National Vision Holdings, Inc.

Emerging constraints to our exam capacity affected customer traffic in many of our stores. While we have delivered a record level of optometrist hiring thus far this year, our exam capacity is temporarily out of sync with our needs. This is primarily due to the impact of a modestly lower level of optometrist retention, coupled with the start date of many new hires occurring later in the year. Both of these challenges are substantially consequences of the COVID era, and had significant impact on our first quarter performance and updated outlook for fiscal 2022. For the first quarter, net revenue decreased 1.2% versus our record Q1 sales last year, and adjusted comparable store sales declined 6.8% compared to the strong 35.8% increase in the first quarter of 2021. And we delivered adjusted EPS of 33 cents. Patrick will provide more detail on our results and outlook in a moment, but I want to emphasize that we believe that the challenges we are facing are temporary. Our team is laser focused on overcoming these headwinds, and we're taking recruitment and retention actions to improve exam capacity, including the acceleration of our remote medicine initiative. We believe remote medicine will help to address our ever-present need for optometrists to keep up with the demand for eye exams at our locations. The optical category has a history of consistency over time, and we believe that the future will see a return to a more stable and predictable environment. Our long-term confidence in the health of our model remains unchanged, as we remain a low-cost provider of a medical necessity. Turning to slide five. As the chart shows, prior to the pandemic, our business demonstrated consistent performance over time, even amidst broader economic challenges. During the Great Recession of 2008 and 2009, our business generated comps in the positive low to mid-single digits. So in this current environment of higher inflation and lower consumer confidence, we believe that our value offerings should be even more appealing to an even larger slice of the American public. And we believe that once consumers have tried our value price products, it will be hard for them to ever go back to paying higher prices again. I would note that this week, after significant consideration, we implemented our first pricing change to America's Best Signature Offer in over 15 years. We now offer two pairs of eyeglasses, including a free eye exam, for $79.95. I would also add that the signature offer at Eyeglass World was increased to two for $89 during the first quarter. We feel these actions are appropriate given the current inflationary environment. Even with these increases, we're proud to continue to deliver industry-leading value to our consumers. On slide six, the chart of quarterly comps highlights the volatile comp performance caused by the pandemic over the last two years. Turning to slide seven, the comp volatility was especially pronounced in the first quarter, as the chart in the upper left corner shows. But it is also equally, if not more, volatile in the second quarter. During the pandemic era, the consistency and predictability of the optical purchase cycle was disrupted, and this trend continued in the first quarter. As we noted on our last call, our store operations and customer traffic this quarter were negatively impacted by the COVID surge at the beginning of the year. Since our call, we believe optical consumer demand was further affected by inflationary pressures and a decline in consumer confidence, as well as lapping government stimulus from last year. The softness is noticeably more pronounced for our predominantly uninsured customers who are paying out of pocket for our products and services. We believe that this slowdown in demand has been felt in most of the category in March and April. Those of you who have been following us for years have heard us say that we are always seeking more optometrists, as the optical consumer journey typically begins with an eye exam. This has been more true recently. In the first quarter, we experienced constraints in exam capacity in some locations. And by that, I mean specifically that in some locations, we could not fulfill exam demand that is there due to the lack of available optometrists. Some of these constraints relate to pandemic factors, such as scalebacks in days worked by individual optometrists or a modest downtick in optometrist retention. And some relates to the mix and timing of new optometrist arrivals. Although our level of optometrist retention has declined since the record high pre-pandemic, it still remains within historical bands. We have multiple recent initiatives to drive retention, which are being executed by a new level of clinical management and the early signs that these initiatives are encouraging. In terms of hiring, we've been investing more heavily in recruiting programs. These efforts are leading to enhanced hiring trends, as this year thus far has been a record year for the hiring of optometrists. However, many of the new hires will not begin to practice until late this summer. Thus, there is a timing lag between hiring and start dates. We currently expect these disruptions to impact our business performance for the next couple of quarters. Our team is working hard to quickly expand our exam capacity to mitigate this impact. Amidst this, we see our remote medicine initiative as a way to address our exam capacity constraints, and thus we are accelerating its rollouts. We are now targeting to operate remote medicine in up to 300 stores by year end, up from the previous goal of at least 200 announced last quarter. We are extremely pleased with the increasing exam capacity being added by remote medicine and the role it can play in serving more patients across both geography and time. So despite the temporary challenges facing our business, we remain confident in the long-term strength of our business model based on the following. Our business has shown tremendous consistency and resiliency over long periods of time. This is a benefit of being a low-cost provider of a medical necessity. We operate in a highly fragmented industry with ongoing positive trends, such as an aging population and increased eye strain from such things as increased screen usage. And our customers need to see to get through their lives. As their eyes continue to worsen over time, vision correction issues eventually need to be addressed. Similar to past periods of volatility, we expect the category will eventually revert to its historical cycles. Shifting to slide eight, in addition to our exam capacity and remote medicine efforts, we continue to progress our core growth initiatives. New stores remain a primary focus as we continue to see a sizable white space opportunity. We are off to a solid start with 17 openings in the first quarter, including two Eyeglass World locations as we ramp up expansion of this brand. We continue to plan to open at least 80 stores in 2022 and currently have a solid pipeline of specific locations for this year and into 2023. Marketing, along with the positive word of mouth from happy patients and customers, continues to be a key factor in driving traffic to our stores. We compete in a marketing-intensive category given the infrequent purchase cycle for eyeglasses. We believe our value messaging will resonate with consumers in an environment of high inflation. While we aggressively invested last year to maximize share growth as well as run marketing tests, in 2022, our team is more focused on optimizing our marketing investment. Our participation in vision insurance programs continues to be a positive revenue driver, especially in the current environment. In the first quarter, we experienced solid growth in sales tied to vision insurance as insured consumers because the insurance funds most or all of their purchases are not deterred from shopping in a tight economy. Our comps related to managed care grew in the positive low single digits. Let me repeat that. In the first quarter, our comps related to managed care grew in the positive low single digits. We remain underdeveloped relative to the category and continue to see an ongoing opportunity here as managed care dollars and co-pays tend to go further in our stores than elsewhere. At this point, let me turn the call over to Patrick for more detailed discussion of our financial results and the 2022 outlook.

