National Vision Holdings, Inc. (EYE) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the National Vision Fourth Quarter Fiscal 2018 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's call, Mr. David Mann, Vice President of Investor Relations. Mr. Mann, you may begin.

Thank you and good morning, everyone. Welcome to National Vision’s fourth quarter 2018 earnings call. Joining me on the call today are Reade Fahs, Chief Executive 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 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 include 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 would also 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 recent business highlights and provide a business update. Patrick we'll then review our fourth quarter and fiscal 2018 financial performance as well as details of our fiscal 2019 outlook. Following the 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 on our sixth call as a public company. If you turn to Slide 4, I’ll take you through our Q4 and full-year highlights. 2018 was another record year for National Vision with Q4 reflecting another solid quarter of performance. Q4 net revenue increased 10.6%. We opened 16 stores in Q4, which resulted in 74 new stores open for the year. We ended the year with 1,082 stores or 6.8% growth. Q4 represented our 68th consecutive quarter of positive comparable store sales growth. This streak has continued for 17 years. We are quite proud of the consistency of this track record. Adjusted comparable store growth in Q4 was up 2.9%. The growth was led by our growth brands with a 5.9% increase at America's best and 2.3% at Eyeglass World. For the year, comps at America's Best Eyeglass World were up 7.2% and 6.8% respectively. Adjusted EBITDA increased 16.3% and adjusted net income improved $4.4 million swinging to a positive $1 million. Another sign of customer satisfaction and ambassadorship is our Net Promoter Scores, which we track closely. The annual NPS at all our brands increased to record levels this year. Since year-end, we've also had two noteworthy achievements that occurred in January. First, we opened our fourth domestic optical lab this one in Plano, Texas. This state-of-the-art lens manufacturing facility further positions National Vision to meet the expanding optical needs of consumers. Second, S&P upgraded the debt credit rating on National Vision to double B minus. Turning to Slide 5, 2018 was again filled with a number of highlights at National Vision. We expanded our footprint, increased market share and continue to reinvest in our business for future growth. The optical retail market remains highly fragmented and we continue to see a large opportunity in front of us. We're pleased to be driving profitable current growth, while at the same time reinvesting for sustainable long-term growth and market share gains. Our partnerships grew stronger as we signed a multi-year lens supply agreement with Essilor and expanded our contact lens distribution relationship with Walmart, the first expansion of our overall Walmart relationship since 2013. America's Best celebrated its 40th anniversary of delivering excellent value to cost conscious American patients and customers. Our advertising progress forward with continued positive response to the Owl campaign that America's best and the successful new Mr. World campaign at Eyeglass World. Our merchandising team continued to deliver assortments that exceed customer expectations yet a great values. Another example of this was our rollout of the Oakley brand to America's best story. We're proud of the service that we provide patients and customers in our story. In addition to our record NPS scores, Eyeglass World received well-deserved notice for America's Best customer service in an independent Newsweek survey of consumers. We continue to enhance our balance sheet as we refinance$200 million worth of our credit agreement. Moody's acknowledged our progress with a credit rating upgrade. We strengthened our board of directors with the addition of two independent board members, Virginia Hepner and Tom Taylor, who have provided valuable insights during 2018. We also made large strides in our social mission with advancements in America's Best, our Boys & Girls Clubs partnership and the successful pilot of a new program for Eyeglass World. Turning to Slide 6, it was another quarter of positive comps, further demonstrating the consistency in store performance and comp store sales team game. This graph highlights are 68 quarters of comparable store sales growth across the economic cycle both strong and weak economic times. As you can see, our comps can fluctuate quarter-to-quarter but it's been consistent over longer periods of time which we believe is one of the nice benefits of our purchase tied to a medical necessity. This quarter, comps were primarily driven by an increase in average ticket as well as a slight increase in transaction. As we've stated on past calls, our comps have historically been driven by increases in customer transaction. We believe that the unique calendar in the fourth quarter impacted transaction count. More specifically, the fourth quarter of 2018 had one less selling day in the high volume final week when customer traffic related to vision insurance is typically quite strong. This had a significantly negative impact on the number of customer transactions compared to last year. Also, our transaction count was negatively impacted by five stores that were closed for most of the quarter as a result of severe weather. Importantly, comps for America’s Best were more evenly driven by increases in transactions and average ticket with Eyeglass comps driven primarily by increases in transactions as