Good day and thank you for standing by. Welcome to the National Vision's Third Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' 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 over to your speaker today, David Mann, Vice President of Investor Relations. Please go ahead.

Thank you and good morning everyone. Welcome to National Vision's third quarter 2021 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 Investor 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 and 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, and good morning everyone. I'd like to thank you all for joining us today. Let me begin by sharing my heartfelt appreciation to the entire National Vision team for their continued hard work and commitment to serve our patients and customers with a safety-first approach during these ever challenging times. Turning to Slide 4 and a summary of Q3 results, as noted in today's press release, our results are, as in our Q2 release, being compared to the third quarter of fiscal 2019. Due to the significant recovery following the reopening of our stores last year, we believe that 2019 is the most helpful basis for comparison. We're pleased to deliver another quarter of consistent performance. Net revenue increased nearly 20% over the third quarter of 2019 with adjusted comparable store sales growth of 13.3% over the same period. The top-line strength continues to be led by our growth brands, America's Best and Eyeglass World. We opened 14 new stores during the quarter and ended with 1,262 locations. Adjusted operating income increased 110% and adjusted EPS increased 134% to $0.38. Subsequent to quarter end, we announced the following significant developments. We released our first corporate responsibility report as we continue to progress in our ESG journey. Also, we paid down $50 million in debt this week and announced a new $50 million share repurchase program. Overall, our third quarter results reflect the consistent strength and durability of our business model. Finally, in today's earnings release, we tightened our 2021 outlook. In a few minutes, Patrick will take you through our Q3 results and updated outlook in more detail. Turning to Slide 5. As the chart shows, our business has demonstrated a track record for consistency over the past two decades with 72 quarters of positive comparable store…

Thanks, Reade. And good morning, everyone. We're pleased with our consistent performance this quarter as we build on the operating momentum delivered during the pandemic. Our results were driven by continued positive traffic trends and excellent store-level execution. In addition, we continue to reinvest in the business to maximize our opportunity to grow share while continuing to reduce our debt. As a reminder, the comparability of our reported results was affected by the impact of temporary store closures last year. Thus, consistent with our second quarter earnings release, we have shared results versus both 2020 and 2019. As Reade noted earlier, our comments today are being primarily made to 2019, which we believe is a more helpful comparison. Now let's turn to Slide 8. Net revenue increased 19.9% over 2019. The timing of unearned revenue versus 2019 benefited revenue growth by 1.5%. During the quarter, we opened 14 new America's Best stores and closed one store for a 5.1% increase in store count. For our America's Best and Eyeglass Growth brands combined, unit growth increased nearly 7% over the last 12 months. Adjusted comparable store sales growth was up 13.3% over 2019 and 0.2% over 2020. Q3 same-store sales growth over 2019 was driven by growth in both average ticket and customer transactions. Compared to 2020, comps were driven by an increase in customer transactions as the average ticket moderated as expected from elevated levels last year. Before moving to a discussion of margin highlights, I want to pause to provide some additional perspective on our quarterly comp trends. The two-year comp in Q3 was generally consistent with the two-year comp that we delivered in the first quarter. We believe the stronger performance in the second quarter reflected the benefit from significant government stimulus which we did not expect to…

Thank you, Patrick. Turning to Slide 15 and our Moment of Mission. We are continuing to live out our mission, both close to home and at a global scale. We are proud to have released National Vision’s first corporate responsibility report, which is the first time our company has shared a comprehensive overview of our efforts across environmental, social and governance activities. The report also presents our framework and overall approach to corporate responsibility and lays the groundwork for continued enhancements in transparency and disclosure to our stakeholders. You can access the report, along with other information about our corporate responsibility efforts on the Corporate Responsibility page of the National Vision website. Separately, we recently received yet another unsolicited accolade for our culture. National Vision was included in Forbes 2021 list of America’s best employers for veterans our second year in a row to receive this honor. Recall that earlier this year, we were named to Forbes List of Best Employers for Diversity and Best Employers For Women. In summary, we’re pleased with our third quarter results and the continued consistency of our performance during the pandemic, despite what remains a challenging and volatile environment. Our associates and network of optometrists continue to serve patients and customers with their commitment to safety, patient care and customer service every day and in every store, one patient and one customer at a time. I could not be more proud and appreciative of the entire National Vision team. The key takeaway from today’s call is this. Our performance during the pandemic highlights the strength and durability of our business model. We’re growing market share in the recovering optical retail market and are benefiting from the hastening of trends that favor National Vision, and we’re emerging from the pandemic a stronger and more profitable company and continue to see tremendous opportunities ahead of us while keeping our ESG efforts core to our DNA. With that, I’d like to turn the call back to the operator to start the question-and-answer portion of the call.

