Q2 2021 National Vision Holdings Inc Earnings Call

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Good day and thank you for standing by welcome to the National Vision's second quarter 2021 earnings 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 will need to press star one on your telephone.

If you require any further assistance please press star zero.

I would now like to hand, today's conference over to your Speaker, Vice President of Investor Relations David Mann. Please go ahead.

Thank you and good morning, everyone and welcome to National Vision's second quarter 2021 earnings call. Joining me on the call today are Reade Fahs, 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.

<unk> 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 in the private Securities Litigation Reform Act of 1095. These statements are subject to risks and uncertainties that could cause actual results to.

Differ materially from our expectations and projections.

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 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 <unk>.

Slide two in today's presentation for additional information about forward looking statements and non-GAAP measures as a reminder, national vision expects to provide certain supplemental materials or presentations for them to 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, let's begin by thanking our national vision team for continuing to rise to the challenge due to our collective hard work dedication and commitment to patient care our results over the past year have been remarkable and for the first time in our company's history.

<unk>, our trailing 12 month net revenue surpassed $2 billion, turning to slide four and a summary of Q2 results as noted in our press release, our results they are being compared to the second quarter of fiscal 2019 due to the significant impact from the extended voluntary closure of our.

<unk> in the spring of 2020, we believe 2019 is more helpful basis for comparison as you read in our earnings release. This morning, we delivered exceptional top and bottom line performance in the second quarter net revenue increased 28% over the second quarter of 2019 with adjust.

Comparable store sales growth of 23, 5% over the same period. The top line strength was broad based and led by our growth brands America's Best and Eyeglass World with strength at our legacy legacy segment as well the.

The outsized growth that we've experienced over the last year is further evidence that covid has hastened the industry trend that we've been benefiting from for many years, we're confident that we're continuing to grow market share and believe that this should continue we opened 20 new stores during the quarter and ended with 1249.

Locations.

<unk> operating income increased 125% and adjusted EPS increased 163% to 48 cents, which established another record for our second quarter profit. Finally, we continue to progress in our ESG journey and published our first greenhouse gas inventory this way.

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Q2, quite simply exceeded our expectations, while the pandemic has clearly not over our year to date momentum gives us confidence to raise our full year outlook in a few minutes Patrick will take you through our Q2 results and our updated 2021 outlook in more detail turning to slide five.

As the chart shows our business has demonstrated remarkable consistency over the past two decades with 72 quarters of positive comparable store sales growth prior to our Covid closing with an instant returned to an even healthier comp performance since reopening in June last year. This results from a number of factors include.

<unk> being the value priced provider of a medical necessity.

Also industry trends continue to favor larger better capitalized value retailers like national vision. According to a leading industry source the market share of the top 10 optical retailers grew nearly 500 basis points last year to exceed 40% yet the optical industry remains highly fragmented and we're confident we have a <unk>.

Significant opportunity to continue to grow our market share.

Q2 started out strong and likely benefited from government stimulus checks as the quarter continued our business remained healthy in May and June as rising vaccination rates and increased mobility likely played a role in bringing more patients and customers back to stores. Our store teams remain focused on safely meeting this heightened demand.

For low cost eye exams glasses and contact lenses, we continue to believe that our safety first mindset and our rigorous safety protocols have resonated with patients and customers and have been a factor in our strong performance. During the pandemic. We are pleased with our momentum as we exited June with positive transaction trends compared to <unk>.

Last year's record performance in terms of Q3 in the second half. We expect this positive transaction trends to continue the back to school season has begun amidst the ongoing uncertainties of covid and its variants and while it's still quite early we have seen a ramp in back to school traffic that is more aligned with pre covid trends.

And then with 2020.

Shifting to slide six we see a path to continued growth and sustained market share gains based on the latest industry data. We believe that we were the second largest optical retailer by sales in North America last year and among the fastest growing.

Let me provide an update on our core growth initiatives and how we plan to maximize our opportunities and further strengthen our competitive advantages.

New stores remain a primary focus as we continue to see a sizable white space opportunity with the potential to nearly double our current total store footprint. We opened 45 stores year to date and are well on our way to open about 75 stores. In 2021, we currently have a solid pipeline of specific locations for this year.

And into 2022.

Our real estate team is executing well defined locations that fit the formula that's worked for us in the past, including sites to support our plan for a modest acceleration in eyeglass world openings next year due to their ongoing success.

We're fortunate to have two very attractive growth engines, and America's best and Eyeglass World. Both brands have achieved new highs during the pandemic. We're excited by the strong sales gains delivered across our store network at both newer and mature stores, notably at our highest volume locations. We saw a significant jump in the number of.

Stores with an annual net revenue exceeding $3 million, thus showing the potential of what our growth brand boxes can achieve.

Our strong performance this quarter and over the last year would not have been possible without the admirable hard work and commitment to patient care of our network of over 2200 up contrasts we continued to invest in our optometrist recruitment and retention programs to keep our high retention rates near record levels.

One program worth noting was the successful education symposium that we held for doctors in June we provided continuing education and networking opportunities to over 1500 participating Uptown Trust from our network. This is just another example of what makes us an ever more optimum optometric centered in up to metric friendly health care come.

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As you've heard me say before we are always seeking more outbound tourists at this time of year. We're excited to welcome newly graduated optometrists to the National Vision family and believe we are one of the top destinations for these new grads in terms of marketing we returned to a more typical level of spend this quarter marketing continues to be a key.

Factor in attracting customers and driving traffic to our stores our advertising investment in both TV and digital channels is consistent with our strategy to grow market share and maximize opportunities during the pandemic and beyond as a result, we are pleased to have acquired many new customers in Q2.

We believe the positive word of mouth from happy patients and customers continues to play a key role in driving comps that the combination of low prices and excellent customer service leads to satisfied repeat customers and positive word of mouth referrals. Additionally, we believe that our safety first approach and protocols have resonated with.

<unk> customers during the pandemic participation.

Participation in vision insurance programs remains a positive comp driver strong net revenue growth tied to these partnerships continued in the second quarter, we remain underdeveloped relative to the category and continue to see an ongoing opportunity here as managed care dollars and co pays tend to go further in our stores than elsewhere.

Regarding our supply chain. Our lab teams have continued to have definitely handle elevated eyeglass volumes. Our lab network is well positioned with the capacity in place to handle projected future needs and remains a key reason that we are a low cost provider.

Merchandise inventories are remain in a solid position. Despite the record sales trends our merchandise teams have worked hard in this environment to maintain inventory flows to date, we have not been impacted by any of the significant supply chain disruptions that are impacting other sectors.

In terms of our digital and omni channel initiatives, we continue to advance efforts to expand capacity to see patients as well as opportunities to improve engagement throughout the customer journey. Our efforts in remote medicine are continuing and we're pleased with the progress and the additional flexibility that remote exams provide.

Before I turn the call over to Patrick Let me say that we could not be more pleased with our Q2 performance in this environment results. Like these are due to the consistent execution and hard work of the entire national vision team their commitment to safety and patient care and customer service every day in every store one patient and one customer at a.

Time, I could not have more respect for how the team has risen to the many challenges of the pandemic.

Looking ahead, we appreciate that the environment remains volatile with growing risks of Covid variants and a potential uneven economic recovery given our consistent performance since reopening last year and our safety first approach we are confident in our ability to navigate the challenging and dynamic environment and remain in.

The position of strength now I will turn the call over to Patrick Thanks, Ray and good morning, everyone. I would also like to express my appreciation to the team for their enduring hard work and dedication their efforts over the last year has truly been remarkable we were extremely pleased with our second quarter sales and earnings.

Results as the business performed ahead of our expectations. Our performance was driven by positive traffic trends excellent store level execution and solid cost leverage. In addition, we continued to reinvest in the business to maximize our opportunity to grow share while significantly reducing our debt.

Yeah.

As a reminder, the comparability of our reported results was affected by the temporary store closures last year. Thus, we have shared results versus both 2020 and 2019 as Reade noted our comments today are being primarily made to 2019, which we believe is a more helpful comparison.

Now, let's turn to slide eight our Q2 results reflect the continued strong momentum in our business net revenue increased 28% over 2019 or a two year compound growth rate of over 13% the timing of unearned revenue was immaterial versus 2019.

During the quarter, we opened 18, new America's best stores and to our glass World stores and closed one store for a five 5% increase in store count for our America's Best and Eyeglass World growth brands combined unit growth increased seven 6% over the last 12 months.

Adjusted comparable store sales growth was up 23, 5% over 2019 and 76, 7% over 2020.

Shifting to unpack the components for Q2 same store sales growth over 2019, and 2020 was driven primarily by increases in customer transactions, we experienced higher transaction counts throughout the quarter, including June when we lap record opening results last year, the strong positive comp.

Were broad base for both eyeglasses and contact lenses and driven by increases in customer transactions.

Turning to margin highlights on slide nine as a percentage of net revenue cost applicable to revenue decreased 430 basis points versus 2019 or about 300 basis points ahead of our expectations. This decrease was driven by lower growth in optometry cost increased eyeglass.

