Q2 2022 National Vision Holdings Inc Earnings Call

August 11, 2022

Okay.

Thank you for standing by and welcome to the National Vision's second quarter 2022 financial results Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your telephone as a reminder, today's conference call is being recorded.

Now, let's turn the conference host Mr. David Mann Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone welcome to National Vision's second quarter of 2022 earnings call. Joining me on the call today are <unk>, CEO and Patrick Moore, CLO and CFO . Our earnings release issued this morning, and the presentation, which will be referenced during the.

The call are both available on the investors section of our website National vision Dot com and a replay of the audio webcast will be archived on the investors page. After the call before we begin let me remind you that our earnings materials and today's presentation include forward looking statements as defined in the private Securities Litigation Reform Act of 1095 <unk>.

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 our filings with the Securities and Exchange Commission. The release and today's presentation also includes certain non-GAAP measures reconciliation of each measure.

<unk> is 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 supplemental materials or presentations for investor reference on the investors section of our website.

Now, let me turn the call over to Reed.

Thank you David Good morning, everyone. Thank you all for joining us today, I hope, you're all staying safe and healthy.

Turning to slide four and in Q2 summary for the second quarter net revenue decreased seven 3% versus our record Q2 sales last year and adjusted comparable store sales declined 12, 4% compared to the record 76, 7% increase in the second quarter of 'twenty.

'twenty one we delivered adjusted diluted EPS of <unk> 21 for the quarter were pleased with our bottom line performance this quarter, which reflected the team's strong focus can manage expenses.

We expect that our second quarter performance would be impacted by the weaker consumer environment as well as constraints on our exam capacity as the quarter progressed economic conditions for consumers further deteriorated the macro headwinds, including higher inflation weaker consumer confidence and risks the recession are continuing to pressure our.

<unk> income predominantly uninsured customers, especially when compared to record demand last year.

In terms of constraints to our exam capacity, we feel incrementally better about our capacity situation, while exam capacity remains out of sync with our needs and many of our stores in certain markets, thereby affecting patient traffic, we're making sequential progress towards improved retention and strong hiring and continue to project <unk>.

<unk> capacity to gradually improve by year end despite.

Despite these challenges we continued to focus on our growth initiatives, we opened 22 stores, including our 1300 location and now operate over 1000 stores and our two growth brands. We continued our rollout of remote medicine and are on track to operate in up to 300 stores by year end.

Also we recently announced a multiyear extension of our current lens purchasing agreement with Essilor Luxottica. We're excited to extend this relationship with a key long term partner that allows us to continue to provide our patients and customers with world class quality lenses at the low price they have come to expect from us.

During the quarter, we repurchased $73 million worth of stock to continue our shareholder return program.

Finally in today's release, we updated our 2022 outlook, we've made significant progress in our cost alignment efforts that should temper the impact of the lower projected revenues on profitability for the year.

In a few minutes Patrick will provide more detail on our Q2 results and updated outlook.

Turning to slide five as the chart shows before the pandemic our business demonstrated consistent performance every time, even amidst broader economic challenges.

The great recession of 2008, and 2009, our business generated comps in the positive low to middle single digits.

During the pandemic the historical consistency of the optical category has been impacted by macro headwinds, especially higher inflation and temporary disruption to the purchase cycle that has been exacerbated by the multiple waves of Covid variance.

The chart on slide six highlights the volatile quarterly comp performance over the last few years and the pursuit cycle disruption caused by the pandemic.

Turning to slide seven the comp volatility was especially pronounced in the second quarter as the chart in the upper right shows in addition to the disrupted purchase cycle optical consumer demand is being affected by inflationary pressures and the decline in consumer confidence as well as lapping government stimulus from last year.

During the quarter, we experienced modest improvement in comps each month and as we are now in the third quarter. The back to school season has begun amidst the ongoing economic uncertainties.

For us the back to school season consists of two consumer segments children getting glasses for school as well as the seasonal return of adult customers. While it is still quite early we have seen a ramp in the traditional younger back to school patients. However, we're also experiencing weakness in broader seasonal traffic due to the macroeconomic.

Environment and constraints to exam capacity.

Let me expand a little more on what we're seeing in terms of consumer behavior are lower income predominantly uninsured consumers are feeling the greatest pressure demand softness is noticeably more pronounced for these customers who are paying out of pocket for our products and services.

Last quarter, we noticed that we're seeing the beginnings of a trade down of higher income consumers into our stores, what we've referred to in the past as nicer cars in the parking lot, we especially are seeing stronger trade down behavior in markets, where our stores are exposed to higher concentrations of higher income consumers.

We continue to be in the early stages of this trade down and we'd expect it to build over time.

As noted on our last call, we implemented a pricing change to our signature offer at America's best in May thus far the consumer reaction is consistent with our expectations. We continue to believe that the signature offer of two pairs of eyeglasses, including a free eye exam for $79 95 represents industry leading value.

To our consumers.

And the current inflationary environment, we believe our value offerings should be even more appealing to an even larger slice of the American public the optical category has been inherently consistent over time due to the biology of the eye and we believe we will see a return to a more stable and predictable environment in the future.

Our business is also facing the challenge of constraints on exam capacity in certain markets in other words, we could not fulfill the demand for exam appointments and some stores due to the lack of an available optometrists.

Our team is working hard to expand our exam capacity to mitigate this impact this quarter I am pleased that we are making incremental progress on multiple fronts.

Our retention levels stabilized in Q2, and we are up versus last year. This is a testament to multiple recent initiatives to drive retention, which are being executed by a new level of clinical management.

In terms of hiring our increased investments in recruiting continue to pay off year to date, we've experienced strong hiring of optometrists, we're beginning to see the wave of new hires who had delayed start dates arrive to practice and expect this benefit to begin to accrue in the third quarter.

Lastly, we remain excited about our remote medicine initiative to help address our historical an ever present need for optometrists to keep up with the demand for eye exams that our story.

With the accelerated rollout we are on target to operate remote medicine and up to 300 stores by year end, which would represent nearly 30% of the stores and our growth brands in stores that are operated remote exams for the longest period, we're continuing to see a significant ramp in operating productivity.

We're extremely pleased with the increase in exam capacity being added by remote medicine and the role it can play in serving more patients across both geography and time.

Because of these initiatives, we expect that our exam capacity should gradually improve by year end.

So we are in an unusual operating situation today and that we are simultaneously facing both demand headwinds across our network of stores given the current macro environment as well as a supply challenge and a smaller subgroup of stores due to the constraints on exam capacity, but we see these as temporary and we remain confident in the <unk>.

Long term strength of our business model.

Shifting to slide eight in addition to our exempt capacity and remote medicine efforts. We continue to progress other core growth initiatives new stores remain a primary focus as we continue to see a sizable white space opportunity.

We had 22 openings in the second quarter, including two more eyeglass world locations as we ramp up the expansion of this brand. We continue to plan to open at least 80 stores in 2022, and currently have a solid pipeline of specific locations for this year and into 2023.

Our focus in 2022 has been to optimize our marketing investment and we're pleased to be leveraging marketing expense and a difficult environment.

Our participation in vision insurance programs continues to be a positive revenue driver, especially in the current environment in the second quarter, we experienced growth in sales tied to vision insurance as insured consumers because the insurance funds most or all of their purchases are not deterred from shopping in the economy.

Our comps related to managed care, where positive and continued to outperform comps from uninsured consumers. This is a reversal from last year's period of economic stimulation when the uninsured business was stronger than the managed care business.

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.

And before turning the call over to Patrick Let me comment on the exciting leadership update that we provided today Patrick has been appointed Chief operating Officer. In addition to his current role as CFO Patrick has done great work as our CFO . He has been instrumental in our growth and success, especially in navigating national vision through our <unk>.

An important early years as a public company Patrick has been a terrific partner to me and I'm really looking forward to continuing to work with him in this new role as we look to drive growth and accelerate our value creation initiatives.

At year end, Patrick will be stepping down as CFO as part of our planned succession. We are so pleased to be announcing Melissa Rasmussen will become national Vision's, New CFO starting January one.

As Chief Accounting Officer, Melissa has been a vital member of our leadership team for the last three years. Most is an incredibly talented executive and as we've worked on this succession plan for a while I believe she will be an excellent CFO .

At this point, let me turn the call over to Patrick for a more detailed discussion of our financial results and the 2022 outlook.

Thank you Ray and good morning, everyone. It has been such an enormous privilege to be the company's CFO for the last eight years and I look forward to continuing to contribute in my new position.

