National Vision Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q2 2023 National Visions Holding 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. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Angie McCabe, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to National Vision's second quarter 2023 earnings call. Joining me on the call today are Reid Fogg, 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 relief issued this morning and the presentation accompanying our call are both available in the investor section of our website, nationalvision.com. A replay of the audio webcast will be archived in the investor 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 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 in the investor section of our website. I will now turn the call over to Reid. Reid?

Thank you, Angie. Good morning, everyone. Thank you all for joining us today. As you likely saw on July 26th, we announced our preliminary second quarter financial results in conjunction with the news that our partnership with Walmart will be ending in 2024. This morning, I'll provide some highlights from the second quarter, update you on the progress we're making on our key strategic initiatives with particular emphasis on how we're expanding exam capacity, and provide some color on the Walmart transition. Then Melissa will review our second quarter financial results and 2023 outlook in more detail. As we communicated two weeks ago, our second quarter 2023 results were largely in line with our expectations and reflected trends similar to what we experienced in the first quarter. Compared with the second quarter of 2022, we delivered net revenue growth of 3.1% and delivered adjusted comparable store sales growth of 1%. We continue to see strength in our managed care business, as well as a further shift in the number of higher income customers who traded into our more value priced offerings. During the second quarter, we opened 24 new stores and remain on track to open approximately 65 to 70 new stores this year. As I'll discuss later in my remarks, we continue to see tangible results from the execution of our key strategic initiatives. These factors, among others that Melissa will discuss, resulted in adjusted diluted EPS of 17 cents for the second quarter. Importantly, we believe the adjusted operating income and adjusted diluted EPS will be at or above the midpoint of our fiscal 2023 guidance ranges. Regarding our Walmart relationship, as we detailed it in our July 26 press release, as of February 23, 2024, we will no longer be managing the 229 vision centers in select Walmart locations, nor will we be providing our related optometric services for Walmart in California. Consequently, we made the decision to end the wholesale distribution and e-commerce contact lens services that we provide to Walmart and Sam's Club through our AC Lens business when our contract ends on June 30th, 2024. While we did not expect this decision from Walmart, for well over a decade, we've been focusing on growing our two larger, more strategic brands, America's Best and Eyeglass World, driving the revenue from Walmart stores down to about 8% of our net revenue in fiscal 2022. We have created a dedicated transition team, and over the coming months, it will be focused on executing a successful transition of the vision centers we operate to Walmart. In addition, we are focused on ensuring we align our cost structure with our go-forward business model and expect to provide more details on this when appropriate. As we look ahead, as a less complex and more streamlined organization, we will be able to have even greater focus on the core strategic initiatives that will grow our two large growth brands and return to a mid-single-digit adjusted operating margin milestone while solidifying our leadership position in the marketplace. We continue to make progress on our strategic initiatives, which underscores our confidence and our ability to adapt our business to thrive in this new and evolving environment. Our primary strategic focus has been on expanding exam capacity. In Q2 as in Q1, The stores that achieved our capacity goals produced positive comparable sales growth above our reported consolidated comp. We are laser focused on improving coverage and are making progress on this front. One example is in dark stores where there is no in-store optometrist coverage or remote exam enablement. In America's Best, dark stores were at their highest level in the second quarter of 2022 and are now at less than half that. even while we have increased our store base. We are