we prefer. We were less pleased with the performance of our legacy and host brands. These brands face difficult comp comparisons from last year's robust performance. Having said that, we're working hard to deliver improvement in 2019. Overall our consistent positive comp results highlights the benefits of operating in a growing segment of an attractive industry, having the 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 double-digit sales growth in 2018, we continue to believe that we are gaining share in this attractive $35 billion optical retail market with our value-oriented business models. Our highly experienced management team continues to focus on execution. Every day, one patient and one customer at a time. Turning to Slide 7, we see a path to continued growth and market share gains. At the end of 2018, we believe that we were the third largest optical retailer in the U.S. and among the fastest growing. In 2019, we looked to continue to execute on our core drivers of growth. First, new stores our primary focus as we continue to see a wide 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 2020, the majority of our openings will continue to be in the America’s Best brand with the remainder in Eyeglass World. A key to our ongoing success is our ability to attract and retain optometrists. We are an optometrist-centric company and want to be the place of choice for optometrists, whether it be new graduates, paying off their student loans, or experienced optometrists looking for the ability to focus on pure optometry without the many burdens of running their own stores. This means having programs in place to help optometrists succeed such as enhanced onboarding, mentorship and start strong training for optometric condition and receptionists. Our efforts are paying off as we experience an improved optometrist retention rate in 2018. In fact, our optometrist retention rate was the best since we began tracking it six years ago. Second, we look to continue to focus on driving comparable store sales growth in 2019. Our key comp drivers are the comp waterfall from maturing new stores as well as our marketing and vision insurance initiative. 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. Two pairs of eyeglasses for $69.95 including a free comprehensive eye exam at America's Best or two pairs of glasses for $78 at Eyeglass World. We believe that this leaves the 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 store. Existing customers represented 64% of total customers at mature stores in 2018. We continue to invest in television advertising and digital marketing to attract new customers as well as remind existing customers to come back for another great experience. Our Owl TV campaign for America's Best and the Mr. World campaign for Eyeglass World are helping to drive traffic to our store. Our marketing team and external advertising agency continue to come up with catchy new versions of our advertising campaign. Our Owl campaign has played for years and continues to resonate and remind consumers that they've paid too much if they didn't shop at America's Best. The awareness and effectiveness of our Owl advertising continue to increase in 2018. We frequently hear our customers say how much they like the Owl and our ad. 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 continue to advance in the fourth quarter and 2018. We remain under-penetrated relative to the industry for the percentage of our business coming from vision insurance. Net revenue tied to vision insurance while fast-growing remains a minority of our revenue. Operationally, we continue to progress key initiatives to support our growth and drive operating efficiencies. We're pleased with the opening of our new state-of-the-art eyeglass lab in Texas last month. This new facility allows us to better support all of our brands and meeting the ever-expanding optical needs of our customers, both today and into the future. We believe our centralized lab network is a world-class manufacturing operation that provides a true competitive cost advantage towards being a low-cost provider. We can't be everyday low-price, without being everyday low-cost. And our labs are a key reason we’re everyday low-cost. We continue to progress our omni-channel efforts to improve the customer experience and operating efficiency. One of our key initiatives has been the online and mobile scheduling of eye exam, which continues to trend higher. As we've noted on past calls, we continue to closely monitor the tariff situation. Our exposure to tariffs on imports from China that have already been imposed which is limited to eyeglass cases, is not expected to have a material impact on our overall product cost. We estimate that less than 15% of our total cost applicable to revenue are related to products imported from China and potentially subject to future tariffs. We continue to review our contingency options to mitigate the impact in the event that additional tariffs are enacted. I'd like to comment briefly on the management realignment that took place earlier this quarter. In January, we had announced that Jeff McAllister was transitioning from his position as COO and is continuing his relationship with the company in a new position as special adviser to the board. The change in Jeff’s position was prompted by Jeff and the company reorganizing in a way that modified the current role and responsibilities of the COO. Jeff has agreed to serve in the special advisory capacity through the end of 2020 and I have assumed many of the COO responsibilities. Separately in Q4, we eliminated our SVP position by consolidating our brand leadership which streamlines our operations. Let me hand the call now over to Patrick.