I also wanted to say how pleased I am that Melissa will serve as our next CFO beginning in January Melissa I have worked side by side for the last three years and she is an outstanding leader for the team.

Together, we are executing a seamless and effective transition.

Now, let's start on slide 10 for some additional financial detail on the quarter. As a reminder, the second quarter of 2021 had the tailwind to revenue and profitability from pent up demand from the store closures the benefit of government stimulus and an elevated average ticket.

In Q2, 2022, net revenue decreased seven 3% compared to 2021 due to macroeconomic headwinds constraints to exempt capacity and exceptional growth last year.

Timing of unearned revenue was inconsequential this quarter benefiting revenue growth by 2%.

During the quarter, we opened 20, new America's best stores, and two eyeglass world stores for a five 2% increase in store count.

For our America's Best and Eyeglass World growth brands combined unit growth increased six 9% over the last year.

Adjusted comparable store sales declined 12, 4% versus 2021 compared to a record 76, 7% increase in the second quarter of 2021.

Q2 comparable store sales were impacted primarily by a decline in customer transactions average ticket declined slightly year over year. We remain encouraged by the fact that our average ticket has generally stabilized this year helped by pricing actions and successful product introductions like Blue light.

Turning to slide 11, as a percentage of net revenue cost applicable to revenue increased 310 basis points or better than our expectations of a 400 to 450 basis point increase this increase was driven by deleveraging of optometrist related costs reduced.

Eyeglass mix and lower eyeglass margin.

The better than expected performance, primarily resulted from the relative stability of average ticket.

Adjusted SG&A declined approximately 1% due to disciplined cost management this quarter adjusted SG&A expense percent of net revenue increased 280 basis points. The key factors behind this increase were the deleverage of store payroll and occupancy expense from lower revenue partially offset by.

Lower incentive compensation and lower advertising investment.

We now expect advertising to be slightly leveraged in 2022.

Our store and marketing teams have done an excellent job of realigning their cost structures to the current environment.

Adjusted operating income decreased 58% to $28 million and adjusted diluted EPS decreased 57% to 21.

Turning to first half 2022 results on slide 12.

Compared to 2019, despite the challenges this year net revenue increased approximately 17% and adjusted diluted EPS increased 8%.

Now turning to slide 13, our balance sheet and liquidity remains strong at the end of the second quarter, our cash balance was over $254 million.

And total liquidity of nearly $550 million, when including available capacity from our revolver.

We ended the quarter with total debt of $569 million net.

Net debt to adjusted EBITDA was one three times.

While our term loan debt has a variable LIBOR based interest rate. This debt is more than fully hedged and further increases in our base rate above one 8% would be helpful to our net interest expense and cash flows.

Year to date, we funded $56 million in capital expenditures that we're primarily focused on new store and customer facing technology investments.

We remain on track for 2022, Capex in the range of $110 million to $150 million as we continue to invest in key growth initiatives, including our remote medicine rollout.

In the second quarter, we continued our shareholder return program and repurchased two 6 million shares for a total of $73 million and have $50 million remaining under the current share repurchase authorization.

Since the inception of our share repurchase program last November we have repurchased four 2 million shares for $150 million.

At the end of the quarter inventory per store grew less than 2% on a year over year basis, we're comfortable with the current level of inventories and their ability to support our 2022 growth plans, our merchandising and distribution teams continued to execute very 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 remain a competitive advantage.

Turning now to our outlook on slides 14 and 15.

I'll conclude with some commentary regarding our updated 2022 outlook, which we included in today's earnings release as we all know the dynamic operating in macro environments are extremely uncertain.

The updated fiscal 2022 outlook reflects the currently expected impacts related to macroeconomic factors, including inflation geopolitical instability and risk of recession as well as the ongoing COVID-19 pandemic and constraints on exam capacity.

Against the backdrop of what we know today, our updated 2022 outlook projects net revenue between $1 99 to 2.02 billion adjusted comparable store sales growth compared to last year and a range of negative $6 five to negative 8% adjusted operating income between 85.

To $100 million and adjusted diluted EPS between <unk> 65, and 77 <unk>.

Assuming $80 1 million weighted average diluted shares.

I'd like to share some underlying assumptions in our outlook.

Given the uncertain environment, we continue to maintain a more conservative posture for our updated outlook. The high end and low end of the comp and revenue ranges represent two potential scenarios for consumer demand for the rest of the year at the high end of the ranges. We're assuming continued pressure on consumer demand over the remainder of the year <unk>.

<unk>, a modest back to school season, as well as gradual improvement in exam capacity at.

At the low end of the ranges, our comparable store sales and revenue assumptions reflect further deterioration in the macro environment.

Compared to the previous fiscal 2022 outlook provided in May our updated outlook includes lower projected ranges for comps and net revenue to reflect the deteriorating macro environment exam capacity and current trends.

Our updated outlook also projects that the impact of these lower revenues is expected to be significantly offset by cost alignment efforts, primarily in store payroll advertising and corporate overhead. The team has taken smart tactical actions to align costs with the revised near term revenue outlook.

Even amidst a difficult macro backdrop, we are continuing to invest in the business.

<unk> initiatives and our store growth and capital expenditure plans remain unchanged our ongoing commitment to investment as further evidence of our confidence in the future of the business.

As you model the second half of the year, we now expect comps to be in the negative mid single digit range, the improving trend versus the first half performance reflects easier comparisons moderating average ticket pressure and increased exam capacity we.

We are projecting Q3 comps in the range of negative mid to high single digits in Q4 in the negative mid to low single digits.

Store openings. This year will continue to be predominantly America's best locations, coupled with a doubling of eyeglass world openings. We are on track to open at least 80 stores and we projected a few closings as is typical each year.

I would like to express my thanks to our real estate team for successfully navigating the growing supply chain challenges to date.

Let me share a couple of other factors assumed in our outlook for 2022.

We're excited about the accelerated rollout of our key remote medicine and EHR initiatives as Reade noted earlier, we are seeing a significant ramp in operating productivity and remote medicine, such that we now anticipate incremental dilution to be approximately $3 million or one half of our original estimate.

We continue to expect that the timing of unearned revenue will have a negative impact in 2022, we continue to estimate the 2022 impact on adjusted operating income to be about $9 million.

With approximately half of the impact expected to be realized in Q3.

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 full year 2022, as a percentage of net revenue. We now expect cost applicable to revenue to increase 325 to 350 basis points versus last year, primarily due to the deleveraging of fixed cost as well as the lapping of last year's record performance that benefited from product.

Mix shift and an elevated ticket for Q3 cost applicable to revenue are expected to increase about 400 to 425 basis points versus last year.

In terms of expenses, we continue to expect 2022, adjusted SG&A to increase between 125, and 150 basis points as a percentage of net revenue year over year. The SG&A increase primarily reflects sales deleveraging and to a lesser extent higher levels of wage investments with.

A partial offset from advertising leverage.

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

In summary, while there are significant challenges in the current environment I have every confidence in the underlying health of our business and our value proposition. We continue to view the current issues as transitory in the interim our management team is focused on what we can control continuing to invest in key growth initiatives and taking the necessary.

Actions now to return the business to a growth trajectory.

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

Thank you Patrick turning to slide 16, and our moment of mission for a moment of mission, let me introduce Dr. John Jet, an optometrist, who has practiced for 28 years, including about seven years with National vision and it was performed remote exams in our stores for over a year.

Recently, a female patient booked an appointment for a newly available remote exam with Dr. Jeff and America's Best store her chief complaint was blurry vision and she assumes she just needed new glasses, because money was a concern she put off C&I doctor for some time once you could afford to do so which America's best support.

The ability made possible sooner than other options. She scheduled a remote appointment with doctor chat on a day when an exam with an in store Doctor was not available during.

During the remote exam performed from a location over 500 miles away from the store Dr. Jeff saw a medical condition on the retinal image that required urgent care. He sent the patient to the emergency room immediately with a recommendation for a spinal tap within two hours the patient was airlifted for emergency brain.

Surgery, where two five inch tumor was removed.

As we say a routine eye exam is routine until it isn't when every second counted for this patient's life, our remote capacity made it possible for doctor jet to give her an exam that ultimately saved her life. When we talk about access to eye care. This is what we're talking about this is our mission.

Affordability and access to Eyecare added lifesaving best and an example of how remote capabilities are making it possible for us to create greater affordability greater accessibility and ultimately make profound even life saving impacts on patients' lives.

