National Vision Holdings, Inc. (EYE) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 National Vision Holdings Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Sir David Mann, Vice President of Investor Relations. Sir, you may begin.

Thank you, Brian, and good morning, everyone. Welcome to National Vision's Fourth Quarter and Fiscal 2017 Earnings Call. Joining me on the call today are Reade Fahs, Chief Executive Officer; and Patrick Moore, Chief Financial Officer. Jeff McAllister, our Chief Operating Officer, is also on the call and will be available during the question-and-answer portion of the call. Our earnings release issued this morning and the supplemental presentation, which will be referenced during the call, are both available on the investors section of our website, nationalvision.com. In addition, a replay of this morning's conference call will be available later today. The replay number as well as access code can be found in the earnings release. A replay of the audio webcast will also be archived on the investor section of our website. Before we begin, let me remind you, our earnings release 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 in our filings with the Securities and Exchange Commission. The release and today's presentation also includes certain non-GAAP measures. Reconciliation of these measures are included in our release and the supplemental presentation, which can be found on our website. We also would like to draw your attention to Slide 2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. In addition, from time to time, National Vision expects to provide certain supplemental materials or presentations for investor reference on our Investor section of our website. Turning to Slide 3. On today's call, Reade will discuss some of our recent business highlights. Patrick will then give an in-depth review of our fourth quarter and fiscal year 2017 financial performance as well as details of our fiscal 2018 outlook. Following these prepared remarks, we will open the call for questions. Now let me turn the call over to Reade.

