Q2 2020 National Vision Holdings Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the National Vision second quarter fiscal 2020 financial results Conference call.
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I would now like they had the conference over to your host David Mann, Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone welcome to National Vision second quarter 2020 earnings call. Joining me on the call today or read Fives, Chief Executive Officer, and Patrick more Chief Financial Officer.
Our earnings release issued this morning in the presentation, which will be reference during the call but available on the Investor section of 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 that our earnings materials. In today's presentation include forward looking statements has.
Defined in the private Securities Litigation Reform Act of 1995.
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 release in today's presentation also include certain non-GAAP.
GAAP measures reconciliation of these measures are included in our release in the supplemental presentation. We also would like to draw your attention to fly to 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 were presentations for investor.
<unk> referenced on the Investor section of our website now let me turn the call ever to read.
Thank you David Good morning, everyone I'd like to thank you all for joining US today, we hope that everyone is doing well and staying safe during these adverse times.
Turning to slide for the second quarter represented one of the most eventful period in our company's history and our respective careers. The key highlights work quarter, what's the successful safe and gradual reopening of our stores that was completed my early June.
All of our stores were closed the public for about six weeks beginning in mid March during which time, our cross functional safety Committee developed the protocols to operate safely and remain open during this pandemic.
These protocols include heightened cleaning and disinfecting procedures personal protective equipment, social distancing in stores and expanded health and safety training also we've adopted a face coverings required policy in all of our stores.
We believe that we've implemented effective safety first approach to serve patients and customers in a cobot 19 environment has been successfully integrated into our store operations and while some adjustments maybe needed as the environment dictates. We believed that we are well positioned to continue our store operations through the remainder of the cobot.
Team pandemic, regardless of its duration.
Turning to slide five.
Since early June our stores have been open and return towards more normal operations, we've brought back for OLED associates and normalized hours and compensation across the organization, including Executive Officer. We've also resumed the opening up new stores after a temporary pause in activity.
In May we significantly improved our liquidity with a highly successful convertible note offering in the week. Following our last earnings release with our strengthened balance sheet, we're confident in our financial flexibility and liquidity to navigate this pandemic.
During the last several months, we've focused on to see our decisions and actions towards our successful reopening and the long term return of our business. Another example of this focus with our decision in July to pay a onetime 250 dollar appreciation bonus to our frontline associates and network of doctors for their exceptional work.
Under difficult circumstances over the past few months, we believed that this payment is consistent with our ongoing goal of providing life, giving and appreciative culture for our people.
Turning to slide six let me briefly touch on trends in the second quarter.
Results reflected the significant impact of the temporary store closures during the pandemic Q2, net revenues decreased nearly 40% with 10% of this decline due to the timing of unearned revenue adjusted EPS decreased to 41 cents loss versus a profit of 18 cents last year I just.
Comparable store sales growth was down 36.5% in the quarter our performance improved each month as we reopened stores, culminating with a 19.3% increase in June for the best reported comp increase in my 18 years at N.B. I I'll speak more to the comp trends in a few minutes.
During the quarter, we ended our pause in new store growth and opened 12 stores. Our store network is now approaching 1200 locations.
Let me take a moment to talk about our Walmart partnership two weeks ago, we extended our contract with Walmart for another three years with the current economic terms, where we are honored and excited to extend our long standing relationship with Walmart into 2024 for 30 years Walmart has been a great partner for our company and our mission.
We look forward to that continuing long into the future.
During Q2, we transitioned to five additional Walmart vision centers, which Walmart granted us in January two N.V. I management. This was the first time that Walmart added stores to our contracting over 25 years. We were pleased to welcome. These stores the N.V. I family. We're encouraged by the initial early results at these stores to date and see tremendous future.
Potential for them as well.
Turning to slide seven.
The chart shows our business has a history of health, even amidst broader economic challenge during the great recession of 2008 in 2009, our business generated comps in the positive low to mid single digits. Each quarter, we do believe as the low cost provider of a medical necessity, we're well positioned to attract and.
Even larger slice of the American public during the upcoming economic challenges.
Our introductory offers for our two growth brands to for 69 95 at America's best including a free comprehensive eye exam and two for $78. It eyeglass world glasses available that same day represents incredible values that have historically attracted patients and customers to our stores and we believe that one.
They have tried our value priced products it will be hard for them to ever go back to paying higher prices again.
Another factor underpinning our consistency over the last two decades has been the optical industry shift in favor of chains and the value segment in particular, the optical retail industry remains highly fragmented we believed that the current environment should hasten these trends and favorite larger better capitalize value retailers like national.
We also would not be surprised if overall there were fewer optical locations in the U.S. next year, then there were prior to coated.
Thus as I noted last quarter, we continued to see a large opportunity in front of us and potentially an even larger opportunity than before.
Turning to slide eight and our 2020 comp trends the temporary closing of our stores turned our Q2 results into another tale of two periods.
In the first two months of the quarter comps declined, 86.6% and 38.5%, respectively, resulting from stores being locked into the public for the entire month of April and most of May once our store network was fully open stores experienced consistently strong demand from our patience and customers which was really.
