Ladies and gentlemen, thank you for standing by, and welcome to the National Vision Second Quarter Fiscal 2020 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your host, David Mann, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to National Vision's Second Quarter 2020 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 presentation, which will be referenced during the call, are both available on the Investors section of our website, nationalvision.com, and a replay of the audio webcast will be archived on the Investors page after the call. Before we begin, let me remind you that our earnings materials and today's presentation includes 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. Reconciliation of these measures are included in our release and the supplemental presentation. 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. As a reminder, National Vision expects to provide certain supplemental materials or presentations for investor reference on the Investors section of our Web site. Now let me turn the call over to Reade.

Thank you, David. Good morning, everyone. I'd like to thank you all for joining us today. We hope that everyone is doing well and staying safe during these adverse times. Turning to Slide 4; the second quarter represented one of the most eventful periods in our company's history and our respective careers. The key highlight to our quarter was the successful, safe and gradual reopening of our stores that was completed by early June. All of our stores were closed to the public for about six weeks beginning in mid-March, during which time, our cross-functional safety committee developed the protocols to operate safely and remain open during this pandemic. These protocols include heightened cleaning and disinfecting procedures, personal protective equipment, social distancing in stores and expanded health and safety training. Also, we have adopted a face coverings required policy in all of our stores. We believe that we have implemented an effective safety-first approach to serve patients and customers in a COVID-19 environment that has been successfully integrated into our store operations and while some adjustments may be needed as the environment dictates, we believe that we are well positioned to continue our store operations through the remainder of the COVID-19 pandemic regardless of its duration. Turning to Slide 5; since early June, our stores have been open and returned toward more normal operations. We've brought back furloughed associates and normalized hours and compensation across the organization, including executive officers. We have also resumed the opening of new stores after a temporary pause in activity. In May, we significantly improved our liquidity with a highly successful convertible note offering in the week following our last earnings release. With our strengthened balance sheet, we are confident in our financial flexibility and liquidity to navigate this pandemic. During the last several months,…

Thanks, Reade, and good morning, everyone. Although the impacts of COVID-19 weighed heavily on our second quarter performance, we were pleased by our rapid sales recovery since reopening, our actions to strengthen the balance sheet and our demonstrated ability to navigate the pandemic. Turning to slide 11. Let's dive into Q2 results. After entering Q2 with the pause in our real estate development activity, we resumed unit growth in May. We opened 11 new America's Best stores, one Eyeglass World store, added the five Walmart Vision Centers and closed five stores. We ended the quarter with 1,185 stores for a 5.1% increase in store count in the past year. For our America's Best and Eyeglass World growth brands combined, unit growth increased 6.3% over the last 12 months. The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same-store sales decreased 36.5% during the quarter, driven by the decline in customer transactions due to store closures, partially offset by an increase in average ticket. By category, we experienced stronger contact lens revenue growth in Q2 compared to eyeglasses, as expected, since contact lens customer transactions were less impacted by the store closures. As Reade noted, we were pleased with the strong recovery in our business in June and continued momentum through July. While we typically do not provide monthly comp detail, given the unique situation due to COVID-19, I'd like to share a little more context about the June comps specifically. In June, our comps were driven by increases in both average ticket and customer transactions. By product, we experienced positive comps in both the eyeglasses and contact lens categories as the product mix of eyeglasses sales to contact lens sales normalize toward historical levels. June eyeglass comps were driven by increases in customer…

