Q1 2023 National Vision Holdings Inc. Earnings Call
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Caitlin Churchill of Investor Relations. Please go ahead.
Okay.
Thank you and good morning, everyone welcome to National Vision's first quarter 2023 earnings call. Joining me on the call today are REIT class C E O and lots of restaurants, and CFO Patrick Moore C. O. L is also with us and will be available during the Q&A portion of the call.
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 Nashville bets in dot com and a replay of the audio webcast will be archived on the investors page after the call before.
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 1995.
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.
Release, and today's presentation also includes certain non-GAAP measures.
Conciliation 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 materials for Investor reference on the investors section of our website now let me turn the call over to Reed.
Thank you Caitlin and good morning, everyone. Thank you all for joining US today since we last spoke to you in March we continue to execute our initiatives focused on adapting to the new realities of the post pandemic marketplace that we believe will position us to deliver improved sales and profitability, while staying true to our mission to make <unk>.
Eyewear more affordable for all.
Before I review our progress on these initiatives, let me review highlights from Q1 performance.
Beginning on slide four Q1 came in slightly above expectations with a year over year increase in net revenue of six 6% and adjusted comparable store sales growth of 8% compared to Q1 2022. This translated into adjusted EPS of <unk> 31 for the period.
Overall, the quarter reflected a similar sales mix to what we saw in Q4, we didn't even stronger performance from our managed care business.
Our managed care business is less pressured by inflation since the insurance company pays most of the customers Bill managed care business is typically strongest in the fourth quarter as insured customers are using benefits before they expire and in the first quarter due to benefit plan reset timing.
In addition, during the quarter, we continued to see a greater shift in the number of higher income customers, who traded into our more value priced offerings as tends to happen in a tough economy.
These two trends helped mitigate the sales impact of inflation on our core budget conscious uninsured customers as well as the impact from continued exam capacity constraint.
Turning now to slide five and the progress we're making against our key initiatives as we discussed last quarter National vision is moving rapidly down the path to adapt our business to thrive in the new realities facing our business and the industry.
These new realities include exam capacity constraints and persistent inflationary pressures on our business and our customers' wallets lets start with exam capacity.
On the whole in stores, where we are achieving capacity objective comps are positive thus demonstrating the strength of our business model.
There are three components to achieving optimal exam capacity.
First is retention of the Upfronts rest, who currently practice in and alongside our story.
As we've previously shared our optometrist retention rate is in the 80% to 90% range. While there are some variability within that range from 2019 through 2021, mainly due to increased retirement and other pandemic related factors our retention rate improved in 2022 compared with 2021.
Given our healthy Q1 retention levels, we expect to see another step up in retention in 2023 over 2022.
The second is the recruitment of new countries to our network. We are pleased that our recruitment efforts are off to a strong start this year.
Both recruitment and retention have been aided by the addition of a menu of more flexible scheduling options available to optometrists and our network as we discussed last quarter. These updates were piloted late last year and based on positive results. They are being further rolled out in the first half of this year, we continue to learn how best to optimize the new schedule manager.
Meant that goes along with this program and balanced customer desired shopping patterns with the flexibility desired by the contracts.
Third we're deploying a remote medicine capabilities to help improve exam capacity.
Medicine provides patients with greater access to care and I'll contrast, with the ability to see patients across geographies.
This is because remote upfront fees can be licensed in multiple states and see patients in remote enabled exam rooms across the country, where they are licensed.
Our remote program is a fairly sophisticated startup within our organization and we expect it to significantly unlocks additional exam capacity over time.
While we continue to learn and evolve the program. It remains on track to contribute to profitability. This year.
While the greatest benefit of course is to darken didn't story. There is also an important benefit in covering situations, where an in person op contract is out of the office and it's ending supplementing the coverage that alive. Dr provides in store when there is strong demand.
We remain on track with our expansion into at least an additional 200 remote enabled stores. This year taking into account planned positive expected for peak volume periods.
Sure.
I encourage everyone to take a look at the video we recently published on our website demonstrating a remote exam.
In response to the current rising cost environment, we're driving a variety of the effort, which should over time help to rightsize, both our store and our overall cost structure. This.
This includes the ongoing digitization of the store to improve efficiency and productivity and example of this if our electronic health record or EHR program.
Going out in conjunction with our remote medicine capabilities that is designed to make our stores work more efficiently than with traditional paper records.
In addition, as we continue our deep dive into our pricing architecture. We're conducting a study that will help us update the competitive landscape and our position within it to best determine options for potential pricing changes, while executing our mission to provide quality eye care and eyewear at a value to all.
Finally, with respect to consumer spending conservatism, we are constantly testing and expanding new marketing programs, including those that attract consumers via a variety of relatively new omnichannel offerings.
