National Vision Holdings, Inc. (EYE) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to National Vision Third Quarter 2018 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 Mr. David Mann Vice President, Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to National Vision's third quarter 2018 earnings call. Joining me on the call today are Reade Fahs, Chief Executive Officer; Jeff McAllister, Chief Operating Officer; and Patrick Moore, Chief Financial Officer. 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 Investors section of our website. Before we begin, let me remind you that 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 in today's presentation also includes certain non-GAAP measures. Reconciliations 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 at our investor section of our website. Turning to Slide 3, on today's call, Reade and Jeff will discuss recent business highlights and provide a business update. Patrick will then review our third quarter 2018 financial performance and provide insights for the remainder of the year. 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. It's a pleasure to be speaking with you today to share our third quarter results. Turning to Slide 4, Q3 was a real good quarter for us, a quarter to be proud of. We're pleased to report our 67th consecutive quarter of positive comparable store sales growth. We remain quite happy with consistency and durability that this track record reflects. Q3 adjusted comparable store sales growth was up 6.8%. The growth was led by our growth brands with an 8.9% comp at Eyeglass World, and an 8.4% comp on America’s Best. Comps were once again driven primarily by customer count, not average ticket, which is the way we like it. Another sign of customer satisfaction is Net Promoter Scores. Our Net Promoter Scores improved across all brands year-over-year. This is a testament to the focus and store-level execution of our teams every day and in every store, one patient and one customer at a time. We opened 18 stores this quarter, which brings us to 58 new stores through the third quarter. We ended the quarter with 1,067 locations or a 7.1% increase in store count over the third quarter last year. The unit growth and comparable store sales growth combined to drive an 11.9% increase in net revenue. Adjusted EBITDA increased 7.3% and adjusted net income grew 57.7%. Since our last conference call, we have several noteworthy achievements to share. In September, our AC Lens business significantly expanded its contact lens distribution relationship with Walmart and we now manage most all contact lens fulfillment for Walmart except store replenishment. We're pleased to further assist Walmart and its customers. Note, this is the first expansion of our overall relationship with Walmart since 2013. In October, we refinanced $200 million of existing debt under our credit agreement to a lower rate of LIBOR plus 175 basis points. Separately, Moody's upgraded the debt credit rating on National Vision to Ba3 in September. These balance sheet enhancements helped to lower our borrowing costs. We strengthened our Board of Directors with the addition of Tom Taylor, CEO of Floor and Decor. It's nice to have a sitting CEO of a fast-growing successful public retailer on our board and the fact that he's based in Atlanta is added value as well. Finally, we're pleased to announce a multi-year extension of our lens purchasing agreement with Essilor. As you probably know, the recently merged entity is now known as EssilorLuxottica. We’re excited to expand this relationship with Essilor with a key long-term partner that allows us to continue to provide our patients and customers with world-class quality lenses at a low prices that they've come to expect from us. In today's earnings release, we provided additional insights regarding the remainder of 2018, which Patrick will take you through in detail. Overall, our third quarter results reflect the ongoing strength of our differentiated, value-focused and service-based business model and compelling value proposition that continue to resonate with our customers. This further drives market share gains in our very fragmented optical industry. Turning to Slide 5. Our business continues to demonstrate consistency in store performance and comp store sales gain. The graph highlights our 67 consecutive quarters of