National Vision Holdings, Inc. (EYE) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the National Vision Third Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference to your speaker today, David Mann. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to National Vision's third 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 in 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. 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 website. 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. I hope you're all staying healthy and safe. Today, we are sharing exceptional third quarter results that highlight the strength of our business model in these challenging times. Before we begin, I want to acknowledge that these results would not have been possible without the team's great thinking, great execution and great patient and customer care over the last few months. Our National Vision team has remained focused on our mission to make eye care and eyewear more affordable and accessible, something that continues to grow in importance throughout America. Our key priority remains the health and well-being of our store teams, our patients and our customers. I'm pleased to report we accomplished these third quarter results with our continuing safety protocols firmly intact. Our results can be tied to many decisions made earlier this year. We were quick to act in the early days of the pandemic to put our people first, to strengthen our financial position and manage our costs. We developed enhanced safety and clean protocols that enabled us to safely reopen and operate during the pandemic, and we made decisions with a long-term focus on our optometrists, store associates and our customers. We believe that these actions have placed us in an advantaged position during this continued period of disruption. Turning to Slide 4, let me briefly touch on trends in the third quarter. While continuing to navigate the pandemic, we managed to deliver one of our best quarters. Q3 net revenue increased over 12%. Adjusted EPS increased to $0.54 versus $0.16 last year, which established a record for our quarterly profit as a public company. Adjusted comparable store sales growth increased 12.4% in the quarter. This is the best quarterly comp I have witnessed in my 18 years with National Vision. I'll speak more to the comp trends in a few minutes. During the quarter, we opened 18 stores, including our 1,200th location in America's Best store in Deerfield Beach, Florida. As we noted on our last investor call, we extended our contract with Walmart until 2024. Regarding the five additional Walmart Vision Centers added in the second quarter, we continued to generate positive results at these stores to date. In August, we published our first-ever Philanthropic Impact Report, which details how National Vision, including through the generosity of our associates and network of doctors, is transforming the lives of people in the U.S. and around the world. We strengthened our Board with the addition of two independent board members, Naomi Kelman and Susan Somersille Johnson. Both are accomplished executives. Naomi brings a strong background in contact lens and healthcare technology and digital transformation. Susan brings world-class marketing, branding and data analytics expertise and a strong mission orientation. Randy Peeler was appointed Chairperson of the Board, replacing Nate Taylor who rolled off the Board after five years. I would like to sincerely thank Nate for his service and significant contributions during his tenure. Randy is our longest-serving board member and has been a great strategic and operational partner with us for the past 15 years. His understanding of our business and our category is unrivaled. We love the institutional memory that his chairmanship brings while also appreciating the fresh perspectives and insights from our newer Board members. Based on our recent performance and confidence in our business model, we are reinstating our fiscal 2020 outlook. In a few minutes, Patrick will take you through our Q3 results and the Q4 and 2020 outlook in more detail. Turning to Slide 5. As the chart shows, our business has a history of strength and resilience through a variety of economic and external challenges. This is one of the benefits of a purchase tied to a medical necessity. We're pleased with the return to positive comps this quarter, led by double-digit comps at our growth brands. Our stores experienced consistently strong demand for our patients and customers, which we believe highlight that our affordable eye care and eyewear offerings are even more in need during the pandemic and in this economy. We noted that consumer demand remained healthy even after the government stimulus faded and enhanced unemployment benefits expired during the quarter. The fourth quarter is off to a strong start as the third quarter comp momentum continued throughout October. The trends that we've experienced this quarter are a testament to the essential healthcare role we play in the communities we serve. Our low-cost value offerings given the state of the economy and the combined macro and micro operational navigation by our long-tenured management and field teams. We believe that our strong sales results also continue to be helped by pent-up demand. I do want to note that our Q3 comps moderated from the June levels we reported immediately following our successful reopening. While the duration of pent-up demand is difficult to predict, we continue to expect our comps to normalize as pent-up demand further moderates. Based on industry data, we are confident that we've grown market share through the third quarter this year. The optical industry remains highly fragmented, and we believe that the current environment is hastening the trends that favor larger, better capitalized value retailers like National Vision. We also believe there will be fewer optical locations in the U.S. over the next year than there were prior to COVID. Thus, we continue to see a large opportunity in front of us and potentially an even larger opportunity than before. Shifting to Slide 6. Let me provide an update on our core growth initiatives. First, after brief pause in openings pandemic, new stores remain a primary focus, given our sizable white space opportunity. We opened 18 stores this quarter. Year-to-date, we've opened 52 new stores and now expect to open about 57 new stores this year, or a total of 62 when you include the five additional Vision Centers that we transitioned from Walmart last quarter. As we look out to 2021, the pipeline of locations looks strong. Turning to comparable store sales growth. This quarter's performance demonstrates the important role that optometrist play in our success and our mission to deliver low-cost eye care and eyewear throughout America. We continue to invest in our optometrist recruitment and retention programs. Our optometrist retention rates remain high at near-record levels, and our healthy doctor coverage helped to meet strong pent-up demand for eye exams. The record performance was not possible without the tireless hard work and commitment of our network of optometrists. In terms of marketing, we did not invest nearly as much this quarter as in the prior year. We experienced strong organic demand, a reminder of the fact that the optical services and products we offer are in essential medical necessity. We believe optical consumers are attracted to our extreme values such as our introductory offer for our two growth brands, two for $69.95 at America's Best, including a free comprehensive eye exam and two for $78 at Eyeglass World, with glasses available that same day. As we plan for the fourth quarter, we expect to return to more normalized marketing investments to remind consumers that they don't have to pay higher prices for their optical needs. We continue to experience strong revenue growth tied to our Managed Care partnerships. Net revenue tied to Vision Insurance remains a minority of our net revenue, and thus, we remain underdeveloped relative to the category. We continue to see an ongoing opportunity here as Managed Care dollars and co-pays tend to go further in our stores than elsewhere. Regarding our supply chain, our lab teams have been working hard to handle the elevated business volumes this quarter, and we're very proud of their efforts. Our lab network remains a key reason that we are a low-cost provider. In September, the temporary relief on tariffs for frames imported from China expired and reverted back to the 15% level. Given the fluid nature of tariffs over the last year, we will continue to monitor ongoing developments as well as continue to progress our tariff mitigation efforts. In terms of our digital initiatives, we continue to experience an acceleration in e-commerce orders compared to pre-COVID levels. From an omnichannel perspective, we've also noted a significant increase in ship-to-home orders this year. Lastly, our remote medicine pilots are continuing as well, and we are pleased with their progress. Before I turn the call over to Patrick, let me say that we are quite happy to be reporting such strong results this quarter. But as we look ahead, we still operate within an environment of tremendous COVID uncertainty. Yet I am confident that we're well positioned as an essential healthcare retailer, with thoughtful safety protocols in place, to operate throughout the duration of the pandemic. That we have a strong liquidity position, including $377 million in cash as of quarter end, that we have a proven team of optical veterans executing our initiatives with both fairness and rigor. And that we operate a business that has been resilient in previous downturns as the low price seller of a medical necessity and see the potential for an even larger opportunity on the other side of this pandemic. For all these reasons, as we navigate through an uncertain environment, I'm confident National Vision will emerge from the pandemic, a stronger company. Now to Patrick.