We continue to believe that over time due to the biology of the human eye.
<unk> purchase cycle, which remained consistent in the decades prior to the pandemic will eventually normalize.
Now regarding our ongoing store growth during the first quarter, we opened eight new stores and are on track to open approximately 65 to 70, new stores. This year, our new stores opened over the past 12 months are continuing to perform well and in line with our expectations as illustrated on slide six we continued to see great.
Opportunity to expand our America's best and Eyeglass World store base over time, and we will continue to capitalize on the white space opportunity in front of us.
In summary, we are taking aggressive action to position national vision for success in the post pandemic marketplace.
April was somewhat softer than we previously anticipated we're beginning to see encouraging signs of progress from the actions, we are taking which is giving us confidence in reaffirming our 2023 guidance at this time I will now.
Now I'll turn the call over to Melissa for a more detailed discussion of our financial results and the 2023 outlook.
Thank you Reed and good morning, everyone as read discussed we had a stronger than expected start to the year driven primarily by managed care sale, leading to adjusted comparable store sales growth of 8% slightly better than originally guided and we are beginning to see progress based on the accident.
We're taking.
Now I'll cover our first quarter financial performance in more detail.
Turning to slide nine net revenue for the quarter increased six 6% compared to the prior year. This includes the impact from the timing of unearned revenue, which benefited revenue growth by 2% in the period.
During the quarter, we opened four new America's best and for Eyeglass World stores and closed five stores.
For our America's Best and Eyeglass World growth brands combined unit growth increased 5% over the total store base last year, and we ended the quarter with 1357 stores.
As Reade mentioned, we are on track to open between 65% 70, new stores this year consistent with our previous guidance.
Adjusted comparable store sales grew 8% compared to the first quarter of 2022, driven by an increase in average ticket and transactions.
Turning to slide 10, as a percentage of net revenue cost applicable to revenue increased 50 basis points driven by the deleverage of optometrist related costs, which was partially offset by higher eyeglass margin and increase eyeglass mix.
Adjusted SG&A expense as a percentage of revenue increased 140 basis points compared to the first quarter of 2022.
The key factors behind this increase included higher performance based incentive compensation given the normalization of our incentive plan this year versus last year as well as higher store payroll.
Factors were partially offset by advertising expense leverage during the period.
Adjusted operating income was 39 9 million.
Compared to $45 3 million in the prior year period.
Adjusted operating margin decreased 150 basis points to seven 1% driven primarily by the increase in optometrist related cost in the normalization of incentive compensation compared to last year.
Net interest expense was $4 9 million.
Which includes mark to market losses on derivative instruments and charges related to amortization of debt discount and deferred financing costs of $3 9 million.
Adjusted diluted EPS was <unk> 31, compared to 33 per share in the prior year period.
Now turning to slide 11, our balance sheet and liquidity remains strong we ended the quarter with a cash balance of $246 9 million and total liquidity of $545 million.
Including available capacity from our revolving credit facility.
We have total debt outstanding of $566 9 million.
With no mandatory principal payments due until the term loan matures in July of 2024.
We are currently exploring refinancing options for our term loan and revolving credit facility in advance of their maturity and.
And we expect to provide an update when appropriate.
We ended the quarter with net debt to adjusted EBITDA of one eight times.
During the quarter, we generated operating cash flow of $74 $1 million.
We invested $27 7 million in capital expenditures, primarily focused on new store openings and customer facing technology investments.
And remain on track for 2023, Capex in the range of $115 million.
To $120 million.
To support our key growth initiatives.
During the quarter, we returned capital to stockholders with the repurchase of one 1 million shares for $25 million under the share repurchase program at an average share price of $22 90 per share.
We have $25 million remaining under the current share repurchase authorization.
Inventory per store declined 8% on a year over year basis.
Our merchandising and distribution teams continue to execute well and we are confident our current inventory levels are sufficient to support continued growth in 2023.
Overall, we will continue to utilize our strong balance sheet and cash flow to invest in our strategic initiatives to enhance our customer experience and strengthen our market position.
Turning now to our outlook on slide 12.
We are reaffirming our 2023 fiscal year outlook for key metrics that we provided on our last earnings call.
We continue to expect net revenue between Q3 zero 75 billion to $2 135 billion supported.
Supported by adjusted comparable store sales growth of zero percent to 3%.
65% to 70, new store openings this year.
Adjusted operating income of between $48 million.
And $66 million.
And adjusted diluted EPS between <unk> 40 to 60.
<unk> 60 per share assuming $80 2 million weighted average diluted shares.