Thank you, Patrick. Turning to Slide 17 and Moment of Mission. As matters of diversity, equity and inclusion are ever more on the minds to both consumers and associates, this is the topic I thought I'd speak about today and share recent actions at National Vision. In June, as our country was grappling with a sudden heightened consciousness of age-old racial injustices and inequities, our messaging on social media and internal communications highlighted our commitment to equity in our company and broader society. We established a Diversity, Equity and Inclusion Council in order to give a stronger voice to blacks and other minorities within the NVI family. We became a founding co-sponsor of Black Eyecare Perspective's IMPACT HBCU program, a program designed to attract black students to the field of optometry. We are pleased to support Black Eyecare Perspective in their goal of, to increase the number of black optometrists to 13% from the current 2% level. These actions further reinforce our ongoing commitment to enhance diversity and inclusiveness throughout our organization. We look forward to sharing more in the future as we strive to be an ever more inclusive workplace and corporate citizen. In summary, I want to thank the entire team at National Vision, including the over 2,000 optometrists who have risen to the adversity that this COVID era presents. As I think about the events of the last several months and how the entire National Vision team performed, I could not be more proud and appreciative of their inspiring endurance. With that, I'd like to turn the call back to the operator to start the question-and-answer portion of the call.

[Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

My first question is on comps. I want to ask, you mentioned you expect comps to normalize going forward. Do you think there's a new normal for what normalize means, or is it the old normal? And I know you mentioned pent-up demand is helping. But Reade also mentioned the backdrop is going to be tough, and there's going to be some closures of some of, competitors independent. So curious if normalized means you mean what historic national vision comps have been running at?

Well, Simeon, thank you for that and we're still sort of, we're still trying to figure that out as we go. At some point, the pent-up demand does start to taper off, and was sort of to be determined on what's going to happen with stimulus and for us, of course, back-to-school is a factor, and we're really early in the back-to-school season. So it's a little hard to predict, which is why we're not giving much guidance there. But we are real pleased with the June results. We're pleased to see similar momentum in July and I think what we're showing is that we can, our stores can accommodate the sort of demand, high demand even in the COVID season.

That's fair and then can I ask, it's a little bit related, right? So the path toward whatever normalization for gross margin and SG&A, does that path normalize as comps do? Or do we get back to prior levels on a different schedule?

So as we think about, hey, Simeon. Good morning. It's Patrick. As we think about the margins in the business and think about those going forward, obviously, the gross margin has seen some volatility during the period of time when our stores were closed and now open again. I would expect to see those returning toward normal levels. The thing that swung those so much in the early part of the quarter was the continued payment of our optometrists, as well as the mix. The contact lens mix spiked up a bit during the period when our stores were closed. But now that we're open again, mix has returned much closer to normal levels. I would expect to see gross margins continue to look like they did pre COVID. On the SG&A, we've been through periods of deleverage in the first couple of months of the quarter to a period of very high leverage in June. And again, I think there are going to be some minor incremental costs related to COVID and PPE, but overall, even coming off a period of time when our stores were closed, we're expecting for things to get back closer to normal, sooner than later.

Thank you. And our next question comes from the line of Robby Ohmes with Bank of America Securities. Your line is open.

I think a follow-up on Simeon's question, and Reade, you mentioned your stores are handling it fine. But I'm just curious how, if you, you're now two months into a 19% comp. I think this is one of the busiest times of the year for you guys typically for back-to-school. Just how do you have the capacity to do that? What are you doing? Are you hiring more optometrists to handle this potential bottleneck? And how are the lab facilities dealing with that kind of jump? Were you guys expecting this? And then kind of a follow-up is, what are you seeing your competitors doing as they're reopening? Do you think they're seeing similar types of comps? And are any trying to match your value offerings?

So thank you, Robby. First of all, were we expecting this? Robby, I would say we live in a world where I just don't know what to expect anymore. You just, I wasn't expecting a pandemic this year. I wasn't expecting a lot of things this year. So it is a little harder to predict things. Luckily are things like our lab model and our supply chain are well designed for scaling and scaling up where needed. So while certainly busy, and certainly, I'm sort of pleased and impressed, I would not describe stress in our system relative to that. And overall, sort of we've been able to manage our exam books in such a way that we can spread the business out a bit as the pent-up demand is there. Pent-up demand is people who are really excited to get in to see us. And it's sort of -- when we opened, it happened immediately. Again, best reported comp in my 18 years here. I'd like to point out, because your question is sort of about execution that sort of, yes, pent-up demand was a -- is a factor. And yes, government simulation -- stimulus is a factor. I'd like to add sort of -- this sort of thing doesn't just happen. It requires probably a more sophisticated level of planning and execution that have been called from us in the past. And when I think about sort of all the different phases of Q2, managing sort of being close to the public, managing the public -- again, we say close to the public because our doors were locked for the public. But we still were answering phones. We still had a skeleton crew in the stores. We were still triaging the medical -- urgent medical pieces and then…