comparable store sales growth across the economic cycle during both strong and weak economic times. We noted continued strong comparable store sales growth as our third quarter comps increased in line with our year-to-date comp trend of 6.6%. This performance highlights the consistency derived from operating in a category where the purchase is tied to a medical necessity. The comp growth this quarter was driven, once again, primarily by gains in customer accounts. Our consistent positive comp results highlight the benefits of operating in the growth segment of an attractive industry, having a leadership team of optical experts, new store growth, as well as comparable store sales growth in our more mature stores as customers keep coming back. With our 12% sales growth year-to-date, we continue to believe that we're gaining market share in the $35 billion optical retail industry with our value-oriented operating model I want to say a few words about hurricane disruption this quarter. First, our greatest concern of course has been for the well-being of our associates and optometrists, their families and our customers. Our hearts go out to the communities and people whose lives were so disrupted by the Hurricane Florence this quarter, and Hurricane Michael in the fourth quarter. From a business perspective, the impact of net revenue and comps was more moderate than we experienced last year. We would expect sales in the affected areas recover as these markets return to normalcy, similar to our past experience with weather events. This again reflects the resiliency of the business tied to a medical necessity. However, as a result of severe weather activity this year, we currently have five stores that have been closed for an extended period and remain close today. Turning to Slide 6. We look to continue to execute on our core drivers of grow. New stores are our primary focus, even the white space opportunity relative to our current footprint. We opened 18 stores in the third quarter and remain on track to open about 75 stores this year, following the formulaic approach that has worked so well for us at the start. As we look out to 2019, the pipeline for location looks strong. A key to our ongoing success is our ability to attract and retain optometrist. We are an optometrist-centric company and strive to be the place for optometrist were to practice and stay for their entire career. Optometrist retention remains stable to last year and we work hard every day to fill our constant need for new optometrist to support our growth. For 2018, our team expects to continue to drive solid comparable store sales growth, even as we lack strong multiyear comparisons. Our key comp drivers are the comp waterfall from maturing stores, as well as our marketing and vision insurance initiative. Our new stores gained traction, as customer awareness grows over the first few years, given an infrequent purchase cycle for eyeglasses that averages two to three years. We strive to ensure that our customer gets the best value around and believe that our growth brand offer extreme values that resonate with the consumers. Two pairs of eyeglasses for $69.95, including a free comprehensive eye exam at America’s Best or two pairs of eyeglasses for $78 at Eyeglass World, along with the opportunity of same-day service from our in-store labs. We believe that this combination of incredible value, backed by excellent customer service, leads to satisfied repeat customers. As we have noted, existing customers represented over 60% of total customers at mature stores in 2017. We continue to invest in television advertising and digital marketing to attract new customers, as well as to remind existing customers to come back for another great experience. Our Owl TV campaign at America’s Best and the Mr. World campaign at Eyeglass World are helping to drive traffic to our story. We believe that our investments in marketing are paying off and a factor in our market share gains. Participation in vision insurance programs remains a positive comp driver. Net revenue growth tied to these partnerships continues to advance in the third quarter. We remain under penetrated relative to the industry for the percentage of our business coming from vision insurance. Let me now turn it over to Jeff, who in Q3 celebrated his one year anniversary with us, for a few operational updates.

