Q3 2023 National Vision Holdings Inc Earnings Call
Okay.
Good day, and thank you for standing by walking through the third quarter 2023 National Vision's Holdings earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
A question here, especially as we restore one one on your telephone.
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Caitlin Churchill Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to National Vision's third quarter of 2023 earnings call. Joining me on the call today are <unk> CEO and Melissa Rasmussen CFO, Patrick more C. O O 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 accompanying our call are both available in the investors section of our website Nashville theirs in Dot com.
A replay of the audio webcast will be archived in the investors section after the call.
Before we begin let me remind you that our earnings materials and today's presentation include forward looking statements as defined in the private Securities Litigation Reform Act of like 95 D.
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 question.
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 materials for Investor reference the investors section of our website I will now turn the call over to Reed Reed.
Thank you Caitlin and good morning, everyone. Thank you all for joining us today.
This morning, we will begin with a review of highlights from our third quarter, including ongoing progress on our strategic initiatives. We will then provide an update on the upcoming end of our Walmart partnership as well as our plans to position National vision for long term profitable growth as we look ahead to operating a more streamlined and less complex business.
Model.
And then Melissa will review, our third quarter financial results and updated outlook in more detail.
Turning to our results we are pleased with our third quarter performance, which reflected ongoing strength from our managed care business and was supported by the continued progress, we're making with expanding eye exam capacity, particularly within Americas best for the quarter, we delivered net revenue growth of six 6%, including comparable.
Core sales growth of four 3% and we delivered adjusted diluted EPS of <unk> 15.
We saw strength, particularly in Americas, best which was partially offset by softness in our eyeglass world business. While we've continued to contend with an exam capacity constraints across both our growth brands our initiatives to date have been predominantly focused on our largest brand America's best.
Given the improvement we've seen in our America's best locations, we are applying and incorporating the learnings from that playbook to improve our eyeglass, where our performance.
As we discussed on our last earnings call. We were encouraged with the early trends we are seeing with the back to school season, and we're pleased to see that performance continued through the period. In addition, we continued to see strength from our managed care business, which is one indicator of the trade down behavior that is occurring with many customers as we continue to navigate.
A dynamic macro macro environment.
As I mentioned the quarter also benefited from ongoing progress on our strategic initiatives, particularly focused in our America's best business.
We have continued to see improvement with historically did not have optimal coverage, which we refer to as dark and Jim locations to expanding exam capacity from our recruiting retention and remote initiatives. We're pleased to continue to see much lower levels of dark stores compared to the peak, we saw last year and are seeing slower but steady.
Our progress addressing our <unk> storage as well.
As a reminder, we define dark stores thats locations that do not have doctor coverage and data storage as those locations that have less than three days with Dr. Coverage. We remain focused on executing our initiatives to continue to drive improvement across our fleet and as I discussed last quarter, where we have the desired level of capacity.
<unk> are delivering comp more in line with our historical operating model.
We remain on track to deliver our second year of record recruiting and have contracted more new graduates this year than in any previous year. In addition, we continue to expect to deliver improved retention rates. This year. These trends are delivered are driven in part by the schedule flexibility options that have been made available to the doctors.
Our remote initiative is also helping us to expand the exam capacity and has been a major factor in improving dark <unk> store performance, enabling a double digit productivity lift in sales.
As of the end of Q3 more than half of our America's best locations have been enabled with remote exam capabilities and electronic healthcare records, reflecting the progress we've made through the initial heavy implementation phase over the past two years, we remain on track to roll remote capabilities out to at least 200 stores.
This year and as we look ahead, given the work done to date as well as the evolving state regulatory landscape, we expect the pace of our implementation of remote to slow in 2024.
We continue to believe in the opportunity there is for remote exam capabilities across across our stores and we'll continue to monitor the regulatory landscape and assess our plans accordingly with respect to our EHR rollout we remain on pace to have EHR installed at all America's best locations by the end of 2024.
Turning next to our Digitization plans for our corporate office, we have begun to implement the first phase of our ERP project focused on finance system upgrades. We are taking a measured approach to this project and plan to evaluate each phase appropriately to mitigate risk and maintain our focus on disciplined capital allocation.
Finally, with respect to our white space opportunity, we remain on track to open 65 to 70, new stores. This year and opened 21, new stores in the third quarter.
Now, let me provide an update on our transition plans with the pending end of our Walmart partnership beginning early next year we.
We are committed to ensuring the continuity of our Walmart business through the end of our contracts and actions have been taken to support the retention of the associates and doctors during this time.
I'm very appreciative of how our teams have continued to operate with discipline and focus on customer care amidst this transition.