I want to thank our entire team at National vision and network about contracts, including those performing remote exams like Dr jet, who provide much needed medical services to patients at our over 1500 storefronts every day.

In summary, the key takeaways from today's calls are these.

After 18 years of consistency and predictability the pandemic era has temporarily made the optical market and consequently, our business more volatile.

We believe that the marketplace over time should return to trends more consistent with the pre Covid era.

Especially as our customers eyes, only continued to get worse with time, and we remain a low cost provider of this medical necessity.

We operate in a highly fragmented industry with ongoing structural tailwind such as an aging population and increased ice strained from such things as greater screen usage.

And we believe that several initiatives, including our remote medicine rollout should help us to get our exam capacity more in line with the demand that is there for exams at our stores.

Thus despite the current challenges our confidence in our mid and longer term prospects remains unchanged.

This concludes our prepared remarks and at this time I'd like to turn the call back to the operator to start our Q&A session.

Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press star one one on your touch tone telephone again to ask a question. Please press star one way, we do ask that you. Please limit yourself to one question and a follow up and then please feel free to join the queue.

Our first question comes from Kathleen Brennan of Goldman Sachs. Your line is open.

Hi, This is Kate Mcshane from Goldman Sachs. Thanks for taking our question.

We are interested in hearing a little bit more about the sequential improvement you could be seeing as a result of customers trading down it sounds like it maybe with a little bit more than what you saw in Q1, but are there any more details around quantifying it.

Thank you Kate.

We are seeing nicer cars in the parking lot emerging gradually.

And this is not a.

Out of line with sort of what what we remember back from the eight or nine.

And it is happening more in the markets, where there are sort of wealthier consumers were seeing this in our in.

A more pronounced way.

So that is occurring and I will say the comps throughout the month or improving modestly.

Two months of that that was somewhat encouraging in nature, but.

But.

We're at the beginning stages of the nicer cars in the parking lot and we expect it to build over time.

Okay. Thank you and then as a follow up question, we wanted to ask about.

Price increases, which I think were implemented later in the first quarter and the beginning of the second quarter.

Just any kind of detail around the impact on the comp in the quarter.

The second happened.

What the elasticity response.

Tim Burns to that higher prices, it's been quite quite a while thank you all right.

It has been quite a while since we.

Increase the price I will say the.

The effect has been right in line with our expectations we.

We feel that this was the smart thing to do we're pleased with that.

We're always in touch we're very in touch with our store associates, who are saying.

They actually were expecting it to be a bigger event than it was a non event at the at the store level.

Due to our low price model, we believe the gap between us and our competition is going to only increase in these inflationary environment, but we think that was the right Paul and we feel we feel real good about it.

But we think that was the right call and we feel we feel real good about it.

Thank you.

Our next question comes from Simon Gutman Your line is open.

Hey.

If you said Simeon I guess I can ask.

Back to <unk> question, I guess, you prefer not to answer regarding a price increase.

Like how much that's helping the comp just to clarify and then can you discuss how it impacts the incremental margins, meaning do we get back to a average rate of incremental flow through with the price increase does it help relative to history or does it not fully account for all the costs that are running through the business.

Hey, Simeon good morning, Patrick.

Yeah, we have modeled I mean, obviously you can do the math on the percentage increase on that on that base offer and we had modeled.

Certain percentage of volume deterioration on a short term basis.

We were expecting to see net benefit out of that this year and we are.

So read was confirming that.

As I look at that as I kind of think more broadly and think about that entry level.

The entry level pricing and what we're delivering to the customer in terms of value.

It's at a margin that's lower than the aggregate eyeglass margin, but it is still quite healthy.

And we've got a lot of customers that come in and take that base offer and.

And also add one or two things to us as well.

Pricing did help net helped the second quarter.

Based on that net advantage that I discussed.

Okay.

My follow up it's more high level.

Looking at some metrics from 2019 compared to today.

There's a couple of things that stand out it looks like sales per store or not really higher versus that period.

Gross profit per store.

Down a little as well and SG&A is up not an unreasonable amount, but it is having a pronounced effect on the EBIT. So theres a lot of deleverage and I am sure you see the same thing.

In terms of explaining it.

It either means maybe the business isn't gaining share.

Maybe youre opening too many stores.

Either you're not raising price enough or you're you're under earning and this all gets rectified next year.

It may be a combination of all the above but curious how you look at the.

The growth versus <unk> 19.

Yes, and I think.

We've given some of these numbers before I'll update them here for you as you think about 2022, there have been large scale impacts and frankly body blows out of the gates severe omicron period, we disclose to figure I don't remember it off hand.

We have seen continued weakness.

Macro challenges and we've kind of called out a couple of hundred million in sales that frankly, as we started the year, we would have expected to see.

And you've seen that as we've adjusted guidance. So to me the big impact is the.

The large headwinds the business has faced this year beginning as early as January one.

And we do not see those headwinds are going to continue in that degree. So I think that it's a tough time to look at those metrics I agree with you.

Obviously, the kind of the same things.

I think that as I think about the future I go back to 2019 as a baseline I think about where did we peak across the pandemic in 2021 stimulus was high volumes were high and it's going to be somewhere between those two probably not at the peak, but I do think we're going to see.

Some improvements coming off 19.

Another part of your question SME and we do not believe we're losing market share. We think we are holding our own.

Marketing market share, which we think is impressive given our.

Our consumer and the impact of inflation on our consumer and the fact that managed care is such a small part of our business and also given the market share gains we've had in recent years, so, but we do not believe losing market share.

Okay. Thanks, Bob I appreciate it.

Thank you.

Next question comes from Stephanie Wissink of Jefferies. Your line is open.

One we wanted to explore the supply and demand balance and if you could just help us think through.

What percentage of opportunity do you think you're missing because of capacity and how much do you think remote medicine can help close that gap.

Give us some sense of maybe what you're implying in the back half guidance, but also how much you think you are leaving on the table with respect to just the capacity constraints you are experiencing.

Yes, we think so.

The macroeconomic environment and the capacity issues are are roughly in balance in terms of their impact on our business and therefore as we increase capacity.

We are expecting that to be quite favorable for us again, we're pleased that that retention is.

Improving and up versus last year, we are having a very strong recruiting season, and as we accelerate remote that should help as well, but in essence, we see it sort of balanced.

And we see with remote a nice a nice jump in productivity.

Overall so.

And so we're encouraged by that and we think it's important yes, I would just add one other point on remote as we started the outset of the year. We were we discussed a figure of about $6 million of net dilution and thats all the remote benefits to profitability less the startup and ramp costs.

We've effectively cut that didn't have as we've moved through the year based on what that initiative is providing us, especially in those markets, where we started early in the year with remote that really needed the assistance from remote.

Patrick if I could offer one follow up on the average ticket. It was really encouraging to see that stabilize from quarter to quarter. I also want to make sure. We're hearing what you're saying about back to school with the children's business outperforming maybe some of the traditional seasonal adult business do you anticipate average ticket could dip in the third quarter before it recut.

In the fourth quarter are you assuming that it stays quite stable given a full quarter of the price increase in the base business.

Thanks for the question so as we thought about ticket and gross margin.

We are guiding towards a little dip in ticket.

And there is some conservatism in that which I think is continues to be warranted and the dip is seasonal we do see with under 18.

Customers that we serve we see the ticket typically drop and we're just also watching macro macro challenges for the lower income consumers. So we.

We do have it dipping somewhat through the third quarter.

We're happy that in general it's significantly above 2019.

We've added some we've taken some price increases along the way we've added some.

We've added blue lights to lens.

Options and we're seeing that on a pretty good take up so all in all we've been really pleased with where ticket has stabilized. This year. So any short term dip in that we're really not that worried about it.

Thank you.

Our next question comes from Adrian E Bar.

Barclays. Your line is open.

Good morning. Thank.

Thank you for taking my question.

So read I'm going to go back to the exam capacity because that seems to be.

Where you can get a lot of kind of incremental.

And our margin and profit.

Damn capacity today versus sort of more normalized and then the remote medicine is offering up you know it can be 30% of stores.

300 stores when it is fully rolled out.

How much does that increase exam capacity.

Because I'm assuming that that <unk>.

And the store isn't going to be a materially higher kind of in a percentage.

Increased.

And then Patrick where is your breakeven point in the back half how should we think about that for Cogs and SG&A and then.

The reduction you called out store payroll hours.

So I'm wondering is that reduction in hours reduction in staffing so that impact or the productivity of the stores that you're trying to achieve thank you very much.