Thank you, David. Good morning, everyone I know many of you are slogging through some pretty difficult weather up there in the Northeast. I hear that some of you are even listening on generators and some without Internet. We appreciate the extra efforts you're going through to be with us this morning. If you turn then to Slide 4, I'll take you through Q4 highlights. 2017 was a record year for National Vision. We ended the year healthy, with Q4 reflecting another solid quarter for us. Q4 was our 64th consecutive quarter of positive comparable store sales growth, a streak that began 16 years ago when many members of our current management team started at National Vision. We take a lot of pride in the consistency of this track record. Adjusted comparable store sales growth in Q4 was up 10.4%. The comp growth was led by strong performance at both America's Best and Eyeglass World, with increases of nearly 12% at both of these brands as well as positive comps at our legacy and host brand. Importantly, our comps were driven by increases in customer transactions. Another sign of customer satisfaction is Net Promoter Scores, which we track closely. In Q4, we posted record scores for the company and for the America's Best brand. We opened 17 stores in Q4, which resulted in 76 new stores open for the year, including our 1,000th store in October. The unit growth and comparable store sales growth combined to drive a 16.1% increase in revenue. Adjusted EBITDA increased 19.4%. Solid leverage of our fixed cost base was partially offset by higher optometrist-related compensation. Turning to Slide 5. Our business continues to demonstrate consistency in store performance and comp store sales gains. The graph highlights our 64 consecutive quarters of comparable store sales growth across the economic cycle during both strong and weak economic times. We're encouraged by the sales recovery in stores in hurricane-related markets, which, to some extent, drove the comp acceleration that we achieved in the quarter. This recovery highlights the benefits of a customer purchase tied to a medical necessity. As I mentioned earlier, our comp growth is driven predominantly by gains in customer count, not average ticket, which, to us, is another reflection of the health of our business. Our performance highlights the benefits of operating in a growing industry, having a consistent leadership team of optical experts, newer stores gaining traction as customer awareness grows over the first few years, and as positive word of mouth spreads, comparable store sales growth in our more mature stores as customers keep coming back, as well as the success of our marketing efforts, managed care relationships, store training and company culture. While hard to quantify precisely in our industry, we believe that we continue to gain market share. Our highly-experienced and long-serving management team continues to focus on executing every day as the key to retail, of course, is about good execution, one patient and one customer at a time. Turning to Slide 6. In 2018, we look to continue to execute on our core drivers of growth. First, new stores are a primary focus as we continue to see a sizable white space opportunity given the size of our current footprint. We plan to open about 75 stores again this year following the formula-based approach that has worked well for us. We have a solid pipeline of locations for this year and into next year, 2019. The majority of our openings will continue to be in America's Best brand with the remainder in Eyeglass World. The focus will be to continue to open stores in California as well as expansion into the Northeast. We're excited to enter new markets and believe that patients and customers in the Northeast will also be attracted by the opportunity to save money on eye exams, glasses and contact lenses. Overall, our store growth in 2018 will skew slightly more towards openings in new versus existing markets. A key to our ongoing success is our ability to attract and retain optometrists. We are an optometrist-centric company and strive to be the place of choice for optometrists to spend their careers. Our efforts are paying off as we continue to maintain consistent year-in and year-out retention rates among optometrists, while continuing to attract several hundred new optometrists every year. Second, we look to continue to focus on driving comparable store sales growth in 2018. Our key comp drivers are the comp waterfall for maturing new stores as well as our vision insurance and marketing initiatives. Our new store gains -- our new stores gain traction as customer awareness grows over the first few years. We believe that our low prices and excellent customer service are important to our core customers and drive traffic to our stores. We want to be known as the low-cost provider of this medical necessity. We strive to ensure that our customer gets the best value around, and we believe that our growth brands deliver extreme value: 2 pairs of eyeglasses for $69.95, including a free comprehensive eye exam at America's Best, or 2 pairs of designer glasses for $78 at Eyeglass World. We believe that this leads to satisfied repeat customers and positive word of mouth as customers tell their friends how little they spent and the great service they received at our stores. A key additional driver is vision insurance. We have already seen consistent growth on this front and see an opportunity to expand our relationships further and to increase our penetration with vision insurance providers. As I noted last quarter, this is episodic and unpredictable in nature, but we are working hard to be favored partners in the vision insurance plans we participate with. Our television advertising continues to resonate with customers. Our marketing team and external advertising agency continue to come up with catchy new versions of our Owl Campaign, which reminds consumers that they paid too much if they didn't shop at America's Best. Last year, we moved to national advertising for America's Best, which we believe should, for the first time, result in higher initial brand awareness in new markets. At Eyeglass World, our new advertising hit the airwaves in January. And while it's still early, we're encouraged by the initial customer response. In terms of operating productivity, we continue to promote a low-cost culture. It's always nice to have a fresh set of eyes on the expense front, and it doesn't hurt that our new Chief Operating Officer, Jeff McAllister, comes from a similar environment having joined us from Walmart. Jeff has been with National Vision for over 6 months now and is meshing well with our senior management team and bringing new perspective to our strategies and execution while concurrently respecting the formulas that have consistently delivered for us historically. Of course, Jeff comes to us with tremendous optical experience also having led Walmart Vision Centers from 2006 to 2010. One area of confident productivity improvement is our central lab network. Our labs may be behind the scenes to our patients and investors except for the in-store labs at Eyeglass World, but we believe we operate a world-class light manufacturing operation that is a true competitive advantage towards being a low-cost provider. We can't beat everyday low price without being everyday low cost, and our labs are a key reason we are everyday low cost. Later this year, we're working to open our fourth domestic lab, bringing us to a total of 6 in our network. The new lab will feature the latest state-of-the-art equipment and processes. Our teams have started the groundwork for this lab, thus providing the security of economic diversity. We're on schedule for the lab to be operational for the first quarter of 2019. We continue to invest in technology to improve the customer experience. Our omnichannel investment is now providing one view of the [ customer ], a significant step towards sophisticated omnichannel offerings. This technology will also improve the speed and ease-of-use of key customer online interfaces, such as exam scheduling and store locator identification. 2017 was a great year for National Vision, and I want to congratulate the entire team for their dedication to patient and customer happiness and their execution of our store formulas. And in 2017, we delivered record revenues, profits and customer count, took the company public, opened our 1,000th store, introduced America's Best to California and continued to build our executive leadership team. We continue our dedication to progressing the work of the ecosystem of optical social enterprises and philanthropy. America's Best continues to roll out its partnership with local Boys and Girls Clubs around the country. Eyeglass World is piloting a new tailored social enterprise of its own, and overall as a company, we continue to partner with VisionSpring, RestoringVision, Volunteer Optometric Services to Humanity while advancing our own Frames for the World group. We strive to be the best, business-wise, at providing low-priced exams, glasses and contact lenses, while both at home and abroad, we work to bring glasses and, consequently, sight to those who would be unable to see otherwise. With that, let me turn the call over to Patrick, and he will take you through the financial results in more detail as well as our fiscal 2018 outlook.