Thanks, Reade, and good morning, everyone. My remarks begin on Slide 9. As Reade noted, our business continues to perform well in the fourth quarter. The two fundamental revenue drivers of our business are new store growth and comparable store sales growth. During the quarter, we opened 16 new stores and closed one store. For the year, we opened 74 stores and closed five locations or 6.8% year-over-year increase in unit growth with the openings entirely in our America's Best and Eyeglass World brands. For these two growth brands combined, unit growth increased 10.1% in the quarter. Our 2018 openings were 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 awareness. We note that the majority of our new stores have historically taken approximately three to five years to mature and pay back invested capital. We're excited about these newer markets and see a lot of our potential competitors there. The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same store sales increased 2.9% versus the 10.4% increase in the fourth quarter last year. As Reade mentioned, five stores were closed for much of the fourth quarter due to weather events, which hurt comparable store sales growth by about 40 basis points. As of today two of the stores remain closed. The comp growth was driven primarily by an increase in average ticket with a slight increase in transactions, customer transactions were negatively impacted by the one less selling day in the final week of the year as well as the impact in closed stores. Importantly, comps for America's Best were driven by increases in customer transactions and average ticket and Eyeglass comps were primarily driven by increases in transactions. During the fourth quarter, we generated solid comps in our growth brands compared to strong comparisons in last year's fourth quarter. America's Best and Eyeglass World generated gains of 5.9% and 2.3% respectively. Legacy costs declined 5.6 in the fourth quarter, the brand faced a robust 5.5% comp comparison for the fourth quarter of 2017 which was its strongest comp in almost three years. On a two-year stock, Legacy comps were relatively flat. Turning to income statement highlights on Slide 10. As a result of the solid comp and unit growth, net revenue increased 10.6% to $355.9 million. Revenue growth was positively impacted by about 70 basis points due to the timing of earn revenue. Net revenue included over $9 million from the expanded contact lens distribution relationship with Walmart which benefited revenue growth by approximately 290 basis points but had a minimal contribution to profitability. This line of business is one element of our larger 29- year Walmart relationship. Cost applicable to revenue increased 13.8% or an increase of 130 basis points as a percentage of net revenue versus last year. The increase was driven by the impact from this expanded contact lens distribution relationship with Walmart. Cost to pick applicable to revenue before the impact of the new Walmart business was unchanged as a percentage of net revenue versus last year. In the quarter, we experienced higher optometrist cost that were partially offset by a higher mix of eye exam sales as a result of our growing managed care business. Optometrist-related expenses reflect expanded coverage as well as wage inflation in certain geographic market. For our doctors, we pay competitive salaries for the good work that they do. As Reade noted, we work very hard to attract and retain optometrists and compensation is an important part of this equation and our improved retention rate. SG&A expenses increased 8.8% or a decrease of 80 basis points from a percentage of net revenue versus last year. This decrease was driven by the impact of the expanded contact lens distribution relationship, which benefited SG&A expenses by 120 basis points as a percentage of net revenue. Higher stock compensation and long-term incentive expenses as well as the support of the citizens’ initiative in Oklahoma were partially offset by IPO-related sponsor fees paid last year and lower write-offs with managed care receivables this year. Adjusted EBITDA increased 16.3% and adjusted margin rose 40 basis points to 8.1% in the quarter. Adjusted EBITDA growth benefited by 660 basis points from the net change in margin on unearned revenue. We would expect that this timing benefit would reverse to some extent in the first quarter. Depreciation in amortization expense increased 15.4% compared to the fourth quarter last year. The growth primarily reflects our ongoing investments in these stores including the impact of capital leases, our network of optical laboratories, and our omni channel-related investments. Interest expense decreased $5.4 million versus the fourth quarter of last year primarily due to a decrease in deferred debt cost amortization as well as lower debt levels both of which resulted from the $360 million IPO debt pay down in the fourth quarter of 2017. In terms of taxes, we recorded a $10 million income tax benefit this quarter compared to a $47 million dollar tax benefit in the fourth quarter of 2017. This reflected a $7.5 benefit from stock option exercises this year and a one-time $42 million benefit last year associated with the new tax legislation. We project our 2019 tax rate to be approximately 26% excluding the impact of stock option exercises. Adjusted net income increased $4.4 million to a profit of $1 million and excluded the income tax benefit from the option exercises. Adjusted diluted EPS of $0.01 swung to a profit compared to the adjusted diluted loss of $0.05 per share last year. Turning to Slide 11 and our full year results. Our adjusted comparable store sales growth was 5.7%, net revenues were up almost 12% and adjusted EBITDA increased over 10%. This performance highlights the consistency of our business over time. Adjusted EBITDA margin decreased 20 basis points to 11.3%. This production reflects the impact of the expanded Walmart contact lens business and higher public company expenses partially offset by the benefit from the net change in margin on unearned revenue. We're pleased to have delivered relatively stable margins in 2018 as we have continued to reinvest some margin gains into the business. We believe these investments, such as advertising, optometrist's related programs, and omni channel capabilities will help drive continued consistent top line growth and market share gains over the longer term. On Slide 12 at the end of the fourth quarter, our total debt was $578 million and our cash balance was $17 million, net debt to adjusted EBITDA was 3.2 times. We were pleased to receive the corporate credit rating upgrade to be A3 from Moody’s in September which lowered our interest