a stroke in the back of the left side of his brain dr. protect immediately refer them to the emergency room and made the sister signed the refer form to show the importance of going six days later, the patient and the sister return to thank Dr. pretax.
They did go to the emergency room and MRI results confirmed the spoke was happening at that moment. The sister Express that if dr. pretax had not had her signed the referral they would not have gone and her brother would have died.
As we've said many times a routine eye exam is routine until it isn't and dr. pretax saved a life that day.
While it's easy to focus on our sales of eyeglasses and contacts do note that need each of our stories everyday thousands of patients primarily uninsured are receiving site saving and even lifesaving healthcare from dock from optometrists like Dr. pack.
In summary, we're extremely pleased with our fourth quarter and 2019 results as well as our outlook for another year of consistent growth in 2020, I want to thank our entire team at national vision, including the over 2000, optometrists like Dr. pack, who provide much needed medical services to patients at our over 1100.
Sure fronts every day.
Each year millions of patients and customers come to us for affordable eye care and eyewear, we continue to strive to be the basket, providing low price exam glasses and contact lenses, while both at home and abroad. We worked bring glasses, and consequently site and improved quality of life to those would not be able to see where.
Otherwise.
This is why we believe optical retailing is a noble profession.
With that I'd like to turn the call back to the operator could start question and answer portion of the call.
Thank you I was reminded to ask a question you know what the press Star why don't you touched on telecom to withdraw your question. Please press the pound.
Please standby while bucket pallet you any roster.
Our first question comes from semi on Gutman of Morgan Stanley. Your line is open.
Hey, good morning, everyone I have one for Patrick one fareed.
First on the fourth quarter.
Can you separate out how much operating margins improved if you want to focus on EBIT or the new adjusted.
EBITDA margins.
If you remove the benefit from on on revenue how much the core underlying and just to clarify you said that your adjusted EBIT margin for 2020 is slightly or I think it was flat or slightly down as implied for next year.
Hey, Simeon.
Good morning.
I'll answer the second question first.
As we as we look at margins in the guidance and we're pleased to lay out guidance that shows another good year of consistent growth.
At the operating margin level there.
Sure down 10 to 20 Bips in terms of the middle of the range do note that there are approximately flat at the at the high end up outlook.
These are based on 3% to 5% comps and obviously would look to leverage should our results be above that range I would note the theres.
No 10 to 15 basis points of negative impact in those margins relative to the.
Unearned revenue that will see next year in the 50 Threerd week will have.
None of that revenue will differ a lot of that and we'll have some of the fixed cost of that so.
Thats certainly a factor.
But again at the upper end of the range, we do expect to see.
Flat margins.
In terms of the impact on the growth.
I think I noted.
The EBITDA growth of 30.
Seven or so percent about 14, 15%.
Or I guess 1400 60 basis points was due to the unearned.
We saw similar occurrence last year, and we'll see that turned to a degree in Q1 of 2020.
Thanks for that my follow up.
Maybe for read if you look at Q4, it was a strong quarter.
Stacks looked pretty good would definitely a sequential acceleration.
You talk about the impact of flexible spending people rushing to use whatever insurance money year end.
When you do this well in the fourth quarter does it Rob anything from Q1, and then wrapped into that.
You must be tracking tax refunds is that going to dictate the cadence of Q1.
So, let's see a few parts.
We do benefit from the fourth quarter does benefit from of flex spending accounts and people using their insurance and that generally starts. So is the day after Christmas and Thats been a factor in optical retailing for four years and years now so that that is is real.
We don't necessarily see that is something that that deals from Q1 because.
Q1 people sort of re up and a lot of people who it over to use their accounts or whatever get get new insurance.
Benefits and so it's not really so the answer is no.
To that.
What was the second part again.
Oh, the three five yes, we are always impacted by tax refunds that sort of the timing of them and the extent of them is a factor in our business and we we monitor that on.
And ongoing basis, but we'd like to this is why we always like to focus people on on on half a as well as quarters because those things.
Spread out over time and in the past few years, we've talked about yeah. Please. Please don't look at end of Q1 early Q2 to tax refund timing effects that and you look at us over half that all through all washes out.
Thanks for the color.
Thank you Simon Thanks human.
Thank you. Our next question comes from Michael Lasser you'd be at your line is open.
Good morning, Thanks, a lot for taking my question Patrick you mentioned in your prepared remarks that you you'll be facing difficult comparisons and that's one of the reasons why you guided 3% to 5% comp growth for this year, but you've really been facing difficult comparisons for the last few years. So what's your common intended to signal that theres anything.
Different on the horizon.
Good morning, Michael.