Thank you, Reade, and good morning, everyone. I'll be starting my remarks on Slide 8. As Reade noted, our business continued to perform very well in the fourth quarter, and we are extremely pleased with our results. The 2 fundamental revenue drivers of our business are new store growth and comparable store sales growth. During the quarter, we added 17 new stores, all in our America's Best brand. For the year, we opened 76 stores and closed 6 locations, which represents 7.4% increase in stores, with the openings almost entirely in our America's Best and Eyeglass World brands. Regarding the performance of new stores, we have noted that these stores have taken approximately 3 to 5 years to mature. While we do not disclose vintage-specific results, I do want to provide some color on the 2017 business performance. As we compare multiyear results for stores opened at least 6 months, sales in our 2017 vintage are performing near the top of the historical range. We would note that most of these stores are now going through their first peak seasonality period when refreshed insurance benefits and tax refunds drive customer traffic to heightened levels. The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis and highlights the strong performance in the quarter. Same-store sales growth increased 10.4% versus the 7% increase in the fourth quarter of last year. As Reade mentioned, this comp growth was driven predominantly by an increase in customer transactions. Comps also benefited from hurricane-related sales recovery in the quarter. During the fourth quarter, we generated positive comps in all 5 brands. America's Best led the way with strong performance of 11.8% on top of 10.4% in the fourth quarter of 2016. For the year, comps at America's Best were 10.1%, representing the third consecutive year that the AB team has delivered comparable store sales growth of at least 9.5%. At Eyeglass World, comps increased 11.7% for the fourth quarter. This, in part, reflects the brand's recovery in the quarter from the severe impact of Hurricane Irma in the prior quarter, given our concentration of stores in Florida. As we assess the total impact of hurricanes on our revenue in both the third and fourth quarter, we believe the overall net impact to revenue across the time period was immaterial. This recovery in our operating performance after a substantial external event like a hurricane is a great example of customer behavior regarding the purchase of a medical necessity and the resiliency of our service-based business model. Legacy comps increased 5.5% in the fourth quarter. Of this growth, we estimate approximately 260 basis points of benefit from incremental eye exam revenues tied to the operational changes and resulting volume shift from FirstSight. Excluding the benefit of this transition, we're encouraged that the underlying business results in the legacy segment returned to positive territory in the quarter. Similarly, we are encouraged by the solid Q4 results at our military and Fred Meyer brands as well. Turning to the income statement highlights on Slide 9. Net revenue increased 16.1% to $321.8 million, adjusted EBITDA increased 19.4%, and adjusted EBITDA margin grew 20 basis points to 7.8% in the quarter. Cost applicable to revenue increased 16.9%, or an increase of 40 basis points as a percentage of revenue versus last year. We continue to experience higher optometrist costs due to wage inflation. For our doctors, we're glad to pay competitive salaries for the good work that they do. We work extremely hard to attract and retain optometrists, and compensation is an important part of this equation. SG&A expenses increased 17.8% or an increase of 70 basis points as a percentage of revenue. The largest factor in the increase was a $4.4 million expense related to the automatic termination of our monitoring agreement with our sponsors in connection with the initial public offering, which represented about half of the increase as a percentage of revenue. To a lesser extent, we experienced higher write-offs associated with managed care receivables. Increased participation in managed care plans has been a positive factor in our growth in recent years. The higher managed care write-offs resulted from increasing managed care penetration as a percentage of total revenues as well as an increase in Q4 costs tied to a provider's system conversion. These costs were partially offset by a leveraging of expenses such as advertising and corporate overhead. Depreciation and amortization expense increased $3 million compared to the fourth quarter of last year. The growth reflects our ongoing investments in new stores and our network of eyeglass laboratories as well as our omnichannel-related investments that were capitalized during the fourth quarter of 2017. Interest expense increased $4.9 million versus the fourth quarter of last year, which reflects 2-point -- $3.2 million in write-offs of deferred debt cost amortization as a result of the $125 million payoff of our second lien credit agreement with the proceeds from the IPO. Additionally, incremental interest of $2.5 million was associated with our derivatives and was partially offset by approximately $1 million in lower interest driven by the IPO-related debt paydown. We recorded an income tax benefit of just over $48 million for the fourth quarter of 2017 compared to an income tax benefit of $3.4 million in the prior year. The income tax benefit this quarter reflects the effect of U.S. tax reform as of quarter-end as noted in our earnings release. The 2017 tax act required us to remeasure certain deferred tax assets and liabilities at the reduced U.S. corporate income tax rate of 21%. As a result, the company realized a onetime $43 million tax benefit. In a few moments, I will talk more about our future tax rate expectations. Included in the income tax benefit in the quarter was an approximate $2.0 million income tax expense driven by onetime discrete tax items. Adjusted net loss was $3 million compared to a loss of $1.7 million in the fourth quarter of 2016. The increase in adjusted net loss reflects the impact of the increase in interest expense, higher depreciation and amortization as well as the $2 million in discrete tax expense items. As a reminder, the net revenues and adjusted EBITDA results do not include amounts reflected as deferred revenue. Recall that deferred revenue is generated from our contact lens club and eyeglass warranty programs, and provides current period cash benefits not reflected in our income statement. For the fourth quarter of '17, there was a $2.4 million net decrease in deferred revenue due to typical fourth quarter seasonality. Finally, as disclosed, we had a zero-sum shift in revenue and expense from the Corporate/Other segment into our legacy segment driven by the FirstSight operational changes noted in our press release. In addition, in connection with changes in California law, we ceased the sale of vision care products in Walmart locations that are not operated by National Vision. As a result, revenues and associated costs in the Corporate/Other segment in the fourth