Q4 2021 National Vision Holdings Inc Earnings Call

Thank you for standing by and welcome to National Vision's fourth quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.

To speak his presentation there'll be a question and answer session to ask a question at that time. Please press Star then one when you touched on the telephone as.

As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host Mr. David Mann, Vice President Investor Relations. Please go ahead Sir.

Thank you and good morning, everyone and welcome to National Vision's fourth quarter 2021 earnings call. Joining me on the call today are Reade Fahs, Chief Executive Officer, and Patrick Moore, Chief Financial Officer, Our earnings release issued this morning, and the presentation, which will be referenced during the call are both available on the investors section number.

Website National vision Dot com and a replay of the audio webcast will be archived on the investors page. After the call before we begin let me remind you that our earnings materials and today's presentation include forward looking statements as defined 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.

Patients. We also would like to draw your attention to slide two in today's presentation for additional information about forward looking statements and non-GAAP measures as a reminder, national vision expects to provide certain supplemental materials or presentations for 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, I hope, you're all staying safe and healthy.

To begin by sharing my heartfelt appreciation to the entire national vision team for their continued resilience hard work and their commitment to patient care and customer service. During these ever changing times I've said it repeatedly over the past two years and I'll say it again I am just so impressed with this team.

Turning to slide four net revenue in 2021 exceeded $2 billion for the first year ever with record adjusted EPS of $1 48, we are confident that we continue to outperform the industry in 2021 and believe that this should continue we increased our white space target for America's best by three <unk>.

<unk> stores in 2021, and see a long runway for expansion for both our growth brands, we invested in and progressed key strategic initiatives, including the improvement Eyeglass World are ROIC and the ongoing Digitization of America's best stores with remote medicine, and electronic Health Records, which we expect to continue.

Driving growth in 2022 and beyond we.

We generated record operating cash flow paid down $167 million in debt and returned nearly $70 million to stockholders through share repurchases. We released our first corporate responsibility report and greenhouse gas inventory, our corporate responsibility efforts have been well received by investors and other stakeholder.

And have been reflected in improved ESG ratings all in all 2021 was a record setting year on a variety of dimensions.

Turning to slide five and a summary of Q4 results as noted in today's press release, our results are being compared to the fourth quarter of fiscal 2019, just as we did in our Q2 and Q3 releases due to the significant recovery following the reopening of our stores in 2020, we believe that 2019.

Helpful basis for comparison.

We're pleased to have delivered another quarter of consistent performance in Q4.

Net revenue increased nearly 19% over the fourth quarter of 2019 with adjusted comparable store sales growth of 11, 5% over the same period. The topline strength continues to be led by our growth brands America's Best and Eyeglass World. We opened 16, new stores during the quarter and ended with 1200.

78 locations.

Adjusted operating income increased approximately 2% and adjusted EPS increased 35% to 13 sense overall.

Overall, our fourth quarter results reflect the ongoing strength and durability of our business model in a few minutes Patrick will take you through our Q4 results and 2022 outlook in more detail.

Turning to slide six we're proud of the strength and resilience that our business has demonstrated both during the pandemic chapter and over the last two decades, our business performance has been consistent across strong and weak economic periods. Our performance was aided by ongoing positive trends such as an aging population migration.

The mall shopping and increased ice strained from such things as increased screen usage. We expect these trends combined with other macro environmental factors to continue to favor our value positioning and help us to drive market share gains.

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

In the fourth quarter, we were pleased with our positive comp performance versus 2020, as we lap the difficult comparison from last year. When we had the tailwind from pent up demand from store closures the benefit of government government stimulus and then elevated average ticket. We're encouraged by the fact that our average ticket has stabilized at a higher level than we expect.

It primarily helped by 2021 pricing actions and successful product introductions like Blue light lenses.

With the current inflationary environment, we expect our target customer will more than ever seek out value offerings. We completed an evaluation of our pricing and implemented some peripheral pricing actions in Q4 that we believe are appropriate while continuing to save our customers money versus competitors.

As noted in today's earnings release short term macro headwinds are affected store operations and customer traffic. Thus far in 2022, the omicron variant impacted our ability to staff stores based on optometrists and associates illness.

This coupled with unusually severe winter weather has led to a slower than anticipated start to 2022 for us and we believe this slowdown has been felt in most of the category during the optical industry typically high seasonality period.

Taking a step back from the volatility thus far in Q1, we believe our foundation is solid and are confident in the health of our business model as we've been saying for years. This is a benefit of being a low cost provider of a medical necessity.

Shifting to slide seven.

As we move into 'twenty to 'twenty, two we are continuing to execute on our core growth initiatives and investments that we expect will position us to continue to build market share new stores remain a primary driver for growth and we're fortunate to have two attractive growth engines, and America's best and Eyeglass World. Both brands delivered strong sales performance last year.

