Q4 2020 National Vision Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the National Vision fourth quarter fiscal 2020 financial results Conference call. At this time, all participants are in a listen only mode. After.
The speaker's presentation, there will be a question and answer session to ask a question during the session you'll need of press star one on your telephone. Please be advised the today's conference is being recorded debt.
Do you require any further assistance. Please press Star then zero I would now like to hand, the conference over to one of your speakers today, Mr. David Mann, Vice President Investor Relations. Sir. Please go ahead.
Thank you and good morning, everyone welcome to National Vision's fourth quarter, 2000, and 'twenty earnings call. Joining me on the call today are <unk>, Chief Executive Officer, and Patrick Moore, Chief Financial Officer.
Our earnings release issued this morning, and the presentation, which will be referenced during the call are both available on the investors 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 and today's presentation include forward looking statements as defined.
And the private Securities Litigation Reform Act of 1995 of these statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission the.
The release and today's presentation also includes certain non-GAAP measures reconciliation of these measures are included in our release and the supplemental presentation. We also would like to draw your attention to slide two in today's presentation for additional information about forward looking statements and non-GAAP measures as a reminder, national vision expects to prove.
By certain supplemental materials or presentations for investor reference on the investors section of our website now let me turn the call over to Reed.
Thank you David Good morning, everyone I'd like to thank you all for joining us today, I hope, you're all staying healthy and safe.
Turning to slide four as I reflect on 2020 in general and the fourth quarter in particular I could not be more pleased with how the national vision team rallied to serve our patients and customer needs, while maintaining of safety first focus our key priority throughout the pandemic remains the health and wellbeing of our associate.
It's a network of doctors, our patients and our customers the strong execution of our store teams since the reopening of our stores and June has been remarkable for the period from June through December we generated at 12, 6% comp the best seven month comp and at least the past.
18 years, our partnership with Walmart now and its 31st year was extended for another three years through 2024, we continued to generate positive results at the five additional Walmart vision centers that we added in 2020.
We celebrated the opening of our 1200 store and Deerfield Beach, Florida, We strengthened our board with the addition of three new Independent Board members, Naomi Kelman, Susan and summer fill Johnson and Jose our Mario with Jose joining us in February of this group of accomplished executives with diverse backgrounds bring skill.
Fills and experiences across multiple disciplines, such as marketing technology and business operations.
We finished the year with a stronger balance sheet and the lowest debt leverage and our public company history for the year, we generated record operating cash flow. Despite our stores being closed for over two months and in early February Moody's upgraded the credit rating on our debt, which returned national vision to the rating that Moody's ascribe to our debt of immediate.
The prior to the onset of Covid, our balance sheet positions us well to continue to make investments to further strengthen our competitive moat.
Finally in 2020, we embarked on the journey toward developing a more formal ESG strategy. We published our first philanthropic impact report and progressed, our diversity equity and inclusion initiatives, we conducted and materiality risk assessment and look forward to sharing more details of our ESG strategy in 2021.
2020 may have been the most difficult and eventful year of our careers yet.
Yet despite of one sell a century pandemic of record economic downturn and many societal challenges we expanded our footprint grew market share achieved record profitability and continued to invest and our business for further growth.
Importantly, this was all accomplished with decisions consistent with our company culture values and long term orientation.
And our life, giving culture and our people at all of our core strength and this year. We saw their very best our teams were truly tested and a variety of ways by Covid and we share and we rose to its many challenges.
Turning to slide five and a summary of Q4 results I am pleased with the way. We finished 2020 and continued to navigate the pandemic Q4 was another outstanding quarter for us and further highlights the strength and resilience of our business model.
Net revenue for the quarter increased over 23% adjusted operating income increased 281% and adjusted EPS increased to 45 cents versus nine cents last year, which established a record for our fourth quarter profit as a public company.
Adjustable comparable store sales growth increased 10, 6% and the quarter comps were once again led by our growth brands with the 17, 6% increase at Eyeglass World and the 12, 2% increase at America's Best I'll speak more to the comp trends and a few minutes.
We opened five new stores during the quarter and ended with 205 locations or a four 7% increase in store count in the past year.
With our exceptional performance, we're pleased to have exceeded our fiscal 2020 outlook and we enter fiscal 'twenty 'twenty, one with good operating momentum.
And a few minutes Patrick will take you through our Q4 results and our 2021 outlook in more detail.
Turning to slide six as the chart shows our business has a history of strength and resilience to a variety of economic and external challenges. We're pleased with our continued strong comps this quarter and our second consecutive quarter of double digit comps. This made for the best half year comps and my 18 years with Nash.
Vision.
Our Q4 comps were consistent with the third quarter trend on a two year stacked basis, even despite rising COVID-19 cases post election uncertainty and the lack of additional government stimulus. We believe the strong results were aided by pent up demand from our patients and customers and by our low cost eye care and eyewear offerings.
Seeming to be even more in need during this pandemic economy.
The duration of the heightened level of demand is difficult to predict we continue to expect it to moderate over time.
The continued momentum and eyeglass world is especially noteworthy and encouraging as the brand's 'twenty 'twenty comps declined only two 7% despite being closed for nearly nearly 10 weeks of the year Eyeglass World has really found its moment in the post COVID-19 period emerging with consistently strong performance weekend and.
