Q3 2022 National Vision Holdings Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Thank you for standing by and welcome to the National business third quarter 2022 earnings 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 Touchtone telephone.
As a reminder, today's conference call is being recorded.
Now I'll turn the conference host Mr. David Mann Senior Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone and welcome to National Vision's third quarter 2022 earnings call. Joining me on the call today are <unk> CEO , Patrick Moore, Chief operating and financial Officer, and Melissa Rasmussen CFO elect our earnings release issued this morning and the presentation.
Which will be referenced during the call are both available on the investors section of our website national vision Dot com and a replay of the audio webcast will be archived on the investors page. After the call before we begin let me remind you that our earnings materials and today's presentation include forward looking statements as defined in the private Securities Litigation Reform Act.
At a 1095. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and our filings with the Securities and Exchange Commission the release and today's presentation also includes certain.
non-GAAP measures reconciliation of these measures 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 provides investor presentation and supplemental.
Aerials for Investor reference on the investors section of our website now let me turn the call over to breed. Thank you David Good morning, everyone. Thank you all for joining US today, let's start with slide four and a summary of Q3 for the third quarter net revenue decreased three 6% and adjusted comparable store.
Core sales declined eight 1% compared to the third quarter of 2021, we delivered adjusted diluted EPS of <unk> 15 for the quarter. Our third quarter performance was impacted by the continued weaker consumer environment as well as constraints on our exam capacity, the macro headwinds, including higher inflation.
Consumer confidence and risks of recession are pressuring our lower income predominantly uninsured customers, but at the same time, we saw a broadening in our customer base and an acceleration in trade down of higher income customers into our stores.
In terms of constraints to our exam capacity, we're making sequential progress through improved retention strong hiring and remote medicine, while our exam capacity that remains out of sync with our needs in certain markets, which of course affects patient traffic, we expect exam capacity to gradually improve into 2023 and through.
Out next year.
As we address these challenges. We're also focused on our growth initiatives, we opened 18 stores, including a record seven eyeglass world locations and we're currently enabled with remote medicine and approximately 300 stores, which is two months ahead of our year end target.
Also as shared in August we signed a multiyear extension of our current lens purchasing agreement with Essilor Luxottica.
We're proud to have released our 2021 sustainability report last week, providing more in depth disclosure of the progress we're making on our ESG journey.
Finally in todays release, we reaffirmed our 2022 outlook for revenues and profitability in a few minutes, Patrick and Melissa will provide more detail on our Q3 results and our 2022 outlook.
Turning to slide five.
As the chart shows before the pandemic our business demonstrated quite consistent performance over time, even amidst broader economic challenges the historical consistency of the optical category has been impacted by macro headwinds, especially higher inflation and temporary disruption to the purchase cycle that began with the star.
With the pandemic and has been exacerbated by the multiple waves of Covid variance.
The chart on slide six highlights the volatile quarterly comp performance over the last two years and the purchase cycle disruption caused by the pandemic.
Optical category has been inherently consistent over time due to the biology of the eye and we believe we will see a return to more stable and predictable environment in the future.
In terms of third quarter trends optical consumer demand continues to be impacted by inflationary pressures and weaker consumer confidence. This weaker demand is also being felt more broadly in the industry.
During the quarter, our back to school season was better than last year as we experienced more engagement with traditional younger school age patients.
Although we were not back to historical pre COVID-19 seasonal levels. We were encouraged by this movement to a more normal normal purchase cycle and seasonality.
At the same time, we experienced weakness in broader seasonal traffic due to the macro environment and constraints to exam capacity near.
Near the end of the quarter Hurricane and impacted our store operations in Florida of course, the greater concern was with the well being of our associates and optometrists their families and everyone affected by this natural disaster. Our Hearts go out to the people whose lives were so disrupted by the storm we worked closely with our internal store teams to help us.
Associated optometrists and customers in need at.
At <unk> peak, we had over 100 temporary store closings and one store still remains closed due to damage. We estimate the revenue impact was approximately $2 million or a comp impact of approximately 40 basis points with a disproportionate effect that eyeglass world due to its concentration of stores in Florida, we would expect to recur.
Cover these sales in Q4 and into 2023.
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 as our insured business continues to comp positively this.
<unk>.
In Q3, we also experienced an acceleration of the trade down of higher income consumers into our stores that began in the first half of 'twenty to 'twenty two what we've referred to in the past as nicer cars in the parking lot and we're encouraged by this trade down acceleration and would expect it to build further over time as <unk>.
That is what happened during the last recession.
And the current inflationary environment, we believe our value offerings should be ever more appealing to an ever larger slice of the American public.