Thanks, Reade, and good morning, everyone. We are delighted with our execution this quarter and pleased by our strong performance, exceptional cash flow generation and our demonstrated ability to navigate and in. Turning to Slide 8, let's dive right into our results. We opened 17 new Americas best stores, one eyeglass world store and closed one Vision Center in Walmart which was due to the closing of the Walmart host location. We ended the quarter with 1,201 stores or a 4.9% increase in store count in the past year. For our America's Best and Eyeglass World growth brands combined, unit growth increased 6.2% over the last 12 months. As Reade noted, we were excited to celebrate passing the 1,200 store milestone this quarter. The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same-store sales increased 12.4% during the quarter. At our growth brands, comps at Eyeglass World increased 18.4% and America's Best was up 13.6%. We are especially pleased with the robust post reopening performance at Eyeglass World. This quarter's same-store sales were driven by an increase in average ticket as the trend in customer transactions and average ticket was influenced by a more muted back-to-school season, which we believe was consistent across the industry. We experienced fewer children transactions, which tend to carry a lower average ticket and, in turn, had a positive impact on our average ticket this quarter. By category, we experienced positive comps in the eyeglasses and contact lens, with especially strong performance in eyeglasses. Eyeglass pumps were driven by increases in both customer transactions and average ticket, especially at our growth premiums. The contact lens category continued to see growth in average ticket as our contact lens customers are increasingly adopting newer technology lenses that have higher prices which is a trend that we expect will continue. Turning to income segment highlights on Slide 9. As you see from today's press release, our Q3 results reflect the continued strong momentum in our business since June. Net revenue increased 12.4%. And in terms of unearned revenue, the change this quarter was consistent with the third quarter last year. Thus, the impact to net revenue and profitability was not material this quarter. Cost applicable to revenue increased 3.1%, or a decrease of 390 basis points as a percentage of net revenue versus last year. The decrease as a percentage of net revenue reflected both higher eyeglass mix and eyeglass margin as well as lower growth in optometrist costs. Adjusted SG&A expenses increased 3.1% in the third quarter versus last year, or a decrease of 350 basis points as a percent of net revenue. The key factor behind this decrease was lower advertising investments. Additionally, the company incurred incremental COVID-related expenses of nearly $5 million in the quarter primarily for the onetime $250 appreciation bonus to our front-line associates and network of doctors as well as the acquisition of PPE supply. Adjusted EBITDA increased over 89% to $88.1 million, and adjusted EBITDA margin increased 740 basis points to 18.2% in the quarter. Adjusted operating income increased 160% to $67.7 million and adjusted operating margin increased 800 basis points to 14%. The increase in adjusted operating margin was driven by the strong comp leverage of fixed costs, higher eyeglass mix and eyeglass margin and lower advertising. As a result of these factors, the flow-through this quarter was unusually strong. Adjusted diluted EPS increased to $0.54 versus $0.16 last year. Our diluted share count reflects the impact of the convertible senior notes issued in May, which were in the money this quarter. By all measures, this was a stellar quarter for the company, one of the best in our history. Turning to Slide 10. Our year-to-date results reflect the strong recovery in our business after the first half impact of store closures and to a lesser extent, the timing of unearned revenue. Adjusted comparable store sales growth was down 11%, net revenues down 8%, and adjusted operating income declined 27%. Adjusted diluted EPS declined $0.42 from $0.66 last year. Now turning to Slide 11 and our balance sheet. At the end of the quarter, our total debt was $252 million, our cash balance was $377 million or an increase of $121 million during the quarter. We are extremely pleased with the strong free cash flow generation this quarter. Net debt to adjusted EBITDA crossed the 2.0 mark for the first time in our history as a public company at 1.6 times, a decrease from 2.6 times in the third quarter last year. Balance sheet strengthening has been a key stated priority for our company, and I'm very pleased with and proud of this milestone accomplishment. Year-to-date, we invested nearly $41 million in capital expenditures. The lower level of CapEx versus last year generally results from cash preservation strategies deployed during the second quarter, including the timing of new store capital investments. Our financial gives us the opportunity to make ongoing investments in our people and our business. We believe that our ability to invest remains a competitive advantage. As such, we are continuing to invest in projects that will support our future growth. We now expect our total 2020 CapEx to be in the range of $75 million to $80 million, up from the estimated $65 million to $75 million range we noted last quarter. Turning to Slide 12. At the end of Q3, we are in a strong financial position with over $671 million of liquidity from our cash balances and available capacity from our revolver. We believe that we have sufficient liquidity to manage our operations, continue to invest in our business and successfully navigate the pandemic. As we emerge from this period of uncertainty, balance sheet improvement will remain a key priority. As noted in the press release today, we are reinstating our financial outlook for fiscal 2020 and providing fourth quarter outlook as well. While the operating and macro environments remain uncertain, our performance since reopening our stores gives us heightened confidence in our business. Our outlook reflects the currently expected impacts related to COVID. However, the ultimate impact of COVID remain uncertain. That outlook assumes no material deterioration in the company's current business operations as a result of potent government actions and regulations. As a reminder, fiscal 2020 is a 53-week year for National Vision. We estimate the extra week will add approximately $35 million to net revenue with an approximately breakeven impact to adjusted diluted EPS and the projected minimal profitability is due to the expected net change in margin on unearned revenue in the 53rd week. We currently expect the timing of unearned revenue to be generally immaterial in the fourth quarter. However, during the high-volume last week of the year, sales are a little more difficult to predict, and we could see a material swing in unearned revenue and its associated impact versus our estimates. Turning to slide 13 and the details of our financial outlook. For the fourth quarter, we project net revenue of $460 million to $475 million, adjusted comparable store sales growth in the range of 5% to 9% on a 13-week basis, adjusted EBITDA between $42 million and $47 million, adjusted operating income between $20 million and $25 million, adjusted diluted EPS between $0.10 and $0.14, assuming 84.2 million weighted average diluted shares. As Reade noted, we are off to a strong start to the fourth quarter. And the third quarter comp momentum continued throughout October. However, significant macroeconomic and COVID-related uncertainties remain, and we expect our comps to continue to normalize as pent-up demand moderates further. For the fourth quarter, we estimate a 70-basis point increase in adjusted operating margin at the midpoint of our guidance range. Our outlook assumes a more normalized flow-through in the quarter due to the following factors: as a percentage of revenue, cost applicable to revenue should rise modestly versus the fourth quarter of last year. We expect to incur an increase in advertising investment. We are cycling a more difficult Q4 comp comparison from last year and the impact of the extra week this year as well. Turning to our full year outlook. We expect net revenue for fiscal 2020 of $1.675 billion to $1.69 billion, adjusted comparable store sales growth of between negative 6.4% and 7.4% and adjusted diluted EPS between $0.53 and $0.57. We are projecting 2020 depreciation of approximately $93 million, interest of approximately $32.5 million and incremental COVID-related costs of approximately $9 million. We estimate ongoing COVID-related costs should be around $1 million per quarter based on current pandemic and related conditions. Lastly, our fiscal 2020 tax rate is estimated to be approximately 26%. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2020. For additional details regarding our 2020 outlook, please reference today's press release or presentation. In summary, I'm extremely pleased with the stellar performance this quarter and proud of the team's accomplishments. This quarter further highlighted the competitive strength and health of our business model, the strong store level execution and free cash flow generation, we continue to feel well prepared to effectively navigate this challenge and emerge as an even stronger business. At this point, I'll turn the call back to Reade.

