National Vision Holdings, Inc.

good day and thank you for standing by welcome to the third quarter 2023 national visions holdings earnings conference call at this time all participants are in a listen-only mode after the speaker's presentation it will be a question and answer session to ask a question during session you need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star one one again please be advised that today's conference is being recorded I would now like to hand the conference over to speaker today, Caitlin Churchill, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to National Vision's third 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 accompanying our call are are both available in the Investors section of our website, nationalvision.com. A replay of the audio webcast will be archived in the Investors section after the call. Before we begin, let me remind you that our earnings materials and today's presentation include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 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, Caitlin. Good morning, everyone. Thank you all for joining us today. This morning, we will begin with a review of highlights from our third quarter, including ongoing progress on our strategic initiatives. We will then provide an update on the upcoming end of our Walmart partnership, as well as our plans to position National Vision for long-term profitable growth as we look ahead to operating a more streamlined and less complex business model. Then, Melissa will review our third quarter financial results and updated outlook in more detail. Turning to our results, we are pleased with our third quarter performance, which reflected ongoing strength from our managed care business and was supported by the continued progress we were making with expanding eye exam capacity particularly within America's Best. For the quarter, we delivered net revenue growth of 6.6%, including comparable store sales growth of 4.3%, and we delivered adjusted diluted EPS of 15 cents. We saw strength, particularly in America's Best, which was partially offset by softness in our eyeglass world business. While we've continued to contend with an exam capacity constraint across both our growth brands, our initiatives to date have been predominantly focused on our largest brand, America's Best. Given the improvement we've seen in our America's Best locations, we are applying and incorporating the learnings from that playbook to improve our eyeglass world performance. As we discussed on our last earnings call, we were encouraged with the early trends we were seeing with the back-to-school season, and we're pleased to see that performance continued through the period. In addition, we continue to see strength from our managed care business which is one indicator of the trade-down behavior that is occurring with many customers as we continue to navigate a dynamic macro environment. As I mentioned, the quarter also benefited from ongoing progress on our strategic initiatives, particularly focused in our America's Best business. We have continued to see improvement with stores that do not have optimal coverage, which we refer to as dark and dim locations, to expanding exam capacity from our recruiting, retention, and remote initiatives. we are pleased to continue to see much lower levels of dark stores compared to the peak we saw last year and are seeing slower but steady progress addressing our dim stores as well. As a reminder, we define dark stores as locations that do not have doctor coverage and dim stores as those locations that have less than three days of doctor coverage. We remain focused on executing our initiatives to continue to drive improvement across our fleet. And as I discussed last quarter, where we have the desired level of capacity, stores are delivering comps more in line with our historical operating model. We remain on track to deliver a second year of record recruiting and have contracted more new graduates this year than in any previous year. In addition, we continue to expect to deliver improved retention rates this year. These trends are driven in part by the schedule flexibility options that have been made available to the doctors. Our remote initiative is also helping us to expand exam capacity and has been a major factor in improving dark and dim store performance, enabling a double-digit productivity lift in sales. As of the end of Q3, more than half of our America's Best locations have been enabled with remote exam capabilities and electronic healthcare records, reflecting the progress we've made through the initial heavy implementation phase over the past two years. We remain on track to roll remote capabilities out to at least 200 stores this year, and as we look ahead, given the work done to date, as well as the evolving state regulatory landscape, we expect the pace of our implementation of remote to slow in 2024. We continue to believe in the opportunity there is for remote exam capabilities across our stores, and we'll continue to monitor the regulatory landscape and assess our plans accordingly. With respect to our EHR rollout, we remain on pace to have EHR installed at all America's best locations by the end of 2024. Turning next to our digitization plans for our corporate office, we have begun to implement the first phase of our ERP project focused on finance system upgrades. We are taking a measured approach to this project and plan to evaluate each phase appropriately to mitigate risk and maintain our focus on disciplined capital allocation. Finally, With respect to our white space opportunity, we remain on track to open 65 to 70 new stores this year and opened 21 new stores in the third quarter. Now let me provide an update on our transition plans with the pending end of our Walmart partnership beginning early next year. We are committed to ensuring the continuity of our Walmart business through the end of our contracts and actions have been taken to support the retention of the associates and doctors during this time. I'm very appreciative of how our teams have continued to operate with discipline and focus on customer care amidst this transition. As we've previously discussed, the Walmart business has continued to become a smaller piece of our overall performance over the last decade and carries a much lower margin than our larger growth brands. Moving beyond the termination dates of the contracts, we will operate a far more streamlined and less complex model. As detailed in our press release this morning, In conjunction with the termination of our Walmart partnership, we will be winding down our remaining AC Lens operations. In doing so, we will be closing our Ohio Distribution Center, which largely supports the wholesale distribution and e-commerce contact lens services that we provide to Walmart and Sam's Club. While this is a difficult decision, it is a prudent one for our organization. We are continuing to work with Walmart on the transition of the Vision Center Associates and ODs, and currently expect approximately 7% of our total associate headcount to be impacted by this decision and termination of the Walmart partnership, the vast majority of whom will be Walmart Vision Center and AC Lens roles. In addition, given the changes in our go-forward operating model, we have conducted a comprehensive review of our cost structure and will be implementing expense savings initiatives focused on streamlining corporate overhead as well as reducing travel expenses and third-party spend. We believe these decisions, combined with benefits from our pricing actions we plan to take on the heels of the pricing study completed earlier this year, will more than offset the profitability gap created by the termination of the Walmart partnership. Through this work and our ongoing execution of our strategic initiatives focused on driving revenue and enhancing performance in our two strategic growth brands, we are well positioned to deliver operating margin expansion and thus drive increased shareholder value. Melissa will discuss details of these actions and anticipated financial impact in a moment. In closing, we remain committed to our mission of making quality eye care and eyewear more affordable and accessible. While we continue to maintain a conservative approach to our outlook, given the ongoing challenging macro environment that has continued to pressure our core uninsured customer, we remain on track to deliver on our objectives for this year as reflected in the narrowing of our guidance. I will now turn it over to Melissa.

