National Vision Holdings, Inc.

At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automating message advising your hand is raised. To withdraw your question, please press star 1-1 again. At the company's request, you may ask one question and one follow-up. 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. Thank you, and good morning, everyone.

Welcome to National Vision's first quarter 2023 earnings call. Joining me on the call today are Reid Fahs, CEO, and Melissa Rasmussen, CFO. Patrick Moore, COO, 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, nationalvision.com. and a replay of the audio webcast will be archived on the investor's page after the call. Before we begin, let me remind you that our earnings materials in 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. The release and today's presentation also include 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 presentations and supplemental materials for investor reference on the investor section of our website. Now let me turn the call over to Reid.

Thank you, Caitlin. 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 eye care and 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 6.6% and adjusted comparable store sales growth of 0.8% compared to Q1 2022. This translated into adjusted EPS of 31 cents for the period. Overall, the quarter reflected a similar sales mix to what we saw in Q4 within an 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 customer's 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 constraints. 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 a path to adapt our business to thrive amidst 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. Let's start with exam capacity. On the whole, in stores where we are achieving capacity objectives, comps are positive, thus demonstrating the strength of our business model. There are three components to achieving optimal exam capacity. The first is retention of the optometrists who currently practice in and alongside our stores. 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 optometrists 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 in our network. As we discussed last quarter, These updates were piloted late last year, and based on positive results, they're being further rolled out in the first half of this year. We continue to learn how best to optimize the new schedule management that goes along with this program and balance customer-desired shopping patterns with the flexibility desired by the optometrist. Third, we're deploying our remote medicine capabilities to help improve exam capacity. Remote medicine provides patients with greater access to care and optometrists with the ability to see patients across geographies. This is because remote optometrists 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 unlock 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 dark and dim stores, there's also an important benefit in covering situations where an in-person optometrist is out of the office and in supplementing the coverage that a live doctor 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 pauses expected for peak volume periods for our stores. 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 efforts that should, over time, help to right-size both our store and our overall cost structure. This includes the ongoing digitization of the store to improve efficiency and productivity. An example of this is our electronic health record or EHR program that we're rolling 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, The consumer 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 continue to see great opportunity to expand our America's Best and Eyeglass World store base over time, and we'll 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. While 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'll now turn the call over to Melissa for more detailed discussion of our financial results and the 2023 outlook.

Thank you, Reid, and good morning, everyone. As Reid discussed, we had a stronger than expected start to the year driven primarily by managed care sales, leading to adjusted comparable store sales growth of 0.8%, slightly better than originally guided. and we are beginning to see progress based on the actions we are taking. Now I'll cover our first quarter financial performance in more detail. Turning to slide 9, net revenue for the quarter increased 6.6% 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 four 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 1,357 stores. As Reid mentioned, we are on track to open between 65 and 70 new stores this year, consistent with our previous guidance. Adjusted comparable store sales grew 0.8% compared to the first quarter of 2022, driven by an increase in average ticket and transactions. Turning to slide 10, as the percentage of net revenue, costs applicable to revenue increased 50 basis points driven by the deleverage of optometrist-related costs, which was partially offset by higher eyeglass margins and increased 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. The 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 7.1%, driven primarily by the increase in optometrist-related costs and the normalization of incentive compensation compared to last year. Net interest expense was $4.9 million which includes marked market losses on derivative instruments and charges related to amortization of debt discounts and deferred financing costs of $3.9 million. Just diluted EPS was 31 cents compared to 33 cents 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 $540.5 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 we expect to provide an update when appropriate. We ended the quarter with net debt to adjusted EBITDA of 1.8 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 initiative. During the quarter, we returned capital to stockholders with the repurchase of 1.1 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 $2.075 billion to $2.135 billion supported by adjusted comparable store sales growth of 0% to 3% in 65 to 70 new store openings this year. Adjusted operating income between $48 million and $66 million and adjusted diluted EPS between $0.42 and $0.60 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 expiration of the Consolidated Appropriations Act of 2021. From a 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 we move into the back half of 2023, We expect our tax rate to be more in line with our full-year guidance. As Reid 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 investments, and 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 Reid 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 and corporate 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 in our moment of mission, which focuses on our latest technology investment in an early stage healthcare artificial intelligence startup called Toku, which we're investing in alongside Topcon Healthcare. Eye exams are more than simply getting an eyeglass or contact lens prescription. They also assess ocular and overall health. The picture of the retina that we're able to take in most of our stores provides a treasure trove of valuable information that an optometrist 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 TOCU, we're enhancing these capabilities. TOCU 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. Theirs is among the first AI screening approaches designed primarily with optometry in mind. In addition, TOCU is working on validating an AI assessment of cardiovascular risk from the retinal photo, which would be a first, connecting optometry and primary care. In supporting TOCU, National Vision is investing in a future for optical care in which more people are able to have affordable access to potentially life-saving health data to an easily accessible, non-invasive test. In summary, the key takeaways from today's call are we are rapidly adapting our business to thrive amidst the new realities of the post-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 optometric 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 the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To draw a question, please press star 11 again. And as a reminder, at the company's discretion, please only ask one question and one follow-up question, please. Please stand by while we compile the Q&A roster.