We got the.
Thus far 2021, despite the recent weather disruptions is off to a solid start likely aided by the refresh of vision insurance benefits and the second round of direct stimulus payments in late 2020, we're fortunate to be in a category, where the purchase is tied to of medical necessity.
Based on industry data, we are confident we have grown share in 2020, the optical industry remains highly fragmented and we believe that the current environment is hastening the trend that favor larger better capitalized value retailers like national vision.
<unk> to slide seven as we move into 2020, one we're looking to capitalize on our momentum and plan to continue executing on our core growth initiatives and further investing to strengthen our competitive advantages. After a brief pause and the openings early in the pandemic new stores remain our primary focus given the.
Our sizable white space opportunity, we plan to return to normalized growth in 2021 and opened approximately 75 stores. We have a solid pipeline of specific locations for this year and into 2020 two our relationships with landlord partners are strong and our results. This year highlight the patients and consumers.
Continue to seek physical locations for their optical needs.
As noted in today's press release and on Slide eight we increased the white space target for our America's Best and Eyeglass World growth brands to at least 2150 stores or an additional 300 locations based on updated modeling by third party real estate data analytics provider and our inter.
The team we have identified this additional runway for expansion of our updated white space target is over two four times, our current network for our growth brands with at least 1300 stores identified for America's best and at least 850 eyeglass World stores.
We now see and even larger opportunity in front of us.
Additionally, our strong performance this quarter would not have been possible without the tireless hard work and commitment of our network of Optometrists, we continue to invest in our optometrist recruitment and retention programs to keep our high retention rates near record levels with healthy Doctor coverage, we're able to meet strong customer demand.
And for eye exams with the safety first approach.
In terms of marketing, we had quite an unusual year with much lower spending in 2020 initially due to cost containment and then due to the decreased marketing given robust consumer demand.
We returned to our normal cadence of investment and the fourth quarter in part to fulfill pre pandemic and commitments and we plan for 2020 one to be more in line with our historical level of.
Our focus will be across TV and digital media to ensure that our brands are always top of mind for consumers wherever they are on their purchase journey.
During this period of economic stress, we believe optical consumers are even more attracted to our extreme value such as the introductory offer for our two growth brands.
Two for $69 95 at America's best including a free comprehensive eye exam and two for $78 of eyeglass World with glasses available that same day, we believe that the combination of low prices and excellent customer service leads to satisfied repeat customers and positive word of mouth as customers tell their friends how little the.
I spent and the great service they received at our stores in 2020, approximately two thirds of customers and mature stores were existing customers.
Late last year, we invested in market and consumer research to further understand the optical consumer the research further confirmed our strategies and we're continuing to use these insights to improve engagement with the optical consumers.
We continue to experience healthy revenue growth tied to our managed care partnerships in 2020 revenues tied to vision insurance represented approximately one third of net revenue and we remain underdeveloped relative to the category. We continued to see and ongoing opportunity here as managed care dollars and co pays and tend to go further.
And our stores than elsewhere.
Regarding our supply chain. Our lab teams have continued to have definitely handled the elevated business volumes and 2020, our lab network is well positioned with the capacity in place to handle the projected 2021 needs and remains a key reason that we are a low cost provider.
We currently face 15% tariffs on products imported from China, which for US are predominantly eyeglass frames with the new administration, we are monitoring any ongoing developments, while continuing to progress our tariff mitigation efforts, our digital and omni channel initiatives continue to progress we experienced an acceleration.
And in e-commerce orders compared to pre COVID-19 levels the.
The trend towards omni channel purchases also accelerated during the pandemic as we experienced the significant increase and ship to home orders in 2020 for.
For the year, our combined ecommerce and omni channel sales rose to about 12% of net revenue up from 10, 3% in 2019.
Lastly, our efforts and remote medicine are continuing as well and we're pleased with their progress.
Overall, despite the pandemic, we focused on improving our business operations and competitiveness as we invested towards expanded capacity to see patients as well as initiatives to improve customer engagement throughout the customer journey that are supported by insights from updated consumer and market research.
Before I turn the call over to Patrick Let me say that we are very pleased with our Q4 and 2020 performance in this environment. The events of the past year really showcased our strong positioning as an essential health care of retailer with thoughtful safety protocols in place to operate through the.
<unk> of the pandemic, our proven team of optical veterans and executing our initiatives with both thoroughness and rigor.
Our resilient business model is the low price seller of of medical necessity with the potential for even larger opportunity on the other side of this pandemic.
And our great network of Optometrists that are associated with the company.
And new year brings new hope, but challenges and uncertainty persist.
Yet we are entering 2021, knowing that we have what it takes to navigate the rest of this pandemic and beyond and I am confident national vision will emerge and ever stronger company.
Now to Patrick.
Thanks, Reed and good morning, everyone before reviewing the full details for the quarter and fiscal year, Let me begin by adding my thanks for the incredible resolve of our team during 2020.
Their efforts have been remarkable and instrumental and delivering the strong second half performance and demonstrating our ability to successfully navigate the pandemic.