Especially eyeglass world as a result, we're increasing our annual growth target and intend to open at least 80 stores in 2022 with a plan to double the unit growth Eyeglass World. Our real estate team has developed a solid pipeline of specific locations to support this plan.

Let's talk for a minute about eyeglass world, we're especially excited about eyeglass world's runway for growth and improved return profile. The brand is at an inflection point our investments in people and processes have paid off with the strong momentum experienced throughout the pandemic eyeglass World has really hit its stride with strong performance weekend and week out.

Since early 2020.

On these calls you repeatedly heard me say that we are always seeking more optometrists are Congress play a key role in our company's ongoing success because the optic optical customer journey typically begins with an eye exam. That's why we've always been so focused on making sure. We are offering great places for our promises to practice and thereby.

<unk> increased exam.

The ability for our patients.

This means continuing to invest in programs that attack attract optometrists and maintain high retention rates in 2021, new initiatives related to optometrists compensation and recruiting were implemented and thus far we've been encouraged with the early results of these initiatives. These initiatives initiatives will continue to be a focus area in 2010.

Two.

Another key focus to ensure we can serve ever increasing patient demand has been our remote medicine pilots. We've spent significant time working to develop these offerings and are very pleased with the progress given the success of these pilots I'm pleased to report remote exams are currently offered in over 100 locations in 2022.

We plan to expand the remote medicine, offering and expect to have a total of at least 200 store locations by year end simply.

Simply put we believe everybody wins with remote medicine optometrists like the flexibility that it provides while patients benefit from the increased exam availability as a result, we're excited by the role that remote medicine can play in serving more patients across both geography and time with the remote medicine rollout we are concurrently.

Adding our proprietary electronic health record system further digitizing the patient customer experience.

Marketing along with the positive word of mouth from happy patients and customers continues to be a key factor in driving traffic to our stores. We compete in a marketing intensive category given the infrequent purchase cycle for eyeglasses and we believe our results in 2021, and our acquisition of many new customers demonstrate the effectiveness of our <unk>.

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In 2021, we leaned in to invest more aggressively to maximize share growth during a period of disruption caused by the pandemic. Our marketing team also used the opportunity to run additional marketing tests and we believe we're more sophisticated in our CRM and digital marketing efforts than ever before.

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.

Lastly, as it pertains to the current supply chain environment, our efforts to mitigate supply chain disruption continue to be effective to date, we've extended our order lead times and are benefiting from our strong long term vendor relationships market cloud and financial strength. Our merchandize inventories are currently in a solid position as.

Our merchandising and supply chain teams continue to effectively navigate the ongoing challenge.

At this point, let me turn the call over to Patrick for a more detailed discussion of our financial results.

Thanks, Ryan and good morning, everyone. We're pleased with our fourth quarter results as the business performed ahead of our expectations. Our performance was driven by continued positive traffic trends and excellent store level execution. In addition, we continue to reinvest in the business to maximize our opportunity to grow share.

While reducing our debt further and returning capital to shareholders.

As a reminder, the comparability of our reported results was affected by the impact of temporary store closures in 2020.

Thus consistent with our second and third quarter earnings releases, we have share results versus both 2020 and 2019 as Reade noted our comments today are being primarily made to 2019, which we believe is a more helpful comparison now, let's turn to slide 10.

Net revenue increased nearly 19% over 2019, the timing of unearned revenue versus 2019 benefited revenue growth by one, 1%, which was better than expected due to the omicron impact on sales during the final week of 2021.

During the quarter, we opened 14, new America's best stores, and two eyeglass world stores for a six 1% increase in store count for our America's Best and Eyeglass World growth brands combined unit growth increased eight 2% over the last year.

Adjusted comparable store sales growth was up 11, 5% over 2019 and up one 2% over 2020 compared to a 10, 6% increase in the fourth quarter of 2020.

Q4 same store sales growth over 2019 was driven by growth in both average ticket and customer transactions compared to 2020 comps were also driven by an increase in customer transactions as well as a slight increase in average ticket.

Turning to slide 11, as a percentage of net revenue cost applicable to revenue decreased 110 basis points versus 2019 or about 240 basis points ahead of our expectations. This decrease was driven by increased eyeglass mix and higher eyeglass margin the outperformance.

Versus our expectations was driven by higher sales and a higher average ticket than expected.

Adjusted SG&A expense percent of net revenue increased 290 basis points compared to 2019. The key factors behind this increase were higher advertising investment and higher corporate overhead and payroll, partially offset by the leverage of occupancy expense as well as <unk>.

Lower incentive compensation.

The higher advertising spending reflected investments to drive the business media inflation and timing differences this year compared to advertising spending in 2019.

We expect advertising in 2022 to be maintained at a similar percentage of revenue as 2021 with the potential to be leveraged for the year, especially beyond Q1.