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

I think you mentioned that you pulled back on marketing spend a little bit. I'm curious if you altered your promotional plans. As stores have opened again, are you having to do anything to lure customers back from a promotional standpoint? I'm curious what you're seeing from competitors as well on the promotional front and what your outlook is there? And then second, just curious what percent of your business is kids and how that's trended over the, over the past several years and if you see that changing going forward?

The marketing pullback was because we were getting so much demand, why would you pay for more. It was coming in on its own and so we were saying, Why spend to take it further? We're pretty nicely content with 19% comps, and so our marketing will only return very gradually. We're not at full throttle. Now we see ourselves as historically sort of everyday low price. The offers that we have in our stores today were the same offers that we've had for years. So for me, when I think of a promotion, it's you get this now, but it's limited time offer. We don't tend to do that. That's really not a part of our toolkit. So no change there. We continue to be who we are, execute who we are consistently and know and nothing surprising or too interesting on the competitive front, nothing different in terms of that. Kids, I don't think we share our kids percentage. I would say that I'm fairly confident, without knowing the details, that our kids percentage is higher than most of our competitors, and it is seasonal in nature. There's a higher thing in back-to-school. But so there's sort of two parts to the kids thing, on the one hand, where a lot of people will spend a little bit more for their glasses and a little bit less for kids' glasses and so even some people who want the latest fancy designers will still bring their kids in to us. They know kids are going to break them. They're going to lose them, and that sort of stuff. So we tend to always be higher with kids in that way. But also, kids bring in their parents and a lot of people come to us saying, Oh, great. I'm going to save money for my kids, and then see the deals we have and see the products and services we have, and then the parents get converted too. But we are overdeveloped, have been forever, will be going forward, and it's especially true around back-to-school season.

And our next question comes from the line of Adrienne Yih with Barclays.

Reade, I was wondering if we could talk about sort of the digital aspect of it. The consumer, obviously, in a post-COVID world is shifting much more to digital. But eyeglass exams and fitting doesn't naturally lend itself to that format. Are there technology, technological developments that you have either implemented or foresee implementing that can accelerate that shift, whether it's telehealth or virtual reality? Any comments there? Then on the onetime pent-up demand, can you see how many new customers you've acquired during this two month period? I know it's very short and for Patrick, my last question is I know I haven't, we haven't gotten this before, but any color on four-wall economics of new store openings? Any change from history? Probably the most important metric we're looking for is what's the non-comp productivity in year one and how many years does it take typically to ramp and any changes?