Turning to slide 10, let's dive right into Q4 results.
We opened five new America's best stores and closed one of America's best and to end the quarter with 1000.
205 stores for a four 7% increase and store count in the past year.
And for our America's Best and Eyeglass World growth brands combined unit growth increased five 9% over the last 12 months our store growth rate. This year was impacted by the temporary pause and new store openings during the second quarter.
And as Reade noted, we have increased our projected white space opportunity based on refreshed modeling by third party experts and our internal teams.
The demonstrated the strength of our new store performance as well as the outstanding post reopening performance across store vintages further reinforces management's confidence and our store model.
New stores continue to generate favorable returns and cash flows and historically breakeven in the second year with payback and three to five years.
The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis.
Same store sales increased 10, 6% during the quarter on a 13 week basis, and our growth brands comps at Eyeglass World increased 17, 6% and Americas Best was up 12, 2% as Reade noted we are especially pleased with the continued robust perform.
And that's at Eyeglass World.
This quarter same store sales were driven by an increase and average ticket by category, we experienced positive comps in both eyeglasses and contact lens with especially strong performance and eyeglasses.
Eyeglass comps were driven by increases in both customer transactions and average ticket, especially at our growth brands.
The contact lens category continued to see growth and average ticket as our contact lens customers are gravitating to newer technology lenses that have higher prices.
Our customers are also tending to purchase more units per transaction.
Turning to income statement highlights on slide 11.
Our Q4 results reflect the continued strong momentum and our business since June the fourth quarter consisted of 14 weeks this year and the 14th week added $32 2 million to net revenue and approximately <unk> to adjusted diluted EPS for the quarter and the year.
Net revenue increased 23, 6% for the quarter, excluding the impact of the 14th week net revenue grew 15, 6%.
Unearned revenue had a positive impact this quarter as net revenue growth benefited two 8% due to the timing of honor and revenue recognition.
Cost of clickable to revenue increased 15, 4% or a decrease of 310 basis points as a percentage of net revenue versus last year. The decrease as a percentage of net revenue reflected both higher all glass mix and higher eyeglass margin as well as lower growth and optometry.
The cost, which continued the trends we experienced in the third quarter.
Adjusted SG&A expenses increased 13, 2% and the fourth quarter versus last year or a decrease of 370 basis points as a percentage of net revenue. The key factor behind this decrease was the leveraging of store and corporate payroll and occupancy expense and corporate overhead.
Additionally, the company incurred incremental COVID-19 related expenses of approximately $800000 in the quarter, primarily for the acquisition of protective equipment and other supplies.
Adjusted EBITDA increased 118% to $83 $5 million and adjusted EBITDA margin increased 730 basis points and the quarter.
Adjusted operating income increased 281% to $62 $8 million and adjusted operating margin increased 850 basis points to 12, 6% the increase and adjusted operating margin was driven by the strong comp leverage of fixed cost higher eyeglass.
Mix and eyeglass margin and the timing of honor and revenue recognition.
As a result of these factors we experienced another unusually strong quarter of flow through.
Adjusted diluted EPS increased 45% versus nine last year.
Beginning in Q4 EPS is calculated using the if converted method of accounting and thus our diluted share count of $95 9 million shares reflects the fully converted impact of the convertible senior notes.
In summary for the quarter by all measures. This was another stellar quarter for the company.
Turning to slide 12, our fiscal 2020 results reflect the exceptionally strong second half recovery and our business that resulted in increased profitability. Despite the decline in net revenue from temporary store closures during spring and early summer.
While adjusted comparable store sales growth declined 6% and net revenue fell 1% adjusted operating income increased 17% and adjusted EPS increased 22% to 91 on the year.
Now turning to slide 13, and our balance sheet and.
At the end of the fourth quarter, our total debt was $655 million, our cash balance was $374 million net debt to adjusted EBITDA was one three times or a 50% decrease from two six times in the fourth quarter last year.
Year to date, we invested approximately $77 million and capital expenditures the lower level of Capex versus last year generally resulted from cash preservation strategies deployed during the second quarter, including the timing of new store capital investments.
In terms of capital allocation, our primary focus is on investing for growth and our financial strength gives us the opportunity to make ongoing investments and our people and our business. We believe that our ability to invest remains a competitive advantage as such we are continuing to invest to support future growth.
For 2020, one we project Capex again to be in the range of $100 million to $105 million.
We've been very focused on reducing our capital intensity with the midpoint of our 'twenty 'twenty, one capex outlook of approaching 5% of net revenue our capex outlook at the beginning of each year has not changed since our IPO. Despite projected 2021 net revenue being over 25% higher.
And the 2018 level.
I'm, especially proud of our demonstrated ability to continue to drive business growth and then the capex curve over time.
We entered 2021 and the very strong financial position with $668 million of liquidity from our cash balances and available capacity from our revolver and February we were pleased to receive and upgrade from Moody's that returned our corporate credit rating to its pre pandemic level as we can.
Proceed this year, we will look to balance the conservative cash posture against this period of continued uncertainty with our key stated quality of balance sheet improvement.
One last housekeeping item to note on the balance sheet and the first quarter of 2021, we intend to early adopt the new accounting standard regarding accounting for convertible notes, we expect the adoption of the standard to result in a reclassification of conversion feature balances tied to our convertible notes.