Thank you. [Operator Instructions] And our first question comes from Adrienne Yih with Barclays. Your line is open.

Good morning, everybody. And nice progress year-to-date, continued success. Reade, my first question is a comment that you made on back-to-school. I’m not seeing that come to fruition as it has in past years. Are you seeing a more elongated kind of post back-to-school? Are you seeing children and the sales that you’re expecting to come back in kind of September, October? And then Patrick, I just want some more detail on the fourth quarter. And I just want to make sure I got this part right. Growth in sales over 2019 of low to mid-teens, but lower profitability in over 2019 due to marketing and wage growth. So just kind of marry those higher sales with perhaps lower profitability if I got that correct? And any early thoughts on how we should model the first half of next year given the stimulus. Thank you very much.

Good. Thank you very much, Adrienne. The back-to-school season, we have about the time of our last call, we were starting to see it, it begin and it just never hit the high that it has in the past. So it was just a very muted back-to-school season. Back-to-school season, it’s a little bit of a misnomer because yes, it does involve kids but also a lot of parents come back at the same time. So really the better way to think about it, it’s just sort of our second seasonality. Generally, we have our first seasonality in February, March around the time of federal tax returns coming back. Our customers get a little bit more money in their pocket then and address the necessities. And then our second season is that August, September, both with kids and adults at that time. And it just – it did not follow the trends of past normal back-to-school years. So this is like the second year. Last year, there was not much kids weren’t going back to school last year this year. It was just – it was not for us or the industry from things we’ve heard just the highs that we would have expected from the seasonality in pre-COVID or from kids going back to school.

Yes, Adrienn. Good morning. Thanks for the question. And before I dive into Q4, and I want to unpack that well for everybody, let me just kind of take a tariff level view of 2021, because I think it’s important as a backdrop. So based on the demonstrated consistency and resiliency of our business, we decided to provide full year guidance this year across all P&L elements. I think we were one of the few companies that did that. And we said in the beginning, we were going to take a slight lean towards conservatism as the environment remains tough to predict. As we stand now, we’ve raised twice. We’ve narrowed one. I’m really pleased with how we guided and how we performed. I’m actually very pleased and proud of the associates and doctors that continue to operate in this shifting environment and delivered all this. As I reflect on the full year, we got most of this right. We did push advertising had a few times during the year in somewhat of a test and learn mode. I think we’ve talked about that earlier. It was a great environment to do so, good demand, high ticket, high flow-through, very conducive to testing. We made surgical wage investments around midyear in our stores, associates and lab associates where we saw immediate returns in hiring and retention rates even amid the delta variant peak that we all experienced. We also made investments in doctor compensation. These investments, which totaled in the mid-single-digit millions on an annualized basis, continued to yield gains for us. Finally, we saw the beginnings of a normal back-to-school season, as Reade mentioned, but then it kind of lightened and we didn’t see the fall back-to-school season. So if I were doing an assessment of how we do,…

Incredibly helpful. Thank you very much.

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hey, everyone. I want to focus on demand side. So two questions. First, can you talk about how you expect the optical market or the retail market to grow or to evolve the next two years? Do you think we continue to see growth on the robust growth? And then the second question is, is there any way – now we’re seeing some of the stacks moderate, is there any way to parse out maybe the stimulus dollars and that had an impact on the business? How should we think about that?

So to your first question, Simeon, we still feel like we’re in COVID era now. And COVID era is unpredictable. I mean when we looked at September, that delta variance came back, and that was something we hadn’t been expecting. And I still think we’re in the unpredictable COVID era that we sort of do that gray out thing on our comp store chart. I don’t know how long we’re going to be that gray out COVID era is going to last. I’m believing and/or I’m hoping that we get to a stage of more normalcy in terms of the health of the nation and the normalcy of the category and more predictable normal trends to our business. But this is a – this is – we all have said so many times, such an unprecedented time. In terms of your question on stimulus impact, our customer always when they get some money in their pocket, it always helps us. It helps us in terms of them coming in and buying our products. And certainly, last year, it also helped us in average sale. Our plan is for our average sale to moderate over time. And I can’t predict what’s going to happen with future stimulus from the government. But as a rule of thumb, when our customer gets more money – surprised money in their pocket as happens with stimulus programs and often tax returns, it benefits us and causes seasonality.