Adjusted operating income increased 2% to $16 $8 million and adjusted diluted EPS increased 35% to 13 <unk>.

<unk> 2019 overall, we were delighted to deliver another quarter of consistent growth.

Turning to full year 2021 results on slide 12, net revenue increased approximately 21% versus 2019 to approach $2 1 billion with a record adjusted operating income of nearly $205 million adjusted diluted EPS nearly doubled to a record.

<unk> dollars 48.

Now turning to slide 13, our balance sheet and liquidity remained strong at the end of the fourth quarter, our cash balance was $306 million and total liquidity was nearly $600 million.

When including available capacity from our revolver.

We ended the quarter with total debt of $579 million net debt to adjusted EBITDA was nine times compared to one three times at the end of 2020.

For the year, we generated record operating cash flow of $259 million, we funded $96 million in capital expenditures that we're primarily focused on new store and customer facing technology investments and ended slightly below our expectations due to supply chain related delays.

We are planning 2022, capex in the range of $110 million to $115 million to reflect the higher store opening cadence as well as an acceleration and technology investments such as remote medicine and electronic Health Records.

With our free cash flows and considerable cash position, we were pleased to further reduce our debt position as well as initiate a share repurchase program during the quarter, we voluntarily prepaid $50 million of term loan borrowings to bring the term loan balance down to 150 million altogether in 2020.

One we paid down 167 million and the term loan and are very comfortable with our current level of leverage and the term loan balance.

During the quarter, we returned capital to shareholders with the repurchase of one 4 million shares for nearly $70 million under the $100 million authorization approved by our board of directors.

As noted in our earnings release today, our board recently expanded our share repurchase program by another $100 million and we now have $130 million remaining under the authorization our share repurchases to date and the increased authorization reflect the confidence of management and the board and our business.

Model and our ability to continue to generate strong cash flows and deliver sustainable growth.

Regarding our inventory position, we're comfortable with the current level and its ability to support our 2022 growth plan at the end of the year inventories were approximately $124 million in inventory per store grew about 5% on a year over year basis, our merchandising and distribution teams continued to execute well.

To help us manage through the current challenging supply chain environment.

Overall, we believe that our financial strength and our commitment to invest in our business remains a competitive advantage.

Turning now to our outlook on slides 14, and 15 I'll conclude with some commentary regarding our 2022 outlook, which we included in today's earnings release.

While the operating and macro environments remain uncertain, our consistent performance over time gives us sustained confidence in our business and we are continuing our practice of providing selected full year outlook for fiscal 2022, our outlook reflects the currently expected impacts related to COVID-19 outside of the Q1.

<unk> as a result omicron the outlook currently assumes no material deterioration in the company's current business operations as a result of geopolitical instability as well as Covid and experience government actions and regulations.

Against the backdrop of what we know today, our 2022 outlet projects net revenue between $2. One 2 billion to $1 7 billion flattish adjusted comparable store sales growth compared to last year in the range of negative one to positive one 5% adjusted operating income between 100.

<unk> 40, and $150 million and adjusted diluted EPS between $1 three to $1 10, assuming 95 3 million weighted average diluted shares.

Compared to 2019, the midpoint of our outlook represents a solid three year CAGR for net revenue of seven 5% and for adjusted diluted EPS of 12, 5% respectively.

As we've done at times in the past I'd like to provide some additional color given the unique comparisons to 2021 in each half our record result, and government stimulus last year present, a grow over challenge in the first half also we estimate a Q1 revenue headwind approaching $50 million given these short.

Term macro impacts that Reade noted earlier as a result, we expect negative mid single digit comps and a decline in our profitability metrics for the first half of the year in the second half, we expect comps to be solidly positive in the mid to higher single digits due to easier comparisons moderating average ticket.

Pressure and increased eye exam capacity with profitability more in line with last year for the year, we are planning for positive customer trends.

With a slight decline in average ticket.

Store openings. This year will continue to be predominantly America's best locations, coupled with the doubling of eyeglass world openings store openings are expected to be evenly spread over the year and we project a few closings as is typical each year.

Let me share a couple of other factors assumed in our outlook for 2022, we anticipate the planned expansion of our key remote medicine and E. HR initiatives to result in incremental dilution in the range of $6 million as Reade noted we are very excited about the role that these digital initiatives will play in <unk>.

Driving future growth.

We also expect the timing of unearned revenue will have a negative impact in 2022. We currently estimate that 2022 impact to adjusted operating income to be about $9 million. As a reminder, unearned revenue recognition is a seven to 10 day timing impact that can affect our quarter to quarter and annual comparisons.

For the full year 2022, as a percentage of net revenue, we expect cost applicable to revenue to increase 220 to 240 basis points versus last year as we lap last year's record performance that benefited from product mix shifts and an elevated ticket, notably our outlook.