As we've previously discussed the Walmart business has continued to become a smaller piece of our overall performance over the last decade and carries a much lower margin than our larger growth brands moving beyond the termination dates of the contracts, we will operate a far more streamlined and less complex model.
As detailed in our press release this morning in conjunction with the termination of our Walmart partnership we will be winding down our remaining AC lens operations.
In doing so we will be closing, our Ohio distribution center, which largely supports the wholesale distribution and E. Commerce contact lens services that we provide to Walmart and Sam's club. While this is a difficult decision. It is a prudent one for our organization. We are continuing to work with Walmart on the Transitional Division Center Associates.
And currently expect approximately 7% of our total associate head count to be impacted by this decision and termination of the Walmart partnership the vast majority of them will be Walmart vision Center and AC lens rolls.
In addition, given the changes in our go forward operating model. We have conducted a comprehensive review of our cost structure and we will be implementing expense savings initiatives focused on streamlining corporate overhead as well as reducing travel expenses and third party spend.
We believe these decisions combined with benefits from our pricing actions, we plan to take on the heels of the pricing study completed earlier this year will more than offset the profitability gap created by the termination of the Walmart partnership.
Through this work and our ongoing execution of our strategic initiatives focused on driving revenue and enhancing performance and our two strategic growth brands, we are well positioned to deliver operating margin expansion and thus drive increased shareholder value Melissa will discuss details of these actions and anticipated financial impact in a moment.
In closing, we remain committed to our mission of making quality eye care and eyewear more affordable and accessible.
While we continue to maintain a conservative approach to our outlook given the ongoing challenging macro environment that has continued to pressure our core uninsured customer we remain on track to deliver on our objectives for this year as reflected in the narrowing of our guidance.
I'll now turn it over to Melissa.
Thank you Larry and good morning, everyone.
We discussed we are pleased with our third quarter performance and the ongoing progress we are making on our strategic initiatives.
For the third quarter net revenue increased six 6% compared to the prior year driven by adjusted comparable store sales growth and growth from new store sale.
The timing of unearned revenue negatively impacted revenue in the period by 30 basis points.
Opened 17, new America's bat and for Eyeglass World stores in the third quarter.
Unit growth in our America's Best and Eyeglass World brands increased five 3% on a combined basis over the total store base last year, and we ended the quarter with 1400 stores.
As Rick mentioned, we are still on track to open between 65 and 70 stores in 2023.
With our previous guidance.
Adjusted comparable store sales grew four 3% compared to the third quarter of 2022, driven by an increase in customer transactions integrate lesser degree an increase in average ticket.
<unk> mentioned with Australia, particularly in Americas debt, which was partially offset by softness in our eyeglass world business.
As Ray discussed our initiatives continued to address our dark indebted store population.
We have always contended with dark indebted store. However, the combination of post Covid doctor availability issue and a more challenged lower end consumer has exacerbated the impact from darko them on our revenue performance.
On average a dark store at approximately 80% less productive than a store with full coverage, which we define as having five to six days of in store Doctor covers.
<unk> store on average is approximately 50% less productive than a store with full coverage.
By enabling remote we have significantly improved this productivity drag and while there is still more progress to be made we are making nice headway with dark in the stores.
As a percentage of net revenue cost applicable to revenue increased 70 basis points compared with the prior year quarter, driven primarily by the deleverage of optometrist related cost as.
As well as other components as service revenue, including warranty claim revenue.
These costs were partially offset by ongoing strength in exam revenue and a decrease in product costs attributable to higher eyeglass margin and decreased freight expenses.
As we discussed last quarter, the pricing actions taken with respect to exam has helped to partially mitigate the increase in optometrist related cost.
For the quarter and net impact from deleverage of optometry related costs and the increase in exam revenue was approximately 50 basis points.
Adjusted SG&A expense as a percentage of revenue increased 90 basis points compared with the third quarter of 2022.
The increase in adjusted SG&A as a percentage of net revenue was primarily driven by performance based incentive compensation as we expected.
Depreciation and amortization expense was $24 4 million.
Compared to $24 9 million in the prior year period.
Adjusted operating income was $15 7 million.
Compared to $21 $5 million in the prior year period.
Adjusted operating margin decreased 130 basis points to 3% due primarily to the same factors I just reviewed.
Net interest expense was $3 7 million, which includes mark to market gains and losses on derivative instruments and changes related to amortization of debt discount and deferred financing cost of $3 5 million.
The year over year change was primarily a result of lower derivative income and higher interest expense on our term loan partially offset by higher income on cash balances.
Our effective tax rate in the third quarter was five 8% primarily due to legacy segment impairment losses, we expect our tax rate on ordinary income items to be in line with our original guidance.
