Q3 2021 National Vision Holdings Inc Earnings Call

November 10, 2021

Okay.

Yeah.

Good day, and thank you for standing by welcome to the National Vision's third quarter fiscal year 2021 financial results Conference call. At this time I'll just pits are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press.

The star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, David Mann, Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone welcome to National Vision's third quarter 2021 earnings call. Joining me on the call today are Reade Fahs, Chief Executive Officer, and Patrick Moore.

<unk> financial officer.

Our earnings release issued this morning, and the presentation, which will be referenced during the call are both available on the investors section of our website national vision Dot com and a replay of the audio webcast will be archived on the investors page. After the call before we begin let me remind you that our earnings materials and today's presentation include forward looking statements as define.

And 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 there really.

And today's presentation also includes certain non-GAAP measures reconciliation of these measures are included in our release and the supplemental presentation. We also would like to draw your attention to slide two in today's presentation for additional information about forward looking statements and non-GAAP measures as a reminder, national vision expects to provide certain supplement.

Materials or presentations for Investor reference on the investors section of our website now let me turn the call over to Reed.

Thank you David and good morning, everyone I'd like to thank you all for joining US today, let me begin by sharing my heartfelt appreciation to the entire national vision team for their continued hard work and commitment to serve our patients and customers with a safety first approach during these ever challenging times.

Turning to slide four and a summary of Q3 results as noted in today's press release, our results are as in our Q2 release being compared to the third quarter of fiscal 2019 due to the significant recovery. Following the reopening of our stores last year. We believe that 2019 is the most helpful basis for comparison.

We're pleased to deliver another quarter of consistent performance net revenue increased nearly 20% over the third quarter of 2019 with adjusted comparable store sales growth of 13, 3% over the same period. The topline strength continues to be led by our growth brands America's best and Eyeglass World.

We opened 14, new stores during the quarter and ended with 1262 locations adjusted operating income increased 110% and adjusted EPS increased 134% to 38 cents.

Subsequent to quarter end, we announced the following significant developments, we released our first corporate responsibility report as we continued to progress in our E. S. T. Journey also we paid down $50 million in debt this week and announced a new $50 million share repurchase program overall, our third quarter results were.

The consistent strength and durability of our business model finally in today's earnings release, we tightened our 2021 outlook in a few minutes Patrick will take you through our Q3 results and updated outlook in more detail.

Turning to slide five as the chart shows our business has demonstrated a track record for consistency over the past two decades with 72 quarters of positive comparable store sales growth prior to our Covid clothing, followed by strong comp performance since reopening last year, we're fortunate to be the low cost provider of a medical necessity.

Our consistency also highlights the benefits of operating in it in an attractive industry supported by positive trends such as an aging population migration from both shopping and increased ice strained from such things as screen usage. We expect these market trends to continue and to favor larger better capitalized value.

Retailers like National vision.

The optical industry remains highly fragmented and we are confident that we have a significant opportunity to continue to grow our market share.

In the third quarter, we were pleased with our slightly positive comp performance versus 2020.

As we lap the difficult comparison from last year due to the pent up demand from store closures the benefit of government stimulus and an elevated average ticket.

We also faced the impact from the surge in cases from the COVID-19 variant in what turned out to be a tepid back to school season, we did not experience the seasonal back to school lift that had been typical in pre pandemic years, having said that we're confident that we continued to outperform the industry. This quarter and we believe that this should continue.

I want to say a few words about the current supply chain environment, given the challenges being noted across the broader economy, our efforts to mitigate supply chain disruption had been effective thus far planning is crucial in our merchandising and supply chain teams have done a tremendous job over the last few months, we've extended our order lead times.

And are benefiting from strong long term vendor relationships and financial strength. Consequently, our merchandise inventories are currently in a solid position.

Shifting to slide six we see a path to continued growth and sustainable market share gains. Let me now 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, we have the potential to nearly double our current store footprint with two very attractive growth engines, and America's best and Eyeglass World year to date, we opened 59 stores and are on track to meet our target to open about 75 stores in 2000.

'twenty one we currently have a solid pipeline of specific locations for next year, which includes sites to support our plan for a modest acceleration in eyeglass world openings.

Optometrists play a key role in our company's ongoing success effect, even more evident since our reopening last year, our consistent performance would not have been possible without the admirable hard work and commitment to patient care of our network of optometrists, we strive to be the place of choice, where optometrist wanted to practice and stay for their entire.

Career as you have heard me say before we are always seeking more optometrists as such we continue to invest in optometrist related programs toward maintaining high retention rates and expanding exam capacity.

Marketing along with the positive word of mouth from happy patients and customers continues to be a key factor in attracting customers and driving traffic to our stores.

We compete in a marketing intensive category given the infrequent purchase cycle for eyeglasses, our advertising investment in both TV and digital channels.

Is consistent with our strategy to grow market share and we're investing more aggressively to maximize opportunities during the pandemic and beyond we believe that our value message and safety first approach have resonated in the current environment and are pleased to have acquired many new customers in Q3.

Our participation in vision insurance programs continues to be a positive revenue driver, 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.

Our digital and omni channel initiatives remain a key strategic focus for investment.

We continue to advance efforts to expand capacity to see patients as well as opportunities to improve engagement throughout the customer journey.

Our pilots and remote medicine are continuing and we are thus far pleased with the pilots at this point let.

Let me turn the call over to Patrick for more detailed discussion of our financial results.

Thanks, Ryan and good morning, everyone. We're pleased with our consistent performance this quarter as we build on the operating momentum delivered during the pandemic. Our results were driven by continued positive traffic trends and excellent store level execution. In addition, we continued to reinvest in the business to maximize our <unk>.

<unk> to grow share, while continuing to reduce our debt.

As a reminder, the comparability of our reported result was affected by the impact of temporary store closures last year, thus consistent with our second quarter earnings release, we have shared results versus both 2020 and 2019.

Reade noted earlier our comments today are being primarily made to 2019, which we believe is a more helpful comparison.

Now, let's turn to slide eight net revenue increased 19, 9% over 2019, the timing of unearned revenue versus 2019 benefited revenue growth by one 5% during the quarter. We opened 14, new America's best stores and closed one store for a fine.

1% increase in store count for our America's Best and Eyeglass World growth brands combined unit growth increased nearly 7% over the last 12 months.

Adjusted comparable store sales growth was up 13, 3% over 2019.

2% over 2020.

Q3 same store sales growth over 2019 was driven by growth in both average ticket and customer transactions compared to 2020 comps were driven by an increase in customer transactions as the average ticket moderated as expected from elevated levels last year.

Before moving to a discussion of margin highlights I want to pause to provide some additional perspective on our quarterly comp trends. The two year comp in Q3 was generally consistent with the two year comp that we delivered in the first quarter. We believe the stronger performance in the second quarter reflected the benefit from significant government.

Which we did not expect to continue this quarter.

Turning to slide nine.

As a percentage of net revenue cost applicable to revenue decreased 360 basis points versus 2019 or about 150 basis points ahead of our expectations. The decrease was driven by lower growth. How much was related crossed increase eyeglass mix and higher eyeglass margin given the environment.

We did experience higher freight costs this quarter like other retailers. However, these costs represented an immaterial impact to our overall expense structure.

Adjusted SG&A expense as a percentage of net revenue decreased 60 basis points compared to 2019. The key factors behind this decrease with a leverage of corporate overhead and payroll expenses as well as lower performance based incentive compensation, which was partially offset by higher advertising.

<unk> investment.

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

Adjusted operating income increased 110% to $54 $7 million and adjusted operating margin increased 460 basis points to 10, 6%. The increase in adjusted operating margin was driven by the strong comp leverage of fixed cost higher eyeglass mixing eyeglass margin.

And lower depreciation and amortization.

Adjusted diluted EPS increased 134% to 38 cents overall, we were delighted to deliver another quarter of consistent growth.

Turning to year to date results on slide 10, net revenue increased 21% versus 2019 to $1 6 billion with adjusted operating income of $188 million adjusted diluted EPS more than doubled to $1 35.

Now turning to slide 11, our balance sheet and liquidity remained strong at the end of the third quarter, our cash balance was $439 million for an increase of $31 million from last quarter and total liquidity was over $730 million when including available.

<unk> from our revolver.

We ended the quarter with total debt of $620 million net debt to adjusted EBITDA with five times or our lowest net leverage point as a public company.

As Reade noted we were pleased with our current inventory position at the end of the quarter inventories were approximately $125 million year over year inventory per store grew over 6% or in line with revenue growth.