rate on our term loan debt by 25 basis points. In addition, during the quarter we completed a $200 million Term Loan A loan refinancing which lowered the interest rate on that tranch by 75 basis points from the existing loan rate. In January of 2019, S&P raised our corporate credit rating to DD- which triggered a provision that lowered interest rate on our new Term Loan A loan by an additional 25 basis points. We're very pleased with the improvements to our borrowing costs. For the year we invested $104 million in capital expenditures in line with our outlook with the majority of the CapEx Folkestone growth initiatives including our new Texas lab. Turning to Slide 13, now I'll conclude with some commentary regarding our 2019 outlook which we included in today's earnings release. Our 2019 outlook is as follows. Net revenues of $1.675 billion to $1.705 billion adjusted comparable store sales growth in the range of 3% to 5% percent opening approximately 75 new stores, adjusted EBITDA between $186 million and 191 million and a vested net income between $53.5 million and $56.5 million. We project another year, our 18th consecutive year, of positive same-store sales growth in 2019. It's important to remember that while we expect our growth brands to continue to perform well, we will be facing challenging comparisons from the strong comp trend for the last four years especially at our America's Best brand. As a result, we believe it is responsible to plan a business in the 3% to 5% comp range as reflected in our 2019 outlook. Store opening this year will continue to be predominantly America's Best locations with the remainder being Eyeglass World stores. Most of our store growth will be in existing markets and openings are expected to be skewed towards the first half of the year. We project that these store closings as is typical each year. We expect to generate $20 million to $25 million in incremental revenue from the expanded Walmart contact lens distribution relationship, which as noted would dampen our adjusted EBITDA margin due to the minimal contribution to profitability for this line of business. We estimate that our adjusted EBITDA margin before the impact of this incremental Walmart business to be relatively stable despite approximately $4 million in planned incremental investment in cyber security this year. Specifically, the cyber security investment is estimated to have a negative impact of 20 basis points to adjusted EBITDA margin as well as over 200 basis points to adjusted EBITDA growth. We're pleased to be delivering stable margins while making smart investment decisions that will drive future growth. We expect depreciation in amortization of $88 million to $90 million or about 20% growth at the midpoint and similar to our growth rate in 2018. Since 2015, we've been investing at a high rate and increased e-store growth, land and system improvements to support that growth and more recently enhanced omni-channel capabilities. Given the depreciable lives of these investments, G&A growth should continue to outpace revenue growth over the next few years. Finally, we estimate annual interest expense to $36 million to $37 million and CapEx between $100 million and $105 million or very similar to the 2018 level of investment. As you can see from our guidance, we expect another year of consistent growth driven by the underlying momentum in our business. Let me highlight a few other factors that will affect the P&L in 2019. First, the incremental contact lens distribution business with Walmart will increase our cost applicable to revenue as a percentage of revenue and reduce our SG&A expenses as a percentage of revenue. Before the impact of this Walmart business, we would expect generally stable margins in 2019. As a percentage of revenue, we would expect cost applicable to revenue to turn flat to down and SG&A to be flat to up slightly. Second, cyber security is an enhanced focus. This plan formally an investment is a near-term growth pressure but it's an important investment to support the forward momentum of our business. Finally, our new Texas lab is a prime example of growth investments we're making today that we believe will drive future performance. Over time, we expect to see benefits for our unit cost from this lab. In 2019, as this lab ramps up, we expect to see a modest drag to adjusted EBITDA in the range of $1 million to $1.5 million in a similar amount of depreciation. So the overall impact is a little heavier to adjusted net income in the range of $1.5 million to $2 million. As we have indicated on prior calls, we do not provide specific quarterly guidance. However we do want to make sure that you take into account the expected impact of these items on quarter-to-quarter comparison in 2019. We expect that certain items will impact adjusted EBITDA in the first quarter, collectively in the range of $7 million to $8 million. The majority of the estimated impact of these items is timing-related and tied to the net change in margin on unearned revenue as well as the timing of vendor rebates. Additionally, we expect the impact from our investments in cyber security and our continued support of managed care growth. But as you can see from our outlook, we would expect solid adjusted EBITDA growth over the remainder of the year. As a reminder, as we enter our peak selling season, the timing of tax refunds is a variable that can affect our performance between our first and second quarters while our business can experience fluctuations quarter-to-quarter due to timing and other factors. Our business has delivered very consistent results on a semi-annual to annual basis. As of January 1, 2019, we are adopting new lease accounting standards. This new standard alters our accounting for operating leases as we are required to record a right to use asset and corresponding liability on the balance sheet. We estimate that adoption will result in additional assets and liabilities in the range of $325 million to $345 million with no material impact on our cash flows or profitability. Finally, as noted in today's release and 10-K filing, we made immaterial revisions to prior period financial statements related to lease accounting. These revisions were noncash in nature and not related to business operations. As you think about our 2019 outlook and how the impact of these revisions roll forward, we would note that the projected impact to adjusted EBITDA is in the vicinity of $2 million. In summary, we're very pleased with our consistent performance in 2018. We're focused on executing our 2019 growth initiatives and look forward to delivering another year of consistent growth. At this point, I will turn the call back over to Reade.