also focused on improving coverage in our DIM stores, which are generally stores with some coverage, but well below our desired levels. The number of DIM stores can fluctuate throughout the year. We've been attacking coverage and continue to attack it through recruiting and retention efforts and deployment of our remote technology. We also continue to drive increased exam capacity through retention of existing optometrists in our network, recruitment of new optometrists to our network, and deployment of our remote medicine capabilities. We believe that the increase in flexible scheduling options that we now offer to new and existing optometrists is one of the key drivers of improved recruitment and retention levels. We're pleased that we remain on track to deliver a second consecutive year of improved retention rates as we work towards returning to retention levels at or above where they were prior to the COVID-19 pandemic. Additionally, we're pleased this year's student recruitment efforts are shaping up to be another record year. We believe the flexible scheduling options offered to graduating optometrists were a key driver of the increase in new graduates joining us. Now more than ever, new and experienced healthcare professionals want more control over their schedules, including how and when they decide to practice. Scheduling flexibility combined with other incentives is resulting in strong levels of interest by new graduates and experienced optometrists in joining the optometrist network since we launched changes to our recruitment approach and benefits earlier this year. Another driver of expanding exam capacity is the continued rollout of our remote medicine technology. Year to date, through July 1st, we deployed remote in nearly half of our 200 targeted locations, mainly in our America's Best locations, and remain on track with our rollout target this year. Notably, more than 40% of our 926 America's Best locations are now enabled with both our remote and electronic health record platforms. We're deploying remote in tandem with electronic health record technology as the two work together to drive expanded capacity, improve in-store efficiencies, and importantly, improve the patient experience. The combination of these two initiatives is resulting in added exam capacity and sales that we would not have had otherwise. and we remain on track for remote to be EBITDA profitable in 2023. Many optometrists enjoy practicing via a remote setting, which helps support both recruitment and retention efforts. While still in the early innings of our remote program, we remain confident in its ability to continue to expand exam capacity over time, thereby allowing remote optometrists to serve even more patients. As we look ahead, we are focused on carefully navigating the evolving and complex state regulatory landscape in future deployment phases. Before I conclude and turn the call over to Melissa, there are a couple of other recent highlights that I want to touch on. First, and as we mentioned in our first quarter earnings call in May, we recently undertook a study of our pricing architecture to complement the internal pricing analysis we do on a regular basis. This study was recently completed And while still early in our evaluation of the findings, we're already implementing some modest non-headline adjustments. Second, we are currently in the midst of back to school season, which is our second largest selling season after the first quarter, when health benefit plans reset and customers receive tax refunds. During back to school season, children are getting eye exams and glasses in preparation for returning to school, and we can currently see a seasonal increase in adult customers. As has been our historical practice prior to the COVID-19 pandemic, over the past several weeks, we conducted robust in-person back-to-school meetings across the country with our store teams where we listened to our customer-facing associates to ensure we're providing them with everything they need to best serve our patients and customers. We are reinforcing our focus on our field management to improve operations and thereby improve performance. As we look ahead, we remain encouraged by the progress we're making across the business with execution of our strategic initiatives. While our model is evolving, we remain focused on our mission to help people by making quality eye care and eyewear more affordable and accessible. I'll now turn the call over to Melissa for a more detailed discussion of our second quarter financial results and our outlook for the remainder of 2023. Melissa?