Elected in June comps up 19.3% our business rebounded strongly in June and we're pleased to see similar sales momentum continue throughout July.
The recent trends that we have experienced after reopening are a testament to the essential health care role we play in the communities, we serve our attractive value offerings, given the state of the economy and the combined macro and micro operational navigation by our long tenured management team in turn.
<unk> of geographic performance customer demand has remained generally consistent across markets, even in cobot 19 hot spots and consistent with our safety first mentality and a modest subset of stores in Kobin Hot spots, we have made temporary adjustments to our operations.
As we've analyzed our recent results we've come away with the following insight.
First we believed that the strong sales.
Salt had been helped by pent up demand during locked down as well as the benefits from government stimulus payments, while the duration of these factors it's hard to predict we would expect our comps to normalize as these benefits moderate.
Second these comps also resulted from the planning and precise execution of our reopening including day by day operational navigation down to store level adjustments. We remain confident that we can operate boats, both safely and effectively during the duration of the pandemic.
Finally, recognizing that we are operating in a world of social distancing, we believe the demand and purchase behavior of our patients in customers demonstrate they're comfortable with our store based environments as well as our new operating protocols.
Shifting to slide nine let me update how we're navigating our business and our core initiatives to adapt to the pandemic first after we paused our new store openings in mid March we resumed our real estate efforts and opened 12 stores. This quarter year to date, we've opened 35, new stores and now expect to open a total of between five.
<unk> and 55 stores this year.
All of these respective store counts do not include the additional five vision centers that we transition this quarter from Walmart, we're pleased with and appreciative of the support we've received from our real estate partners, including while our stores were closed as we look ahead given that dynamic retail real estate landscape, we believe our.
Pipeline is solid for the remainder of the year and into 2021.
Turning to comparable store sales growth our stores have reopened to operate in an unprecedented consumer environment. However, the strong customer response to our reopened stores has been a reminder of the fact that the medical services and optical products. We offer our truly are an essential medical necessity.
As we emerge beyond the cobot pandemic, we expect to continue to enjoy multiple levers to drive comparable store sales growth on past calls you've heard me shared that optometrists play key role in our success and our mission to deliver improved eye care throughout the U.S.
This fact became ever more evident as we reopened stores to robust demand from patients and customers are network of optometrist continues to rise to this challenge.
We continue to invest in our optometrist recruitment and retention programs our decision to continue to compensate optometrists during the store closure as well as our safety first focus further demonstrate that we are and optometrists centric company. We believed that the fact that are optometrist retention rates remain high at near record levels.
[noise] reinforces the value of the investments we made in maintaining our optometrists salaries and not furloughing odcs during the pandemic.
As we noted last quarter, we significantly curtailed our marketing efforts while stores were closed and have only very gradually began to ramp up advertising again beginning in June the organic demand. We were seeing in June and July meant that we did not have to spend nearly as much in advertising as we had been pretty pandemic, we will come.
Thank you to monitor the environment and customer demand and would expect to increase our marketing investments gradually when warranted.
In terms of managed care, we continued to see strong revenue growth tied to these partnerships in June as we reopened net revenue tied division insurance remains a minority of our net revenue and thus we are under developed relative to the category. We continued to see an ongoing opportunity here as managed care dollars and co pays tend to go further.
In our stores than elsewhere.
In terms of other aspects of our operations. Our lab network remains a key reason that we have been a low cost provider as business rebounded our lab networks adeptly ramped up to meet the demand.
Last quarter, we noted that we experienced a spike in E commerce orders, while our stores were closed while the order rate has moderated as stores reopened we continue to experience and accelerate for acceleration from pre cobot levels. In addition, our remote medicine pilots are continuing as well and we're pleased with their progress.
Before I turn the call over to Patrick Let me say that we're quite happy to be reporting our initial success in safely reopening our stores to serve the many patients and customers who have been a waiting our return to summarize I hope that you take away the following from listening to this call.
Our store reopening has been a success, we're well positioned as an essential retailer with the safety protocols in place to operate during the pandemic regardless of duration.
We have solidified our financial resources and liquidity position.
We have a proven team of optical veterans executing our initiatives with both thoughtfulness and rigor.
And we operate a business that has been resilient in previous doubts downturns as the low priced seller of a medical necessity and see the potential for a larger opportunity on the other side of this pandemic for all these reasons I'm confident as we navigate through an uncertain environment that national vision will emerge from the pandemic a stronger.
Andy.
Now to Patrick.
Thanks read and good morning, everyone. Although the impacts of covert 19 weighed heavily on our second quarter performance. We were pleased by our rapid sales recovery since reopening our actions to strengthen the balance sheet and our demonstrated ability to navigate the pandemic.
Turning to slide 11 lets dive into Q2 results after entering Q2 with a pause in our real estate development activity. We resumed unit growth in May we opened 11, new America's best stores, one eyeglass World store added the five Walmart vision centers and closed five stores, we ended the quarter with.