Thanks, Reid, and good morning, everyone. First, I want to echo Reid's confidence in the underlying health of our business and that we view the current issues as shorter-term in nature. In the interim, the team is focused on what we can control continuing to invest in key growth initiatives, and appropriately realigning cost to our revenue outlook. Now let's turn to slide 10. As a reminder, the first quarter of 2021 results had the tailwinds to revenue and profitability from pent-up demand from store closures, the benefit of government stimulus, and an elevated average ticket. In Q1 2022, net revenue decreased 1.2% compared to 2021, due to the Omicron impact, macroeconomic headwinds, the constraint to exam capacity, and the exceptional growth last year. The timing of unearned revenue benefited revenue growth by 0.2%, which was better than expected due to the volume of sales in the final week of the quarter. Compared to 2019, net revenue increased 14.4%. During the quarter, we opened 15 new America's Best stores and two Eyeglass World stores for a 5% increase in store count. For our America's Best and Eyeglass World growth brands combined, unit growth increased 6.8% over the last year. Adjusted comparable store sales declined 6.8% versus 2021 compared to a record 35.8% increase in the first quarter of 2021. Q1 comparable store sales were impacted primarily by a decline in customer transactions. Average ticket declined slightly year over year, but increased sequentially from the Q4 ticket level. We are encouraged by the fact that our average ticket has stabilized, primarily helped by pricing actions and successful product introductions like blue light. Turning to slide 11, as a percentage of net revenue, cost applicable to revenue increased 260 basis points, or slightly above our expectations for a 220 to 240 basis point increase. The increase was driven by the leverage of optometrist-related cost, decreased eyeglass mix, and lower eyeglass margin associated with the year-over-year decline in average ticket. Adjusted SG&A expense, percent of net revenue increased 110 basis points. The key factors behind this increase were the deleveraging of advertising, store payroll, and occupancy expenses from lower revenue, partially offset by lower incentive compensation. We expect advertising in 2022 to be maintained at a similar percentage of revenue as 2021, with the potential to be slightly leveraged for the year. Adjusted operating income decreased 33%, to $45 million and adjusted diluted EPS decreased 32% to 33 cents. Compared to 2019, despite the challenges this quarter, adjusted operating income and adjusted diluted EPS were up 6% and 7% respectively. Now turning to slide 12. Our balance sheet and liquidity remained strong. At the end of the first quarter, our cash balance was approximately $315 million. and total liquidity exceeded $600 million when including available capacity from our revolver. We ended the quarter with total debt of $578 million. Net debt to adjusted EBITDA was 0.9 times compared to 1.2 times at the end of the first quarter of 2021. We funded $28 million in capital expenditures that were primarily focused on new store and customer-facing technology investments and remain on track for 2022 CapEx in the range of $110 to $115 million as we continue to invest in key growth initiatives. With our free cash flows and considerable cash position, we continue in our shareholder return program. Year-to-date through May 6th, we repurchased 0.5 million shares for $19 million and have $111 million remaining under the current share repurchase authorization. Since the inception of our share repurchase program last November, we have repurchased 1.9 million shares for $89 million. Regarding our inventory position, we are comfortable with the current level and its ability to support our 2022 growth plans. Our efforts to mitigate supply chain disruption continue to be effective to date. At the end of the quarter, inventories were $127 million, and inventory per store grew less than 2% on a year-over-year basis. Our merchandising and distribution teams continue to execute extremely well to help us manage through the current challenging supply chain environment. Overall, we believe that our financial strength and our commitment to invest in our business remain a competitive advantage. Turning now to our outlook on slides 13 and 14. I'll conclude with some commentary regarding our updated 2022 outlook, which we included in today's earnings release. The operating and macro environments are extremely uncertain. The updated fiscal 2022 outlook reflects the currently expected impacts related to macroeconomic factors, including the ongoing COVID-19 pandemic, inflation, geopolitical instability, and risk of recession, as well as constraints on exam capacity. The outlook assumes no material deterioration in the company's current business operations as a result of such factors. The current environment is difficult for forecasting as visibility is quite challenged. As a result, we have taken a more conservative posture to the updated outlook and have incorporated wider ranges reflecting specific planning scenarios. The wider range of assumptions are driven by the unprecedented market conditions that reduce our ability to protect demand with a normal level of certainty, given the real shift in the consumer and the disruption of the purchase cycle. Against the backdrop of what we know today, our updated 2022 outlook projects net revenue between 2.01 and 2.07 billion, adjusted comparable store sales growth compared to last year in the range of negative four to negative 7%, adjusted operating income between 85 and 105 million, and adjusted diluted EPS between 65 cents and 80 cents, assuming 82 million weighted average diluted shares. Let me share some underlying assumptions in our outlook. The high end and the low end of