Thank you, Reed, and good morning, everyone. As you know, two weeks ago, along with the news that our partnership with Walmart will be ending in 2024, we announced preliminary second quarter results that were largely in line with our expectations and reaffirmed our fiscal 2023 outlook, as we previously communicated on our first quarter earnings call in May. For the second quarter, net revenue increased 3.1% compared with the prior year's quarter. The timing of unearned revenue negatively impacted revenue growth in the period by 90 basis points. We opened 21 new America's Best and three Eyeglass World stores and closed one store in the second quarter. Unit growth in our America's Best and Eyeglass World brands increased 5.1% on a combined basis over the total store base last year. And we ended the quarter with 1,381 stores. As Reid mentioned, we are still on track to open between 65 and 70 stores in 2023, consistent with our previous guidance. Adjusted comparable store sales grew 1% compared to second quarter of 2022, driven by an increase in average tickets and an increase in customer transactions supported by the continued strength in our managed care business. As a percentage of net revenue, costs applicable to revenue increased 120 basis points compared with the prior year quarter. As we expected, we continued to see deleverage of optometrist-related costs. However, this was partially mitigated by an increase in exam revenue driven by managed care strengths and pricing actions. The net impact from deleverage of optometrist-related costs and the increase in exam revenue was approximately 50 basis points and in line with our expectations. In addition, we experienced a 50 basis point headwind due to reduction in other components of service revenue, including decreased warranty plan revenue. Lastly, the remaining 20 basis point increase was associated with an increase in contact lens product costs, which was partially offset by additional pricing actions, as well as favorability with freight expense management. As a reminder, for the year, we initially expected a gross margin headwind of approximately 100 basis points balanced between higher product costs and investments in doctors. Given the mitigating actions we are taking across both product costs as well as overall service costs, we now believe it is best to look at this breakdown as a split between product costs and overall service costs, which include investment in doctors. Given our year-to-date results and expectation for the remainder of this year, we now expect the 100 basis point growth margin headwind for the full year to be skewed to service cost versus product cost. Adjusted SG&A expense as a percentage of revenue increased 140 basis points compared with the second quarter of 2022. The increase was primarily driven by higher payroll and performance-based incentive compensation as we expected and higher occupancy partially offset by other expenses. As a reminder, we expected adjusted SG&A to grow in the high single digit range in the second quarter but saw a slightly lower increase due to the timing of certain expenses that we now expect to incur in the third quarter. Depreciation and amortization expense decreased 1.3% to $24.9 million from the prior year period, primarily due to a shift in cloud-based software investments that are amortized in SG&A, partially offset by our ongoing investments in remote medicine technology and new store openings. Adjusted operating income was $16.4 million compared to $27.8 million in the prior year period. Adjusted operating margins decreased 240 basis points to 3.1%, driven primarily by the factors discussed, as well as the $3.5 million negative impact from the margin on unearned revenue in the period. Net interest expense was $1.8 million, which includes mark-to-market gains and losses on derivative instruments and changes related to amortization of debt discounts and deferred financing costs of $1.3 million. The year-over-year decline in net interest expense was primarily due to income on cash balances and higher derivative income, partially offset by higher term loan interest expense. Our effective tax rate in the second quarter was 4.7%. As we move into the second half of 2023, we continue to expect our tax rate to be more in line with our full-year guidance of 26 to 28%. Adjusted diluted EPS was $0.17 per share compared to $0.21 per share in the prior year period. Turning to our financial results for the six 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 nearly 1%. Adjusted operating margin declined 180 basis points compared to the prior year period, driven primarily by the aforementioned factors that impacted the second quarter. Our balance sheet and liquidity remained strong. During the second quarter of 2023, we successfully refinanced our term loan and revolving credit facility, extending our access to $300 million in liquidity through the revolving credit facility for an additional five years through June 13, 2028. We ended the quarter with a cash balance of $254.6 million and total liquidity of $548.3 million, including available capacity from our revolving credit facility. As of July 1, our total debt outstanding was $565.7 million And for the trailing 12 months through July 1, 2023, we ended the period with net debt to adjusted EBITDA of 1.9 times. Year to date, we generated operating cash flow of $112.2 million. In addition, for the first six months of fiscal 2023, we invested $54.1 million in capital expenditures, primarily driven by investments in new stores, our lab 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. Moving now to a discussion of our 2023 outlook. Consistent with what we communicated on July 26, With the exception of our outlook for depreciation and amortization expense, we are reaffirming our previous guidance ranges for fiscal 2023. Our revenue guidance continues to incorporate ongoing execution of our strategic initiatives focused on expanding exam capacity, as well as a range of scenarios pertaining to consumer sentiment. We believe we are well within our provided range and well positioned to deliver on the expected sales trend improvement in the back half, supported by the timing of new doctors joining and the ongoing execution of our strategic initiatives. We now expect depreciation and amortization to be in the range of $99 million to $101 million, given lower depreciation in the first half of this year the timing of capital expenditures, and the anticipated impact of the intangible asset impairment related to the Walmart exit. In addition, we expect adjusted operating income and adjusted diluted EPS to be at or above the midpoint of our guidance ranges of $48 million to $66 million and 42 cents per share to 60 cents per share, respectively. Our guidance for adjusted diluted EPS assumes approximately 79 million weighted average diluted shares outstanding. Finally, with respect to our relationship with Walmart, as Reid discussed, Walmart's contribution to our overall revenue and EBITDA has declined over time, in large part due to our efforts to grow America's Best and Eyeglass World. consistent with what we communicated two weeks ago when we announced the ending of our relationship with Walmart. For fiscal 2023, we expect the EBITDA contribution from Walmart to be lower in fiscal 2023 than fiscal 2022. We also expect to record non-cash goodwill and intangible asset impairment charges of approximately $60 million and $10 million, respectively, in the third quarter of fiscal 2023. Given the termination of our Walmart relationship, we are taking a close look at our cost structure and remain committed to making the necessary changes to align it with our go-forward operating model. We believe through the elimination of the direct and indirect costs associated with these businesses, combined with our growth in America's Best and Eyeglass World brands, we will be able to mitigate the financial impact from exiting these agreements. We expect to share more on these plans as appropriate at a later date. As we look ahead, our focus remains on operational execution, delivering further progress on our strategic initiative, and returning to mid-single-digit adjusted comparable store sales growth and mid-single-digit adjusted operating margins. Thank you for your time today. I will now turn the call over to Reid for closing remarks before we open the call to your questions. Reid?