Thank you, Reed, and good morning, everyone. As Reed discussed, we are pleased with our third quarter performance and the ongoing progress we are making on our strategic initiative. For the third quarter, net revenue increased 6.6% compared to the prior year, driven by adjusted comparable store sales growth and growth from new store sales. The timing of unearned revenue negatively impacted revenue in the period by 30 basis points. We opened 17 new American's Best and four Eyeglass World stores in the third quarter. Unit growth in our American's Best and Eyeglass World brands increased 5.3% on a combined basis over the total store base last year, and we ended the quarter with 1,402 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 4.3% compared to the third quarter of 2022, driven by an increase in customer transactions into a lesser degree and increase in average tickets. As Reid mentioned, we saw strength, particularly in America's Best, which was partially offset by softness in our eyeglass world business. As Reid discussed, our initiatives continue to address our dark and dim store population. While we have always contended with dark and dim stores, however, the combination of post-COVID doctor availability issues and a more challenged lower-end consumer has exacerbated the impact from dark and dim on our revenue performance. On average, a dark store is approximately 80% less productive than a store with full coverage, which we define as having five to six days of in-store doctor coverage. A dim store, on average, is approximately 50% less productive than a store with full coverage. By enabling remote, we have significantly improved this productivity drag, and while there is still more progress to be made, we are making nice headway with dark and dim stores. As a percentage of net revenue, costs applicable to revenue increased 70 basis points compared with the prior year quarter, driven primarily by the deleverage of optometrist-related costs, as well as other components of service revenue, including warranty plan revenue. These costs were partially offset by ongoing strength in exam revenue and a decrease in product costs attributable to higher eyeglass margins and decreased freight expenses. As we discussed last quarter, the pricing actions taken with respect to exams have helped to partially mitigate the increase in optometrist-related costs. For the quarter, the net impact from deleverage of optometrist-related costs and the increase in exam revenue was approximately 50 basis points. Adjusted SG&A expense as a percentage of revenue increased 90 basis points compared with the third quarter of 2022. The increase in adjusted SG&A as a percentage of net revenue was primarily driven by performance-based incentive compensation as we expected. Depreciation and amortization expense was $24.4 million compared to $24.9 million in the prior year period. Adjusted operating income was $15.7 million compared to $21.5 million in the prior year period. adjusted operating margin decreased 130 basis points to 3% due primarily to the same factors I just reviewed. Net interest expense was $3.7 million, which includes mark-to-market gains and losses on derivative instruments and changes related to amortization of debt discounts and deferred financing costs of $3.5 million. The year-over-year change was primarily a result of lower derivative income and higher interest expense on our term loan, partially offset by higher income on cash balances. Our effective tax rate in third quarter was 5.8%. Primarily due to legacy segment impairment losses, we expect our tax rate on ordinary income items to be in line with our original guidance. Adjusted diluted EPS was 15 cents per share compared to 15 cents per share in the prior year period. Turning to our financial results for the nine month state as compared with the prior year period. Net revenue increased approximately 5% driven by new stores and adjusted comparable store sales growth of 2%. Adjusted operating margin declined 180 basis points compared to the prior year period, driven primarily by the same factors I just reviewed, which impacted the third quarter. Please note our adjusted results for the third quarter and nine-month year-to-date period exclude the impacts associated with one-time charges related to the termination of our Walmart partnership, including $2 million in retention bonuses and termination benefits for certain employees, supporting the Walmart Vision Centers and the AC Lens Distribution Center, and $79.4 million of non-cash impairment charges related to impairment of goodwill, intangible assets, and fixed assets. Turning next to our balance sheet, we ended the quarter with a cash balance of approximately $266 million and total liquidity of $559 million. including available capacity from our revolving credit facility. As of September 30th, our total debt outstanding was $563 million, and for the trailing 12 months, we ended the period with net debt to adjusted EBITDA of 1.9 times. Year to date, we generated operating cash flow of $153 million. In addition, the first nine months of fiscal 2023, we invested $82 million in capital expenditures, primarily driven by investments in new stores, our labs and distribution center, and our remote medicine technology. We remain on track for capital expenditures to be in the range of $115 million to $120 million in 2023 to support our key growth initiatives. Our balance sheet and liquidity remain strong, enabling our robust and disciplined capital allocation plan, which is designed for continued growth, balanced with opportunistically returning capital to our shareholders. Earlier this summer, we refinanced our term loan A and extended our revolving credit facility, and we are continuing to evaluate options with respect to our convertible notes, which mature in May of 2025. Given