quarter were both approximately $1.5 million lower than the fourth quarter of 2016. There were no material impacts on profitability. Turning to Slide 10 and fiscal 2017 results. This was another consistent year of performance for the company with same-store sales growth of 7.5%, net revenues up 15% and adjusted EBITDA up 15.9%. We achieved these results in a year where there was fluctuation in quarterly comp growth driven by external factors such as weather, timing of tax reforms and calendar shifts. But in each instance this year, the business eventually recovered. Adjusted EBITDA margin increased by 10 basis points to 11.6% as we continued to reinvest in initiatives to drive future growth. And similar to the quarter's results, our full year results do not include amounts reflected in deferred revenue where there was a $6.8 million net increase during the year. Turning to Slide 11. At the end of the fourth quarter, our total debt was $569 million and our cash balance was $4 million. During the quarter, we used the proceeds from our IPO to pay down $235 million of our first lien credit facility and eliminated the entire $125 million second lien. These were significant balance sheet improvements for the business, and we look forward to the possibility of additional deleveraging as we continue to execute on our business model. For the year, we invested just over $93 million in capital expenditures, with the majority of the CapEx focused on growth initiatives. Turning to Slide 11 (sic) [ 12 ], I'll conclude with some commentary on our 2018 outlook, which we included in the earnings release. First is a housekeeping item. I want to point out the company will experience the elimination of approximately $6 million in revenue and the same amount in costs this year associated with the FirstSight operational changes mentioned earlier. This will affect the comparability of revenue between 2017 and 2018, but there are no material impacts on profitability. Our 2018 outlook is as follows: net revenues of $1.485 billion to $1.515 billion; adjusted comparable store sales growth in a range of 3% to 5%, opening approximately 75 new stores; adjusted EBITDA between $172 million and $177 million; and adjusted net income between $52 million and $56 million. We project another year, our 17th consecutive year, of positive same-store sales growth in 2018. And it's important to remember that while we expect our brands to continue to perform well, we will be facing challenging comparisons from the strong comp trend for the last 3 years, especially in our America's Best brand. As a result, we believe it is prudent and responsible to plan the business at 3% to 5% comps as reflected in our 2018 outlook. Store openings this year will be predominantly in our America's Best brand, with the remainder being Eyeglass World stores, similar to the mix of openings between these brands in 2017. The timing of the America's Best openings are generally evenly weighted across the year, while the Eyeglass World openings are planned for the second half. We project a couple of closings as is typical each year. We expect adjusted EBITDA margin to be relatively stable despite over $2 million in incremental public company costs this year. We're highly focused on managing cost in an environment of rising wages. In addition, we continue to reinvest in growth and build out our omnichannel capabilities. We expect adjusted net income growth this year will exceed 60% at the midpoint of our outlook, reflecting a lower estimated effective tax rate due to tax reform. Taking this into account, we project an effective tax rate of approximately 26% for 2018 versus a normalized tax rate of 39% in 2017. As a result, we are estimating that the cash benefit of tax reform could approach $20 million during 2018. We've been reinvesting at a fairly high rate over the last several years, utilizing our business model's positive operating cash flows to invest in significantly increased new store growth, labs and system improvements, and more recently, focusing on omnichannel capabilities. As a result, we believe we're in a great position at this time. We will strategically invest incremental cash flows with a focus on growth investments and other areas such as an improvement in our customer-facing technologies for stores and online, balance sheet improvements, which could come in the form of debt pay down or improved interest rates, and potential incremental competitive wage investments on a geographic basis. In addition, we estimate annual interest expense of $37 million to $38 million, depreciation and amortization of about $72 million to $73 million and capital expenditures between $100 million and $105 million. Our business has delivered highly consistent results on a semiannual to annual basis. It can experience fluctuations quarter-to-quarter. For example, unearned revenue can be highly variable as it depends in great part on customer behavior and is ultimately an issue of the timing of sales and the volume of sales in the last 79 days of the quarter compared to the same period in the prior quarter. Also, last year's delay in tax refunds was a factor in weaker-than-expected first quarter, which resulted in lower incentive compensation. Finally, weather events can be disruptive on a short-term basis. So while we do not provide specific quarterly guidance, we do want to make sure that you're aware of key factors that may affect our quarter-to-quarter comparisons in 2018. In terms of adjusted EBITDA, we expect the rate of growth to vary over the course of the year, with stronger adjusted EBITDA growth in the second half of 2018. We expect that certain items will impact adjusted EBITDA in the first quarter, collectively in a range of $4 million to $5 million. These items include the net change in unearned revenue, new public company costs and higher incentive compensation. Additionally, we are now in the midst of our peak season. There are 3 key weeks remaining in the quarter, which are all subject to the components of variability that I just mentioned. One last topic to mention is the implementation of new revenue recognition accounting rules that will be starting in Q1 of '18. The new statements will alter our accounting for revenues for our eye care club, resulting in more revenue recognized upfront from each contract and less deferred revenue. We estimate the implementation of this standard will result in a onetime reduction of deferred revenue with an immaterial impact on 2018 net revenues. Under these standards, we estimate the net change in deferred revenue in 2018 will be reduced by approximately $1 million. There are no impacts to our accounting beyond this specific item. All of the aforementioned items have been contemplated in the 2000 (sic) [ 2018 ] outlook ranges provided. In summary, we're very pleased with our record performance in 2017. We're focused on executing our 2018 strategic growth initiatives and look forward to delivering another year of consistent growth. This concludes our prepared remarks. And at this time, I'll turn the call back over to Brian to start our Q&A session.