Our business continues to face constraints on exam capacity in certain markets in other words demand for exam appointments and some stores goes unfulfilled due to the lack of an available optometrist. Our team is making incremental progress on key initiatives to expand our exam capacity.
Retention levels remain up versus last year. This is a testament to our multiple initiatives to drive retention.
In terms of hiring our increased investments in recruiting continue to pay off year to date, we've experienced strong hiring about contracts. During Q3, we saw the arrival of the wave of new hires that began to practice in our stores.
Lastly, we remain excited about the progress of our remote medicine rollout.
As noted in today's earnings release remote Medicine is currently enabled and approximately 300 stores, thereby achieving our year end target ahead of schedule with.
With the rollout of remote medicine, and electronic Health Records at our stores Associates setup contrast, learn new operating processes, which come with a learning curve in stores that have performed remote exams for the longest period, we're continuing to see a significant ramp in operating productivity. We are pleased with the incremental increase in <unk>.
Aimed 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 going into 2023 and throughout next year.
So we are in an unusual 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 in a subgroup of stores due to the constraints on exam capacity, but we see these as temporary and we remain confident in the long term.
Strength of our business model.
Shifting to slide seven we continued to progress our core growth initiatives.
In terms of store expansion, we continue to see a sizable white space opportunity with growth for many years to come we had 18 openings in the third quarter, including a record seven eyeglass world locations as we ramp up the expansion of this brand we.
We expect to open at least 80 stores in 2022, and currently have a solid pipeline of specific locations into 2023.
Our real estate team has done a fantastic job navigating the growing supply chain challenges.
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 budget conscious and trade down consumers are finding us attracted by our value messaging and positive word of mouth, we continued to focus on marketing efficiency and our.
Pleased to be leveraging marketing expenses this year.
Our participation in vision insurance programs continues to be a positive revenue driver, especially in the current environment.
In the third 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 a tight economy, our comps related to managed care were positive and continue to outperform comps for uninsured consumers.
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.
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 Reed and good morning, everyone, let's start on slide nine with third quarter financial details in Q3 net revenue decreased three 6% compared to 2021 due to macroeconomic headwinds and constraints to exempt capacity the timing of unearned revenue negatively impacted revenue growth.
By 4%.
During the quarter, we opened 11, new America's best stores, and seven Eyeglass World stores for a five 5% increase in store count.
For our America's Best and Eyeglass World growth brands combined unit growth increased seven 4% over the last year.
Adjusted comparable store sales declined eight 1% versus 2021 as Reade noted, we estimate that hurricane Irma impacted our Q3 comps by approximately 40 basis points.
Q3 comparable store sales were impacted by a decline in customer transactions average ticket was flat year over year. We're pleased that our average ticket has stabilized this year helped by pricing actions and successful product enhancements like Blue light.
Turning to slide 10, as a percentage of net revenue cost applicable to revenue increased 290 basis points or better than our expectations of a 400 to 425 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 stable average ticket.
<unk> SG&A increased three 9% and adjusted SG&A expense percent of net revenue increased 320 basis points.
Our store and marketing teams continue to execute disciplined cost management this quarter.
The key factors behind this increase were the deleverage of store payroll corporate overhead and occupancy expense, partially offset by lower advertising investments. We continue to expect advertising to be slightly leveraged in 2022.
Adjusted operating income decreased 61% to $21 5 million.
And adjusted diluted EPS decreased 60% to 15.
Turning to the year to date 2022 results on slide 11, compared to 2019. Despite the challenges this year net revenue increased by approximately 16% adjust.
Adjusted diluted EPS increased nearly 5%.
At this point I will turn the call over to Melissa to discuss our financial position.
Thank you Patrick and good morning, everyone.
Turning to slide 12.
My transition into the CFO role at year end, I'm inheriting a strong balance sheet excellent liquidity to support our growth strategy.
We are in the enviable position as a result of Patrick stewardship over the last eight years and I plan to continue executing the long term financial strategy that we have developed.
At the end of third quarter, our cash balance exceeded $256 million.
With total liquidity of nearly $550 million, when including available capacity from our revolver.
We ended the quarter with total debt of $568 million.
Net debt to adjusted EBITDA was one and a half.
I want to take a moment and highlight one item related to our term loan debt and the hedging that we have in place.
In the first quarter at 2020, we hedged our term loan debt using an interest rate collar. While the term loan has a variable LIBOR based interest rate that is more than fully hedged by the interest rate collar to voluntary term loan prepayments made in 2020 and 2021.
As a result, when our LIBOR rate past one 8% in late July we began to receive payments from our counter party, which totaled $400000 this quarter.
Just on the current rate outlook, we expect to continue to receive counterparty payments in the fourth quarter.
These payments are helpful to our net interest expense and cash flows are incorporated in our lower interest expense outlook provided today.