the current environment and our focus on continuing to fortify our balance sheet, our share repurchase activity to date was focused on the first quarter of this year. And as of the end of Q3, we have $25 million of share repurchase authorization remaining. We will continue to deploy capital to ensure we are making prudent decisions that are financially responsible for the company. Moving now to the discussion of our 2023 outlook. Year to date, we remain on track with our expectations for this year. And as we move into the fourth quarter, our seasonally lowest quarter from a profitability perspective, we are narrowing our full year guidance range. We now expect revenue to be in the range of $2.115 billion to $2.125 billion. supported by adjusted comparable store sales growth of approximately 2% for fiscal 2023. Our revenue guidance incorporates ongoing execution of our strategic initiatives focused on expanding exam capacity and contemplates current business trends. We continue to expect depreciation and amortization to be in the range of $99 million to $101 million. We expect adjusted operating income and adjusted diluted EPS to be in the range of $60 million to $65 million and 53 cents to 58 cents per share respectively. Our guidance for adjusted diluted EPS assumes approximately 78 million weighted average diluted shares outstanding. As a reminder, Our adjusted results, as well as our outlook, exclude the one-time charges related to the termination of our Walmart partnership I reviewed, as well as the expected costs associated with the first phase of our ERP implementation. Regarding our ERP project, as Reid noted, we are taking a disciplined and phased approach. The first phase, which kicked off late in third quarter, will focus primarily on finance system upgrades. and is expected to be substantially complete in 2024. We expect to incur one-time expenses associated with the first phase of this project to be between $11 million and $13 million, of which we expect to incur between $2 million and $3 million in fiscal 2023. Now, let me provide an update on the work underway as we plan for the upcoming termination of our Walmart partnership. As we previously announced, as of February 23, 2024, we will transition the operations of the 229 vision centers, as well as the related optometric services for Walmart in California to Walmart. And as of June 30, 2024, we will cease the wholesale distribution and e-commerce contact lens services that we provide to Walmart and Sam's Club through our AC Lens business and will wind down the remaining AC Lens operations. For fiscal 2023, we expect our Walmart store operations and the wholesale distribution and related services to Walmart and Sam's Club included in our corporate other segments to account for approximately $355 million of revenue. The remaining portion of our AC Lens operations, which generate approximately $45 million in sales and is immaterial from an earnings perspective, will be wound down in conjunction with the overall Walmart and Sam's Club exit. Combined, the Walmart store operations and the AC LEND operations are expected to generate approximately $400 million in revenue and earnings before income tax of approximately $15 million. The annualized direct and indirect costs associated with these operations for fiscal 2023 are expected to be approximately $385 million. We expect costs associated with these operations including our Ohio distribution center, to be wound down in conjunction with the contract termination date. While we expect to provide our full 2024 outlook as part of our year-end earnings call in 2024, due to the Walmart contract's staggered end date in 2024, we want to provide some additional details now to help with modeling. Using 2023 as our guide, we expect revenue related to the vision center operations and the AC lens operations in fiscal 2024 to range between $140 million to $150 million, with a margin profile similar to 2023, assuming no material degradation in the Walmart operations. As we look ahead with an enhanced focus on our largest growth brands, We are taking actions that will further optimize our cost structure and position us to advance our long-term strategy and strengthen our competitive position. As Reid noted, beginning in 2024, we will be implementing an expense reduction program targeting annualized savings of $10 million to $12 million, focused on streamlining corporate overhead as well as reducing travel expenses and third-party spend. As Reid noted, we are also planning to take additional non-headline pricing actions, which we believe will continue to enable us to deliver on our mission to provide affordable eye care and eyewear while maintaining a competitive position in the marketplace and leveraging our costs more effectively. We expect the combined impact of the non-headline pricing increases and the cost savings program to more than offset the profitability gap created by the termination of the Walmart partnership. We believe these actions, combined with growth margin tailwinds from the exit of the lower margin Walmart operations and the ongoing progress of our strategic initiatives, including the completion of the large initial implementation phase of our remote and EHR capabilities, position us well to return to mid-single digit adjusted comparable store sales growth and operating margins by fiscal 2025. In summary, we are pleased with ongoing progress in expanding exam capacity and expect to continue to build on this momentum as we move forward with an even greater focus on our strategic growth brand. We believe the actions we have announced today will further support our plans to drive long-term success and shareholder value. Thank you for your time today. I will now turn the call over to Reed for closing remarks before we open the call for your questions. Reed?