Mix and higher eyeglass margin.

Adjusted SG&A expense percent of net revenue decreased 60 basis points compared to 2019. The key factors behind this decrease were the leverage of corporate overhead and occupancy expenses from the strong sales, which was partially offset by higher performance based incentive compensation and advertising.

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We were pleased with the leverage achieved this quarter, while continuing to reinvest in the business for growth.

Adjusted operating income increased 125% to $65.6 million and adjusted operating margin increased 510 basis points to 11, 9%. The increase in adjusted operating margin was driven by the strong comp leverage of fixed cost higher eyeglass mix.

And eyeglass margin and lower depreciation and amortization.

As a result of these factors we experienced another unusually strong quarter of flow through and are thrilled with our margin performance in Q2 and for the last four quarters.

Adjusted diluted EPS increased 163% to <unk> 48.

By all measures the company delivered another exceptional quarter.

Turning to slide 10 year to date as compared to 2019 net revenue increased nearly 22% to $1.1 billion with adjusted operating income of $133 million adjusted diluted EPS increased 96% to 97 per share which already.

<unk>, our adjusted EPS for all of 2020.

Now turning to slide 11, and our balance sheet at the end of the second quarter. Our total debt was $620 million and our cash balance was $408 million.

Net debt to adjusted EBITDA was six times or our lowest net leverage point as a public company.

Year to date, we invested $39 million in capital expenditures, primarily for new store and customer facing technology investments and continue to project 2021, Capex in the range of $100 million to $105 million.

With our updated outlook for top line growth and relatively stable Capex, we expect our 2021 capital intensity to decline to approximately 5% of net revenue a significant improvement over the past few years.

Turning to slide 12, given our performance and the resulting strong cash flows we repaid $117 million of term loan a debt in June also we amended our credit agreement to reduce the applicable margin for interest rates and also modifying certain financial covenants back to pre covid levels.

And as Reade noted Moody's upgraded our corporate credit rating to be <unk>. We are delighted with these improvements for our capital structure.

We continue to be in a very strong financial position with over $700 million of liquidity from our cash balances and available capacity from our revolver, we believe that our financial strength and our ability to invest remain a competitive advantage.

Turning now to our outlook on slides 13, and 14 today given the strength of our year to date performance. We are raising our fiscal 2021 outlook, while the operating and macro environment remain uncertain, our consistent performance over the last year gives us heightened confidence in our business.

Our outlook reflects the currently expected impacts related to Covid. However, we anticipate potential significant volatility driven by ongoing uncertainty related to the pandemic and variance.

The outlook currently assumes no material deterioration to the company's current business operations as a result of Covid government actions or regulations.

As a reminder, fiscal 2021 is comparing to the 53 week period in 2020 against the backdrop of what we know today, our 'twenty 'twenty one outlook now projects net revenue between $2.1 billion and $2.6 billion adjusted comparable store sales growth over last year in the range of 19.

<unk> to 22%.

Adjusted operating income between 180, and $187 million and adjusted diluted EPS between $8.28 to $1.33, assuming $96.3 million weighted average diluted shares.

Compared to 2019, the midpoint of our outlook represents a net revenue increase of nearly 18%.

And adjusted diluted EPS increase of 74%.

Our guidance reflects the flow through of the strong second quarter results as well as a slightly more positive view for the second half of the year than when we last spoke in May.

Our outlook now projects net revenue in the second half to be generally flat with last year due to significant grow over challenges and the 50 <unk> week benefit compared to 2019. This would represent growth in the mid to higher teens.

In terms of comps, we expect generally flattish comps in both the third and fourth quarters driven by continued positive transaction growth over time, we continue to expect the underlying level of heightened demand to further moderate.

Our outlook continues to project a decline in profitability in the second half as we lap the exceptional margin expansion in 2020, but would still represent a strong double digit increase in profitability compared to 2019.

For modeling purposes, we continue to expect the quarterly cadence of results to be more in line with 2019 with net revenue and profitability higher in Q3 than in Q4.

For full year 2021, as a percentage of net revenue, we expect cost applicable to revenue to decrease 140 to 160 basis points versus last year.

As a reminder, our record performance in the second half of 2020 benefited from product mix shifts and an elevated ticket that we expect to both normalize in the next two quarters with some expected cost pressure as well our outlook continues to assume tariffs on products that we import from China for Q3 cost.

To revenue are expected to increase about 190 to 210 basis points versus last year.

In terms of expenses, we would expect 2021 adjusted SG&A to increase between 80, and 100 basis points as a percentage of net revenue year over year. The SG&A increase primarily reflects higher performance based incentive compensation marketing spend that is projected to return to a more.

Normalized percentage of net revenue and higher levels of wage inflation against this backdrop, we will continue to tightly manage growth in corporate expenses.

As a result, we estimate an adjusted operating margin of approximately 9% at the midpoint of our guidance range or approximately 120 basis points above the 2020 level and approximately 240 basis points above 2019 to.

To assist with modeling we have also provided additional assumptions on depreciation and amortization interest and tax rates.

Lastly, we would remind everyone that unearned revenue recognition timing can affect our quarter to quarter comparisons we would expect the year over year change in unearned revenue in Q3 to be generally immaterial as always we have included an explanatory slide on unearned revenue in the appendix section of today's earnings presentation.

Really communicate the seven to 10 day accounting timing impact so that investors can always understand the underlying cash momentum of the business.

To summarize I would like to reiterate how pleased we are with our continued momentum in the first half of fiscal 2021, our Q2 performance exceeded our expectations and underscored the strength and resilience of our business model and our initiatives. We remain confident that we are well positioned to effectively navigate.

This evolving environment and continued to strengthen our business.

At this point I'll turn the call back to Reed.

Patrick turning to slide 15, and our moment of mission, we're continuing to live out our mission every day, both close to home and at a global scale. We're moving forward in our commitment to corporate responsibility internally by better aligning our governance with best practices. The management proposals approved at our June annual meeting.

And to do just that.

On an environmental front, our initial greenhouse gas inventory is an important first step in it in assessing our environmental impact and identifying viable goals for improvement you can access the inventory along with other information about our corporate responsibility efforts on the corporate responsibility page of the National vision website.

We're pleased with our several external unsolicited accolades that came our way in Q2 National Vision was included in Forbes 2021 list of America's Best employers for women and 50.50 women onboard bestowed top honors to us because we have a gender balance among our independent.

Board members and achievement only 6% of Russell 3000 index companies can claim big.

Big things are happening globally as well in July the United Nations General Assembly passed a resolution to include vision care for everyone in the Un's sustainable development goals, thus committing the international community to making eye care accessible to everyone by 2030.

There were $1.1 billion people living in the world.

With preventable vision problems National vision has the unique ability to support this fight to end the global vision crisis, and we are fully committed to do our part.

Finally, we're very proud of our eyeglass world team, they're made locally given globally program, which began just a few years ago. In 2019 has hit the milestone of surpassing 100000 eyeglass donations to people in need around the world via our partnership with restoring vision.

In summary, the key takeaway from today's call is this we have demonstrated the ability to operate and outperform amid pandemic conditions, we're growing market share in the recovering optical retail market and are benefiting from the hasting of trends that favorite national vision.

And we continue to believe we have a bigger opportunity beyond the pandemic 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 and as a reminder to ask a question simply press star one on your telephone to withdraw your question press the pound or hash key.

And we ask that you please limit your questions to one and one follow up.

Please standby, while we compile the Q&A roster.

Our first question is from Michael Lasser with UBS.

Good morning, Thanks, a lot for taking my question.

You're guiding to flattish comps for the third and fourth quarter yet.

There will be encouraging on the trends that you've been seeing quarter to date.

Reconcile what seems to be very conservative guidance.

The momentum in the business or are you factoring in that you're going to see a slowdown.

It's hard work.

The virus or some other factor.

Hey, good morning, it's Patrick.

We were pleased with our exit rate coming out of the quarter read made some incremental comments about seeing some degree of back to school. We certainly at this point just like where we were back in February in May we are taking a prudent and conservative posture Mike.

I think it's just part of the environment that we live in the.

The guide assumes some flattish comps in the third and fourth quarter.

Respectively, and you know what I would say is just to keep in mind that we are growing over.

11, and 12% comps coming off last year. So.

We were pleased with the exit rate.

We've got flattish comps, that's still going to be really nice looking on a two year stack.

But we are we are you know.

Continuing to be prudent and conservative based on the overall <unk>.

Environments.

We essentially also we're expecting to continue to see some mild.

Mild a ticket decline as it gets a little back more to normal trends, but we're also thinking that a new normal probably has a higher degree of blue light attachment. So there may be some lasting benefit on ticket that will play out as well.

Okay.

Follow up question is on your gross margin.

Four consecutive quarters.

Gross margin being above 56% why wouldn't that continue moving forward well.

Structurally changing about your business.

It's going to put it back to where it was prior to the pandemic.

Well, if we think about it there was there was benefit to ticket there was benefit to eyeglass mix, we're seeing those boats slowly moderate back towards normal levels not at all fully back there yet.