Our financial strength has helped us manage through the current challenging supply chain environment, Let me add my call out and thanks to our merchandising and distribution teams for their excellent work.

Capital expenditures for 2021 are primarily focused on new store and customer facing technology investments. We expect 2021 spend to be near the lower end of the range of $100 million to $105 million.

We believe that our financial strength and our commitment to invest in our business remain a competitive advantage.

Turning to slide 12, given our strong cash flows and considerable cash position. We are delighted to share the company's $100 million commitment this week towards debt reduction and share repurchase yesterday, we voluntarily prepaid $50 million of term loan borrowings under our credit agreement, which.

It brings the term loan balance down to $150 million.

In addition, the board of directors approved a $50 million share repurchase authorization under the program shares may be repurchased through the end of 2023 and repurchases are intended to offset management equity program dilution.

Turning now to our outlook on slides 13 and 14.

Today, given our year to date performance, we are providing an updated fiscal 2021 outlook.

The operating and macro environment remain uncertain.

<unk> performance gives us continued confidence in our business our outlook reflects the currently expected impacts related to Covid. However, COVID-19 continues to create uncertainty and potential significant volatility. The outlook currently assumes no material deterioration in the company's current business operations as a result of the <unk>.

Oh, good and its variance or government actions and regulations, including risks stemming from vaccination testing programs and mandates.

As a reminder, fiscal 2021 is comparing to the 53 week period in 2020 against the backdrop of what we know today, our 2021 outlook now projects net revenue between 2.04 billion and 2.06 billion adjusted comparable store sales growth over last year in.

The range of 21% to 22% or 15% to 16% on a two year stack basis.

Adjusted operating income between $180 million to $187 million and adjusted diluted EPS between $1 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 19% and in an adjusted diluted EPS increase of 74%.

Let me provide some additional context as it relates to our outlook our guidance reflects the flow through of the strong third quarter results and a slightly lower margin expectation for the fourth quarter in the fourth quarter. We will continue to face significant grow over challenges from last year's record performance. In addition, there are several key.

Iterations that will also affect the quarterly comparison.

Last year, the fiscal fourth quarter included a 14th week, which added approximately $32 million in revenues and a penny in EPS.

Due to the seasonality in the optical industry. The fourth quarter is historically, our lowest period for revenues, we expect a return to more normal seasonality this year, which would make it more difficult to leverage the more fixed components of our cost structure.

Lastly, unearned revenue recognition timing can affect our quarter to quarter comparisons. We now expect the year over year change in unearned revenue in Q4 to be materially negative driven by the sales at the end of Q3 versus last year as in past presentations. We have included an explanatory slide on unearned revenue in the <unk>.

Next section of today's earnings presentation.

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

With this in mind, we expect net revenue in the fourth quarter to be down compared to last year compared to 2019. This would represent growth in the low to mid teens.

In terms of comps, we continue to expect flattish comps in the fourth quarter versus last year, driven by continued positive transaction growth offset by a reduction from last year's elevated ticket level. This would represent a growth rate versus 2019 that is generally consistent with the growth delivered in the third.

Quarter.

Our outlook continues to project a decline in profitability in the fourth quarter as we lap the exceptional margin expansion in 2020 compared to 2019, we expect lower Q4 profitability due to the impact of wage investments implemented earlier this year as well as continued advertising investments to further grow market share.

For full year 2021, as a percentage of net revenue, we expect cost applicable to revenue to decrease 170 to 190 basis points versus last year. As a reminder, our record performance in the fourth quarter of 2020 benefited from product mix shifts and an elevated ticket mark.

Right again, this quarter with some expected cost pressures as well for Q4 cost applicable to revenue are expected to increase about 340 to 360 basis points versus last year or just slightly above the 2019 level.

In terms of expenses, we would expect 2021 adjusted SG&A to increase between $1 20, and 140 basis points as a percentage of net revenue year over year. The SG&A increase primarily reflects higher performance incentive compensation marketing investments as we returned to a more.

Normalized percentage of net revenue and the higher levels of wage and other investments.

As a result, we estimate an adjusted operating margin of approximately 9% at the midpoint of our guidance range or approximately 110 basis points above the 2020 level and approximately 230 basis points above 2019.

To assist with modeling we've also provided additional assumptions for depreciation and amortization interest and tax rates.

To summarize our third quarter performance further highlights the consistency and resiliency of our business model, we feel good about the underlying strength of the business and are focused on our goal to deliver consistent strong financial performance, while strategically investing for the long term we remain confident we are well positioned.

To effectively navigate this evolving environment and are pursuing the right strategies to drive continued market share gains and sustainable growth.

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

Thank you Patrick turning to slide 15, and our moment of mission, we are continuing to live out our mission, both close to home and they have a global scale.

We are proud to have released National Vision's first corporate responsibility report, which is the first time our company has shared a comprehensive overview of our efforts across environmental social and governance activities. The report also presents our framework and overall approach to corporate responsibility and lays the groundwork for continued enhancements and.

Let's see and disclosure to our stakeholders.

You can access the report along with other information about our corporate responsibility efforts on the corporate responsibility page of the National Vision website separately. We recently received yet another unsolicited accolade for our culture.

National Vision was included in Forbes 2021 list of America's Best employers for veterans, our second year in a row to receive this honor.

Call that earlier this year.

We were named to Forbes list of best employers for diversity and best employers for women.

In summary, we're pleased with our third quarter results and the continued consistency of our performance during the pandemic.

What remains a challenging and volatile environment.

Our associates and network of Optometrists continue to serve patients and customers with their commitment to safety patient care and customer service every day in every store one patient and one customer at a time I could not be more proud and appreciative of the entire national vision team.

The key takeaway from today's call is this our performance during the pandemic highlights the strength and durability of our business model, we're growing market share in the recovering optical retail market and are benefiting from the hastening of trends that favor national vision and we are emerging from the pandemic are stronger and more profitable company and kantar.

To see tremendous opportunities ahead of us while keeping our ESG efforts core to our DNA.

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 as a reminder to ask a question you will need to press star one on your telephone to withdraw your question.

Question press the pound key.

First question comes from Adrienne <unk> with Barclays. Your line is open.

Good morning, everybody.

Progress.

We continue to catch up my first question is a comment that you made on back to school I'm not seeing that come to fruition as it has in past years are you seeing a more elongated.

Kind of post back to school or are you seeing.

Sure.

The sales that you're expecting to come back in September October and then Patrick.

I just wanted some more detail on the fourth quarter.

All right.

Growth in sales overnight.

Lower profitability in over 19 data marketing of wage growth. So just trying to kind of marry those higher sales.

Profitability, if I got that correct and any early.

Thoughts on how we should model the first half of next year given the Daniela. Thank you very much.

Thanks, Thank you very much adrianne that the back to school season, we have at the time of our last call. We are starting to see it begin and it just never hits.

The high that it that it has in the past. So it was it was just a very muted.

Back to school season, you know back to school season.

A little bit of a misnomer because yes. It does involve kids, but also a lot of parents come back at the same time. So it really the better way to think about it is it's just sort of our second seasonality generally we have our first seasonality in February March around the time of of a federal.

Federal tax returns coming back our customers get a little bit more money in their pocket, then and address the necessity and then our second season at that August September both with kids and adults at that time and it just it did not follow the trends of past normal back to school years. So this is like the second year.

Last year, there was not much kids work going back to school last year this year.

It was just it was not for us or the industry from things that we've heard.

The highs that we would've expected from the seasonality in pre COVID-19 or from kids going back to school.

Thanks.

Yes, Adrian and good morning, Thanks for the question and before I dive into <unk>.

Q4, and I'm going to unpack that well for everybody.

Kind of take a terrorist level view of 2021, because I think it's important as a backdrop. So based on the demonstrated consistency and resiliency of our business, we decided to provide full year guidance this year across all P&L elements.

I think we were one of a few companies that did that and we said in the beginning we were going to take a slight leans towards conservatism is the environment remains tough to predict.

As we stand now we've raised twice we'd narrowed once I'm really pleased with how we guided and how we performed I'm actually very pleased and proud of the associates and doctors that continued to operate in this shifting environment and delivered all of this as I reflect on the full year, we got most of this right.

We did push advertising as hard a few times during the year in somewhat of a test and learn mode. I think we've talked about that earlier.

Environment to do so good demand high ticket high flow through very conducive to testing.

We made surgical wage investments around mid year in our stores associates and lamp associates, where we saw immediate returns in hiring and retention rates, even amid the delta variant peak that we all experienced we also made investments in Dr compensation, These investments which totaled in them.

Mid single digit millions on an annualized basis continued to yield gains for us.