Adjusted diluted EPS was <unk> 15 per share compared to <unk> 15 per share in the prior year period.
Turning to our financial results for the nine months to date as compared with the prior year period.
Net revenue increased approximately 5% driven by new stores and adjusted comparable store sales growth of 2%.
Adjusted operating margin declined 180 basis points compared to the prior year period, driven primarily by the same factors I, just reviewed which impacted the third quarter.
Please note our adjusted results for the third quarter and nine months year to date period excludes the impacts associated with one time charges related to the termination of our Walmart partnership, including $2 million in retention bonuses and termination benefits for certain employees.
According the Walmart vision centers and the AC lens distribution center.
And $79 4 million.
As noncash impairment charges related to impairment of goodwill intangible assets and fixed assets.
Turning next to our balance sheet.
We ended the quarter with a cash balance of approximately $266 million.
And total liquidity of $559 million.
Including available capacity from our revolving credit facility.
As of September 30, our total debt outstanding was $563 million and for the trailing 12 months. We ended the period with net debt to adjusted EBITDA of one nine times.
Year to date, we generated operating cash flow at $153 million.
In addition, the first nine months of fiscal 2023, we invested $82 million in capital expenditure, primarily driven by investments in new stores.
Our labs and distribution center, and our remote medicine technology.
We remain on track for capital expenditures to be in the range of $115 million to $120 million in 2023 to support our key growth initiatives.
Our balance sheet and liquidity remained strong, enabling our robust and disciplined capital allocation plan, which is designed for continued growth balanced with opportunistically returning capital to our shareholders.
Earlier this summer, we refinanced our term loan a and extended our revolving credit facility and we are continuing to evaluate options with respect to our convertible notes, which mature in may of 2025.
Given the current environment and our focus on continuing to fortify our balance sheet.
Our share repurchase activity to date with focus on the first quarter of this year.
And as of the end of Q3, we had $25 million of share repurchase authorization remaining.
We will continue to deploy capital to ensure we are making prudent decisions that are financially responsible for the company.
Moving now to the discussion of our 2023 outlook.
Year to date, we remain on track with our expectations for this year.
And as we move into the fourth quarter, our seasonally lowest quarter from a profitability perspective, we are narrowing our full year guidance range.
We now expect revenue to be in the range of 2.115 billion to $2.1 billion to $5 billion.
Supported by adjusted comparable store sales growth of approximately 2% for fiscal 2023.
Our revenue guidance incorporates ongoing execution of our strategic initiatives focused on expanding exam capacity and contemplate current business trends.
We continue to expect depreciation and amortization to be in the range of $99 million to $101 million. We expect adjusted operating income and adjusted diluted EPS to be in the range of $60 million to $65 million and 53.
<unk> to <unk> 58 per share respectively.
Our guidance for adjusted diluted EPS assumes approximately 78 million weighted average diluted shares outstanding.
As a reminder, our adjusted results as well as our outlook excludes the onetime charges related to the termination of our Walmart partnership I reviewed as well as the expected costs associated with the first phase of our ERP implementation.
Regarding our ERP project as Reade noted, we are taking a disciplined and phased approach.
The first phase, which kicked off late in third quarter, we will focus primarily on finance system upgrade and is expected to be substantially complete in 2024.
We expect to incur one time expenses associated with the first phase of this project to be between $11 million and $13 million.
Of which we expect to incur between $2 million and $3 million in fiscal 2023.
Now, let me provide an update on the work underway as we plan for the upcoming termination of our Walmart partnership.
As we previously announced as I said during 2003 2024, we will transition the operations of the 229 vision centers as well as the related Optometric services for Walmart in California to Walmart and.
And as of June 32024, we will see a wholesale distribution and e-commerce contact lens services that we provide to Walmart and Sam's club through our AC lens business and will wind down the remaining AC lens operation.
For fiscal 2023, we expect our Walmart store operation and the wholesale distribution and related services to Walmart and Sam's club included in our corporate other segment to account for approximately $355 million of revenue.
The remaining portion of our <unk> operations, which generate approximately $45 million in sale and it's immaterial from an earnings perspective will be wound down in conjunction with the overall Walmart and Sam's club exit.
Combined the Walmart store operation and the AC lens operation are expected to generate approximately $400 million in revenue and earnings before income tax of approximately $15 million.
The annualized direct and indirect costs associated with these operations for fiscal 2023 are expected to be approximately $385 million.
We expect costs associated with these operations, including our Ohio distribution center to be wound down in conjunction with the contract termination date.
While we expect to provide our full 2024 outlook as part of our year end earnings call in 2024 due to the Walmart contract staggered end date in 2024, we want to provide some additional details now to help with modeling.