And from equity to debt and a decrease and reported noncash interest expense. We currently expect the net impact of the re class to result, and an increase of long term debt of approximately 83 million with a corresponding reduction to equity.
Which will be reflected beginning and our first quarter 2021 financials.
Now turning to slides 14 and 15.
Conclude with some commentary regarding our 2021 outlook, which we included in today's earnings release.
While the operating and macro environments remain uncertain and our performance sensor and opening our stores gives us heightened confidence and our business and we are continuing our practice of providing selected full year outlook for fiscal 2021 based on the factors we know today.
Our outlook reflects the currently expected impacts related to Covid. However, we anticipate potential significant volatility driven by ongoing uncertainty related to the pandemic. The outlook currently assumes no material deterioration and the company's current business operations as a result of Covid government actions or Reg.
<unk>.
Also as a reminder, fiscal 'twenty 'twenty, one and is comparing to the 53 week period in 2020.
With that setup, our 'twenty one outlook projects net revenue of $1 93 to $1 98 billion adjusted comparable store sales growth and the range of 13% to 16%. The opening of approximately 75, new stores adjusted operating income between 130 and 130.
$7 million adjusted diluted EPS between <unk>, 88, and 93, assuming 96 million weighted average diluted shares reflecting the treatment of our convertible notes under the if converted method.
I would like to provide some additional color to our historical practices given the unique comparisons from 2020 into each half and we expect our first half results to benefit from easier sales comparisons due to the 2020 temporary store closures as a result, we expect strong net.
Revenue and profit growth and the first half compared to 2020. However in the second half we will face grow over challenges from record double digit comps and exceptional margin expansion that is not expected to be sustained thus we project second half net revenue growth to be generally flat.
And with a meaningful decline and our profit metrics for modeling purposes, we expect the quarterly cadence of results to be more in line with 2019.
As Reade noted we're off to a solid start to the first quarter. Despite the weather impacts in February and while we would project first half comps to benefit from negative year over year comparisons. We continue to expect the underlying level of heightened demand to moderate brother.
Also as we enter what is our historical peak selling season, we remind everyone that both the timing and magnitude of tax refunds are an important variable that can affect our performance and our first and second quarters, and which might be further affected by COVID-19 conditions.
Store openings. This year will continue to be predominantly America's best locations with the remainder of being eyeglass World stores store openings are also expect to be skewed towards the first half of the year. We project a few closings as is typical each year.
For full year 2021, as a percentage of net revenue, we expect cost applicable per revenue to increase 15 of 70 basis points versus last year, our record performance and 2020 benefited from product mix shifts that we expect to normalize in 2021.
With benefits and the first half and cost pressure and the second half hour.
Our outlook also takes into account the 15% tariffs on products that we import from China.
For Q1, we expect cost applicable to revenue to be down 100 to 120 basis points and reflect our highest margin for the year.
We would expect adjusted SG&A to be up 70 to 90 basis points as a percentage of net revenue and our outlook.
Our marketing spend is projected to return to a more normalized percentage of net revenue. This year. We also expect some degree of continued wage inflation, while looking to tightly manage growth and corporate expenses.
As a result, we estimate and adjusted operating margin of approximately six 8% at the midpoint of our guidance range. While this margin would represent an approximately 100 basis point decline from 2020, given the abnormally high flow through and the second half of last year, our adjusted operating.
<unk> margin outlook is 20 basis points above the 2019 level and 50 basis points higher than 2018.
We are projecting depreciation and amortization and the range of $97 million to $98 million interest expense of approximately $28 million and ongoing COVID-19 related cost of about $1 million per quarter based on current pandemic and related conditions.
Our fiscal 2021 tax rate is estimated to be approximately 26% and does not consider the tax benefit due to the impact of option exercises that may occur in fiscal 2021.
Lastly, we would remind everyone that honor and revenue recognition timing can affect our quarter to quarter comparisons last year. The closing of our stores of the end of March added approximately 28 million and unearned revenue and the first quarter, which we would expect to mostly reversed and the first quarter of 2021, however, the sales.
During the last week of the first quarter are highly dependent on tax refund and volume and timing and are difficult to predict hence we could see of material swing and unearned revenue and its associated impact versus our estimate as always we will clearly communicate the seven to 10 day accounting.
Timing impact so the investors always understand the underlying cash momentum of the business.
In summary, I just want to say how delighted that we are with our exceptional second half performance and the momentum that it provides for fiscal 2021 2020 was an incredibly challenging year, but it also highlights the strength and durability of our growth model and the relentless commitment and focus of our.
The teams, we continue to feel very well positioned to effectively navigate this challenge and emerge as an even stronger business at this point I'll turn the call back to Reed.
Thank you Patrick turning to slide 16, and our moment of mission.
Last quarter, we shared that we've begun the process of creating and environmental social governance or ESG strategy in many ways ESG and corporate responsibility have been core to our DNA for almost two decades, we simply haven't had it formalized our expense explicitly talked about it and this law.
<unk> before.
The development of our ESG strategy, which includes board level oversight will use the recently completed materiality risk assessment as its compass.
