National Vision Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by, and welcome to the National Vision Fourth Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to one of your speakers today, Mr. David Mann, Vice President-Investor Relations. Sir, please go ahead.
  • David Mann:
  • Reade Fahs:
    Thank you, David. Good morning, everyone. I'd like to thank you all for joining us today. I hope you're all staying healthy and safe. Turning to Slide 4, as I reflect on 2020 in general and the fourth quarter in particular, I could not be more pleased with how the National Vision team rallied to serve our patients and customer needs while maintaining a safety first focus. Our key priority throughout the pandemic remains the health and well-being of our associates and network of doctors, our patients, and our customers. The strong execution of our store teams since the reopening of our stores in June has been remarkable. For the period from June through December, we generated a 12.6% comp, the best 7 month comp in at least the past 18 years. Our partnership with Walmart now in its 31st year was extended for another three years through 2024. We continue to generate positive results at the five additional Walmart Vision Centers that we added in 2020. We celebrate the opening of our 1,200 store in Deerfield Beach, Florida.
  • Patrick Moore:
    Thanks Reade and good morning everyone. Before reviewing the full details for the quarter and fiscal year, let me begin by adding my thanks for the incredible resolve of our team during 2020. Their efforts have been remarkable and instrumental in delivering the strong second half performance and demonstrating our ability to successfully navigate the pandemic.
  • Reade Fahs:
    Thank you, Patrick. Turning to Slide 16 and our moment of mission. Last quarter, we shared that we've begun the process of creating an Environmental Social Governance or ESG strategy. In many ways, ESG and corporate responsibility have been core to our D&A for almost two decades. We simply haven't had it formalized or explicitly talked about it in this language before. The development of our ESG strategy, which includes board level oversight, will use the recently completed materiality risk assessment as its compass. Earlier this year, through our foundation 2020 quest, National Vision coordinated the donation of more than 40,000 eyeglasses – eyeglass frames to the non-profit to use in a Eye Care Clinic serving the rural poor in Nigeria. As a result of this successful collaboration with our optical partners, we are now preparing an even larger eyeglass donation this spring, to be deployed in free clinics in rural poor areas around the world. This is an example of how we can work with our partners to exponentially extend our mission and create profound impacts on the world. Closer to home, we recently announced the sponsorship of six scholarships over the next two years. Through The Vision Council’s, Open Your Eyes Scholarship Program, which supports high-schoolers in marginalized communities who want to pursue a career in the optical industry. Our investment in this scholarship improves access to optical education for talented ambitious students, while honoring our commitment to build a more inclusive future for the next generation of optical professionals. We're also focusing on improving the hearing now. We are proud that today the percentage of black optometrists in our doctor network is three times that of the percentage represented in the optical industry. We're also proud to be majority, minority company with BIPOC associates and optometrist, that's black indigenous people of color, making more than half of our 14,000 associates and optometrist in our network. This includes black and latinx associates being overrepresented in our population versus the U.S. population. We understand we still have important work to do and are committed to advanced diversity equity inclusion throughout our company and the optical industry. Having diversity represented amongst our associates and doctors is a driver of our success as a company, but it doesn't stop there. The three newly added board members help maintain a gender balance among our independent directors, while broadening the diversity and expertise across our board. Ultimately, being responsible corporate citizens and stewards and empathetic human beings is at the core of how we carry out our mission and achieve our success. The National Vision ESG journey is clarifying and expanding our capacity to best impact the world, including the development of environmental programs to manage our energy and climate impact. I'm excited to continue sharing more details as this process progresses, especially as we determine our areas of focus amid the formal ESG framework. In summary, for a year like 2020 to culminate in overall growth and success for our company is remarkable. It truly reflects the durability of our business model year-in and year-out, and positions us for a larger long-term opportunity. I also believe it's a direct result of the character and commitment of our associates a network of doctors, no matter the challenges they showed up for and leaned into our mission again and again this year. I'm so proud to be a part of this and look forward to seeing what we can achieve and what I hope will be a far healthier 2021 for all of us. With that, I'd like to turn the call back to the operator to start the question-and-answer portion of the call.
  • Operator:
    Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.
  • Simeon Gutman:
    Hi, good morning, everyone. My first question, I want to ask about everyone's favorite topic about operating margins. Patrick you mentioned the 6.8 mid-point and I think 2020 adjusted was close to 8%. And I realized, you know, it's going to be higher in 2021 than where you were over the past few years. Can you talk about that 8% level, I realized that was a function of, you know some costs coming in some costs going away or margins being better, but is that a good feeling level for this business to think about over time or there's no reason why you can't get to that level and then move past it over time?