Year to date, we funded $86 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 $115 million as we continue to invest in key growth initiatives, including our remote medicine rollout we.
We did not repurchase any shares of common stock in this quarter and had $50 million remaining under our current share repurchase authorization.
At the end of the third quarter inventory per store declined more than 7% on a year over year basis.
Our inventory levels are in good shape, and we are comfortable with the ability to support our growth plan.
Merchandising and distribution teams continued to execute well it can help us manage through the current challenging supply chain environment.
Overall in this environment, we believe that our financial strength and our commitment to invest in our business remain a competitive advantage let.
Let me turn the call back over to Patrick for a discussion of our outlook.
Thanks, Melissa turning now to slides 13, and 14 I'll conclude with some commentary regarding our 2022 outlook, which we included in today's earnings release as we all know the dynamic operating in macro environments remain extremely uncertain, our fiscal 2022 outlook reflects that.
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.
Given the uncertain environment and continued forecasting challenges, we are maintaining a more conservative posture for our outlook against the backdrop of what we know today, we are reaffirming our 2022 outlook as follows net revenue in the range of $1 91 to 2.02 billion representing adjusted comparable.
Core sales growth in the range of negative $6 five to negative 8% with at least 80 store openings.
Adjusted operating income between 85, and 100 million and.
<unk> diluted EPS between <unk>, 65, and 77 <unk>.
Assuming $80 1 million weighted average diluted shares.
Even amidst a difficult macro backdrop, we are continuing to invest in the business and key 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 our business.
Let me provide some underlying assumptions in our outlook.
As you model the fourth quarter, we continue to expect comps to be in the negative low to mid single digit range.
In terms of profitability, we would look for fourth quarter adjusted operating income to be slightly negative. We expect Q4 profitability to be impacted by <unk> expense deleverage during our seasonally low period as well as two additional factors.
First we now expect that the timing of unearned revenue will have a negative impact in 2022 of about 10% to $11 million.
Slight increase from our previous estimates with the impact to be realized in Q4 as a reminder, on our revenue recognition is a seven to 10 day timing impact only that can affect our quarter to quarter and annual comparisons.
Second we elected to make an incremental $2 million wage investment for retention bonuses, primarily for our district managers and store managers.
For full year 2022, as a percentage of net revenue. We now expect cost applicable to revenue to increase approximately $2 90 to 300 basis points versus last year, primarily due to the deleveraging of fixed costs as well as lapping last year's record performance that benefited from product mix shifts.
An elevated ticket.
For Q4 cost applicable to revenue are expected to increase about 300 to 325 basis points versus last year or similar to the trend experienced during the third quarter.
In terms of expenses, we expect 2022 adjusted SG&A to increase approximately 190 to 205 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 updated assumptions for depreciation amortization and interest.
The lower net interest expense assumption reflects the positive benefit in the current higher rate environment from our hedges and interest income on cash balances that Melissa highlighted.
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. Our company has experience with successfully weathering difficult market conditions and we continue to view. The current issues are temporary in the interim our management team is focused on what we can can.
Troll continuing to invest in key growth initiatives and taking the necessary actions now to emerge from the pandemic era stronger than ever on a personal note I'll be transitioning full time to chief operating officer in the next couple of months after eight years as CFO as CFO I'm looking forward to continuing to her.
The company achieved our long term mission and execute our strategic plan I could not be more confident in handing off the CFO role to Melissa.
As she is an outstanding leader trusted colleague and talented financial executive and with that I will turn the call back to Reed for closing remarks.
Thank you Patrick and Melissa.
Turning to slide 15, and our moment of mission.
We are proud to have recently published National Vision 2021 sustainability report guided by our ESG strategic framework. This detailed report covers our impact on society and highlights the progress of our efforts across environmental social and governance activities.
The reports shares many impressive data points as well as some of our goals for the future. For example, we had a fivefold increase in our annual impact for philanthropic activities and we shared our intention to impact at least 5 million people through our philanthropic efforts in the next five years.
For full details on our activities you can access the report via the link in the presentation or on the corporate responsibility page of the National vision website.
I'm also pleased to note that our ESG programs and disclosures are being acknowledged by key stakeholders and ESG Raiders.
Following our first corporate responsibility report last year, our MSCI ESG rating was recently increased to double AA from Triple B National Vision is now considered a leader in our industry sector.
I want to thank our entire team at National Vision and network of Optometrists, who provide much needed medical services to patients at over 1300 store fronts every day and to the ecosystem of philanthropic partners, we work with including vision spring restoring vision and the international agency for the prevention of flying them.
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.