Adrienne, thank you. So let's see, in terms of e-commerce, our e-commerce business, of course, jumped in, during the period where we were closed to the public. Again, mostly contact lenses, people wanting refills and things like that. So our contact lenses were, online, were pretty thriving, and that was both in our pure-play e-commerce websites and in our store brands and it does still represent a small percentage of our sales overall. And what's interesting is our customers still very much lean toward picking up the phone and calling our stores. I don't think there were a lot of groups like ours where we felt compelled to, when the stores were closed, have them be locked to the public but have them staffed to answer the phone calls and put in ship-to-home orders for customers who wanted the contact lenses shipped to their houses along the way. It's still a default mode and we're happy to be there for a customer in whatever way they want to interact with us in that way. In terms of technological pieces, we, we've been very interested in aspects of telehealth, and that's because we think that the customers that we can sort of get heightened doctor efficiencies and coverage to places that maybe we can't find an optometrist who wants to live, via tele-exams, this is still a patient sitting in a chair in a store but with the doctor being remote and I think, so we are testing that, and we're finding encouraging things, but it's still early days for us and the entire industry in that way and just one other thing on the e-commerce. I'm sorry, one other thing on the e-commerce side. Yes, e-commerce is growing. It's still a very small part of our industry. People are still stores-based in our industry to a massive degree. It is hard to buy these products online and we've been competing against online players for the past 15, 16 years, and we continue to grow share along the way. In terms of new customers and pent-up demand, overall, if you look at the business in general, the skew of new to past customers has been very, it's been sort of fairly consistent post COVID and pre COVID with one thing that stood out. With Eyeglass World, we are noticing a big jump in new customers, a jump-in. I think this shows that the same-day service that we offer there, the one-trip shopping there has been -- I think, is more relevant in a post-COVID world. And so that's been encouraging for Eyeglass World. And I think you can sort of see it in the math. But post reopening, Eyeglass World has actually done a bit better than America's Best, just a little bit, but noticeably better. So that's been nice for Eyeglass World. And then I think Patrick has a four-wall economics.

Adrienne, so yes, a couple of comments. Obviously, new stores felt the same disruptions as mature and existing stores during the store closure period. But honestly, prior to that point and since, we've seen a normalization of ramps. It was almost like if you take that six to eight week period out and you were to delete it in the trends, you would see very similar ramps. So overall, we have typically seen AB in the 65% new store productivity level and EGW, just a shade below that. Those brands, the overwhelming majority of stores mature somewhere in the three to five year period, and there's a lot of factors inside of that range of two years there. So I'm not expecting to see significant changes in store ramps. This has been a big part of our growth. That machine is back and now on position. We opened 12 new stores in the quarter, plus we added the five Walmarts. We have revised our capital plans upward a little bit as we've seen cash flows stabilize and actually grow and gives us the confidence to continue to invest in the business. So headline is no change to store ramp, still going to be very important. We are back in the on position in terms of opening new stores and have our sights set on a good year in 2021 and have most of those locations already preidentified.

Our next question comes from the line of Zach Fadem with Wells Fargo. Your line is open.

Could you talk about any throughput constraints you're experiencing, particularly around doctor visits given the heightened demand? And aside from virtual visits, what other initiatives are you putting in place to maintain social distance without impacting the customer experience?

So I think that the 19% comp in June shows that we're managing the throughput well. And again, I think there's a very methodical, regimented approach to doing it. But I would say, I think the takeaway is we can handle high levels of demand even while we're executing the safety protocols. And then, you said -- there was a question beyond -- so in terms of what we're doing on the safety side there, we're following the CDC and AOA protocols. There's a lot of screening done when we're doing the social distancing. We have the floor stickers out. We are doing face coverings for all, have been doing that for a while now and then there's just a lot of cleaning protocols, both in our exam room and every time you try on a frame, you put it in personal bin that we've given you and every frame is disinfected before it gets back on the shelf. So, and again, we're, I think we're particularly good at execution and execution when dealing with the sort of demand our stores get, and we've been able to implement these protocols and keep the patients and customers going through the stores in a very similar manner.

June comp levels were certainly exceptional and overall flow-through was exceptional as well. You, we basically saw mix returning more toward normal in terms of glasses and contacts. We leveraged the optometrist and the lab costs. Well, heck, we actually leveraged all fixed costs throughout the business and as Reade mentioned earlier, we were, we're still not full throttle on advertising. So flow through levels for the month of June, in high contrast to April and May, were also very high and well correlated to those high comps. So we were happy to see the good top line results and just as happy, maybe happier, to see the flow through coming through as well.

I was just trying to confirm whether there weren't any issues getting doctor visits for customers. But it doesn't sound like there is. So that's great and then Patrick, could you walk us through the P&L mechanics in a little more detail around the convert and how we should think about the share count and impact of hedging transactions going forward?