Finally, we saw the beginnings of a normal back to school season, as Reed mentioned, but then it kind of lightened and we didn't see the full back to school season. So if I were doing an assessment of how do we do those are the things that I call out all in all a pretty darn good year forecasting and execution and for.

And for most quarters and good leveraging of fixed cost and very effective navigation as it relates to inventory and supply chain.

Now, let's take let's take that and apply it to fourth quarter. Several of the items I mentioned are continuing positive customer transactions generally off site offset by a moderating average ticket coming down off these very elevated levels, that's resulting in a flattish comp for Q3.

<unk> comp for Q4, now I just want to make this point, a moderating ticket coming off exceptionally high levels.

Certainly changes margins and changes flow through but it's also core to our business model if customers as customers elevated those ticket. If they are elevating them now that's okay to US yes, it's less margin, it's less flow through but it's keeping those customers over a longer period of time because their means.

Them with what they want to purchase.

We did make the wage investments.

I mentioned that those were in the mid single digit millions across all three categories and we continue to lean into advertising. We are seeing some degree of inflationary impacts across certain elements of advertising and we're doing our best to manage that.

And then we are seeing a little bit less or.

Lower or performance based incentive comp in the quarter.

But there are also a few kind of structural items that affect fourth quarter that you Havent felt in third to this degree remember we're growing over the 50 <unk> week that was $32 million last year. It was a penny of EPS.

We expect unearned revenue.

To be materially negative in the fourth quarter and that's got a lot to do with how strong Q3 of 'twenty was in peak demand pent up demand versus Q3 of this year, where we saw a little later back to school than we had hoped.

We will always unpack that explicitly because thats just a timing.

Fact for seven to 10 days.

We think we are returning to normal seasonality, which means fourth quarter will be a little less than third quarter.

We're thinking 2022 is going to return to seasonality.

And the other thing I would remind folks off is probably long forgotten now.

In the fourth quarter of 19, as we compare gross margins and SG&A to 19, we did have a few million dollars of good guys in that quarter around vendor rebates and some compensation accrual adjustment. So it's not a perfectly normal to do the comparisons back to so on.

No that was a lot that are really in owned it on this call to unpack fourth quarter for everybody and so I hope that I hope that helps you give you a sense of kind of how we're moving through the year and from third to fourth.

Incredibly helpful. Thank you very much.

Yes.

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hey, everyone I wanted to focus on demand side. So two questions first can you talk about how you expect the optical market or the retail market to grow or to evolve. The next two years do you think we continue to see growth on the robust growth.

And then the second question is is there any way.

Now we're seeing some of the facts moderate is there any way to parse out maybe the stimulus dollars and that had an impact on the business how should we think about that.

So.

To your first question Simeon.

We still feel like we're in Covid era now and.

And Covid era is unpredictable.

When when we looked at at September you know that Delta variance came back and that was something we hadn't been expecting and I still think we're in the unpredictable.

You're right that we sort of do that gray out thing on our on our comp store chart I don't know how long we're going to be that gray out Covid era is going to last I'm, believing and I'm, hoping that we get to a stage of more normalcy in terms of the health of the nation and.

The normalcy of the category and more predictable normal trends too to our business, but this is a this is al.

I've said, so many times such an unprecedented.

Time.

In terms of your question on stimulus impact.

You know our customer always when they get some money in their pocket.

They always helps us it helps us in terms of then come again and buying our products and and certainly last year. It also helped us in an average sale are our plan is for our average sale to moderate over time and I can't predict what's going to happen with future stimulus from.

<unk> from from the government, but as a rule of thumb when our customer gets more money is surprised money in their pocket as happens with.

With stimulus programs end to end often tax returns it benefits us and causing seasonality.

Have there been any changes to date in terms of good better best where you're starting to see that wane.

Wayne.

Starting to see that I didn't hear your last word.

Wayne, meaning where we're starting to see some of the the ticket trends starting to slow or the decision is being made we're buying good and better instead of better best or we're starting to put fewer head on what we are seeing is a gradual normalizing of our average ticket I wouldn't be surprised.

If it if when it when it when it hits a stable place, whether that's still above where it was pre COVID-19, we're finding things like blue light lenses are are selling quite.

Quite well in this post pandemic.

This pandemic and beyond period.

So I wouldn't be surprised it when it stabilizes it stabilizes at an elevated level, but what we're seeing now is a normalization declined versus the <unk>.

Elevated levels of last year, and what you're seeing is we're making up for it by increased transactions and customer count, which is how we've always said, we'd like to build our business through footfall not not average sales were to repeat what Patrick said the success of our business is because of the low cost provider of a.

Medical necessity, we liked the fact that our customers save money versus going to other places.

That is a key source of our ongoing market share gain in our success and positive word of mouth and we don't we.

We let it we let the consumer by what they wanted to and let that fall, where it may and again thats been fundamental to our success for a long time. So we.

We are expecting continued declines versus the heightened and unusual levels of last year and average sale and we are making it up versus the customer count.

Thank you.

Our next question comes from Michael Lasser with UBS. Your line is open.

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

You can hear national Vision's third quarter results with some of the indications from the other publicly traded optical players in the market.

It appears that our national vision share gains load in the period now you're talking about increasing.

Marketing investment recognizing your comparisons are probably much more difficult than others.

What would be causing your share gain.

Slow down versus where they had been.

Yes, yes, we are.

We believe we are continuing to grow market share every indication, we get including from the category players who can glimpse the entire category.

Raymond lens suppliers and the insurance companies. We believe we are continuing to grow market share.

And that that is happening at a similar pace to two the past, but so.

We're not seeing it the way you are seeing it there.

Understood.

Follow up question is on the claims marketing of wage investments.

But I think he said.

You referenced the mid single million dollar wage investment.

You're referring to that will continue into the fourth quarter. If not can you give us a sense of what the incremental wage investments, notably in the fourth quarter.

And similarly, how big the marketing investment this is important because we're planning to probably.

Our model for 2022, recognizing that the demand environment will be pretty uncertain, but if your messaging that the expenses that youre going to incur in the fourth quarter are going to persist well into next year.

When incorporated.

Thank you.

Oh, yeah. So.

I would say in terms of the wage Michael I was trying to give guidance that says mid single digit millions impact.

Three wage adjustments and that's an annualized figure. So you can kind of do the math on how much of that affected the second or third.

The third and fourth quarters.

In terms of advertising we.

We've been saying for quite a while.

We expect advertising to return to similar levels as the ratio of advertising to.

Sales I would say in general thinking about looking ahead, there's still a lot of uncertainty in the environment. You know, we're not providing specific 22 metrics at this time, but.

We will offer a few things that might help I do think as I said, we're going to see more normal seasonal seasonality in 2022, I think it will have kind of challenging growers in the first half and much easier in the second half.

Do think advertising comes back to normal levels.

Spend relative to revenue and then those surgical wage investments that we've made.

We will lap those and in the summer in mid year of next year and again I wanted to give a way to figure that you can kind of arrive at in terms of how much that is we're so so yeah, there's a few headwinds.

This management team has faced headwinds like this in the past tariffs was a great example, you can expect us to continue to find ways to work through.

And we currently are looking at multiple initiatives.

That'll that'll help us do just that just like we did with tariffs.

We kind of want delivering a level of a consistent and resilient performance that seems to please everybody and our intent is to keep doing that so we will provide a lot more insight into that when we talk again in Q1, Yeah, I hope that helps a little bit Michael.

Thank you.

Thank you our next question comes from.

That's a wednesday.

With Jefferies. Your line is open.

Thank you good morning, everyone. We wanted to spend a little time on talking to new customer cohort. If you could share with us some of the insights from the new customer he's game and I think they had implemented some incremental CRM initiatives related to some of your marketing if you could talk a little bit about what.

Whether it's appointment reminders are prompt she tried to reactivate lapsed customers anything you can share with us around success that some of those digital initiatives and your new customer cohorts that'd be very helpful. Thank you.

Well you know what.

What we saw in the quarter was with gains in both existing and new customers across both our our growth brands.

And a slightly higher with eyeglass world, which is an encouraging there.

As Patrick mentioned this is a marketing intensive category and we think those results reflect the fact that our marketing.

It is effective we are getting ever more sophisticated and our TMR at CRM and digital marketing our programs and a variety of way, we don't like to detail that too.

And too much too much publicly because it is part of our secret sauce, but of our marketing efforts are.

Ever more sophisticated and ever more effective.

That's great just one follow up for us on Eyeglass World.

A brand that you pretty quickly come up with strong returns on in Boston at the unit level. How are you thinking about the growth.