Thank you, Reade. We have a low cost culture here at National Vision and we know that we can't be everyday low price without the everyday low cost. We are pleased with our progress towards opening our new state-of-the-art lab in Texas and we remain on schedule to be operational in time for the first quarter next year. We believe our centralized lab network is a world-class manufacturing operation that provides a true competitive cost advantage. We continue to make omni-channel investment to improve customer experience and operating efficiency. We're in the early innings of leveraging our new one view of the customer capability. In addition, online scheduling of eye exams continues to trend higher. We believe that an omni-channel approach is going to be an ever more important part of the optical buying process in future years and we aim to have this be a major competency for National Vision. We'd like to address the topic of tariffs and the potential financial impact to our business. As we commented on our last call, eyeglass pieces where the only item affected by tariffs imposed earlier this year on imports from China and these tariffs are not expected to have a material impact on our overall product costs. Having said that, this is a fluid situation and we will continue to monitor the status of trade negotiations. We estimate that less than 15% of our cost applicable to revenue are related to products imported from China and potentially subject to future tariffs. We are currently reviewing our contingency options to mitigate the impact in the event that additional tariffs are enacted. Let me hand the call over to Patrick.

Thanks, Jeff, and good morning, everyone. As Reade noted, our business continued to perform well in the third quarter. The two fundamental revenue drivers of our business are new store growth and comparable store sales growth. During the quarter, we added 18 new stores and closed 1 store. Over the last 12 months, we've added 71 net new stores or 7.1% year-over-year increase with the openings almost entirely in our America's Best and Eyeglass World brand. For these two growth brands combined, unit growth increased 10.5% in the quarter. We're on track for approximately 75 store openings this year which should be about 65 America's Best locations with remaining being Eyeglass World stores similar to the mix of openings between these brands in 2017. Year-to-date, we have closed four stores. As Reade noted, our total store count is 1,067 locations as of the end of the quarter. Our 2018 openings have been balanced between new and existing markets. In our newer markets, we continue to expand our store base and invest where our new stores are still ramping and building warehouse. We have noted that new stores historically taken approximately three to five years to mature. We are excited about these markets and see a lot of our potential customers there. The chart of adjusted comparable store sales growth presents our comps calculated on the cash basis. Same-store sales growth increased 6.8% versus the 7.0% increase in the third quarter of last year. This comp growth was driven primarily by increases in customer transaction. During the third quarter, we generated strong comps in our growth brands America's Best and Eyeglass World drove the growth with sales of 8.4% and 8.9% respectively. Legacy comps were flat in the third quarter. The comps for our Legacy stores were impacted by approximately 100 basis points by Hurricane Florence, given the segment store concentration in the Carolinas. Turning to income statement highlights on Slide 9. As a result of a solid comp and unit growth, net revenue increased 11.9% to $387.4 million. Revenue growth was negatively impacted by about 40 basis points by the timing of earned revenue. Finally, as a reminder, year-to-date, the company has experienced the elimination of approximately $5.4 million in revenue and cost associated with FirstSight operational changes that occurred in 2017. In the third quarter, which is the final quarter in which we experience this grow over, the impact was a reduction to net revenue of $1.8 million which had the effect of lowering revenue growth by 50 basis points but with no material impact on profitability. Net revenue included approximately $3 million from the new contact lens distribution relationship with Walmart that began in September. This expanded role involves contact lens orders that are shipped to Walmart corporate stores for customer pickup. Similar to other contact lens distribution that our AC Lens business provides for Walmart, this agreement is accounted for on a retail basis, though National Vision earns a modest packing and shipping fee. As a result, this business is expected to provide minimal contribution to overall profitability. Regarding storm impacts this quarter from Hurricane Florence and other weather events, we estimate that over 37 stores were affected for an overall impact on net revenue of approximately $1.3 million As Reade mentioned, we have five stores that remained closed as of today’s call. Cost applicable to revenue increased to 12.5% percent or an increase of 20 basis points as a percentage of net revenue versus last year. The increase was primarily driven by higher optometrist’s cost and the impact from the expanded contact lens distribution relationship with Walmart with a partial offset from a higher mix of eye exam sales as a result of our growing managed care business as well as vendor rebates driven by volume growth. Cost applicable to revenue before the impact of the new Walmart business increased 10.5% or a decrease of 20 basis points as a percentage of net revenue versus last year. Optometrist-related expenses reflect expanded coverage as well as wage inflation in certain geographic markets. As we have noted, we work very hard to attract and retain optometrists and compensation is an important part of this equation. SG&A expenses increased to 21.9% or an increase of 390 basis points as a percentage of net revenue versus last year. This increase was driven by stock compensation expense, cash expenses related to a long-term incentive plan for nonexecutive employees, our investment in advertising, and the continuing year-over-year impact of public company costs. These factors were partially offset by the impact of our expanded contact lens distribution