Thank you, Melissa. To summarize, we're pleased with our third quarter results and the ongoing improvement we are making regarding the strategic initiatives we've put in place this year, particularly with expanding exam capacity. While we continue to navigate an ever-changing macro environment, we remain focused on the aspects of the business we can control. With respect to profitability, we are taking actions to mitigate the impact of the termination of the Walmart partnership and streamlining our organization to align with our go-forward operating model. As we look ahead, I am confident that we will continue to build on the progress we have made throughout this year, positioning us well to deliver on our long-term objectives. Now we'll open it up for questions.

And 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. One moment for our first question. Our first question will come from the line of Anthony Chukumba from Loop Capital Markets. Your line is open.

Good morning. Thank you so much for taking my question. Congrats on the strong results. You know, I found the cost savings opportunities interesting. I'd have to imagine you're going to save a ton of money just not having Reed having to fly to Bentonville all the time. So there's that. So, but seriously, so my first question, you know, you've talked in the past about, you know, the comp differential between, you know, managed vision care versus out-of-pocket. was just wondering if you can just give any commentary, particularly on the out-of-pocket and whether you're seeing any improvement in the comp trend there.

Yeah, so as you pointed out there, our managed care business has been really great year to date. Our managed care penetration started strong and just has strengthened throughout the year. You know, the great thing about our managed care business is that that it's not our customers' money, so that's good. And also, I think the managed care customers have realized that their money goes further with us than it does otherwise.

Got it. And then, you know, you've talked in the past, you know, sort of anecdotally about, you know, seeing better cars in the parking lot is, you know, evidence of the trade down impact. And it sounds like you got some impact from that. I mean, is that sequentially getting better? I'm just trying to think about, you know, the sequential comp acceleration, how much of that was, you know, remote eye exams versus, you know, normalization of purchase patterns versus like trade down. So how should we kind of think about that?

Yes, so trade down continues, and we're seeing a greater percent of our customers coming from over $100,000 households, and managed care is part of that, but some relates to non-managed care as well.

Got it. That's helpful. Keep up the good work. Thanks.

Good. Thank you, Anthony. And yes, I will be saving money by not going to Bentonville. That was very good.

Thank you. One moment for our next question. Our next question comes from Michael Lasser from UBS. Your line is open.

Good morning. Thank you so much for taking my question. Your expectation that you can get to a mid-single-digit operating margin by 2025, can you give us a bridge on the components that are going to drive that? And as part of it, how much is going to be driven by pricing? What are you finding about your ability to pass through additional price increases without disrupting the value proposition to your customer?

I'll take the pricing side of that first, Michael. So, you know, we've been taking some peripheral pricing action throughout the year, non-headline pricing action, and I think we mentioned two calls ago that we were doing a deeper dive study. We're always monitoring price scores, but that we're doing a deeper dive study in our pricing architecture relative to competition. And based on that, we have some programs that we're going to be putting in place at the very end of this year that, as Melissa said, we think are going to play a nice role in improving our margins next year.

Hey, Michael. It's Melissa. So we're expecting that we will have some benefit in into 2025 as we complete the remote implementation phase. We spoke about that earlier in the year. And with that, we'll save on some rollout expenses. We'll expect to see some gross margin improvements as we move past the Walmart lower margin business and the AC Lens distribution lower margin business. With that, we'll see some operating margin benefit as we roll into 2025.