The short answer is no. We've we've been pretty consistent about guiding in the 3% to 5% comp range and and that's also where we set frankly operating plan expense targets, we think thats kind of a nice conservative approach and.
Enjoyed seeing what happens with leverage.
Beyond that so not intending to signal anything different I'll tell you. We we have had a nice five year, Ron a b comps that were very.
Very strong in Q1 that was only the point I was trying to do make is remind folks that.
A b has been strong every quarter. So it's early in the year. We're we're right out of the we're excited about 2020 really pleased with what we delivered in.
19, as well as 18 and have a tendency to take a prudent posture early in the year then ill just add onto that I mean, if you look at our last 18 years. We've we've averaged about a 5% Tom. So you know again, we've been saying for a long time were.
Consistent predictable business and over time and through to all the economic cycles, but that's.
We get to that range.
Thank you very much and my follow up is you mentioned that the cost applicable to revenue grew in part driven by higher by glass margin.
In lower growth in Apama trust related costs in the fourth quarter. Two can you explain what drove those improvements in why would that not continue into 2020.
Okay sure in terms of the gross margin in the quarter. We did have we did experience higher onquest margins recall back that we had a new lynn's contract.
To affect at about mid year and also recall that we had some.
Telegraphed to dilution in terms of our new Texas lab ramping so both of those were helpful to margins in fourth quarter.
As as we saw the results.
In in terms of the margins for 2020 in Q1, we've certainly provided some.
Guidance around that we.
We do expect to have the full impact of the 15% tariffs, which is kind of.
Level, where we were buying inventories for our peak season for a little while longer.
But certainly do expect to see.
Gross margins so on the year.
Slightly lower but in the first quarter a little higher.
Do you think you reach this inflection point, we're up how much was wage pressure is starting to beat.
Yes. So your second part of your question optometrist wage pressure in the quarter.
We saw a little lower benefit cost per optometrist.
And we benefited from them in the quarter I would really point you more to the full year.
The full year numbers for optometrist, so in the quarter revenue growth outpaced optometrist cost.
For the full year those were much closer I think the costs were just to shave higher than annual rate of revenue I'm not ready to signal an inflection point, but we have seen some stabilization in that we we do expect our guidance assumes that theres some continued inflation.
Our wages for optometrist and associates, but again in a more stabilized in a more stable lost cut and we are very encouraged by our record levels of already retention that that's the says a lot as a real real.
Positive sign for us.
Oh, Thanks, a lot and good luck.
Thank you Michael Thank you.
Thank you. Our next question comes from Kate Mcshane of Goldman Sachs. Your line is open.
Hi, Thank you good morning.
With regards to the contact contact.
Growth that you saw during the quarter I think you said a lot of it had been driven by ticket I wondered if there was any traffic commentary that you can point to.
That's going on and contacts and if it deferred much from what you saw earlier in the year versus Q4.
In general in the quarter, we saw overall comps traffic driving.
Outpacing ticket and eyeglasses it was pretty much the total traffic story.
For contact lens, we saw good growth there. It was more balanced I don't think I have a ratio off the cuff to provide but there was a little more ticket than traffic and again thats, principally driven by water consumer patients selecting and in general.
There has been an overall trend in the industry, where consumers are picking better technology.
More daily lands and certainly the prices are reflecting that we obviously can't it's an area that we monitor closely.
Terms of pricing because in general contact lens are fairly commoditized product you can get them online as well as in store and and we want to make sure. Our prices are competitive so the price impact of the contact lenses more about what our patients choosing versus what our weve selling and at what price.
But it was nice that we saw restart traffic growth on contact lenses as well as ticket growth.
Okay, Great and then my follow up question is you've talked about the opportunity of.
Getting more growth from being site.
Cited in the insurance plans et cetera, I just wondered how we should think about the contribution of this hospital growth opportunity in 2020.
Contribution to comp.
Well, we think that managed care will continue to grow its been steadily growing over the years and as we've always said, we're underpenetrated in the area of managed care.
We are customers that we're underpenetrated for two reasons, one sort of America's best got a late start when we took over America's best They didnt, even except insurance that we are starting from a a dead start there, but but also our consumer base is underpenetrated relative to insurance.
When it when it's your own money you go in seek out through value. So so that's all we strong but that that's a that's why the majority of our customers are still are noninsurance customers, but.
But it's it's steadily growing and I think its grows because people have figured out your dollars go further when you use your managed care benefits at a national vision brands that you know our our low prices mean, you get to you get more for your money and more for your insurance benefit from us.
Thank you.
Your next question.
Thank you. Our next question comes from Adrian Cighi of Barclays. Your line is open.