Have there been any changes to date in terms of good, better, best, where you’re starting to see that wane?

Starting to see that. I didn’t hear you last word.

Wane, meaning where we’re starting to see some of the ticket trends starting to slow or the decision is being made we’re buying good and better instead of better, best or we’re starting to put fewer add-ons.

What we are seeing is a gradual normalizing of our average ticket. I wouldn’t be surprised if when it hits a stable place, whether that’s still above where it was pre-COVID. We’re finding things like Blue Light lenses are selling quite well in this post-pandemic or this pandemic and beyond period. So I wouldn’t be surprised that when it stabilizes, it stabilizes at an elevated level. But what we’re seeing now is a normalization decline versus the elevated levels of last year. And what you’re seeing is we’re making up for it by increased transactions and customer count, which is how we’ve always said we’d like to build our business through footfall, not average sales to repeat what Patrick said, the success of our business is because we’re the low-cost provider of a medical necessity. We like the fact that our customers save money versus going to other places. That is the key source of our ongoing market share gain and our success in positive word of mouth, and we don’t – and we let the consumer buy what they want and let that fall where it may. And again, that’s been fundamental to our success for a long time. So we are expecting continued. So the declines versus the heightened and unusual levels of last year in average sale, and we are making it up for via customer count.

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

Good morning. Thanks a lot for taking my question. If we compare National Vision’s third quarter results to some of the indications from the other publicly traded optical players in the market, it appears that National Vision’s share gains slowed in the period. Now you’re talking about increasing the marketing investment, recognizing your comparisons are probably much more difficult than others. What would be causing your share gains to slow down versus where they have been?

Yes. We believe we are continuing to grow market share. Every indication we get, including from the category players who can glimpse the entire category, the frame and lens suppliers and the insurance companies. We believe we are continuing to grow market share. And that’s happening at a similar pace to the past. But – so we’re not seeing it the way you are seeing it there.

Understood. And my follow-up question is on the planned marketing and wage investments. Patrick, I think you said you referenced a mid-single $1 million wage investment. Is that what you were referring to that will continue into the fourth quarter? If not, can you give us a sense of what the incremental wage investments going to be in the fourth quarter? And similarly, how big the marketing investment is? This is obviously important because we’re trying to calibrate our models for 2022, recognizing that the demand environment will be pretty uncertain. But if you’re messaging that these expenses that you’re going to incur in the fourth quarter are going to persist well into next year, we would want to incorporate that in our forecast. Thank you.

Yes. So, I would say in terms of the wage, Michael, I was trying to give guidance that says mid-single-digit millions impact of three wage adjustments, and that’s an annualized figure. So, you can kind of do the math on how much of that affected the second – the third and fourth quarters. In terms of advertising, we’ve been saying for quite a while, that we expect advertising to return to similar levels as a ratio of advertising to sales. I would say in general, thinking about looking ahead, there’s still a lot of uncertainty in the environment. We’re not providing specific 2022 metrics at this time, but I will offer a few things that may help. I do think, as I said, we’re going to see more normal seasonality in 2022. I think we’ll have kind of challenging growers in the first half and much easier in the second half. I do think advertising comes back to normal levels spend relative to revenue. And then those surgical wage investments that we made will lap those in the summer and midyear of next year. And again, I wanted to give a way to you the figure that you can kind of arrive at in terms of how much that is worth. So yes, there’s a few headwinds. Hey, this management team has faced headwinds like this in the past, tariffs was a great example. You can expect us to continue to find ways to work through them, and we currently are looking at multiple initiatives that will help us do just that, just like we did with tariffs. We kind of like delivering a level of a consistent and resilient performance that seems to please everybody and our intent is to keep doing that. So we’ll provide a lot more insight into that when we talk again in Q1. I hope that helps a little bit, Mike?

It does. Thank you.