Using 2023 as our guide we expect revenue related to the vision Center operation and the AC lens operations in fiscal 2024 to range between $140 million to $150 million.
With a margin profile similar to 2023.
Assuming no material degradation in the Walmart operations.
As we look ahead with an enhanced focus on our largest growth fragrance. We are taking actions that will further optimize our cost structure and position us to advance our long term strategy and strengthen our competitive position.
As Reade noted beginning in 2024, we will be implementing an expense reduction program targeting annualized savings of 10 million to $12 million.
Just on streamlining corporate overhead as well as reducing travel expenses in third party spend.
As Reade noted we are also planning to take additional non headline pricing actions, which we believe will continue to enable us to deliver on our mission to provide affordable eye care and eyewear, while maintaining a competitive position in the marketplace and leveraging our cost.
More effectively.
We expect the combined impact of the non headline pricing increases in the cost savings program to more than offset the profitability gap created by the termination of the Walmart partnership.
We believe these actions combined with gross margin tailwind from the exit of the lower margin Walmart operation.
And the ongoing progress of our strategic initiatives, including the completion of the large initial implementation phase of our remote and EHR capabilities.
Position us well to return to mid single digit adjusted comparable store sales growth and operating margin by fiscal 2025.
In summary, we are pleased with ongoing progress in expanding exam capacity and expect to continue to build on this momentum as we move forward with an even greater focus on our strategic growth brands.
We believe the actions we have announced today will further support our plans to drive long term success and shareholder value.
Thank you for your time today I will now turn the call over to Reid for closing remark before we open the call for your questions.
Right.
Thank you Melissa to summarize we're pleased with our third quarter results and the ongoing improvement we are making regarding the strategic initiatives. We've put in place this year, particularly with expanding exam capacity, while we continue to navigate an ever changing macro environment. We remain focused on the aspects of the business we can control.
With respect to profitability, we are taking actions to mitigate the impact of the termination of the Walmart partnership and streamlining our organization to align with our go forward operating model.
As we look ahead I am confident that we will continue to build on the progress we have made throughout this year positioning us well to deliver on our long term objectives.
Now we will open it up for questions.
And as a reminder to ask a question. Please press star one on your telephone and wait for a name to be announced to withdraw your question. Please press star one again.
Please turn bandwidth composite Q&A roster.
Moments for our first question.
Our first question comes from the line of Anthony <unk> from Loop capital markets. Your line is open.
Good morning. Thank you so much for taking my question congrats on the strong results.
I found the cost savings opportunities interesting I'd have to imagine you're going to save a ton of money.
Having read having to fight a baton bill all the time so.
Okay.
So.
Seriously. So my first question you've talked in the past about.
The comp differential between you know.
Managed vision care versus out of pocket was just wondering if you can just give any commentary.
Particularly on the on the out of pocket and whether Youre seeing any improvement in the comp trend there.
Yes.
As as you.
You pointed out there are managed care business has been really great.
Year to date, our <unk>, our managed care penetration started strong and it just has strengthened throughout the year.
Do you think about our managed care business is that.
That's not our customers money and so that's good and also on the managed care customers have realized that their money goes further with us than it has.
Then it does otherwise.
Got it and then you talked in the past sort of anecdotally about seeing better cars in the parking lot is evidence of the trade down.
And it sounds like you've got some impact from that.
Is that is that sequentially getting better I'm, just trying to think about.
The sequential comp acceleration, how much of that was remote eye exams versus normalization of purchase parents versus like trade down. So how should we kind of think about that.
Yes, so Matt trade down continues and we're seeing a greater percent of our customers coming from over.
Over $100000 households, and managed care is part of that but but some relates to non managed care as well.
Got it that's helpful. Thank you and good work thanks.
Thank you Anthony.
Yes, I will be saving money by not going to bet and build that sounds very good.
Yeah.
Thank you.
One moment for our next question.
Our next question comes from the line of Michael Lasser from UBS. Your line is open.
Good morning. Thank you so much for taking my question your expectation that you can get to a mid single digit operating margin by 2025 can you give us a bridge on the components that are going to drive that and as part of it how much is going to be driven by pricing what are you finding.
In about your ability to pass through additional price increases without disrupting the value proposition to your customers.
Sure I'll take the pricing side of that first Michael.
So.
We've been taking some peripheral pricing action.
Half of the year non headline pricing action and I think we mentioned.
Two calls ago that that we're doing a deeper dive study, we're always monitoring prices of course, but we're doing a deeper dive.
Study in.
Our share of our pricing architecture relative to competition and based on that we have some programs that we're going to be putting in place at the very end of this year. That's that's as Melissa said, we think are going to play a nice role in improving our margins next year.