Currently our business more volatile we believe that the marketplace over time should return to trends more consistent with the pre COVID-19 era, especially as our customers I've only continue to get worse with time as we remain a low cost provider of medical necessity.
We operate in a highly fragmented industry with ongoing structural tailwind such as an aging population and increased ice cream 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 there is.
For example at our stores.
Thus despite the current challenges our confidence at 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 again, ladies and gentlemen, if you'd like to ask a question. Please press star one one when you touch tone telephone again to ask a question. Please press star one one our first question comes from Zack <unk> of Wells Fargo. Your line is open.
Hey, Good morning. So first question for me is on your structural margin profile as <unk> gone back to 2019. This was up mid to high single digit operating margin business that accelerated to nearly 10% in 2021. So as we look at sub 5% margins today could you walk us through the puts and takes around.
And where the business should ultimately land as your sales levels normalize in 2023 in the years ahead.
Sure Good morning Zach.
I'll start with.
We do a lot of margin comparisons back to 2019 pharma thats less.
Most consistent year and as you fast forward up to 2022, there's just a lot of distortion and us being kind of off our original sales plan by a couple hundred million dollars in turning in comps.
Negative seven negative 8% range on the year for our God.
So I don't consider this year.
Great year to do the margin analysis, because you are going to see some deleveraging, but yes youre right.
Going towards a four 5% to 5% operating margin. This year that was 678 and nine eight over those few years with benign eight high watermark being reached due to just incredible demand and really elevated.
Average ticket.
If I kind of go back and think what really changed okay. As we just think about margins does that time gross margins permanently held up nicely.
Had some cost pressures there with.
And investments in wages for optometrists, we'd have some.
Pressures, there a little bit for cost of sale, a little bit for freight none of those have been huge and we've manage them well and it's been offset with number one productivity increases in our labs every year.
Some of the pricing so as I look at gross margin it's been.
Fairly stable SG&A.
As more deleveraged, if I differ.
If I were to give you kind of a normalized version of where have SG&A margins move structurally I would say.
A little wage inflation for associates, which I think we've managed pretty well.
Slight deleveraging advertising, but we are going to leverage this year, even admit that $200 million.
$200 million lists and then from there rents are up a little.
Some of the areas, where we see have seen the most cost to increase in de Leverages frankly in our corporate our corporate headquarters.
And that's really around key growth initiatives.
And what we've decided there is kind of except for short term deleverage betting on.
The growth propulsion and coming out of the chapter that we're in now that's been a remote medicine initiative.
Very significant re mentioned that.
We've already hit our 300 stores will be doing a lot more of those next year that includes omnichannel initiatives that includes.
Kind of beefing up in areas around Dr recruiting and retention. So we have made some very.
<unk>.
Definitive investments there and have held onto that cost and again being willing to take the short term to be leveraged to come out of that and better better shape in the future.
As I think about margins again, it's tough from a base of negative 7% comps.
But as we as we move into a more kind of a normal future I think where disruption.
Purchase cycles has decreased deferrals or less.
I think we're going to see a similar gross margin story. Those same factors that I mentioned are affecting us from 2019 to 22 are probably going to all still be there both pro and con.
And then below the line, we probably will see a little bit of wage inflation still.
But I'm expecting that we're going to continue to leverage advertising I think that we will eventually levered.
Corporate overhead so I see us having a good chance to get back to the trajectory we were on as.
As we move from 19 through 21, noting that 'twenty, one with a really was a high watermark, but it also shows that the machine can do that.
As we kind.
Kind of come out of the phase that we're in a return to growth.
It's really the same business with a few tweaks there for wages and rent.
And so on.
And I'm really happy with the decisions that we've made on hanging in there with those investments.
And then I'm just kind of one.
This can reinforce one thing Zach we are investing to emerge stronger because we are confident that historical cycles will return because that's how it works in our category for decades.
That's what happens with the human eye.
And we're making those investments so that when things do normalize we're coming out even stronger.
Got it got it thanks for that and just a couple nitpicky follow ups for you first of all I calculate per store inventory down 7%. So any color there on inflation versus units in stock levels and to what extent that was intentional would be helpful.
Then second could you walk through the hedging mechanics on the interest expense and a little bit more detail and whether you expect this lower.
Interest expense level to be a temporary Q3, Q4 phenomenon or a new run rate.
Sure Zach this is Melissa as far as the inventory per store that we are down 7% at our inventory levels. However, we are pleased with our efforts to mitigate the supply chain disruption that has that has existed so far and our merchandising and supply chain teams have been at.
Great job at managing our inventory levels, we are confident in the level of inventory that we have to support our ongoing revenue and growth players. So I think a 7% decrease is it we're comfortable with that.
Now related to the interest expense question that you had we are in a position where we had.