Across the last four quarters I agree its been exceptional margins, we've seen a little lower growth in optometrist cost.

We think that with with wage inflation, we could see that.

Either remain there or maybe returned closer to normalized levels we are.

We do expect margin and mix to normalize so you know I would.

We've put it in the same category of.

We are expecting to see some moderation across our ticket mix and we have baked that in as a as an area of being cautious.

Understood. Thank you so much.

Thank you. Our next question comes from Paul Lajoie with Citigroup.

Hey, Thank you guys.

Can you just come back to the transactions versus ticket size can can you talk about any differences between your two growth concepts and as you think about those those metrics versus 19.

And I think you mentioned just as a second question the supply chain no issues. I think you called out are you seeing any cost inflation on the product side and if so how you might be expecting to navigate that thanks guys.

Yeah, Yeah. So.

So we had an increase in transactions throughout the throughout Q2.

And positive and coming from both our growth brands. So that's been a.

Really encouraging and and yes, it's coming in in both in both ways and we expect that to continue.

And do you want to talk about the only on the inflation Paul We've got long term contracts in place across all of the major areas of our cost of sales. So those contracts are typically three to four years in nature.

We are not expecting or guiding towards any forms of inflation as it relates to gross margin in the guidance.

Haven't started talking about 2022, but again.

It's really nice to have long term partners in those key vendor relationships and benefit from long term contracts and and I think you said, it but but but.

Not seeing.

Major disruptions to our supply chain like many others are out there that we're under control there and our inventories are arguing didn't happen and I'll just add with the benefit from the business growth flow through cash flows where it made sense, Paul we pre purchased some things to make sure.

That we wouldn't be talking about our supply chain shocks either at the gross margin level or frankly in.

The core growth engine of our business, which is building and.

<unk> launching new stores. So we've we've tried to be well out in front of those curves right and kudos to our merchandise teams are just it's just a great planning there and our labs also are handling the elevated volumes and we feel that we have the capacity we need to handle the projected needs.

Got it. Thank you good luck guys.

Thanks.

Our next question comes from Simeon Gutman with Morgan Stanley.

Hey, guys. This is Michael Kessler on for Simeon. Thank you for taking my questions.

First I wanted to follow up on Michael's question on that.

Outlook for the back half I'm, just wondering if you could maybe even put a finer point on.

Your expectations and what you're already seeing some back to school, how that's built into your guidance anything from the child care tax credits and then just kind of bigger picture on the comp.

I guess, how you're viewing the way that the comp and the sales trends.

Progress through the year do you kind of view it as overconfident utility under Comping in any way and I guess, leading into next year is there any reason to think that based on the trends I know, there's a lot of puts and takes here that you wouldn't be able to necessarily compound on the kind of the.

The baseline that's being reestablished this year.

Why don't why don't I start there right. If there are things that you think would be an whitening feel free to jump in.

In terms of the second half.

Outlook, we kind of talked about those comps.

Flattish we commented earlier that we.

We have seen the beginnings of back to school ramp.

Looks somewhere in between 2019, but not nearly as flat as 'twenty was it's early we're in the comps.

Kind of southern state waves of back to school and and I think we've got weeks of that remaining before we can really pointed at it and say here's how we felt about back to school.

In terms of the child tax credit tax credit.

We are open to see benefit from that.

Can't really say that we are we have a comment there either way at this point, that's still very early as well usually any and all stimulus helps lower income Americans and we have generally benefited from that in the past.

You know in terms of the comp sales progression, it's still been kind of a whack a year or grow overs where are they.

They were strong.

Coming off the periods when we closed our stores. We were pleased that we saw positive transaction growth for the month of June June was when we reopened last year or two lines with people outside lines with people on websites lines with people on the phones.

It was just an extraordinary period of time for.

Serving customers and frankly doing so in a way and a brand new mode of execution. So we did see positive.

So positive transactions across June and again exit rate coming out of the quarter feel real good about it.

Great maybe just a quick follow up on you talked about a little bit about them.

<unk> pressures in the second half and into your expectation on the labor front.

I guess I guess, how has that evolved over the past quarter I would say maybe more on on the associate side, but also on the top armature side.

Has that been.

More of a pressure point than you expected, maybe going into the year a quarter ago.

And I guess, what you're seeing there would be helpful. Thank you I don't I don't think there's been any any surprises inside of the year we've seen.

We go to a bigger picture, we've seen some degree of modest wage inflation for our doctors.

We're happy to pay them competitive rights because they do a lot of work here for us and for patients.

That has moderated a bit across the last year.

And we've been happy to see that moderation, but we also understand that it's a supply demand equation in every market, it's not they're not ubiquitous supply demand.

Challenges for Optometrists that we do we do look at that at every market. So you know I would expect to see some degree of continued wage inflation there in terms of our associates it really.

It's a function of water states doing with minimum wages are either what are we doing relative to market changes. We have guided that we are not immune to wage inflation. We expect to see some of that is absolutely included in our guide.

So really more of the same we're expecting a little more associate inflation, which is in the guide.

But again in terms of our associates were remodeled.

I'd say that the thing you've got to.

Always keep in mind is are the national vision team regards ourselves as optical professionals and when we think about when.

Our store associates are thinking about their career, they're thinking about it relative to other optical firms, primarily they arent, saying gosh I Wonder I Wonder I wonder what I could make it the Amazon distribution center down the street.

Think of themselves as optical people and we.

And that's an important part.

All of the components.

Managing our labor.

Thank you guys.

Yeah.

Carmen next question. Our next question is from Saks seed them with Wells Fargo.

Hey, good morning guidance can you talk a bit more about the contribution of new versus existing customers and specifically with respect to the new customer gains have you seen any change in the mix of these customers relative to your legacy customers, particularly when you think about vision care versus cash pay.

Average ticket side, there are demographics any color there would be helpful.

Yes, Thank you Zack.

Experienced gains in both existing and new customers that are at our growth brands. Both both versus last year of course and versus 2019, we think we're getting our share of new customers that both are at both the eyeglass World and America's best Little higher growth in new customers at eyeglass.

World, but but frankly in Q2, the America's best growth in new customer. It was an improvement versus recent trend. So we think frankly, our investment in marketing is driving.

Growth in new customers.

Gotcha and for Patrick I, just want to make sure I heard the Q3 margin color correctly I think you said, you're expecting gross margin down roughly 200 basis points, and then SG&A deleverage of 100 basis points. So first of all I want to make sure that that's right and then second like this.

Would represent our fifth consecutive quarter of double digit EBIT margin performance I recommend I recognize the environment is a big driver here, but curious if you could talk to the long term sustainability of double digit margins in and how we should think about changing dynamics as we look to 2022.

Yes.

So to kind of clarify Q3 on the gross margin side, we're expecting a decrease in the 200, plus or minus basis point range and that's.

Our space a little bit on seasonality product mix as we said earlier about.

Moderation in Hum.

Ticket, we didn't specifically guide on Q.

Q3, SG&A, but you know the toggles there are going to be.

Leveraging of corporate expense, probably a little bit of wage inflation.

Advertising being back in normal ranges. So we didn't we didn't but we didn't guidance specifically on that.

I've been so pleased with what we've seen in the last year in terms of.

Revenue growth comp growth flow through and margin expansion and.

I have to reiterate theres been some rather exceptional circumstances that I think we've talked about 100 times, but we do expect to see some near term margin moderation that's baked into the guide.

You know, it's less so with the upper ends of the range, but you know looking ahead on the positive side I still think that there's.

Probably less industry capacity, which could be helpful. In terms of the comps and leverage.

We get productivity gains in our labs year in and year out.

We've seen some nice leveraging of Covid corporate overheads over the last year expect that to continue.

And then longer term.

We continue to expect some advertising leverage I think the.

Things that we're doing our best to work around or this wage inflation, which thus far.

Not had this signal huge implications there we've managed through that really well not expecting that to continue to.

The change to a large degree.

But it will be curious to see kind of how states play out so bottom line I think we've made great gains maybe not 100% of that is permanent.

So we will see a little moderation, but the management team here is keenly focused.

On growing margins and doing it in a smart way at the same time continuing to invest.

The business is strong today, and we want it to be strong in three years and five years and so even inside of that we will continue to make the right investments.

Got it appreciate the time.

Thank you. Our next question comes from Adrienne <unk> with Barclays.

Good morning, and congratulations on the solid quarter Reed. This is a longer term question about sort of the telehealth opportunity and the utilization and enhance scheduling.

I guess, it's a couple of fold.

Can you tell how many independents maybe has not made it through covid, maybe those optometrists are looking for a new home.

As a result of the pandemic.

Yeah, optometrist costs were well down or better to the better.

Patrick instead, I think so is that transitory or something of a more long term trend and then quickly for Patrick I know, it's tough to answer given all the volatility, but where should we think about the breakeven comp on fixed costs as we go into the kind of move away from it carried about that thank you very much.

Great Adrianne, we're trying to make sure I've I've covered the various.

Pieces there.