Embedded in our guidance is the expectation for the 2023 fiscal year tax rate to be in the range of 26% to 28%, which includes the impact of reduced deductibility of certain expenses as a result of the exploration of the consolidated Appropriations Act of 2002.
'twenty one.
For the quarterly cadence perspective, we expect our tax rate to decrease in the second quarter from the first quarter of 2023, resulting in a second quarter tax rate below the full year expectation as.
As we move into the back half of 2023, we expect our tax rate to be more in line with our full year guidance.
As we stated previously April was somewhat softer than we anticipated due to ongoing macro related headwinds our core uninsured patients and customers are facing including lower tax refunds this year versus last year.
Given this and the timing of expected increased product costs Doctor related investment in SG&A deleverage with adjusted SG&A dollar growth in the high single digit range. We continue to expect adjusted operating margin in the second quarter of this year to be pressured.
Looking beyond the second quarter, we continue to expect sales trends to improve in the back half of this year as we execute our strategic initiatives, including addressing doctor capacity constraints.
In summary, we remain focused on executing our strategy and believe we are on track to achieve our objectives for this year.
As Reade mentioned, while still early we are encouraged by the progress we are making especially with respect to our efforts in expanding exam capacity through our recruiting and retention initiatives as well as the further implementation of our remote exam technology.
As we move beyond the initial implementation phase for remote technology, we continue to expect operating margins to improve especially as we drive further efficiencies with our store incorporate Digitization initiative.
In addition, we continue to evaluate our pricing structure and opportunities to further offset increased costs, while maintaining our position within the industry.
Thank you for your time today I'll now turn the call back to Reed.
Thank you Melissa turning to slide 13, and our moment of mission, which focuses on our latest technology investment in an early stage health care artificial intelligence startup called Tokyo, which we're investing in alongside top gun healthcare.
I exams are more than simply getting an eyeglass or contact lens prescription.
Also assess ocular and overall health.
The picture of the retina that we're able to take in most of our stores provide the treasure trove of valuable information did not come.
<unk> can use to assess ocular and overall health and identify potential diseases that otherwise may go undetected for a long period of time, thus, helping to improve the health outcomes for our patients.
Through our investments in Tokyo, we're enhancing these capabilities.
<unk> analyzes retinal images for biometric markers linked to overall health and risk of cardiovascular events, including stroke, which is highly prevalent in people living with diabetes.
<unk> is among the first AI screening approaches designed primarily with optometry and mind in.
In addition, <unk> is working on validating and AI assessment of cardiovascular risk from the retinal photo which would be our first connecting optometry and primary care.
Supporting Tokyo National Vision, and divesting in a future for optical care and with more people are able to have affordable access to potentially life saving health data to an easily accessible noninvasive tests.
In summary, the key.
Key takeaways from today's call are we are rapidly adapting our business to thrive admits the new realities of the pandemic marketplace.
Our retention recruitment and remote medicine efforts are all heading in the right direction towards improved exam capacity.
The digitization of our stores corporate office and marketing efforts continue to progress towards improved productivity and longer term, we're making investments for improved patient care and optimistic experience, including investments in AI.
While our more budget conscious consumer remains pressured we are reiterating our guidance for the year and reiterating our conviction that the optical purchase cycle will eventually return to the normal historical patterns.
Now I would like to turn the call back to the operator to start our Q&A session.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
And as a reminder, at the company's discussion. Please only ask one question and one follow up question. Please please standby, while we compile the Q&A round.
One moment please.
Our first question comes from Michael Lasser of UBS. Your line is now open.
Good morning, Thanks, a lot for taking my question really if you had to dimension.
<unk> in your comp in the most recent quarter between the cycle getting better beat meaning we're getting closer to the replacement of glasses that were purchased in the last few years.
The improvement in optometry capacity.
And the trade down benefit that you might be seeing because of the challenging economic conditions, how would you disaggregate and quantified those three factors.
Thank you Michael Great Great question, I would rank order them in this way I would mandate I would begin with with capacity.
The improvements on the.
I have an appointment availability or ITM.
Availability front.
Your second piece was.
The second one would be the trade down piece, but ive actually not say it is trade down I would say it is increase in managed care because the increase in managed care does a bit correlate with the the.
The trade down effect in that.
Wealthier people tend to have managed care benefits. So I would say capacity managed care and I think it's premature to talk about a normalization of the cycle just yet.
Looking forward to today, Michael when we can announce that it will it will come I am confident it will come but I think it's premature to too.
Appointed bat at this at this point.
Okay.
Softness in April that you talked about you would attribute that mostly to.
To tax refunds and not any sort of.
Turnell execution challenges that reversal of the benefits that you're seeing that drove the improvement in the first quarter.
And I want you to clarify I was hoping you could clarify the comments you are making you made about potential price changes does that mean you could.