Hey, Michael it's Melissa so we're expecting that we will have some benefit.
Into 2025, as we complete the remote implementation phase we spoke about that earlier in the year and with that we'll we'll save on and some rollout expenses, we'll expect to see some gross margin.
Improvement as we.
As we move past, the Walmart lower margin business and the AC lens distribution lower margin business.
With that we will see some operating margin benefit as we roll into 2025.
And Mike Okay.
Okay can I just follow up on one other thing relative to the pricing side of that we are we are we are putting in the pricing actions that we referred to I think ever since we met you've heard us say that we like to grow by transaction count more than than by by average sale and we are.
Very pleased that Q3 showed a positive comp transactions for the quarter and that's the way we'd like to grow.
And that was the primary focus of the.
Of the growth in the quarter.
Without a doubt read and that being said your implied fourth quarter guidance does suggest that your comp is going to slow.
Is that what you've seen already thus far this quarter.
And B why do you think it would be slower.
Yeah, So Michael we do expect some deceleration in the implied Q4 comp.
And we believe that is prudent given the uncertain environment, we have factored in the current trends that we're seeing in the business and something to keep in mind is that our company has always factored in two key drivers first being the health of the consumer in second being the success that we have as we expand exam capacity.
We are gaining traction with respect to that and controlling the factors of the business that we can control. We're pleased with the performance to date and expect to have positive <unk> <unk> and full year.
Thank you very much and good luck.
Thank you.
Thank you for a moment our next question.
Our next question comes from the line of Zacks, Adam from Wells Fargo. Your line is open.
Hey, good morning, So when you look at your 4% comp in the quarter and nearly 6% at America's Best could you parse out the comp impact from fully staffed stores relative to the drag up under staff to dark stores and then maybe talk about how these metrics each of them had been tracking throughout.
The course of the year.
Yes sure Zack.
So related to the dark <unk> stores that number can fluctuate greatly throughout the year and year to year. So it's difficult to tie a specific comp because youre not looking at the same store now with that what we have said is that we do expect to see or we have seen that we have comp.
In line more in line with our historical performance when it stopped at the capacity that we desire.
And when we're thinking about the total sales productivity, we can talk about that from our perspective at the dark and didn't impact on overall revenue.
With the dark stores that have a productivity drag of about 80% compared to a fully staffed store and the store has about a 50% drag as compared to a fully staffed store and with this we have continued to add.
To expand our strategic initiatives.
Recruiting retention in remote and remote is something that can help.
Dark in game situations quite significantly and that has the kindness factor in stores that we are looking to open as we expand our fleet, we think about whether or not a remote state will allow us to implement remote as we're moving in there when we think about our recruiting initiatives. So overall remote can help and it continues.
To have a positive impact as we drive forward on dark in them.
I'm going to try to ask that a little bit differently. What is your comp for policy staff stores.
We haven't spoken specifically to comp on our fully staffed stores. What we did talk about is that we have our.
Dark store that were a percentage of our fleet at their highest of America's best at mid single digit number of store.
Now low single digit number of dark stores, but we haven't spoken specifically to comp on a fully SaaS versus SaaS.
I believe I said in my comments now where we have the capacity the stores are delivering comps in line with historical norms.
We aren't giving a specific number but it is in line with historical norms.
Where.
Where we can execute our model it works great.
I appreciate that read and then just it looks like the spread between America's Best and Eyeglass World has widened over the past couple of quarters and with your initiatives largely focused on America's best just curious if you could talk about the <unk>.
Date of Eyeglass World as a concept strategically and whether you still expect eyeglass world to be at an accelerating unit growth driver in the years ahead, and how those returns compare to AAV.
You got it a 100% right, we have and focusing our attention on the challenge is primarily the same it's primarily a coverage related challenge we've been implementing our key programs and America's best first because it's bigger right and now we're turning our attention as we've been getting.
The nice success there.
To taking that same playbook and applying it to two eyeglass world. So.
So you can say, yes, it is and it's a similar.
Similar challenge, we just focus on America's Best first, but we're putting the playbook in place now with Iqos works.
Got it thanks for the time.
Thank you.
One moment for our next question.
Our next question comes from the line of Paul <unk> from Citi. Your line is open.
Hey, everyone. This is Brandon Cheatham on for Paul.
Wanted to follow up on that you mentioned, how many stores at America's best.
Work with them.
Could you unpack that for what that looks like at eyeglass world versus what's kind of a normal level.
We haven't shared that we might share that in the future. We took Kevin we haven't broken that out yet yeah, Brandon we specifically spoke about the American's best fleet, because that's the larger fleet and we wanted to quantify what that was doing the business overall as we thought about that.