<unk>, our cost applicable to revenue to be 100 basis points below the 2019 level as a percentage of revenue as Reade noted we are seeing our average ticket stabilize at a higher level as compared to 2019, partially due to pricing actions late in Q4 for Q1 cost applicable to revenue.

<unk> are also expected to increase about 220 to 240 basis points versus last year.

In terms of expenses, we would expect 2022 adjusted SG&A to increase between 60, and 80 basis points as a percentage of net revenue year over year. The SG&A increase primarily reflects sales deleveraging in Q1 and higher levels of wage investments as a result, as we lap the exceptional margin expansion.

<unk> in 2020 in 2021, we estimate an adjusted operating margin of nearly 7% at the midpoint of our guidance range, which is approximately 20 basis points above the 2019 level. Despite the significant short term headwinds.

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

As a reminder, the timing and magnitude of tax refunds are an important variable that can affect our performance in the first and second quarters, and which might be further affected by COVID-19 conditions.

To summarize our fourth quarter performance further highlights the consistency and underlying strength of our business model in this evolving operating environment. We are focused on what we can control and despite the short term macro headwinds. We are excited about the strategies and initiatives that we've shared today and that give us confidence that we are well positioned.

<unk> to deliver improving performance as we move through 2022.

At this point I will turn the call back to Reed.

Thank you Patrick turning to slide 16, and our moment of mission being responsible individuals and corporate citizens has been a core part of the national vision ethos for decades over the past year. We've made several leaps forward in our ESG journey, including several firsts such as completing our first greenhouse gas emissions inventory.

Publishing our first corporate responsibility report these efforts to improve our transparency and disclosure and lower our perceived governance risk are reflected by recent improvements in national Vision's ESG scores and ratings, thus reinforcing that our ESG journey is aligning to the needs of our stakeholders. Our ESG framework is.

So helping us maximize the impact of our philanthropic activities last year National vision made philanthropic commitments that we expect will help a million people around the world to see better and consequently live better. This includes collaborative partnerships with such groups as americares and restoring vision as well as our own programs like <unk>.

<unk> and eyeglass World made locally given globally program.

More information about our philanthropic and corporate responsibility efforts is available and the corporate responsibility section of the National vision website.

In summary, the key takeaway from today's call as this as we entered the third year of the pandemic, we've grown our business and market share advanced key initiatives and further strengthened our foundation for sustainable growth. We feel good about what we can control and the smart investments, we're making to drive our business Eyeglass World.

Is that an inflection point of growth, we're excited about our optometrist recruitment retention and remote medicines initiatives. Our average ticket has stabilized and we've taken some pricing actions and our financial position and cash flows are strong and remain a competitive advantage for these reasons, we're confident about our prospects for this year and beyond.

With that I'd like to turn the call back to the operator to start the question and answer portion of the call.

Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.

To withdraw your question press the pound key again Thats star one to ask the question.

Our first question comes from a lot of Paul <unk> with Citi. Your line is open.

Hey, Thanks, guys a couple of questions.

Can you maybe talk about the.

The impact that you saw in December that last week I'm not sure. If you quantified how much that impacted your fourth quarter results to date, one micron and then also on the pricing actions when exactly did those kick in in the fourth quarter, how broad and workday.

And.

Are you planning any other action pricing actions beyond that this year and then just just higher level. You know Patrick can you maybe talk about accelerated store opening but I'm curious if you could give an updated view on what the new store model might look like in a post pandemic world in terms of payback ROI.

Hi.

He changed on the cost side in terms of the initial investment.

Just give us an update there thanks.

Sure Paul Good morning, I'll take the first and the third and we will come in on pricing.

In terms of the last week of the year, we were really seeing the beginning of what we ended up feeling in significant ways in January improved bulk of February with Omicron and Omicron boat.

Started affecting our store staffing for the doctors started affecting affecting customers coming for their appointment and so we did see some sales sales impacts out of that that weakened in the last week or two.

I wouldn't call it severe but we did see some weakening did a little less than we expected to but then the big impact was kind of the impact on our revenue, where we had guided for that to be fairly negative and it was like $4 million to $5 million better.

So that also kind of offset some of the sales Miss that we would've felt in December now that four to 5 million of less negative on earned in 2021 found its way into 2022, which as you know part of our guide as well.

I think your second question with the pricing action that was sort of late October early November is what you should assume that.

And then you're getting in the future.

Coming up this year.

But going beyond that.

And the other pricing actions is that what you're saying.

Yes, Sir Yeah, we don't we don't rule that out that's always a lever we have if we choose to we're not announcing anything and frankly, we generally won't be announcing a sharing any of that until sort a little while afterwards as we're doing now just for competitive reasons, we don't need to have broadcast that.

But as you know.