Let me start with that the industry data suggests that 2% to 3% of independent doctors closed their doors last year, not not to reopen and and other industry data suggest that.

<unk> closed hundreds historic as well.

And not to reopen I think some some some stores are.

Plasma reopened sometime but are they are in malls and that sort of thing. So there are less doors are out there.

And that's one of the we keep talking about the hasting of trends that have been benefiting us and that's another trend that's been hastened by by Covid again, I think that was part of a longer term trend that had been benefiting us for a while in terms of telemedicine. We do think there are.

<unk> in that area and we have a number of pilot programs are going on that has been that we've been encouraged with their progress and we believe that remote medicine, which we describe as a ah.

Ah patient sitting in our chair amidst all the fancy equipment that we have in our exam rooms with a doctor remotely.

Getting all the data and doing the exam, we believe that that should be able to be helpful to us in expanding capacity over time, and making our stores overall more more productive, helping helping with flexible scheduling and maybe some sundays and hard to say.

The locations and that sort of.

Thing so so that that those two pieces and then Patrick is going to cover a few more go ahead yeah.

Well lets say in more linear times, where we had good periods of growth growing over prior year good periods of growth.

That comp leverage point was probably in the four ish range for us I still think that's tough to give me give you a new updated figure that works now for this year good growth year growing over last year, rather exceptional second half so.

I'm going to probably pull up from.

Given.

Other than to say, we are certainly not linear over linear growth I do think it's important to mention that the guide reflects double digit growth, our topline and bottomline margins versus 2019.

So we do expect to continue to see really good growth over that period and.

Incrementally slightly more positive on the back half as I sit here today versus where we were a few months ago. So we have seen.

Proved our guide on the second half.

Based on the performance.

And so you have the business thus far this year.

Thank you very much well done.

Thank you.

Our next question comes from Anthony to comeback with loop capital markets.

Good morning, Thanks for taking my question and congrats on a really strong quarter as well.

Just two quick questions number.

Number one any update on on Walmart and that relationship those five.

Uh huh.

You converted and then second just any update in terms of.

Tom interest turnover trends. Thank you.

Yeah. Thank you Anthony So Walmart, we have a great relationship with Walmart, we have I think the fact 31st year. A reminder, we last year extended the contract for several more years and they gave us the first new stores that they've granted us in probably a decade.

Uh huh.

And and that's the story here and we're very encouraged by the results on those stores and we think we can still see some opportunity for even better results on those stores and so.

Great honored operate 230 stores inside of Walmart and our real place for that relationship.

Got it and then just on Thomas was trends our turnover trends.

We're still at near record highs on retention of doctors and it.

It can't deliver results like we delivered in Q2, if you don't have strong strong.

Doctor coverage accurate throughout so yeah that is that there's a good correlation there and yeah, but we're still at near record highs on retention.

Got it thank you.

Thank you Anthony.

And our next question comes from Robby <unk> with Bank of America Securities.

Oh, Hey, good morning, I just had a follow up question just on that.

Industry capacity and maybe what the competitors are doing can you give a little more color on.

So that 2% to 3% left is there is there an accelerating capacity from competition coming on.

Is there any kind of price competition going on Thats, starting up as you move into back to school and are you guys doing.

Can you give color on anything new you might be doing on the marketing side, specifically targeting keeping some of these customers that gotten over the last six months.

Yeah. So there's there's not a lot of new on the competitive front can not new on the price competition front yeah.

Past 20 years, it's been a competitive category there admirable competitors out there, but we seem to be able to navigate through that.

Consistently over time and aside from sort of less doors, we're not seeing any any big changes.

There again.

So there's a lot of times the Hastings.

<unk> trends.

Overall.

And in terms of new marketing to keep the new customers. Yes, we have strong CRM programs that we're always optimizing it and getting better at and we'd like to build long term relationships with our customers and we have a great variety of programs, which were the nice thing about CRM efforts as Theyre very quant.

A fireball you can figure out what works and we're always testing new approaches to get ever better at that but you know the best way to keep a new customer is making really happy with their experience save them money and have them leave the store knowing that they've got they've received a great value and great service and again I think that the results in.

Q2 show that we're doing that.

Got you and then just one quick follow up the you guys are not being impacted by supply chain disruptions or are you, saying relative to your industry. There are people within your industry that are been pretty impacted by disruptions in.

You guys are not or do you mean relative to other industries I think we were saying relative to other industries and <unk>.

Competitors don't really call it as much and talk about things like that so I don't I don't know what our competitors are may or may not be feeling in that area, but it's not an issue for us and the comment was based on there seems to be a lot of macro trends that we arent being affected by.

Got it that's really helpful. Congrats.

Thank you Ravi.

Our next question comes from Bob <unk> with Guggenheim.

Hi, Good morning, just two quick questions for me I think the first one I was like as you look to more of a normalization of trends a little bit.

Throughout the business I think one of the ones where you.

<unk> had some flexibility has been on the marketing expense line and I guess, just trying to understand how you are finding.

The right level through the pandemic and where we are today, just given how strong the businesses.

Do you think maybe you could pull.

Pulled back a little bit further given how much success, you've had or I'm just trying to understand how do you find that right level on the marketing side and I think the second question I have is as you continue the unit growth.

You talked a lot about labor and wage pressures I'm, just wondering if youre seeing any challenges in terms of staffing outside of the O. These hum and your store stocks.

So on the marketing level up.

Last year.

Sort of in the second half of the year, we pulled back on marketing just because of that drove the folks that were coming in so we did pull back we have.

<unk> been normalizing, our marketing spend and frankly this is a disruptive environment and we're trying to take advantage of this market opportunity to continue to gain share and expose new customers to our.

Our services and our value and I'd also say that the.

The great thing about the digital marketing World is there. There's just a lot of that a lot of things you can be testing and learning about and investing in the future.

That's where we're doing that to make sure that we're wherever optimizing and when you've got such successes. We've had it's a great time to make sure that it.

They're learning into so that that is what happened what is happening there in terms of staffing.

Challenges.

We're not we're not immune to the macro trends, but the impact to us on staffing challenges as a mild relative to what we're all sort of hearing about and reading about and much of retail and the service industry and again I think that relates to the fact that we are an environment of ethic.

Professionals to define themselves as optical professionals, who have there.

Make careers in optics and and there.

Given our success, we're considered a great and very secure place to have your optical career I mean with the nice thing about the growth that we've had it provides lots of opportunity for for career development here and I think a lot of people see that and say Wow I can really builder.

Career here the more stores you build the more district managers you need the more regional Vice presidents you need so the odds of promoting and getting promoted and growing a career here at <unk>.

Quite are quite strong.

Thank you.

Thank you.

Our last question comes from Stephanie Wissink with Jefferies.

Thank you good afternoon or excuse me good morning, everyone. I wanted to just follow up with two really quick tactical question I think Reed you mentioned that Youre marketing or Patrick you mentioned marketing spend in the back half is going to be consistent with historic levels. I'm wondering if you can just give us a sense of what historic levels, you're referencing and then similar question on the fourth.

I think you're guiding to flat comp I just wanted to verify that 13 week versus 13 week and doesn't take into account the 53rd week.

I'll take that one first stepping so yes that is true.

A true comp.

It's good to think about that 50, <unk> week as it relates to net revenue, but yes on the comp you're exactly right.

In terms of the my comment on marketing on.

Normalizing I would say back to those levels that we were seeing in across 2019, specifically, probably the second half of 2019 a percentage.

Percentage of revenue basis.

We monitor very closely what our competitors doing where are they spending how are they spending we have an incredible incredible degree of data analytics capabilities now Hum on the search side and you know we try our best to kind of titrate that to get it just right.

It is an advertising driven category. These are.

Not every three month purchases there.

Every year or two or even two and a half years.

So it remains a category where you know.

Marketing spend as part of the machine, we do look to leverage that over a longer term.

Okay. That's great and then just to double click on that really quickly.

If you think about your marketing effectiveness. It seems like your transactions just continue to rise every year.

You're finding that you are marketing is activating incremental new customers or is it frequency of visit maybe talk a little bit about connecting the transaction outperformance to the marketing activation.

It's much more new customer driven than frequency of visits.

R. R. R R.

Our customer base with very Patrick conscious so it's a purchase again, it's a medical necessity purchase it's it's not Oh, let me get the latest fashion at Fei <unk>.

My vision is going I need to be able to see and so and so.

The trigger and we want to be there and ready and top of mind when.

When that moment occurred yeah, there's still a lot of opportunity. We still think our brand awareness is not it's not what it should be there's just a lot of a lot of different opportunities there and we are planting season.

Very helpful. Thank you.

Okay.

Thank you and I would love to turn the call back to Repass for his final remarks.

Carmen. Thank thank you very much and I would like to once again, just congratulate the entire N V. I team results like this.

Just don't happen they require great execution, great patient care, great great customer care, and so kudos to all around there and we'd like to thank you all for joining US. This morning and for your continued interest in and support of National Vision, and we look forward to speaking to you again with our third quarter results in a few months. So thank you. Thank you all very.