Good morning, everybody congratulations on a great quarter.
Thank you.
Patrick My first question for you can you talk about you you'd mentioned 30 basis points of cyber security investment throughout slide 19, how should we think about that line item either that specifically or really SGN a dollar gross.
Slide 20 should we think the that kind of maintained.
As a percent of sales or actually gains leverage.
And then for Reed can you talk about the newer markets, where you're opening stores, how far apart or the different stores and do you see any impacts to the nearest store and then remind us what the ultimate potential for each of AB and eyeglass world. Thank you very much.
Sure thing I'll start with the cyber and SGN a leverage.
Overall as we look at 2020, we do expect the flat to slight leverage.
In SGN a cost on the the headwinds five we as I said earlier, we still are planning to see some degree of wage inflation.
For both doctors was wireless associates were planning to continue to invest in advertising as we are a growth company that is certainly.
Intending to continue to take share I do expect to see us leverage corporate cost a little more so that will be offsetting to get to that slight to.
Flat to slightly leverage as it relates to cyber.
That was an important effort last year, we feel like we have done the things that we needed to do I think we guided that we would spend.
About 4 million last year and.
Pretty close to that I wouldn't see that cost being ever mentioned as a growth over pressure.
That is as long as things are going smoothly. So I don't think you'll hear me talking about that in fact.
We may even see that dial back just a slight amount coming out of the build year and now we're in more run. So overall, we're expecting to see flat to slight leverage in espina.
Great.
And on the store Count front are we still believe that American needs at least a thousand America's best stores and 850 Eyeglass World stores, we continue to focused on America's best because the ROI C is is a little better and because we have the network effect now of network television and and just the.
More stores you have the more awareness people have of your stores and when they moved to new places and they see you again.
Reinforces that you're a strong national brand terms of stores near near one another its story, we factor in cannibalization into our models and into our pro forma us when we when we built the stores and and so that that is something that we have already taken due to account when we select where to where to open our stores.
Okay and then my my last final question is on purveyor of though I assume how long is a length of the exclusivity and how much of the comp was driven by did you do I know you did advertising specifically for that because I saw that throughout the fourth quarter was there anything that you did that was.
Over indexing Q2, highlighting for favorite vote.
Well. Thank you Ed in terms of our advertising sort of in at we this year not not not in 19, but this year. We started the year with a strong advertising focus on it. So in terms of that that was the key communication I think those as been posted so you can see them I hope you like and I think they're great great great Yeah, right there a lot of.
Lot of fight in fact, we're just having a lot of pharma Destino. We've had movie stars show up at Arsenal or than we had nice crowds and they're sort of these people have very large Instagram followers. So that that's a that's fair.
For competitive reasons, we aren't going into a lot of specifics by the way you should check them out eyewear them and they're just they're just funds fund styles or two and they're very enjoyable and that way, but we don't we don't like to get into the details of of the exclusivity or the exact part of the business attributable to this but at that it's a nice relationship and we're real.
Happy and we're having a lot of fine with it.
Thank you. Our next question comes from Paul.
Of Citigroup your line is open.
Thanks, guys.
Going back to Kates question and your answer read Im just curious how much of a higher mix of exam sales are being driven by those customers using insurance versus whether or not you are seeing exam sales increase for cash paying customers.
Then second I'm curious if you could talk about the performance of mature stores, how that shook out in 2019, but also curious about the 2018 store class how they comped in their fair share and then just last one for me is on the Walmart conversions, just curious what changes need to be made on.
The backend.
From from what you need to do from systems perspective versus what changes will the customers see if any thanks [laughter]. The ads is let me start with the Walmart question and then Patrick will follow on with the other piece.
So so actually that that's a key point is the long lead time item and taking over one of these Walmart stores is importing are putting in our Pos system and are sort of IP infrastructure and getting sort of all the everything in place to do that in ways that provide all the right security.
For us and for Walmart. So that is the long lead time, and then sort of we put in our approach to managing the stores in terms of.
All the operational pieces, the product pieces and the like so so although we are granted the five stores a few weeks ago, it's going to be a a little while before we take them over and we sort of do it in phases, we will probably take over one and then sort of see what we learned there and take of the other for soon soon thereafter.
Hey, Paul So I'm following up on the other two questions.
The real driver in the exam growth is managed care and the reason there is.
When when cash pay patients come in those patients are more applicable are more likely to take our to peer offer.
And those that come in with a managed care insurance card. They are fitting into whatever providers schedule, which has exam separate from frames and lenses and so it's simply a function of we're growing managed care penetration, we still feel like we've got great runway left there but thats.