In closing, let me summarize. Our second quarter performance was largely in line with our expectations. Where we have achieved our exam capacity goals, we've delivered positive comparable store sales growth in excess of our overall consolidated growth. Retention trends are encouraging. Recruitment trends are encouraging. And remote is expected to be EBITDA profitable this year and poised to be an ever more important part of our exam capacity. We are reiterating our full year 2023 outlook with adjusted operating income and adjusted diluted EPS to be at or above the midpoint of their respective full year guidance ranges. And we look forward to being a far simpler, faster growing company with an increased focus on our two strategic growth brands, America's Best and Eyeglass World. Thank you for your time today. We will now open the call for your questions.

Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from Kate McShane with Goldman Sachs.

Please proceed. Hi, good morning. Thanks for taking our question. I just wondered if you could provide any more detail behind the same store sales trends difference between America's Best and Eyeglass World and the performance there. Thank you, Kate.

I'm happy to do that. Yes, so America's Best was a 1.8% comp, and iGlass World was a negative 2.8% comp. I've got to tell you, it's a little bit of the same story of managing doctor coverage and GIM stores here. We've really been focusing our efforts with remote, which has been a help so far on our AB stores, on our America's Best stores. That's where we've been rolling that out and have that going. And at some point, we will turn to iGlassWorld on that front, but it's really... So much the story of capacity constraints there, but we do believe that we can continue to improve those over time.

And Kate, I just wanted to add, we did talk about dark stores in our prepared commentary this quarter. And as far as the dark stores go, this is something that we are really focused on working through with our remote enablement. But the dark stores were at their worst at second quarter of 2022 at mid-single digits, and we're less than half that amount currently. And so we'll continue to attack that through our recruiting and retention efforts as well as our remote. And I'm sorry, those numbers that I quoted were the percent of America's best fleet. Now, that is something, like I said, that we are working to attack through recruiting efforts. remote, and we'll move to the eyeglass world brand once we have established our increases with America's Best.

And finally, Kate, I think the real story here is as we have been improving the capacity in America's Best, we're seeing the comps improve. And as we said in our remarks, where we have the desired level of capacity we are able to deliver the comps in line with our historical operating model. So it's just getting back to making sure we have the exams available for all the patients who want to take advantage of them.

Thank you. Thank you. Please stand by for our next question. Our next question comes from Michael Lasser with UBS. Please go ahead.

Good morning. Thank you so much for taking our question. Reed, Patrick, Melissa, Angie, there are so many moving pieces in your model given what's happened over the last few years along with now the divestiture of the Walmart business. So it would be extremely helpful if you could help unpack whether or not National Vision can get back to the average adjusted operating income margin that it regularly achieved prior to the pandemic, which was in the 6.5% to 7% range. And if that is feasible, what are going to be the key factors and strategies that allow National Vision to get there? Is it simply just going to be a function of generating consistent same-source sales growth, leveraging expenses, especially in light of the investments that you're having to make in order to attract and retain optometrists at this point. Thank you.

