Good day, and thank you for standing by. Welcome to the Q4 2022 National Vision Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Caitlin Churchill, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to National Vision's Fourth Quarter 2022 Earnings Call. Joining me on the call today are Reade Fahs, CEO; Melissa Rasmussen, CFO; Patrick Moore, COO, is also with us and will be available during the Q&A portion of the call. 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 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 our filings with the Securities and Exchange Commission. The release and today's presentation also include certain non-GAAP measures. Reconciliation of these measures is included in our release and 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 provides investor presentations and supplemental materials for investor reference on the Investors section of our website. Now, let me turn the call over to Reade.

Thank you, Caitlin. Good morning, everyone. Thank you all for joining us today. I thought I'd start today with an overview of what we're going to take you through to provide context and a framework from the further details that Melissa and I will then be providing. As we've discussed before, the pandemic disrupted the historically consistent optical purchase cycle. In addition, it impacted global supply chains, leading to increased cost and inflation and created a challenging labor market, especially impacting doctor availability as seen in other areas of specialty healthcare as well. While we believe that we will return to a more normalized purchase cycle and cost environment, we're addressing the new reality of the optometrist market and overall business environment in which we're operating today. As we will discuss, optometrists in our network are now being offered a greater variety of scheduling options and improved variable compensation programs, and we're progressing the remote medicine initiative that we've been discussing in our last few calls. We're also resetting our management's short-term incentive plan to ensure that we keep our team highly incentivized to perform. In addition, like all companies, we must evolve our systems to support our growing business and gain advantages and efficiencies of ongoing digitization. As we enter 2023, while the actions we are continuing to take will have an impact on our operating margins in the near term and the macroeconomic factors remain challenging, we are intently focused on continuing to further adapt and transform our business to excel in the post-pandemic new normal business environment. Before I discuss our plans and initiatives for 2023 in more detail, let me first review highlights from our fourth quarter and full year performance. Turning to Slide 4. 2022 was a challenging year for the optical industry overall and…

Thank you, Reade, and good morning, everyone. Turning to Slide 11. Net revenue for the fourth quarter decreased 1.9% compared to the prior year due to macroeconomic headwinds pressuring traffic and constraints to exam capacity. The timing of unearned revenue negatively impacted revenue growth by 2.9%. The 40-basis points revenue loss in the third quarter as a result of Hurricane Ian was recovered in the fourth quarter. During the quarter, we opened 23 new America's Best stores for a 1.7% increase in total store count sequentially over the third quarter of 2022. For our America's Best and Eyeglass World growth brands combined, unit growth increased 5.9% over the total store base last year, and we ended fiscal 2022 with 1,354 stores. Adjusted comparable store sales growth declined 2.4% compared to an increase of 1.2% in the fourth quarter of 2021. The fourth quarter same-store sales decline over 2021 was driven by lower traffic, which was partially offset by an increase in average ticket. Turning to Slide 12, as a percentage of net revenue, cost applicable to revenue increased 180 basis points, driven by deleverage of optometrist-related costs, lower eyeglass mix and lower eyeglass margin. This is better than our expectations of 300 basis points to 325 basis points increase due to a more stable average ticket than we had anticipated. Adjusted SG&A expense as a percent of net revenue increased 300 basis points compared to 2021. The key factors behind this increase were timing of unearned revenue, higher corporate office expenses, which included a one-time investment in our associate of $5 million for retention bonuses, and increased occupancy expense, partially offset by lower advertising expense. Adjusted operating income was a loss of $6.8 million compared to adjusted operating income of $16.8 million in the prior-year period. Adjusted operating margin decreased…