Thank you, Patrick. For our closing moment of mission, I'd like to share the work of the Clear Vision Collective. We have, in the past, shared that we partner with an ecosystem of businesses, non-governmental organizations, social enterprises, and governments - the groups that impress us with their dedication and approaches to sustainably solving the problem of the lack of available affordable glasses for the world's poor. Starting a year and a half ago, many of these groups began to form into something we call the Clear Vision Collective and chose Bangladesh as the ideal place for a variety of reasons for all of us to test working together in a coordinated manner. In January, we collectively launched a pilot project in the Sherpur District of Northern Bangladesh with the hopes of proving a program that can someday expand to Bangladesh's 165 million people. We are working in partnership with VisionSpring, Essilor, OneSight - which up until recently was [indiscernible] internal philanthropic arm - restoring vision, orbit, and other and local governments and others. We look forward to the possibility of sharing successful news of this collective action in the future. I want to thank our entire team for their dedication to patient and customer happiness and their execution of our store formulas. We strive to be the best business-wise at providing low-priced exam glasses and contact lenses; while at home and abroad, we work to bring glasses, and consequently sight, to those who would be unable to see well otherwise. This concludes our prepared remarks. I will turn the call back to the operator to start our Q&A session.

Our first question comes from Paul Lejuez with Citigroup.

Just curious if you can talk about gross margin and the core, AB and EG business, with just the moving parts on the Walmart lens business. I'm curious what's happening on the core. And related to that, have you seen the drag from optometrist's cost get any less severe in the fourth quarter relative to prior quarters? What do you assume for FY 2019 as it relates optometrist's costs. And I'm just curious, Patrick. Free cash flow assumption for FY 2019, if you can provide that. Thanks.

I missed the last - Paul, I missed that last question, say that in the third part?

Free cash flow for 2019.

So unpacking the gross margin, if we take the new AC Lens Walmart contact lens distribution and put that to aside, gross margins were generally flat in the core business if I look at kind of combined owned and host and legacies. Most of the impact in the quarter was the new business mix. Inside of those two lines of business, so a little better performance being owned and host. And in general, we've got the higher early compensation from wage inflations we've discussed and that is being offset to a degree by more paid eye exams as we continue to increase our managed care penetration. So fairly stable margins in the core business, mostly a function of mix. In terms of OD inflation pressures, really, that’s trending about the same, Paul. I haven't seen that really spike up or improve significantly so that's a little bit – that’s similar in terms of free cash flow will be, I mean it’s been our EBITDA guidance. We’ve seen our CapEx guidance. The bulk of that will go into new stores and continued growth, and we'll be improving cash balances a little bit during the year.