Continue to take prices up while wallet, there's still time, while at the same time trying to maintain the deep value offering of national vision.
Let me, let me start with your first point, yes, I think.
April is more related to tax the.
Tax refund related softness in <unk> and other things and again, we are reiterating our guidance for the balance of year, but we did want to point out that that April was a little softer than anticipated.
But I do think it was the tax refund piece on the on the pricing side.
<unk>, that's something that we're always looking at and especially in an inflationary world. There is a small amount of pricing baked into our guidance, but we're looking at other pieces to year on a regular basis, we do sort of price checks on various aspects relative to the industry as a whole we.
Shared in our comments there we're doing a little odd.
Deeper dive and getting some fresh perspectives on it also because we.
We think that there may be some opportunities there also.
A bit.
We're looking at so it's good to have fresh perspectives on that in an inflationary environment.
And you are absolutely correct, we are committed to being a value player. We are committed to having a nice price gap between us and the competition that is what people come to us for that is what we are known for and that is what we want to constantly deliver but in this world there may still be opportunities for further pricing actions.
Understood. Thank you so much.
One moment please.
As we promote the next question.
Our next question comes from Zach <unk> from Wells Fargo. Your line is now open.
Hey, good morning Reed.
You called out encouraging results from your optometrist recruiting and retention initiatives could you talk a bit about what that means for existing versus new stores and whether it has an impact on your new store openings and then separately curious what type of things you are looking for is proof points that remote medis.
<unk> is working.
Okay.
Yes.
Terms of Avi.
<unk> existing versus new stores, so again net net.
We said on the recruitment.
On the retention front is that it looks like on the retention front. It looks like this year is going to be better than last year and last year was better than the year. Before so we are encouraged by that that that trajectory in terms of retention and recruitment is also healthy.
Pinpointed out by that our student recruitment is tracking ahead of last year and last year was a record its still little early in the season a lot of students are don't make decisions till till the very end there, but but in Q1. We were tracking ahead. There. So what does that mean for new stores. We also pointed out that new stores. If you look at that.
Stores, we opened over the past 12 months there in line with expectations, which reinforces our conviction in the white space opportunity ahead of us and and we think relating to the remote piece that remote Ken help us even even more in terms of white space opportunities.
What do we look for in terms of the remote for success, what we what we want of course is we want to expand our capacity.
Cost efficient manner and make more.
Im slots available to the customers, who want to come to us really important point I wanted to just reinforce where we are achieving our capacity objectives, our comps are positive.
So that it just reinforces that.
The model is great.
What we're doing in this environment, where our confidence are harder to get is well.
We're sort of chasing getting those optometrists, so that we're able to deliver our model, but where we can deliver our model comps are positive and that's all that's all good.
Got it and read now that we are a solid two years away from it from the pandemic and the stimulus gains of 2021.
Can you talk about the impact of a multi year replacement cycle in the category and just considering the.
Pull forward, we saw in 'twenty, one and just at three to four year replacement cycle to what extent would you expect 2024 and 25.
To be a year of accelerated growth for the category.
So.
As as.
This challenge that we're facing.
<unk> in the purchase cycle is a category wide challenge the category last year around March or April .
A dip throughout the category to the extent to which you at a high penetration of managed care you were a bit.
Are insulated from it we of course have a low percentage of managed care because most of our customers are paying paying cash themselves.
Lower income budget conscious consumers.
The entire category is believing that the purchase cycle has not normalized and the entire category is believing that the purchase cycle will eventually normalize because it's been a very consistent category for decades prior to the pandemic. It was quite quite a boom for that a year or so after.
The reopening that was.
Lots and lots of people bought classes when they tended to buy nicer glasses are at the time.
Then they were in general hit with this this and this.
And that has pulled back the entire category and we believe the purchase cycle will normalize eventually we believes the purchase cycle normalized eventually given the biology of the human eye and a lot of trends like all of the screen usage, which makes which contributes to ice cream, which will increase the category and bringing younger people into the.
Categories are also I just can't tell you. When this is unusual and this is unprecedented.
I appreciate the color thanks for the time.
One moment, please as I promote the next question.
Okay.
Our next question comes from Todd Phillips of Jefferies. Your line is now open.
Hey, it's Bryan Spillane from Jefferies. Good morning.
That's in the quarter.
Right I guess my first question for you as we think about remote eye exams and the virtual strategy.
Are there any metrics that you can see from your early rollout in terms of maybe improvement acquisition fee or store productivity.
Activity or recruitment or reducing.
The days or hours.
Don't have a clinician in the store and can't see patients that way.