the comp and revenue ranges represent two potential scenarios for consumer demand for the rest of the year. At the high end of the ranges, we are assuming a modest level of recovery, for consumer demand in the second half, including the back-to-school season, as well as improvements in exam capacity. At the low end of the ranges, our comparable store sales and revenue assumptions essentially reflect very limited demand recovery, as well as a lower degree of exam capacity improvement. In terms of operating expenses, we've taken smart, tactical actions to align costs with the revised revenue outlook, primarily in store payroll, advertising, and corporate overhead. However, we are continuing to invest in the business and key initiatives and our store growth and capital expenditure plans remain unchanged. Our ongoing commitment to investment is further evidence of our confidence in the future prospects of the business. As we have done in the past, I would like to provide additional color given a unique comparison to 2021. In the second quarter, we are facing a continued grow over challenge from the record results and government stimulus last year. Also, quarter to date revenue trends have been negatively impacted given the macro headwinds and exam capacity. Our outlook assumes comps in the negative low teens and modest profitability for the second quarter. For the second half, we now expect comps to be in a range of negative low single digits to positive low single digits due to easier comparisons moderating average ticket pressure and increased exam capacity. Store openings this year will continue to be predominantly America's best locations, coupled with a doubling of eyeglass world openings. We are on track to open at least 80 stores and the openings are expected to be evenly spread over the year. We project a few closings as is typical each year. Let me share a couple of other factors assumed in our outlook for 2022. We are excited about the accelerated rollout of our key remote medicine and EHR initiatives and continue to anticipate incremental dilution in the range of $6 million. We continue to expect the timing of unearned revenue will have a negative impact in 2022. We currently estimate this impact to adjusted operating income to be about $9 million. As a reminder, unearned revenue recognition is a 7-10 day timing impact that can affect our quarter-to-quarter and annual comparisons. For full year 2022, as a percentage of net revenue, we expect cost applicable to revenue to increase 350 to 375 basis points versus last year, primarily due to the deleverage of fixed costs as well as the lapping of last year's record performance that benefited from product mixed shifts and an elevated ticket. For Q2, costs applicable to revenue are expected to increase about 400 to 450 basis points versus last year. In terms of expenses, we would expect 2022 adjusted SG&A to increase between 125 and 150 basis points as a percentage of net revenue year over year. The SG&A increase primarily reflects sales deleveraging and, to a lesser extent, higher levels of wage investments. To assist with modeling, we've also provided additional assumptions on depreciation and amortization interest and tax rates. As Reid stated earlier, we have successfully navigated several unique chapters during the pandemic, and while the current chapter is one of the more challenging, I have every confidence in our business model, value proposition, and our management team to take the necessary actions now to return the business to a growth trajectory. At this point, I'll turn the call back to Reid.

Thank you, Patrick. Turning to slide 16 and our moment of mission. As we continue our ESG journey, we are continuing to invest in our associate experience to ensure that National Vision is providing a life-giving, fulfilling workplace. We received the results of our first associate experience survey this quarter. This is an important additional way for us to have an ongoing dialogue with our associates and to continuously improve our work environment in the ways that will matter most to our associates. We were quite pleased with the results and encouraged to confirm that associates feel we are doing many things well already. Some quick highlights. 92% of associates are proud to work for National Vision. 90% feel good about the ways we contribute to the community. 93% clearly understand how their job contributes to achieving the goals of National Vision. And importantly, 90% have confidence in the future of National Vision. which is significantly above U.S. benchmarks. In these highlights and throughout the survey results, we see tremendous alignment among associates on some of the core values that we feel make National Vision successful. I'd like to conclude by sharing my heartfelt appreciation to the entire National Vision team for their continued resilience, hard work, and their commitment to patient care and customer service during these challenging and dynamic times. In summary, the key takeaways from today's call are these. After 18 years of consistency and predictability, the pandemic era has temporarily made the optical market and consequently our business more volatile. We believe that the marketplace over time should return to trends more consistent with the pre-COVID era, especially as our customer's vision only continues to get worse with time and we remain a low-cost provider of this medical necessity. We believe that several initiatives, including our remote medicine rollout, should help us to get our exam capacity more in line with the demand that is there for exams at our stores. Thus, although we are currently in one of the challenging COVID era chapters, our confidence in our mid and longer term prospects remain unchanged. With that, I'd like to turn the call back to the operator to start the question and answer portion of the call.