1185 stores for a 5.1% increase in store count in the past year.
For our Americas, Baskin Eyeglass World growth brands combined unit growth increased 6.3% over the last 12 months.
The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis same store sales decreased 36.5% during the quarter driven by the decline in customer transactions due to store closures.
Partially offset by an increase in average ticket.
By category, we experienced stronger contact lens revenue growth in Q2 compared to eyeglasses as expected since contact lens customer transactions were less impacted by the store closures.
As we noted we were pleased with the strong recovery in our business in June and continued momentum through July while we typically do not provide monthly comp detail given the unique situation due to cope with my team I'd like to share a little more context about the June comps specifically in June our comps were driven by.
Increases in both average ticket and customer transactions by product, we experienced positive comps in both the eyeglasses and content wins categories as the product mix of eyeglasses sales to contact lens sales normalize towards historical levels.
June on glass comps were driven by increases in customer transactions and to a lesser extent average ticket. We believe the increase in eyeglass average ticket is being aided by customer purchase behavior and the government stimulus the contact lens category continued to see growth in average ticket as our contact lens customer.
These are increasingly adopting newer technology lenses that have higher prices, which is a trend that we expect will continue.
Turning to income statement highlights on slide 12, as you see from today's press release, our Q2 results reflect a significant impact from the temporary store closures and the impact of timing of unearned revenue.
As would be expected given the negative comps net revenue decreased 39.5% about 10% of the decline in net revenue growth resulted from the change in unearned revenue.
This impact in that revenue and profitability was unusually significant this quarter as a result of store closures and lack of revenue in the final days of the first quarter that would have typically been recognized in the second quarter and the strong sales near the end of the second quarter, we would expect this impact too.
Reverse and the timing of unearned revenue to benefit the third quarter.
To help unpack how unearned revenue is somewhat unique to our service based business model versus more traditional retailers. We have again included and explanatory slide in the appendix section.
Cost of portable to revenue decreased 30.5% or an increase of 690 basis points as a percentage of net revenue versus last year. The increase as a percentage of net revenue primarily reflected the continued optometrist compensation incurred during the temporary store closures as well as increased con.
That lends revenue mix.
Tested ESG <unk> expenses decreased 25.4% in the second quarter versus last year or an increase of 970 basis points as a percent of net revenue. The key factor behind this increase was the de leveraging store payroll corporate payroll in occupancy costs due to the store closures, partially offset by lower advertising.
Last month, the company incurred incremental could related expenses of $2.5 million in the quarter, primarily for the initial acquisition of PE supplies.
Adjusted EBITDA decreased to negative $14.4 million and adjusted EBITDA margin was negative 5.5% in the quarter.
Adjusted operating income decreased to negative $34.4 million and adjusted operating margin decreased two negative 13.2%.
The decrease in adjusted operating margin was driven by our de leveraging of optometrist and store payroll expenses related to store closures higher depreciation and amortization group as well as the change in margin on revenue.
The net change in margin on revenue reduced both adjusted EBITDA and adjusted operating income by $32.5 million.
Adjusted diluted EPS decreased to a loss of 41 cents versus 18 cents in income last year with a 30 cents negative impact from the net change in margin on revenue.
Turning to slide 13, our first half results reflect the impact of store closures and through a lesser extent the timing of unearned revenue.
Adjusted comparable store sales growth was down 22.6% net revenues down 18% and adjusted operating income declined 95%.
Adjusted diluted EPS declined to a loss of 13 cents from 49 cents and earnings per share last year.
Now turning to slide 14, and our balance sheet at the end of the second quarter. Our total debt was $648 million and our cash balance was $256 million net debt to adjusted EBITDA was three times, a slight increase from the 2.8 times in the second quarter last year.
Today, we invested $26 million and capital expenditures, the lower level of Capex versus last year generally, resulting from the postponement of capital projects, including the pause in store openings with the restart in store openings and the strength of our performance as well as our improved liquidity, we are essentially back on track.
Our investment plans, we believe that our ability to invest now in the business is a competitive advantage.
We would expect Capex to increase in the second half of the year relative to the first half span and plan for totaled 2020, capex in the range of $65 million to $75 million.
Turning to slide 15, and the recent changes to our capital structure as we've mentioned, we executed a successful financing transaction and raised $402.5 million and convertible senior notes. These notes carry a coupon of 2.5% and mature in 2025.
You lost the proceeds of the new nodes to repay the entire $294 million in revolver borrowings as well as $75 million in existing term loan a debt.
We have no debt maturities on our term loan or revolving credit facility until 2024. In addition, as a result of debt prepayments. The company now has no repayment obligations until maturity.
As I mentioned last quarter, we received strong support from our bank group and entered into an amendment under our credit facility that suspended certain financial maintenance covenants through our fiscal quarter ending in March 2021 at the end of the second quarter of 2020, we were in compliance with all covenants under our credit agreement.
Turning to slide 16 at the end of Q2, we are in a strong financial position with $550 million and liquidity from our cash balances and available capacity from our revolver. We believe that we have sufficient liquidity to manage our operations continue to invest in our business and continued to see.