Had renegotiated our credit agreement and with that we entered a hedge for our LIBOR based debt.
That LIBOR based debt as soon as we crossed the one 8% threshold we started.
Breastfeeding Counterpath.
Counterparty payments for that hedge that we have in place. So in the third quarter, we received about $400000 interest.
Payments from our counterparty and we continue to expect to receive that through fourth quarter and as long as the interest rate.
<unk>, where they are or continue to increase that you expect to see a benefit on our interest expense line.
Got it appreciate the time.
Thank you one moment please.
Our next question comes from the line of Anthony <unk> of Loop capital. Your line is open.
Good morning, Thanks, so much for taking my question.
So.
So the remote.
Sam initiative.
Thanks for the update on that at what point do you think that we start to see the benefits.
In the P&L, because it certainly seems that particularly given the.
Staffing issues that you're having right now that that's a pretty compelling initiatives. So what.
At what point do we start to see that benefit.
Hey, Anthony it's Patrick.
This year has been launch year number one.
We have a project team we have equipment installers.
Covering that cost and I think that as we get beyond this first year, where we've talked about a little dilution.
We'll get to next year, we will see positive P&L impact from that we've rolled it out to 300 stores. It's enabled there.
As those stores needed, we can turn it off and turn it on so.
We're kind of working through our plans for 2023.
Certainly expect a P&L benefit next year.
As we look at individual as we look at individual stores or markets or groupings of stores as I think we said.
Hey, look we see we see really nice productivity impact coming off those stores were.
They are they've got the equipment and they've gotten accustomed to the change around it.
<unk> are trained in its way of life in those stores I think we've referred to.
Double digit productivity lifts in those older markets.
By the time, we get to midyear next year, a lot of those will be older markets. So.
Spectrum to see good results out of that next year.
Got it and then one tangentially related follow up what.
What was the impetus for the I guess, the $2 million retention bonus that you had mentioned.
In the fourth quarter.
Yes so.
So our win with.
Sales down versus expectations for our store managers and field teams day, they arent getting the bonuses they've been used to and we wanted to say to them Hey, we are going to hit and we realize that this is a tougher tough environment to work in and we.
Wanted to make up some of the <unk>.
Some of the lost to their compensation, we have traditionally had heavy incentive compensation, there and we wanted to make sure that that our team.
New that they were appreciative and invest in them in the long haul.
That's the game about retaining your talent and.
We are good at that and pleased with that but we wanted to make sure people knew they were appreciated and.
And recognize that there with that.
<unk> hit and we wanted to make up a little bit of that.
Have a very cultural thing in my opinion, it's about.
Long term orientation, and keeping keeping yourself surrounded by the community of talent that you've assembled.
That's very helpful. Thank you.
Thank you.
One moment please.
Our next question comes from the line of Paul Louise.
Your line is open.
One moment please.
Next question comes from the line of Brandon Cheatham with Citi. Your line is open.
Hey, everyone.
Brandon on for Paul. So I was just wondering can we kind of dig in a little bit on how consumer behavior has changed especially around your uninsured customer.
Do you get a sense of how much time, they're extending between their last appointment.
Typical I assume we get to a point, where you just can't put offset eye exam any longer this is.
Wondering if you have any kind of insights there.
So so again this is such a key points around our business or our our consumers are very budget conscious.
Many many living paycheck to paycheck. These are the people most affected by the inflation.
We're also.
So aware of.
And as we.
Like to reinforce our managed care customers for whom this is not.
As much there their money because they've got insurance, we are comping positively amongst our managed care customers, but managed care is roughly a third of our of our business.
The non managed care customers.
Is a lot.
And what we found in the last recession and we're seeing this now also is our lowest income customers have to drop out of the category that they stopped going out to restaurants, I thought being viewed as a necessity as they just don't have the cash to do it but we've started to see trade down our internal fragrance nicer cars in the parking lot.
And and that is that is what happens typically in an hour and the dynamics of our business and many other businesses.
Service bunch of concept.
<unk> during during tough economic times.
Got it.
The percentage of insured customers now versus what's typical.
So what.
What we said when we went public was that.
That was about five years ago, we said, 25% to 30% of our business came from insured customers. It has been growing at a faster rate. So we referenced it as an <unk>.
Over a third of our customers.
Got it okay.
And I was wondering if we could talk a little bit more about the remote medicine initiative.
Does that ultimately kind of solve.
A no show problem, how many of your appointments now.
Customer ends up not showing up for you.
And where do you think that can ultimately changers throughput from today too. If you eventually have remote medicine than most of your doors.
Brian Great Great question, Great insight and great understanding because it is.
What's wonderful about this from a from optometrist perspective is when you are a remote doctor. There is never a no show you are covering all the stores in a state.