Thank you, Patrick. Turning to Slide 14 and our moment of mission. The topic of investing based on environmental, social and governance factors or ESG, has gained much attention recently, and we continue our efforts as well. As you know, our company has always operated with a mission-based focus. And this year, we've embarked on a journey toward developing a more formal approach to ESG's strategy. We have long thought of ourselves as a fast-growing business engine that meets a critical need in society whose success fuels a fast-growing philanthropic mission. Our philanthropic efforts have long been an integral part of who we are and what we do. Our commitment to philanthropy was highlighted in our first philanthropic impact report, which was published in Q3. The report details the many ways in which we strive to help children across America, help them polish people with diminished site globally and partner with the optical philanthropic ecosystem. We invite you to access the report on the National Vision website and via the link in our presentation. We have a commitment to diversity as embodied by the gender balance now reflected on our Board with 50% female directors. Only 5% of mid-cap companies in the U.S. can say that. We are quite happy and pleased with our Board. For a long time, we have tried to ensure that our store teams and central support teams reflect the communities that we serve. I'm proud of our continuing initiatives to enhance diversity, equity and inclusion throughout the organization, including the establishment this quarter of a senior leadership position to oversee and support our ongoing DEI efforts. We continue to invest in optometry and are proud of our recent pledge to reestablish the summer enrichment program at Salas University's Pennsylvania college of Optometry, a program that's been considered one of the most successful in attracting large numbers of minority students to the profession of optometry. Lastly, we are committed to best practices for corporate governance. Our proxy statement earlier this year shared the Board's commitment to declassify the board and remove supermajority amendment provisions and put these issues to a stockholder vote at our 2021 Annual Meeting. As noted, we are developing a holistic ESG strategy that will identify opportunities to build on our philanthropic mission and social efforts. We are in the process of formalizing our priorities, including consideration of environmental impacts, and we look forward to providing further information as we continue to progress on our ESG journey. The tremendous success of this past quarter, combined with our belief in the strength of our future, allows us the time, resources and stability to ensure that our societal impact is every bit as strong as our finances. In summary, as we just passed our three year anniversary as a public company and in thinking about the events of the last several months and how the entire National Vision team performed, I could not be more proud, appreciative and impressed with all they accomplished. 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 Simeon Gutman with Morgan Stanley. Your line is open.