Well, Patrick as our COO one of his big responsibilities as looking over our remote programs that Patrick I'll turn that to you just as a reminder for everybody our remote care initiatives, it's a clear win for doctors patients and our store teams as well.
It is a game changer for dark and Denton stores. So we do look at coverage and capacity in terms of stores.
We have a substantial demand and coverage need we've seen double digit productivity improvements. So we do track metrics around capacity matching demand.
Doctor and store productivity as well as frankly sales comps.
Ill.
We did see benefit in the quarter in terms of EBITDA promote last year, we were dilutive in the mid single digit millions was a positive contribution to EBITDA in Q1.
We're expecting to.
Rollout at least 200, new signs this year, bringing us to 500.
We do create remote is also healthy retention.
It's a theme for doctors in general across the industry.
Thus, having that capability is just another form of flexibility to offer doctors practice methodologies.
They are like the best so.
The answer to your question is yes lots of different things come into play.
We do track and look at all of those as we progress this key initiative.
And I appreciate that Patrick and then maybe my follow up.
Talked about sell through here really briefly but maybe if you can share with us sort of the strategy and how you are intending to youre planning to.
Reach our outreach to health care companies. So that you can leverage your capabilities and <unk> capabilities.
And get more into the health care side of things versus just your traditional retail.
Thanks.
That's a great question. Thank you.
When I think of sort of optometry and big picture longer term trends I think of three things I think first of employment it seems that ever more theres a desire to work in employed situations versus non employed situations I think about flexibility.
This generation that post pandemic period thats flexibility in terms of.
<unk>, but also modes of practice like like Ark, our remote that initiative and I also think on a longer term basis sort of more medical aspects of practice are also going to be ever more appealing to our contracts. We have had a mantra for the past 15 years, we are.
Creating environments, where our contracts we want to spend their entire career when I say environments. It's because we have a variety of different environments everything from leasing to employ.
Ed.
If theres a motive practice, we'd like to have it available.
For optometrists in our various different brands out there. So the last trend I talked about with longer term more medical as I said, we were doing millions of eye exams. Each year, we have thousands of optometrists practicing.
Alongside our stores and in the National Vision network.
And these these optometrists are trained to two not just find prescriptions, but to find all manner of ocular diseases and all manner.
Healthcare oriented diseases.
And.
And.
And that is a big part of what they do our comps which are oftentimes the first person to talk to them when they have diabetes or hypertension, something along those lines for many of our patients. It's the only interaction with the medical profession, where theyre going to going to have.
That year. So it is very important we regard that as a big responsibility.
We are offering the network of optometrist. The primary healthcare some people have said to US we are sort of an entry point for healthcare for a lot of our patients <unk> is an early stage startup, let's let's be clear on that but the promise of of patients being able to come to us and through a <unk>.
Quick photograph of the back of there.
Being able to assess all manner of healthcare related things diabetes hypertension cardiovascular disease, we think that that can be an added value to the overall health care system. Again. This is this is longer range in nature. This is this is.
This is not about sort of how we're going to deliver this year's guidance, but we think that the network up optometrists, who are practicing alongside our stores are playing an important role in health care in America, and net technologies like AI like tofu is advancing can play an even greater role in health outcomes for patients and we think fit.
That could be valuable to the overall health care of America at some point in time and so we're planning a few seats to learn evermore.
About that and see what added value. We can we can provide.
Awesome. Thanks Lee.
Okay.
Yes.
Thank you.
Sure.
Thank you for your question one moment as I promote the next.
Question.
Our next question comes from the line of Anthony <unk> from Loop capital markets. Your line is now open.
Good morning. Thank you so much for taking my question Congrats on a strong start to 2023.
I guess my question is there anything that Youre seeing notable in the competitive landscape whether it's from.
The independents are some of the larger chains or some of the.
In stores.
Stores that are in.
Discount retailers like Costco and Walmart is there anything youre seeing from a promotional perspective or.
The unit competition firm Tomtom for Tom just perspective.
Well, yes, so so.
It's not new since we've been talking about it since the pandemic, but competition for optometrists is very real.
This is what all all of the groups.
Operating change of any size are talking about so that that is very real the growth of managed care.
On the strength of the managed care sector more so than the cash pay sector that also is very real.
In terms of sort of market share trends.
<unk>.
We're at we're at best maintaining or at least maintaining our market share.
And.
I don't sense large share changes with the exception of a deceleration in the E Commerce space, which is in line with what.
What I think is being seen in other aspects of direct to consumer that there was a big high in E Commerce related.
Pieces.
Eric.
That sector.
Retail during the pandemic and now there is a trend towards back to stores back to stores. So that is is is happening within our category as well, but again, we think we are at least maintaining our share maybe even growing a little bit on the managed care.
<unk>.
And aside from that.