And Michael, can I just follow up on one other thing relative to the pricing side of that? We are putting in the pricing actions that we referred to. I think ever since we met, you've heard us say that we like to grow by transaction count more than than by average sale, and we're very pleased that Q3 showed a positive comp transaction for the quarter. And that's the way we like to grow. That was the primary focus of the growth in the quarter.

Without a doubt, Reed, and with that being said, your implied fourth quarter guidance does suggest that your comp is going to slow. So, A, is that what you've seen already thus far this year? order, and B, why do you think it would be slower?

Yeah, so Michael, we do expect some deep acceleration in the implied Q4 comp, and we believe that's prudent given the uncertain environment. We have factored in the current trends that we're seeing in the business, and something to keep in mind is that our comp has always factored in two key drivers. first being the health of the consumer and second being the success that we have as we expand exam capacity. We are gaining traction with respect to that and controlling the factors of the business that we can control. We're pleased with the performance to date and expect to have positive comps in 4Q and full year.

Thank you very much and good luck. Thank you. Thank you. One moment for our next question. Our next question comes from Zach Fathom from Wells Fargo. Your line is open.

Hey, good morning. So when you look at your 4% comp in the quarter and nearly 6% at America's Best, could you parse out the comp impact from fully staffed stores relative to the drag of understaffed and dark stores? And then maybe talk about how these metrics, each of them have been tracking throughout the course of the year.

Yeah, sure, Zach. So, related to the dark and dense stores, that number can fluctuate greatly throughout the year and year to year. So, it's difficult to tie a specific comp because you're not looking at the same store. Now, with that, what we have said is that we do expect to see or we have seen that we have comps more in line with our historical performance when it's staffed at the capacity that we desire. When we're thinking about the total sales productivity, we can talk about that from the perspective of the dark and dim impact on overall revenue. So with the dark stores, that has a productivity drag of about 80% compared to a fully staffed store. And a dim store has about a 50% drag as compared to a fully staffed store. And with this, we have continued to expand our strategic initiatives in recruiting, retention, and remote. And remote is something that can help the dark and dim situation quite significantly, and that has become a factor in stores that we are looking to open. As we expand our fleet, we think about whether or not a remote state will allow us to implement remote as we're moving in there when we think about our recruiting initiatives. So overall, remote can help, and it continues to have a positive impact as we drive forward on dark and dim.

I'm going to try to ask that a little bit differently. What is your comp for fully staffed stores?

We haven't spoken specifically to comp on our fully staffed stores. What we did talk about is that we have our dark stores that were a percentage of our fleet at their highest of America's best. at mid-single-digit number of stores, and we're now low single-digit number of dark stores. So we haven't spoken specifically to comp on fully staffed versus not staffed.

But I believe I said in my comments, though, where we have the capacity, the stores are delivering comps in line with historical norms. So we aren't giving a specific number, but it is in line with historical norms. Gotcha. Where we can execute our model, it works great.

Appreciate that, Reid. And then just, it looks like the spread between America's Best and Eyeglass World has widened over the past couple of quarters. And with your initiatives largely focused on America's Best, just curious if you could talk about the state of Eyeglass World as a concept strategically and whether you still expect Eyeglass World to be an accelerating unit growth driver in the years ahead and how those returns compare to A.B.? ?

Zach, you got it 100% right. We have been focusing our, so the challenge is primarily the same. It's primarily a coverage-related challenge. We've been implementing our key programs in America's Best First because it's bigger, right? And now we are turning our attention, as we've been getting the nice success there, to taking that same playbook and applying it to iGlass World. So, yes, it is a similar challenge. We just focused on America's Best First, but we're putting the playbook in place now with iGlass World.

Got it. Thanks for the time.

Thank you. One moment for our next question.

Our next question comes from the line of Paul Lejway from Citi. Your line is open.

Hey, everyone. This is Brandon for Paul. Just want to follow up on that. You mentioned how many stores at America's Best are dark or dim. You know, could you unpack that for what that looks like at Eyeglass World versus What's kind of a normal level?

We haven't shared that. We might share that in the future. We just haven't broken that out yet.

Yeah, Brandon, we specifically spoke about the American's Best fleet because that's the larger fleet, and we wanted to quantify what that was doing to the business overall. As we thought about the dark stores, we talked specifically about the improvement that we've made related to hiring retention and remote rollout. And we'll look to apply that learning and playbook to our eyeglass world stores.