relationship. The stock compensation and long-term incentive plan expenses represented approximately 360 basis points of the total 390-basis-point increase. The expanded contact lens distribution relationship aided expense leveraging by approximately 40 basis points. The long-term incentive plan apply to non-executive employees, who were not part of our management equity plan. The plan was put in place with the KKR acquisition in 2014 and the cash payments were triggered by the reduction in KKR ownership of about 50%. We have made investments for growth and incurred some incremental expenses that were not contemplated when we provided our 2018 outlook back in March, which I'll cover in more detail at the end of my remarks. I do want to mention that one such investment related to a citizen’s initiative in Oklahoma, we invested a total of $1 million in support of this initiative, with half occurring in this quarter and half in the fourth quarter. This onetime expense was an investment in growth potential in Oklahoma, where we currently have no store presence. The initiative would have allowed the provision of optical services and eye exams in big box retail locations. Unfortunately, the initiative failed to be approved by a narrow margin. Adjusted EBITDA increased 7.3% and adjusted EBITDA margin fell 40 basis points to 10% in the quarter. As expected, adjusted EBITDA growth was negatively impacted by 280 basis points from the net change in margin on unearned revenue. Depreciation and amortization expense increased to $3.7 million, compared to the third quarter last year. The growth primarily reflects our ongoing investments in new stores, our network of optical laboratories, and our omni-channel related investments. Interest expense decreased $5.4 million versus the third quarter of last year, primarily due to lower debt levels driven by the $360 million IPO debt paydown in the fourth quarter of last year. In terms of taxes, we recorded a $16.4 million income tax benefit this quarter, compared to $200,000 tax provision in the third quarter of 2017, reflecting a benefit from pre-tax losses at our statutory tax rate and a $13.9 million income tax benefit from stock option exercises. We expect our full year 2018 tax rate to be approximately 48% excluding the impact of stock option exercises, which primarily reflects the non-deductibility of certain items including the investment to support citizens' initiative in Oklahoma. Adjusted net income increased 58% to $9.2 million and excluded the income tax benefit from option exercises. Adjusted diluted EPS increased 16% to $0.12 compared to $0.10 last year. Turning to Slide 10 in our year-to-date results. Through nine months, our adjusted comparable sales growth was 6.6%, net revenues were up 12%, and adjusted EBITDA was up about 9%. Our performance highlights the consistency of our business over time. Adjusted EBITDA margin decreased 40 basis points to 12.0% primarily due to higher optometrist costs, investments in advertising, managed care and support of the Oklahoma citizens' initiative, as well as higher public company expenses. On Slide 11, at the end of the third quarter, our total debt was $574.8 million and our cash balance was 48.9%, net debt-to-adjusted EBITDA improved to 3.1 times, down from 3.2 at the end of the second quarter. Year-to-date, we have invested $78.8 million in capital expenditures with the majority of CapEx focused on growth initiatives. Cash flow provided by operating activities increased almost $20 million. In terms of our capital structure, we completed the $200 million term loan refinancingin October which lowered the interest rate on that tranche by 75 basis points for the existing loan rate. In addition, we were pleased to receive a corporate credit rating upgrade to Ba3 from Moody's which triggered a provision in our credit agreement that lowered the interest rate on our term loan debt by 25 basis points. Overall, we're very pleased with these improvements in our borrowing costs. Turning to Slide 12. As you saw from our press release, we're providing the following insights for the remainder of fiscal 2018. We expect adjusted same store sales growth to be at or above the top end of the range of 3% to 5% in our previously provided 2018 outlook. While we’re pleased with our year-to-date adjusted comp of 6.6%, we are facing our most difficult quarterly comp comparison of 10.4% in the fourth quarter which benefited from storm recovery last year. In addition, our AC Lens business is generating higher net revenue, including the expanded contact lens distribution relationship with Walmart that is estimated to add, at least, $10 million to 2018 net revenue. As a result, we expect net revenue to be above the range of our previously provided 2018 outlook. As noted, the expanded Walmart relationship is expected to provide minimal contribution to profitability and no impact on same store sales growth. We expect to incur during the year approximately $45 million for certain growth investments and incremental operating expenses by the end of 2018 that were not contemplated in our original 2018 outlook. These items primarily include investments to support our strong managed care growth, the Oklahoma citizens’ initiative and cyber security upgrades. Also, as noted last quarter, public company expenses have been running higher than initially expected as we work towards serving as per compliance this year. As a result, we expect both adjusted EBITDA and adjusted net income to be in the lower half of their respective ranges in our previously provided 2018 outlook. We expect capital expenditures to be near the high end of the range in our previously provided outlook driven by growth investments. On several previous calls, we've noted that unearned revenue can cause material swings in quarterly results. Unearned revenue was associated with purchases in the last weeks of the reporting period and can be difficult to predict. Historically, due to the significant revenue in the last week of the fourth quarter, the net change in unearned revenue is largest in this quarter and is seasonally negative. We are currently in the planning process for 2019. Consistent with last year, we look forward providing fiscal 2019 outlook on our year-end conference call in late February. This concludes my remarks. I will turn the call back to Reade.