Much.

Thank you and this concludes today's conference call. Thank you for your participation and you may now disconnect.

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Yes.

Good day, and thank you for standing by and welcome to the National Vision's second quarter 2021 earnings call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask a question during the session you will need to press star one on your telephone.

If you require any further assistance please press star zero.

I would now like to hand, today's conference over to your Speaker, Vice President of Investor Relations David Mann. Please go ahead.

Thank you and good morning, everyone welcome to National Vision's second quarter 2021 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.

<unk> 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 in the private Securities Litigation Reform Act of 1095. 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 release and today's presentation. Also includes certain non-GAAP measures reconciliation of these measures are included in our release and the supplemental <unk>.

Dentation, 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 provide certain supplemental materials or presentations for inter reference on the investors section of our website now let me turn the call over to Rick.

Okay.

Thank you David Good morning, everyone I'd like to thank you all for joining US today, let's begin by thanking our national vision team for continuing to rise to the challenge due to our collective hard work dedication and commitment to patient care our results over the past year have been remarkable and for the first time in our company's history Our trail.

12 month net revenue surpassed $2 billion.

Turning to slide four and a summary of Q2 results as noted in our press release, our results they are being compared to the second quarter of fiscal 2019 due to the significant impact from the extended voluntary closure of our operations in the spring of 2020. We believe 2019 is more helpful basis for comparison.

As you read in our earnings release. This morning, we delivered exceptional top and bottom line performance in the second quarter net revenue increased 28% over the second quarter of 2019 with adjusted comparable store sales growth of 23, 5% over the same period.

Top line strength was broad based and led by our growth brands America's Best and Eyeglass World with strength at our legacy legacy segment as well.

The outsized growth that we've experienced over the last year is further evidence that covid has hastened the industry trends that we've been benefiting from for many years, we're confident that we're continuing to grow market share and believe that this should continue we opened 20 new stores during the quarter and ended with 1249.

Occasions, adjusted operating income increased 125% and adjusted EPS increased to 163% to 48 cents, which established another record for our second quarter profit. Finally, we continue to progress in our ESG journey and published our first greenhouse gas.

Inventory this week Q2 quite simply exceeded our expectations, while the pandemic has clearly not over our year to date momentum gives us confidence to raise our full year outlook in a few minutes Patrick will take you through our Q2 results and our updated 2021 outlook in more detail.

Turning to slide five as the chart shows our business has demonstrated remarkable consistency over the past two decades with 72 quarters of positive comparable store sales growth prior to our Covid closing with an instant return to an even healthier comp performance since reopening in June last year.

This results from a number of factors, including being the value priced provider of a medical necessity.

Industry trends continue to favor larger better capitalized value retailers like national vision. According to a leading industry source the market share of the top 10 optical retailers grew nearly 500 basis points last year to exceed 40% yet the optical industry remains highly fragmented and we're confident we have a significant.

Second opportunity to continue to grow our market share.

Q2 started out strong and likely benefited from government stimulus checks as the quarter continued our business remained healthy in May and June as rising vaccination rates and increased mobility likely played a role in bringing more patients and customers back to stores. Our store teams remain focused on safely meeting this heightened.

<unk> for low cost eye exams glasses and contact lenses, we continue to believe that our safety first mindset and our rigorous safety protocols have resonated with patients and customers and have been a factor in our strong performance during the pandemic.

We are pleased with our momentum as we exited June with positive transaction trends compared to last year's record performance in terms of Q3 in the second half. We expect this positive transaction trends to continue the back to school season has begun amidst the ongoing uncertainties of covid and its variance and while it's still quite early.

We've seen a ramp in back to school traffic that is more aligned with pre Covid trends, then with 2020 ship.

Shifting to slide six we see a path to continued growth and sustained market share gains based on the latest industry data. We believe that we were the second largest optical retailer by sales in North America last year and among the fastest growing.

Let me provide an update on our core growth initiatives and how we plan to maximize our opportunities and further strengthen our competitive advantages.

New stores remain a primary focus as we continue to see a sizable white space opportunity with the potential to nearly double our current total store footprint. We opened 45 stores year to date and are well on our way to open about 75 stores. In 2021, we currently have a solid pipeline of specific locations for this year.

And into 2022, our real estate team is executing well defined locations that fit the formula that's worked for us in the past, including sites to support our plan for a modest acceleration in eyeglass world openings next year due to their ongoing success. We're fortunate to have two very attractive growth engines in America.

Best Ni glass World, both brands have achieved new highs during the pandemic. We're excited by the strong sales gains delivered across our store network at both newer and mature stores, notably at our highest volume locations. We saw a significant jump in the number of stores with an annual net revenue exceeding $3 million.

Thus showing the potential of what our growth brand boxes can achieve our strong performance this quarter and over the last year would not have been possible without the admirable hard work and commitment to patient care of our network of over 2200 up contracts, we continue to invest in our optometrist recruitment and retention programs to.

Keep our high retention rates near record levels. One program worth noting was the successful education symposium that we held for doctors in June we provided continuing education and networking opportunities to over 1500 participating optometrists from our network. This is just another example of what makes us an ever more often.

The metrics centered in Optum metric friendly health care company.

As you've heard me say before we are always seeking more optometrists at this time of year. We're excited to welcome newly graduated optometrists to the National Vision family and believe we are one of the top destinations for these new grads in terms of marketing we returned to a more typical level of spend this quarter marketing continues to be a key <unk>.

Factors in attracting customers and driving traffic to our stores our advertising investment in both TV and digital channels is consistent with our strategy to grow market share and maximize opportunities during the pandemic and beyond as a result, we are pleased to have acquired many new customers in Q2.

We believe the positive word of mouth from happy patients and customers continues to play a key role in driving comps that the combination of low prices and excellent customer service leads to satisfied repeat customers and positive word of mouth referrals. Additionally, we believe that our safety first approach and protocols have resonated with <unk>.

<unk> customers during the pandemic.

Participation in vision insurance programs remains a positive comp driver strong net revenue growth tied to these partnerships continued in the second quarter, we remain underdeveloped relative to the category and continued to see an ongoing opportunity here as managed care dollars and co pays tend to go further in our stores than elsewhere.

<unk>.

Regarding our supply chain. Our lab teams have continued to have definitely handle elevated eyeglass volumes. Our lab network is well positioned with the capacity in place to handle projected future needs and remains a key reason that we are a low cost provider.

Merchandise inventories are remain in a solid position. Despite the record sales trends our merchandise teams have worked hard in this environment to maintain inventory flows to date, we have not been impacted by any of the significant supply chain disruptions that are impacting other sectors.

In terms of our digital and omni channel initiatives, we continue to advance efforts to expand capacity to see patients as well as opportunities to improve engagement throughout the customer journey. Our efforts in remote medicine are continuing and we're pleased with the progress and the additional flexibility that remote exams provide.

Before I turn the call over to Patrick Let me say that we cannot be more pleased with our Q2 performance in this environment results. Like these are due to the consistent execution and hard work of the entire national vision team their commitment to safety and patient care and customer service every day in every store one patient and one customer at a.

Time, I could not have more respect for how the team has risen to the many challenges of the pandemic.

Looking ahead, we appreciate that the environment remains volatile with growing risks of Covid variants and a potential uneven economic recovery given our consistent performance since reopening last year and our safety first approach we are confident in our ability to navigate the challenging and dynamic environment and remain in.

The position of strength now I will turn the call over to Patrick Thanks, right and good morning, everyone. I would also like to express my appreciation to the team for their enduring hard work and dedication their efforts over the last year has truly been remarkable we were extremely pleased with our second quarter sales and earnings.

Results as the business performed ahead of our expectations. Our performance was driven by positive traffic trends excellent store level execution and solid cost leverage. In addition, we continued to reinvest in the business to maximize our opportunity to grow share while significantly reducing our debt.

Yes.

As a reminder, the comparability of our reported result was affected by the temporary store closures last year. Thus, we have shared results versus both 2020 and 2019 as Reade noted our comments today are being primarily made to 2019, which we believe is a more helpful comparison.

Now, let's turn to slide eight our Q2 results reflect the continued strong momentum in our business net revenue increased 28% over 2019 or a two year compound growth rate of over 13% the timing of unearned revenue was immaterial versus 2019.

During the quarter, we opened 18, new America's best stores.

Two our glass world stores and closed one store for a five 5% increase in store count for our America's Best and Eyeglass World growth brands combined unit growth increased seven 6% over the last 12 months.

Adjusted comparable store sales growth was up 23, 5% over 2019 and 76, 7% over 2020.

Shifting to unpack the components for Q2 same store sales growth over 2019, and 2020 was driven primarily by increases in customer transactions, we experienced higher transaction counts throughout the quarter, including June when we lap record opening results last year the strong positive.

<unk> were broad base for both eyeglasses and contact lenses and driven by increases in customer transactions.

Turning to margin highlights on slide nine as a percentage of net revenue cost applicable to revenue decreased 430 basis points versus 2019 or about 300 basis points ahead of our expectations. This decrease was driven by lower growth in optometry cost increased eyeglass.