Gotcha. I was wondering, you know, if we could dive in a little bit into margin impact in the first half of 24. You know, I believe that, you know, the contact business had increased costs that, you know, is impacting the back half of this year. So, you know, can we expect a similar headwind in the first half of next year? And then just the timing of the AC lens business rolling off, which I believe is a lower margin business than your Walmart stores. So, you know, should we see incremental pressure in the first half of next year and then, you know, as that rolls off?

things improve from there yeah so we'll uh we'll talk more specifically about 24 as we release our year-end guidance but what we did put out related to ac lens and walmart we did want to quantify what the impact of that roll-off would be because of the staggered end date so we we put out that the expected revenue would be between 140 and 150 million with a similar profit profile to what you're seeing in 2023. We do expect that we'll continue to have, as we go into fourth quarter, the gross margin headwinds and tailwinds that we've spoken about previously. The quarter and the year has played out largely as we have expected. We have had doctor cost headwinds offset by exam pricing benefits and expanded exam capacity. In addition, we have seen some product favorability from freight expense as well as some additional product favorability.

Got it. I appreciate it. Good luck.

Thank you. One moment for our next question. And our next question will come from Adrian Yee from Barclays.

Your line is open.

Great. Thank you so much. Good morning. Reid, happy to hear the progress on the remote exam. But I think what would be super helpful, at least for me, would be sort of more the long-range plan. So definitely you're making progress kind of quarter by quarter. But maybe on a three-year basis, because you talked about the pace of remote implementation possibly slowing. I think I heard that correctly next year. It just seems like such... I'm not going to say low-hanging fruit, but it seems like it's such an impactful when you get the coverage on the exam. I guess I'll ask it. Can you share with us your sort of base case kind of status quo if you kind of do it as planned? And then maybe I'm sure you have an upside sort of accelerated big goal over that same time horizon. Does that require you just to go faster with what you're doing, or are there disruptive technologies that you can implement? I know it's a very long-winded question, but it just seems like there's so much opportunity over the one, two, and three-year horizon to get to that 5% and higher. So if you can speak to that, and then I have a follow-up from Melissa. Thank you.

Good, Adrian. And first, I'm going to turn it over to Patrick, who's the captain of our remote initiative here. But I just want to, it was a little hard to hear you, so I'm going to just serve it up. So it's understanding the expansion game plan. Adrian agrees that it's a huge opportunity. I think there was a little bit of a why not go faster aspect to the question. So Patrick, could you handle that?

Yeah, Adrian, I'll follow up your long-winded question with a long-winded answer. No, I do want to unpack that a little bit. I'm glad you asked that question. And just, you know, as a precursor, great results out of remote. We're seeing it as a win for doctors, patients, store teams. It's driving incremental sales, incremental comps, incremental profitability. As a side note, we will be EBITDA profitable this year, as expected after being diluted last year. Melissa talked about the benefits of remote for dark and dim. I won't recover that, but that's a big factor. We're on track to set up another 200 this year, taking us to 500. And really, this kind of brings the first big initial phase to a close. We still have future phases, but there's really a couple of things there. A, we have now equipped two-thirds of the states where we operate America's Fast. While there is opportunity remaining in some other states, and there are a couple of larger states out there that we look forward to hopefully equipping one day, we are at critical mass now. Remote has become a really big factor in our site selection for new stores as well. So, you know, this slowing is both natural based on what we've done thus far, but we're also now kind of continuously monitoring state regulatory and navigating state regulatory rules and looking for other states to open up. My own belief is that over time, telemedicine will become more and more normal and natural, but it's gonna take a while. And so, as we look, as we've always said since earlier this year, as we clear the big initial investment phase of remote, we are looking to see about a turn of operating margin improvement. We have guided towards that happening in the second half of 2024. know by the end of the second half of 2024 and still feel really good about that so pace is slowing based on good work pace is slowing based on our confidence to take our model into each state which can have varying rules but again we monitor that super closely and we'll be looking to take more states into remote it just won't be quite as broad scale and lumpy as this first big phase okay just a quick follow-up to that is there alternative technology or newer technologies that you're testing that you have not yet implemented you know in the States it really comes down to what do regulatory bodies allow for a full health exam and so we believe we have as good maybe the best remote exam out there in the market today and so it's probably less about you know us doing things differently and and more about us kind of navigating into those states, and maybe even those states becoming a little more open to telemedicine.

I'll also say that technologies evolve and new technologies emerge, and we are generally testing a couple of different things in the area of exam technology, and who knows what will be invented, who knows what will be made legal, but we'll be ready on both those fronts. And remote... remote sibling electronic health records. I think we're saying by the end of next year, all of America's Best will have electronic health records.