Thank you, Patrick. Turning to Slide 13. In honor of Veterans Day on Sunday, we thank veterans for their service. At National Vision, we've developed an active veterans recruiting effort and now employed nearly 1,000 veterans and veterans’ spouses. We work hard to honor them in every way we can. For our moments of mission, let me introduce Dr. Dan Knepper, an optometrist at one of our America’s Best store in Nashville. Dr. Knepper recently saw a male patient who presented with numerous rectal hemorrhages. With some convincing from Dr. Knepper, the patient went straight to the emergency room where while he was waiting to be seen he suffered a heart attack. As I’ve said, routine eye care routine until it isn't, and Dr. Knepper saved a life that day. These moments of mission does not end there. Less than two weeks later Dr. Knepper saw a female patient with sudden vision loss and rectal hemorrhages and sent first straight to the emergency room too and probably saved her life as well. I want to thank our entire team at National Vision. These 11,000-plus associates, including the 2,000 optometrist, also including Dr. Knepper, who provides much needed medical services to patients at our over 1,000 storefronts every day. We strive to be the best at providing low price exams, glasses and contact lenses, while those at home and abroad we work in glasses and consequently sight and improved quality of life to those who would be unable to sell well otherwise. We are helped to fulfill this mission by our long-term relationship with others in the optical ecosystem. Essilor is one of those relationships. Essilor has been a great business partner for us for over a decade, as well as a great profit partner on a variety of fronts. Together, we share a common value of trying to bring improved sight to all, especially the low income and disadvantaged. As a business and fulfill profit efforts and partnerships, both in the U.S. and throughout the developing world. These efforts and these partnerships are part of the beauty that the work we do. Many of you have heard me say this before, that this is why we believe optical retailing is a noble profession. This concludes our prepared remarks and at this time, I’ll turn the call back to the operator to start our Q&A session.