So the P&L implications around the, I missed one word, but it was very...

The converts.

First, I thought you were saying, actually, I thought you were saying that the twofer. We sell two glasses for $69, and a free exam.

The convert, we get it, yes.

Yes, the convertibles...

Must be the speakerphone issue.

I was glad I wasn't the only one that's hearing twofer. Yes. So we issued $402.5 million. We immediately put $391 million of that to work, paying down $75 million on the TLA and the revolver balance that had grown to of $391 million, 2.5% coupon and we were delighted with the timing and the results that we got out of that deal in the market. That matures in 2025. The convertible price was $31.17. There's a lot of kind of parameters around when investors can execute those options. But in general, we expect to see most of that in the 90 days prior to that five year maturity. There are other reasons and certainly, David and I can take you through that, but I won't take care everybody through that. Bottom line, this was a really successful capital raise for us. It put the company in a wonderful position of not having to think about liquidity and only thinking about getting these stores reopened, getting them opened safely, taking care of patients, customers, associates and doctors and it was the, we've done several restructurings here in my tenure, and this was by far the most impactful and just a really successful one.

Our next question comes from the line of Bob Drbul with Guggenheim.

Couple of questions, just on the gross margin line, when you look forward to sort of, I don't know, the next few quarters and especially Q4 and Q1 of next year, when you think about the results that you had pre COVID, Q4, Q1 of last year, can you talk through just the drivers of the gross margin strength that you saw then? Like, should they be able to be replicated in the fourth quarter? In the coming quarters? I'm just trying to think of the different puts and the takes on the gross margin going forward.

Let me kind of lay out how I'm thinking about that. Just so I'll hit Q3, and then I'll just kind of hit margins in general. So the Q3 start, it all starts with momentum and as we mentioned, we've seen good momentum coming out of June into July, strong customer demand because we're selling an important medical necessity product at a really low price. We think that, that's going to be a good place to be in general over the coming months and years, especially if we see a little economic stress coming off the more intense COVID period. We do expect comps to normalize toward more historical levels coming off stimulus and pent-up demand. One item I'd note for Q3, Bob, is the unearned revenue and the net margin on unearned revenue should swing back to a positive. We'll, of course, normalize that away so you can understand the business and then in general, the more volumes we do, the more we leverage our lab costs, the more we leverage the investments in our optometrists. We are seeing a little higher level of spend related to COVID. In Q4, there will be about $4 million, and about $3 million of that was, frankly, related to the appreciation bonus that Reade mentioned, and about $1 million of that is the PPE, and that will be ongoing. So as I think about gross margins going forward, I'm hoping that we see a little bit of moderation in some of the wage pressure that we've seen and in gross margin, that's going to be the doctors. I think we're going to be back on track in terms of seeing improved efficiencies in the lab. We're two years outside of opening that, our last Texas lab. So that lab is, has been…

Our next question comes from the line of Anthony Chukumba with Loop Capital Markets. Your line is open.

I wanted to talk a little bit about the Walmart Vision Centers. First off, congrats on extending the agreement. I guess, we won't be seeing any sale reports from firms I never heard of before saying that, that's going to be pulled from you. So we have that going for us, which is nice. Specifically, so you have -- you've converted the 5 Vision Centers. Would love to just get a little bit more color in terms of the early results and, based on those results, how you think about -- I know it's very, very early, and maybe you can't even talk about it public on this call, but just any color you could give in terms of how you think about whether that means that Walmart could potentially give you additional Vision Centers to manage going forward. Thank you.