Mix and higher eyeglass margin.

Adjusted SG&A expense percent of net revenue decreased 60 basis points compared to 2019. The key factors behind this decrease were the leverage of corporate overhead and occupancy expenses from the strong sales, which was partially offset by higher performance based incentive compensation and advertising.

<unk>.

We were pleased with the leverage achieved this quarter, while continuing to reinvest in the business for growth.

Adjusted operating income increased 125% to $65.6 million and adjusted operating margin increased 510 basis points to 11, 9%. The increase in adjusted operating margin was driven by the strong comp leverage of fixed cost higher eyeglass.

And eyeglass margin and lower depreciation and amortization.

As a result of these factors we experienced another unusually strong quarter in flow through and are thrilled with our margin performance in Q2 and for the last four quarters.

Adjusted diluted EPS increased 163% to <unk> 48.

By all measures the company delivered another exceptional quarter.

Turning to slide 10 year to date as compared to 2019 net revenue increased nearly 22% to $1.1 billion with adjusted operating income of $133 million adjusted diluted EPS increased 96% to 97 per share which already.

<unk>, our adjusted EPS for all of 2020.

Now turning to slide 11, and our balance sheet at the end of the second quarter. Our total debt was $620 million and our cash balance was $408 million net debt to adjusted EBITDA was six times or our lowest net leverage point as a public company.

Year to date, we invested $39 million in capital expenditures, primarily for new store and customer facing technology investments and continue to project 2021, Capex in the range of $100 million to $105 million.

With our updated outlook for top line growth and relatively stable Capex, we expect our 2021 capital intensity to decline to approximately 5% of net revenue a significant improvement over the past few years.

Turning to slide 12, given our performance and the resulting strong cash flows we repaid $117 million of term loan a debt in June also we amended our credit agreement to reduce the applicable margin for interest rates and also monetize certain financial covenants back to pre covid levels.

And as Reade noted Moody's upgraded our corporate credit rating to be <unk>. We are delighted with these improvements for our capital structure.

We continue to be in a very strong financial position with over $700 million of liquidity from our cash balances and available capacity from our revolver, we believe that our financial strength and our ability to invest remain a competitive advantage.

Turning now to our outlook on slides 13, and 14 today given the strength of our year to date performance. We are raising our fiscal 2021 outlook, while the operating and macro environment remain uncertain, our consistent performance over the last year gives us heightened confidence in our business.

Our outlook reflects the currently expected impacts related to Covid. However, we anticipate potential significant volatility driven by ongoing uncertainty related to the pandemic and barriers.

The outlook currently assumes no material deterioration to the company's current business operations as a result of Covid government actions or regulations.

As a reminder, fiscal 2021 is comparing to the 53 week period in 2020 against the backdrop of what we know today, our 'twenty 'twenty one outlook now projects net revenue between $2.1 billion and $2.6 billion adjusted comparable store sales growth over last year in the range of 19.

<unk> to 22%.

Adjusted operating income between 180, and $187 million and adjusted diluted EPS between $1.28 to $8.33, assuming $96.3 million weighted average diluted shares.

Compared to 2019, the midpoint of our outlook represents a net revenue increase of nearly 18%.

And adjusted diluted EPS increase of 74%.

Our guidance reflects the flow through of the strong second quarter results as well as a slightly more positive view for the second half of the year than when we last spoke in May.

Our outlook now project net revenue in the second half to be generally flat with last year due to significant grow over challenges and the 50 <unk> week benefit compared to 2019. This would represent growth in the mid to higher teens.

In terms of comps, we expect generally flattish comps in both the third and fourth quarters driven by continued positive transaction growth over time, we continue to expect the underlying level of heightened demand to further moderate.

Our outlook continues to project a decline in profitability in the second half as we lap the exceptional margin expansion in 2020, but would still represent a strong double digit increase in profitability compared to 2019.

For modeling purposes, we continue to expect the quarterly cadence of results to be more in line with 2019 with net revenue and profitability higher in Q3 than in Q4.

For full year 2021, as a percentage of net revenue, we expect cost applicable to revenue to decrease 140 to 160 basis points versus last year.

As a reminder, our record performance in the second half of 2020 benefited from product mix shifts and an elevated ticket that we expect to both normalize in the next two quarters with some expected cost pressure as well our outlook continues to assume tariffs on products that we import from China for Q3 cost.

To revenue are expected to increase about 190 to 210 basis points versus last year.

In terms of expenses, we would expect 2021 adjusted SG&A to increase between 80, and 100 basis points as a percentage of net revenue year over year. The SG&A increase primarily reflects higher performance based incentive compensation marketing spend that is projected to return to a more.

<unk> percent of net revenue and higher levels of wage inflation against this backdrop, we will continue to tightly manage growth in corporate expenses.

As a result, we estimate an adjusted operating margin of approximately 9% at the midpoint of our guidance range or approximately 120 basis points above the 2020 level and approximately 240 basis points above 2019.

To assist with modeling we have also provided additional assumptions on depreciation and amortization interest and tax rates.

Lastly, we would remind everyone that unearned revenue recognition timing can affect our quarter to quarter comparisons we would expect the year over year change in unearned revenue in Q3 to be generally immaterial as always we have included an explanatory slide on unearned revenue in the appendix section of today's earnings presentation.

Clearly communicate the seven to 10 day accounting timing impact so that investors can always understand the underlying cash momentum of the business.

To summarize I would like to reiterate how pleased we are with our continued momentum in the first half of fiscal 2021, our Q2 performance exceeded our expectations and underscored the strength and resilience of our business model and our initiatives. We remain confident that we are well positioned to effectively navigate.

This evolving environment and continued to strengthen our business.

At this point I will turn the call back to Reed. Thank you Patrick turning to slide 15, and our moment of mission, we're continuing to live out our mission every day, both close to home and as a global scale. We're moving forward in our commitment to corporate responsibility internally by better aligning our governance with best practices.

The management proposals approved at our June annual meeting do just that.

On an environmental front, our initial greenhouse gas inventory is an important first step in assessing our environmental impact and identifying viable goals for improvement you can access the inventory along with other information about our corporate responsibility efforts on the corporate responsibility page of the National vision website.

We're pleased with our several external unsolicited accolades that came our way in Q2 National Vision was included in Forbes 2021 list of America's Best employers for women and 50.50 women onboard bestowed top honors to us because we have a gender balance among our independent.

Board members and achievement only 6% of Russell 3000 index companies can claim big.

Big things are happening globally as well in July the United Nations General Assembly passed a resolution to include vision care for everyone in the UN sustainable development goals, thus committing the international community to making eyecare accessible to everyone by 2030, there were $1 one bill.

People living in the World.

With preventable vision problems National vision has the unique ability to support this fight to end the global vision crisis, and we are fully committed to do our part.

Finally, we're very proud of our eyeglass world team Theyre made locally given globally program, which began just a few years ago. In 2019 has hit the milestone of surpassing 100000 eyeglass donations to people in need around the world via our partnership with restoring vision.

In summary, the key takeaway from today's call is this we have demonstrated the ability to operate and outperform amid pandemic conditions, we're growing market share in the recovering optical retail market and are benefiting from the hasting of trends that favor national vision and we continue to believe we have a bigger opportunity beyond depend.

Mick.

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 and as a reminder to ask a question simply press star one on your telephone to withdraw your question press the pound or hash scheme.

And we ask that you please limit your questions to one and one follow up.

Please standby, while we compile the Q&A roster.

Our first question is from Michael Lasser with UBS.

Good morning, Thanks, a lot for taking my question.

You're guiding to flattish comps for the third and fourth quarter yet.

It sounds fairly encouraging on the trends that you've been seeing quarter to date.

Reconcile what seems to be very conservative guidance.

The momentum in the business are you factoring in that you're going to see a slowdown in Calgary.

The virus with some other factors.

Hey, good morning, it's Patrick.

We were pleased with our exit rate coming out of the quarter read made some incremental comments about seeing some degree of back to school.

We certainly at this point just like where we were back in February in May we are taking a prudent and conservative posture.

Michael I think it's just part of the environment that we live in the.

The guide assumes some flattish comps in the third and fourth quarter.

Respectively.

I would say is just to keep in mind, we are growing over.

11% and 12% comps coming off last year. So.

We were pleased with the exit rate.

We've got flattish comps, that's still going to be really nice looking on a two year stack.

But we are we are.

Continuing to be prudent and conservative based on the overall environment.

We essentially also we're expecting to continue to see some more.

Mild ticket decline as it gets a little back more to normal trends, but.

We're also thinking that a new normal probably has a higher degree of blue light attachment. So there may be some lasting benefit on ticket that will play out as well.

Okay.

Follow up question is on your gross margin you've now had four consecutive quarters.

Gross margin being above 56% why wouldn't that continue moving forward.

Structurally changing about your business.

It's going to put it back to where it was prior to the pandemic.

Well, if we think about it there was there was benefit to ticket there was benefit to eyeglass mix, we're seeing those boats slowly moderate back towards normal levels not at all fully back there yet.