  • Patrick Moore:
    Thanks Simeon. Good morning. You know, if you think about the margin that we saw, particularly after our store opening periods from June through December, you know, we used the word exceptional purposefully that they were very high margins, there was a lot of great work being done in our stores, demand was high, there was some stimulus benefit, we were seeing mixed benefits in terms of a little more eyeglass and contact lens versus historical patterns. We were seeing the stimulus benefits lift tickets, and that's just customers, you know, picking out incremental things that they wanted to add, because they could. We were in a fairly low to moderate position in terms of our typical advertising spend. We obviously weren't traveling, and due to the double digit comps, we were really well beyond our comp leverage point. So, you know, I would say like this, if we had another period where we were 2 x or more on our comp leverage point and found that advertising wasn't necessary that could be a nice benchmark. I don't think there's anything. So, elements of that are going to moderate back to a norm. But again, our norm has been improving, we, we lifted operating margins, 30 basis points from 2018 to 2019, another 20 from 2019 to 2020. You know, management team is focused on that. We hope to, you know, have a shot at delivering some more that lift again, but I do want to cordon off those months of June through December as being just outside of the norm. Now, in the fourth quarter, we did see advertising moderate back to more normal levels. And it was a great high watermark. I don't know if that makes sense in the next two years to be able to shoot for that, but I can promise you that management is always looking for ways to improve margins without you know, providing any negative consequences for the mission of the company.
  • Simeon Gutman:
    Okay. And then, I guess shifting topics to the new store targets. The higher numbers, do you intend to open at a same rate that you're opening now? And then how do you think about EGW versus America's Best? And obviously EGW is less mature and they're growing faster, but why shouldn't those two store totals look similar over time?
  • Reade Fahs:
    So, we are sticking with opening 75 stores a year. That's been very successful for us in the past that it works well with our doctor recruitment cadence overall. So, we're sticking with that in 2021. Eyeglass World, oh my gosh we’re so pleased with the performance of Eyeglass World. It's just been the brands of the post-COVID moment. We are working on ways of getting the ROIC closer to America's Best and the improved performance. Sure it helps. With that, there is a bit of lead time required to plan out and acceleration in any growth and of course the Eyeglass World was – got very strong late last year, but couldn't be happier with the performance ROIC is closing the gap with EGW and – but for sticking with 75 stores a year.
  • Patrick Moore:
    Hey, and I would just add Simeon. We did a nice analytical update this year in terms of new store performance and payback and even after the last few years where we entered some really large urban markets we went West Coast, we've gone East Coast. We're delighted that our new store metrics are really the same as they were before we extended into those major urban areas there. We're still seeing payback in that, you know kind of early mid-second year of operations for the bulk of those stores were – are breakeven. And we're still seeing cash on cash payback between . So, the company really expanded the types of places where it's putting new boxes. And I'm delighted to report that the same numbers that were used back at the IPO still make sense. Gives us a lot of confidence.
  • Operator:
    Thank you. And our next question comes from the line of Bob Drbul with Guggenheim Securities. Your line is open. Please go ahead.
  • Bob Drbul:
    Hi, good morning. I guess two questions. I think first Reade bigger picture, as you guys talk about the increased store counts. Can you just give us an update, where you think the industry contraction in terms of, you know, as part of what you're seeing, because there's been store closures and you know, if you have any estimates on what you saw, you know, in 2020, in terms of the industry contraction, an update on that would be great? And then I guess just the second question for Patrick is, on the gross margin piece, can you just talk a little bit more about I mean, the trends have been really good, you know, are they sustainable? And can you just maybe just help us understand the puts and takes a little bit better? As you think about what you said earlier for this year? That'd be great. Thanks.
  • Reade Fahs:
    Good Bob. Thank you very, very much for that. You know, what we've seen is a hastening of the trends that we've been talking about, ever since our IPO roadshow, that that the, you know, we call it the rising tide, and the rising tide, and the rising tide category, growth, that that the chains are gaining market share at the expense of the independence, the largest chains are, have been gaining market share value chains have been the biggest grower of market share, and that has all favored us. And we see that that continuing. The industry seems to have closed this industry data. 2% to 3% of stores have closed since the since the pandemic or over the past year or so. So, there's a contraction in store count and some of it’s, you know, independent doctors saying I'm not going to reopen. I'm close to retirement, so I'm not going to reopen there, some of it is a decline in Mall and Big Box store count there. We're also seeing, by the way, sort of doctors opening with just less slots, shorter hours, less exams per hour, again, all favoring us along the way. And so, we just have seen this as an overall continuation of the trends that we thought we've been talking about for years now, and the larger whitespace opportunities, further reinforcement of that.