Thats the bulk of that dynamic and then in terms of store performance. We are we're happy with what we're seeing across years and cohorts.
We.
There is not what we have mature stores comping, probably on average across multiple quarters at the lower end of that 3% to 5% range. There quarters like Q4, where that was also a larger number for mature stores. So as you think about the are increasing managed care penetration.
That doesn't really toggle between existing and new it's more ubiquitous across the entire classes.
18, I don't have any specific comments to offer up there we were a little careful with geographies in years, specifically, but I can tell you 18 was one of those classes, where we were entering new markets and we feel like we continue to take share in those new markets and see a lot of our potential customers there.
Thank you. Our next question comes from Robby Ohmes Bofa Global Research your line is open.
Hey, guys. Thanks for taking my question and congrats on a great quarter.
Actually two questions. The first read I constantly get questions about the changing competitive environment and what's going on out there and maybe could you just speak to any thing you're seeing any changes in maybe work into that you know America's best positioning versus eyeglass World and.
What would it take ticket eyeglass world comps to be more in line with what America's best has been able to achieve.
Oh, yes. So you know the optical industry continues to shift to a the value segments. We when we went public we talked about where a rising tide in a rising tide in a rising tide to the button the market's growing there's a shift the chains and within the shift to change there's a shift to the value.
And we are the key beneficiary of it I think the most.
Interesting competitive change of the of the path a few months has been that the Sears optical.
Closed all its remaining locations those are they in essence aren't there is no more sears optical so that that says heads.
As happened has been happening gradually over over the years, we do think that that's our key brands are gaining market share.
And and America's best, especially but America's best and Eyeglass World are both gaining market share and we're we're working on ways to continue to get the eyeglass world comps a little closer to the Americas best comps, but you know there there are a lot of retailers out.
They are in the world, who would be pretty darn pleased with a 6.4% conifer for Q4, and I guess world team, though there were a little in the Americas best Shadow with built rather proud to have delivered 6.4%.
That's a very good point I just one follow up question just on.
Corona virus, what can you give us any kind of thought on what your exposure might be under scenarios, where theres a lot of bottlenecks coming out of China, how exposed would you be to that or or not be to that.
Robbie I was waiting for that question I'm supposed surprised that hasn't come up so far so yes that given given how much. This is a topic throughout throughout the world to date, we have had no no significant impact on our on our supply chain, we are well inventory for the first half the year in that include.
Our peak season, our China lab is is up and going after Chinese new year end delivering to our needs and expectations.
Of course of course this is an ever evolving situation. So we're monitoring it closely but we're very pleased with our inventory levels and with with the continuation of our supply chain via the Chinese lab, which is of course, one of our six labs out there and the only.
Running in China. So of course, we are for domestic labs, one lab in Mexico and one in China.
Great Thats really helpful. Thanks, so much yeah.
Thank you. Our next question Zach Fadem of Wells Fargo. Your line is open.
Hi, This is Eric on for Scott Thanks for taking the question.
Said another quarter of 5% comps in Walmart, if you look kind of two year stack it actually slowed notably so just curious what maybe that comp we shouldn't have been higher and as you look into fiscal 20, but we should expect given that comps not segment are going to get tougher.
Okay. So again, we had about a 5% comp in Q4, and that's our second our second consecutive quarter of of over 5%. Yes. We have serve our execution, we think is getting.
Thanks, a lot tighter and and better and we were pleased that we've got sort of a fresh.
New leadership team that started in Q4 of 2018, and we saw our side sort of a jumpstarting of of the business. There. So we feel like there's good good momentum there.
And I would say we're also if you if you look at the three year stack is it's a little better we saw.
5.5% in Q4.
And at 17, and the average of our 226 open walmarts towards the average age is 24 years. I mean these are these are hyper matures story, so I think.
Positive trends in this way say a lot.
And then just as we look.
Last year, you left you're lapping a cyber security and the new sorry.
Assessing lab is it fair to think that fiscal 2000 will sort of be the borrowing of EBIT margins.
Well you can we've certainly laid out our guidance there and in terms of EBIT Weve regarding down just 10 to 20 bips in the middle point of the range, we'll obviously.
It looks more like flat at the top into the range and frankly, we think that if comps come in higher than our leverage point, which is in that kind of 4% to 5% range will we should see some continuation of margin improvement.
I'm not laying that out is like given.
But in general you know the puts and takes we are two year to your point, the Texas lab will not be.
Drag.
We will see we took some peripheral pricing actions.
In 2019.
On the headwinds by we're going to sees a little bit of inflation in terms of wages were still we've still got tariffs baked in.
So I think that we did a pretty good job and leveraging especially in the second half of the year and 19 and.