Successfully navigate the pandemic as we emerge from this period of uncertainty balance sheet improvement will remain a top priority.
As for the remainder of 2020, we're not providing and earnings outlook at this time given the continued uncertainty regarding the pandemic contributing to this and certainty includes macro economic factors, social distancing measures current and future quarantine measures and the tapering of government stimulus benefits.
Given this backdrop, we're pleased by the initial momentum in July, but we expect our comps to normalize as pent up demand moderates, we would anticipate that unearned revenue will reverse in Q3 due to the strong sales at the end of Q2 and have a positive impact on net revenue and profitability.
As noted in the earnings release, we are providing the following updated assumptions for 2020, new store openings in the range of 50 to 55, new stores Capex in the range of $65 million to $75 million depreciation and amortization is expected in the range of $94 million to $95 million, we expect.
Interest in the range of 33 to 34 million given our higher amount in cost of debt and lastly, we expect to continue to incur incremental coated related cost at this point, we would project 2020 costs of approximately $8 million.
In Q3 cost in the $4 million range, primarily due to the onetime 250 dollar appreciation bonus we estimate ongoing costs should be around a million dollars per quarter.
In summary in light of the dynamic environment I'm very pleased with a tremendous amount accomplish this quarter and the way in which the management team has executed I want to reiterate what Reed said earlier, we believe this company will effectively navigate this challenge and emerge as an even stronger business.
At this point I'll turn the call back to read.
Thank you Patrick turning to slide 17, and moment of mission as.
That's matters of diversity equity, an inclusion art ever more on the mind to both consumers and associates. This is the topic I thought I'd speak about today and share recent actions at National vision.
In June as our country with grappling with a sudden heightened consciousness of age old racial injustices and in equities, our messaging on social media and internal communications highlighted our commitment to equity in our company and broader society, we established a diversity equity it inclusion council in order to give a stronger voice.
Blacks another minorities within the family.
We can became a founding co sponsor of Black eye care perspective impact HPC you program a program designed to attract black students. The field of Optometry, we're pleased to support Black eye care perspective in their goal of is to increase the number of black optometrists to 13% from the current too.
Percent level.
These actions further reinforce our ongoing commitment to enhance diversity and inclusiveness throughout our organization, we look forward to sharing more in the future as we strive to be an ever more inclusive workplace and corporate citizen.
In summary, I want to thank the entire team at National vision, including the over 2000, Optometrists, who have reason to the adversity that this cobot erupt presents.
As I think about the events of the last several months and how the entire national vision team performed I could not be more proud and appreciative of their inspiring interference.
With that I'd like to turn the call back to the operator to start the question and answer portion of the coal.
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Ladies and gentlemen, if you have a question at this time, Please press star and the number one on your Touchtone telephone.
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Please standby all we compile the kuni roster.
Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Hi, Good morning, everyone. My first question is on comps I want to ask you mentioned, you expect comps to normalize going forward.
Do you think theres, a new normal for what normalized means or is that the old normal and I know you mentioned pent up demand is helping a read also mentioned the backdrop is gonna be tough and there's going to be some closures of some of competitors independent. So curious if normalized means you mean, what historic national vision comps have been.
Running it.
Oh semi in fact, thank you for that and and we're still further we're still trying to figure that out as we go you know at some point the pent up demand does start to taper off and and we're sort of to be determined on what's going to happen with stimulus and for US of course back to school is a factor and we.
We're really early in the back to school.
Season.
So it's a little hard to predict which is why we're not giving much much guidance there, but we're real pleased with the June results were pleased to see similar momentum in July and I think what we're showing is that we can are our stores can accommodate the sort of demand high due.
Man to even in the co bid.
Okay.
Okay, that's fair.
And then can I ask it's a little bit related right. So.
The path towards whatever normalization for for gross margin and as Gionee.
Does that path.
Normalized.
As comps do or do we get back to prior levels on a different schedule.
So as we think about hey, I mean could mornings Patrick as we think about margins in the business Im thinking about who's going forward.
Obviously, the gross margin.
I see some volatility during the period of time when our stores were closed in the open again I.
I would expect to see those returning towards normal levels. The thing that swung those so much in early part of the quarter was the continued payment of or a common.
As what was the mix the contact lens mix spiked up a bit.
And our stores were closed but now that were open again mix is return that's closer to normal levels I would expect to see gross margins.
We continue to look like they did.
We recorded on the SDMA.
We've been through periods of de leverage in the first couple of months the quarter to a period of very high leverage in June.
And again, I think youre going to be some minor incremental costs related to covert NPV, but overall.
Even coming off a period of time in our stores close we're expecting for things to get back closer to normal sooner than later.
Great. Thank you appreciate it.
Thank you know next question comes from the line of Robby Ohmes with Bank of America Securities. Your line is open.
Hey, good morning, guys. Thanks for taking my question I I think you don't follow up on Simeons question and read you mentioned years your stores are handling it fine, but I'm just curious how.