[Operator Instructions] And our first question will come from the line of Robbie Ohmes with Bank of America Merrill Lynch.

Actually, 2 questions. First, Reade, I was hoping -- and I apologize if you covered this in the beginning. I unfortunately got on slightly late. But the announced Luxottica-Essilor merger, I was hoping you could remind us the exposure you have with each and sort of how National Vision is thinking about that merger. And then just a follow-up question would be just some update on how the California stores are doing versus your expectations.

Great. Thank you, Robbie, and no, I didn't cover either of those before you got on. All I did was thank people for slogging through the bad weather to be on the call at all. So thank you for that. So Luxottica-Essilor, there was big news earlier -- or was it this week or late last -- it was late last week where both the FTC and the European Union blessed the merger. So those were, of course, 2 big milestones for that. I understand there's still 1 or 2 countries out there of note that have yet to do that, and they're going to wait to get those blessings before they finalize. We have, since the time they announced this, believed that the deal would get approved by the major regulatory bodies. And so our planning assumption is that, in the second quarter, there will probably be some sort of -- assuming all goes well with those remaining countries, that they would probably announce that the merger has gone through. We have had strong long-term relationships with both Luxottica and Essilor. We are a company of strong long-term relationships. Both have been good partners with us for a great many years. We are -- we believe we're one of their larger and faster-growing customers, and we don't see the merger changing the nature of our relationship with them, and they've sort of sent us that vibe also. We think that we'd be an important part of the future of the merged companies as we've been an important part of each of the companies when they were separate. So we aren't seeing any new news here other than it's progressing along through the various regulatory bodies as we anticipated, and we continue to believe it will happen and aren't seeing that as being a major change to our lives. In terms of California, for competitive reasons, we don't discuss specific markets, but we do talk about vintages, and our 2017 vintage of new stores is performing near the top of historical ramps. I do have to point out that for a great many of those stores, they didn't exist during Q1. They were opened throughout the year. We're continuing to open stores in L.A. and in San Francisco. In 2018, we think there are lots of potential of customers in both those markets.

And our next question will come from the line of Matt Fassler with Goldman Sachs.

I've got 2 quick questions. The first relates to EGW. I know, Patrick, that you spoke about the recovery from the hurricane dynamic in Florida. Still, it was a pretty big comp number that you saw from that business. Any sense as to whether the tweaking of the marketing formula there is poised to unleash a better comp trajectory more similar to what you've been able to get at America's Best?