And what should we expect from the inventory side, just sort a bit of a tick up in this quarter, just curious how that might impact free cash flow.

That was a little out of the norm. And it was very intentional. As you're aware, we've kind of talked about the potential for China tariffs and that’s very fluid. We took some opportunistic forward buys in December in the event that could help us if those tariffs were to come into play in this year. So that was a little out of guardrails and it was a little bit of a defensive move. So I would say that I wouldn’t expect to see inventory levels be out of any normal ranges other than that forward buy as we think about 2019.

Nice benefit of a product that isn't a perishable. You can buy ahead if you want to.

Our next question comes from Robbie Ohmes with Bank of America.

I was hoping, you know, Reade and Patrick, maybe you could talk a little bit more about the comps. I understand the tough comparisons but the comp guidance is below the long-term average that you guys have been doing. Do you expect to sort of run a 3% to 5% this year and then maybe get back more in line with the mid-single digit range and maybe more thoughts on how to think about that, or are you just being conservative? Are there things you're doing that could drive some upside to that 3% to 5% forecast for this year and maybe roll into that. You did launch those advertising campaigns. It did so well. Is that going to grow this year? Are there a lot of initiatives that could drive upside there? Thanks.

Robbie, I'll start to talk a little bit about our guidance philosophy on comps. We used the 3% to 5% range this past year in 2018, again in 2019. We think it's responsible for the business to be set up to perform well and profitably in that range that we exceed that range. We get obviously flow-through benefits for that. But I don't know if I'd call it conservative. We think that you'll never quite know what degree of weather or hurricanes or events we're going to see and we like to provide a guidance range that we feel very confident in meeting and hopefully beating as we did in 2018?

And just a follow up question on the Walmart, on the legacy stores there. Any strategies to improve the performance there that you can call out?

First of all, in those brands in our host brands, we had sort of a tough year of year-over-year comparisons. Last year, our legacy business was up 5.5 comp points and that was our best comp since early 2015. And of course we did have that one less selling day that hurt us in 2018. But I think that there's opportunities to make the execution sharper in those areas and we've put some adjustments in place to ensure that happens. So we've made some changes and I think we're just going to be crisper than we were. And of course it's also nice that we have such strong growth in our comp in our growth brands to offset that.

Our next question comes from Simeon Gutman with Morgan Stanley.

My first question is on margin expansion, I'd say more broadly thinking about 2019 and then maybe beyond. Curious if the business model should allow for it? I'm thinking big picture. And should we just focus on dollar growth or have there been investments post IPO technology investments, public company costs that roll off that do allow this business model to look – to get leverage over time?

I'll take that question. So as I think about 2018 and 2019 combined, the company has maintained relatively stable core margins while continuing to make good investments to drive future growth as you mentioned. This kind of puts the new capital grow-over aside and the business mix implications of Walmart. So as we drill into the own and host in Legacy where the bulk of profit dollars or our margins have been relatively stable. We've done that while investing. We've increased our degree of advertising spend, drive traffic and build new market awareness. We are rolling out new better recruiting retention programs for our optometrists. We've met market wage levels for managed care we discussed last year, supporting this important component of growth. And as I've remarked in my comments earlier, we've just built a very new state-of-the-art site of our domestic lab. So stable margins have been in place as we've been investing relatively heavily. We've also managed through some degree of general wage inflation, and I think most retailers have seen. We're focused on smart ways to reduce costs without affecting our track record of strong consistent comp growth. I do think that each time we invest in a lab, we get unit cost efficiencies out of that. I would continue to expect to see those, and I would expect to see us leverage corporate costs and even advertising where we earn national advertising for AB. So I'm not ready to define this as a specific margin expansion story. As I've said before that I do feel like spending related in the right foundation for that.

My next question, my follow up is for Reade. I wanted to ask about the COO position. Can you talk about the rationale when it was created? What was the role in vision? How will those responsibilities get done? And look, I think we all know it shouldn't be a commentary on Walmart. So rather than answer that, maybe can you talk about anything new with regard to expanding that relationship?