[Operator Instructions] And our first question will come from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

I wanted to ask first about some of the added investments for the back half of the year. Can you talk about the planned payback either sales to margins and their timing as we think about it into 2019? Thanks.

Yes. I would just start of by saying it's - I want to note that we set a fairly tight range for EBITDA back in March, and we're still in that range. We have guided a little lower. As we kind of thought about those factors, we did call out $4 million to $5 million and also those in a couple of categories. The managed care incremental investments, we're very happy with our managed care growth, and we're simply making incremental investments to continue that. The Oklahoma initiative was effectively, we took a onetime shot, costs us about $1 million. Unfortunately, it didn't work as nonrecurring component. And then we've also got some of the public company costs. As we think about the investments, advertising, the managed care, we do expect that to continue to drive revenue. I don’t have specific return metrics to provide today, but we wouldn't be making those investments if we felt like those wouldn’t pay off.

And then a follow up on the Essilor contract you signed. I think you've teed it up to tell us that it was coming due at some point. Just wanted to check, the expiration I think was June of next year. So, this was sort of normal course to renegotiate at this point? So, that’s my first part of the question. And then any changes to consider? Are you giving up anything now that you have an extra five years or its normal course and steady as she goes?

So, the timing is normal course, and we - this is an extensional agreement on favorable terms that we’re happy with.

Great. Okay. Thanks.

And Simeon, this is Patrick. I think I just have one part of your question that I wanted to circle back to. We did guide back in August that we expected that our company costs to be a little higher this year. I do think this should be the peak year, assuming things go very well for us and certainly nicely. So those costs will obviously continue, but I think in a little more moderated level as we move beyond this critical first year.

And our next question will from the line of Bob Drbul with Guggenheim Securities. Your line is now open.

A couple of questions for me. The first one is just on the Eyeglass World business, continued strength, could you give us any update on the new marketing campaign, what's working there? And then the other question I have is, can you talk about the Sears bankruptcy and the opportunity or market share you think is available with what's going on there from your perspective?

We're pleased with the performance for Eyeglass World, 8.2% comp. That's real nice and we think the marketing was a factor in that. We do face a tough Q4 comp comparison. We're up 11.6% last year during - due to our hurricane benefit. But we think that - we're pleased with the formula. We think the new ad campaign is helping us a lot and operationally we've got fresh energy in the group there. So that is - your first question in terms of Sears, there are a little over 250 Sears of stores with optical in them. Of course the Sears' bankruptcy is not very encouraging for the future. There's disruption there that provides market share that provides doctors for us. And so - yes, we see this as being a nice part of a health toward growth and then healthy market share gain.

And I guess just one last question. Can you talk a little bit about as you continue to expand stores, store employee availability, and optometrist availability, can you just talk about the trends you're seeing in both of those areas?

We are finding availability even in that tight marketplace. As you know sort of optics is a portable field and a lot of people who work in optics, like us, say, hey, this is our field, this is what we're going to do, and sort of look at other places. And we're finding both in terms of optical people, and frankly I started I feel the other day, who started as a receptionist and worked her way up and that’s a great part about being a growing company you're able to provide those sorts of career growth opportunities and people see that with us. So that's encouraging. Yes. With optometrist, we are always out there recruiting optometrists. With our growth that optometrists feed our growth but we're not seeing any change in trend in that area, but we're always recruiting and that's part of being an optical retailer that’s growing lots of stores every year.

And our next question will come from Paul Lejuez with Citigroup. Your line is now open.

Just curious on that $45 million, how much of the incremental cost there was third quarter versus fourth quarter? Is there any specifics you can provide in terms of what incremental investments are necessary to support that managed care business. And if you can give us an update on where managed care revenues were this quarter versus last year, where we expect 2018 to come out versus 2017 and what’s the right number long-term? Thanks.

The $45 million is generally balanced across third and fourth quarter, so I’d probably would model it that way. In terms of the incremental costs, as we think about managed care, again, that are very important growth driver, we want to continue that growth. There are rather internal and external types of costs internally. You got billing and system support and externally you got reimbursement rates and fees. So there’s a whole portfolio things that kind of come in to that expense bucket necessary to drive it, to manage it and drive it. So I hope that gives you a little more color there. And then finally in the third quarter, we continue to see our penetration in Korea. We are still well under index to U.S. national average but we don’t disclose those specifics any more, but we could see penetration continue to pick up, right, continue to be a nice part of our growth. Expect that growth.

And our next question will come from Zach Fadem with Wells Fargo. Your line is now open.

Could you talk about the moving parts on the gross margin line? It looks like both your product and services margins were positive, but total gross margin is down about 20 basis points. How much is the impact of unearned revenue? And if it is, should we expect the impact to reverse out in Q4 and turn positive again?

So in terms of the gross margins, yeah, you’re right. The cost applicable to revenue were up about 20 bps. And if I normalize that for this new Walmart business that we talked about in AC Lens, that would be down around 20 bps. So, generally, I would characterize our margins is relatively stable. We continue to see a little OD cost pressure, although most of that in the quarter was really more concentrated in our legacy segment. I saw a little bit of moderation in the OD cost pressure in our own in-house segment. The [indiscernible] revenue was essentially flat on a year-over-year basis for the year-to-date. So I think it was about $1 million growth in 3Q.