Yes, I'll take that first one, Matt. So the -- yes, the hurricane recovery was part of EGW's results there, and EGW's results were quite strong. So -- and when we look at sort of the overall as a company, when we look at the 2 quarters together, we think it's sort of we got what we should have over the 2 quarters there. The new Eyeglass World marketing launched earlier this year -- or launched in January, and sort of we're initially encouraged. We also have sort of new leadership who's been in place, I think it's about 6 months there. And I can tell you the execution is getting ever better. So we're continuing to be optimistic about Eyeglass World and its future. And we like the momentum.

That's great. And then one quick follow-up. I think this one will probably be for Patrick. So as we look at adjustments to get to the adjusted EBITDA numbers for next year, I'm not sure how willing you are to itemize some of these. But most notably, preopening, if you have a sense of it. And also stock comp, if you can get visibility on that number this early in the year just as we think about the mapping between reported and adjusted numbers on those bases.

Yes, I probably can't go to that degree of granularity. I would say, Matt, that the store preopening will probably be fairly similar to what we've seen in the past. In terms of the stock comp, there's just too many factors involved in that. And I'd hate to give you bad advice at this point, so I just -- I'll hold off on going granular there.

And our next question comes from the line of Paul Lejuez with Citi.

I think you expected the timing of Christmas and New Year's this past year, this past quarter, to be a negative for you. I'm just curious if it didn't play out that way and if you saw some sort of benefit from the timing of that in the first quarter. And then also curious if you've seen any changes to the competitive landscape. Any new threats? And I'm curious how you would characterize the pricing environment out there right now.

Let me take the competitive one first. Not a lot has changed since we were on the roadshow or since our last call. We believe we're continuing to gain share. We don't think there's been any major changes in the pricing competitiveness overall, which again favors us because we're the low-cost provider. And we're still happy that we're in strip centers. We're still happy to have employed doctors, and are happy to have such an efficient lab network and a lot of private-label emphasis in some of our products. So nothing of note in the competitive environment that changes much there.

And then in terms of the last week, we did call out on our third quarter earnings release call that we expected to feel about a day of less impact there. And I would say, I really don't want to get into talking about weekly results too often, but we really kind of got what we expected there within reason. So what we guided for, we essentially got.

Just one follow-up. You had mentioned a higher mix of stores in new markets versus existing, and I'm curious if that's a change versus what you were thinking just a few months ago, or if you had always planned it that way.

[indiscernible] an ongoing gradual shift, we've always historically sort of filled out existing markets and moved on to new markets. And we have new markets, not a large -- not a significant change versus our planning before.

Yes, I would add, our launch into the West Coast this year skewed a lot of our openings to "new markets." As we've discussed earlier, we'll be moving into the Northeast as well to continue our store footprint there. So if you put those in the equation and probably last year and this year and maybe next year, we may be a little higher skewed towards new. But I would expect that to be fairly balanced beyond a period of West Coast and Northeast build out. Yes.

[indiscernible] as we realized how many analysts need to save money on their glasses, so maybe I'm paying more a little bit more attention to the New York market.

And our next question will come from the line of Simon (sic) [ Simeon ] Gutman with Morgan Stanley.

Simeon Gutman. Sorry about the background noise. A quick question on the next year's comp outlook, and I appreciate the conservatism. I just wanted to confirm, I mean, there's nothing that you expect different from the environment or from your share-taking ability. And I ask given that you had -- you've delivered on tough comparisons in the past and then you have the rollout of national advertising, which typically is a positive for consumer-oriented businesses. So just how do you put those into context and just making sure there isn't anything exogenous in that 3% to 5%.

Sure, Simon (sic) [ Simeon ] . This is Patrick. I'll take the question. Essentially, we were taking what we believe is a prudent and responsible approach to guidance, especially this early in the year. We've got a high bar for multiyear comparisons. I mentioned earlier that AB is -- hit at least 9.5% for the last 3 years. So we think this is a reasonable approach. From my perspective, this allows us to put early year guardrails around cost. Now everyone here, associates, managers, executive leadership, are all incented to beat the plan and beat the objectives. So we're excited to do that. And I would just simply say, to the degree that we're able to deliver better than expectation performance, we would see reasonable flow-through into the P&L, and you could probably look at our segment margins, Simon (sic) [ Simeon ], and assume that, that was a good floor in terms of flow-through.