Across the last four quarters I agree its been exceptional margins, we've seen a little lower growth in optometrist cost.

We think that with with wage inflation, we could see that.

Either remain there or maybe returned closer to normalized levels we.

We do expect margin and mix to normalize.

So.

I would put it in the same category of we are expecting to see some moderation across ticket mix and we have baked that in as a as an area of being cautious.

Understood. Thank you so much.

Thank you. Our next question comes from Paul <unk> with Citigroup.

Hey, Thank you guys can.

Can you just come back to the transactions versus ticket size can can you talk about any differences between your two growth concepts and as you think about those those metrics versus 19, and then I think you mentioned.

Second question the supply chain no issues I think you called out are you seeing any cost inflation on the product side and if so.

How you might be expecting to navigate that thanks guys.

Okay.

Yes so.

So we've had an increase in transactions throughout the throughout Q2.

Positive and coming from both our growth brands. So that's been.

Really encouraging.

And yes, it's coming in both in both ways.

We expect that to continue.

And do you want to talk about the only one.

The inflation, Paul we've got long term contracts in place across all of the major areas of our cost of sales. So those contracts are typically three to four years in nature.

We are not expecting or guiding towards any forms of inflation as it relates to gross margin in the guidance.

Haven't started talking about 2022, but again, it's it's really nice to have long term partners in those key vendor relationships and benefit from long term contracts.

And I think you said, it but but but we are not seeing.

Yeah.

Major disruptions to our supply chain like many others are out there that we're under control there and our inventories are good and healthy and I'll just add with the benefit from the business growth flow through cash flows.

Where it made sense.

We pre purchased some things to make sure that we wouldn't be talking about supply chain shocks either at the gross margin level or frankly in.

The core growth engine of our business, which is building and.

Launching new stores.

We've tried to be well out in front of those curves right and kudos to our merchandise teams are just great planning there and our labs also are are handling the elevated volumes and we feel that we have the capacity we need to handle the projected needs.

Got it. Thank you good luck guys.

Thanks.

Our next question comes from Simeon Gutman with Morgan Stanley.

Hey, guys. This is Michael Kessler on for Simeon. Thank you for taking my questions.

So first I wanted to follow up on Michael's question on the outlook for the back half I'm. Just wondering if you could maybe even put a finer point on your.

Your expectations and what you're already seeing for back to school, how that's built into your guidance anything from the child care tax credits and then just kind of bigger picture on the comp.

I guess, how you're viewing the way that the comp and the sales trends.

Progress through the year do you view it as over comp. Thank you feel under Comping in any way and I guess, leading into next year is there any reason to think that based on the trends I know, there's a lot of puts and takes here that you wouldn't be able to necessarily compound on the kind of the baseline that's being reestablished this year.

Why don't why don't I start there right. If there are things that you think would be enlightening feel free to jump in.

<unk>.

In terms of the second half.

The outlook is.

<unk> talked about those comps.

Flattish we commented earlier that.

We haven't seen the beginnings of back to school ramp.

Look somewhere in between 2019, but not nearly as flat as 'twenty was it's early we're in the.

Kind of southern state waves of back to school and and I think we've got the weeks of that remaining before we can really pointed at it and say here's how we felt about back to school.

Terms of the child tax credit tax credit, we we are open to see benefit from that.

Can't really say that we.

We have a comment there either way at this point, that's still very early as well usually any and all stimulus helps lower income Americans and we have generally benefited from that in the past.

In terms of the comp sales progression, it's still been kind of a whack a year or grow overs, where they.

They were strong.

Coming off of periods. When we closed our stores. We were pleased that we saw positive transaction growth for the month of June June was when we reopened last year two lines with people outside lines with people on websites lines of people on the phones.

It was just an extraordinary period of time for serving customers and frankly doing so in a way and a brand new mode of execution. So we did see positive.

We saw positive transactions across June and again exit rate coming out of the quarter feel real good about it.

Great maybe just a quick follow up on you talked about a little bit about them.

<unk> pressures in the second half and into your expectation on the labor front.

I guess I guess, how has that evolved over the past quarter I would say maybe more on the associate side, but also on the top armature side has that.

Been more of a pressure point that you expect that maybe going into the year a quarter ago.

And I guess, what Youre seeing there would be helpful. Thank you I don't think theres been any any.

Any surprises inside of the year we've seen.

We go to a bigger picture, we've seen some degree of modest wage inflation for our doctors.

We're happy to pay them competitive rights because they do a lot of work here for us and for patients.

That has moderated a bit across the last year.

And we've been happy to see that moderation, but we also understand that it's a supply demand equation in every market, it's not they're not ubiquitous supply demand.

Challenges for Optometrists that we do we do look at that at every market. So I would expect to see some degree of continued wage inflation. There in terms of our associates. It really is.

It's a function of water states doing with minimum wages are either what are we doing relative to market changes. We have guided that we are not immune to wage inflation. We expect to see some of that is absolutely included in our guide.

So really more of the same we're expecting a little more associated inflation, which is in the guide.

But again in terms of our associates will rebound.

What I'd say the thing <unk> got.

Always keep in mind is are the national vision team regards ourselves as optical professionals and when we think about when.

Our store associates are thinking about their career they are thinking about it relative to other optical firms, primarily they arent, saying gosh I Wonder I Wonder I wonder what I could make it the Amazon distribution center down the street.

They think of themselves as optical people and we.

And that's an important part.

All of the components.

Managing our labor.

Thank you guys.

Carmen next question our next.

<unk> is from Zach <unk> with Wells Fargo.

Hey, good morning guidance can you talk a bit more about the contribution of new versus existing customers and specifically with respect to the new customer gains are you seeing any change in the mix of these customers relative to your legacy customers, particularly when you think about vision care versus cash.

Average ticket side, there are demographics any color there would be helpful.

Yes, Thank you Zack.

Experienced gains in both existing and new customers that at our growth brands, both both versus last year of course and versus 2019.

We think we're getting our share of new customers that both are at both the eyeglass World and America's best Little higher growth in new customer that eyeglass world, but.

But frankly in Q2 of the America's best growth in new customer it was an improvement versus <unk>.

Our recent trend so we think frankly, our investment in marketing is driving.

And new customers.

Gotcha and for Patrick I, just want to make sure I heard the Q3 margin color correctly I think you said, you're expecting gross margin down roughly 200 basis points in the next G&A deleverage of 100 basis points. So first of all I want to make sure that that's right and then second like this.

This would represent our fifth consecutive quarter of double digit EBIT margin performance I recommend I recognize the environment is a big driver here, but curious if you could talk to the long term sustainability.

Double digit margins and how we should think about changing dynamics as we look to 2022.

Yes.

So to kind of clarify Q3 on the gross margin side, we're expecting a decrease in the 200, plus or minus basis point range and Thats.

Let's face a little bit on seasonality product mix as we said earlier about.

Moderation in.

Hum.

On ticket.

We didn't specifically guide on Q3, SG&A, but the toggles there are going to be.

Leveraging of corporate expense, probably a little bit of wage inflation.

Advertising being back in normal ranges. So we didn't we didn't but we didn't guidance specifically on that.

Yeah.

I've been so pleased with what we've seen in the last year in terms of revenue growth comp growth flow through and margin expansion and.

I have to reiterate there have been some.

Rather exceptional circumstances that I think we've talked about 100 times, we do expect to see some near term margin moderation that's baked into the guide.

It's less so at the upper ends of the range.

But.

Looking ahead on the positive side I still think that there is.

Probably less industry capacity, which could be helpful. In terms of the comps and leverage.

We get productivity gains in our labs year in and year out.

We've seen some nice leveraging of corporate overheads over the last year expect that to continue.

And then longer term.

We continue to expect some advertising leverage I think.

The things that we're doing our best to work around or this wage inflation, which thus far.

Not had this signal huge implications there we've managed through that really well not expecting that to continue to.

To change to a large degree.

But it will be curious to see kind of how states play out.

So bottom line I think we've made great gains maybe not 100% of that is permanent.

So we will see a little moderation, but the management team here is keenly focused.

On growing margins and doing it in a smart way at the same time continuing to invest.

The business is strong today, we wanted to be strong in three years and five years and so even inside of that we will continue to make the right investments.

Got it appreciate the time.

Thank you. Our next question comes from Adrienne <unk> with Barclays.

Good morning, and congratulations on the solid quarter Reed this is.

Longer term question about sort of the telehealth opportunity and the utilization and exam scheduling.

I guess, it's a couple of fold.

Can you tell how many independents maybe has not made it through covid, maybe those optometrists are looking for a new home.

As a result of the pandemic and then yeah, optometrist costs were well down or better to the better.

Patrick had said I think so is that transitory or something of a more long term trend and then quickly for Patrick I know, it's tough to answer given all the volatility, but where should we think about the breakeven comp on fixed costs as we go into the kind of move away from that period about now thank you very much.

Great Adrianne, we're trying to make sure I've covered the various.

Keith is there.