So, Patrick is that 20 bps impact from Walmart, should we expect that to carry forward over the next three, four quarters until it anniversaries?

And actually I think what I’ll provide in our insights related to outlook is we expect at least $10 million in revenue there and it will probably be a little bit higher than that. And I think we actually released probably $15 million in the quarter. So you probably see that grow a little bit as you’re modeling those revenues approaching $10-plus million with frankly low profitability, but that should get you in the ballpark. I will mention a couple of positives on gross margin. As a consequence of our increasing managed care growth, we actually have more eye exams that are reimbursed. I mean that’s when managed care patients come in, they're not able to generally take advantage of our two office with free eye exams, so we're seeing higher levels of eye exams reimbursed. And then frankly, we have very good long-term relationship with vendors and we get broken through a couple of new volume levels this year and that's helped us in other product rebate. So I wanted to paint the full picture for you in terms of the levers and swing factors that I see in gross margin. But my headline is, generally stable.

That’s really helpful. And then briefly, you’re now more than a full year in on some of your newer California markets. I'm curious if you could just talk about how those stores have performed in year one, relative to your internal expectations? And now as these stores begin to enter the comp base, could you talk about the tailwind that is expected to have on your comp performance?

We don't like to comment about specific markets due to competitive reasons. Each market have its own competitive ecosystem. And certainly California is still early in the life cycle there. So our stores are continuing to ramp there as we build awareness. Our store ramp-up has historically been three to five years to get to maturity. But we're excited about these markets and there are just lots of potential customers for us in these markets.

And our next question will come from the line of Michael Lasser with UBS. Your line is now open.

In light of your expanded contact lens relationship with Wal-Mart. Should we do that if prélude of an expansion of the overall business that you're doing with Walmart? Perhaps getting more stores in not too distant future?

Well, we are pleased to expand the contact lens distribution business with Walmart. The first expansion of relationship since 2003 and what this is a - it's shipping to stores our contact lens orders for Walmart. There’s a nice chunk there. We focus everyday on our relationship with them. We've been saying for well over a decade that we want to be a great partner for them. And we've been their partner for 27 years. But in terms of their future decisions, you need to ask them that.

And as a follow up to that, the ballot in Oklahoma, ballot measure in Oklahoma, how is that…

Against the extras - I just want to say I think I misspoke it in the first expansion of the relationship since 2013, my friends here told me I said 2003. Sorry about that.

No problem. The ballot measure in Oklahoma trying to expand the availability of eyeglass for patient with big boxes. How does that play into it the fact that that did not go through? Was that just the overall…

So the initiative was very much - it was all about allowing optical stores and eye exams in big box location. Currently, the law says that you can't have optical stores in big box locations. It was narrowly defeated. In my opinion people in Oklahoma lost out for a broader access and lower prices. It doesn't materially impact the white space for our growth brands. It was really only just about big box retail, but we’re always looking for opportunities to invest in some levels that are favorable to consumers and favorable to expanding value.

And then my follow up question is on the Eyeglass World stores, in light of a soft compare you have in the fourth quarter but recognizing the strong performance of that business has keep in line for a couple of quarters. Should we be modeling a negative comp for Eyeglass World in the fourth quarter?

We don't really comment at the grand level in terms of our forward-looking guidance. I can't help you there. Regarding the overall comps, this management team impact to continue that winning streak of consecutive quarters of positive comp and look forward to discussing what we see in those specific brands as we cover Q4 in February.

And our next question will come from the line of Robby Ohmes with Bank of America Merrill Lynch. Your line is now open.

This is Marisa Sullivan, on for Robby Ohmes. Thanks for taking the question. I just want to pick up on the last question regarding the same-store sales outlook. The updated guidance implies that you would see a slowdown in 4Q on a one and two year stack and potentially even negative. So is that just conservatism around the tough compares or is there are there other factors that might be driving that implied outlook? Thank you.