Tom <unk> shortage in the managed care growth.
And the deceleration of e-commerce towards more back to active store I don't I Wouldnt say there arent there are other changes other than us.
Got it and then just a related question in terms of given the.
As you mentioned very real conferences for optometrists.
What does that translate into for optometrists compensation.
Relative to your expectations I know you had some new initiatives as well, so maybe that muddies the waters a bit.
Hi, Anthony its Melissa as we think about the optometrist compensation.
And we have seen an increase in compensation over the past year, and we had a higher growth in optometrist related cost for the quarter of about 90 basis points, we continue to see inflationary.
Actions in a.
<unk> costs as well as just overall wage pressure and we have added significant variable compensation opportunity to our doctors to tie their productivity to their level of pain, and so with the incentive compensation component, but that benefit then as they provide more <unk>.
And are more productive.
<unk> are doing a variety of efforts to rightsize, our storied overall cost structure. So that we can offset these increased costs as we become more efficient in the initiatives that we're putting forward and we do expect still about 100 basis point headwind related to <unk>.
<unk> evenly between optometrist costs and investment and product cost increases throughout the year.
That's helpful.
Thanks for taking my questions. Good luck with the rest of the year. Thank.
Thank you Kim.
Thank you for your question one moment as I promote the nets.
Participants.
Our next question comes from.
<unk> from Citi. Your line is now open.
Hey, everyone. This spring treat them on for Paul.
We're excited.
The capacity constraint stores like are there any similarities with the stores are the same ones or is it really just the <unk>.
<unk> turnover issue.
Juno, where optometrists are going or is it a retirement issue or is it really.
Just making sure that you offer a competitive package to retain them or are they going to kind of look in their own practice.
So thank you. Thank you Brad in terms of that and there are not broad themes in terms of where uptime cuzco win when they leave us it's sort of all over the board, having said that theyre, leaving us in lower numbers when I say that our retention was better in 'twenty two versus 21 in it.
Looks like we're on track for a nice improvement in 'twenty three again.
What that says is we're doing a better job.
Keeping them.
Associated with us so that's that's in there.
The trend and in again and recruitment healthy as well.
Yes.
To your point about.
Okay.
Sorry.
Oh.
Yes. The reason is there were retirements more retirements in.
The year following the year of that pandemic, but actually the bigger or a bigger factor has been a lot of our partners wanted to cut back the number of days. They work and if you think about that overall as the trend. It just means a nationally there are less exam slots then there would be otherwise so.
Those are two factors and we have a variety of incentive programs that incentivized doctors.
Stay at their traditional five days or to pick up a day here and there if they want to be at three days, but during busy times sort of maybe maybe ramp up a bit again, when we talk about flexibility. We're trying to offer all sorts of different options to appeal to the lifestyle decisions of an ever wider collect.
<unk> of our contracts, which by the way change over time through the lifecycle of your career and we are designing our programs to be flexible to change overtime.
Throughout throughout optometrist career again trying to create environments, where our Congress will want to spend their entire career.
Got you and we are pleased with the success, we're seeing on those fronts.
Makes sense.
The normal product cost fraud.
I think most of that and correct me if I'm wrong is coming out of all the contract side of the business.
Can you just kind of walk us through some of the competitive dynamics that you're seeing in that business.
What's flowing through.
Commentary pricing.
Yes, as we think about the higher product cost.
Announced in March that we were expecting to see about 100 basis point impact split between both of the Doctor investment and the increase in product costs. We expected those increased product cost to go into effect in the second quarter of the year and it is primarily related to the contact lens side of the business that is.
<unk> a product that is easily shop also harder to take price is priced at.
That cost goes up.
And we have taken non headline pricing, where it makes sense to do so and we have been able to offset some of the cost increases that we have seen to date that has been factored into our guidance that we released in March and we'll continue to evaluate the competitive landscape and cake pricing measures, where it makes sense.
Okay.
Alright appreciate it. Thank you good luck.
Okay.
Thank you for your question one moment as I promote our next participant.
Okay.
Our next question comes from Simon Gutman of Morgan Stanley . Your line is now open.
Good morning, everyone. It's Simeon how are you.
I wanted to ask about price changes I think we've been talking about this for a few quarters it seems like.
There is more openness can you talk about whats being contemplated is that opening price point is it the better and best.
Guess, what time frame are you expecting to make a decision and act changes.
Yeah. Thank you Simeon.
Yes, we are talking about non headline price.
Pricing actions.
And again.
Some level of those are baked into our guidance and we have a number of ideas that were sort of betting on how on potential other other pricing actions that could be taken and as we said, we're doing sort of a deeper dive study and getting some some.
Our fresh perspectives also.