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

Thank you. Good morning everyone. We wanted to spend a little time on packing the new customer cohort. If you could share with us some of the insights from the new customers you’ve gained. And I think you had implemented some incremental CRM initiatives related to some of your marketing. So, if you could talk a little bit about whether it’s appointment reminders or prompts to try to reactivate lapsed customers? Anything you can share with us around success of some of those digital initiatives and your new customer cohorts that would be very helpful. Thank you.

Good. Well, what we saw in the quarter was gains in both existing and new customers across both our growth brands, and slightly higher with Eyeglass World, which is encouraging there. As Patrick mentioned, this is a marketing intensive category, and we think those results reflect the fact that our marketing is effective. We are getting ever more sophisticated in our CRM and digital marketing programs in a variety of ways. We don’t like to detail that too much publicly because it is part of our secret sauce, but our marketing efforts are ever more sophisticated and ever more effective.

That’s great. And then just one follow-up for us on Eyeglass World. I think that was a brand that you started to see some really strong returns on investment at the unit level. How are you thinking about the growth of that business going forward, should we start to anticipate that the unit growth in that brand could start to accelerate into the out years? How should we be thinking about that in the forward model? Thank you.

Yes, very, very happy with Eyeglass World’s performance ever since we reopened after the COVID closure period, it’s just been fantastic. And again, versus 2019 in Q3, Eyeglass World was up 21%. We think it’s a combination of the resonance of the model and improved execution and marketing on our part there. I think we’ve shared that we find the return profile. The ROIC is now much closer to AB. And so we have said we’re going to modestly accelerate EDW unit growth in – or a growth in 2022. And so we have – I’ll share we opened two Eyeglass World were in October, what’s nice is, it’s nice to have two growth engines in both America’s Best and Eyeglass World, and we think that we can sort of double our store count of the combined to growth brands in the coming years. We think America really love both these concepts, and we plan on making them available to ever more Americans.

Thank you. And our next question comes from Bob Drbul with Guggenheim. Your line is open.

Hey, guys. Good morning. Just a couple of quick questions for me. I guess just following on some of the new store openings, in terms of like whether it's existing markets and how the stores are opening in the various markets. Any sort of insights into that? And then I guess the other question that I would love to hear more is just about the Walmart business and some of the new stores that you opened in Walmart, if there's any update generally with your relationship on Walmart? Thanks.

Good. Okay. Go ahead, Patrick

For a new store, the last two really large markets that we went into strong, whereas the was West Coast with L.A. and San Francisco and the East Coast in the New York Vicinity more recently, Connecticut. Since that time, we've taken Bob, a little more balanced approach and not weighted ourselves so much on any given year with lots of brand-new market stores. So I can't give you the exact ratio, but it's now a majority of our store openings are in existing markets. But each year, we tend to pick off one or two new metros or states but it's a smaller portion since entering those last two really large markets. And we like that balanced approach. Stores in existing markets tend to already have brand awareness. They tend to take off a little faster and we're really happy. Our new store is performing well. The only time they didn't perform well in the last 1.5 years was when we closed them during COVID. But since they came out of the gate, wow, they've looked great. They've hit a lot of their multiyear metrics quicker. So we're really happy with our new store opening batting ever.

Good. Good. I'll take the Walmart part of that question. Again, we're in our 31st year of partnering with Walmart company with founded to do vision centers inside Walmart 31 years ago. We last year extended our contract for three years with the same economics. So that's got several more years there. They gave us five stores last year, it was the first time they've added store to our contracts since 1994 and we're real pleased with the results. We're continuing to see positive and encouraging results in those five stores, and we still think we're still in the ramp-up of all the things we can do with those stores, and the whereby ship with Wallmart is great.

Thanks, both.

Thank you. Our next question comes from Paul Leju with Citi. Your line is open.

Hey, thank you, guys. Curious how you're thinking at a high level about 2022 relative to 2021 from a top line perspective. Do you think there was any sort of pull forward in 2021 that would take away from 2022? Or was it more of kind of a catch-up from 2020? Would you look at 2021 as just kind of the new sales base from which you can grow comps at your normal historical rate? And then second, just curious about store pipeline for 2022. How many are locked and loaded with a signed lease? And how does that break down by concept? And are you finding it any easier or harder to find good locations for one concept versus the other? Thanks guys.

Yes. Reade, do you want to take the second one, and then I'll come back to the first one.

Yes. Yes.

Store pipeline?