Thank you. One moment for our next question. Our next question will come from the line of Brian Tanculay from Jefferies. Your line is open.

Good morning and great job on the quarter. You have Taji on for Brian. So maybe I'll kick off with a question on optometrist labor first. It'd be helpful maybe if you provide some KPIs to help us understand how optometrist capacity has been trending quarter to quarter, you know, things like ads, turnover, retention. And then also as you continue to roll out remote, I know it's still in early phases, but Can you detail the impact on average productivity per clinician? And then I have a follow-up.

Good. So while we don't quantify specific capacity levels, I think if we're saying retention has improved for the second year in a row, that our retention Recruitment is going to deliver a second record year and record new grads who tend to start in July and August. And then Patrick just went through the remote successes. Those do add up to improved capacity.

Yeah, in terms of remote doctor productivity, we're laser focused on continuing to improve that through really three key emphasis areas. The first is just the technological optimal alignment of supply and demand, doctors to patients. Remote has introduced complexity into what was a more simple model for scheduling. We continue to improve our scheduling capabilities. We continue to improve training and feedback loops for doctors and technicians and store associates. And then finally, a lot of time it comes down to the remote software and electronic health record interfaces. We have teams that are continually making those more streamlined and fluid for doctors. So our expectation is remote doctors will at least mirror the productivity of in-line doctors. And again, in some theoretical manner, I see them going to surpass that over time.

But yeah, I certainly hope you're taking away that we are pleased with our progress in capacity expansion. As we like to say, retain, recruit, remote. I think that is showing in our Q3 results, as we said, positive transactions because we're able to offer more eye exams and more exam appointment slots. And this remains our constant focus. And we'll be now bringing that playbook to eyeglass world.

Absolutely, and really appreciate the color. And to switch topics a little bit, on managed care penetration, I mean, clearly that's been trending really well throughout the year. As we look at this on a long-term basis, you know, Reed, maybe can you talk about, you know, where you think the high watermark is in terms of just penetration in the managed care population as it relates to your entire book of business and, you know, I guess what it would take to get there?

So we only publish our managed care penetration once a year because of changes in seasonality and the like. And so the last time we said it was a third of the business. We've been repeating that it's been very healthy and getting healthier throughout the year. And I think what has been discovered is that by customers with some help from our marketing that we're a great place to use your managed care benefits. And of course, there's also the word of mouth side of that. You've You have the same managed care as your coworkers, and you tell them about your good experience, and that snowballs from there. But I'm not sure there is a high watermark. I think it will continue to grow. I think we are on a roll here, and so I don't, I think when we publish our number with our, at the end of the year, it's going to be up nicely, and I would expect that to continue.

Thank you. And one moment for our next question. Our next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.

Hey, good morning, everyone. Pace of openings for the go forward in terms of new units, is that commensurate so you don't have dark or dim stores? And then can you speak to, you mentioned the new hires from this recruiting class. Can you talk about the prevailing, uh, the, the wage that you're hiring at versus the prevailing wage of your system?

Hey, Simeon. Good morning. It's Patrick, uh, hitting on new stores. Do you want to add that, you know, assuming the year, uh, end of the year timing works out well, we do expect to be at the, hopefully the tip top of that 65 to 70 range for 2023. Um, so we're happy, really happy with what we've accomplished over the last two years. for our real estate and store teams in terms of continuing the unit growth. In terms of how we're thinking about next year, hey look, we're in the midst of planning. I will tell you that there are a lot of factors that come into that as every year. You know, state site brands, doctor recruiting, optionality for remote has become a significant factor as it is not plan A, but it is a really nice plan B. We're looking at all that very carefully right now and expect to be able to share those details with you as we close the quarter and fourth quarter. But, you know, rest assured, we're still focused on taking advantage of the white space opportunity that remains in front of us while carefully balancing the, you know, the other dynamics that we mentioned.

Okay. And then a follow-up. Oh, sorry, go ahead.

Oh, I'm sorry. This is Melissa. So just to add on to that a little bit about the doctor component. So we don't expect that the supply environment will change as it relates to doctors anytime soon. But what we are doing, we had implemented an incentive compensation program to incent the doctors to be more productive, and that would their level of productivity would drive their incentive compensation. And in addition to that, as far as base wages go, we had previously seen wages expand in the low single-digit range historically, and now that's closer to the mid-single-digit range. And we do expect that going forward at this time. We will leverage our cost structure at mid-single digits, and we've laid out the plan to get back to mid-single digits as we roll into 2025.