I want to first ask about gross margins. So the business got a lot of leverage on that line, some of it mix, some of it against the fixed cost. You've had other quarters with good comps, not quite as strong as you've had, but we've never seen the gross margin expand like this. So I was hoping you could talk a little bit more maybe about the components, if you can, breaking down some of the expansion by buckets. And then how to think about them going forward.

Yes. Sure. Happy to do that, Simeon. Good morning. So on Q3, you're right, we saw really outsized gross margins in the quarter up just under 400 basis points. And you're exactly right. We saw nice leverage there. It benefited from higher eyeglass mix and margin. And the margin is a function of a little bit of a lift in ticket that we've seen as well as lower growth in optometrist costs. So those are pretty big factors. On the ticket side, we think that some of that is at least partially related to stimulus effects and the other factor is we saw a very muted back-to-school season. Typically, we have a large end blocks of children's glasses, which are often lower price. They're single vision. Folks are picking very affordable options. And we really didn't get that in the mix this quarter. And so all of those factors weighed into what you saw there in Q3. As I kind of look to fourth quarter and as, if you look at the guidance we provided, we are expecting the comps in the ticket to moderate a bit. And we are cycling a pretty strong gross margin comparison from last year that was up 200 basis points. I think the last factor that I want to make sure everybody understands is that the 53rd week, we probably talked about it back in February when we did guidance, but we probably haven't mentioned it again. And that 53rd week for our company where unearned revenue comes into play can be a little odd in that we do expect, I think we had guided on mid-30s, like $35 million of incremental revenue in that 53rd week, but due to unearned revenue accounting impact, those delays in customer pickup versus when they purchased it in that last really big week of the year, most of that impact will defer. And so those are kind of some of the big factors for the quarter as well as how we're thinking about the fourth quarter. It was great to see the leverage, it's a nice testament to the business model, and we were really pleased with those results.

Okay. And then a follow-up. If you take the 12 four comp, can you share what you think, what percentage of that was driven by new customers and then compare how that looks versus prior trends?