  • Patrick Moore:
    Yeah, and then following on the gross margin, just to level set, we have been seeing significant gross margin benefit in the second half of 2020. And that was really related to a little heavier shift over to eyeglasses versus contacts and our business inside of eyeglasses, nice customer driven traffic demand and nice customer ticket elevations. Those have, you know, we're expecting to see some moderation in that over time for the full-year guide. On gross margins, we, you know, had basically said, we expect it to be down in the 50 basis points to 70 basis points range, but for Q1, up about 100 basis points to 120 basis points. So, Q1 should probably be the high watermark for gross margins. And then we just will also have to understand what swings we get out of the unearned revenue component that I mentioned a few minutes ago in terms of call comments.
  • Operator:
    Thank you. And our next question comes from the line of Michael Lasser with UBS. Your line is open. Please go ahead.
  • Michael Lasser:
    Good morning. Thanks a lot for taking my question. Do you think you're seeing a continuation of pent-up demand in the fourth quarter and so far, year to date? Or is this just more reflection of National Vision taking market share and a realistic run rate of the business despite offering what seems like conservative guidance for the year ahead?
  • Reade Fahs:
    We believe it's both. We believe that there is pent up demand. We believe there's less supply as I detailed a moment ago, and we believe we are building market share. We believe all those things are combining together.
  • Michael Lasser:
    And Reade, how long would you expect that pent up demand to persist? Is it fair to think that this is just going to stall out after the next two weeks or could it go longer than that?
  • Reade Fahs:
    It's hard to predict how long that will go. We have said that Q1 has had a solid start to it, suggesting we're still seeing sort of continued momentum there, despite the crazy storms of February, and there sort of data out there suggesting a lot of customers are still hesitant to go back. And my favorite example is are you are you going to your dentist as frequently as you used to that there are a lot of consumers out there just sort of saying. You know, maybe I will just hold off a little longer. So, I can't predict it, but I think it will continue and eventually moderate.
  • Michael Lasser:
    Okay. I want to come back to the profitability discussion. You had indicated that relative to 2019, your margin will be up at about 20 basis points. So, two questions on that, is that a realistic run rate? Should I think about over the long run, assuming that you're able to maintain your algorithm? And two, isn't there anything that you've learned in the last, call it 12 months that that would make National Vision and more efficiently run business such that you could generate more operating margin expansion than that modest rate that you're implying for this year?
  • Patrick Moore:
    Yeah, I'll start that one Reade, and maybe back to you. Yeah. So, I think that when we look at what the operating margin has done, since – through 2018, 2019. 2020 was a very abnormal year. We had a loss period followed by exceptional margins. Our guide at the midpoint has that moving backwards a little bit. We're still focused on eking out some margin gains, you know, most every year, if possible. So, you know, the guide has to be 2021 over 2020, which is one of the oddest years ever to do kind of grow over and think about it, especially on quarters and seasonality. But I do think there's continued upside moving from 2018, 2019, let’s skip 2020 into 2021 and then 2022 and beyond. I think if we go back and look at that period, our intent is that you will see gradual operating margin improvement.
  • Reade Fahs:
    Right. And then in terms of, sort of the things that we've been learning, you know, again, sometimes we like to compare things to 2020, and sometimes to 2029. When I think of where we are now, relative to a comparable period or anytime in 2019, I think we are just much more sophisticated than we were. Our data analytics are deeper, you know, we referenced the market research and we realized, sort of post-COVID that we have to just keep our finger even more on the pulse of changing consumers dynamic. So, we've probably done more market research in the past six months than we have in the past two or three years just to make sure we're all over any consumer dynamic, changing our, sort of our consumer technology is more sophisticated, the omni-channel pieces that we're tracking ever more, and we believe that's going to be really helpful to keeping us sharp over the coming periods.
  • Operator:
    Thank you. And our next question comes from the line of Zack Sadam with Wells Fargo. Your line is open. Please go ahead.
  • Zack Sadam:
    Yeah, hey, good morning. So, Reade could you update us on the state of the category here, coming out of the pandemic? You know, what do you think the underlying growth rate should look like over the next couple of years, particularly for the value segment? And then you touched on the competitive landscape a little bit earlier, but maybe you could also frame the opportunity to take share as Mall-based and mom and pops the addressable market?