One moment, please.

Our first question comes from Michael Lesser of UBS. Your line is now open. Good morning.

Thanks a lot for taking my question. Reid, if you had to mention the improvement in your comp in the most recent quarter between the cycle getting better, meaning we're getting closer to the replacement of glasses that were purchased in the last few years, the improvement in optometrists capacity and the trade-down benefit that you might be seeing because of the challenging economic conditions? How would you disaggregate and quantify those three factors?

Thank you, Michael. Great, great question. I would rank order them in this way. I would begin with capacity. with improvements on the eye exam appointment and availability, or eye exam availability front. Your second piece was, the second one would be the trade-down piece, but I'd actually not say it is trade-down. I'd say it is increase in managed care, because the increase in managed care does a bit correlate with the trade-down effect in that wealthier people tend to have managed care benefits. So I'd say capacity, managed care, and I think it's premature to talk about a normalization of the cycle just yet. I'm looking forward to the day, Michael, when we can announce that. It will come. I am confident it will come, but I think it's premature to point at that at this point.

Okay. And the softness in April that you talked about, you would attribute that mostly just to tax refunds and not any sort of internal execution challenges or reversal of the benefits that you were seeing that drove the improvement in the first quarter. And I want you to clarify, I was hoping you could clarify the comments you made about potential price changes. Does that mean you could continue to take prices up while at the same time trying to maintain the deep value offering of National Vision.

Let me start with your first point. Yes, I think April is more related to tax refund related softness than other things. And again, we are reiterating our guidance for the balance of year, but we did want to point out that April was a little softer than anticipated. But I do think it was the tax refund piece. On the pricing side, that's something that we're always looking at, especially in an inflationary world. There's a small amount of pricing baked into our guidance, but we're looking at other pieces. So 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 deeper dive and getting some fresh perspectives on it also, because we think that there may be some opportunities there also that 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 action.

Understood.

Thank you so much. One moment, please, as we promote the next question. Our next question comes from Zach Fettum.

from Wells Fargo. Your line is now open.

Hey, good morning. Reid, 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're looking for as proof point that remote medicine is working?

okay uh yeah in terms of the uh existing versus new store so again that that what we said on the recruitment uh front uh on the retention front is that it looks like that 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 the that that trajectory in terms of retention and recruitment is also healthy. I didn't point out, but our student recruitment is tracking ahead of last year and last year was a record. It's still a little early in the season. A lot of the students don't make decisions till the very end there. But in Q1, we're tracking ahead there. So what does that mean for new stores? We also pointed out that new stores, if you look at the stores we opened over the past 12 months, they're in line with expectations, which reinforces our conviction in the white space opportunity ahead of us. And we think, relating to the remote piece, that remote can help us even more in terms of white space opportunities. What do we look for in terms of the remote for success? What we want, of course, is we want to expand our capacity in a cost-efficient manner and make more exam 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 objective, our comps are positive. So that just reinforces the model is great. What we're doing in this environment where optometrists are harder to get is 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 good. Got it.