If you you're now two months into a 19% comp I think this is one of the busiest times of the year for you guys typically for back to school just how how do you have the.
Capacity to.
To do that what are what are you doing are you hiring more optometrists to handle.
This.
From bottleneck and how that how are the lab facilities dealing with that kind of jump or you guys expecting this and then.
Kind of a follow up is what do you. What are you seeing your competitors doing is they reopening you know do you think theyre seeing similar types of.
Comps and.
Or any trying to match your value offerings.
Yes. So thank you Rob me out first of all we are we expecting this you know Robbie I would say we live in a world where I just don't know what to expect anymore. You know you had just that I wasn't expecting a pandemic. This year I was expecting a lot of things that this year. So it is it is a little harder to predict things Luckily our.
Things like our lab model and our supply chain are well designed for scaling.
And scaling up where needed to so while well certainly are busy and certainly I'm on sort of pleased and impressed I would not described stress in our system relative to.
That's a and overall just sort of we've been able to.
Manage our exam books in such a way that that we can spread the business out a bit as the pent up demand is there pent up demand as people who are.
It would really excited too.
So to get into see us and it's sort of is when we opened it happened immediately again best reported top in my 18 years gear on I'd like to point out to get comes the question is sort of about execution that sort of yes, pent up demand. It was a is a factor and yes Kevin.
Emulation stimulus is a factor I'd like to add sort of.
This sort of thing doesn't Jeff happen.
It requires probably a more sophisticated level of planning and execution that have been a cold from us in the past and when I think about sort of all the different phases of Q2, managing sort of being.
Close to the public managing the public you know again, we think cause a public because our doors were locked to the public but we still were answering phones, we still had a skeleton crew in the stores were still trashing.
The medical urgent medical pieces, and then to the phase of the gradual reopening with tremendous training on on safety protocols, and then to dealing with this explosive demand it called on everything we had in a good way.
And that way.
Yes, I was trying to work today thinking about the sorry I was thinking.
This this quarter in terms of just.
Our our groups skill at navigating this is one of our one of our finest hour moments it called on everything we had I'm. So pleased we had a team who had so much experience will work together, so long the communication and coordination with there and that it was very.
Dealing with comps like this.
Required heightened execution coordination and teamwork and I think you look at June and July and they say that the team sort of came through with flying colors.
On that so I again, I'm I'm sort of real proud of.
How we did it because it's not just opened the doors independent demand Andy.
The stimulus drives in every one it's just hunky dory it required a lot of thinking that I don't think every every team could have pulled off.
And then you talked about competition.
It's sort of all over the board what you're seeing it is not a lot of consistency.
There.
I do have yeah, I do believe we're continuing to gain share as we did a as we were before and our our view of this is that now and going forward, we're seeing a hastening of the trends that we were enjoying and benefit.
And from for the say for the past say four or five years, and we believe that's going to continue to.
To play in our favor in the next month in years.
That sounds great. Thanks, so much Reid.
Thank you Robert.
Thank you. Our next question comes from the line of Paul in the last with Citi. Your line is open.
Hey, guys. Thanks.
You mentioned the pullback on marketing spend a little bit I'm curious if you altered your promotional plans as as stores have opened again did you having to do anything to delore customers back or promotional standpoint, I'm curious what you're seeing from competitors.
As well on the promotional front.
And what's your outlook is there and then second just curious what percent of your business.
These kids.
And how that's trended over the over the past several years and see that changing.
I'm sorry thanks.
Good Paul Okay, Let me do that piece by piece, though the marketing hold back was because we were getting so much demand why would you pay for more you know it was it was coming in on its own and so.
We were we were saying why.
Why why why spend to take it further where we're pretty nicely content with 19% comps and and so.
Our marketing will only return very gradually we're not we're not at full throttle now.
We fear for ourselves this historically sort of everyday low price the offers that we have.
In our stores today, where the same offers that we've had for years. So so for me for me when I think about a promotion that Ed.
You get this now but it's limited time offer we don't we don't tend to do that that's really not a part of our of our tool kit. So.
So.
No change there we continue to be who we are execute who we are consistently and and no and and nothing nothing surprising.
Or two interesting on the competitive front nothing different in terms of that.
Yes, I don't think we we share our kids percentage I would.
Say that.
I'm fairly confident without knowing the details that our kids percentage is is higher than most of our competitors than it is seasonal in nature.
There's a higher thing in back to school.
But so there are two parts the kids thing on the one hand, where.
A lot of people will spend a little bit more for their glasses, and a little bit less for kids glasses, and so so even even some people who want the latest fancy designers will will still bring their kids into us. They can go kids are going to break them, they're going to lose them in that first off so we tend to always.
We'd be higher with kids in that way, but also kids, bringing their parents and a lot of people come to us, saying, Oh, great I'm going to save money for my Kids and then see the deals we have and see the products and services. We have and then the parents get converted to but we are overdeveloped have been forever.
We'll be going forward and its especially to around back school season.
Thanks, Good luck.
And our next question comes on the line of Adrian Cighi Barclays. Your line is open.