Yes. I'll start with that. Yes. Good. Yes, the store pipeline is looking good. We're not having trouble finding locations. There's plenty of good locations out there. I don't think we ever announced how many are locked and loaded, but we are very confident we're going to be able to build 75 great stores next year in the same sort of rough, rough timing and flow that we've done in past years. No change at all in that area, things are good.

And Paul, I love your question on pull forward. It's one that we've contemplated and thought about here. The retention data that we look at seems to indicate that we didn't – we were not going to suffer from a lot of cycle pull forward. And I think as I look at sales for next year, obviously, a more difficult grow-over in first and second quarter. But beyond that, I really think we're back into normal seasonality, normal kind of comp growth expectations. So I think that we have maybe one more half-year where we've got a little grow over challenge that we got to win and got to get through. But beyond that, I see a very much more normal landscape for planning.

And I'm going to caveat, the one thing Patrick said there was assuming no new variants, assuming no big dramas associated with mandates and stuff, and that's all really hard to predict. But on a COVID impact exclusive base – excluding basis, I agree with everything. And your guess is as good as mine as to what any of that might mean to the future.

Yes. I think as we look at the overall aggregate guidance that we'll lay out next year and the plans that we're working on now, I think they start to look a lot more normalized versus where we've been over the last 18, 24 months.

Got it. Thank you, guys. And Patrick, just one follow-up. Did you quantify the unearned revenue impact in 4Q, specifically in terms of millions of dollars, sorry if I missed that?

We did not quantify that. We said it would be material, but we didn't quantify, Paul.

Thank you. Our next question comes from Robby Ohmes with Bank of America. Your line is open.

Hey. Good morning, guys. Just a couple of quick follow-ups. First, maybe Reade or Patrick, can you remind us what happens in really high gas price environments with your customers? Does it change their purchasing patterns at all, especially the lower income ones? Do they sort of delay getting eye exams and things like that. And then the other question was just on – I understand the stimulus is rolling off. I think you guys had mentioned in the past that you guys were also more open than a lot of the competition and that you were expecting more competition to open up in the back half of this year. Has that been happening? And is that having an impact on you guys at all? And do you see that having a bigger impact in the first half of next year? Thanks.

Good. Yes. So Robby, thank you for that. Our customers do live on a tight budget. That's why we benefit from stimulus, but we're not immune to any temporary impact of any external economic event. So like gas prices are that. There's no direct correlation. We do watch out when the gas goes way up, but it's been a long time, things have happened. But I think if you look at our long-term trends, we are able to positively in good economic times and bad. And you could almost see the flip side also. On the one hand, our normal customer is feeling a little tight in their budget, but sort of the customer just a little better off is then also feeling tight in their budget and looking for more value. On your second question, the more open. So we opened sort of gradually throughout May of 2020 and were fully open as of June 1 of 2020. And it took many of our competitors a while to reopen, some of them still opening stores in the fall September period of 2020. So last year, we were benefiting from that, all – the category has been pretty much fully open since Q4 of last year with the exception of the fact that we believe about 3% of the independent doors shut along the way through retirement or financial reasons. So there are a few less doors there. But there are also – I mean, there is data out there on sort of the top 50 optical retailers and most of the – while we were growing stores, a lot of them closed down stores last year, a couple of 100 stores there. And last year, the whole series chain shut down, and there were other. So last year saw the decline – the closing of stores that have yet to reopen. But in terms of reopening the category, that all occurred by Q4 of last year.

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

Good morning and thanks for taking my questions. My first question, as I look at your results relative to 2019, the sales growth slowed from 28% in the second quarter to 20%. And I guess I was wondering, do you think that maybe in terms of the back-to-school being somewhat underwhelming if there is maybe like a demand pull forward into the second quarter, particularly with people with having stimulus check. So maybe that back-to-school purchase, they would have made in the third quarter, they made in the second quarter with the stimulus check. Does that make sense at all?

It's hard to assess pull forward in our category. It's not something we normally see, especially with our consumer segment. But generally, the trigger is – I'm not seeing as well. And we found that it's sort of from the first moment of, hey, I'm not seeing as well to acting on it. It's generally about 90 days. You've got to go through the denial phase, and all that and hope it goes away, but then it doesn't and you have to act on it. So amongst our customer base in general, we don't think pull forward is big. These are regular times, but we aren't thinking of it as a lot of it's really very hard to assess that.

Got it.