And Reed, now that we are a solid two years away 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 21 and just a 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 this challenge that we're facing of the normalization of the purchase cycle is a category-wide challenge. The category last year around March or April, it dipped throughout the category. To the extent to which you had a high penetration in managed care, you were a bit insulated from it. We, of course, have a low percentage of managed care because, you know, most of our customers are paying cash themselves. They're sort of lower income budget conscious consumers. But 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 in a very consistent category for decades prior to the pandemic. It was quite a boom for the year or so after the reopening. That was lots and lots of people bought glasses and they tended to buy nicer glasses at the time. Then they were in general hit with this inflation and that has pulled back the entire category and We believe the purchase cycle will normalize eventually. We believe the purchase cycle must normalize eventually, given the biology of the human eye and a lot of trends like all the screen usage, which contributes to eye strain, which will increase the category and bring younger people into the category 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. Our next question comes from Taj Phillips of Jefferies.

Your line is now open.

Hey, it's Brian Phillips from Jefferies. Good morning, and congrats on the quarter. Reid, 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 in clinician or store productivity or recruitment or reducing the days or hours that you don't have a clinician in the store and can't see patients that way.

Well, you know, Patrick is our COO. One of his big responsibilities is looking over our remote program. Patrick, I'll turn that to you.

Yeah, just as a reminder for everybody, our remote care initiative is a clear one for doctors, patients, and our store teams as well. It is a game changer for dark and dim stores, but we do look at coverage and capacity in terms of stores where we have a substantial demand and coverage need. We've seen double-digit productivity improvements, so we do track metrics around capacity, matching to demand, doctor and store productivity, as well as, you know, frankly, sales comps. We did see benefit in the quarter in terms of Evadop remote. Last year, we were diluted in the mid-single-digit millions. It was a positive contribution to Evadon Q1. We are expecting to roll out at least 200 new sites this year, bringing that to 500. We do think remote is also healthy retention. It's a theme for doctors in general across the industry, and us having that capability is just another form of flexibility to offer doctors practice methodologies that fits their life the best. So the answer to your question is yes, lots of different things come into play, and we do track and look at all those as we progress this key initiative.

I appreciate that, Patrick. And then maybe my follow-up, you talked about SOCU here really briefly, but Maybe if you can share with us sort of the strategy and how you are intending to or planning to reach or outreach to healthcare companies so that you can leverage your capabilities and Sotheby's capabilities and get more into the healthcare side of things versus just your traditional retail footprint. Thanks.

Yeah, that's a great question. Thank you for that. You know, 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 there's a desire to work in employed situations versus non-employed situations. I think about flexibility. This generation, this post-pandemic period, that flexibility in terms of days, but also modes of practice like our remote 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 optometrists. We have had a mantra for the past 15 years of we are creating environments where optometrists will want to spend their entire career. When I say environments, it's because we have a variety of different environments, everything from leasing to employed to just if there's a mode of practice, we like to have it available for optometrists in our various different brands out there. So the last trend I talked about was longer term, more medical. You know, as I said, we're doing millions of eye exams each year. We have thousands of optometrists practicing alongside our stores and in the National Vision Network. And these optometrists are trained to not just find prescriptions, but to find all manner of ocular diseases and all manner of of healthcare-oriented diseases, and that is a big part of what they do. Our optometrists are oftentimes the first person to tell someone they have diabetes or hypertension, something along those lines. For many of our patients, It's the only interaction with a medical professional they're going to have that year. So it's very important. We regard that as a big responsibility, sort of offering the network of optometrists the primary healthcare. You know, some people have said to us, we are sort of an entry point for healthcare for a lot of our patients. Toku is an early stage startup. Let's be clear on that. But the promise of patients being able to come to us And through a simple, quick photograph of the back of their eye, 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 healthcare system. Again, this is longer range in nature. This is not about sort of how we're going to deliver this year's guidance. But we think that the network of optometrists who are practicing alongside our stores are playing an important role in healthcare in America, and that technologies like AI, like TOCU is advancing, can play an even greater role in health outcomes for patients. And we think that that could be valuable to the overall healthcare of America at some point in time. And so we're planning a few weeks to learn ever more about that and see what added value we can provide.