I'll take the second part. I'll take the second part first. Again, we have that expansion of the contact lens distribution business last year with Walmart. We're always focused on being a great partner with them. And we're in touch with them frequently on a variety of topics and we feel the relationship remains quite strong. There's been no change in that relationship recently nor did the change in the COO position reflect anything about our Walmart relationship. The change was prompted by Jeff and the company, sort of reorganizing in a way that modified the role and Jeff has agreed to serve in an advisory capacity through the end of next year, and I'm taking many of his roles and dividing up other pieces within the group. We are a very highly experienced team of folks who have been here consistently for a long time; all sort of optical folks, so we're not expecting big business interruption there, and I'm not going anywhere. I’ll have my 17th anniversary with the company. So, yes.

Our next question comes from Matthew McClintock with Barclays.

Reade, I was wondering, with all the noise out there in the press regarding a delay in tax refunds are you seeing any issues or any challenges that your business is facing right now or do you expect to have any near-term pressure from that? Thanks. That’s my first question.

So, we don't we don't talk about intra-quarter events and we don't like to talk about – what you're talking about Q4 not about Q1. Where we are in optics is we are currently entering sort of our key selling season. This is for optics is like the middle of December for most other retailers and tax refunds are an important part to the Q1-Q2 selling season. It is early. Our core customer is just now starting to get their tax refund dollars. So, it's really hard to comment in any way on that. But were a purchase tied to a medical necessity. Your eyes go bad, you need to fix it to be able to get by in life, and we provide great values out there so. So we’re still sort of seeing how the cards play in Q1 and Q2sort of seeing how the cards how the card play in Q1 and Q2 on the tax refund a bit but not much I can really share now.

I appreciate the color that you did – that you could provide. So thank you for that. My second question is just Patrick in terms of the DNA – elevated DNA spend over the next couple of years I think is the comment that you said. I think this year, did the increase in DNA accounts for most if not all of your adjusted EBITDA growth? Should we expect that relationship to stay over the next couple of years as well?

In terms of DNA as I remarked on the phone, back in 2015 the company moved from building 40 to 50 stores per year to about 75 per year. And we're still in the – we're still in the process and flow of those build outs that have capitalized lives – depreciation lives that stretch out longer than five years. So we are seeing DNA growth outpace revenue growth and we expect to see that for a bit. We're pleased with the investments we're making. We're pleased with kind of new store acceleration. We're pleased with the market share that we're getting out of that. We're getting the right returns that we are in somewhat of an investment cycle that should normalize in the next couple of years as those depreciation rates fall off.

Our next question comes from Stephanie Wissink with Jefferies.

This is Ashley Helgans on for Steph Wissink. Thanks for taking our question. When we reconciled your net income guidance to EBIT and imply something distinct is going on with the tax rate. Is that related to stock comp? Any clarity around that would be appreciated. Thanks.

Yes. We've seen some pretty substantial swings and stock comp in 2017 and then 2018.I think the number I used earlier was about $7.5 million of impact. So the go forward tax rate is expected to be right there on top of 26% excluding any future noise around stock compensation, and happy to unpack that in more detail if that would be helpful a little later as well.

Our next question comes from Bob Drbul with Guggenheim.

Just a couple of questions on, as you continue to invest in advertising, can you talk about an updated view on where you are in terms like household income levels in your customer base, and are you getting a newer, higher income customer into your stores? Do you think and I guess the second piece of that is, you mentioned the addition of the Oakley brand. Can you give us an update on the good, better, best mix in terms of the product, and the glasses, and the frames and sort of where that's trending as well? Thank you.

Yes. So I’d say the summary to both those is things are staying pretty consistent. So we are not seeing a significant change in the demographics of our customers. We're still going to – it's still a big target that’s cost conscious, on the contrast American consumer but we're not seeing a change in that. But we do like to advertise and keep our message fresh in their heads for when they're entering our category. And similarly on Oakley, so yeah, we aren't seeing a large increase or many changes in the mix overall. We do like to have brand names at the high end of our range, some consumers are excited by that and certainly a minority of our consumers are buying the fancy names like that. But there's a nice sort of a halo effect that comes sort of having those names there, gives a nice halo to everything else we have in the store. So it's sort of a balance. The thing it's been that way for a long time. So it's nice to have the ugly name in there. There's a consumer that really loves that. There's a great value. But no change in product mix of significance from that. No change in customer base. Steady as she goes.