There are options and we're always looking at that and looking at.

The difference between us and competitors, we like we like our customers they know theyre saving money by by coming with us but.

It's certainly a lever we have pulled several times over the past several years.

Okay.

In terms of new store models and payback is really not a lot has changed there.

We still see target in your five revenues in the one four to one six range.

Cost to open in the four to $500000 range and so you know kind of the same breakeven time frame the frame the same paybacks Wilson, Paul we are we continue to.

Test some slightly different concepts, where we will you know maybe shrink the store with that or.

Putting in different configurations for our America's Best brand and our <unk> brand, but all in all for the foreseeable future.

Until we were to say something different there you should expect a pretty similar.

For opening cadence in economics, which is a big part of the consistency of the business.

So im just going to chime in and add in.

As you've been hearing US say, we're very excited about eyeglass World. We think the last few years have been a real inflection point for it and we have opened two new configuration marbles that we're pretty darn pleased with so that's there.

Out there also and we've done that pretty recently.

Thanks, guys. Good luck.

Thanks, Paul Thank you Paul.

Our next question comes from the line of exact data.

Your line is open.

Hey, good morning, so you've been talking about the elevated average ticket in your business for several quarters now and in the past few quarters, you've been guiding for some form of normalization that thus far has been a little bit better than anticipated. So first of all can you talk a bit about the makeup here between.

Price and mix.

What what you think has driven the average ticket and then what of that is expected to moderate and then for 2022.

How much of that 220 basis points of gross margin pressure would you specifically attribute to the ticket reduction.

Let me start and Patrick you can chime in on that that.

Point, yes, actually we were pretty pleased of what we've been saying is that that we've been having an elevated average ticket for quite some time since the reopening of our stores and that we expected it to moderate and we expected it to moderate.

Probably above 2019 level, but we expected it to.

It's a moderate and we think it's now stabilized and we think it stabilized at a level above or above our previous expectations and certainly above the pre pandemic levels. It's a combination of three things. There is mix shift customers are are buying more feature blue lights doing doing quite well that sort of thing.

And the peripheral pricing action and we're we're pleased to have seen this despite the fact that theres less stimulus out there than there was before so this was a.

Unexpected plus for us to see it stabilizing in the way it has.

Hey, Hey, it's Patrick.

The bulk of that $2 20 to 240 basis point reduction as ticket related when theres, a small amount call. It 30 bps for the remote rollout dilution, but I mean for all practical purposes. All of that ticket stabilization is the gross margin change and I'll just say we are.

It hurts financially for that ticket to stabilize but it's really important to our business model really important to our customers as a part of the growth model going forward. So part of this we just have to work through.

But it has stabilized.

And then for Reed, how do you expect the category to perform as a whole in 2022 and considering the lower income headwinds from inflation and lapping.

Et cetera.

What's the value tier to still outperform this year.

Oh, yes, like what we're seeing is a long term trend in the category.

We're a shift to value and that's I know, it's certainly been going on for a decade, and especially so in the past seven years and so the.

The category there is a.

Definitely shift to value going on and we've been the beneficiary of that for for quite some time I do think that the category is off to a slower start for the reasons. When you talked about a micron and and weather and the weather I think it was like five or six storms and they all hit on the worst possible days of the week.

Two the highest the highest days of the week, so that would and so that whole that anyone who's out there with a broad geography affected by whether well have that so I think the categories off to a slower start.

And then any of us expected due to the factors.

We don't think.

From a competitive environment. It is generally unchanged, but is generally unchanged in the the shift from from independence to change the shift from a mall to non mall businesses.

Sort of several pieces like that there've been two or 3% of doors have shut since.

Since COVID-19 .

Started that two or 3% of independent doors are shut you know a lot of it.

Doctors, just throwing the towel and said I'm going to I'm going to retire. This is this is too much.

For ethane NCR there've been sort of challenged host that that have that have been not great places to be in opex.

And that's again that all favors that all favors Oscar I can't predict the future of the consumer but I do think that when inflation is out there and the like people seek seek value and that's what we're we're known for so.

In general I feel that's a continuation of what we've been talking about for since we went public in 2017.

Thank you.

Our next question comes from line of Michael.

Michael Lasser with UBS Your line is open.

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

How much of the lost sales or disrupted sales that national business experienced year to date have you assumed that you will get back over the course of the coming months your first half comp guidance, we're on marketing.

Number.

We're expecting a mid to high single B G.

He came in the back half of the year, which would be higher than the long term average around 5%.

Okay.

I'll start and Patrick you can chime in if you wanted to this is this thing about the vagaries of our category you got to remember sort of Q1. It is optimal optical Christmas and January and February are the warm up and then and then March is really the high seasonality.

And we've not really had this sort of dynamic before it in the category.