Right.

Going forward should we start.

But the unit growth we're not.

Well, Matt Brown.

But for the out years, how should we be thinking.

Thinking about that in the Port model.

Good.

Very very happy with our eyeglass world.

Formats.

Ever since we reopened after the Covid closure period, it's just been fantastic and again versus versus 2019 in Q3 Eyeglass World was up 21.

Perfect.

We think we think it's a combination of the residence of the model and.

<unk> execution and marketing on our part there.

I think we shared that we find the return profile of the ROIC is now much closer to a b and so we have said, we're going to modestly accelerate EDW unit growth in or eyeglass world.

Growth in 'twenty.

'twenty two.

So we have I'll share we opened two eyeglass world in October.

What's nice is it's nice to have.

Two growth engines in both America's Best and Eyeglass World and we think that we can sort of double our store count of the combined two two growth brands in the coming years, We think America really loves both these concepts and we plan on on making them available to ever more Americans.

Yeah.

Thank you and our next question comes from Bob <unk> with Guggenheim. Your line is open.

Hey, guys. Good morning, just a couple of quick questions for me I guess just following on some of the new store openings in terms of like whether its existing markets and how the stores are opening.

In the various markets.

Any sort of insight into that and then I guess the other question that I would love to hear more as just about the Walmart business and some of the new stores that you're opening in Walmart if theres any update generally what's your relationship on Walmart.

Good.

Okay go ahead Patrick.

Our new store.

The last two really large markets that we went into.

Strong, whereas the west coast with L, a and San Francisco and in East Coast, and the New York vicinity more recently, Connecticut since that time, we've taken.

A little more balanced approach and not weighted ourselves so much on any given year with lots of <unk>.

Brand new market stores so.

I can't give you the exact ratio, but it's now a majority of our store openings are in existing markets, but each year, we tend to pick off one or two new metros are states.

But it's a smaller portion since entering those last two really large markets and we liked that balanced approach stores in existing markets tend to already have brand awareness they tend to take off a little faster.

And we're really happy our new stores are performing well.

The only time they didn't perform well in the last year and a half is when we closed them during COVID-19, but since they came out of the gate wildly looked great they've hit a lot of their multiyear metrics quicker. So we're really happy with our new store opening batting average.

Good good good out I'll take the Walmart part of that question, yet again, where we're in our 31st year of partnering with Walmart Company was founded to do vision centers inside Walmart 31 years ago, We last year extended our contract for three years with the same economics.

So that's we've got several more years there they gave US five stores last year. It was the first time they've added stores to our contracted $19 94, and we're real pleased with the results, we're continuing to see positive and encouraging results in those five stores and we still think we're we're still in the ramp up of all the things we can.

Do do with those stores.

Our relationship with Walmart is great.

Thanks, Mike.

Thank you. Our next question comes from Paul Knight.

<unk> with Citi. Your line is open.

Thank you guys I'm curious, how you're thinking at a high level about 2022 relative to 'twenty. One from a topline perspective do you think there was any sort of pull forward in 'twenty, one that would take away from 'twenty, two or was it more of kind of a catch up from from 2020.

Or do you look at 2021, and I was just kind of the new sales base from which you can grow comps at your normal historical rate.

And then second just curious about store pipeline for 'twenty two how many are locked and loaded with a signed lease and how does that breakdown by by concept.

It any easier or harder to find good locations for one concept versus the other thanks Scott.

Yes ill read you want to take the second one and then I'll come back to the first.

Yeah.

Our store pipeline.

Start with that.

Yes, let's start by looking good we're not having trouble finding locations. There's plenty of good locations out there I don't think we ever announced how many are locked and loaded but we are very confident we're going to be able to build 75, great stores next year in the same sort of rough rough timing inflow that we've done in past years.

No no change at all in that area things are things are good and Paul I Love. Your question on pull forward. It's one that we've contemplated and thought about here.

The retention data that we look at it seems to indicate that we didn't we were not going to suffer from a lot of cycle pull forward.

And I think that I think as I look at sales for next year.

Obviously, a more difficult grow over in first and second quarter, but beyond that I really think we're back into a normal seasonality normal kind of comp growth expectations.

So I think that we have maybe one more half year, where we've got a little grow over.

The challenge that we've got to got to land and got to get through but beyond that I see a very much more normal landscape for planning and I'm going to caveat. The one thing Patrick said, there with assuming no new variants, assuming no big drama is associated with mandates and stuff and.

All of them really hard to predict but on a on a COVID-19 impact exclusive basis, excluding basis I agree with everything in it.

Our guess is as good as mine as to what any of that might mean to the future I think as we look at the overall aggregate guidance that we'll lay out next year and the plans that we're working on now I.

I think they start to look a lot more normalized versus where we've been over the last 18 24 months.

Got it. Thank you guys. Patrick just wanted to follow up did you quantify the unearned revenue impact in <unk>, specifically in terms of millions of dollars sorry, if I missed that.

We did not quantify that we said it would be material but.

But we didn't quantify it Paul.

Thank you. Our next question comes from Robbie <unk> with Bank of America. Your line is open.

Hey, Good morning, guys, just a couple of quick follow ups.

First maybe read more Patrick can you can you remind us.

What happens in really high gas price environments with your customer does it change their purchasing patterns at all.

Especially the lower income ones do they sort of.

Delay getting eye exams and things like that and then the other question was just on.

I understand the stimulus rolling off I think you guys had mentioned.

In the past.

You guys were also more open than a lot of the competition that you were expecting more competition to open up you know on the <unk>.

Half of this year has that been happening and is that having an impact on you guys at all or do you see that.

A bigger impact in the first half of next year. Thanks.

Yeah. So I'll probably thank you for that you know our customers go live on a on a tight budget. That's that's why we benefit from stimulus, but we're not immune to any temporary impact of any external.

Economic events sounds like like gas prices are that there is no direct correlation we do watch out when the gas goes way up but that's been a long times things that happened, but I think we are looking at if you look at our long term trends, we are able to comp positively in good economic times and.

Bad and you could almost see the flip side also on the one hand, our normal customer is feeling a little tight in their budget, but sort of the customer just a little better office.

Is that also feeling tightened their budget and looking for more value on your second question.

The more open says so.

Opened sort of gradually throughout may of 2020, and we're fully open as of June one of 2020 and it took.

Many of our competitors a while too.

Reopen some of them still opening stores in the fall September pure.

Of 2020, so last year, we were benefiting from that.

All the category has been pretty much fully open since Q4 of last year with the exception of the fact that we believe about 3% of the independent doors shut along the way through retirement or financial.

So there are a few less doors there, but there are also I mean, there is there is data out there on sort of the top 50 optical retailers and most of the debt while we were.

Growing stores, a lot of them close to close down stores.

Last year, a couple of hundred stores, there and last year, the whole Sears chain shutdown and there were other.

So last year saw the decline the closing of stores that have yet to reopen but in terms of reopening the category that all occurred by Q4 of last year.

Our next question comes from Anthony to Kumba with loop capital markets. Your line is open.

Good morning, and thanks for taking my question. So my first question.

Sure results relative to two.

2019.

<unk> growth slowed from 20, 28% in the second quarter to 20% and I guess I was wondering do you think that maybe you know are.

In terms of the back to school being somewhat underwhelming.

Like a demand pull forward into the second quarter, particularly with people with them.

Most checks so maybe that that back to school Fortunately would've made the third quarter. They made in the second quarter with the stimulus checks.

That makes sense at all.

Yes.

It's hard to assess pull forward in our category, it's not something we normally see especially with our consumer segment, but generally the trigger is my I'm not seeing as well and we've found that.

It's sort of from that from the first moment of Hey, I'm, not seeing as well too to acting on it generally about 90 days and you've got to go through the denial phase and all that and hope it goes away, but then it doesn't and you have to act on it so it might start customer base in <unk>.

We don't think Florida is big these are irregular times, but we aren't thinking of it as a lot of it's really very hard to assess that.

I would just also add as we worked through the 53rd week year.

The 50 <unk> week was a factor in our calendar shifts that affected second quarter I think as you look at our first and third quarter two year comp stacks youre going to see fairly similar numbers and then second quarter Youre going to see an elevated number that's a structural factor as well as just the stimulus and and frankly in the second quarter Covid.

Was over.

Temporarily until delta variance for us.

I think as you are looking at what looks like a normal quarter.

And third on a two year stack.

Don't have those implications and Anthony.

Got it that's helpful. And then just one clarification in terms of the.

$50 million share repurchase so so that's just to offset.