In that way and we're looking forward to that and we would feather those in over time.
Some are some are things generally these things can be done generally can be done reasonably quickly, but there are a lot of different aspects of our business beyond the headline price.
And we have been where there is a small.
About a pricing taken the very end of Q1 and again. This is this is something that gets feathered in over time, but we think there could be more opportunity, especially in this environment, where we think our competitors have been more apt to pull the pricing lever then.
And we traditionally are.
Okay.
And then.
My follow up it will have two parts first.
If you look at your comp between managed care and customer pay.
The rate of notation can you talk about the spread between those is it.
You're getting wider and why work or narrower NOI and then the second part of my follow up is.
The adjusted EBITDA, or EBIT, which is down year over year.
I don't know if you could talk about it in basis points, but a few drivers that are causing it and then how the movement of that throughout the year may abate or not based on investments deleverage.
Ods et cetera.
I am going to take the first part of that and Melissa is going to take the second part.
The difference between our managed care comps and our.
Call it cash pay.
<unk> is significant managed care is very strong.
And the cash pay consumer is is weaker so managed care managed care strength played a significant role in delivering that comps.
The comps of Q1.
So we will take the second part there Melissa.
As we think about the decline in adjusted EBITDA year over year. Many of the factors that are tied into that what we discussed in March related to the increasing product costs related to the increasing cost in doctor investment and in addition, the incentive compensation reset that.
That's about in March with all of those factors combined in addition to the initiatives that we've been putting in place that is creating a drag on year to year EBIT at your school.
Okay. Thanks, everyone. Good luck.
Thank you Simeon.
Okay.
Okay.
Thank you for your question.
One moment please.
Our next question comes from Robbie Holmes Bofa Securities. Your line is now open.
Hi, Thanks for taking my question. This is Molly Baum on for Robbie <unk>.
One clarification question I wanted to ask on gross margin you mentioned I think that you still expect 100 basis points of pressure for the full year. So I just wanted to dive in a little deeper could you provide some details on maybe what your expectations are in terms of the cadence of that.
Did want to come in ahead of your expectation should we anticipate the second quarter, maybe to comment a little bit weaker just given the year to date trends that you're seeing.
Sorry, just any additional details that you might be able to get there. Thanks.
And yes, so as we think about gross margin for the year. The first quarter came in relatively close to expectations and the reason for that is because the increased product cost that we had referred to in March go into effect largely starting in second quarter, we expect to be 100 basis points that we talked about.
In March to be split between Doctor investment, which is pretty ratable throughout the year, and then 50 basis points tied to product cost increases which began in the second quarter.
Got it that makes sense. So then in terms of the second quarter.
A bigger function is just related to the top line and then maybe some expense deleverage on SG&A.
Better way of thinking about it as opposed to the gross margin piece.
Yeah. So as you think about the SG&A piece, we expect that we will have some growth in SG&A as we go into second quarter.
Dollars will be slightly lower than what you saw in the first quarter. However, we're expecting the high single digit range largely driven by the incentive compensation reset that we spoke about and in addition to that based on the timing of our new store openings, we expect to see occupancy expense be a little bit heart higher in second quarter.
And.
Got it no that makes a lot of sense. Thank you for taking my questions.
Macquarie. Thank.
Thank you.
Alright.
Thank you for your question one moment please.
Our next question comes from the line of Dylan Carden of William Blair. Your line is now open.
Thank you I was just curious you speak to sort of encouraging.
Trends in darker availability capacity.
Between recruitment, which I would imagine is sort of more of a now and go forward issue some of the initiatives you've done around toward a more flexible scheduling.
And remote care and anything else kind of what Youre seeing is that is working.
This early in the year and kind of walk you through more tangibly.
How you how you expect to kind of get your way out of this and maybe some of the timing around that.
Got it okay. So so.
I'm using is ever improving <unk>.
Retention.
Improving.
Health and recruitment and remote creating more capacity sounds encouraging improving are those are those are both of those words I would like to reinforce that with.
With recruitment there is always a delay of.
Generally for our working doctors at least 60 days before they can start from the time they agree and of course the students all tend to arrive.
In the summer along the way.
So that's again that's that's.
As we do our projections and reiterate our guidance that is baked into that we are.
Our believing in the initiatives we have in terms of the flexibility programs. We have in terms of the promise of remote but it is not solved yet we are getting better the trends are going in the right way, but it is not solved yet.
We're pleased with the direction.
And and confident in our future again, reinforcing where we have the capacity that comps are positive.
And that's that to US says this is a game of just making sure. We can we can deliver the capacity cuts that consumers want to come to life.
So I'm taking from that that retention is really driving the encouragement.
At this point relative to us.
All three.
Uh huh.