We were talking earlier today about the few years back there was a lot of store in Denmark pent up demand came back in April April was a lower seasonality time. So there was there was.

Plenty of capacity there, but in in March so we have the least excess exam capacity to take up pent up demand. So so.

So if this whole mess of Omaha, and weather couldn't have happened at a proper time, given the categories seasonality overall, but so sort of.

We're assuming a more a more modest recovery than we would if the seasonality with different.

Thank you very much for that and my follow up question is your gross.

Gross margin guidance implied.

That in 2022, it'll still be above where it was in 2019.

Can you frame the puts and takes.

How your gross margins going to compare this year versus.

Prior to the pandemic.

The division has experienced tremendous amount of gross margin expansion over the last couple of years can you paint.

Just to think about how much.

The price increase.

We'll go to cover some of the incremental optometry and Sweden.

Be paying this year.

What extent would that be a drag on your gross margin this year versus where it was prior to the pandemic. Thank you.

Sure.

As we look at gross margin. We are modeling yet ahead of 2019, the certainly the ticket stabilizing at a higher level than frankly, we predict is a factor and.

And that's part of that is some attachment to new products. We've also taken pricing actions. So I think those things mindful, we're obviously, helping.

We still expect to see some low degree of optometrist wage inflation also so expect to see lab productivity advances.

Every year. So we're fairly confident that we can maintain the gross margin gains that we would experience.

Have long term contracts with our partners and vendors in terms of most of the things that come through our cost of sales were not immune to it we're not immune to it but a lot of the cost of sales as you know it gives them are under long term contracts so that gives us.

A little bit more confidence there.

Coming back to the first question. He asked Reid I would just add there to gosh, it's still a different difficult time to plan and provide guidance.

And as we think about how much of that <unk>.

Revenue will get back we have taken somewhat of a conservative posture, which is probably use no shocker to anyone listening.

But there is there's an element of conservatism in there.

Revenues that will pick back up.

Thank you.

Thank you.

Next question comes for the line of Adrienne <unk> with Barclays. Your line is open.

Yes, good morning, Joe.

Well done in an incredibly difficult environment.

Reed I really wanted to focus on this remote exam.

100 locations in 'twenty.

2021, and I guess, you don't have it by the end of this year.

Are they are these location outside of like what type of MSA.

<unk> are they outside of are.

How are they.

For both <unk> as well as eyeglass world and how much more optometrists capacity utilization are you seeing in its initial phase.

Any data.

Share with us on those initial reads on what's giving you that confidence thank you.

Great.

I appreciate that question in in particular, and just to level set to make sure everyone's got the the common vision as to what we're talking about here, we're talking about patient.

In our store in the exam room sitting amidst all of the expensive exam equipment that is in all of our stores doctor not in the store Doctor let's call it.

Practicing from from there Dan.

Synchronous exam. So the Doctor is on a video screen talking to the customer as if they were there and the doctor due to the electronic Health Records.

Has all of the data that they would have otherwise so the only difference in the experience is the doctor is honest screen versus Ah versus actually in the room.

With the person.

You talked about sort of.

Msas.

The key thing is the Doctor has to have a license for that particular state.

And so they don't have to be sitting in that state, but they do have to have a license for that state and so we're looking at this as more of a state by state rollout. So that we sort of a recruit in and half the doctors all.

All the doctors that will need for that particular stage. So it won't be a state by state rollout.

In the past we've been talking about the that we've been into the pilot phase and now we're sort of moving into a broader expansion phase. It is all in America's best at the moment.

And in short that the benefit is Ah patient.

Is more likely to be able to get an exam when they want to have it so with that customer convenient fair in the patients.

Enjoy the exam. They all work I think we're all just getting a lot more used to doing things virtually than we ever thought.

Thought about in the past so.

We're excited by that and and it expands exam capacity and allows us to serve more patients.

Hey, I would also add.

Well, we're really we're excited about the ROI will see elements of this.

This will be.

Probably a multi year project in the same vicinity of scale of our retinal camera projects that we did over a few years and the return economics are great. If you think about a store where you can add a second mine doctor to handle customer traffic or are you going to store. This.

Dark for a day for some reason, having a doctor in that day.

And having that second line when you need it is really big it doesn't take many of those days to begin to kind of payback on investment. So we think this will be very rossi accretive.

Early on it.

And and and who knows down the road or right now, we're putting it in and in current stores in heavy into current storage, but but if you go.

Down the road, we may have an opportunity to start building stores in places we wouldn't have contemplated before because we didn't think we'd be it would be easy to get a doctor to move there and this this.

This allows.

Us to be agnostic about about what whether a doctor will eventually leave in that area. So there may be more remote or rural stores.

In the future I'm, not announcing anything yet, but that's that.

It's a possibility that this unlocks.

Now this is very interesting because it I.

I guess my follow up question to that is the.