Good morning, everyone. Reid I was wondering if we could talk about on the digital aspect of it consumer obviously in a post Kevin world shifting much more to digital but I glass exams, and sitting just naturally lend itself to that format, our their technology technological developments that you.
Hi, guys are implemented or foresee implementing they can accelerate that shift whether its tele health or virtual reality any any comments. There then on the onetime pent up demand can you see how many new customers you've acquired during this she maturity. They know it's very short.
And for Patrick My last question is I know I haven't we haven't gotten this the four but any color on four well economics of new store openings.
He changed from history.
Probably the most important metric we're looking for is whats did it the noncomp productivity in year, one and how many years does it take typically to ramp and any changes. Thank you so much.
Every bank. Thank you so let's see in terms of.
E Commerce, our ecommerce business of course jumps in during the period, where we are close to the public again, mostly contact lenses people people wanting refills and things like that so our contact lenses well online were pretty thriving and that was a both in our pure play.
<unk> ecommerce websites and in our store brands and and it does still represent a small percentage of our sales overall and you know what's what's interesting is our customers still very much lean toward picking up the phone and calling our stores. You know I don't think there were a lot of groups like ours, where we fell.
Compelled to win the stores were closed have them be locked to the public but have them have them staffed to answer the phone calls and put in ship to home orders for customers, who wanted the contact lenses shifted to their there.
Their houses a along the way it's still a default modem, where we're happy to to be there for a customer in whatever way they want to interact with with us in that way in terms of technological pieces.
We.
Oh, we've been very interested in aspects of of Tele health and that's because we think that that the customers.
We can sort of get heightened dr. efficiencies and coverage to places that maybe we can't find out Tontons do wants to live via until the exams. This is still a patient fitting in a chair in us door, but with the doctor being.
Being remote.
And I think you know.
Oh, so so so we are testing that and we're we're finding encouraging things, but it's still early days for us in the entire industry in that way and just one other thing on the E Commerce, I'm, sorry, but anything on E. Commerce side, you know, yes E. Commerce is growing it's still a very small part of our industry Uh huh.
People are still stores based in our into industry to eight a massive degree it is hard to buy these products online and we've been competing against online players for the past 15, 16 years, and we continued to grow grow share along the way.
In terms of new customers and pent up demand.
Overall, if you if you look at.
The business in general the skew of new to to pass customers has been very it's been sort of fairly consistent post.
Post coded and pre covered with one thing that stood out with eyeglass World. We are noticing a big jump in in new customers.
A jump in I think this this shows that you know the same day service that we offer there in the one trip shopping there.
Has been I think as more relevant in a post coveted world and so thats been encouraging for eyeglass World and and you know I think you can sort of fee in the math, but post post.
A post reopening eyeglass world has actually done a bit better than America's best as just a little bit, but notably better. So that's that's been nice for eyeglass World and then I think Patrick has a formal economics.
Thank you.
Oh, yes comment.
Obviously, new stores the felt the same disruptions as mature and existing stores during the store closure period, but but honestly prior to that point and since we've seen.
Normalization of rounds. It was almost like you take that.
So we period out and you were to delete it in the trends.
You would see very similar ramps so overall.
We have typically seen maybe in 65% new store productivity.
Level and each GW is just a shade below that.
Those brands the overwhelming majority of stores, which are somewhere in the three to five year period, and there's a lot of factors inside of that range of two years. There. So I'm not expecting to see significant changes in store rooms. This has been a big part of our group.
That machine is back in the on position, we opened 12 new stores in the quarter. Once we added the five Walmart we have a revised our capital plans upward a little bit as though we are.
The cash flows stabilize and actually grew and gives us the confidence to continue to invest in the business. So headline is no change to store ramp still going to be very important we are back in the on position in terms of opening new stores and.
Have our sights set on.
Good year in 2021 and have most of those locations already pre identified.
Great. Thank you very much.
Our next question comes from the line Zack Fadem with Wells Fargo. Your line is open.
Hey, good morning could you talk about any a throughput constraints, you're experiencing particularly around doctor visits given the heightened demand and decide from virtual visits what other initiatives are you putting in place to maintain social distance without impacting the customer experience.
So I think that the 19% comp in June shows that we're managing the throughput well and again I think if.
There is very methodical regimented approach to doing yet, but I would say.
It is that the I think the takeaway is we can handle high levels of demand or even while we're executing the safety protocols and then you said beyond Oh in terms of there was it was the question beyond.
So in terms of what we're doing Ted on the safety side. There. It's it's we're following the CDC in airway protocol Seasonalized screening done when we're doing the appointments Oh, we are doing the special different thing we have the floor stickers out we are doing face coverings for all had been doing that for.
While now and then there's just a lot of cleaning protocols, both in our exam room and every time you try on a a frame your put it in a personal band that we've given you. An every frame is disinfected before it gets back on the on the shelf So and again, we're I think were particularly good at execution.
On an execution when dealing with the sort of demand our stores get and we've been able to implement these protocols and keep and keep the patients and customers going through the stores.