I'll take the.

First part.

Adrian Youre right.

Optimistic capacity is.

A key focus area for us and again, we're we're pleased that retention is is up versus last year and improving and we're pleased that our hiring is going.

Well.

And remote is a key part of Av.

The improvement program that we have we are seeing incremental progress and exam capacity with every month and we're expecting it to.

Improved by year end, we don't go into a lot of detail on the exact.

Specific productivity related too.

Remote because it's an internal program that we have and like to keep it as such but.

But youre right. What are we what are we believing is going to help us going forward as improvements.

Capacity what are we seeing we are seeing that occurring and we are expecting continued improvement by the end of the year.

Yeah on the breakeven comp its really where we've been for quite a while.

At 4% to 5% range in terms of comp leverage point, we're obviously guiding significantly lower than that in the second half of this year and but we have been I think making really nice smart cost reduction decisions.

A large component of our cost is as store labor and we do our best to match the labor to the level of demand that we're seeing and expecting.

That's not easy our store teams have done a really nice job working through that we've also we're going to also leverage advertising in a year where on that setting most people would have expected we could do that.

So we've been really pleased with how our marketing teams have navigated Venezuela and finally, we've taken some degree of cost out of some of the corporate areas, but frankly, not a lot we're still focused on.

Building 80, plus stores, we're focused on remote medicine rollout we're focused on.

Omnichannel initiatives around the edge, where we're still moving forward knowing that at some point the biology of the disposal not deferrable and we're going to we're going to be ready for it. So when I talk about smart cost reductions.

We think they are well fitted now.

But we also think there not too deep such that we can't come back and accept demand when we see that improve.

And then it really quick question on Walmart.

<unk> operated stores.

Performing in kind with your core.

Similar to your car.

Yes.

Their debt.

The Walmart stores are.

Roughly in line with the America's best stores in terms of comp performance.

Thank you.

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

My question.

So we understand that market share data is difficult to come by we do have some publicly traded competitors that are generating positive growth.

So what's driving your belief that you are not losing market share.

If youre not losing market share in its core customer.

Referring the purchase of a medical necessity that they will eventually have to make and we're going to improve the capacity.

It reasonable for us to expect that when you get into a more normalized economic period, perhaps in 2023 that theres going to be outside comp gains.

Retraced some of what we lost this year.

I'll take the market share share piece of that and Patrick will tie into your second part of your question.

So.

Our cross referencing on market share relates to talking to.

Some of the larger vendors, who deal with all aspects of.

The industry is.

And sort of are touching all aspects of the industry and they have reinforced to us that we are not losing market share from talking to the large insurers.

And seeing where we are in terms of market share within their portfolio and also watching the trends of online, which which the recent data suggests the continuation of the online consumers returning to stores post pandemic when stores reopen so those are the three.

Factors that give us.

Confidence in our market share.

I think the other thing that I would add you have to be careful with is.

Good growth over what.

And when did each of these competitors close reopen gained traction again.

We found that as you look at just grow the rates. This year, you've got really got to go back a couple of years and understand what was that growing over.

Which also contributes to at least neutral maybe slightly possible market share.

I would say on the second question that 20 to 2020 twos had multiple challenges.

Hope would not repeat.

We're not going to get into 2023 expectations today.

Do know that this business has performed very well over the long term.

And can grow through challenging economic times.

I am so I'm still focused on.

In the mode that we're going to have hopefully less challenges next year, which kind of gets to how are we thinking about comps and add to the first part of Patrick's comment.

I am very proud.

Proud of the crisp execution, we had coming out of the pandemic.

Amongst the first to Rio.

Reopen in a very safe.

Say hi protocol.

Manner, when others were not.

Sort of opening as as rapidly our ability to do eye exams, when others were having.

Constraints on their capacity and so we are up against healthier numbers than many others had.

Okay. My follow up question is on the long term margin outlook.

Some of the cost reductions that will kick in.

We'll be able to maintain your operating income outlook in the face of lower than expected sales.

We assume that your normalized margin over the long term is going to be higher than what it was previously on the same level productivity or.

We will come back some of these costs might come back as well.

Yes.

So if I think about what transpired with margins we saw margins improved nicely in 2019 and then this current chapter took hold which was.

Period of Ugly margins in stores were closed followed by explosive margins I think that we're going to get we're going to be north of.

19.

And not providing.

Long term guidance today, but I will say that as we've mentioned there have been some large impacts to margins this year.

I'm still hopeful that we're going to see margin improvement.

Think about returning to positive comps, we're lapping the wage investments I think remote medicine, that's going to provide productivity.

Benefits.

We've just secured.

A critical long term contract with a major cost of sale supplier that we discussed and frankly, we generally eke out some my productivity gains every year and we're still focused on leveraging advertising. So I think as ticket has stabilized as we see some improvement in demand I think that we're going to see.

Our reversion back to better than 19 volumes.

And.

At the end of the day, we've taken some cost out and I don't expect that to play through as well.

Thank you very much and good luck.

Thank you. Our next question comes from Dylan Carden of William Blair. Your line is open.

I'm just curious you are speaking to obviously the macro headwinds, but there seem to be some sort of nuances as well as it relates to capacity constraints.

I'm wondering maybe even price increases and maybe even pullback in marketing if that's having some impact and sort of combined those non macro issues. If you could just speak to the magnitude as you understand it that's sort of embedded in your current performance and then lead the.

<unk>.

How long do you typically see the sort of lower income customer differ that purchase when you go back to other periods of economic uncertainty.

Yes.

I'm really pleased you asked that because because.

Describing our business at a macro national level can be confusing because.

Yeah.

There are.

Demand is softening sort of nationally as the inflation in all is a national phenomenon, but our capacity issues are highly localized down to specific stores and markets and so in those there is underserved demand there's uncertain demand where if we had.

<unk> capacity, we would be doing better because their customers. We are serving in there they are booking out further and further.

In advance and it's harder than that so I think it's really important to point out the balance between.

So we're trying to describe things nationally and the localized.

Demand that we could be surveying if we had more capacity as we are continuing to.

Progress, possibly on a on a.

Capacity upfront we've.

We watch our marketing very carefully and we think we are getting that at the.

The right level and Luckily at the very.

Sort of quantitative.

A very quantitative.

Are there on your second question.

So yes, we've found that a consumer can put off for many months.

Im not saying well, it's frustrating, but so it was so.

So it's not not being able to pay your rent.

And so.

One can put it off.

Again, what we found in the last recession was.

Some of our lowest income consumers did drop out and just said I'm going to suffer through not seeing for fill him a little bit more flush and that was when so the nicer cars in the parking lot piece started.

And again, we're starting to see the beginnings of the nicer cars and <unk>.

And especially in markets, where where there is a.

Theyre more wealthy consumers around tracking metro card.

Great. Thank you very much.

Thank you.

Next question comes from is that Freedom of Wells Fargo. Your line is open.

Good morning. So this is now the second quarter in a row that you've knocked down your 'twenty two outlook, even with some Q2 upside.

So can you talk to the change in your back half assumptions and what gives you the confidence today that youre now in the right place and then secondly, Patrick is there any extra detail you can share on the margin cadence from Q3 to Q4, and whether you're assuming positive operating income in Q4.

The unearned revenue headwind.

Sure let me take both of those.

If you go back to May and think about our guidance. We set two we set an upper range and the upper range, we indicated that would be gradually improving consumer demand and.

Significant hiring and hiring for doctors at the lower end, we said both of those would weaken.

We did see consumer demand not improve we actually saw it.

Further degrade and we did see some of our doctor hiring.

Start dates delay a bit we saw some increased vacation levels over what we had historically historically felt scene.

So we did come off the top end for sales and comps the new ranges. The scenarios. There are we expect demand for the rest of the year at the top of our range to the.

About where it is now we do expect to see decent Dr. Hiring so we are.

Have started to see the beginnings of that with the new brands coming onboard and so that's kind of our top of range.

Bottom end of range is really less about doctors and far more about consumer demand.

And that's why we've been working through some.

Disciplined smart cost management decisions.

Second question in terms of margins Q3 to Q4 first I'll talk about Q2 to Q3. So we do expect to see some deterioration in gross margin.

Q2 to Q3, and that's really a function of.

<unk> margin I mentioned earlier, we were we're expecting to see a little bit of a ticket based on macro pressure in back to school.

And.

And also when new doctors come onboard they have a low ramp takes a little time for them to come up to speed and so theres a theres somewhat of an investment period. There we think that'll that's what's probably driving the three.