Awesome. Thanks, Reid. Thank you. Thank you for your question. One moment as I promote the next question. Our next question comes from the line of Anthony Chakamba from Loop Capital Markets.

Your line is now open.

Good morning. Thank you so much for taking my question. Congrats on the strong start to 2023. I guess my question, is there anything that you're seeing notable in the competitive landscape, whether it's from the the independents or some of the larger chains or, you know, some of the, you know, stores that are in, you know, deep discount recos like Costco, Walmart? Is there anything you're seeing from like a promotional perspective or, you know, or just even a competition from an optometrist perspective?

Well, yes. So it's not new since we've been talking about it sort of since the pandemic, but competition for optometrists is, very real. So this is what all groups operating chains of any size are talking about. So that is very real, the growth of managed care and 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, my sense is 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 I think is being seen in other aspects of direct to consumer that there was a big high in e-commerce related pieces, that sector throughout retail during the pandemic. And now there's a trend towards back to stores. So that is happening within our category as well. But again, we think we are at least maintaining a share, maybe even growing a little bit on the managed care front. And aside from that, the optometrist shortage and the managed care growth, and the deceleration of e-commerce towards more back-to-store, I wouldn't say there are other changes other than those.

Got it. And then just a related question. In terms of, you know, given the, as you mentioned, very real competition for optometrists, What does that translate into for optometrist compensation relative to your expectations? I know obviously you had some new initiatives as well, so maybe that muddies the waters a bit.

Hi, Anthony. It's Melissa. As we think about the optometrist compensation, we have seen an increase in compensation over the past year, and we had a higher growth in optometrist-related costs for the quarter of about 90 basis points. We continue to see inflationary actions in optometrist 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 pay. And so with the incentive compensation component, that benefits them as they provide more eye exams and are more productive. We are doing a variety of efforts to right-size our stored 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 split evenly between optometrist cost and investment or and product cost increases throughout the year.

That's helpful. Thanks for taking my questions. Good luck with the rest of the year.

Thank you. Thank you. Thank you for your question. One moment as I promote the next participant.

Our next question comes from Paul Ahuiz from CITI. Your line is now open.

Hey, everyone. This is Brandon Cheatham on for Paul. wanted to kind of dig in on the capacity constraint stores. Like, are there any similarities with the stores? Are they the same ones or is it really just a doctor turnover issue? And, you know, do you know where the optometrists are going? Like, is it a retirement issue or is it really, you know, just making sure that you offer a competitive enough package to retain them or are they going to kind of open their own practice? Thanks.

So thank you, Brad. In terms of that, there are not broad themes in terms of where optometrists go when they leave us. It's sort of all over the board. Having said that, they're leaving us in lower numbers. When I say that our retention was better in 22 versus 21 and looks like we're on track for a nice improvement in 23 again, what that says is we're doing a better job of keeping them associated with us. So that's That's the trend, and again, and recruitment healthy as well. To your point about, sorry, oh yeah, the reason is there were retirements, more retirements in the year following, the year of the pandemic. But actually, the bigger or a bigger factor has been a lot of optometrists have wanted to cut back the number of days they work. And if you think about that overall as a trend, it just means nationally there are less exam slots than there would be otherwise. So those are two factors. And we have a variety of incentive programs that incentivize doctors to start. 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 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 collection of optometrists, which, by the way, change over time through the life cycle of your career. And we are designing our programs to be flexible to change over time throughout the optometrist's career. Again, trying to create environments where optometrists will want to spend their entire career.

Gotcha.