Dark stores, we talked specifically about the improvement that we've made related to our hiring retention and remote rollout and we'll look to apply that learning and playbook to our eyeglass world stores.
Gotcha.
Was wondering.
If we could dive in a little bit into margin impact in the first half of 'twenty four.
Believe that the contact business had increased costs.
Impacting the back half of this year. So can we expect a similar headwind in the first half next year and then just the timing of the AC lens business Rolling off which I believe is a lower margin business.
Walmart stores, so should we see incremental pressure in the first half of next year, and then as that rolls off things improve from there.
Yes, so well I will talk more specifically about 24 as we release our year end guidance, but what we did put out related to AC lens in Walmart, we did want to quantify what the impact of that.
That roll off would be because of the staggered in date.
So we put out that the expected revenue would be between $1 40, and $150 million with a similar profit profile to what youre seeing in 2023.
And we do expect that we'll continue to have as we go into fourth quarter. The gross margin headwinds in tailwind that we've spoken about previously.
In the quarter and the year has played out largely as we had expected we have had doctor cost headwinds offset by exam pricing benefit and expanded exam capacity. In addition, we have seen some product favorability from our trade expense as well as some additional products favorability.
Got it I appreciate it and good luck.
Thank you.
Our next question.
Yeah.
And our next question comes from the line of Adrian <unk> from Barclays. Your line is open.
Great. Thank you so much good morning, Reed I'm happy to hear the progress on the remote exam, but I think what would be super helpful. At least for me would be.
Furthermore, the long range plan, so definitely youre, making progress on a quarter by quarter, but maybe on a three year basis could you talked about the pain of remote implementation, possibly following I think I heard that correctly next year.
It just seems like such a low I mean.
The low hanging fruit, but it seems like such an impactful when you when you get the coverage on the exam are there.
Yes, I will I'll ask it can you share with us your sort of U K, it's kind of status quo. If you don't if you could do with a plan and then maybe I'm sure you have.
And upsides are accelerating.
Big goal right over that same time horizon.
Would that require.
To go faster with what you're doing or are they are disruptive technologies that you can implement I know, it's a very long long winded question, but it just seems like there's so much opportunity over the one two and three year horizon to get to that 5% and higher thank you.
I can speak to that and then I have a follow up for Melissa. Thank you Adrian and first I am going to turn it over to Patrick who is the captain of our remote initiatives here, but I.
I guess, what I was a little hard to hear you. So I'm going to just serving us so it's understanding the expansion game.
<unk> plan.
Adrian agrees that it's a huge opportunity I think there was a little bit about why not go faster.
<unk> for the question so Patrick.
Could you handle it yeah Adrian <unk>.
Follow up Youre long winded question with a long winded answer.
No.
They want to impact a little bit Im glad you asked that question and just as a precursor great results out of remote work.
Seeing it as a win for doctors patients store teams its driving incremental sales incremental comp increase.
Incremental profitability as a side note, we will be EBITDA profitable this year.
As expected after being dilutive last year, Melissa talked about the benefits of remote for dark and demo recover that but that's a that's a big factor.
We're on track to set up another 200 this year, taking us to 500 and really just kind of brings the first big initial phase two.
Those we still have future phases, but it's really a couple of things there as we have now equipped.
Two thirds of the states, where we operate America's best.
While there is opportunity remaining in some other states Humira couple of few larger states out there that we look forward to hopefully equipping one day. We are at critical mass now remote has become a really big factor in our site selection for new stores as well so.
Boeing is both natural based on what we've done thus far but we're also now.
Kind of continuously monitoring state regulatory and navigating state regulatory rules and looking for other states to open up my own belief is that over time telemedicine will become more and more.
Normal and natural but it's going to it's going to take a while and so as we look as we've always said since earlier this year as we clear the big initial investment phase of remote we are looking to see about a turn of operating margin improvement we have guided towards that happening in the second half of <unk>.
2024 by the end of the second half of 2024 and still feel really good about that so pace is slowing based on good work pace slowing based on our confidence to take our model into each state, which can have varying rules.
But again, we monitor that super closely and we'll be looking to take more states into remote it just won't be quite as broad scale and lumpy is this first big phase.
Okay. Just a quick follow up to that is there an alternative technology, a newer technologies that you're testing that you have not yet implemented.
In the states it really comes down to what do regulatory bodies allow for a full health exam and so we believe we have as good maybe the best remote exam out there in the market today, and so it's probably less about us doing things differently.
And more about us kind of navigating into those states and maybe even though states, becoming a little more open to telemedicine also say this technology support and new technologies emerge and we are.