And your comments about, I think, the start of the year and that you still have a lot of this quarter ahead and it's an important season. Just to clarify, there isn't anything unusual that you've seen in the beginning part, meaning that gives you pause or even optimism about it. I don't know to the extent you care to talk about that.

We're not going to be super granular on a quarter-to-quarter trend. We -- I gave you a couple of data points on costs that we're expecting. Beyond that, we're looking at 3 Q weeks, as I mentioned. And we're ready to go, we just have to see exactly how they play out and hope for less nor'easters. So I know there's nothing further to share there in terms of expectations.

Okay. And then my one follow-up is on incremental margins. We're trying to back into -- we look at this for any company, into the following year, what's sort of implied in the model. And I guess there are some adjustments and some moving pieces. And so I guess the question is what -- as you look at the flow-through of the business in 2018, is there anything unusual? Is it a little bit better than the way you had initially planned or a little bit worse? If you can share any color on that, please?

We're still looking and aiming for stable margins, and we think that's a pretty good outcome based on a couple of things. One, managing the wage pressure that we will feel in areas. And second, we continue to reinvest in the business. We think that building out the omnichannel capabilities are important. So at the EBITDA and EBIT lines, we are -- our guidance suggests fairly stable margins, and we feel like for the business this year and 3 years in the future, that's the right place to be.

And our next question will come from the line of Dan Binder with Jefferies.

My first question is around the hurricane benefit in the quarter. I realize you said, over 2 quarters, you didn't think it was that material. I was wondering if you could just isolate the benefit in the quarter. And my second question is around your comments around optometrist wages and retention. One, if you could just outline what that retention looks like. And then secondly, is the wage inflation that you're seeing there greater than you expected? And would you anticipate any price increases to cover it? If not, how do you plan to deal with it?

I'll take the first question in terms of the storm impact. In Q3, we disclosed a range of $3.5 million to $4.1 million of revenue impact, and you can certainly do the math on the comps. Now in my earlier remarks, what I was indicating was, if you take the downside of Q3 and the recovery in Q4, you're pretty much at a wash. So we view the business recovered nicely in terms of both Irma and Harvey. Harvey recovery had already started late in the third quarter, but most of the Irma recovery happened in the fourth quarter. On the cost side, probably still pretty close to a wash. We had a little more cost in third quarter because we were playing optometrists and associates. But in the fourth quarter, you'd get a little store payroll leverage and you would probably have a little better flow-through in margins. So all in all, I would say, take the 2 quarters and it really had a fairly immaterial impact on the business. And again, this is one of the most positive attributes of the business. You can have a short-term impact due to an external event and get a nice recovery. You can't always dictate or predict the timing on that recovery, but we have seen a couple of instances in 2018 that were good examples for this.

Good. And let me take the 2 topics related to the potential of wage inflation. We sort of bucket this in 2 different ways. One bucket relates to optometrists and one bucket relates to store-level associates. And we are happy to pay competitive salaries to both doctors and associates. That's something we focus on. Attracting and retaining optometrists is a big part of what we do, and compensation is an important part of that equation. With doctors, from time to time, in specific geographic instances, we see sort of flare-ups of wage inflation. And sometimes that comes into play in sort of the specific markets we enter. But it's generally a short-term impact and very sort of geographically-centered and focused. And then in terms of the associate level, we monitor this on a market-by-market and position-by-position basis. But the key thing I think you've got to keep in mind is that the competitive frame from a labor perspective for our store associates is often other optical players. We are -- most of the folks in this company have sort of defined themselves as people who are creating careers in optics and they consider themselves optical people. And most of us who have sort of spent some time here sort of stay in the category for all sorts of different reasons. And so our comparison point is often just other optical employers. We also have the advantage of our growth in terms of all the stores we build, which means we need more store managers and more district managers. So those folks in the category who are ambitious look to us as a place to create a long-term career. And I think finally, there's an aspect here of just feeling good about your work. If you're used to environments where the prices are really high and you come to us, you find there's a lot of fulfillment in being able to provide such great value and sort of being directly on the side of the customer and all that, so we find that's sort of an intangible that we provide culturally that people feel good about. So it's a holistic picture there. And I probably -- the short answer to your question is, this is all anticipated in the outlook we're providing, and we think we've put that in the outlook in the appropriate ways based on history and insight into sort of our future.