Stock option exercises. So in other words, we shouldn't really expect any significant change in the in your weighted average shares outstanding.

Yes. This is just us.

Siding to start offsetting any impact of management stock action. Our goal is to keep that very balanced and neutral we have not been doing that thus far as a public company and we're starting now.

It's not the beginning of a big stock buyback and you can tell because it's just $50 million I mean, we think that last us two to three years.

And so it's just exactly for that I will go ahead and since you brought up the number 50, all plugged the debt reduction.

Really happy to take another 50 off the term loan and I do think we're probably we've probably done making moves there, we'll probably sit tight on that term loan a at $1 50 for quite a while.

Next Big thing, we're thinking about it is multiple years out on the horizon and that's the convertible notes we will.

Probably start accruing some cash and thinking about that but again those notes or a hybrid product that allows us to satisfy them with cash debt or equity, but in general I think from a cash deployment strategy.

Going to offset dilution.

Probably not going to do many more voluntary prepayments at all on the term loan and we will have our eye on the notes in the future.

That's helpful.

Yeah.

Our next question comes from Zack <unk> with Wells Fargo. Your line is open.

Hey, good morning can you talk a bit about inflation in the category and to what extent, you're seeing peers raised prices in response to the current supply chain and cost environment and just given the dynamic out there how should we think about the direction of your average ticket spread versus the industry and.

Do you view this as an opportunity to take more share.

So so we are a group that.

Hasn't raised our entry offer on on our lead brand America's best and well over a decade.

Many of our competitors do take price fairly often and we find that that's one of the long term trend that benefits us is.

The higher the traditional category goes in terms of pricing the better it is for our market share.

In terms of our attitude towards pricing, we did take peripheral pricing in 2019, and we do that on a.

Infrequent basis over time, but we consistently.

Evaluated evaluate.

Potential peripheral pricing.

The options, but we're committed to to our customers saving money versus most any alternative out there because that's that's our reason for being.

And then and then I'll talk a little bit about inflation in the category just in general.

We have long term contracts in place with all of our major vendors.

That doesn't make us perfectly immune to inflation, but it certainly does help.

And just as a reminder, we saw some freight pressure in the quarter, but it's just so small for us its immaterial element of our cost structure.

And then finally as it relates to inventories we have still been in a position of pre buying.

We want to make sure that we have everything we need to open stores and sell to customers and patients and so.

Well in the year, probably a little heavy on inventory, but that will be purposely that'll also with us.

Any potential small inflationary pressures that we might feel later in next year.

Got it and that the gross margin line. Patrick Q3 came in about 360 basis points above 2019 levels and I know, we should expect a leg down in Q4, and you talked about the moving parts, there which was helpful. But longer term is it fair to expect the gross margin run rate to return back.

Closer to that 2019 level or is the current rate of about two to three points higher than 2019 more appropriate for your business.

Well I'll remind you that gross margin is gross margin can be that can fluctuate with seasonality I mean, there's typically really good in the in a normal year and February through April ish with peak season, and again in back to school. There are some fixed costs in our gross margin related to labs.

And a lot of.

Flavors. So we do have periods of the year, where it'll be a little higher a little lower it wouldn't get locked into into fourth quarters for gross margin I think we continue to.

We're going to have a little bit of wage pressure there with the languages that we raised through next year that's fairly small.

We're going to see lab productivity gains are probably going to offset that and then another big factor for me is where does ticket normalize.

We've kind of talked about we now do not expect ticket to return to pre pandemic levels and so all of that comes into play as I think about.

What will the story on gross margins be I still think there is a shock that we can continue to see.

So gross margin improvements over time.

Got it I appreciate the time, but thank you I think we're at the end of our hour. There. So thank you very much Kathryn for moderating the call and thank you all for joining us today and thanks to our stockholders for continued support and we're looking forward to speaking to you again, when we report our fourth quarter results. Thank you all.

Very much.

Yeah.

This concludes today's conference call.

Thank you for participating you may now disconnect.

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Good day, and thank you for standing by welcome to the National Vision's third quarter fiscal year 2021 financial results Conference call. At this time Altice pits are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on telephone please be advised.

Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, David Mann, Vice President of Investor Relations. Please go ahead.

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

Joining me on the call today are Reade Fahs, Chief Executive Officer, and Patrick Moore, Chief Financial Officer.

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 presentation. We also would like to draw your attention to slide two in today's presentation for additional information about <unk>.

Forward looking statements and non-GAAP measures as a reminder, national vision expects to provide certain supplemental materials or presentations for investor reference on the investors section of our website now let me turn the call over to Reed.

We opened 14, new stores during the quarter and ended with 1262 locations.

Adjusted operating income increased 110% and adjusted EPS increased 134% to 38 cents.

Subsequent to quarter end, we announced the following significant developments, we released our first corporate responsibility report as we continue to progress in our ESG journey also we paid down $50 million in debt this week and announced a new $50 million share repurchase program overall, our third quarter results were.

The consistent strength and durability of our business model.

Finally in today's earnings release, we tightened our 2021 outlook in a few minutes Patrick will take you through our Q3 results and updated outlook in more detail.

Our consistency also highlights the benefits of operating in it in an attractive industry supported by positive trends such as an aging population migration from mall shopping and increased ice strained from such things as screen usage. We expect these market trends to continue and to favor larger better capitalized value.

Retailers like National vision.

The optical industry remains highly fragmented and we are confident that we have a significant opportunity to continue to grow our market share.

In the third quarter, we were pleased with our slightly positive comp performance versus 2020.

As we lap the difficult comparison from last year due to the pent up demand from store closures the benefit of government stimulus and an elevated average ticket.

I want to say a few words about the current supply chain environment, given the challenges being noted across the broader economy, our efforts to mitigate supply chain disruption have been effective thus far planning is crucial in our merchandising and supply chain teams have done a tremendous job over the last few months, we've extended our order lead times.

And are benefiting from strong long term vendor relationships and financial strength. Consequently, our merchandise inventories are currently in a solid position.

'twenty one we currently have a solid pipeline of specific locations for next year, which includes sites to support our plan for a modest acceleration in eyeglass world openings.

Optometrists play a key role in our company's ongoing success affect even more evident since our reopening last year, our consistent performance would not have been possible without the admirable hard work and commitment to patient care of our network of optometrists, we strive to be the place of choice, where optometrist wanted to practice and stay for their entire.

Career as you've heard me say before we are always seeking more optometrists as such we continue to invest in optometrist related programs toward maintaining high retention rates and expanding exam capacity.

Marketing along with the positive word of mouth from happy patients and customers continues to be a key factor in attracting customers and driving traffic to our story.

We compete in a marketing intensive category given the infrequent purchase cycle for eyeglasses, our advertising investment in both TV and digital channels is.

This is consistent with our strategy to grow market share and we're investing more aggressively to maximize opportunities during the pandemic and beyond we believe that our value message and safety first approach have resonated in the current environment and are pleased to have acquired many new customers in Q3.

Participation in vision insurance programs continues to be a positive revenue driver, 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.

Our digital and Omnichannel initiatives remain a key strategic focus for investment.

We continue to advance efforts to expand capacity to see patients as well as opportunities to improve engagement throughout the customer journey.

Our pilots and remote medicine are continuing and we are thus far pleased with the pilots at this point let.

Let me turn the call over to Patrick for more detailed discussion of our financial results.

Kennedy to grow share, while continuing to reduce our debt.

Which we believe is a more helpful comparison.

Now, let's turn to slide eight net revenue increased 19, 9% over 2019, the timing of unearned revenue versus 2019 benefited revenue growth by one 5%.

During the quarter, we opened 14, new America's best stores and closed one store for a five 1% increase in store count for our America's Best and Eyeglass World growth brands combined unit growth increased nearly 7% over the last 12 months.

Adjusted comparable store sales growth was up 13, 3% over 2019 and <unk>.

2% over 2020.

Which we did not expect to continue this quarter.

Turning to slide nine.

As a percentage of net revenue cost applicable to revenue decreased 360 basis points versus 2019 or about 150 basis points ahead of our expectations. The decrease was driven by lower growth. How much was related cost increased eyeglass mix and higher eyeglass margin given the environment.

We did experience higher freight costs this quarter like other retailers. However, these costs represented an immaterial impact to our overall expense structure.

<unk> investment.

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

And lower depreciation and amortization.

Adjusted diluted EPS increased 134% to 38 cents overall, we were delighted to deliver another quarter of consistent growth.

Turning to year to date results on slide 10, net revenue increased 21% versus 2019 to $1 6 billion with adjusted operating income of $188 million adjusted diluted EPS more than doubled to $1 35.