[Operator Instructions] Our next question comes from Zach Fadem with Wells Fargo.

On the omni-channel front, you talked about online exam scheduling. Curious if you could talk about additional digital offerings that you're testing like online try-on? Curious what else you're considering on that front.

Yes. We sort of looked at and trial in various ways all sorts of things. I am confident we're sort of in touch with every innovation that is out there and sort of see them in sort of sequencing mode. We like sort of things like online scheduling of exams and staff and sort of text to confirm your appointment and those sorts of communications. Now, we are trialing virtual try-on and have an investment in what I think is considered the leading virtual try-on company. And so we track and trial almost everything that we think is going to impact and any innovation is going to impact us in the near term.

And also with respect to cannibalization of your stores. Could you comment on the impact in 2018 and then with your openings trending towards existing markets this year. Do you expect cannibalization to weigh on your results as we move over the next 12 to 18 months?

We always factor in cannibalization to our models. When we do a pro forma, we are – it all depends on how near the store is. But that is always something we calculate before deciding whether we're going to select a location. But I'm not feeling you're going to be hearing us talk a lot about cannibalization in 2019.

And one more quick one, any changes in the trend of managed care penetration?

Managed care continues to grow nicely for us. It has for the past several years. It will continue to, I believe continue to grow nicely in 2019. Nothing dramatic, I would say, consistent growth over the years. But I'll say that it's still a minority of our business that we're under penetrated relative to the industry overall. And that comes about for two reasons. One is, because we're over penetrated in non-managed care business. We believe that’s because when it's your money and your decision is not influenced by insurance-related things, you seek out true value and therefore you come to us. So that's why we're over penetrated in non-insurance business. And why we're under penetrated and still growing so much in insurance business is sort of, when we bought America's Best, it had - it didn't even take insurance. It didn’t participate at all. So the story of the year since we bought America's Best has been one that’s steadily adding more plans and relationships with insurance companies that have helped us and that will continue.

And our next question comes from Michael Lasser with UBS.

My question, what's been driving the increase in the average ticket and have these stores been incentivized any differently to drive the average ticket increase?

No. The stores have not been incentivized any differently to drive the average ticket. That's not how we generally play that. We saw a modest increase, most of that was product mix shift driven by customer behavior especially related to contact lenses where people were just sort of choosing fancier and better and added value contact lenses. Traffic continues to be the main driver of comps for eyeglasses. There's a difference between eyeglasses and contacts. We'd like to say we sell glasses but people buy contacts, but there is no incentive difference in that way.

So the comp in the fourth quarter was more sort of driven by the dynamic with contacts rather than eyeglasses? And is that a change from where the trend has been over the longer term?

It's Patrick, Michael. One of the other big factors in Q4 was the – what we think was the lost selling day in that last week of the year. That last week is a huge sales year. That can be one of our top one or two weeks of the year. So I wouldn’t put a factor on and call it, put a two-day factor or whatever on it But we lost a really big day. Average ticket, due to that day loss, it didn't really move in the quarter. So you had a big selling day-out out of the overall denominator of selling days. And that had a pretty decent impact on comps in terms of traffic. And additionally, the five stores that were closed. So as we kind of zeroed in and looked at the quarter excluding that last week, we saw trends that were a little more consistent with what we've been seeing.

And my follow-up question Patrick is, the amount of aggregate adjustment in 2018 were up about 6% year-over-year. How should we think about that number looking towards 2019?

There were a couple areas of large and just add-backs that were abnormal. One was all the stock comp and we can certainly unpack that on our – after call if you'd like. We obviously disclosed it in the K. The second area was any other incentive compensation. And then finally, we had some goodwill impairment. We impaired the trend in military brands. And so between stock comp and military, you saw some out of the guardrails degrees of figures there. What I would call kind of a normal add backs, we're still in the upper mid-single digit million range.

Thank you very much.

And the purpose on all of that is to get the noncash items out of the momentum adjusted EBITDA.

Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

Thank you, Sherrie. We want to thank you for joining us today and for your continued interest in National Vision. For those of you who would like to see our latest television ads which are quite fun for both America's Best and Eyeglass World, we invite you to go online and have included a link on Slide 23 of our presentation. We look forward to speaking with you again later this spring when we report our first quarter results. Thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.