And so when Youre done with one exam you just look up on the screen and there is another one there to be had so for a remote doctor. There is never an air show. We believe that remote is something that many many doctors are going to want to have as all or part of their practice.
Just as as we're all seeing in the Labor force that a lot of people are saying.
In my office, a few days live and I'll be home a few days that seems to be Americans are enjoying and ever.
Never ever more flexibility than we ever would have imagined pre pandemic and optometrist like that also I do think this hybrid model of our practice some days alive and at Sunday promote will be very popular although some doctors that they know I always wanted to be alive, and some are saying they always want to be remote but we are trying to be.
The place where optometrists want to spend their entire career that's been our mantra for decades now and a part of that is this is a motive practice that many doctors aren't going to want for at least part if not all of their of their practice and we want to be there for them because we want to.
We are in the place where the more optometrist the more demand we can we can serve.
Got it.
I think I read a stat that its like about 20% for the industry as you know no show on the appointment and would that be.
A fair assumption for you all any quantification that you can provide there.
Yes.
We don't share a number on that but but no show rate for our lives doctors.
Is it is a factor that we we monitor and keep track of.
The other the other piece that relates to remote is.
We have a lot of work in to take come in and say can I have an exam today and.
We're sitting at FERC.
In the traditional way affiliated if like you just hope that you have capacity, where the person walks in because if they walk into a store without capacity then we can't serve them, but with the remote option. We can we are more able to take walk ins than we were because we're spreading the optometric resource across geography and talk.
So there there is a remote doctor.
Sitting there ready to take the the outwork in exam, most probably and even if we don't have the EBIT doctor in the store is totally booked up.
Thank you.
Ladies and gentlemen could we please limit questions to one question and a follow up thank you our next.
Comes from the line of Adrian <unk> of Barclays.
Again that question Craig.
Hey, Jeremy.
Yes.
Great.
Okay.
Okay I guess.
My question is what can tanks or the commentary from last quarter to this quarter and last quarter. There are three kind of critical issues on the top line number one lack of optometrists capacity. It seemed like the core was shrinking because of what you just said.
Sorry, because we hadn't seen the trade desk. So now it feels like you're fixing number one.
And then I'd like to know like when they come onboard you just hired than when do they get to that kind of full productivity.
Like the core demand still shrinking.
Third piece of it you are getting the trade desk.
With that kind of characterization is that about correct and then my follow up is for Patrick Andrew Melissa.
Can you remind us like how many weeks of safety stock do you have now outside of the inventory per store how much will you run the business with kind of on a more 12 month basis and how are you thinking about unit inventory as you anniversary kind of the spring where you were starting to build the safety thought thank you.
Very much.
Good Okay. Let me, let me take the first part of that I'm going to start with the trade down piece in our in our last.
Call.
Pretty sure what we said was where we are.
Seeing the gradual trade down and we're seeing that more so now so the Richard nicer cars. The richer people nicer cars trading down to US that we were we said in the last call that we are seeing it.
Emerge and now we are saying, yes, it's continuing to come through as we would've expected based on our historical recessionary experienced in terms of core demand core demand in the optical industry is down started around March and April .
And it down is it is across the board as we referenced if you have Richard customers. If you have insured customers you are a little better off but the whole category.
Is down and sort of went down in March and April and all of all indications.
And reference points I'll re enforced.
That piece. So there is a demand issue and we have that that the double whammy of there are places there are stores, where if we had more optometrist capacity, we would be able to weave.
Be able to serve more demand, but but again on the on the plus side. Our retention is up <unk> is higher than last year. Our recruiting has been strong year to date.
And we believe remote medicine will help us even more so.
Two to create capacity flexible capacity that.
Can help us as the as the historical cycle.
Cycle.
Returned eventual and then for the second part Melissa can you take the second part sure. Thank you regarding our inventory level and we are happy with our inventory levels currently they're down 2% year over year and the inventory per store is down 7%, but we don't see our inventory levels.
As an issue as we continue to grow.
And kudos to our product team.
Amidst supply chain issues you hear about in other places I just love, we've got such great experience in our and our product team.
They planned.
Our head well and this is the benefit of the sort of long term partnerships with our supplier community that we've talked about since our IPO as being a real competitive advantage that that we've been able to not have the supply chain disruptions in product that are are affecting <unk>.
Of our industry, but have not been impacting us and they've done better managing their inventory very intelligent.
Thank you. Our next question comes from the line of Bob durable with Guggenheim Partners. Your line is open.
Hi, good morning.
I was wondering if you could spend a little time on the legacy segment.
How that's going some of the new stores and new formats.
Participate in with Walmart you can really.
Give us an update on what Youre seeing there and any plans going forward that would be great. Thanks.