I'd say retention is encouraging and recruitment is recurrent encouraging remote is still a startup still on a learning curve, but it's generating exams profitably for us and we see it getting better and better over time.
Okay and then.
The comments around how managed care, maybe is not directly related to trade down impact can you help me understand that and yes.
I Hope you took away it is directly related so wealthier people tended to have managed care.
Managed care benefits go further with us than they do otherwise.
And so so there is a strong overlap between the.
Between the two.
You would think they would go in lockstep.
No I apologize, maybe correlate im sorry Im sorry.
If I misstated that performance you're correct. They are there is overlap.
It is plentiful and so is the idea or is the commentary that the trade down impact that maybe was delayed relative to where people thought last year.
And even greater force at this point.
Yeah trade down versus prior year is increasing.
Okay.
Thank you very much and yes and no.
And.
As inflation hits ever wealthier People's pocket books that should continue.
Thank you for your question one moment, please as I come over the next five participants.
Our next question comes from the line of Robert <unk> from Guggenheim. Your line is now open.
Hi.
Good morning.
My question's around like the new store opening plan I guess when you look at all the headwinds around optometrist why does it makes sense to keep adding stores at the same pace as recent years.
Would you consider or are you considering maybe slowing the pace of the new store rollout.
So again overall, if you look at the stores, we've opened over the past 12 months. They continue to perform in line with historical expectations.
Where we are.
The ability to get doctors is a highly localized.
Are things sort of where you where you place the store and it may be either an encouraging place too.
The preferred Dr. Richard practice or otherwise with various store are related or were always driving cannot open a dark store and yet if for some reason Dr doesn't show up in many of our many places we can open with remote and Thats a factor also which we never had in the past and again the promises that over time.
Remote could actually increase our white space opportunity.
Got it.
The new stores are still working.
And we have.
Ben We're we're still going we think that white space is very real.
Thank you.
Okay.
Thank you for your question one.
One moment please.
Anti promote the next participant.
Our next question comes from Adrienne <unk> of Barclays. Your line is now open.
Good morning, Thank you very much.
Reed I guess I have a couple of kind of higher level questions for you with the comments on April on seeing some pressure from tax refunds I.
I guess my question is how do you now feel about sort of back half macro changes is it too early to see any recovery if that tax pressure tax refund pressure was sort of more near term in nature.
And then under what kind of assumption are you assuming that these doctors come on in the summer whats the increase in sort of doctor capacity to increase sort of the exam.
So the debt to reduce unfulfilled exams.
And then for Melissa on the SG&A.
The SG&A for this year, how should we think about that if we're thinking out a year or two out.
Out year about what portion of that is just heavy up investment.
How that streamlines and gets more kind of balanced in 2024. Thank you so much.
Most of what when you go through what the guidance contemplates for the second half of the year the balance of the year on the SG&A and then I'll take the question about the.
The increase in capacity from the hiring.
Sure Hi, Adrian and as we think about with April being a little bit softer we did tie that.
What we believe to be a lower tax refund season for our low income consumer.
We expect that the at the initiatives that we're putting in place to continue to take hold and expand exam capacity.
Too soon to talk about May as well just a couple of weeks into that period, but we have taken all of the information that we have to date and factored that into the guidance that we reaffirmed today that we do expect the back half of the year to have slightly better comps and what we've seen so far.
In first quarter.
And as we think about SG&A.
As we think about SG&A the modeling that we've talked about this year, we do expect the headwinds related to the incentive compensation reset.
And.
The increased occupancy expense that we talked about a few moments ago as we think about beyond this year with the initiatives that we're putting in place as we get back to mid single digit we expect to leverage many of the investments that we're putting in place currently and as we get past the implementation phase Mr glass.
March that we expect to see at least 100 basis point improvement in operating margin related to some of the implementation teams being disbanded and the productivity lift that we expect for many of those initiatives.
Okay, great very helpful.
And so that part of your question Adrian about about the new hires and the increase in capacity.
We're encouraged by Q1 students hiring it's better than Q1 last year last year, we had record stewards and hiring so that's a plus doctors new doctors coming on is always part of our plan, but it's right now it's looking a little bit more encouraging them what within the plan, but this is all part of the puts and takes.
The balance of the year that Melissa just took you through this is there are a lot of a lot of factors.
<unk> got a balance as you project out through the balance of the year and.
But we as we assess all those we felt quite comfortable reiterating our guidance.
Great. Thank you very much.
Thank you for your question.
At this time I would now like to turn it back to Reed for closing remarks.
Thank you very much Gerald and thank you all for joining us here today.
Thank you for your ongoing support and we look forward to speaking to you again, when we report our second quarter results. Thank you all very much have a great day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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