Thanks for that. And then my follow-up is on SG&A. I saw the factors in the release, especially regarding, I think, incentive comp, which you just mentioned. Can you talk about advertising expense? Are you spending along the lines of which you planned, or did you spend any more? And then the outlook for that for the rest of the year, please.

Yeah, so with advertising, we do see a little bit of advertising leverage. as we move into the fourth quarter, and that's just due to more productive advertising that we're expecting to have. SG&A overall, yes, we will expect to be leveraged for the full year, and that is largely related to the incentive compensation reset that we spoke about initially with our year-end release.

Thanks. Thank you. One moment for our next question. Our next question comes from the line of Dylan Carden from William Blair.

Your line is open. Thank you. Just curious, what percent of your stores are dim? Sorry if I missed that. And do you count a store as dim if it's got remote capacity? Maybe how that's trended over time.

Hey, Dylan. So we didn't specifically quantify the number of dim stores because that number changes quite significantly because DIM is less than three days of coverage. So if you have part-time doctors, you may be DIM one week and not the next week. So that number is a little bit harder to nail down, but we were able to nail down the productivity drag for a DIM store, which is about 50% of a productive, fully productive store. Now with that, we are enabling remote. in as many stores as possible that are specifically impacted by dark and dim. And that increases the productivity, you know, in double-digit range based on adding remote to a darker dim store.

So can you at least directionally give us a sense of how dim – I mean, if you can nail down the productivity, I guess how many stores are you counting in that calculation and just sort of how that's worked through the year? Broad strokes.

So with dark stores, we talked specifically about we've improved that from the mid-single digits at the high point to now we're at low single digits. With dim stores, again, that number changes quite significantly from period to period, year to year. So we will continue to figure out ways to explain that to you all. But dark is the one thing that we can nail down. We do have more DEM stores than dark stores. And that impacts, though, as I said, with DEM stores and a little bit less than it is with dark stores. So we'll continue to work on that. We'll continue to put remote into those stores and increase productivity with the levers that we do have.

Okay, and then in the services and plans segment, just thoughts on kind of the margin degradation and plans to kind of get that back, if you can get it back to more historical ranges.

Yeah, so what we had talked about initially was that we would continue to expect to see the doctor cost headwinds, and that is being offset partially by the exam expansion and exam pricing initiative. We will continue to work to get back to mid-single digits, which will leverage that cost structure. And with the warranty plans revenue, that's a component that, you know, our stores will be working on. And we'll continue to expand those offerings so that we can service our customers.

Thank you. Thank you. One moment for our next question. And our last question for today will come from the line of Molly Baum from Bank of America. Your line is open.

Hi, thanks for taking my question. I just had one quick one, kind of high level on the competitive landscape. I know you talked a little bit about you're leveraging marketing and advertising dollars a little bit better. Other competitors this week have announced that they're returning to growth in marketing and advertising markets. dollars. So just curious how you feel about the current competitive landscape. And then I guess on top of that, how you're thinking about Walmart as a competitor now that they're taking their optical business in-house. Thank you.

Good. So overall, we haven't seen significant changes in the competitive landscape. Yes, I were aware that one competitor did announce more aggressive marketing efforts you know you've got to just think about market share in this category because because uh it's just a highly fragmented uh category so an increase in in uh marketing spend from one competitor doesn't doesn't drive massive pieces and especially uh sort of different competitors attract different customer bases ours is a more lower income budget conscious less high-end consumer. And so oftentimes we're talking to different consumers in our marketing. And while Walmart is, yes, sort of taking the 227 stores, we're not expecting them to be a more aggressive competitor, and they do not historically do marketing of their vision center business. In general, the competitive landscape, I think, is pretty similar to the last call that we did, and e-commerce has stayed very stable for a long time as a percentage of the business, of the category.

Got it. That's it for me. Thanks so much. Appreciate it.

Yeah, but I would like to just point out one other thing. To your first piece, even in light of some competitive marketing increases, positive comp transactions for Q3. They're still coming in.

Thank you. And I would now like to turn the conference back over to Reed for closing remarks.

Hey, thanks everyone for joining us today. We're pleased with the third quarter on track to deliver on our objectives for the year. The macro environment, of course, is uncertain, but we're pleased with the customer account growth, both for Q3 and year-to-date, and believe it supports the progress we're making in our key strategic initiatives, especially in the area of building capacity so that we can provide eye exams to the patients and customers who want to come to us. We appreciate your interest and support. We look forward to talking to you and taking you through our Q4 earnings next year. Thank you very much.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.