Yes, With a record comp like this, we saw gains in existing and new customers. We're getting a higher mix of new customers, especially at Eyeglass World. At America's Best, a bit more consistent with historical trends but Eyeglass World definitely seeing growth in new customers. And we're really pleased with this growth there of new customers when, in a period where sort of we had a lower level of marketing investment, which generally drives the new customers and all that against the backdrop of muted back-to-school season versus last year for us and the industry, we believe.

Our next question comes from Zack Sadam with Wells Fargo.

Could you talk a little more about the strength you're seeing at Eyeglass World as I don't think we've seen that business outcomp America's Best by this wider margin in recent memory. And you mentioned new customers there, Reade. I'm curious if this is specific to any initiatives that you've put in place at EGW or a more so a function of the demand environment or consumer preferences for that model in this climate. Any color there?

Yes. Yes. Thank you, Zach. We're proud that those are 18.4% comp is a real nice world there. A few things on that. First of all, when you talk about specific initiatives, I really would just like to point out for Eyeglass World and the rest of the business, these numbers don't just happen. Again, I do think that there are trends that we are riding a wave of, but there's been a number of sort of specific initiatives in all our brands that we've put in post-COVID that we think have played a role here. For competitive reasons, we don't want to go too much into specifics on that. But I really think the team's thinking, planning, execution, internal communication both sort of micro and macro thinking and planning has played a role in all of this. But to your question about Eyeglass World specifically, I do think that there is a wave of sort of post-COVID interest in same-day service that has been helpful to us there and sort of one trip sort of movement and speed of turnaround. So I do think that the Eyeglass World positioning is especially well suited for the world we're living in now.

Got it. And then for Patrick on the impact of deferred revenue in a little more detail. As this -- I believe the larger-than-normal week is typically a headwind for Q1. But with that week shifting to Q4, should we expect a net positive impact in Q1 relative to normal years? And is this -- maybe you could walk through how this will impact gross margin versus SG&A?

Yeah. So I like your statement, in a normal year. In a normal year, you would absolutely expect that. So all other factors held constant, Zach, I think you're right to assume that. That last week of the year is a typically big sales week as many customers and patients make sure they're using any benefit they're going to lose. It's not the easiest week to predict. This year, we're doing it in kind of pandemic world. So I think a normal year, you're right to think about that, that deferring, but we're being careful this year. And I think we indicated we expected to have probably another immaterial impact in fourth quarter as it did in third quarter as well. Now when you think about the unearned revenue, we defer the revenue and the cost of sales that goes with that revenue. So you're deferring the revenue and the margins. The other costs in the business have occurred. And so that's why you can get such lumpy swings to gross margin and even EBIT margin with the swings in the unearned revenue and margin because you're -- it's very high-margin impacts to whatever quarter it's been recognized in. Hope that helps.

Thank you. Our next question comes from Paul Lejuez with Citigroup. Your line is open.

Hey, thanks guys. Curious, remember legacy segment was positive, but not as strong as your owned host businesses. So just curious if you can just speak to the trends that you saw in that business. Were you limited at all in terms of hours of operation, maybe talk traffic ticket in that business? And also if you could give an update on how the converted Walmart stores have been performing.

Paul, thank you very much sort of our legacy business sort of return to pre-COVID performance levels. And we are operating in a way where we have a lot of sort of things up to make it a little harder to enter in the store because we want, we've got the safety-first mentality. So sort of there are extensions up to make it so that you have to, in essence, sort of knock on the door almost. If at the door, you have to be let in and temperature and all that, which is a factor in all this. The five new stores, they're continuing to generate positive results, and we see great future potential for those five stores. And I guess on our legacy group, I did want to point out that we did close one Vision Center in Q3, and that's because the big box closed itself. So the big Walmart store closed, and we, therefore, had to close also. So that explains, that piece.

Okay, thanks. And just a follow-up on optometrist. Are we past the days of deleverage as we think about that line item within gross margin? And maybe if you could talk about just how recruitment efforts have been going during this kind of whacking period?

Hi Paul, it's Patrick. I'll take the first part of that, and then Reade can complete the scene. We did see a less of a growth rate in optometrist cost in the quarter, which we reported. I'm not ready to call that a trend yet. Although over time, we think there will be a few less optical doors open, which could help supply and demand. If you leave the economics theory, then that would say you probably could see some lessening of wage pressure for optometrists, but I'm not ready to call that a trend yet. We were glad to see it in the quarter. And the recruiting efforts of, Reade...

Yes. So retention remains high at near-record levels for optometrists. And of course, you don't deliver the sort of results we just delivered if you don't have strong coverage out there. Recruitment is stable to overall the trends. And but we've, as we've said since the day we went public, we can always use more optometrists. And again, I do think that we're going to be seeing sort of a hastening of the trends that have been benefiting us pre-COVID that hastens post-COVID, including sort of decline in market share of the traditional segment and the mall segments. And just makes me feel that, again, these trends are good for us coming out of the other side of all this.