Michael, I love your question, and there are a few moving pieces really brought on by the post-COVID marketplace and those Those moving pieces are affecting the optical category in general. Again, what I like to remind you is where we are able to execute our model, where we have capacity, we are driving the comps in line with our historical model. We do believe that mid-single-digit adjusted operating income margin is our next milestone, and we've been talking about how we will get back to that and hope to be back there certainly in 2025 and start seeing that in late 2020. 2024. I'll say the elimination of the Walmart part of our business, you know, that was pulling down our margins. So that alone is going to help with that. And we see that expansions in capacity are a key driver in helping us to get there, but also the digitization of our stores, further digitization of our corporate businesses. office, more leveraging of omni-channel capabilities, as well as more sorts as we take advantage of our white space opportunity. I'll add, Michael, that since you've been following us so long, at this time last year, I'd say we were sort of feeling more back-footed by a lot of changes that were affecting us and coming our way and sort of coming to understand to the full extent what was happening both to our consumer in the rising inflation environment and to the doctor capacity within the marketplace also. We are feeling far more front-footed now with the programs we've put in place, especially flexibility, in terms of driving increased and improved retention. And frankly, we think our retention will be at maybe the best year post the best year post-COVID, and, you know, record recruitment of students and the like. And we're encouraged with the start of the third quarter. We, you know, it's a back-to-school season, and back-to-school season does evolve across the country. So, you know, it starts more in the southeast and then goes north and then across the country. But where it has started, we are encouraged by the initial trends we are seeing there.

Okay. My follow-up question is that it's clear the purchase cycle for new eyewear had been disrupted over the last couple of years, given all that's going on. And now, as you mentioned, you're on front footing, more firmer footing. And is what you're seeing a sign that there's return to normalization of the optical purchase cycle? Or is it more of a sign that National Vision is gaining or retracing some of the share that it might have lost over the last years as it was contending with some of the constraints it was dealing with.

I think it's a sign of our improved capacity allowing us to offer patients the exams they want to get from us. We have not yet seen a normalization in the purchase cycle. It could start to happen in the second half, but we are not planning for that. It could start to happen in the second half since it's been about two years since that big boom of optical purchases for us and others that came about when the government gave out so much money to our customers. So it's been about two years. So there is a logic that that could happen, but we are not planning for that in our guidance. We are planning that the improved capacity is going to be helping us in the second half. We believe our market share is flat to up and maybe more up in the managed care segment.

Okay. Thank you very much, and good luck.

Thank you, Michael.

Thank you. Please stand by for our next question. Our next question comes from Anthony Chicumba with Loop Capital Markets. Please proceed.

Good morning. Thanks for taking my question and for all the helpful information that you shared so far this morning. I guess my question was on dark stores and dim stores. I just want to make sure I have this correct. So a dark store is not offering any eye exams, and a DIMM store is offering some, but not at, you know, sort of 100% capacity. Is that the right way to think about that?

Yes. At DART, we do not have a doctor, and we do not have remote. So, yes, we can't get an eye exam there. And a DIMM store has maybe a day, maybe a couple of days, but not at our desired level.

Got it. And so I think it's pretty safe to say that your dark stores and your dim stores are doing comps that are significantly lower than company average. Is that a fair assessment?

Yes, for sure. And especially those dark sales, they are quite a drag. And, again, the fact that we've cut the dark stores in half as a percentage of our fleet since the lows about this time last year, we're pretty proud of that. We think that shows nice progress, and also remote is helping, too, ever more exams in the remote-enabled stores. But, yeah, and the converse of what you said, Anthony, is where we're able to deliver our Our model, where we are able to offer the eye exams, the cops are doing what they were doing historically prior to COVID. And that's encouraging, too. What it says is, hey, deliver the model and the patients show up for you like they used to.

Got it. And just one last question. I don't want to bogart the Q&A session here, but okay. When you say mitigate the financial impact of losing the Walmart partnership, are you talking about fully mitigating that impact? Like literally getting a recapture of the $19 million of EBITDA? Is that the way to think about it? Or is it like sort of partially mitigating that?

Hey, Anthony, it's Melissa. When we're talking about mitigating the impact of Walmart, we do understand that there is a profit hole to fill. And so we're going to mitigate that through two avenues. First being the continued increase in store count as we expand our America's Best and EGW fleet. And the other portion of that will be through cost reductions related to the Walmart exit. There's both indirect costs associated with that and direct costs associated with that that we'll be taking out of our business. In addition, we're committed to right-sizing the structure of our go-forward model to the new operating model that we have, which is a less complex operating model now that we'll be exiting the Walmart relationship.

Very helpful. Thank you.

Thank you. Please stand by for our next question. Our next question comes from Zachary Fadden with Wells Fargo. Please go ahead.

Thanks so much for taking my question. This is Sam Reed, pitch hitting for Zach here. I wanted to touch on your ongoing relationship with Ethel or Luxottica. How does the Walmart contract change or the change in Walmart contract impact this, if at all? And is there a risk that the reduction in your volumes post the Walmart exit could be a headwind to this relationship? Thanks so much.