And we are pleased with the success we're seeing on those fronts.

Makes sense. And then on the product cost front, I think most of that, and correct me if I'm wrong, is coming on the contact side of the business. So Can you just kind of walk us through some of the competitive dynamics that you're seeing in that business and then what's flowing through on contact pricing?

Yes. As we think about the higher product costs, we announced in March that we were expecting to see about 100 basis point impact split between both the doctor investment and the increase in product costs. We expected those increased product costs 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 a product that is easily shoppable, so harder to take price as cost goes up. 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 take pricing measures where it makes sense.

I appreciate it. Thank you, and good luck.

Thank you for your question. one moment as I promote our next participant. 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's more openness. Can you talk about What's being contemplated? Is it opening price point? Is it the better and best? And I guess what timeframe are you expecting to make a decision and enact changes?

Yeah, thank you, Simeon. Yeah, we are talking about non-headline pricing actions. And again, some level of those are baked into our guidance. And we have a number of ideas that we're sort of vetting on potential other pricing actions that could be taken. And as we said, we're doing sort of a deeper dive study and getting some fresh perspectives also in that way, and we're looking forward to that, and we would feather those in over time. And 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, you know, there's a small amount of pricing taken at the very end of Q1. And again, 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 than we traditionally are.

And then my follow-up, it'll have two parts. First, if you look at your comp between managed care and customer pay, that's the right notation. Can you talk about the spread between those? Is it getting wider and why or narrower and why? 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 talk about it in basis points, but the few drivers that are causing it and then how the movement of that throughout the year may abate or not, you know, based on investments, deleverage, ODs, et cetera.

I'm 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 cash pay comps is significant. Managed care is very strong, and the cash pay consumer is weaker. So, managed care strength played a significant role in delivering the positive comps of Q1. Do you want to take the second part there, Melissa?

Yes. As we think about the decline in adjusted EBITDA year over year, many of the factors that are tied into that were 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 we spoke about in March. With all of those factors combined, in addition to the initiatives that we've been putting in place, that is creating the drag on year-to-year EBITDA that you're seeing.

Okay.

Thanks, everyone. Good luck.

Thank you, Simeon. Thank you for your question. One moment please.

Our next question comes from Robbie Holmes of B of A Securities. Your line is now open.

Hi, thanks for taking my question. This is Molly Baum on for Robbie Holmes. 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 bit deeper. Could you provide some details on maybe what your expectations are in terms of the cadence of that? You know, did 1Q come in ahead of your expectations? Should we anticipate the second quarter maybe to come in a little bit weaker, just given some of the year-to-date trends that you're seeing? Sorry, just any additional details that you might be able to give there. Thanks.

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 costs that we had referred to in March go into effect largely starting in second quarter. We expect the 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 begin in 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 you leverage on SG&A. Is that a better way of thinking about it as opposed to the gross margin piece?

Yes. So as you think about the SG&A piece, We expect that we'll have some growth in SG&A as we go into second quarter. The dollars will be slightly lower than what you saw in 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 opening, we expect to see occupancy expense be a little bit higher in second quarter and beyond.

Got it. That makes a lot of sense. Thank you for taking my questions and good luck on the quarter.

Thank you. Thank you for your question. One moment, please. Our next question comes from the line of Dylan Cardin of William Blair. Your line is now open.

Thank you. I was just curious, you know, you speak to sort of encouraging trends and doctor 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 sort of more flexible scheduling and remote care and anything else, what you're seeing that is working this early in the year and kind of walking through more tangibly how you expect to kind of get your way out of this and maybe some of the timing around that.

Got it. Okay. So the word I'm using is ever-improving retention, improving health in recruitment, and remote creating more capacity. So encouraging, improving, those are both words. I would like to reinforce that with With recruitment, there's always a delay of generally, for a working doctor, it's 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 as we do our projections and reiterate our guidance, that is baked into that. We are believing in the initiatives we have in terms of the flexibility programs we have in terms of the promise of remote, but it's not solved yet. We are getting better. The trends are going in the right way, but it's not solved yet. But we're pleased with the direction and confident in our future. Again, reinforcing where we have the capacity, the comps are positive. And that to us says this is a game of just making sure we can deliver the capacity because the consumers want to come to us.