<unk> from our revolver.

We ended the quarter with total debt of $620 million net debt to adjusted EBITDA with five times or our lowest net leverage point as a public company.

Our financial strength has helped us manage through the current challenging supply chain environment, Let me add my callout and thanks to our merchandising and distribution teams for their excellent work.

Capital expenditures for 2021 are primarily focused on new store and customer facing technology investments. We expect 2021 spends to be near the lower end of the range of $100 million to $105 million.

We believe that our financial strength and our commitment to invest in our business remain a competitive advantage.

The term loan balance down to $150 million.

Turning now to our outlook on slides 13 and 14.

Today, given our year to date performance, we are providing an updated fiscal 2021 outlook, while the operating and macro environment remain uncertain. Our consistent performance gives us continued confidence in our business. Our outlook reflects the currently expected impacts related to Covid. However, COVID-19 continues to create uncertainty.

And potential significant volatility.

Outlook currently assumes no material deterioration in the company's current business operations as a result of Covid and its variance or government actions and regulations, including risks stemming from vaccination testing programs and mandates.

As a reminder, fiscal 2021 is comparing to the 53 week period in 2020 against the backdrop of what we know today, our 2021 outlook now projects net revenue between two points through 4 billion and 2.06 billion <unk>.

Adjusted comparable store sales growth over last year in the range of 21% to 22% or 15% to 16% on a two year stacked basis.

Adjusted operating income between $180 million to $187 million and adjusted diluted EPS between $1 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 19% and in an adjusted diluted EPS increase of 74%.

Let me provide some additional context as it relates to our outlook.

Our guidance reflects the flow through of the strong third quarter results and a slightly lower margin expectations for the fourth quarter in the fourth quarter. We will continue to face significant grow over challenges from last year's record performance. In addition, there are several key considerations that will also affect the quarterly comparison.

Last year, the fiscal fourth quarter included a 14th week, which added approximately $32 million in revenues and a penny in EPS.

As in past presentations, we have included an explanatory slide on unearned revenue in the appendix section of today's earnings presentation, and we will clearly communicate the seven to 10 day accounting timing impact. So the investors can always understand underlying cash momentum of the business.

With this in mind, we expect net revenue in the fourth quarter to be down compared to last year compared to 2019. This would represent growth in the low to mid teens.

<unk>.

A quarter with some expected cost pressures as well for Q4 costs applicable to revenue are expected to increase about 340 to 360 basis points versus last year or just slightly above the 2019 level.

As a percentage of net revenue and the higher levels of wage and other investments as a result, we estimate an adjusted operating margin of approximately 9% at the midpoint of our guidance range or approximately 110 basis points above the 2020 level and approximately 230 basis points above.

2019.

To assist with modeling we've also provided additional assumptions for depreciation and amortization interest and tax rates.

To summarize our third quarter performance further highlights the consistency and resiliency of our business model, we feel good about the underlying strength of the business and our focus on our goal to deliver consistent strong financial performance, while strategically investing for the long term, we remain confident that we are well positioned.

To effectively navigate this evolving environment and are pursuing the right strategies to drive continued market share gains and sustainable growth at this point I will turn the call back to rate.

Thank you Patrick turning to slide 15, and our moment of mission, we are continuing to live out our mission both close to home and they have a global scale. We are proud to have released national Vision's first corporate responsibility report, which is the first time our company has shared a comprehensive overview of our efforts across environmental so.

<unk> and governance activities. The report also presents our framework and overall approach to corporate responsibility and lays the groundwork for continued enhancements in transparency and disclosure to our stakeholders.

National Vision was included in Forbes 2021 list of America's Best employers for veterans, our second year in a row to receive this honor.

Call that earlier this year.

We were named to Forbes list of best employers for diversity and best employers for women.

In summary, we're pleased with our third quarter results and the continued consistency of our performance during the pandemic.

Spite, what remains a challenging and volatile environment.

The key takeaways from today's call is this our performance during the pandemic highlights the strength and durability of our business model, we're growing market share in the recovering optical retail market and are benefiting from the hastening of trends that favor national vision and we are emerging from the pandemic are stronger and more profitable company and kantar.

To see tremendous opportunities ahead of us while keeping our ESG efforts core to our DNA.

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 as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

And our first question comes from Adrienne <unk> with Barclays. Your line is open.

Good morning, everybody.

Oh gosh.

Okay.

That's.

My first question is a comment that you made on Baptist School I'm, not seeing that come to fruition as it has in past years are you seeing a more elongated and.

Kind of post back to school or are you seeing.

Okay.

The sales that you're expecting to come back in September October and then Patrick.

I just wanted some more detail on the fourth quarter and I just wanted to check that.

Right.

Growth in sales overnight.

Mid teen lower profitability.

Over 19 data marketing of wage growth. So just trying to kind of marry those higher sales, but perhaps lower profitability, if I got that correct.

Any early.

Thoughts on how we should model the first half of next year given the Daniela. Thank you very much.

Thanks, Thank you very much adrianne.

The back to school season, we have at the time of our last call. We are starting to see it begin and it just never hits the.

The high that it that it has in the past. So it was it was just a very muted.

The school season back to school season.

Last year, there was not much kids work going back to school last year this year.

It was just it was not for us or the industry from things we've heard.

Just at the highs that we.

We would have expected from the seasonality in pre COVID-19 or from kids going back to school.

Thank you.

Yeah, Adrienne and good morning, Thanks for the question.

Before I dive into.

Q4, and I want to unpack that well for everybody.

I think we were one of the few companies that did that and we said in the beginning we were going to take a slight leans towards conservatism is the environment remains tough to predict.

As we stand now we've raised twice we'd narrowed once I am really pleased with how we guided and how we performed I'm actually very pleased and proud of the associates and doctors to continue to operate in this shifting environment and delivered all of this as I reflect on the full year, we got most of this right.

We did push Advertizing hard a few times during the year in somewhat of a test and learn mode. I think we've talked about that earlier.

Rate environment to do so good demand high ticket high flow through very conducive to testing.

We made surgical wage investments around mid year in our stores associates and lab associates, where we saw immediate returns in hiring and retention rates, even amid the delta variant peak that we all experienced we also made investments in doctor compensation These investments which totaled in the.

Mid single digit millions on an annualized basis continued to yield gains for us. Finally, we saw the beginnings of a normal back to school season, as Reed mentioned, but then it kind of lightened and we didn't see the full back to school season. So if I were doing an assessment of how we do those are the things that.

I call out all in all a pretty darn good year forecasting and execution.

And for most quarters and good leveraging of fixed cost and very effective navigation as it relates to inventory and supply chain.

<unk> comp for Q4, now I just want to make this point, a moderating ticket coming off exceptionally high levels.

Them with what they want to purchase.

We did make the wage investments.

And then we are seeing a little bit less or lower.

Lower or performance based incentive comp in the quarter.

But there are also a few kind of structural items that affect fourth quarter that you Havent felt in third to this degree remember we're growing over the 50 <unk> week was $32 million last year. It was a penny of EPS.

We expect unearned revenue.

To be materially negative in the fourth quarter and that's got a lot to do with how strong Q3 of 'twenty was in peak demand pent up demand versus Q3 of this year, where we saw a little lighter back to school than we had hoped.

We will always untapped that explicitly because that's just a timing.

For seven to 10 days.

We think we are returning to normal seasonality, which means fourth quarter will be a little less than third quarter.

We're thinking 2022 is going to return to seasonality.

And the other thing I would remind folks of is probably long forgotten now.

No that was a lot that are really and I want it on this call to unpack fourth quarter for everybody and so I hope that I hope that helps you give you a sense of kind of how we're moving through the year and from third to fourth.

Incredibly helpful. Thank you very much.

Yes.

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hey, everyone I want to focus on demand side. So two questions first can you talk about how you expect the optical market or the retail market to grow or to evolve in the next two years do you think we continue to see growth.

The robust growth.

And then the second question is is there any way.

Now we're seeing some of the facts moderate is there any way to parse out maybe the stimulus dollars and that had an impact on the business how should we think about that.

So.

To your first question Simeon.

We still feel like we're in Covid era now and.

And Covid era is unpredictable when when when we looked at at September you know that Delta variance came back and that was something we hadn't been expecting and I still think we're in the unpredictable.

You're right that we sort of do that gray out thing on our on our comp store chart I don't know how long we're going to be that that gray out Covid era is going to lap I'm, believing and I'm, hoping that we get to a stage of more normalcy in terms of the health of the nation and.

Normalcy of the category and more predictable normal trends too to our business, but this is a emphasis.