Generally testing a couple of different things in the area of exam technology.
Who knows what will be embedded who knows what will be made legal but we'll be ready.
On both on both those fronts and remotes remotes.
<unk> electronic health record. So I think we are we're saying by the end of next year. All of America Best will have electronic Health Records.
Thank you.
Our next questions.
Our next question comes from the line of Brian <unk> from Jefferies. Your line is open.
Good morning, and great job on the quarter, you had Porsche on for Brian So maybe I'll kick off with a question on optometrist labor first it would be helpful. Maybe if you can provide some kpis to help us understand how optometrists capacity has been trending quarter on quarter, you know things like AD turnover and retention.
And then also as you continue to roll out remote I know its still and still in early phases, but can you detail the impact on average productivity per clinician and then I have a follow up.
Good so so while we're not where we don't quantify specific.
Capacity level, so I think if if we're saying.
Retention has improved for the second year in a row that our R. R.
Recruitment is going to deliver a second record year end record new grads, who tend to start in July and August and then Patrick just went through the remote.
Successive those do add up to improved.
Capacity in terms of remote onto a productivity.
Our laser focus on continuing to improve that through really three key emphasis areas. The first is just the technological optimal alignment of supply and demand doctors to patients.
As introduced complexity into what was a more simple model for scheduling we continued to improve our scheduling capabilities. We continue to improve training and feedback loops for doctors and technicians to store associates and finally, a lot of times. It comes down to the remote software in electronic health record interfaces, we have.
Teams that are continually making those more streamlined and fluid for doctors. So our expectation is remote doctors will.
At least mirror the productivity of inland doctors and again.
Some theoretical manner, I see them going to surpass that overtime, but yes.
Certainly hope Youre taken away that we are pleased with our progress and capacity expansion as we like to say retain recruit remote.
I think that is showing in our Q3.
As we said positive comp transactions, because we are able to offer more eye exams and Marc Vance appointment slots.
And this remains our constant focus and will be now.
Bringing that playbook divestments.
Absolutely and I really appreciate the color and just switch topics a little bit on the managed care penetration I mean, clearly that's been trending really well throughout the year as we look at this on a long term basis.
Maybe can you talk about where you think the high watermark is in terms of just penetration of managed care population as it relates to your entire book of business and.
I guess, what it would take to get there.
So we only publish our managed care penetration once a year because of all of them.
Changes in seasonality and the like and so the last time, we said it was a third of the business.
Repeating that it's been very healthy and getting healthier throughout the year and I think what has been discovered is that.
By by customers with some help from our marketing beds.
We're a great place to use your managed care benefits and of course. There is also in the word of mouth side of value Youre at the same managed carrier's your co workers and you tell them.
Youre going to experience in that and Thats snowballs from there, but I'm not sure. There is a high watermark I think it will continue to grow I think we are on a.
Our role here and so I don't.
I think when we publish our number.
With our at the end of the year, it's going to be up nicely and I would expect that to continue.
Thank you and one moment for our next question.
Our next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.
Hey, good morning, everyone.
Pace of openings for the go forward in terms of new units is that commensurate. So you don't have darker dim stores and then can you speak to you mentioned the new hires from this recruiting class can you talk about the prevailing the waves that youre hiring at versus the prevailing wage of your system.
Thanks, Amy and good morning, it's Patrick hitting on new stores do you want to add that assuming the year ended the year timing works out well, we do expect to be at the hopefully the tiptop of about 65 to 70 range for 2023.
So were happy really happy with what we've accomplished over the last two years for our real estate and store teams in terms of continuing.
Unit growth in terms of how we're thinking about next year.
Look where we were in the midst of planning I will tell you that there are a lot of factors that come into that as every year.
State site brands Dr. Recruiting Optionality promote has become a significant factor as it is it is not plan a but it is a really nice plan b.
We're looking at all of that very carefully right now and expect to be able to share those details with you in as we closed the quarter in the fourth quarter.
But rest assured we're still focused on taking advantage of the white space opportunity that remains in front of us while carefully balancing the other dynamics that we mentioned.
Okay, and then a follow up sorry go ahead, Oh I'm sorry. This is Melissa just to add on to that a little bit about the doctor component.
So we don't expect that the supply.
<unk> will change as it relates to doctors anytime soon but what we are doing we had implemented a an.
Incentive compensation program to Incent, the doctors to be.
More productive and that would their level of productivity would drive their incentive compensation. In addition to that as far as base wages go we had previously seen wages.
And in the low single digit range historically and now that's closer to the mid single digit range and we do expect that going forward. At this time, we will leverage our cost structure at mid single digits and we've laid out the plan to get back to mid single digits as we roll into 2025.