  • Reade Fahs:
    Thank you, Zack. You know, what we're seeing is this category is shifting to the value segment. It's been shifting for years. And post-COVID has hastened that. So, I think there's a growing understanding that you don't have to pay what you used to for eyeglasses, especially. And I believe that will – that's not going to go back. You know, once you've experienced the pricing you get from us and a few competitors who are in the game, as well, you don't say, Oh, I think I'd like to go back and pay a lot more the next the next time. So, I believe that what we're seeing is an ongoing, sort of tailwind to the value segments. And, yeah, it's going to come at the expense of the independent sector, which because they have no economies of scale, aren't able to compete anywhere near the prices we are. It's going to come at the expense of Mall-based retailers, and it's going to come at the expense of, sort of anyone who is focused on just a higher price piece, and I think, all that combines to the larger whitespace opportunity that we're seeing before us, you know we don't just sit here and put a finger in the air on that whitespace opportunity. We have really deep data scientists working on this and reinforcing this. And that's where the numbers come from, but it's a combination of all these factors coming together that this is what makes us so optimistic in the post-COVID environment.
  • Zack Sadam:
    Got it. And then you called out some weather driven disruption early in Q1, curious if you could elaborate here in terms of your trends or whether any stores were offline during this time, and as well as any disruption to the supply chain that we should anticipate as we work through our models?
  • Reade Fahs:
    So, the weather pieces I was referencing were about what two weeks ago in Texas and Louisiana primarily, you know that put millions of homes out of power and stores out of power, yeah, so we had lots of closings over it was about a two week periods of storm after storm again late February only is what I was referencing. And, you know, I'm always – always like to compare us to the restaurant industry that if there's a big snowstorm and you were planning on going out to dinner and you don't go out to dinner, while your – that meal is never going to be eaten again. But so – so they lose out, but for us, you stay at home, your eyes just get worse. And you have to come back eventually. So, that's that – so yeah, storms are and similar disruptions are just short blips for us. But it comes back eventually. We’ve seen it time-after-time, year-after-year we talk about it a lot that's expected in the future, but they come back. It's a medical necessity.
  • Operator:
    Thank you. And our next question comes from the line of Steph Wissink with Jefferies. Your line is open. Please go ahead.
  • Steph Wissink:
    Thank you. Good morning, everyone. I have two questions. Patrick, the first is a quick one for you, just on your current lab capacity to support the growth behind America's Best; can you remind us how much capacity you have? How far into the future that would support your growth targets in terms of the store unit cadence? And then Reade maybe this one's best for you, just want to give you some space to tell us a little bit about the mix benefits you saw shift from contacts to glasses in 2020, if that's correlated to, kind of the tired eye syndrome, the Zoom effect, or if it's something bigger, if you think there's a fashion trend, or something underlying a shift from lenses to glasses? Thank you.
  • Patrick Moore:
    Good morning, Steph. So, on the lab capacity, we built our fourth domestic lab a couple of years ago. The way those labs work is, we, you know we get the shell in place and then we use just in time provisioning for incremental equipment to meet peak season demand each year. We are in great shape on lab capacity. Generally, we're building a new lab every five or so years. We could actually start to have visibility into equipment that may let us stretch that even more. So, I'd be stunned if that ended up being on the three year horizon, maybe not even a we’re in great shape with our domestic and global lab network.
  • Reade Fahs:
    And, and to your to your second question, Steph. So, there are two components of this, both sort of a near-term and a long-term. From a near-term perspective, recall, we didn't actually shut down our stores, we closed our stores to the public, but we continue to man our stores, and staff our stores, socially distance, of course, with people because we're providing necessity and our phones were ringing off the hook. And because our consumers are store based and many are very phone based. We were still selling a lot of contact lenses, often annual supplies of contact lenses during that period, because it was easy to do, people call up and go online for our e-commerce offerings. And so, we were still in very much in the contact lens business, even during the closure period. Having said that, I do think your comments, your comments on the other side were right. We hear from a lot of people, I'm staring at my screen all day. I prefer or have optical reasons to do that with glasses, our sales of blue light lenses to protect against screen usage and lower fatigue are up a lot. And frankly, a lot of people who are spending time looking at screens all day or being looked at on screens all day have realized that a different look plays better in the video world. So, I know a lot of people, including many of my family members who have gotten glasses to look better on Zoom, because that's a different aesthetic than the normal one. So, it's both factors.
  • Operator:
    Thank you. And our next question comes from a line of Paul Lejuez with Citigroup. Your line is open. Please go ahead.