The rollout time for it does not seem to be I mean, they're there with the equipment with the equipment and this is sort of just filling up the appointment book and utilizing kind of that appointment slots much better. So it seems like it had a pretty significant long term positive ramifications I said yeah.

And it started to accelerate.

So that was hanging out with Josh I would just add the way I think about it is it takes.

The most or one of the most critical resources in our entire business model and it makes the resource more fungible across geography and time.

Yeah, you no longer have to use that set of skills and that one location and you can flex it.

Yeah, and then really quickly my follow up question I guess.

Patrick or maybe.

Can you remind us what is the percentage of customers that do not have insurance.

And the great resignation is largely coming from average hourly rate workers and I know, it's very early very difficult to tell but this is kind of a semi permanent change in the workforce, but that should be benefiting national vision. How do you think about that and how do you tap into those customer. Thank you.

So are.

We've we have.

Historically <unk>.

Always been underdeveloped in the area of vision insurance.

For much of the category. It is the majority of the business that they get it is true vision insurance and for US It's always been a minority and we say what it would do it if we last announced that it's roughly in the third yeah in their thirties.

Think of it about a third of Av.

All of our patients and customers have that.

This is.

For two reasons when we bought America's best they didn't even take insurance. So that was we were starting from zero when we bought them, but more importantly, we think we will probably always be or at least for the foreseeable future.

<unk> non insured patients because when it's when it's your money there.

And not not masked by <unk>.

Network and things like that when it's your money you tend to seek out real value and and that's that's how people find find out when it's their money.

Oh, I'm going to save money by going too fast or eyeglass world are our our Walmart stores. So.

And to the extent of the great resignation to the extent that people arent going to be in jobs, where they're offered a vision insurance, yes, it should help us in that way.

We think that.

Consumers.

When they are spending their money find find us.

Fantastic.

And well thank you. Thanks, so much.

Thank you. Our next question comes from the line of Kate Mcshane with Goldman Sachs. Your line is open.

Hi, good morning.

Thank you for taking our question.

Just had a couple of questions around.

G&A or the drivers within SG&A I wondered if you could help us understand how we should think about advertising costs throughout 2022, given some of the investment you made there during 2021.

And is there a way to discuss.

Your retention rates.

For your employees over the last few months versus historically, given the wage investments that you've made and will continue to make this year.

Hi, Kate it's Patrick I'll, I'll give you a little color on advertising.

Step back and think about the last few years, we had.

<unk> of 2020, where we reopened our stores and frankly found that we didn't have to advertise that much to draw customers in but to stay with lineup.

In 2021, we took some of the pieces kind of dividends that we were enjoying from high gross margins and we invested in various forms of advertising testing I feel like we walked away with that with a much better sense of advertising effectiveness, where the line was our CRM and so.

Feel like we ended the year very optimized now obviously, we're going to deleverage we're going to have some deleverage as a result of the omicron and weather impacts that we disclosed today, but when we get to the second half of the year.

I expect that we're going to see some leverage for the full year Our guide assumes.

Just a little slight leverage and that includes the negative impact from Q1.

As I look out into the second half in general for advertising and really more broadly margins.

We're going to see better numbers in butter compares.

And NK to your question about about retention rates, we don't we don't share the specific numbers on that I will I will tell you our stores are well staffed now that we're in good shape on that in a vagary of this category that's different from others that you might.

My might look at is a lot of our associates regard themselves as an optical professionals and that that they're there they're career optician or their career optical person there very nice aspects to working in this field you're in health care, there's a fashion.

Component there is a nice sense of fulfillment that you're you're helping people. There's some beautiful moments when you know a child sees for the first time, so there's a lot of fulfillment and that and there's a so so so theres not a oh should I go work at the restaurant down the street, they're competitive and their labor frame it.

His other optical firms and we've had such nice success for so long that that there's a feeling like there without a winning team which is always good. It also yeah. One of the things that we're real pleased about is sort of our our career career tracking and and all that.

Give you a wrong.

<unk> centered around around 40% of our store managers started at an entry level role with us without without optical experience and and grew from within and those people are really dedicated pad.

You know to the national vision and that we've given them great great a career growth and they're well aware that that accompany thats opening formerly 75 now now 80 stores are at least 80 stores a year is a great place to grow our career because of growing <unk>.

He has lots of lots of opportunity and if you feel like you're learning and growing and respected and getting promotions and you like like optical at Kansas.

Tend to stick around.

Relative to a lot of companies you might follow it felt a little better situation than.

Than you might expect if you didn't understand opex as deeply.

Thank you. Our next question comes from the line of Beth with it with Jefferies. Your line is open.

Thank you good morning, everyone and most of our questions have been asked but I wanted to go back and just unpack the operating margin guidance, maybe perhaps this is best for you, but looking at it relative to 2019. It looks like your margins are kind of going back to the 19 level I understand the gross margins are a bit better it sounds like advertising leverage maybe tell us a little bit about what's happening in the.