Thanks for that and then my follow up is on SG&A.
The <unk>.
Factors in the release, especially regarding I think incentive comp, which you. Just mentioned can you talk about advertising expense is that are you spending along the lines of which.
You planned or did you spend any more and then the outlook for that for the rest of the year. Please.
Yeah, so with advertising, we do see a little bit of advertising leverage as we move into fourth quarter and.
That's just due to more productive advertising that we're expecting to have and SG&A. Overall, yes, we will expect to deleverage for the full year and that is largely related to the incentive compensation reset that we spoke about initially with our year end release.
Thanks.
Thank you one moment our next question.
Okay.
Our next question comes from the line of Dylan Carden from William Blair. Your line is open.
Thank you just curious what percent of your stores are Tim sorry, if I missed and you count as tourist Jim if it's got remote capacity.
And maybe how that's trended over time.
Hey, Dillon and so we didn't specifically quantify the number of <unk> stores, because that number changes quite significantly because Dan is less than three days of covers says you have part time doctors you may begin one week and not the next week. So that number is a little bit harder to nail that.
But we were able to nail down the productivity drag for ADM store, which is about 50% as a productive fully productive store now with that we are.
Enabling remote in as many stores as possible that are specifically impacted by dark and Dan and that increases the productivity.
Double digit range based on adding to a darker than store.
So.
Can you give us directionally give us a sense of how Jim if you could nail down the productivity I guess, how many stores are you counting in that calculation and just sort of how that's worked through the year.
Yeah.
So rod strokes.
So as far as.
With dark stores, we talked specifically about we've improved that from the mid single digits at the high point to now we're at low single digit and within stores again that number changes quite significantly and from period to period year to year. So we are we will continue.
To figure out ways to explain that to you all but dark is the one thing that we can.
Nailed down we do have more den stores, they are dark stores and that.
That impact though.
I said with within stores and a little bit less than it is with dark store. So we'll continue to work on that well, we will continue to put remote into those stores and increased productivity.
With with the levers that we do have.
Okay, and then in the services and plans segment, just thoughts on kind of the margin degradation.
And plans to kind of get that back if you can't get it back to more historical ranges.
Yeah. So what we had talked about initially was that we would continue to expect to see the doctor cost headwind and that is being offset partially by the exam expansion and advanced pricing initiatives.
We will continue to work to get back to mid single digits, which will leverage that cost structure and with the warranty plan revenue that that's a component of that.
Our stores will be working on and will continue to.
Expand those offerings, so that we can service our customers.
Thank you.
Thank you one moment furnace question.
Okay.
And our last question for today will come from the line of Molly Baum from Bank of America. Your line is open.
Hi, Thanks for taking my question I, just had one quick one kind of high level on the competitive landscape.
You know I talk I know you talked a little bit about your.
Leveraging marketing and advertising dollars a little bit better.
Other competitors this week have announced that they're returning to growth in marketing and advertising.
So just curious how you feel about the current competitive landscape and then I guess on top of that how youre thinking about Walmart as a competitor now that theyre, taking their optical business in house. Thank you.
Good.
So overall, we haven't seen significant changes in the competitive landscape.
Hi.
Aware that one competitor did announce more aggressive marketing efforts you've got to just think about market share in this category because it's just a highly fragmented category increase.
The increase in marketing spend from one competitor doesn't it doesn't drive massive pieces, and especially sort of different competitors.
Attract different customer bases ours is a more lower income budget conscious.
Yes.
Yes.
Less high end consumer.
Oftentimes, we're talking to different consumers.
Our marketing and and while Walmart is yes sort of taking the 227 stores, we're not expecting them to be a more aggressive competitor and they do not historically do marketing of their vision Center.
In general the competitive landscape I think is pretty similar to the last call that we did in <unk> and E. Commerce has stayed very stable for a long time as upfront as a percentage of the business of the category.
Got it that's it for me. Thanks, so much appreciate it yeah.
I would like to just point out one other thing.
Youre FERC first piece, even in light of some.
Competitive marketing increases positive comp transactions for Q3.
They are still coming in.
Thank you and I would now like to turn the conference back to over to Reed for closing remarks.
Thanks, everyone for joining us today, we're pleased with the third quarter on track to deliver on our objectives for the year.
The macro environment of course is uncertain, but we're I'm pleased pleased with the customer count growth both for Q3, <unk> and year to date and believe it supports the progress we're making in our key strategic initiatives, especially in the area of building capacity. So that we can provide <unk> to the customers who pay.
And customers, who want to come to US. We appreciate your interest and support and we look forward to talking to you and take you through our Q4 earnings next year.
Thank you very much.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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