Third of all Walmart too was affected by the demand related.
Related industry efforts that I talked about before in our Walmart, We've got a 32 year relationship with Wal Mart and its a very strong relationship and we are.
Back in 2020, we extended our contract again, which means I think the second or third consecutive contract.
Renewal.
They gave us a few stores late in 2020 that are doing.
Great and it's a great partnership I'd I'd say that that trend is is <unk>.
Quite similar in that in that they are affected by the demand.
Demand pieces as is every every other part.
That's a great relationship.
We cherish that relationship with Walmart and.
We have had.
It's in a great position.
Great. Thank you very much.
Thank you one moment please.
Our next question comes from the line of Kate Mcshane of Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking our question.
I know you had mentioned that the overall industry.
Is down but.
But we wondered if you have a sense of any market share that might be being lost due to the exam capacity issue.
Specific to the National vision.
We believe that despite the exam capacity issue, which is where we spend a lot of our our time that we are holding our own from a marketing from a market share perspective.
Okay.
Okay and my follow up is on the exam capacity I think this is.
Adrian earlier question, but is there any way you can compare where you are today with exam capacity to where you were when you first started this issue in Q1.
And is there any way to quantify the recruitment class in what you were.
We're able to.
The crude from this year's optometry graduates versus maybe the previous year.
We we don't we don't quantify this for competitive reasons our recruitment.
New grads was very strong and very healthy and up versus prior year.
And.
And again, our retention rate of our context overall is higher than last year also and yes. So we are expecting capacity to gradually improve into 2023 and throughout next year.
Thank you. Our next question comes from the line of Simeon Gutman of Morgan Stanley . Your line is open.
Hey, guys. This is.
Michael Kessler on for Simeon Thanks for taking questions.
First I wanted to follow up on some of the prior questions on top line and the trends that Youre seeing I think what you said on Q4 comp guidance it looks like.
More improvement on both a one year and a three year basis. So.
Just wondering I guess, what you are seeing quarter to date are you seeing.
The trade down continuing further accelerating.
Anything on.
On the low income side as well.
No.
Changing as we've seen some gyrations in the macro.
And then I guess, if you carry forward the run rate on the Q4, it looks like maybe next year. It could definitely flipped back to positive comps is that is that fair or is that kind of how you're preliminarily thinking about the <unk>.
Three outlook.
Okay. Good.
In Q4 overall.
We don't think.
The economy is going to turnaround radically in Q4 to it in a way that will affect our consumers are our comps are expected in the negative low to mid single digit range slightly easier Q4 comparison better holiday calendar.
And up against some covered we we had at the end of Q3, we had hurricane and really a whack us in Florida over over 100 stores and we will get some of that back and again, the fact that we've got.
Many remote enabled stores showed that should be a help.
As well as well as the sort of the trade down.
And then just to add a couple of comments.
On the three year stack and agreement, we're our guidance suggests that's going to pop back up a bit in Q4. So.
With you there Michael we saw the little more depressed in Q3 will not negative, but smaller number coming off Q2, and we believe that was principally related to how the back to school season fared across.
<unk> pandemic.
We'll probably not discussed we're not going to discuss guidance for next year today.
The entire management team is focused on making 2023 is greater years it can be.
And we will be talking about that in February .
Okay, Great and I'm, sorry, if I missed this or I think you mentioned that the ticket being relatively.
Relatively flat just any update on inflation in pricing and the backdrop and how you guys are approaching it.
We've been really pleased with how ticket has progressed.
Last year.
We saw the bottoming of pandemic era.
Impacts to ticket.
We saw that flattened.
Late November early December of last year, we've made a couple of pricing changes around the edge, we took the base offer.
And <unk> and EG W up we have seen.
Good results from all of that net net and are happy with where ticket has evolved and is evolving.
Coming off if you go back to 19, I'll give the percentage, but that's one of those reasons that I mentioned that we've been able to overcome some of the headwinds in gross margin.
We've been really pleased with where that has trended.
And Mike I'll, just add one other thing to your question about.
Our costs.
We talked about in our last call that we have three.
Three year extension of our current <unk> contract with Essilor Luxottica.
Started locks in pricing for several years and so that.
Lenses are a key part about what we buy then than that.
That's one of the costs that we can.
Very predictable.
Thank you. Our next question comes from the line of Dylan Carden William Blair. Your line is open.
Dylan Carden your line is open.
Salary and let's go to the next question. Please. Thank you one moment please.
Our next question comes from the line of Michael Lasser of UBS. Your line is open Mr. Lascar.
Good morning, Big club for taking my question now that you've had some time to reflect an annualized.
What's happened this year.
Why is it different.