Thank you. Our next question comes from Michael Lasser with UBS. Your line is open.

Good morning. Thank you all for taking my question. How much of the pent-up demand do you think you've already worked through? Your stores were closed for a good portion of the time like you constantly say is the medical necessity. So the demand doesn't go away, just presumably comes back over a period of time. So how much have you already worked through and you had indicated that your comp trends were up high teens to start the quarter. Presumably it slowed to the low teens, low double-digit range to end the quarter. Is that how we should think about the exit rate and what continued into the current quarter?

So I'd say the initial surge of pent-up demand is, normalizing. But there are also customers who are sort of just sitting out the market. There are just some people who just don't want to leave their house or, and that sort of thing. Again, the comp show that plenty of people are back in our stores, for sure, record comps show that. But we do know that the consumers who are sort of sitting out for a time period, it's that thing we always talked about. When they're sitting at home, their eyes are just sort of getting worse. We are, I think our metaphor since we went public has been, it's not like a restaurant. If there's a snowstorm, you never eat last night's dinner again, but with us, your eyes get worse and you have to address it sooner or later. So that will, they'll come to us eventually.

In my, just expanding on that point, Reade, and then I'll have my follow-up question. Wouldn't you have expected traffic to be better and given more of your comp if you're seeing the pent-up demand being released? And then my follow-up question is you talked about the factors that drove both the gross margin and the SG&A leverage. Is there anything that you're learning on how you can now run the business more efficiently such that you're going to come out of this situation in a structurally higher-margin situation than you were going into it? Or is what the experience was of the third quarter and maybe to some degree in the fourth quarter, just a function of a unique period that we're in, where you don't need to advertise as much. You can give a little more utilization out of your optometrist and so we shouldn't really read into it?

Yes, I'll take the first half, and Patrick will take the second half. When you deliver a 12.4% comp, the best quarterly comp of certainly the 18 years I've been here. I can't remember any quarters in my life like this. You don't sort of get to frustrated by sort of the pent-up demand normalizing a bit. But I think we've got to remember, I think you're comparing it to like the 19% and in June, sort of we do generally see a back-to-school surge in August, and we and the industry did not see that. The 19% did have a lot of government stimulus, government stimulus has always helped our business a lot, and we saw that dissipating there also. So yes, we're pretty happy with 12.4% comp and the fact that, that momentum has gone through October also in this crazy environment where we're operating as we need to with such, so many safety protocols. We're pretty darn pleased with that.

And then on the margins, Michael, great question. I like the way you worded that. And what I would say is we've adapted a really strong, consistent growth business model to operate inside of the pandemic. That has been more evolutionary and revolutionary. So maybe good news, bad news. The good news is we haven't found anything major through this chapter that tells us we've been doing things in a sub-standard way before the chapter. And in fact, this, our margins right now are probably being hurt a little bit by the incremental cost of COVID. So the business model that came into the pandemic has adapted during it, exceptional period in time. Now longer term, management remains very focused on continuing to eke out margin improvements. We kind of talked about supply and demand factors for OD availability as well as cost. I think we could see a friendlier advertising for rent going forward, maybe some advertising leveraging. Each year, we typically get some small degree of productivity gains in our labs and our opportunity to leverage corporate overhead. We do have, I wouldn't call them headwinds, but it's not all on the positive side of the ledger. There's this incremental cost of doing business during the pandemic, which we estimated for everybody at about $1 million a quarter. And then -- and in some degree, to be determined of wage inflation, we talked about doctor inflation. But states are enacting incremental minimum wage loss and hikes. And so we continue to try to balance that in, maintaining good service levels. So management is still focused on resuming the fine ways to improve margin trajectory. But I don't think we can kind of click format this exceptional period and assume there's been some really large gains that we found and those now paint across the future. But I do see opportunity to focus on here.

Thank you. [Operator Instructions] Our next question comes from Kate McShane with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking my question. We wondered when you start to lap the ticket impact from some of the higher-priced contact me that you're selling. And can you give us any more color on the growth brands that you've been investing in that are showing strength?

I'll take the first. Good morning. It's Patrick. And we do see that trend in our customers and patients selecting a little higher price, a little higher-performing content lens for probably two years now. We expect that to continue as they shift to lower time duration modalities. So I don't know that I would say there's a lapping of that, that we're looking forward to -- this is just a general trend that's playing out and it's showing in our business for our customer set as well.

Yes. And in terms of trends in growth brands. Again, America's Best, 13.6% comp, Eyeglass World, 18.4% comp without a back-to-school, a benefit with less marketing. It says to me that our businesses, especially our growth brands are just very much on trend with what consumers are looking for from a price and one-stop shop standpoint and that our operations teams really are executing with precision in a way that makes consumers comfortable with working with shopping in stores. We're all consumers who, when we enter any environment are looking around for emblems of safety, are people's masks appropriate? Are there -- are all the little things that we need to feel secure in this pandemic occurring. And I think that what these results are demonstrating is people are comfortable being in our stores, like our safety protocols a lot, like our price position and with Eyeglass World, like our speed position, positioning.