To two and I think we have a better opportunity for margins to improve in Q4.

Got it and then you notched down the <unk>.

Expected gross margin dilution from remote medicine should we read this as lower cost to implement or is this more about better uptake from consumers than expected and then second is there any way to quantify.

The productivity or throughput improvement per store for remote medicine stores versus.

Non remote medicine stores.

So the less dilution is about.

Scaling a little more rapidly than we had originally planned when we put that first dilution figure out. So that is a things are going well less dilution not we're scaling that back less dilution.

We have not really released of productivity lifts, but because.

We really know about a year or so under our belt, we will be getting there are some markets where we needed.

We really needed dockers, we were low on doctors and we've put remote in there earlier in the year and that's provided double digit kind of benefits in terms of productivity not all markets will look like that because some other markets had better levels of doctor capacity, but in the initial areas, where we rolled it out.

We really needed the assistance from remote medicine capability, we did see significant impact.

Got it appreciate the time and Patrick Congrats on the new role.

Thank you very much.

Thank you again, if you'd like to ask a question. Please press Star then one.

Our next question comes from Bob durable.

Guggenheim Partners. Your line is open.

Bob first off congrats Patrick relation David.

On your new role and.

I wanted to dig deeper into the traffic in stores.

Can you can you expand on that with the introduction of remote is it going to be any.

Cannibalization from your own customers do you expect more people coming in.

And my follow up on.

On the data analytics around remote I'm, just curious like is it like.

Any additional data points collected that can be like potentially utilized.

For example to increase the penetration of digital sales or any color on that thank you.

So so.

Thinking about the patient journey.

They get to the moment, where they say I am ready to act.

My vision is now sufficiently bothering me that I.

I need to book an appointment.

And they are aware of our of our brand and our great value and so they reach out to us.

Yes. It is.

If we don't have a doctor available if it's two or three weeks to get an appointment.

It might be patient and they might say well I actually wanted to do this this week.

See if I can find an.

An exam.

Someplace else nearby.

So that.

The loss of of our potential customers by not having an exam available when they want them because we are an in patient culture.

Is what remote.

The address is in.

In markets, where either they would have to wait a few weeks or where they are we don't have have a doctor in those specific minority of our markets, but so that's how the demand.

And and there is a lot of data that we collect from remote that we think could be.

Nice factor in.

Various evolutions of our company in the future we have also.

Lots and lots of data is often something that.

Is is useful in many unexpected ways and of course, the remote exam is highly digitized.

Got it and a quick follow up on Optometry ophthalmic first in the industry as it.

Is it the lack of the industry wide or is it like I'm just trying to clarify is it like fair.

Location.

No.

I mean.

There is a shortage of optometrists in America, an unusually high number of Ah. Upon just retired at the pandemic time, if youre thinking if they are going.

Kind of retiring a year anyway, maybe I'll just throw in the towel now I think the numbers, 2% to 3% of doors.

Of independent doors shot.

During the pandemic and frankly.

I think what we're seeing amongst subconscious something we're seeing in a lot of the workforce with an increased desire for flexibility. So people who were five day doctors might say you know what.

I would like to be a four day doctor and so that that's a factor in that the schools do not.

Graduate any greater number of optometrists.

Every year. So now there is.

There is a need because there arent as many of the unusual cycle of generation retirement of new to retired.

Been thrown off and there is an increased desire for flexibility in a variety of ways that we're addressing in a variety of ways, but its different and different than it was pre pandemic.

Thank you.

Ladies and gentlemen, this does conclude today's conference I'd like to turn the call back over to <unk> for any closing remarks.

All right. Thank you very much for your great management of the call and we'd like to thank everyone, who joined US today and all of our stakeholders for your continued support we look forward to speaking with you again, when we report our third quarter results. Thank you all very much.

Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.

Have a great day.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Thank you for standing by and welcome to the National Vision's second quarter 2022 financial results Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one on your telephone as a reminder, today's conference call is being recorded.

I'd now like turn the conference host Mr. David Mann Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone welcome to National Vision's second quarter 2022 earnings call. Joining me on the call today are <unk>, CEO and Patrick Moore, COO and CFO . Our earnings release issued this morning, and the presentation, which will be referenced during.

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 our filings with the Securities and Exchange Commission to release and today's presentation. Also includes certain non-GAAP measures reconciliation of these measure.

Now, let me turn the call over to Reed.

Thank you David Good morning, everyone. Thank you all for joining us today, I hope, you're all staying safe and healthy.

'twenty one we delivered adjusted diluted EPS of <unk> 21 for the quarter were pleased with the bottom line performance this quarter, which reflected the team's strong focus can manage expenses.

<unk> income predominantly uninsured customers, especially when compared to record demand last year.

<unk> capacity to gradually improve by year end. Despite these.

These challenges we continued to focus on our growth initiatives, we opened 22 stores, including our 1300 location and now operate over 1000 stores and our two growth brands. We continued our rollout of remote medicine and are on track to operate in up to 300 stores by year end also we recently.

<unk> announced a multiyear extension of our current lens purchasing agreement with Essilor Luxottica. We're excited to extend this relationship with a key long term partner that allows us to continue to provide our patients and customers with world class quality lenses at the low price they have come to expect from us.

During the quarter, we repurchased $73 million worth of stock to continue our shareholder return program.

In a few minutes Patrick will provide more detail on our Q2 results and updated outlook.

Turning to slide five as the chart shows before the pandemic our business demonstrated consistent performance over time, even amidst broader economic challenges during the great recession of 2008 and 2009, our business generated comps in the positive low to middle single digits.

The chart on slide six highlights the volatile quarterly comp performance over the last few years and the purchase cycle disruption caused by the pandemic.

Turning to slide seven the comp volatility was especially pronounced in the second quarter as the chart in the upper right shows in addition to the disrupted purchase cycle optical consumer demand is being affected by inflationary pressures and a decline in consumer confidence as well as lapping government stimulus from last year.

During the quarter, we experienced modest improvement in comps each month and as we are now in the third quarter. The back to school season has begun amidst the ongoing economic uncertainties.

For us the back to school season consists of two consumer segments children getting glasses for school as well as the seasonal return of adult customers. While it is still quite early we've seen a ramp in the traditional younger back to school patients. However, we're also experiencing weakness in broader seasonal traffic due to the macroeconomic <unk>.

<unk> and constraints to exam capacity.

Let me expand a little more on what we're seeing in terms of consumer behavior.

Our lower income predominantly uninsured consumers are feeling the greatest pressure demand softness is noticeably more pronounced for these customers who are paying out of pocket for our products and services.

We continue to be in the early stages of this trade down and would expect it to build over time.

To our consumers.

In the current inflationary environment, we believe our value offerings should be even more appealing to an even larger slice of the American public the optical category has been inherently consistent over time due to the biology of the eye and we believe we will see a return to a more stable and predictable environment in the future.

Our business is also facing the challenge of constraints on exam capacity in certain markets in other words, we could not fulfill the demand for example appointments in some stores due to the lack of an available optometrists.

Our team is working hard to expand our exempt capacity to mitigate this impact this quarter I am pleased that we are making incremental progress on multiple fronts.

First our retention levels stabilized in Q2, and we are up versus last year. This is a testament to multiple recent initiatives to drive retention, which are being executed by a new level of clinical management.

Lastly, we remain excited about our remote medicine initiative to help address our historical an ever present need for optometrists to keep up with the demand for eye exams that our story with the accelerated rollout we are on target to operate remote medicine and up to 300 stores by year end, which would represent nearly 30% of the story.

And our growth brands in sources of operated remote exams for the longest period, we are continuing to see a significant ramp in operating productivity.

We're extremely pleased with the increase in exam capacity being added by remote medicine and the role it can play in serving more patients across both geography and time.

Because of these initiatives, we expect that our exam capacity should gradually improve by year end.

Long term strength of our business model.

Shifting to slide eight in addition to our advanced capacity and remote medicine efforts. We continued to progress other core growth initiatives new stores remain a primary focus as we continue to see a sizable white space opportunity.

Marketing continues to be a key factor in driving traffic to our stores given the infrequent purchase cycle for eyeglasses in the current environment of high inflation, we believe our value messaging will resonate with budget conscious consumers. Our focus in 2022 has been to optimize our marketing investment and we are pleased to be leveraging marketing expense.

In a difficult environment.

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.

So an important early years as a public company Patrick has been a terrific partner to me and I'm really looking forward to continuing to work with him in this new role as we look to drive growth and accelerate our value creation initiatives.