Then what is happening during prior downturn.
<unk> got a long history of being able to generate very attractive same store sales growth throughout the course of the cycle.
<unk>.
Now obviously this year has been much tougher much tougher than other publicly treated reporters.
Perhaps there was some element to it that the low income.
It was under pressure low income consumers get under pressure in the past, maybe there's some element of it with the capacity.
Has to be constrained but.
Packaging constraints.
<unk> for National business in the past the why is it different.
How does that influence how you think about.
The.
Performance of the business and the ability to.
Maintain positive comp in the face of a weakening economic environment.
I will Michael Thanks, Thanks for that nice to hear your voice.
So a few things.
In the past that <unk> experienced with a recession. This is a recession coupled with witnessed steep inflation that that is a little bit different.
The other piece is just this disrupted purchase cycle from the from the Crazy.
Up and down of the pandemic era, where we set our stores I Miss or that there was purchase cycle disruption there but.
The newer piece has been since the pandemic.
The market for Optometrists has gotten a lot tighter.
And so there is the.
Capacity piece frankly, when I think of this at the most big picture level I think that all of the challenges related to pandemic era or pieces of the.
The capacity the purchase cycle disruption, even the inflation, it's all bundled in with.
<unk> impacts.
Relating to the.
The pandemic.
And my follow up question is yes.
The overall demand environment remains sluggish in the next year the market for our combat troops remained tight.
That it would put upward pressure on wages and in turn your cost structure.
Should the market be prepared for.
The gallon margin next year in that scenario and the other actions that you can take to preserve your profitability in the event that that is the outcome for the business.
Well, we are going to stop short of providing specific guidance for 2023.
Today, Michael as you would guess I go back to the answer that I gave earlier there has been some.
Any twists and turns for margins across the pandemic.
This year the biggest twist was frankly, just the degree of revenue that is that.
We did not get the we expected to at the beginning of the year.
We remain in a posture that.
That says we believe there will be demand recovery and we are going to be very well positioned to take that.
<unk> recovery.
We have not yet.
Taken.
Slashed cost we have been very smart with cost that we felt like we could pull back on that wouldn't damage. Our go forward growth prospects.
And we continue to evaluate that posture I think we're in the right place on this I think time is going to prove it out.
<unk>.
So again I can't give you a specific guidance but.
I do think that there's an opportunity here for us.
You'll see some more recovery.
Okay.
Thank you one moment please.
Our next question comes from the line of Brian <unk> of Jefferies.
Mr. <unk> your line is open.
Our next question comes from Brian tackle it.
One moment please.
Our final question comes from the line of Molly Baum of Bank of America. Your line is open.
Our final question comes from a line of Molly Baum with Bank of America.
Hi, Thanks for taking my question here most of them have been asked already but I just wanted to get clarification on two so I can ask them quickly in sequence here. The first one are you able to size the benefit to comps from price in the quarter and the second one is just a clarification on the capacity constraints. You mentioned that you are pleased with hiring.
Pension model so.
Are the exam capacity constraints I will have to work through strictly a function of timing and ramping up with the new optometrists or is there more hiring that it's needed or alternatively is there an industry wide shortage that presents at the challenges. Thank you.
Let me, let me ask answer your second.
Piece first.
From the time, we went public we talked about that.
I think the phrase we used was we've never had enough of optometrist and new you Shouldnt expect us ever to say that so that that was a constant.
Refrain from from the from 2000 <unk>.
17, but there has been an industry wide tightening on optometrists capacity add Murat <unk> retired some of them scale sale back the number of days. So there is an industry piece there and so we will we will always as we had been for 20 years prior be in.
Very focused on making sure the optometrists, who are with US now I love being with us and that that were ever better at recruiting new ones, both our school initiatives, our ongoing initiatives and and now this.
Mode initially.
Initiatives so.
We are seeing gradual.
Improvements on all fronts since last year on this and we expect gradual improvements continue.
But.
But it's an ongoing part of being in optical retailing in America, and Patrick do you want to add.
Half of them back to the.
First question Molly.
We haven't disclosed what we think are the exact impacted comps in the quarter for the pricing increases. We do think this stable higher than pre pandemic average ticket is certainly aiding that.
The end of the day, we're providing great value.
And thats to both the middle and lower income consumers and now we're seeing a little more trade down from higher income households, as well so.
Helping too.
Stabilize that average ticket and keep it at a rather healthy level for us and we're all feeling real good about the decisions. We've made earlier this year on this.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to <unk> for any closing remarks. Thank you very much Valerie and we'd like to thank all of you for joining us here today and to thank all of our stakeholders for your ongoing support and we look forecast speaking to you again, when we report our fourth quarter results.
Thanks, so much bye bye.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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