And for 2020 were guiding it a flattish margins and hope to do better.
Thank you next question comes from Steph Wissink of Jefferies. Your line is open.
Thanks, Good morning, everyone on most of our questions have been asked but I wanted to unpack three things that you commented on in your prepared remarks. It maybe two of the there for Reed and wondering for Patrick.
The first read is just on the success you've had with your marketing campaign in recruiting new customers I think over the last couple of years about 35%.
All of your customer count has come from new customers will talk a little bit about the CRM system in combination with the marketing agenda, and what K P. I do you use internally and a benchmark the success of that marketing investment.
And then secondly, you mentioned lower optometrists cost despite better coverage I'm wondering if you can also talk a little bit about your labor model. If that has changed over the course, the last six to 12 months, where you're getting better efficiency out of that optometrists cost investment.
And then just last really quick fund Patrick So you had on working capital efficiency at a nice benefit to cash flow. This year. That's something we should continue to expect from your just greater discipline around inventory and working capital. Thank you.
Good. Thanks. Thanks, so much so let me let me start with your comment or the 35% coming from from new customers and you know again I think it's important to just view this in context, where the low cost provider of a medical necessity, we're in a great and growing industry, where chains are growing and.
Value chains are growing in particular, we have great formulas and we're very careful to guard our formula and have had a good momentum as you can see over the past.
Several years also OTI coverage being strong at the record retention level means that we can.
We can deal with the volume of people, who want to come to US I went that that's what happens when a U.S. strong oh, the retention and and good good coverage levels I do think our marketing is getting a ever smarter more more sophisticated and that combined with the continued managed care growth and in many ways impact.
Turning it helps to drive the new customer count and there's also just that the wonderful thing that comes of positive word of mouth. You've heard me say that that this is a fair game those who take the best care of the patients and customers generate positive word of mouth that brings in more more customers on an ongoing beta.
Turning to the details of the CRM system and the Capex, that's a little bit of the secret sauce that we have I'll, just say that there's a there's an integration of traditional and digital and ER and new customer.
Communications.
Recall that I think we get ever better at an ever more sophisticated at and we pay tremendous attention to it and marketing is a key part of what we do in terms of getting into the specifics of the of the KP eyes, I think thats well that is part of our secret sauce that that helps us to be successful side hesitant to.
Where the only where the only public optical retailer out there and I'm hesitant to share to too much of that because it's a part of what makes us a successful.
Yes, and in terms of the lower dr. cost in the quarter.
I would say look a little closer at the year, which was better much better along with revenue growth. We've not we've seen we've not seen a tipping point in terms of optometrist related costs.
But we have seen good stabilization and honestly.
This is the focus one of the model, where a patient focused company were a doctor focused company.
The Doctor component of the labor structure is pivotal we put a lot of emphasis there in terms of acquiring and retaining and it's an area, where we occasionally make investments, but we did have we did see some leverage.
In the quarter.
In terms of working capital benefit I guess the way I would say it is we delivered a.
I think about 60 million and.
And operating cash flow this year, let's just say to the third of that was favorable working working capital timing.
And so that just moves around in general we were doing a lot of forward buying at the end of 2018.
Smart, we think smartly, so because of potential tariff impact. So we didn't have as much of that.
This year at the end of 19, but our working capital is is generally.
For a lot of periods that will will even be negative.
We've not we've not.
Made any strives to change that we like where our inventory levels or especially now steering potentially at this current buyer situation.
Thank you.
Last question comes from asked me to Cooper Upolu capital market. Your line is open.
Thanks for taking my question and congrats on another very strong year.
Most of my questions have been answered.
Just a.
One is to get a quick update I mean, I know, it's not a significant portion of your business would love to give an update just in terms of our E commerce.
Penetration what rate was for sales for maybe for full year and any.
Anything anything that youre seeing any changes.
From my perspective that would be helpful. Thank you.
Well our online sales for the year was 4% and we're pleased with that and Oh, we're always working on different ways of providing meaningful consumer meaningful omnichannel options to our customers.
Category wise contact lenses.
Heavier penetration than than eyeglasses, and that's the same for us as well.
Thank you now like to talk to turn the call back over their CEO refunds for any closing remarks. Thank.
Thank you very much Valerie appreciate your help with the call today in closing I'd like to congratulate the 13000 members of the National vision team on on the milestone of 72 consecutive positive comp quarters, where we're extremely pleased with both our Q4 performance and our 2019 performance and look forward.
Towards building on that performance in 2020, we'd like to thank you all for joining us today and for your continued interest in the and support of National Vision. We look forward to speaking you again, when we report our first quarter results. Thank you all very much.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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