Thank you, Melissa. In summary, this chapter of the pandemic era has created significant changes to the optical category; inflation that has pressured the spending power and affected the purchase cycle of our more budget-conscious uninsured consumer base, created a shortage of optometric capacity for us and across the category and increased our product cost. We believe the purchase cycle and the cost environment will improve with time and are taking aggressive targeted actions necessary to address the situation, both short-term and long-term. Shorter term, we're implementing peripheral pricing changes that will offset some but not all of the product cost pressures we are experiencing, especially as it relates to the commoditized, easily shoppable contact lens category that represents the minority of our business and profit. Aggressive actions are being taken to address the new reality of the optometry labor market, with more scheduling options, variable compensation program updates, and continued investment in remote medicine initiatives. We're encouraged by the initial results of all these efforts. Additionally, we are investing in a variety of digitalization efforts, both customer-facing and back-office to improve our customer offerings and create cost efficiencies. While these efforts create margin pressure in the near term, we are convinced to these are the right actions to position our business for long-term success. With that, I'll turn it over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question comes from Michael Lasser with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Reade, as you diagnose National Vision's performance in 2022, how much of the comp shortfall would you attribute to some of these execution challenges like increased optometrist turnover not having the full rollout of remote medicine versus just a difficult macroeconomic environment for your consumer? And a part of that, you mentioned you are starting to see more of a trade down. Are you surprised that at this point in the cycle that the trade down hasn't been even greater and offset some of these challenges in your core customer base?

Got it. Michael, thank you very much. Good morning to you. So, two pieces. We think overall the comp softness last year was pretty balanced between consumer-related and doctor capacity-related challenges. I do want to point out that our consumer -- about two-thirds of our consumer base is -- does not have insurance that helps them with their optical purchases, so with cash paid, they're out of pocket and the other third is insured customers. And I'd point out the insured customers' comp positively for both the quarter and the year consistently throughout, so that is [indiscernible]. But really in terms of the things we can control, it's a story of doctor capacity. I wanted to point out a number we mentioned in there, that -- because it's the first time we share this that our retention of doctors ranges between 80% and 90%. So, it is a very healthy level and especially when you think about the doctor base we have, many of them are younger and their lives haven't become geographically settled. So, I think a retention rate of 80% to 90% is healthy in this day and age, but we still have customers who want to come to us and we do not have the exam capacity. We don't have the doctor there to give them the exam they want from us. So, there is a demand that we cannot fill. We think remote is going to be a great unlock for this and provide us with incremental capacity. We also think the scheduling options we talked about are going to help us with retention and recruitment. And again, early signs are encouraging on that and, of course, the variable comp we mentioned that's linked to productivity. So, all those things we think are going to play a role in addressing the doctor shortfall component of that. And trade down is gradually happening more and more. So that is coming along, it's hard to sort of have exact expectations of it, but it is occurring just like we saw in the recession of '08 and '09.

Okay. My follow-up question is how dependent is your goal of getting back to a mid-single-digit adjusted operating margin on a mid-single-digit increase in comparable store sales growth? And the reason why I ask that is, because there has been a longstanding debate about the National Vision model as the low-cost provider. Could it be uniquely negatively impacted in an environment where the availability of doctors is eliminated and that low-cost model might not work in that environment, because it's going to -- the company will have to continue to pay off for the important talent, and is it possible that just coming to fruition which will weigh on the structural margin of National Vision? Thank you.

I'm going to have Melissa do the first part of that. And then, I'd like to follow on to the second part of that.

Okay, great. Hi. So, we are investing currently and we're focused on driving long-term success post-pandemic. We believe our business model is strong and we believe that it will continue into the future. What we have incorporated into our guidance currently, anticipate the drag on margins related to these investments. We do believe getting back to mid-single digits will be a key unlock for us, as we think about growth in the future. The investments that we're making currently will enable us to be able to handle the capacity constraints that we have currently. The demand will be there, the doctors will be there, we'll be able to span across geography in time to be able to service the demand that we have at the time that we have it. And so, as I said, mid-single-digit, comparable store sales growth, at that point, we'll begin to leverage the higher costs that we're experiencing this year. And from there, once we have the remote care and electronic health record implementation completed substantially mid to late 2024 and fully productive in 2025, we expect approximately 100 basis point improvement on our operating margin. And then from there, we would expect to further take the opportunity to expand and leverage through sales growth, in addition to driving productivity improvements across the organization based on the investments that we're putting in place today.

And to the second part of that, Michael, there is nothing wrong with our business model. The only challenge is our ability to execute our business model, which is about having the doctor in the store. If we have the doctor in the store, the consumer demand is there. We think our business foundation is strong. Consumers want to come to us and we believe that the actions that we're taking are solving this great challenge of the doctor piece, we think that there are two great trends that we are tapping into in our actions or three great trends actually. One, with remote medicine, we believe more and more doctors are going to want to practice that way in the future. Two, we think that doctors in general, healthcare workers in general, and frankly, all workers in general, are seeking greater flexibility in their working world. The scheduling options we have put in place are addressing that. And thirdly, we think there is an ongoing trend in the optometric markets toward more of an employment model and that is the model that we favor as well. So, in short, we feel that the doctor shortage challenges our ability to execute the business model that consumers really, really want and we think our actions of remote medicine and scheduling options will tap into the way optometrists want to practice now and will ever more so going forward.