Reade, [indiscernible] I think the question also is regarding retention. And I do think, as a team, we're very focused on retention. And frankly, I think it's been the heritage of this company, in focusing on recruiting or retaining our doctors and being a place that they can join us and retire. And I do think that we're living up to that expectation. And certainly, I know our operations team is very much creating an environment to do so.

And again, retention -- the retention is strong and recruitment is strong. But I will say, again, Jeff came here with strong optical experience, and he walked in the door and the first thing he started talking about was making sure we were the best place for optometrists to spend their careers and be with us. And that has been a renewed focus of attention throughout field management. And it was one of those new eyes come in and bring us back to basics. I hope those answer your questions, Dan.

And our next question will come from the line of Bob Drbul with Guggenheim Securities.

I guess the first question that I would ask is, around some of the tax implications broadly for your customer base, are you seeing any change in behavior around like the tax -- some bonuses that are being paid to the lower income customers? And are you seeing that drive any change in behavior? And the second question that I have is you guys have talked about the monster truck-eyeglass partnership, I was wondering if that was at all a comp driver throughout the quarter.

Good. Let me take the 2 questions up. Well I will say, we do spend a lot of time thinking about taxes and our consumers. We watch the IRS website and sort of sort out what's been paid when and how that relates to prior years and when do tax returns start coming out. It's been sort of too early, I don't -- think that's been our area of focus relative to taxes and our customers, which is the refund piece. We haven't seen anything specifically tied to them feeling they have more money in their pocket thus far on this, but that's all sort of relatively new news there. And Monster Jam, again, we've been very happy with our partnership there. I do hope -- this is great family entertainment. If you -- if the Monster Jam comes to town, this is really a nice thing. It's not like anything you -- if you went to a monster truck show 20 years ago, it is not like that, okay? It is really a great thing and it's part of the constellation of elements that help of our comp sales. I wouldn't -- it's not as important as TV overall or pieces like that or our managed care partnerships or things like that, but it's a nice piece and it adds energy and visual interest and excitement, and is a different way in and a different touch point. And it's always fun when you open a new store and have a great big monster truck parked right outside, everyone wants to come over and see that. So yes, we're still going well. I think we had a few -- a bunch of folks inside a monster truck just about 2 weeks ago when they came to Atlanta.

And if I can just ask one more question. You guys had talked previously about just like openings on the optometrists, like how many positions that you had in the marketplace for optometrists that you had like open slots. Could you give us an update in terms of any markets where that is the case? And if you are having any trouble luring and hiring optometrists to the company?

Yes, we don't talk about that on a market-by-market basis. I mean, overall, we feel -- we're feeling just fine right now about retention and recruitment. And there's nothing unusual going on relative to recruitment and retention relative to the past year or 2.

[Operator Instructions] And our next question will come from the line of Zach Fadem with Wells Fargo.

This is Quinn Burch on for Zach. I was hoping you could just update us on the customers using health benefits or FSA accounts in your stores? And if you're seeing any changes in your newer markets versus existing markets.

We don't share that in detail. Managed care is a growth driver for us and has been for years, but we don't get into that. And these are market instances or not. Nice -- helps us nicely at the end of the year, as it always does. But again, no new news there. But we don't talk -- we don't go into depth of the specifics on that.

Okay. And then also, we've been seeing some more online eye exams and prescription renewals from some of your online peers. So I was curious to what extent you're testing some of these ideas and if we should view that as more of an opportunity or a threat to your business.

So I think there are 2 sides to that. We don't like to be the pioneer of something like that. There's a lot you've got to navigate from a regulatory standpoint and from an optometrist perception standpoint, and we are an optometrist-centric organization. We see technology and investments in technology and consumer-facing technology as an ongoing focus of investment and attention and ways of diminishing friction are always good. We see this as small now but emerging, and we are all over understanding it. We just think it's best to move to sort of think a lot about this and sort of make sure to get it right and -- but not much has changed in that area. But there are efforts out there, and we monitor, talk and try to figure out what's best for us and -- on that front.

Thank you. And I'm showing no further questions in the queue. So now, it's my pleasure to hand the conference back over to the management team for some closing comments and remarks.

Great. Well, thank you very much. I know a lot of you had to work hard to even get on this call today. So thanks for joining us and your interest in us. For those of you who are stockholders, thank you for the vote of confidence in our work that your investment reflects. And we will continue to endeavor to ensure you are happy you made that decision, and we're looking forward to talking to you all again soon. Thank you very much.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody have a wonderful day.