We also have said so many times such an unprecedented.

Time.

In terms of your question on stimulus impact.

You know our customer always when they get some money in their pocket.

They always helps us it helps us in terms of them coming in and buying our products and and certainly last year. It also helped us in an average sale are our plan is for our average sale to moderate over time and I can't predict what's going to happen with future stimulus from.

<unk> from from the government, but as a rule of thumb when our customer gets.

More money is surprised money in their pocket as happens with.

With stimulus programs end to end often tax returns it benefits us and causing seasonality.

Have there been any changes to date in terms of good better best where youre starting to see that wane.

Wayne.

Starting to see that I didn't hear your last word.

Wayne, meaning where we're starting to see some of the ticket trends starting to slow or the decision is being made we're buying good and better instead of better best or we're starting to put fewer add on what we are seeing is a gradual normalizing of our average ticket I wouldn't be surprised.

If it if when it when it when it hits a stable place whether thats still above where it was pre COVID-19, we're finding things like blue light lenses are are selling quite.

Quite well in this post pandemic.

And then I can beyond period.

So I wouldn't be surprised that when it stabilizes it stabilizes at an elevated level, but what we're seeing now is a normalization of decline versus the <unk>.

Elevated levels of last year, and what you're seeing is we're making up for it by increased transactions and customer account, which is how we've always said, we'd like to build our business through footfall not not average sales were to repeat what Patrick said the success of our business is because we are the low cost provider of a.

Medical necessity, we like the fact that our customers save money versus going to other places.

That is a key source of our ongoing market share gain in our success and positive word of mouth and we don't we.

We let that we let the consumer buy what they want to and let that fall where it may and again, that's been fundamental to our success for a long time. So we.

We are expecting continued declines versus the heightened and unusual levels of last year and average sale and we are making it up versus the customer count.

Thank you our.

Our next question comes from Michael Lasser with UBS. Your line is open.

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

Most of our third quarter results with some of the indications from the other publicly traded optical players in the market.

Appears that national vision share gains load in the period now you're talking about increasing our marketing investment recognizing your comparisons are probably much more of a coco another well what would be causing your share gain.

Slow down versus where they had been.

Yes, yes, we are we believe we are continuing to grow market share every indication, we get including from the category players who can glimpse the entire category the.

Frame and lens suppliers and the insurance companies. We believe we are continuing to grow market share.

And that's happening at a similar pace to two the past but.

So.

We're not seeing it the way you are seeing it there.

Understood.

Follow up question is on the claims marketing of wage investments Patrick.

Patrick I think you said.

You referenced the mid single million dollar wage investment.

Youre, referring to that will continue into the fourth quarter.

Can you give us a sense of what the incremental wage investment is going to be in the fourth quarter and similarly, how big the marketing investment. This is important because we're trying to calibrate.

Our models for 2022, recognizing that the demand environment will be pretty uncertain, but if your messaging that the.

Ben says that youre going to incur in the fourth quarter are going to persist well into next year.

When I incorporate.

Thank you.

Yeah. So.

I would say in terms of the wage Michael.

Was trying to give guidance that says mid single digit millions impact.

Three wage adjustments and that's an annualized figure. So you can kind of do the math on how much of that affected the second or third.

The third and fourth quarters.

In terms of advertising.

We've been saying for quite a while.

That we expect advertising to return to similar levels as a ratio of advertising too to.

To sales I would say in general thinking about looking ahead.

Still a lot of uncertainty in the environment.

We're not providing specific 22 metrics at this time, but.

I will offer a few things that might help I do think as I said, we're going to see more normal seasonal seasonality in 2022.

We will have kind of challenging growers in the first half and much easier in the second half.

Do think advertising it comes back to normal levels.

Spend relative to revenue and then those surgical wage investments that we've made.

We'll lap those and in the summer in mid year of next year and again I wanted to give a way to figure that you can kind of arrive at in terms of how much that is we're so so yeah, there's a few headwinds.

This management team has faced headwinds like this in the past tariffs was a great example, you can expect us to continue to find ways to work through.

And we currently are looking at multiple initiatives.

That will help us do just that just like we did with tariffs.

We kind of like delivering a level of a consistent and resilient performance that seems to please everybody and our intent is to keep doing that so we'll provide a lot more insight into that when we talk again in Q1.

That helps a little bit Michael.

Thank you.

Thank you our next question comes from.

Wednesday with Jefferies. Your line is open.

Thank you good morning, everyone. We wanted to spend a little time on talking to new customer cohort, if you could share with us some of.

The insights from the new customer he's game and I think they had implemented some incremental CRM initiatives related to some of your marketing if you could talk a little bit about whether it's appointment reminders are prompt to try to reactivate lapsed customers anything you can share with us around success that some of those digital initiatives and your new customer cohort that'd be.

Very helpful. Thank you.

Well.

What we saw in the quarter was with gains in both existing and new customers across both our our growth brands.

And.

A slightly higher with eyeglass world, which is an encouraging there.

As Patrick mentioned this is a marketing intensive category and we think those results reflect the fact that our marketing.

<unk> is effective we are getting ever more sophisticated and our CMO at CN, our CRM and digital marketing our programs and a variety of way, we don't like to detail that too.

To and too much too much publicly because it is part of our our secret sauce, but of our marketing efforts are.

Ever more sophisticated and ever more effective.

That's part of it was just one follow up.

We're off on Eyeglass World.

A brown E critical from a real strong returns on in Boston at the unit level.

Are you thinking about the growth of that.

Going forward should we start.

But the unit growth we're not on.

Well, Matt Brown.

But for the out years, how should we be thinking.

Thinking about that in the Port model.

Good.

Very very happy with our eyeglass world.

Performance.

Ever since we reopened after the Covid closure period. It has just been fantastic and again versus versus 2019 in Q3 Eyeglass World was up 21.

Percent.

We think we think it's a combination of the residents of the model and.

<unk> execution and marketing on our part there.

I think we shared that we find the return profile of the ROIC is now much closer to a b and so we have said, we're going to modestly accelerate EDW unit growth in our eyeglass world growth.

Growth in 2000.

'twenty two.

We have.

Sure we opened two eyeglass Royalton in October.

What's nice is it's nice to have.

Two growth engines in both America's Best and Eyeglass World and we think that we can sort of double our store count of the combined two growth brands in the coming years, We think America really loves both these concepts and we plan on on making them available to ever more Americans.

Thank you and our next question comes from Bob <unk> with Guggenheim. Your line is open.

Guys. Good morning, just a couple of quick questions for me I guess just following on some of the new store openings.

In terms of like whether its existing markets and how the stores are opening.

In the various markets any sort of insight into that.

And then I guess the other question that I would love to hear more as just about the Walmart business and some of the new stores that you're opening in Walmart if theres any update generally whats your relationship on Walmart.

Good.

Go ahead, Patrick also for new store.

You know the last two really large markets that we went into.

Strong, whereas the west coast with.

La and San Francisco and in East Coast, and the New York vicinity more recently, Connecticut since that time, we've taken.

Bob a little more balanced approach and not weighted ourselves so much in any given year with lots of.

Brand new market stores so.

I can't give you the exact ratio, but it's now a majority of our store openings are in existing markets, but each year, we tend to pick off one or two new metros are states.

And we're really happy our new stores are performing well.

The only time they didn't perform well in the last year and a half is when we closed them during COVID-19, but since they came out of the gate, while they looked great they've hit a lot of their multiyear metrics quicker. So we're really happy with our new store opening batting average.

Good good good out I'll take the Walmart part of that question again, where we're in our 30 <unk> year of partnering with Walmart Company was founded to vision centers inside Walmart 31 years ago last year extended our contract for three years with the same economics.

So thats got several more years there they gave us five stores last year. It was the first time they've added stores to our contracted $19 94, and we're real pleased with the results, we're continuing to see positive and encouraging results in those five stores and we still think we're we're still in the ramp up of all of the things we can.

<unk>.

Do do with those stores.

Congratulations with Walmart is great.

Thanks, Rob.

Thank you. Our next question comes from Paul Knight.

<unk> with Citi. Your line is open.

Hey, Thank you guys I'm curious, how you're thinking at a high level about 2022 relative to 'twenty. One from a topline perspective do you think there was any sort of pull forward in 'twenty, one that would take away from 'twenty, two or was it more of kind of a catch up from from 2020.

Or do you look at 2021, and I was just kind of the new sales base from which you can grow comps at our normal historical range.

Then second just curious about store pipeline for 'twenty, two how many are locked and loaded with a signed lease and how does that breakdown by by concept and are you finding it any easier or harder to find good locations for one concept versus the other thanks Scott.