So I'm taking from that that retention is really driving the encouragement. at this point, relative to what?

Nope, all three. I'd say retention is encouraging, and recruitment is encouraging. Remote is still a startup, still on a learning curve, but it's generating exams properly for us, and we see it getting better and better over time.

Okay. The comments around how managed care maybe is not directly related to trade down impact. Can you help me understand that?

No, I hope you took away it is directly related. So wealthier people tend to have managed care. Managed care benefits go further with us than they do otherwise. And so there's a strong overlap between the two. So you would think they would go in lockstep.

No, I apologize.

I'm sorry if I misstated that before, but you're correct. There's overlap.

No, it's my fault. And so is the idea or the commentary that the trade down impact that maybe was delayed relative to what people thought last year happening in greater force at this point?

It is, yeah. Trade down versus prior year is increasing. Yeah. Okay.

Okay. Thank you very much.

And as inflation hits ever wealthier people's pocketbooks, that should continue.

Thank you for your question. One moment, please, as I promote the next participant.

Our next question comes from the line of Robert Dreville from Guggenheim. Your line is now open.

Hi. Good morning. My question is around the new store opening plan. I guess when you look at all the headwinds around optometrists, why does it make sense to keep adding stores at the same pace as recent years? What do you consider? Are you considering maybe slowing the pace of the new store rollout?

Again, if you look at the stores we've opened over the past 12 months, they continue to perform in line with historical expectations. where the ability to get doctors is a highly localized thing, sort of where you place a store. It may be either an encouraging place for a doctor to practice or otherwise, so it's very store-related. We're always striving to not open a dark store, and yet if for some reason a doctor doesn't show up in many places, we can open with remote, and that's a factor also which we never had in the past, and again, the promise is that over time, remote could actually increase our white space opportunity. Got it. But if the new stores are still working, and we're still going, we think that white space is very real.

Thank you. Thank you for your question. One moment, please. as I promote the next participant.

Our next question comes from Adrienne Yee of Barclays. Your line is now open.

Good morning. Thank you very much. Reid, 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 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 refund pressure was sort of more near-term in nature? And then under what kind of assumption are you assuming that as these doctors come on in the summer, what's the increase in sort of doctor capacity to increase sort of exam, unfulfilled exam, to reduce unfulfilled exams? And then for Melissa, on the SG&A, You know, the SG&A for this year, how should we think about that if we're thinking out a year or two, you know, out into the out-out year, about what portion of that is just heavy up investment and how that streamlines and gets more kind of balanced in 2024? Thank you so much.

Melissa, why don't you go through what the guidance contemplates for the second half of the year, the balance of the year of the SG&A, and then I'll take the question about the increasing capacity from the hiring.

Sure. Hi, Adrian. As we think about with April being a little bit softer, we did tie that to what was believed to be a lower tax refund season for our low-income consumer. We expect that the initiatives that we're putting in place to continue to take hold and expand exam capacity, and it's too soon to talk about May as we're 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. So, we do expect the back half of the year to have slightly better comps than what we've seen so far in first quarter. As we think about SG&A, the modeling that we 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, we spoke last March that we expect to see at least 100 basis point improvement in operating margins related to some of those implementation teams being disbanded and the productivity lift that we expect for many of those initiatives.

Great.

Very helpful.

And so the part of your question, Adrian, about the new hires and the increase in capacity, we're encouraged by Q1 student hiring. It's better than Q1 last year. Last year we had record student hiring, so that's a plus. Doctors, new doctors coming on is always part of our plan, but right now it's looking a little bit more encouraging than what was in the plan, but this is all part of the puts and takes on the balance of the year that Melissa just took you through. There are a lot of factors that you've got to balance as you project out through the balance of the year, but 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.

Good. 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.