The selling expense line and the G&A line are you seeing wage inflation that you don't think you can lever what's happening with respect to the operating margins.

Sequence with respect to the overall growth in the business.

Sure Steph good morning, and if I'm, if I missed some of that will come back and make sure. We get everything done you know, let's say in general as you think about operating margins again, we've been through some we've been through some choppy chapters of Covid, where you know we had a high stimulus high ticket.

High pent up demand.

Our ticket mix advantages low advertising.

Extreme leveraging all fixed cost across the board.

The P&L and we're headed to more of a stable place now where we're guiding this year I think at margins to be maybe up just 20 or 30 basis once off 2019, but let's Jeff that's with the that's what the huge Q1 impact.

<unk> taken off the top right here at the beginning of the year. So if you would if you kind of think about where we would have been without that it'll give you a little more insight into you know were really not hit it all the way back there.

I still see that there are margin opportunities over time.

I think as I look at the second half.

Feeling pretty good about the second half the comps are going to be good we're going to lap those wage investments, we held will have remote ramping.

And earlier I expect to see advertising leverage.

So all of those things come together for me too so I think that when we get into the second half when we clear though.

Effectively the.

Comp rollover.

Growing over 53% comps from the first half of last year and then the AUM upon weather impact I think this is kind of look better certainly our internal plans indicate that so that's kind of how I'm thinking about margins and then longer term.

The sales impact in Q1 is a significant a significant tick up and we've got to get beyond that we're assuming a modest recovery.

Beyond that I still think that we've got.

Trends in our favor it's great to be the low cost provider of a medical necessity, especially in a world where that consumer.

Maybe weaker or may get weaker.

Will get lab productivity gains I think we're going to see better leveraging of advertising you have to kind of watch out for some of the wage investments and track those but I still feel good about margin expansion. We ran it all the way up to nearly 10% at one fine point and we're not there today, but.

I wont communicated a specific goal, but we sure like being closer to that.

Great answer thank you very much.

Thank you.

Our next question comes from the line of ULIN Carden with William Blair. Your line is open.

Yes. Thanks, a lot just some follow up here on a couple of items Patrick.

Patrick you had mentioned.

That sort of the impact of tele remote.

Can kind of show through the margins pretty quickly.

On those comments it sounded like maybe youre kind of expecting some benefit in the back half of this year just wanted to clarify that.

And then sort of where we are on optometrist wage the wage cycle is there some catch up this year, having not seen too much inflation in the last couple of years and then on the new store target is 80, plus now that eyeglass world is kind of ramping a better target to use go forward. Thanks.

Oh, yes. So thank you on the on the on the remote.

Hum.

I think about that no I don't know that that's going on we're going to have the dilution evenly spread.

Across the year or will we will certainly as we lap. It next year. If this indeed is a multiyear effort will start feeling a thin, but I don't expect it to get a lot better in the second half because we're going to do a lot of stores.

We're just gonna do like 50 and stop yes, it would get better but this is probably the beginning of a couple of through your efforts. So that's that's my perspective on the remote for second half.

Wages were modeling continued levels of kind of wage inflation.

It was based on supply and demand in a given specific market I do like what we're doing in terms of enhancing our recruiting and retention efforts.

Trying to find ever more ways to give our doctors flexibility.

And you know as I said earlier remote medicine will allow us to make that resource a little more fungible across geography and time, so hopefully over time that will help abate some of the inflation.

Levels.

80, 80, plus is is our number for this year.

I'm not going to commit.

That will do that every year, we might do more than that one year, but I would say right now we've moved kind of beyond the 75, and we're going to try this on and see how it goes and then we'll go from there.

Excellent. Thank you.

Thank you.

Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Anthony So Kumba.

With loop capital markets. Your line is open.

Good morning, Thanks for filling.

Fitting me in a lot of good information.

So I just had one question I guess, it's just more on the competitive environment. I mean, what are you seeing from a competitive perspective, particularly in terms of you know are your competitors also taking price and how do you how do your sort of price differentials you now compare to I guess, let's say like 12 months ago. Thank you.

We take our price differentials are holding up well.

And we think that consumer.

What's that.

Yeah.

We're encouraged on on that front and again that the.

Competitive situation is generally.

Unchanged, but other other groups are taking price as well even.

Even in the value space.

That's very helpful. Thank you.

Thank you Ed.

Alright.

At this time I'd like to turn the call back over to Ray for closing remarks.

Thank you to Wanda and we'd like to thank all of you for joining us here today and thank all of our stakeholders for your continued support we look forward to speaking with you again, when we report our first quarter results. Thank you all very much for your time.

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

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Okay.

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Yes.