Thank you. Our next question comes from Adrienne Yih with Barclays. Your line is open.

Good morning. Thank you everybody for taking my question. Reade, I guess my initial question is really quick. Are you comfortable with a sort of taking that October strength, to low double digit, kind of 12% carryover throughout the rest of the quarter, notwithstanding COVID surging all over the country? So that's my first secondarily, the strength of Eyeglass World with the 1-day return of the product. What is the lab utilization rate of Eyeglass World? Is it logistically sort of impossible, does it not make sense to have maybe America's Best have some ability to fill in that utilization? And then Patrick, on the guidance for the fourth quarter, that return to advertising, are we saying that you're ramping that advertising spend? It's typically 7% annually. So are we ramping that from, can you give us a notion of what it was in the third quarter and how we should think about that relative to the 7%? Thanks so much.

Reade, why don't I take the first question and the third one, the comps in the advertising and hit that.

Okay.

Adrienne, good morning. So on the comps, we are expecting to see some slight moderation in comps across the quarter. So we did remark that October business has continued pretty strong there. But based on our conversations a few moments ago about pent-up demand in the ticket, we're not assuming that, that flat line. We're assuming we start to see some moderation there. And then on advertising, as it relates to the Q4, we've been very judicious in how we've been almost titrating our advertising spend. And over the past 90 days, we've turned a lot of that back on, not completely. We continue to look at that at a very market-specific level. So I would say that will be ramping back to normal levels. There's not going to be a switch where it goes from 0 to 1. So we are seeing, we are expecting that to ramp back.

And to Patrick's point on the first question. Also, ma'am, what an environment we are living in between COVID ramping and national politics, and it doesn't seem like there's a week that goes by where we don't have to deal with either a hurricane or a wildfire someplace. It's just good to be prudent in this day and age because we're getting a lot of stuff thrown at us as a country. So, and to your Eyeglass World point on lab utilization. And I think you were sort of talking about that relative to sort of America's Best stores and possible synergies. That's what I took away from your question. When there's an Eyeglass World in the market with America's Best, they're very friendly to one another. And America's Best, when they have somebody who does have an urgent need, often does send folks over to the Eyeglass World. We really, Eyeglass World model to be as low-cost as we are, has to be sort of did simple and systematized and process-oriented. I mean, so much of the ability to maintain low-cost is about just really well thought out efficient processes and that for America's Best involves the centralized labs, the centralized lab model is based on a algorithm that figures out at which of our fixed labs were able to most efficiently make that particular job. It's really a great source of our low-cost model. So we really, in terms of using Eyeglass World Labs for nearby America's Best, we're sort of not really doing that. We think that, that adds complexity and complexity always has adds cost in our mind. So both run their own way, but there's friendliness for serving consumers who have a need for speed.

Our next question comes from Bob Drubl with Guggenheim security.

Hi, good morning guys. Reade, I was wondering if you could just give us your latest thoughts on, I think, the competitive closures, whether it's store closures in the industry or square footage? I wonder if you could maybe help us with that. Thanks.

Yes. So right, this industry is changing, and we firmly believe that there will be less doors going forward than there were pre-COVID. There was already a trend toward that occurring. Again, some of the traditional operators, some of the mall pieces, but that has been hastened by these new trends. And when we went public, we stated here are the trends we expect to occur and benefit us over the next several years, and we are seeing that it is coming through just as we thought and now more rapidly than ever. We are confident we are growing market share. We are confident that January, February next year, we'll have significantly less doors than before. And those doors many of the doors that are open are seeing less patients. They're slowing down their books. If they, they're taking less exams per hour, they're opening less hours overall. So again, from a competitive standpoint, it's still clear that consumers are, see this as a stores-based purchase there are going to be less doors, especially less traditional mall doors and some host stores, and we are benefiting from that, and we'll continue to benefit from that.

Great. I just have a follow-up, if I could. Reade, you mentioned the times that we're in. I was just wondering if you thought that you might see a surge in demand from people straining their eyes as they watch for the election results?

We can't think quite that short-term in nature. We do believe that all of us are spending a heck of a lot more time staring at screens, both large and small. We believe that, that contributes to eye strain, and we believe that, that is another trend we will be benefiting from, are benefiting from now, will benefit from going forward. Just ask the people you interact with, and they will talk about the strain, they will talk about mid-vision, they'll talked about blue light lens desires and all those pieces. And again, it's another wind in our sale and probably on the election side, yes, that is a near-term impact on people's eyes and mental outlook as well.

Our next question comes from Steph Wissink with Jefferies. Your line is open.