I'll just also add, as we worked through the 53rd week year, the 53rd week was a factor in a calendar shift that affected second quarter. I think as you look at our first and third quarter two-year comp stack, you're going to see fairly similar numbers. And in second quarter, you're going to see an elevated number. That's a structural factor as well as just the stimulus. And frankly, in the second quarter, COVID was over and temporarily until Delta variant. So I think as you're looking at what looks like a normal quarter, first and third on a two-year stack, don't have those implications in them, Anthony.

Got it. That's helpful. And then just one clarification in terms of the $50 million share repurchase. So that's just to offset stock option exercises. So in other words, we shouldn't really expect any significant change in the – in your weighted average shares outstanding.

Yes. This is just us deciding to start offsetting any impact of management stock action. Our goal is to keep that very balanced and neutral. We have not been doing that thus far as a public company. And we're starting now. It's not the beginning of a big stock buyback. And you can tell because it's just $50 million. I mean we think that lasts two to three years. And so it's just exactly for that. I will go ahead and since you brought up the number 50, I plug the debt reduction, really happy to take another 50 off the term loan. And I do think we're probably we're probably done making moves there. We'll probably sit tight on that term loan A at 150 for quite a while. The next big thing we're thinking about is multiple years out on the horizon, and that's the convertible notes we probably start accruing some cash and thinking about that. But again, those notes are a hybrid product. It allows us to satisfy them with cash debt or equity. But in general, I think from a cash deployment strategy, we're going to offset dilution. We're probably not going to do many more voluntary prepayments at all on the term loan, and we'll have our eye on the notes in the future.

That’s helpful.

Our next question comes from Zack Fadem with Wells Fargo. Your line is open.

Hey good morning. Can you talk a bit about inflation in the category? And to what extent you're seeing peers raise prices in response to the current supply chain and cost environment. And just given the dynamic out there, how should we think about the direction of your average ticket spread versus the industry? And do you view this as an opportunity to take more share?

Yes, so we are at group that hasn't raised our entry offer on our lead brand America's best in well over a decade. We – many of our competitors do take price fairly often, and we find that that's one of the long-term trend that benefits us, is that the higher the traditional category goes in terms of pricing, the better it is for our market share. And in terms of our attitude towards pricing, we did take peripheral pricing in 2019, and we do that on a infrequent basis over time, but we consistently evaluate potential peripheral pricing options. But we're committed to our customers saving money versus most any alternative out there because that's our reason for being.

And then I'll talk a little bit about inflation in the category just in general. We have long-term contracts in place with all of our major vendors. That doesn't make us perfectly immune to inflation, but it certainly does help. And just as a reminder, we saw some freight pressure in the quarter, but it's just so small for us. It's an immaterial element of our cost structure. And then finally, as it relates to inventories, we have still been in a position of pre-buying. We want to make sure that we have everything we need to open stores and sell to customers and patients. And so we'll end the year probably a little heavy on inventory, but that will be purposely, that will also offset any potential small inflationary pressures that we might feel later in next year.

Got it. And at the gross margin line, Patrick, Q3 came in about 360 basis points above 2019 levels. And I know we should expect a leg down in Q4 and you talked about the moving parts there, which was helpful. But longer term is it fair to expect the gross margin run rate to return back closer to that 2019 levels? Or is the current rate of about two to three points higher than 2018 more appropriate for your business?

Well, I'll remind you that as – gross margin can be can fluctuate with seasonality. I mean it's typically really good in a normal year in February through April-ish with peak season, and again, in back-to-school. There are some fixed costs in our gross margin related to labs and labor. So we do have periods of a year where it will be a little higher or a little lower. I wouldn't get locked into fourth quarters. For gross margin, I think that we continue to – we're going to have a little bit of wage pressure there with the lab wages that we raised through next year. That's fairly small. We're going to see lab productivity gains are probably going to offset that. And then another big factor for me is where does ticket normalize. Reade kind of talked about; we now do not expect to get to return to pre-pandemic levels. And so all of that comes into play as I think about what will the story on gross margins be. I still think there's a shot that we can continue to see some gross margin improvements over time.

Got it. Appreciate the time.

Thank you. I think we're at the end of our hour there. So thank you very much, Catherine, for moderating the call. And thank you all for joining us today, and thanks to our stockholders for continued support. We're looking forward to speaking to you again when we report our fourth quarter results. Thank you all very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.