And it's in a very similar manner.
Got it so no.
Back real quick.
Add on to that.
You know June June comp levels were certainly exceptional and overall flow through with exception was well.
You know, we basically so mix returning more towards normal in terms of glasses and contact we leveraged the optometrist and the lab costs.
Well heck, we actually leverage all fixed costs throughout business.
And is read mentioned earlier, we were still not full throttle on advertising so flow through levels for the month of June in high contrast to April and May. We're also very high end and well correlated to those high comp. So we were happy to see the good topline results and just as happy may be happier to.
The flow through coming through as well.
Got it I was just trying to confirm whether there weren't any issues getting doctor visits for customers, but it doesn't sound like like there is so that's great and then Patrick could you walk us through the PNM mechanics, and a little more detail around the convert and how we should think about.
The share count and impacted hedging transactions going forward.
So.
The implications around the I missed one word but it was very to convert.
The convert.
Sure. Okay got it first I thought I heard I actually I thought you were saying that the Teuffer, yeah right right right.
Okay, we sell to glasses for is missing on an approved found but convert we got to the convertible so.
The speaker phone issue.
Hi, I'm I'm all good I was glad I wasn't the only one that you're hearing super.
Yes, So we issued 402.5 million, we we immediately put 391 million of that to work paying down 75 million on the t. away in the revolver balance that had grown to 391, 2.5% coupon we were delighted with the.
Timing and the results that we got out of that deal in the market that matures in 2025. The convertible price was 31 17, there's a lot of kind of parameters around.
When investors can execute those options, but in general we expect to see most of that in the 90 days prior to that five year maturity. There are other reasons and certainly David and I can take you through that but I want to everybody through the bottom line. This was a really successful capital raise for us It put the company in a wonderful possess.
Question of not having to think about liquidity only thinking about getting these stores reopened getting them open safely taking care of patients customers as opposed to some doctors.
And it was a we've done several restructurings here in my tenure and this was.
You know by far the most impactful and just really successful.
Got it thanks, so much guys.
Thanks.
Our next question comes from the line of Bob Trouble with Guggenheim. Your line is open.
Hi, good morning, guys.
Couple of questions just on the gross margin line. When you look forward to sort of I don't know the next few quarters, and especially Q4 in Q1 of next year. When you think about the results that you had pre covert.
Q4, Q1 of last year can you talk through just the drivers of the gross margin shrink that you saw then like should they be able to be replicated in the fourth quarter in the coming quarters I'm just trying to think of the different puts and takes on the gross margin going forward. Thanks.
Yeah, Hey, Bob Good morning, let me kind of lay out how I'm thinking about that just so.
Q3, and then I'll just kind of hit margins in general.
So the Q3 sort it all starts with momentum and as we mentioned we've seen.
Good momentum coming out of June and July.
Strong customer demand, because we're selling a important medical necessity product at a really low price.
We think that that's going to be.
Good place to be in general over the coming months in years, especially if we see a little economic.
Stress coming off coming off the more intense over that period.
We do expect comps to normalize.
Yes.
More historical levels coming off stimulus and pent up demand.
One item I'd note for Q3, Bob is.
The unearned revenue in the net margin on an revenues because lean back to a positive we'll of course normalized better ways that you can understand of the business and then in general.
The more volumes, we do the more we leveraged our lab cost the more we leverage the.
The investments in our optometrist.
We are seeing a little higher.
Level of spin related to coated in Q4, there will be about 4 million in about $3 million that was frankly related to the appreciation phones. The read mentioned and about a million and that is the PPG and that'll be ongoing so.
As I think about gross margins going forward.
I'm, hoping that we see a little bit of moderation in some of the wage pressure that we've seen and gross margin that's going to be the doctors on I think we're going to be back on troponin back on track in terms of see improved efficiencies in the lab were two years outside of opening that our last Texas lab. So.
Bob is.
It has been coming home nicely for quite a while.
Oney availability, we think is going to be a little better if there's a prolonged impact on the economy.
Now were down in ESG, and I am thinking advertising in rent.
We could also see some moderation there and.
So honestly I see coming on a code that.
Obviously, the incremental costs, but really more maybe more potential opportunity. If you go back bomb to the period of last year 234, we saw really nice margin expansion.
We were also seeing that same expansion through the first.
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You 10 weeks non weeks as the quarter until we closed all the stores. So what I, what I hope to be able to start to point out soon is really the continuation of that story.
From time to time, you're going to host both hear us talk about some investments in terms of improving our offerings service levels. Omni channel you will be managed care growth. So there will still be a balanced store going forward, but I think the management team is a fairly optimistic that we can get right back.
I'm not saying track that we were were on.
Refocus.
That's kind of how I'm thinking about margins overall and that may have been more of an answer than you were looking for there, but I wanted to unpack that is clearly as possible.
Thank you very much appreciated.
Our next question comes from the line of Anthony.
Combo with loop capital markets. Your line is open.
Hi, good morning, and thanks for squeezing me in.