Thank you. Good morning everyone. Most of our questions have been asked, but, Reade, I'd be remiss if I didn't compliment you on the Board appointment. So bravo for that. My question actually relates directly to it. You spent some time on the call talking about the skill sets of these women that have been appointed talking about digital transformation, marketing and data analytics. So wondering if you can help connect that to the strategy. And then as you think about shifting from cash preservation to cash deployment, how should we think about investments in digital marketing, data, customer data, et cetera, and how you're forecasting some of your strategies around those areas? Thank you.

So although this is -- I'll take the first part, Patrick, you'll take the second part there. Although this is a more traditional category with the consumer purchasing experience more slow-moving than other categories, we have been committed to -- will be -- continue to be committed to ongoing digitization of both the consumer-facing and the internal parts of our business. We have road maps laid out and a steady brick-by-brick process in place. I do think that both Naomi and Susan come to this with great skills and insights that have already been asking great and stimulating questions that will make us better and probably move even faster in these directions. But we're finding all sorts of ways to sort of give consumers digital options that they seem to be taking to and we'll be doing this for years to come. And we're happy with that. And some of those are in areas and things like we're finding a lot of our ship-to-home things and having people order even from our stores and get that done is another aspect of our omni-channel piece. But we are committed to being both a traditional and a digital winner going forward. And Patrick, you can talk about the -- how that affects our input.

Steph, we have been investing in e-commerce, omni and data analytics for quite a while. Pleased with the progress we've made, especially over the last few years. No plans to not keep doing that. As we've looked at strategy and multiyear planning, those all have important places inside of our portfolios that we will be investing in. And as Reade said, we still see this as a store-based business with omni and e-commerce complements. Successful retailers and optical retailers no exception, we'll have to meet the customer where they want to be met. And so we continue to invest in those projects.

Just one other piece. When your sales are as strong as ours have been, you have the ability to think longer-term and to spend time thinking about your processes and ways of working. And I do feel, especially in the area of data analysis of our business and consumer understanding that we are more sophisticated now than we were pre-COVID. We sort of -- in my mind, I think of this as a sort of a piece dividend that the business is so good that we've been able to really focus our internal processes, our internal analysis, our data management and visualization in ways that we'll pay dividends to us long into the future.

Thank you. And our next question comes from Anthony Chukumba with Loop Capital. Your line is open.

Thanks so much for taking my question. Congrats on a strong quarter. And I'll say that I contributed to your comps because I got another item in America's Best, my boss' contact lenses. So just wanted to mention that. But a lot...

Very good.

So a lot of good questions. Most of my questions have been answered. I just had one quick question. You talked about the fact that optometrist compensation growth sounds like it's a little bit slower. And I was just, I was wondering if you can provide a little color around that. Was the fact that your comps grew at 12% so you kind of leveraged optometrist compensation? Or is there some sort of supply demand dynamics? Or just any additional color you could provide would be helpful. Thank you.

Sure, Anthony. You nailed it. That was principally leverage optometrist cost. The rate of growth was a little lower than we've seen. And again, I'm just not ready to call that a trend. We're happy to pay competitive salaries for the doctors. They are a full component of our business model, attracting good doctors and retaining them is central to the business model. And so yes, in Q3, we leveraged that a little more than we have in the past. And part of that is really focused on the outsized comps. So I expect to continue to see some degree of wage pressure there, wage inflation there. But again, so important to the business model and so important to recruiting and retention.

Thank you. We have time for one more question. Molly Baum with Bank of America. Your line is open.

Hi guys, thanks for, thanks for taking my question. I'm on the call for Robbie. He's on another earnings call right now. But I just had one question. You guys have talked a lot about pent-up demand driving some of the comp increases we've seen. I'm just curious if you could talk a little bit more about how big of an impact you've seen from some of the government stimulus programs because when we look at broader spending, we saw a drop in August with the expiration of the CARES Act, to pick up again in September with the FEMA loss wage program when that was distributed. Have you seen similar ebbs and flows or any other indication that stimulus has been a big driver? And kind of related to that, with comps holding up quite well, is anything built into guidance for another round of stimulus? Or would that kind of serve as an upside from here? Thank you.

Yes. So we are a business that always benefits when governments send money to consumers. You sort of in pre-COVID times and more normal times. We always talk about the rush that comes when tax refund checks go out. And so sort of the, some of what we're seeing in June and July was very much related to cash in our consumers' pockets when there was government stimulus. So we, that stimulus helps our business? Having said that, we are, have break nothing in to our guidance or future projections based on the thought that there will be any more stimulus. So that would be encouraging for us and for sure would be helpful.

Thank you. At this time, I'd like to turn the call back over to Mr. Fahs for any final remarks.

Thank you, Norma, and I appreciate all the good questions there. We'd like to thank you all for joining us this morning, for your continued interest in and support of National Vision, and we look forward to speaking with you again when we report our fourth quarter results. Thank you all very much.

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.