Yes ill read you want to take the second one and then I'll come back to the first one yes.

Yeah.

Our store pipeline.

I'll start with that.

Got it alright.

Yes, so our pipeline is looking good we're not having trouble finding a location thats probably a good locations out there I don't think we ever announced how many are locked and loaded but we are very confident we're going to be able to build 75, great stores next year in the same sort of rough rough timing inflow that we've done in past years.

No no no change at all.

And that area things are things are good and Paul I Love. Your question on pull forward. It's one that we've contemplated and thought about here.

The retention data that we look at seems to indicate that we didn't we're not going to suffer from a lot of cycle pull forward.

And I think that I think as I look at sales for next year.

Obviously, a more difficult grow over in first and second quarter, but beyond that I really think we're back into a normal seasonality normal kind of comp growth expectations.

So I think that we have maybe one more half year, where we've got a little grow over.

The challenge that we've got to got to Atlanta, and got to get through but.

Beyond that I see a very much more normal landscape for planning and I'm going to caveat. The one thing Patrick said, there with assuming no new variance assuming no big drama is associated with mandates and stuff and that's all of them really hard to predict but on a on a COVID-19 impact.

Exclusive base, excluding basis I agree with everything and your guess is as good as mine is what any of that might mean to the future I think as we look at the overall aggregate guidance that we'll lay out next year and the plans that we're working on now.

I think they start to look a lot more normalized versus where we've been over the last 18 24 months.

Got it. Thank you guys. Patrick just wanted to follow up did you quantify the unearned revenue impact in <unk>, specifically in terms of millions of dollars sorry, if I missed that.

We did not quantify that we said it would be material.

But we didn't quantify it Paul.

Thank you. Our next question comes from Robbie <unk> with Bank of America. Your line is open.

Hey, Good morning, guys, just a couple of quick follow ups.

First maybe read more Patrick can you can you remind us.

What happens in really high gas price environments with your customer does it change their purchasing patterns at all.

Especially the lower income ones do they sort of.

Delay getting eye exams and things like that and then the other question was just on.

I understand the stimulus rolling off I think you guys had mentioned.

In the past.

You guys were also more open than a lot of the competition that you were expecting more competition to open up the <unk>.

Half of this year has that been happening and is that having an impact on you guys at all or do you see that.

A bigger impact in the first half of next year. Thanks.

Yeah. So I'll, probably thank you for that our customers go live on a on a tight budget. That's that's why we benefit from stimulus, but we're not immune to any temporary impact of any external economic.

Economic events sounds like like gas prices are that there's no <unk>.

Rack correlation we do watch out when the gas goes way up but it's been a long time things that happened, but I think we are looking at if you look at our long term trends, we are able to comp positively in good economic times and bad and you could almost see the flip side also on the one hand, our normal customer is it feels.

A little tight in their budget, but sort of the customer just a little better office.

Is that also feel like tightened their budget and looking for more value on your second question.

The more open says so.

Opened sort of gradually throughout may of 2020, and we're fully open as of June one of 2020 and it took.

Many of our competitors a while too.

Reopen some of them still opening stores in the fall September.

<unk> of 2020, so last year, we were benefiting from that.

All the category has been pretty much fully open.

Q4 of last year with the exception of the fact that we believe about 3% of the independent doors shut along the way through retirement or financial.

So there are a few less doors there, but there are also there.

There is there is data out there on sort of the top 50 optical retailers and most of the debt while we were.

Growing stores, a lot of them closed close down stores.

Last year, a couple of hundred stores there.

Last year, the whole Sears chain shutdown and there were other.

So last year saw the decline the closing of stores that have yet to reopen but in terms of reopening of the category that all occurred by Q4 of last year.

Our next question comes from Anthony to Kumba with loop capital markets. Your line is open.

Good morning, and thanks for taking my question. So my first question as I look at your results relative to two.

2019.

This sales growth slowed from 2028% in the second quarter to 20% and I guess I was wondering do you think that maybe you know.

In terms of the back to school being somewhat underwhelming. If there was maybe like a demand pull forward into the second quarter, particularly with people.

And those checks so maybe that that back to school Fortunately would've made in the third quarter. They made in the second quarter with the stimulus checks.

That makes sense at all.

Yeah, you know.

It's hard to assess pull forward in our category, it's not something we normally see especially with our consumer segment.

Generally the trigger is.

I'm not seeing as well and we've found that.

It's sort of from that from the first moment of Hey, I'm, not seeing as well too to acting on it generally about 90 days and you got to go through the denial phase and all of that and hope It goes away, but then it doesn't and you have to act on it so it might start customer base in general.

We don't think Florida is big these are irregular times, but we aren't thinking of it as a lot of that is really very hard to assess that.

I would just also add as we worked through the 53 week year.

The 50 <unk> week was a factor in our calendar shifts that affected second quarter I think as you look at our first and third quarter two year comp stacks youre going to see fairly similar numbers and in second quarter Youre going to see an elevated number that's a structural factor as well as just the stimulus and and frankly in the second quarter Covid.

Was over.

Temporarily until Delta variants.

I think as Youre looking at what looks like a normal quarter.

And third on a two year stack.

Don't have those implications and Anthony.

Got it that's helpful. And then just one clarification in terms of the 50.

$50 million share repurchase so so that's just to offset.

Stock option exercises. So in other words, we shouldn't really expect any significant change in the in your weighted average shares outstanding.

Yes. This is just us.

Siding to start offsetting any impact of management stock action. Our goal is to keep that very balanced and neutral we have not been doing that thus far as a public company and we're starting now.

It's not the beginning of a big stock buyback and you can tell because it's just $50 million I mean, we think that last us two to three years.

And so it's just exactly for that I will go ahead and since you brought up the number 50 hour plug the debt reduction.

Really happy to take another 50 off the term loan and I do think we're probably we've probably done making moves there, we'll probably sit tight on that term loan a 150 for quite a while.

The next Big thing, we're thinking about is multiple years out on the horizon and that's the convertible notes we will.

Going to offset dilution.

Probably not going to do many more voluntary prepayments at all on the term loan and we will have our eye on the notes in the future.

That's helpful.

Okay.

Our next question comes from Saks Sodom with Wells Fargo. Your line is open.

Do you view this as an opportunity to take more share.

So so we are a group that.

Hasn't raised our entry offer on on our lead brand America's best and well over a decade.

We.

Many of our competitors do take price fairly often and we find that that's one of the long term trend that benefits us.

The higher the traditional category. It goes in terms of pricing the better it is for our market share.

In terms of our attitude towards pricing, we did take peripheral pricing in 2019, and we do that on our infra.

Infrequent basis over time, but we consistently evaluated evaluate potential.

Potential peripheral pricing options, but we're committed to to our customers saving money versus most any alternative out there because that's that's our reason for being.

And then and then I'll talk a little bit about inflation in the category just in general.

We have long term contracts in place with all of our major vendors.

That doesn't make us perfectly immune to inflation, but it certainly does help.

And just as a reminder, we saw some freight pressure in the quarter, but it's just so small for us its immaterial element of our cost structure.

And then finally as it relates to inventories we have still been in a position of pre buying.

We want to make sure that we have everything we need to open stores and sell to customers and patients and so.

Well in the year, probably a little heavy on inventory, but that will be purposely that'll also.

Any potential small inflationary pressures that we might feel later in next year.

Closer to that 2019 level or is the current rate of about two to three points higher than 2019 more appropriate for your business.

Well I'll remind you that gross margin is gross margin can be it can fluctuate with seasonality I mean, there's typically really good in the in a normal year and January February through April ish with peak season, and again in back to school. There are some fixed costs in our gross margin related to labs.

And labor.

Flavors. So we do have periods of the year, where it'll be a little higher a little lower.

Wouldn't get locked into into fourth quarters for gross margin.

We continue to we're going to have a little bit of wage pressure there with the languages that we raised through next year that's fairly small.

We're going to see lab productivity gains are probably going to offset that and then another big factor for me is where does ticket normalize.

Read kind of talked about we now do not expect ticket to return to pre pandemic levels and so all of that comes into play as I speak about you know.

What will the story on gross margins be I still think there is a shock.

You need to see.

Gross margin improvements over time.

Got it I appreciate the time, but thank you I think we are at the end of our hour. There. So thank you very much Kathryn for moderating the call and thank you all for joining us today and thanks to our stockholders for continued support and we're looking forward to speaking to you again, when we report our fourth quarter results. Thank you all.

Much.

Yeah.

This concludes today's conference call.

Thank you for participating you may now disconnect.

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