Earlier this year two of our foundation in 2020 Quest National vision coordinated the donation of more than 40000, eyeglasses eyeglass frames to the nonprofit.
Great for impact to us in a eye care clinics, serving the rural poor and Nigeria.
As the result of the successful collaboration with our optical partners. We are now preparing and even larger eyeglass donation. This spring to grace for impact to be deployed and free clinics and rural poor areas around the world. This is an example of how we can work with our partners to exponentially extend our mission.
And create profound impacts on the world.
Closer to home, we recently announced the sponsorship of six scholarships over the next two years through the vision Council's open your eyes scholarship program, which supports high schoolers and marginalized communities, who want to pursue a career and the optical industry, our investment and the scholarship improves access to optical education.
For talented ambitions students, while honoring our commitment to build a more inclusive future for the next generation of optical professionals.
We're also focusing on improving the here and now we are proud that today the percentage of Black Optometrists and our Doctor network is three times that of the percentage represented in the optical industry.
We're also proud to be majority minority company with Bipack associates, and optometrists, that's black indigenous people of color, making up more than half of our 14000 associates and optometrists and our network. This includes black and Latinx associates being overrepresented in our population versus the U S population, we understand we still.
And important work to do and are committed to advance diversity equity inclusion throughout our company and the optical industry.
Having diversity represented amongst our associates and doctors as the driver of our successes of company, but it doesn't stop there the.
Three newly added board members helped maintain of gender balance among our independent directors, while broadening the diversity and expertise across our board.
Ultimately being responsible corporate citizens and stewards and empathetic human beings is at the core of how we carry out our mission and achieve our success. The national vision ESG journey is clarifying and expanding our capacity to best impact of the world, including the development of environmental program.
And to manage our energy and climate impact I'm excited.
And to continue sharing more details as this process progresses, especially as we determine our areas of focus amid the formal ESG framework.
In summary for a year like 2020 to culminate and overall growth and success for our company is remarkable it true.
Really reflects the durability of our business model here and and year out and positions us for a larger long term opportunity.
And I also believe it's a direct result of the character and commitment of our associates and network of doctors no matter. The challenges they showed up for and leaned into our mission again and again this year.
And I'm, so proud to be of part of this and look forward to seeing what we can achieve and what I hope will be of far healthier 2021 for all of us.
With that I'd like to turn the call back to the operator to start the question and answer portion of the call.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your touch on telephone and we ask that you. Please limit yourself to one question and one follow up if your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
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Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.
Hi, Good morning, everyone. My first question I wanted to ask about the everyone's favorite topic about operating margins.
Patrick you mentioned the $6 eight midpoint and I think the 2020 adjusted was close to 8% and I realize it's going to be higher and 21, and then where you were over the past few years.
Can you talk about that 8% level.
I realize that was a function of some costs coming in and some costs going away or margins being better but is that of a good ceiling level for this business to think about over time, where there is no reason why you can't get to that level and then move past it overtime.
Thanks, Amy and good morning.
As you think about the margins that we saw particularly after our store opening period from June two through December we used the word exceptional purposefully they were.
Very high margins there was a lot of great work being done and our stores demand was high and there were some stimulus benefit we were seeing mixed benefits in terms of a little more eyeglasses and contact lens versus historical patterns, we were seeing the stimulus benefits list lift tickets.
And that's just customers picking out the incremental things that they wanted to add because they could.
We were in a fairly low to moderate position in terms of our typical advertising spend.
We obviously weren't traveling.
And due to the double digit comps, we were really well beyond our comp leverage point so.
I would say it like this if we had another period, where we were.
<unk> or more of our comp leverage point and found that advertising wasn't necessary that could be a nice benchmark I don't think theres anything.
So elements of that are going to moderate.
Back to a norm, but again, our norm has been improving we we lifted operating margins 30 basis points from 18 to 19, another 20 from 19 to 20.
The management team is focused on that we hope to have.
We have a shot and delivering some more of that lift again, but I do want to cordon off those months of June through December as being just outside of the norm now in the fourth quarter, we did see advertising moderate back.
Two of to more normal levels.
And it was of Great high watermark I don't know if that makes sense and the next two years to be able to shoot for that but I can promise.
Promise you that management is always looking for ways to improve margins without providing any negative consequences for the submission of the company.
Okay, and then I guess shifting topics to the new store targets.
The higher numbers do you intend to open at the same rate that you are opening now and then how do you think about EG W versus America's best and I'm.
And I'm, obviously GW is less mature and they are growing faster, but why shouldn't those two store.
Total look similar over time.
So.
We are sticking with the opening 75 stores a year.
It's been very successful for us in the past debt it works well with our our doctor recruitment cadence overall, so we're sticking with that in 2021 Eyeglass World Oh My Gosh, we're so pleased with the performance of Eyeglass World.
And it's just been the brand for the post Covid.
A moment.
We are we are working on ways of getting the ROIC closer to America's best and the improved performance share of helps with that there is a bit of lead time required to plan out and acceleration in in any growth and of course, the eyeglass World was I got the got very strong and.
Late last year, but couldn't be happier with the performance of our ROIC is.
Closing the gap with EDW and.