Anthony, thank you for that question. I was thinking we've gone pretty far into this call without a question about Walmart. So I'm really appreciative of that. And yes, we are pleased with the 3-year extension that brings us into 2024. And again, I believe that our relationship has been extremely strong. So it wasn't something I was sweating about, but I was pleased that -- to take it off the table for the market who doesn't sort of as deeply understand our strong 30-year partnership with Walmart. Yes. We transitioned all 5 over. That went smoothly. It was a really nice process. Walmart was a great partner in doing that and assigning people to make sure that went smoothly, and we are very encouraged by the initial results at these stores. We see a tremendous future for them. And I'll say we're encouraged by the results we've had so far. And I can assure you we are just getting started. We are just sort of in the early stages of the good work we can be doing to improve these stores and get them sort of up to the sales levels that our stores tend to achieve inside Walmart. I'm pleased they're right here in Georgia. They're all over Georgia and Georgia is where Walmart Health & Wellness group likes to test its innovations and new approaches. And my feeling over the past 18 years in my job as the Walmart account executive, is that you keep doing good work. And when Walmart gives you something, you do it well and serve the Walmart customer well, and that's what makes the partnership be so strong and keep going. And beyond that, I really can't conjecture on the future other than I think we continue to have a nice long future with them.

And our last question comes from the line of Steph Wissink with Jefferies. Your line is open.

Many of our questions have already been asked, but I want to go back to just a couple of topics that you've already talked a bit about. I think Adrienne asked you about kind of recruitment opportunity or your unrealized recruitment opportunity on some of the pent-up demand. Is there a way to look at that based on the percentage of your bookings that were canceled that you've already rebooked and executed? Again, just trying to go back to think about what customers haven't necessarily been activated that would have been visitors to your stores during the close-down period?

Yes. So I would say we did keep track, the most frequent phone call we had while the stores were closed is when are you going to reopen, and please call me so I can book an appointment. So that was a very common thing. But I'd say we worked through all that in the first few weeks of June and sort of late June and July, we're seeing sort of it's beyond, it's beyond that. We sort of worked through our list very early on. So again, it's encouraging to see just the demand keeps coming in that way.

And then speaking of June, that 19% comp was impressive and I think, Patrick, you mentioned that it had nice pass-through, too. You also made some comments about your lab starting to deliver some productivity. So at that level of capacity utilization, a nearly 20% comp, how should we think about the store level capacity utilization and then the lab level capacity utilization? Is that a good benchmark for us to look at in terms of kind of the full utilization or pivot point in your utilization that gets you to the incremental margins that you'd like to see?

Well, I certainly don't project 19% going forward. We do expect to see those moderate and in general, Steph, we have typically seen 1.5% to 2.5% of productivity improvements each year is coming out of our lab. In terms of the stores, with the degree of volume that we have coming through, we are bending curves there in terms of margins. So I probably don't have anything specific in terms of margins or basis points of care. In the past, we've talked about inside of our prior comp guidance range of 3% to 5%, where we start to definitely leverage the entire business toward the middle and upper end of that range. So if you set it 4% to 5%, you're seeing good leverage. At 19%, it's sensational leverage. So, and I would expect, again, to head back toward historical levels at some point. As I looked at June P&L, really below the gross margin line, Steph, the only thing that was flexing up was incentives. We compensate our, many in our stores in terms of volumes, and they were, the high sales volumes are driving incentives, which is a great expense that we'd like to pay. So I do see it heading back toward more normalized levels in the future and, but I do think there's the ability for us to continue to leverage store profitability.

And Steph, I'd just like to add also, just in terms of the utilization we are seeing after sort of we went through the sort of list of folks, we even waited 'til to turn on our online booking system, which we think is a really nice offering to our customers. We waited to do that for a few weeks. But when we put that back on, it was, again, helpful to continuing the trends we saw in the first few weeks of June.

I'll now turn the call back over to Reade Fahs for closing remarks.

Good. Thank you very much, Bridget. We'd like to thank you all for joining us this morning and for your continued interest in and support of National Vision. We look forward to speaking to you again when we report our third quarter results. Thank you very much.

Ladies and gentlemen, this does conclude program. Thank you for participating. Enjoy your day.