  • Paul Lejuez:
    Hey, thanks, guys. Just on the raised store target, I'm curious, maybe if you could talk about your most dense markets, how those markets have been performing, if that tied in, to give me more confidence to up that store target further? Also curious if you can talk, what percent of sales are your optometrist wages versus other store personnel in any way you could size those for us and talk about your outlook for each of those two groups in 2021, and then just an update on the converted Walmart stores? Thanks.
  • Reade Fahs:
    I'll take the first part. Patrick will take the second part. And I'll take the third part on the updated Walmart stores. You know, we don't like to go into a lot of geographic specifics, but I'll give you a little color, our oldest market is Chicago. It is our most dense market, and actually for a lot of our competitors, it’s also their biggest market. And, gosh, we love building new stores in Chicago. I can't remember the exact number that we’ve built over the past few years, but we've added several stores to Chicago in the past few years. And I wouldn't be surprised if we keep adding them there. So, that's an old very dense market where we keep successfully adding new stores in to the market and it's continuing to thrive. But similarly, I talk about New York is a fairly new market. The New York Metro, we got lots of stores to continue to build there. You know that's a pretty new entry less than, I think three years of – since entry into there. And so still plenty of whitespace there. Also, just to add one other piece, you know, we've only been on network TV for I think three years. And that just helps us in all categories just build awareness throughout the country and reinforces the whitespace opportunity. Good. Patrick?
  • Patrick Moore:
    Thank you, Reade. Hey, Paul. Yeah, in terms of the exact split between optometrists and associate wages, we've not really provided that degree of detail. There's obviously a whole lot more associates and doctors. The way we're thinking about wage inflation, we have seen a couple of quarters where the optometrist, kind of realized wage inflation has looked a little better. I wouldn't say that we're expecting that to be a permanent trend. We – our doctors are a focal point of the business and we like to pay those folks for the great work that they do. We do expect to see some continued low levels of wage inflation there and then we'll fill that in gross margin. So that's part of the gross margin guide. And then in SG&A, you know, we're aware of some states that are making some minimum wage moves. And we believe like we are prepared for those and how we’ve set up our and plans for the year. So, I think we've done a pretty good job of balancing those associate wage increases, and haven't had to really point to those as big drivers on the P&L, and we expect to continue to do that at, you know, at the local level.
  • Reade Fahs:
    And on your Walmart question, of course, we're now or is now celebrating our 31st year of partnership with Walmart and last year, we extended the contract again for another three years into 2024. Last year, for the first time in over 25 years they gave us some new stores and turned over stores to us that they had been managing, which was the first time that has ever happened. And so we took those over, I think it was in June, we started there. And we're very encouraged by the initial results of these stores. They're doing great and up nicely, and we still think there's the opportunity to build them even further. So, real happy with how those are going.
  • Operator:
    Thank you. There's time for one more question. Our next question comes on the line of Dylan Carden with William Blair. Your line is open. Please go ahead.
  • Dylan Carden:
    Thank you very much for fitting me in here. Reade, there's been a lot of capital – you've spoken to kind of the competition from the independent side, but there's been a lot of capital fields like in the last year, kind of flowing into the chained value in sort of same day, next day segment. Is that something that you guys kind of anticipate when thinking about availability of doctors? I mean, clearly, the expanded store count and performance speaks for itself, but any comment on that would be appreciated? And then, you know the run that you've had with sort of the higher prices in contacts, any sense of sort of how long that will continue to have a positive benefit in the model or is that normalized, sort of in the coming years? Thank you.
  • Reade Fahs:
    On the competition piece, yeah, there, there certainly are sort of some roll ups happening where people are trying to buy up independent pieces and private equity is very involved in our category. We do not see that as a primary factor in our planning for doctor recruitment or having a big effect there, but it is going on and we watch it and monitor it there. And in terms of contact lens, pricing, again, this is primarily driven by doctors saying to patients, here are a few different options for contact lenses that would work well for you here. The benefits of the different ones, and which one would you like? So, it's sort of their newer technologies, they're higher priced and certainly our bread and butter contact lens buyers are buying sort of the low price because they're very budget oriented, but we are seeing based on doctors presenting options and saying, hey, this solves your optical problem in better ways than your prior piece. And I would sort of expect that to continue over time in an encouraging and helpful way for us. It's not something we drive, it’s medically driven. But I bet it's a trend.
  • Operator:
    Thank you. And that does conclude our question-and-answer session. And I would like to turn the conference back over to Mr. Reade Fahs for any further remarks.
  • Reade Fahs:
    Thank you very much, Michelle. We'd like to thank you all for joining us this morning and for your continued interest in and support of National Vision. We look forward to speaking to you again when we report our first quarter results later this year. So, thank you very much. And talk to you all soon.
  • Operator:
    Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.