And but we're sticking with 75 stores a year and.
And I would just add Simeon we did a nice analytical update this year in terms of new store performance and payback and even after the last few years, where we entered some really large urban markets. We went west coast. We've got East coast. We're delighted that our new store of metrics are really the same as they were before we extend it.
And of those major urban areas. There, we're still seeing payback and that kind of early mid second year of operations for the bulk of those stores.
And our breakeven and we're still seeing cash on cash payback between year and five so the company really expanded the types of places, where it's putting new boxes and I'm delighted to report that the same numbers that were used back of the ipos still makes sense.
US a lot of confidence.
Thank you and our next question comes from the line of Bob <unk> with Guggenheim Securities. Your line is open. Please go ahead.
Hi, good morning.
I guess two questions hitting first read bigger picture as you guys talk about the increased store counts.
Can you just give us an update where you think the industry contraction in terms of as part of what Youre seeing because theres been store closures and if you of any estimates on what you saw in 2000 and 'twenty in terms of the industry contraction and update on that would be great and then I guess just the second question for Patrick is.
On the gross margin piece can you can you just talk a little bit more about the trends have been really good.
Are they sustainable and can you just maybe you can just help us understand the puts and takes a little bit better as you think about and what you said earlier for this year and that'd be great. Thanks.
Thank you very very much true for that.
No.
What we've seen is a hastening of the trends that we've been talking about ever since our IPO Road show debt debt the.
And we call it the rising tide and the rising tide and the rising tide category growth debt that that the chains are gaining market share at the expense of the independence of the largest chains are have been gaining market share value chains have been the biggest grower of market share and that is all.
And that has all favorite us and we see that that continuing.
And the industry seems to have closed this this industry data, 2% to 3% of stores have closed.
Since the <unk>.
Since the pandemic of over the past year, So said theres a contraction in store count.
And some of it.
The doctors, saying I'm not going to reopen and close to retirement, so I am not going to reopen there. Some of it is as a decline in mall and big box.
And.
Sort of the store count there, we're also seeing by the way.
The doctors opening with just less slots shorter hours less and less exams per hour again, all favoring us along the way and.
And so we just have seen this as an overall continuation.
Of the trends.
Debt, we thought we've been talking about for years now and the larger white space opportunity is further reinforcement of that.
And then following on the gross margin just to level set.
We have been seeing significant gross margin benefit and the second half of 'twenty 'twenty and that was really related to a little heavier shift over to eyeglasses for his contacts and our business inside of eyeglasses nice customer driven traffic demand and nice customer.
Ticket elevations.
Those have we're expecting to see some moderation in that over time for the full year guide.
On gross margins.
And it basically said, we expect it to be.
Down in the 50 to 70 basis points range, but for Q1.
Up about 100, 2100 to 120 basis points. So Q1 should probably be the high watermark for gross margins and then we just will also have to understand what what the swings we get out of the.
The owner and revenue component that I mentioned, a few minutes ago and in terms of call comments.
Thank you and our next question comes from the line of Michael Lasser with UBS. Your line is open. Please go ahead.
The morning, Thanks, a lot for taking my question.
Do you think youre seeing a continuation of pent up demand in the fourth quarter and and so far year to date or is this just more a reflection of net.
And that's the vision, taking market share and and a realistic run rate.
The business, despite offering what seems like conservative guidance for the year ahead.
We believe it's both we believe that there is pent up demand, we believe there's less supply as I detailed.
A moment ago and we believe we are building market share. We believe all of those things are combining together.
And.
How long would you expect that pent up demand to persist as it is.
Is it fair to think that this is just going to.
Stall out after the next few weeks or critical of longer than that.
It's.
It's hard to predict how long that will go we have said that Q1 has had a solid start to it.
Suggesting we're still seeing sort of <unk>.
Continued momentum.
They're up and despite the crazy storms of.
Of February and there is there sort of data out there, suggesting a lot of customers are still hesitant to go back up and my favorite example is or are you going to your dentist as frequently as you used to add debt. There are a lot of consumers out there just sort of saying you know maybe I will just hold off of.
A little longer so I can't predict it but I.
I think it will continue and eventually moderate.
Okay and.
I want to come back to the profitability of discussion.
You had indicated that relative to 2019 your margin will be up about 20 basis points.
Two questions on that is that of realistic run rate, we should think about over the long run assuming that you're able to maintain your algorithm and two is there anything that you've learned and the last.
Call It 12 months.
That would make the national vision of more efficiently run business such that you could generate more operating margin expansion and then that modest rate of that youre and playing for this year.
Yeah, I'll start that and start rate of me maybe back to you.
<unk>.
So I think debt when we look at what the operating.
Operating margin as dawn since eight through 18 1920 was and.
Very abnormal year, we had a loss period, followed by exceptional margins are our guide at the midpoint has debt moving backwards a little bit.
We're still focused on eating out some margin gains.
The most every year if possible so.
The guide has to be 2021 over 2020, which is one of the oddest years ever to do come and grow over and think about it especially on quarters and seasonality, but I do think there's a there's continued upside moving from 18 19, let's skip 'twenty into 'twenty, one and.