So we're being careful this year. We are providing annual guidance and trying to get into a rhythm being a longer-term focused growth company. To not get too specific on the quarters. We haven't really guided at the quarterly level. We do manage this on a long-term basis. We did say about 2018 that we expect the comps to be at or above the top end of that 3% to 5% range. So I realized that if you kind of do the math at the bottom end, it can swing to flat or negative. We're not guiding at that point and we're - our intention is to continue that healthy streak of consecutive positive comp quarters. There are a couple of call outs in if this redundant, I apologize. But we got a 10.4% last year and there was significant storm recovery that we felt in - particularly in EGW but we really thought that it's tough for the other brands as well. Reade mentioned in his remarks and we have reiterated that we do currently have five stores that are closed. We're not exactly sure of the timing of when those will be opened. If those were to remain closed for the entire quarter, you're looking probably half a point of comp impact there. And then finally, I would just reiterate that last week of the year is a really big year, supercritical patients and customers are trying to exhaust in benefits remain. And so, those last few remaining four to five days in the year are really large days. That can be impacted by this pesky gap on our revenue tightening. And so, I don't know if you'd call it conservatism, but we did take all of that into consideration as we provided the annual guidance ranges that you can use to interpolate fourth quarter, I’ll just - kind of say we intend to continue to drive positive comps and do so with traffic.

And then just as a quick follow-up, you've had very strong comps year-to-date, just make some comments on the health of your customer and whether you're seeing any increases in their spending, of existing customers, maybe the more budget conscious customers, and whether your initiative and what you're doing around the vision insurance, you're seeing new customers coming in the door and has that accelerated? Thank you.

So, we're seeing new customers coming in the door. Yes, and we find this hard to extrapolate on sort of broader consumer trends in the marketplace, but we continue to believe that we're building market share.

[Operator Instructions] And our next question will come from the line of Matthew McClintock with Barclays. Your line is now open.

Reade, congratulations on the new Walmart deal. I was wondering if you could provide a little bit more context into term into how that deal got put into place. Was that something that you chipped away at and worked with them over a long period time? Was that something that they just made a strategic decision all of a sudden? And what do you think actually put you over the top for them to go with this new direction? Thank you.

AC Lens has had - our AC Lens division has had a good relationship with Walmart for a great many years. And have done really good work for them and provides really good service to them. And we're always saying, hey, if you want we could do this for you, we can do this for you, or we could do this for you. We just always like to be available if they need us partnering in the aspect of optics. And so at one point they said, well, this is a chunk that is being done elsewhere, we'd like you to do.

And then just as we think through the tariff issue, when we think through potentially other inflationary cost pressures, you've been very consistent with your pricing strategy over a very long period of time and provided exceptional value to the consumer. And I was just wondering is that something that you would ever be open to thinking about or is that something that's set in stone and you would try to always find other offsets? Thank you.

I'll take that question relative to pricing and anything related to tariffs if you will. As you spoke to the fact we are an everyday low price model, we think that that's really the service that we provide and certainly what our customers and patients have come to expect from us. We will never say never given the situation continues to be fluid in tariffs. But it's something that certainly we're going to do everything we can to maintain our price competitive nature and to ensure that we're providing the best value for our customers. So again, we're keeping our eye on all this and we're modeling different outcomes, and we'll make the right call point if we have more information.

And I'm showing no further questions in the queue at this time. So now, it is my pleasure to hand conference back over to Mr. Reade Fahs, Chief Executive Officer, for any closing comments or remarks. Please proceed sir.

Thank you, Brian. We want to thank you, all, for joining us today and for your continued interest in National Vision. For those of you who have not seen or heard television ads for America's Best Eyeglass World, we invite you to go online and they're included in a link on Page 22 of our presentation. We look forward to speaking to you again in early 2019, when we report our fourth quarter results. Thank you, all, very much.

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