At year end, Patrick will be stepping down as CFO as part of our planned succession. We are so pleased to be announcing Melissa Rasmussen will become national Vision's, New CFO starting January one.

As Chief Accounting Officer, Melissa has been a vital member of our leadership team for the last three years, Melissa and incredibly talented executive and as we've worked on this succession plan for a while I believe she will be an excellent CFO .

At this point, let me turn the call over to Patrick for a more detailed discussion of our financial results and the 2022 outlook.

Thank you Ray and good morning, everyone. It has been such an enormous privilege to be the company's CFO for the last eight years and I look forward to continuing to contribute in my new position.

I also want to say how pleased on hand that Melissa will serve as our next CFO beginning in January Melissa I have worked side by side for the last three years and she is an outstanding leader for the team.

Together, we are executing a seamless and effective transition.

Now, let's start on slide 10 for some additional financial detail on the quarter. As a reminder, the second quarter of 2021 had the tailwind to revenue and profitability from pent up demand from store closures the benefit of government stimulus and an elevated average ticket.

In Q2, 2022, net revenue decreased seven 3% compared to 2021 due to macroeconomic headwinds constraints to exempt capacity and exceptional growth last year the.

The timing of unearned revenue was in consequential this quarter benefiting revenue growth by 2%.

During the quarter, we opened 20, new America's best stores, and two eyeglass world stores for a five 2% increase in store count.

For our America's Best and Eyeglass World growth brands combined unit growth increased six 9% over the last year.

Adjusted comparable store sales declined 12, 4% versus 2021 compared to a record 76, 7% increase in the second quarter of 2021.

Eyeglass mix and lower eyeglass margin.

The better than expected performance, primarily resulted from the relative stability of average ticket.

By lower incentive compensation and lower advertising investment.

We now expect advertising to be slightly leveraged in 2022.

Our store and marketing teams have done an excellent job of realigning their cost structures to the current environment.

Adjusted operating income decreased 58% to $28 million and adjusted diluted EPS decreased 57% to 21.

Turning to first half 2023 results on slide 12.

<unk> 2019, despite the challenges this year net revenue increased approximately 17% and adjusted diluted EPS increased 8%.

Now turning to slide 13, our balance sheet and liquidity remains strong at the end of the second quarter, our cash balance was over $254 million and total liquidity of nearly $550 million when including available capacity from our revolver.

We ended the quarter with total debt of $569 million.

Net debt to adjusted EBITDA was one three times.

Year to date, we funded $56 million in capital expenditures that we're primarily focused on new store and customer facing technology investments. We remain on track for 2022 Capex in the range of $110 million to $150 million as we continue to invest in key growth initiatives.

Including our remote medicine rollout.

Since the inception of our share repurchase program last November we have repurchased four 2 million shares for $150 million.

Chain environment.

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

Turning now to our outlook on slides 14 and 15.

Ill conclude with some commentary regarding our updated 2022 outlook, which we included in today's earnings release as we all know the dynamic operating in macro environments are extremely uncertain.

The updated fiscal 2022 outlook reflects the currently expected impacts related to macroeconomic factors, including inflation Geo political instability and risk of recession as well as the ongoing COVID-19 pandemic and constraints on exam capacity.

To $100 million and adjusted diluted EPS between <unk> 65 and 77.

Assuming $80 1 million weighted average diluted shares.

I'd like to share some underlying assumptions in our outlook given the uncertain environment. We continue to maintain a more conservative posture for our updated outlook. The high end and low end of the comp and revenue ranges represent two potential scenarios for consumer demand for the rest of the year at the high end of the ranges were assuming continued pressure.

<unk> on consumer demand over the remainder of the year, including a modest back to school season, as well as gradual improvement in exam capacity at.

At the low end of the ranges, our comparable store sales and revenue assumptions reflect further deterioration in the macro environment.

Even amidst a difficult macro backdrop, we are continuing to invest in the business.

<unk> initiatives and our store growth and capital expenditure plans remain unchanged our ongoing commitment to investment as further evidence of our confidence in the future of the business.

As you model the second half of the year, we now expect comps to be in the negative mid single digit range, the improving trend versus the first half performance reflect easier comparisons moderating average ticket pressure and increased exam capacity we.

We are projecting Q3 comps in the range of negative mid to high single digits in Q4 in the negative mid to low single digits.

I would like to express my thanks to our real estate team for successfully navigating the growing supply chain challenges to date.

Let me share a couple of other factors assumed in our outlook for 2022.

We continue to expect that the timing of unearned revenue will have a negative impact in 2022, we continue to estimate the 2022 impact on adjusted operating income to be about $9 million with.

<unk> half of the impact expected to be realized in Q3.

As a reminder, unearned revenue recognition is a seven to 10 day timing impact that can affect our quarter to quarter and annual comparisons.

Mix shift and an elevated ticket for Q3 cost applicable to revenue are expected to increase about 400 to 425 basis points versus last year.

A partial offset from advertising leverage.

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

<unk> now to return the business to a growth trajectory.

At this point I will turn the call factory.

Thank you Patrick turning to slide 16, and our moment of mission for a moment of mission, let me introduce Dr. John Jet, an optometrist, who has practiced for 28 years, including about seven years with National vision and with performed remote exams in our stores for over a year.

<unk> ability made possible sooner than other options. She scheduled a remote appointment with doctor chat on a day when an exam with an in store Doctor was not available during.

Surgery, where a two five inch tumor was removed.

As we say a routine eye exam is routine until it isn't when every second counted for this patient's life, our remote capacity made it possible for Dr. <unk> jet to give her an exam that ultimately saved her life. When we talk about access to eye care. This is what we're talking about this is our mission.

In summary, the key takeaways from today's calls are these.

After 18 years of consistency and predictability the pandemic era has temporarily made the optical market and consequently, our business more volatile.

We believe that the marketplace over time should return to trends more consistent with the pre Covid era.

Especially as our customers eyes, only continue to get worse with time, and we remain a low cost provider of this medical necessity.

We operate in a highly fragmented industry with ongoing structural tailwind such as an aging population and increased I strayed from such things as greater screen usage.

And we believe that several initiatives, including our remote medicine rollout should help us to get our exam capacity more in line with the demand that is there for exams at our stores.

Thus despite the current challenges our confidence in our mid and longer term prospects remains unchanged.

This concludes our prepared remarks and at this time I would like to turn the call back to the operator to start our Q&A session.

Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one one we do ask that you. Please limit yourself to one question and a follow up and then please feel free to join the queue.

Our first question comes from Kathleen Brennan of Goldman Sachs. Your line is open.

Actually this is Kate Mcshane from Goldman Sachs. Thanks for taking our question.

Thank you Kate.

We are seeing nicer cars in the parking lot emerging gradually.

And this is not.

Out of line with sort of what what we remember back from the eight or nine.

And it is happening more than that in the markets, where there are sort of wealthier consumers were seeing this in.

A more pronounced way.

So that is occurring and I will say sort of the comps throughout the months were improving modestly.

Two months of that that was somewhat encouraging in nature, but.

But.

We're at the beginning stages of the nicer cars in the parking lot and we expect it to build over time.

Okay. Thank you and then as a follow up question, we wanted to ask about.

Price increases, which I think were implemented later in the first quarter and the beginning of the second quarter.

Just any kind of detail around the impact on the comp in the quarter.

Second half.

What the elasticity response.

Tim Burns to that higher prices at some quite quite a while since you increase will form right.

It has been quite a while since we.

Increased the price I will say the.

The effects have been right in line with our expectations we.

We feel that this was the smart thing to do we're pleased with that.

We're always in touch we're very in touch with our store associates, who are saying.

They actually were expecting it to be a bigger event than it was a non event at the store level.

But we think that was the right call and we feel we feel real good about it.

Thank you.

Our next question comes from Simon Gutman Your line is open.

Hey.

If you said Simeon I guess I can ask.

Back to <unk> question, I guess, you prefer not to answer regarding a price increase.

Like how much it is helping the comp just to clarify and then can you discuss how it impacts the incremental margins, meaning do we get back to a average rate of incremental flow through with the price increase does it help relative to history or does it not fully account for all the costs that are running through the business.

Hey, Simeon good morning, Patrick.

Yes, we have model I mean, obviously you can do the math on the percentage increase on that on that base offer and we had modeled.

Certain percentage of volume deterioration on a short term basis.

We were expecting to see net benefit out of that this year and we are.