And 22 and beyond I think if we go back and look at that period. Our intent is that you will see gradual operating margin improvement.
Alright, and then in terms of sort of the things that we've been learning again, sometimes where we like to compare things of 2020 and sometimes the 2029 when I think of where we are now relative to a comparable period or any time in 2019, Inc.
You are just much more.
Sophisticated debt than we were or data analytics or our deeper we referenced the market research of it and we realized sort of post COVID-19 debt.
We have had to keep our finger even more on the pulse of changing consumer dynamics.
We've probably done more market research and the past six months and we have in the past two and three years just to make sure. We're all over any consumer dynamic changing.
There are sort of.
Our consumer technology is more sophisticated the omnichannel pieces that we're tracking ever more and and we believe that's going to be really helpful to keeping us.
Short over and over the coming periods.
Thank you and our next question comes from the line of Zacks, Adam with Wells Fargo. Your line is open. Please go ahead.
Yeah, Hey, good morning so.
Update us on the state of the category here coming out of the pandemic and what do you think the underlying growth rate should should look like over the next couple of years, particularly for the value segment and then you touched on the competitive landscape a little bit earlier, but maybe you could also frame the opportunity to take share.
As the mall based and and mom and Pops and exit the addressable market.
Thank you Zack.
What we're seeing is this category is shifting to the value segment.
It's been shifting for years.
And and post Covid has has hastened the VAT.
And so I think I think there is a growing understanding that you don't have to pay what you used to four for eyeglasses, and especially and I could I believe that will that's not going to go back.
Once you've experienced the pricing you get from us and.
And for your competitors, who are in the game as well you don't say, Oh, I think I'd like to go back and pay a lot more that the next the next time, so I believe that what we're seeing is.
And ongoing.
Of tailwind to the to the value segment and yeah, it's going to come at the expense of.
The independent sector, which because they have no.
No economies of scale.
The orange arent able to compete.
Anywhere near at the prices. We are it is going to come at the expense of mall based.
The retailer.
And.
And it's kind of come at the expense of fit of anyone who was focused on just a higher price piece and I think all of that combines to the larger white space opportunity that we're seeing before us that we don't just the euro and put a finger in the air on that white space opportunity, we have really deep data science.
Yes.
Working on this and reinforcing this and that's where the numbers come from but.
It's a combination of all of these factors coming together debt.
What makes us so optimistic and the post COVID-19 environment.
Got it and then you called out some weather driven disruption early in Q1 curious if you could elaborate here and.
Terms of your trends or whether any stores were offline during during this time and as well as any disruption to the supply chain that we should anticipate.
And as we work through our models.
So the weather of pieces I was referencing were about two weeks ago, and Texas and Louisiana, primarily the debt.
Millions of homes out of out of power.
And and at stores out of power of say, yes, we had lots of closings over it was about a two week periods of storm after storm again and that late late February only is what I was.
Referencing and.
And I'm always always like to compare us to the the restaurant industry that that if theres, a big snowstorm and you were planning on going out the dinner and you don't go out the dinner while U.
And that meal is never going to be eaten again, but esso so they lose out but for US you stay at home your eyes, just get worse and you have to come back eventually.
<unk>.
So yes the storms.
And.
And similar disruptions are just short blips and for us, but it comes back of eventually and we've seen it time after time year. After year, we've talked about and we've talked about it a lot that's expected and the future, but they come back.
At the medical necessity.
Thank you and our next question comes from the line of Stephens, Inc.
Jefferies. Your line is open. Please go ahead.
Thank you good morning, everyone.
Two questions Patrick the first of a quick one for you just on your current lab capacity to support the gross behind America's Best could you remind us how much capacity you have how far into the future that would support your growth targets in terms of the store unit cadence.
And then maybe the best for you I just wanted to give you some space to tell us a little bit about the mix benefits you saw a shift from contacts to glasses and 2020.
It's correlated to kind of the tired eyes syndrome, the zoom effect or if it's something bigger if you think theres of fashion trend or something underlying of shifts from lenses the glasses and thank you.
Good morning, Steph so on the lab capacity, we built our of our fourth domestic lab of couple of years ago. The way those labs work as we get the shell and place and then we use just and Tom provisioning for incremental equipment to meet peak season demand each year.
We are in great shape on lab capacity Gen.
Generally we are building a new lab every five or so years, we could actually start to have visibility into equipment that may lead of stretch that even more so I'd be stunned at the ended up being on the three year horizon, maybe not even the.
The stuff, we're in great shape with our domestic.
The domestic and global lab network.
And.
And to your to your second question Steph. So there are two components of the.
This both sort of AR and near term and a long term from a near term perspective recall, we did the actually shutdown our stores, we closed our stores to the public but we continue to man our stores' staff our stores socially distance of course with people because arc were provided and necessity and our phone.
And so we're ringing off the hook.
And because of our consumers our store base and many of our very fond of it.
We were still selling a lot of contact lenses, often and youll supplies of contact lenses and during that period.
It was easy to do people call up.
And go online for our e-commerce offerings, and so we were still in very much and the contact lens business even during the the closure period, having said that I do think your comment on the other side we're right.
And here from a lot of people I am staring at my screen, All day, I prefer or have optical reasons to do that with the glass is our sales of blue light.