I think we have a very strong long-term relationship with Essilor and Lexotica, and we have long-term contracts in place. On the LEND side, we talked about last year how that's a fixed price, so the length of the contract there. And we are still, even without Walmart, we are one of the top couple largest optical chains in America. And so we're still a big customer and a big partner. But that relationship goes back a long way. And a lot of it is contractual. And we are not anticipating any significant change in that.

No, thanks, Reed. That's super helpful. And then one quick follow-up, if I could. Can you walk us through some of the non-headline price actions you've taken thus far in a bit more detail? It doesn't sound like they've really impacted transactions, so are there any specific areas where you might have additional runway in 2H and beyond? Thanks.

Yep. Go ahead.

Go ahead.

Hi, Sam. It's Melissa. So we have taken price actions where we have been able to increase that weren't originally contemplated in our guidance. As we have seen continued cost increases, we evaluate the price increases to follow that. Now, some of the things that we've been able to look at for this year specifically are private label contact lenses, for example, and some ancillary exam add-ons. Those are two of the major areas that we've been able to contemplate and increase additional price actions.

Really helpful. Thanks so much.

Thank you. Please stand by for our next question. Our next question comes from Brian Tinkwilt with Jefferies. Thank you.

Hey, good morning, guys. I guess just to follow up on some of the Walmart questions, in your prepared remarks, you alluded to maybe some cost adjustments that you're contemplating. Just curious what those are and the timing and the magnitude of you know, cost opportunities that you think you can realize over the next, you know, 12 to 24 months.

Hi, Brian. It's Melissa. With the Walmart information that we've put out, we are ending the Walmart relationship with the stores in February of 24 and with the distribution contract in June of 24. we are assessing and evaluating our opportunities to exit those cost structures at the same time that we'll be exiting the revenue stream. So we're going to marry those up as closely as possible. That's what our planning is working on. And the costs that will come out of the business are, of course, any direct costs related to supporting those relationships. And in addition, with a corporate structure, you have Back office costs, you have overhead related to things. In the last discussion, we said, you know, like insurance, things like that. Those are types of indirect costs tied to the Walmart relationship and the distribution relationship that would look different in the go-forward models than they do today.

Got it. Okay. Thank you for that. And then in your prepared remarks, you also alluded to the fact that you rolled out virtual to about half of the Target stores. Anything you can share with us in terms of the performance that you're seeing or the ramp that you're seeing as some of these rollouts mature? I think for some of them, you're probably not quite a year, but close to a year out now. So just curious what you're seeing.

Sure. We're very encouraged by what remote is doing for us. Reid mentioned earlier in the dark and dim conversation where it's been kind of a game changer, even from a new store rollout perspective this year. You know, we've even opened some new stores where we haven't found an in-lane doctor yet with a remote doctor. So, you know, I look back on our decision to start pursuing remote three years ago and really happy with that timing because it's playing a pretty big role. You're right, we've rolled this out to other, to about 40% of our AV brand now. We're higher than that. We're going to have 500 of the AVs equipped by the end of the year this year. We're evaluating our 2024 claims now, but we expect to continue to be rolling this out to a vast majority of our ABs over time. And I think more recently, we've started testing it more surgically in EGW, where I think it can be a benefit there as well. So we're on track with remote. And then finally, I would say our wording has been we expect it to be profitable this year, and there couldn't be higher confidence around that.

Awesome. Thank you.

Thank you for your question. Please stand by for our next question. Our next question comes from Adrian Yee with Barclays. Please go ahead.

Good morning, everyone. This is Michael Buon for Adrian, and thank you very much for taking our question. So, I wanted to start off with a more broad question. I know that you mentioned that you saw higher average ticket and an increase in customer transactions. Would you please share some additional color around why you're seeing consumers buying higher ticket? Is this maybe a trivial to the new store openings and the additional capacity? Or are you also seeing any kind of trade down effects?