So read was confirming that.

As I look at that as I kind of think more broadly and think about that entry level.

The entry level pricing and what we're delivering to the customer in terms of value.

It's at a margin that's lower than the aggregate eyeglass margin, but it is still quite healthy.

And when we get a lot of customers that come in and take that base offer.

And also add one or two things to it as well.

Pricing did help net help the second quarter.

Based on that net advantage that I discussed.

Okay.

My follow up it's more high level.

Looking at some metrics from 2019 compared to today.

There's a couple of things that stand out it looks like sales per store or not really higher versus that period.

Gross profit per store.

Down a little as well and SG&A is up not a non reasonable amount, but thats, having thats pronounced effect on the EBIT. So theres a lot of deleverage and I'm sure you see the same thing.

So in terms of explaining it.

It either means maybe the business isn't gaining share maybe your opening too many stores.

Either you're not raising price enough or you're you're under earning and this all gets rectified next year.

It may be a combination of all the above but curious how you look at the <unk>.

Growth versus <unk> 19.

Yes, and I think.

We've given some of these numbers before I'll update them here for you as you think about 2022 there has been.

Large scale impacts and frankly body blows the out of the gates severe omicron period, we disclose to figure I don't remember it off hand.

We have seen continued weakness.

Macro challenges and we've kind of called out a couple of hundred million in sales that frankly, as we started the year, we would have expected to see.

And you've seen that as well.

Adjusted guidance so to me the big impact is the the large headwinds the business has faced this year beginning as early as January one.

And we do not see those headwinds are going to continue in that degree. So I think that it's a tough time to look at those metrics I agree with you.

We'll be kind of the same things.

And I think that as I think about the future I go back to 2019 as a baseline I think about where did we peak across the pandemic in 2021, when stimulus was high volumes were high and it's going to be somewhere between those two probably not at the peak, but I do think we're going.

See some improvements coming off 19.

Another part of your question Simeon we do not believe we're losing market share. We think we are holding our own in terms of market share, which we think is impressive given our consumer and the impact of inflation on our consumer and the fact that managed care is such a small part of our business.

And also given the market share gains we've had in recent years, so, but we do not believe we're losing market share.

Okay. Thanks, Bob I appreciate it.

Thank you.

Our next question comes from Stephanie Wissink of Jefferies. Your line is open.

One we wanted to explore the supply and demand balance and if you could just help us think through.

What percentage of opportunity do you think you're missing because of capacity.

And how much do you think remote medicine can help close that gap can you give us some sense of maybe what you're implying in the back half guidance, but also how much you think you are leaving on the table with respect to just the capacity constraints you are experiencing.

Yes, we think so.

The macroeconomic environment and the capacity issues are are roughly in balance in terms of their impact on our business and therefore as we increase capacity.

We are expecting that could be quite favorable for us again, we're pleased that that retention is.

Proofing and up versus last year, we are having a very strong recruiting season, and as we accelerate remote that should help as well, but in essence, we see it sort of balanced.

And we see with remote a nice a nice jump in productivity overall so.

Yes, so we're encouraged by that and we think it's important yes, I would just add one other point on remote as we started the outset of the year. We were we discussed a figure of about $6 million of net dilution and thats all the remote benefits to profitability less the startup and ramp costs.

We've effectively cut that in half as we've moved through the year based on what that initiative is providing us, especially in those markets, where we started early in the year with remote that really needed the assistance from remote.

And Patrick if I could offer one follow up.

On the average ticket it was really encouraging to see that stabilize from quarter to quarter. I also want to make sure. We're hearing what youre, saying about back to school with the children's business outperforming maybe some of the traditional seasonal adult business do you anticipate average ticket could dip in the third quarter before it recovers in the fourth quarter are you assuming that it stays quite stable.

Given a full quarter of the price increase in the base business.

Thanks for the question so as we thought about ticket and gross margin we are guiding towards a little dip in ticket.

And there is some conservatism in that which I think is continues to be warranted and the dip is seasonal we do see with under 18.

Our customers that we serve we see the ticket typically drop and we're just also watching macro macro challenges for the lower income consumers. So we.

We do have it dipping somewhat through the third quarter, we are happy that in general it's significantly above 2019.

We've added some we've taken some price increases along way we've added some.

We've added blue lights to lens options and we're seeing that on a pretty good take up so all in all we've been really pleased with where ticket has stabilized. This year. So any short term dip in that we're really not that worried about it.

Thank you.

Our next question comes from Adrian <unk>.

Barclays. Your line is open.

Good morning.

Thank you for taking my question.

So Reed and then to go back to the exam capacity because that seems to be.

Where you can get a lot of kind of incremental.

And our margin and profit flow through.

The bond capacity.

<unk> versus <unk>.

On a more normalized and then the remote medicine is offering up you know it can be 30% of stores.

300 stores when it is fully rolled out, but what how much does that increase exam capacity.

And then assuming that that <unk>.

And the store is going to be a materially higher kind of in a percentage.

Increased.

And then Patrick where is your breakeven point in the back half how should we think about that for Cogs and SG&A and then the.

The reduction you called out store payroll hours and so im wondering is that reduction in hours reduction in staffing so that impacts the productivity of the stores that you're trying to achieve thank you very much.

I'll take the first part Adrian Youre right.

Optimistic capacity is.

A key focus area for us and again, we're we're pleased that retention is is up versus last year and improving and we're pleased that our hiring is going.

Very well and.

And remote is a key part of Av.

The improvement program that we have we are seeing incremental progress and exam capacity with every month and we're expecting it to improve.

Improved by year end, we don't go into a lot of detail on the exact.

Specific productivity related too.

Remote because it's an internal program that we have and like to keep it as such but.

But youre right. What are we what are we believing is going to help us going forward as improvements.

Capacity what are we seeing we are seeing that occurring and we're expecting continued improvement by the end of the year.

Yeah on the breakeven comps, it's really where we've been for quite a while its in that 4% to 5% range in terms of the comp leverage point.

We're obviously guiding significantly lowered that in the second half of this year and but we have been I think making really nice smart cost reduction decisions.

A large component of our cost is as store labor and we do our best to match the labor to the level of demand that we're seeing and expecting.

That's not easy our store teams have done a really nice job working through that we've also we're going to also leverage advertising in a year where on that.

Setting most people would have expected we could do that.

So we've been really pleased with how our marketing teams have navigated that as well and finally, we've taken some degree of cost out of some of the corporate areas, but frankly, not a lot we are still focused on.

Building 80, plus stores, we're focused on remote medicine rollout we're focused on.

Omnichannel initiatives around the edge, where we're still moving forward knowing that at some point the biology of the honest debate closely not defer.

Terrible and we're going to we're going to be ready for it so when I talk about smart cost reductions.

We think they are well fitted now.

But we also think there not too deep such that we can't come.

Come back and accept demand when we see that improve.

And then really quick question on Walmart.

<unk> operated stores.

Performing in kind with Evercore.

And similar to your car.

Yes.

The the Walmart stores are rougher.

Roughly in line with the America's best stores in terms of comp performance.

Yeah.

Thank you.

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

My question.

So we understand that market share data is difficult to come by we do have some publicly traded competitors that are generating positive growth.

So what's driving your belief that you are not losing market share and if youre not losing market share in it.

<unk> customer.

Furthering the purchase of a medical necessity, but they will eventually have to make and youre going to improve your capacity.

It reasonable for us to expect that.

When you get into a more normalized economic period, perhaps in 2023 that theres going to be outside comp gains too.

Replaced some of what was lost this year.

I'll take the market share share piece of that and Patrick will tie into your second part of your question.

So.

Our cross referencing on market share relates to talking to.

Some of the larger vendors, who deal with all aspects of.

The industry is.

And sort of are touching all aspects of the industry and they have reinforced to us that we are not losing market share from talking to the large insurers.

And seeing where we are in terms of market share within their portfolio and also watching the trends of online which which.

The recent data suggests a continuation of the online consumers returning to stores post pandemic when stores reopen so those are the three factors that give us.

Confidence in our market share.

I think the other thing that I would add you have to be so careful with as.

Good growth over what and when did each of these competitors close reopen gain traction again.

We've found that as you look at just grow the rates. This year, you've got really got to go back a couple of years and understand.

What was that growing over.

Which also contributes to at least neutral maybe slightly possible market share.

I would say on the second question that 20 to 2022 has had multiple challenges.

Hope would not repeat.

We're not going to get into 2023 expectations today we.