The lenses to protect against.
Screen usage and lower fatigue are up a lot and frankly, a lot of people who are spending time looking at screens. All day are being looked at on screens. All day have realized that a different look plays better and the video.
World So.
I know a lot of people, including many of my family members, who have gotten glasses to look better on on zoom, because thats a different aesthetic than than the normal one so it's both both factors.
Thank you and our next question comes from the line of Paul is Wang with Citigroup. Your line is open. Please go ahead.
Hey, Thanks, guys.
On the res store target of I'm curious, maybe if you could talk about your most dense markets how those markets have been performing if that tied in to.
So, giving you more confidence to up that store target. Further also curious if you can talk what percent of sales or your optometrist wages versus other store personnel and anyway, you can size those for us and and talk about your outlook for each of those two groups and 'twenty, one and then just an update.
On the converted Walmart stores.
I'll take the first part Patrick will take the second part and I'll take the third part on the updated Walmart stores.
And we don't like to go into a lot of geographic.
Specific but I'll give you a little color our oldest market is Chicago.
It is it is our most dense market.
And.
And actually for a lot of our competitors. It's also their biggest market.
And cash we love building new stores in Chicago, I can't remember the exact number that we've built over the past few years, but we've added several of store two two.
The Chicago in the past few years and I wouldn't be surprised if we keep.
Adding them there. So that's an old very dense market, where we keep successfully adding new stores and to the market and and it's continuing to to thrive.
And similarly, I talk about the New York is a fairly new market. The New York Metro We got lots of stores to continue to build there.
That's a pretty new entry less and I think three years of since the entry into there and.
And so still plenty and plenty of white space. There also and I'd just add one other piece.
The only bid on network television for I think three years and and that that just helps us and all in all categories just build awareness of throughout throughout the country and reinforces the white space opportunity got Patrick Thank.
Thank you Reed.
Hey, Paul in terms of the exact split between optometrists and associate wages, we've not really provided that degree of detail. There's obviously, a whole lot more associates and the doctors and the way we're thinking about wage inflation, we have seen a couple of quarters, where the optometrist.
Kind of realized wage inflation has looked a little better.
I wouldn't say that we're expecting that to be a permanent trend.
Our doctors or a full component of the business and we would like to pay those folks for the great work that they do we do expect to see some continued low levels of wage inflation, there and then on the and we will feel that and gross margin. So that's part of the gross margin guide and then and SG&A.
We're aware of some states that are making some minimum wage moves and where we believe we are prepared for those and how we've set up our our labor matrices and plans for the year. So I think we've done a pretty good job of balancing those associate wage increases and haven't had to really point to those as big drivers on the P&L and we.
We expect to continue to do that.
At the local level.
And on your on your Walmart question and of course, we are now or is now celebrating our 30 <unk> year of partnership with Walmart and last year, we extended the contract again for another three years into and the 2024 of last year for the first time in over 25 years They gave us.
And some new stores and and turned over stores to us that they had been managing which was the first.
The first time debt has ever happened.
And so we took those over I think in June we started there and we're very encouraged by the initial results of the stores there were doing.
Great and up nicely and we still we still think there is the opportunity to build them. Even further so real happy with how those are going.
Thank you there is time for one more question. Our next question comes from the line of Dylan Carden with William Blair. Your line is open. Please go ahead.
Thank you very much for fitting me in here.
There's been a lot of Kathleen you've spoken to kind of the competition from the independent side, but theres been a lot of capital it feels like and the last year kind of flowing into the chain value and sort of same day next day segment is that something that you guys kind of anticipate when thinking about availability of doctors I mean, clearly the expanded store count and performance speaks for itself but.
Any comment on that would be appreciated and.
And then.
The the run that you've had with sort of the higher prices and context any sense of sort of how long that will continue to have a positive benefit and the model or does that normalize sort of in the coming years. Thank you.
Good.
On the.
The competition PCI the there.
Certainly are sort of some some.
And our Rollouts happening where people are trying to buy up independent pieces and private equity is very involved in our category, we do not see that as a primary factor in.
Our planning for a doctor recruitment at or having a big effect, there, but it's going on and we watch it and monitor it.
There and in terms of contact lens.
Pricing again this is primarily driven.
By doctors, saying to patients.
Here are a few different options for contact lenses that would work well for you here the the benefits of the different ones, and which which one would you like so it's sort of their newer technologies. They are higher priced and certainly our bread and butter contact lens buyers or are buying sort of.
And the low price because theyre very budget oriented, but we are seeing based on doctors.
<unk> of.
Options, and saying hey at the Salt.
And this solves your optical problem and better ways than your prior pizza and I Wouldnt.
And sort of expect that to continue over time and are encouraging and helpful way for us it's not something we drive it's medically driven.
But I bet if the trend.
Thank you and that does conclude our question and answer session and I would like to turn the conference back over to Mr. <unk> for any further remarks.
Thank you very much Michelle we'd like to thank you all for joining US This morning and for your continued interest and and support of National Vision. We look forward to speaking you again, when we report our.
Our fourth of our first quarter results later this.
And this year. So thank you very much and.
Talk to you all soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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