Hi, Michael. It's Melissa. So there are a couple of factors tied to the higher ticket. The first and foremost being the managed care strength that we're seeing. Managed care customers tend to have a higher ticket. Amy Nunez- than the non managed care customers just based on you know spending somebody else's money versus spending your own money. Amy Nunez- In addition to that, we have seen a continued trade down from the income levels of you know higher than $100,000. Amy Nunez- And with both of those factors combined that's what's driving the higher ticket we provide value to many customers and. with the continued managed care strength where we believe that they come to see our stores because they get more value for their benefits in our stores.

Perfect. Thank you very much.

And as a follow-up to that, I know that you just mentioned the higher household income. And as we were like starting to shortly see the repayment of student loans, I was just wondering whether or not that's going to be positive or creative related to an increase in customer transactions and the overall business? Or are you more seeing that as a headwind? And what kind of assumptions are you making related to that, if any, at all since, you know, you were just mentioning the $100K to $125K range?

So, related to the student loans, while there may be a broader consumer sentiment implication, We do expect that with the higher income bands, we'll likely see some additional trade down into our brands because of the value that these consumers can get at shopping at one of our stores. Now, our target customer, our data shows us that a smaller portion of our target consumer has student loan debt.

Oh, okay. Awesome. Thank you very much. I appreciate you for answering our questions, and I'll pass it along.

Thank you for your question. Please stand by for our final question. Our final question comes from Dylan Cardin with William Blair. Please proceed.

Thank you. I'm just curious if you might be willing to express explicitly of the data you provided on the Walmart business. It's accretive from an EBIT net income standpoint. And is the idea here that through indirect cost reductions, ultimately you'll be able to mitigate kind of the margin implications of losing that business next year.

Hi, Dylan. It's Melissa. Yes, you are correct that Walmart is accretive at the EBIT level. It will take some time to fill that profit hole. However, that has been a declining portion of our business over the past couple of decades as we've grown our America's Best and Eyeglass World brands. And we continue to expand our fleet. So that is a factor in the growth. In addition, the Walmart business has lower margins than what our growth brands have. So through cost reductions, in addition to new store openings, we'll continue to fill that profit hole. If we weren't in an intensive investment cycle on our growth brands, you wouldn't have seen as much of an accretive margin, or I'm sorry, an accretive profit hole that we needed to fill because you would have seen more of the margin drop down to the bottom line based on our growth brands. But our investment cycle is a factor in that currently.

So if you were to dial it back to 18, 19 pre-pandemic, you would see the Walmart business be dilutive on the EBIT line? Is that what you're saying?

I'm not saying you would see it be dilutive on the EBIT level. You would just see it as a lower portion of our overall profit.

Okay. And then with the doctors that are coming out of the Walmart stores, stores and stores, can you kind of speak to the capacity for you to retain those doctors, maybe deploy them across the fleet? Any comments there about what that might actually do from a capacity standpoint?

Yes. Our contract has a transition period where various groups are able to talk to the doctors there. It's sort of a complex thing because it relates to sort of state by state, location by location, doctor model by doctor model, but doctors are going to be making a variety of choices based on the state.

So it's not sort of an immediate windfall, I guess we should... back away from thinking that it might be from a capacity utilization.

Yeah, I don't think we should think of it as an immediate windfall. You know, you've got to have a store nearby, a doctor who wants to shift over, a similar model piece. So I wouldn't say it's an immediate windfall, but it will be, yeah, doctors will be making various decisions.

Great. And then last question on the pricing, the reviews over, you've kind of taken some action here on the periphery. It sounds like there still might be some more that you can do kind of going into the back part of this year into next year. Is that right? And how should we sort of think about, you know, I know that's just a big focus of a lot of investors here, your capacity to kind of close the gap, if you would. Can you just kind of speak to what to expect in the coming quarters on the pricing, specifically your pricing?

And by the way, periphery makes it sound a little smaller. You know, we're thinking non-headline price. The terms mean the same thing. But, yeah, we believe that more pricing actions will come into play in the second half of the year. We're very vigilant about pricing. We mentioned this study that's causing us to ask a lot of other questions, too. So we think there is more – a juice in the pricing lever going forward.

Very good.

Thank you, guys. Thank you.

Thank you. At this time, I would now like to turn the conference back to Reed for closing remarks.

Thank you all for joining us today. We appreciate your interest and support, and we look forward to speaking to you next on our Q3 earnings call. Thank you all very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.