Do know that this business has performed very well over the long term.

And can grow through challenging economic times.

I am so I'm still focused on.

In the mode that we're going to have hopefully less challenges next year, which kind of gets to how are we thinking about comps.

And to the first part of Patrick's comment.

Very.

Proud of the crisp execution, we had coming out of the pandemic.

The first hit.

Reopened in a very safe.

Safe High protocol.

<unk> when others were not.

Sort of opening as as rapidly our ability to do eye exams, when others were having.

Constraints on their capacity and so we are up against healthier numbers than many others had.

Okay. My follow up question is on the long term margin outlook, given some of the cost reductions that <unk>.

Thinking quickly you'll be able to maintain your operating income outlook in the face of lower than expected sales.

We assume that your normalized margin over the long term is going to be higher than what it was previously on the same level productivity or.

He'll come back some of these costs might come back as well.

Yes.

If I think about the.

What transpired with margins, we saw margins improved nicely in 2019, and then this current chapter to a cold which was a period of ugly margins. When stores were closed followed by explosive margins I think that we're going to get.

To be north of <unk>.

<unk> 19.

And not providing.

Long term guidance today, but I will say that as we've mentioned there have been some large impacts to margins this year.

I'm still hopeful that we're going to see margin improvement as I think about returning to positive comps. We're lapping the wage investments I think remote medicine is going to provide productivity.

Benefits.

We've just secured a very critical long term contract with a major cost of sale supplier that we discussed.

And frankly, we generally eke out some lab productivity gains every year and we're still focused on leveraging advertising. So I think as ticket has stabilized as we see some improvement in demand I think we're going to see.

Reversion back to better than 19 volumes.

And.

At the end of the day, we've taken some cost out and I'll expect that to play through as well.

Thank you very much in demand.

Thank you. Our next question comes from Dylan Carden of William Blair. Your line is open.

I'm just curious you are speaking to obviously the macro headwinds, but there seem to be some sort of nuances as well as it relates to capacity constraints.

I'm wondering maybe even price increases and maybe even pull back in marketing if that's having some impact and sort of combined those non macro issues. If you could just speak to the magnitude as you understand it that's sort of embedded in your current performance and then lead the <unk>.

<unk>.

How long do you typically see the sort of lower income customer differ that purchase we go back to other periods of economic uncertainty.

Yes.

I'm really pleased you asked that because because.

Describing our business at a macro national level can be confusing because.

Yes, there are.

Demand is softening sort of nationally as the inflation in all is a national phenomenon, but our capacity issues are highly localized down to specific stores and markets and so in those areas underserved demand there is uncertain demand, where if we had.

<unk> capacity, we would be doing better because their customers. We are serving in there they are booking out further and further.

In advance and and and.

It's just harder in that way. So I think it's really important to point out the balance between that so we're trying to describe things nationally and the localized.

Demand that we could be serving if we had more capacity as we are continuing to.

Progressed positively on a on a.

Capacity.

<unk>.

We watch our marketing very carefully and we think we are getting that at.

The right level and Luckily, it's a very.

Sort of quantitative.

A very quantitative.

Arc there on your second question.

So yes, we've found that a consumer can put off for many months.

Im not saying well, it's frustrating, but so as.

Not being able to pay your rent.

And so.

One can put it off again, what we found in the last recession was.

Some of our lowest income consumers did drop out and just said I am going to suffer through not seeing for tell him a little bit more flash and that was when so the nicer cars in the parking lot piece started.

Occur and again, we're starting to see the beginnings of the nicer cars and <unk>.

And especially in markets, where where there is a.

Theyre more wealthy consumers around driving metro card.

Great. Thank you very much.

Thank you.

Question comes from is that freedom of Wells Fargo. Your line is open.

Good morning. So this is now the second quarter in a row that you knocked down your 'twenty two outlook, even with some Q2 upside.

The unearned revenue headwind.

Sure let me take both of those.

If you go back to May and think about our guidance. We set two we set an upper range and for that upper range, we indicated that would be gradually improving consumer demand and.

Significant hiring and hiring for a doctors at the lower end, we said both of those would weaken.

We did see consumer demand not improve we actually saw further.

Further degrade and we did see some of our doctor hiring.

Start dates delay a bit we saw some increased vacation levels over what we've historically felt scene.

So we did come off the top end for sales.

And comps the new ranges the scenarios. There are we expect demand for the rest of the year at the top of our range to the.

About where it is now we do expect to see.

Dr. Hiring so we have started to see the beginnings of that with the new brands coming onboard and so that's kind of our top of range.

Bottom end of the range is really less about doctors and far more about consumer demand.

And that's why we've been working through some.

Disciplined smart cost management decisions.

Second question in terms of margins Q3 to Q4 first I'll talk about Q2 to Q3. So we do expect to see some deterioration in gross margin.

Q2 to Q3, and that's really a function of.

<unk> margin I mentioned earlier, we were we're expecting to see a little bit of a ticket based on macro pressure in back to school.

And.

And also when new doctors come onboard day to have a little ramp takes a little time for them to come up to speed and so theres a theres somewhat of an investment period. There. We think that will that's what's probably driving the three.

To two and I think we have a better opportunity for margins to improve in Q4.

Got it and then you notched down the expected gross margin dilution from remote medicine should we read this as lower cost to implement or is this more about better uptake from consumers than expected and then second is there any way to quad.

<unk> Fi.

The productivity or throughput improvement per store for remote medicine stores versus <unk>.

Non remote medicine stores.

So the less dilution is about.

Scaling a little more rapidly than we had originally planned when we put that first dilution figure out. So that is a things are going well less dilution not we're scaling that back less dilution.

We have not really released of productivity lift, but because we've.

We really are about a year or so under our belt, we will be getting there are some markets where we needed.

We really needed the assistance from remote medicine capability, we did see significant impact.

Got it I appreciate the time and Patrick Congrats on the new role.

Thank you very much.

Thank you again, if you'd like to ask a question. Please press Star then one.

Our next question comes from Bob durable.

Guggenheim Partners. Your line is open.

Well, Bob first off congrats Patrick relation David.

And.

I wanted to dig deeper into the traffic in stores.

Can you can you expand on that with the introduction of remote so going to be any.

Cannibalization from your own customers do you expect more people coming in.

And my follow up on.

On the data analytics around remote I'm, just curious like is there.

Are there any additional data points collected that can be like.

<unk> utilized.

For example to increase the penetration of digital sales or any color on that thank you.

So.

Just thinking about the patient journey.

They get to the moment, where they say I am ready.

Act.

My vision is now sufficiently bothering me that I.

I need to book an appointment.

And they they are aware of our of our brand and our great value and so they reach out to us.

If it is.

If we don't have a doctor available or if it's two or three weeks to get an appointment.

It might be patient and they might say well I actually wanted to do this this week.

See if I can find an exam.

Someplace else nearby.

So so that.

The loss of of our potential customers by not having an exam available when they want them because we are an impatient culture.

Is what remote.

The address is.

In markets, where either they would have to wait a few weeks or where there. We don't have have a doctor in those specific minority of our markets, but so that's how the demand.

And and there is a lot of data that we collect from remote that we think could be.

Mike factor in various evolutions of our company in the future we have.

While the data is often something that.

Is is useful in many unexpected ways and of course, the remote exam. It I think it's Todd.

Got it and a quick follow up on Optometry Ophthalmology said the industry is at.

There is a lot because of the industry wide are you said.

I'm just trying to clarify is that fair.

<unk>.

No.

I mean.

There are is a shortage of optometrist and America, an unusually high number of.

Our conscious retired at the pandemic time, if youre thinking of things kind of retiring a year anyway, maybe I'll just throw in the towel now I think the numbers, 2% to 3% of doors.

Of independent doors shot.

During the pandemic and frankly.

I think what we're seeing amongst <unk> something we're seeing in a lot of the workforce with an increased desire for flexibility. So people who were five day doctors might say you know what.

Decided I would like to be a four day doctor and so that's a factor in that the schools do not.

Graduate any greater number of optometrists.

Every year. So now there is.

There is a need because there arent as many of the unusual cycle of generation retirement of new to retired.

Been thrown off and there is an increased desire for flexibility in a variety of ways that we're addressing in a variety of ways, but it's different for different than it was pre pandemic.

Thank you.

Ladies and gentlemen, this does conclude today's conference I'd like to turn the call back over to Reade fahs for any closing remarks.

Thank you Lee.

Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

Q2 2022 National Vision Holdings Inc Earnings Call

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