Let me start with that the industry data suggests that 2% to 3% of independent doctors closed their doors last year not not.

Not to reopen and and other industry data suggest that <unk>.

<unk> closed hundreds of historic as well.

And not to reopen and I think some some some stores.

Glad to reopen sometime but they are in malls and that sort of thing. So there are less.

Doors are out there.

And.

And that's one of the we keep talking about the pacing of trends that have been benefiting us and thats. Another trend that's been hastened by by Covid again, I think that was part of a longer term trend that had been benefiting us for a while.

Telemedicine, we do think there are opportunities in that area and we have a number of pilot programs going on that has been that we've been encouraged with their progress and we believe that remote medicine, which we describe as a.

A patient sitting in our chair I missed all the fancy equipment that we have in our exam rooms.

A doctor remotely.

Getting all the data and doing the exam, we believe that that should be able to be helpful to us in expanding capacity over time, and making our stores overall more more productive, helping helping with flexible scheduling and maybe some sundays and hard to fill.

Locations and that sort of.

Thing so so that.

Those two pieces and then Patrick is going to cover a few more go ahead yeah.

So lets say in more linear times, where we've had good periods of growth growing over prior year good periods of growth.

That comp leverage point was probably in the four ish range for us I still think that's tough to give me give you a new updated figure that works now for this year good growth year growing over last year, rather exceptional second half so.

I'm going to probably pull up from.

Given.

Other than to say, we are certainly not linear over linear growth I do think it's important to mention that the guide reflects double digit growth, our top and bottom line margins versus 2019.

So we do expect to continue to see really good growth over that period and.

Incrementally slightly more positive on the back half as I sit here today versus where we were a few months ago. So we have <unk>.

Improved our guide on the second half.

On the performance.

So you have the business thus far this year.

Thank you very much well done.

Thank you.

Our next question comes from Anthony to comeback with loop capital markets.

Good morning, Thanks for taking my question Congrats on a really strong quarter as well.

Just two quick questions.

Number one any update on on Walmart and that relationship those five.

In terms of.

That you converted and then second just any update in terms of.

Optometrist.

Turnover trends thank you.

Yeah. Thank you Anthony so Walmart we have.

Relationship with Walmart right.

The fact, 31st year. A reminder, we last year extended the contract for several more years and they gave us the first new stores that they've granted us in probably a decade.

Sure.

And and.

And that's the story.

We're very encouraged by the results.

Those stores and we think we can still see some opportunity for even better results on those stores and so.

Great honored operate.

130 stores inside of Walmart and our we're just really pleased for that relationship.

Got it and then just optometry trends our turnover trends, we're still at near record highs on retention of doctors and.

You can't deliver results like we delivered in Q2, if you don't have strong strong.

Doctor coverage accurate throughout so yes that is there's a good correlation there and yes.

Still near record highs on retention.

Got it thank you.

Thank you Anthony.

And our next question comes from Robbie <unk> with Bank of America Securities.

Oh, Hey, good morning, I just had a follow up question really just on the.

Industry capacity and maybe what the competitors are doing can you give a little more color on.

So that 2% to 3% left is there is there an accelerating capacity from competition coming on.

Is there any kind of price competition going on Thats, starting up as you move into back to school and are you guys doing can you give color on anything new you might be doing on the marketing side, specifically targeting keeping some of these customers that you've gotten over the last six months.

Yeah.

So there's not a lot of new on the competitive front can not new on the price.

Petition front.

The past 20 years, it's been a competitive category there admirable competitors out there, but we seem to be able to navigate through that.

Consistently over time and aside from sort of less doors, we're not seeing any any big changes.

There again.

We've said it a lot of times the hasting of trends.

Overall.

And in terms of new marketing to keep the new customers. Yes, we have strong CRM programs that we're always optimizing it and getting better at.

We'd like to build long term relationships with our customers and we have a great variety of programs, which were the nice thing about CRM efforts as Theyre very quantifiable you can figure out what works and we're always testing new.

New approaches to get ever better at that but the best way to keep a new customer is making really happy with their experience save them money and have them leave the store knowing that they've got they've received a great value and great service and again I think that the results in Q2 show that we're doing that.

Got you and then just one quick follow up the you guys are not being impacted by supply chain disruptions or are you, saying relative to your industry. There are people within your industry that are been pretty impacted by disruptions.

Or not or do you mean relative to other industries I think we are saying relative to other industries.

Our competitors don't really call as much and talk about things like that so I don't I don't know what our competitors are may or may not be feeling in that area, but it's not an issue for us and the comment was based on there seems to be a lot of macro trends that we arent being affected by.

Got it that's really helpful. Congrats.

Thank you Ravi.

Our next question comes from Bob <unk> with Guggenheim.

Hi, good morning.

Two quick questions for me I think the first one is as you look to more of a normalization of trends a little bit.

Throughout the business I think one of the ones where you've had.

<unk> had some flexibility has been on the marketing expense line and I guess, just trying to understand how you are finding.

The right level through the pandemic and where we are today, just given how strong the businesses.

Do you think maybe you could pull.

Pull back a little bit further given how much success, you've had or I'm just trying to understand how do you find that right level on the marketing side and I think the second question I have is as you continue the unit growth.

You talked a lot about labor and wage pressures I'm, just wondering if youre seeing any challenges in terms of staffing outside of the <unk> and your stores. Thanks.

So on the marketing level up.

Last year.

Sort of in the second half of the year, we pulled back on marketing just because of that drove the folks that were coming in so we did pull back we have.

<unk> been normalizing, our marketing spend and frankly this is a disruptive environment and we're trying to take advantage of this market opportunity to continue to gain share and expose new customers to our.

To our services and our value and I'd also say that the.

The great thing about the digital marketing World is there's just a lot of that a lot of things you can be testing and learning about and investing in for the future and we're doing that through we're doing that to make sure that we're wherever optimizing when you've got such successes. We've had it's a great time to make sure that they get their learning into.

So that's that is what happened what is happening there in terms of staffing.

Challenges.

We're not we're not immune to macro trends, but the impact to us on staffing challenges.

A mild relative to what we're all sort of hearing about and reading about and much of retail and the service industry and again I think that relates to the fact that we are an environment of optical professionals to define themselves as optical professionals, who have there.

Make careers in optics and <unk>.

Given our success were considered.

A great and very secure place to heavier optical career I mean, the nice thing about the growth that we've had it provides lots of opportunity for.

For career development here and I think a lot of people see that and say Wow I can really build a career here the more stores you build the more district managers you need the more regional Vice President you need so the odds are promoting and getting promoted and growing a career here are quite are quite strong.

Thank you.

Thank you.

Our last question comes from Stephanie Wissink with Jefferies.

Thank you good afternoon, or excuse me good morning, everyone.

I wanted to just follow up with two really quick tactical question I think Reed you mentioned that Youre marketing or Patrick you mentioned marketing spend in the back half is going to be consistent with historic levels. I'm wondering if you can just give us a sense of what historic levels, you're referencing and then similar question on the fourth quarter I think you're guiding to flat comp I just wanted to verify that 13.

Week versus 13 week and doesn't take into account the 50 <unk> week.

I'll take that one first stepping so yes that is.

True comp.

It's good to think about that 50, <unk> week as it relates to net revenue, but yes on the comp Youre exactly right.

In terms of my comment on marketing.

Normalizing I would say back to those levels that we were seeing in across 2019, specifically, probably the second half of 2019.

On a percentage of revenue basis.

We monitor very closely what our competitors doing where are they spending how are they spending we have an incredible incredible degree of data analytics capabilities now.

<unk>.

The search side and we try our best to kind of titrate that to get it just right. It is an advertising driven category. These are.

Not every three months purchases there.

Every year or two or even two and a half years.

So it remains a category where.

Marketing spend as part of the machine, we do look to leverage that over a longer term.

Okay. That's great and then just to double click on that really quickly.

If you think about your marketing effectiveness. It seems like your transactions does continue to rise every year.

Finding that Youre marketing is activating incremental new customers or is it frequency of visit maybe talk a little bit about connecting the transaction outperformance to the marketing activation.

It's much more new customer driven than frequency of visit.

R R.

Our customer base will carry better contracts. So it's a purchase again, it's a medical necessity purchase it's it's not Oh, let me get the latest fashion at Fe, My vision is going I need to be able to see.

And so and so.

That's the trigger and we want to be there and ready and top of mind when.

When that moment occurred.

So a lot of opportunity we still think our brand awareness is not is not what it should be there's just a lot of a lot of different opportunities there and we plan to see that.

Very helpful. Thank you.

Thank you and I would love to turn the call back to Repass for his final remarks.

Carmen. Thank thank you very much and I would like to once again, just congratulate the entire MDI team results like this just don't happen they require.

Great execution, great patient care, great, great customer care, and so kudos all around there and we'd like to thank you all for joining US. This morning and for your continued interest in and support of National Vision, and we look forward to speaking to you again with our third quarter results in a few months. So thank you. Thank you all very much.

Thank you and this concludes today's conference call. Thank you for your participation and you may now disconnect.