I wanted to talk a little bit about to the Walmart vision Sandoz first off congrats on extending.
The agreement I guess, we won't be seeing any sell reports from firms I never heard of before things that can be pulled for you. So there will be up that going for us which is nice.
Specifically, so you have you converted the five vision centers.
You know, we love to just get a little bit more color in terms of the early results and based on those results. How how you think about I know, it's very very early and maybe you can talk about it public on this call, but just any color you could get in terms of how you think about whether that means that Walmart could potentially give you additional vision centers to manage.
Forward. Thank you.
Anthony Thank you for that question I was thinking we'd gone pretty far into the call without a question about Walmart So I really appreciate if.
That and yes, we are pleased with the three year expansion that brings us into 2024 and again I believed that our relationship has been extremely strong. So it wasnt something I was oh sweating about but I was pleased that that to take it off the table for the market to doesn't sort of.
As deeply understand our strong 30 year partnership with Walmart <unk>, Yeah, We transit transitioned all all five over that went smoothly. It was a really nice process Walmart was a great partner in and doing that in a signing people to make sure that went smoothly and we are very encouraged by the end.
Actual results.
At these stores that we see a tremendous future for them and I'll say, we're encouraged by the results. We've had so far and I can assure you. We are just getting started we are we're just we're just.
And the early stages of the good work, we can be doing to to improve the stores and get them.
So we're up to the sales levels that that our stores tend to achieve a inside a inside Walmart.
I'm pleased there right here in Georgia, they're all over Georgia, and Georgia is where walmarts health and wellness group likes the test its innovations.
And new approaches and my feeling over the past 18 years in my job is be Walmart account executive is that you just keep doing good work and when Walmart gives you something yes, do well and serve the Walmart customer well and that and that's what makes the.
Ownership.
So strong and keep going and beyond that I really cant can't conjecture on the future. Other then I think we continue to have a nice long future with them.
Got it fair enough. Thanks, so much keep up the good work. Thank you. Thank you.
Thank you and my last question comes from the line of Steph Wissink with Jefferies. Your line is open.
Thank you good morning, everyone. Many of our questions have already been out but I want to go back to just a couple of topics that you've already talked a bit about how many eater and ask you about kind of recruitment opportunity or your unrealized recruitment opportunity on some of the pent up demand is there a way to look at that based on the percentage of your bookings that were cancelled.
That you've already rebooked and executed again, just trying to go back to think about well what customers haven't necessarily Ben activated that would have been visitors to your store is trying to close out period.
Yeah. So so I would say yeah, we did keep track or the most frequent phone call. We had while the stores were closed is when you're going to reopen and and please call me. So I can book an appointment. So that was that was a a very common thing I'd I'd say, we work through.
All that in the first few weeks of June sort of late June and July we're seeing serve its beyond its beyond that we sort of work to our list very very early on.
So again, it's it's it's encouraging to see just the demand keeps.
Coming in that way.
All right that's great and then speaking of June that 19% comp was impressive and I think Patrick you mentioned that had nice pass through to you also made some comments about your lab starting to deliver some productivity so at that level of capacity utilization nearly 20% comp how should we think about the store level.
Paul capacity utilization and then the lab level capacity utilization is that a good benchmarks for us to look at in terms of kind of the full utilization or or.
Pivot point and your utilization that gets you to the incremental margins that you'd like to see.
Well I certainly don't project.
19% going forward, we do expect to see those moderate and in general So we we have.
Typically seen.
1.5% to 2.5% of productivity improvements each each years coming out of our lab.
In terms of the stores with the degree of volume that we have coming through we are we are bending curves there in terms of.
In terms of margins. So I, probably don't have anything specific in terms of margins are based systems to share.
In the past we've talked about.
Inside of our prior guidance range of 3% to 5%, where we start to definitely leverage.
The entire business towards the middle and upper end of that range. So if you said it four to five you're seeing good leverage at 19.
Insatiable Levered, so, yes, I would expect again to add back towards historical levels at some point.
As I looked at June CNL really below the gross margin line. So the only thing that was flexing up was incentives. We we compensate our me in our stores in terms of.
Volumes and.
They were.
The high sales volumes were driving incentives, which is which is a great expense that we locked right. So I.
I do see us, adding back towards a more normalized levels in the future and but I do think theres the ability for us continued to.
Levered so.
Your profitability.
And stuff I'd, just like the and also just in terms of the utilization. We are seeing after sort of we went through this sort of lists of folks you know, we even waited till to turn on our online booking system, which we think is is a really nice offering to our customers we waited to do that for us.
[music] weeks, but when we when we put that back on it was it was a again helpful to continuing the trends we saw in the first few weeks at June.
That's great. Thank you very much.
Thank you Sam so.
Thank you I'll now turn the call back over to read thoughts for closing remarks.
Thank you very much Bridget we'd like to thank you all for joining US This morning and for your continued interest in support of National Vision. We look forward to speaking you again, when we report our third quarter result, Thank you very much.
Ladies and gentlemen. This does include the program. Thank you for participating and you any day.
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