Thank you very much.

One moment for our next question. Our next question comes from Zach Fadem with Wells Fargo. Your line is open.

Thanks, guys, for taking my question. This is our Sam Reid sitting for Zach. Wanted to dig a bit deeper on lower eyeglass margins and maybe parse out the effects of trade down versus stepped-up costs.

Could you repeat that, Sam? I'm sorry, we're just -- could you just repeat your question one more time?

Sure, absolutely. So, I just want you dig a bit deeper on eyeglass margins during the quarter and maybe parse out any effects from trade down versus stepped-up costs.

Yes. As it relates to eyeglass margins, we still believe that our margins are healthy. We are experiencing some product cost increases as we look forward to 2023. However, we are seeing some trade down from our consumers, from the higher-income consumers as we believe some of the lower-income consumers have left the market at the moment. We do believe the continued trade down, those customers are really targeting more of the higher-end product that we have in place and their managed care benefits can get them farther at our stores than they can at our competition.

Yes. And, Sam, just to be clear because we used the word trade down in two different ways, I just want to clarify. One, we are seeing trade down of wealthier consumers to our business. And two, which I think may have been like where you were going, we are not seeing trade down within our frame categories to cheaper -- to shifting to less expensive products. We're finding that, say that, a percentage to take our entry offers about even to where it was before. So, those are the two aspects. The two ways we use the term trade down in the company. Hope that...

Awesome. Yes, I was referring to the latter. So, that's super helpful. And then, maybe just one quick follow-up. Embedded within your 2023 guidance, can you talk through the trajectory for insured versus uninsured consumers? Apologies if I missed, but will uninsured still be a drag on comps?

So, two things, we do believe that our managed care percentage will continue to grow as a percentage of our business, as it was growing consistently in the years before the pandemic, and then -- and it has been growing recently as well. So, the growth in managed care consumers has been steady for years and should continue and we're great with that. And I believe that on the other side of your question, in terms of the uninsured consumers, I think the answer to that is, to the extent to which we continue to retain the doctors we have, recruit more doctors and leverage things like remote, then we should be able to generate positive comps on the uninsured side of our business as well.

That's super helpful guys. Really appreciate it. Will pass it along.

Thank you, Sam.

One moment for our next question. Our next question comes from Adrienne Yih with Barclays. Your line is open.

Great. Thank you very much. Reade, I guess, I'm kind of back on the trade down, the literal trade down where you're seeing sort of the higher household income kind of coming in. So, I know, historically, I think you've talked about better cars in the parking lot, but I'm sure that there is some sort of credit card like zip code analysis that you're doing. How do you know that's happening? And is it happening at an accelerating rate? Relative to 2008 and 2009, how is this sort of trade down the speed, the duration, the strength of that trade down happening? And then, very quickly how is the -- like the lack of optometrist capacity, is that the walk-in that come in want a doctor in the office and he is not there? Or is there a capacity to hold on to that consumer by giving them other options or coming in a later date or something like that? Can you retain that potential loss kind of [earns] (ph) in this interim period? Thanks so much.

Good. So, Adrienne, the great thing is -- about this moment is it reminds us just how much more sophisticated we are versus '08 and '09 when, in truth, our assessment in '08, '09 was literally about store managers telling us that were nicer cars in the parking lot, okay, because we did not have data on that. We do now, as you say, we can say what percentage of our customers are coming in from over $100,000 income households and we have seen steady improvements in that since -- why don't we call it, since about this time last year, since about March, April last year when the economy started to get tighter. So, yes, that is very data-driven, and in '08, '09, it was not. In terms of capacity, so let me take you through the patient journey. So, the whole patient journey is, first you start to realize you're not seeing street signs as well or menus as well, and then you go through a period of denial where you are trying to think it will go away and trying not to think you're getting older, and then over the course of several weeks, you get to the point where you say, "Wow, I really need to act now," and then you're in the mood to act once you get over that denial. And so, what you do is go to our -- go to americasbest.com and or for any of our brands, you can make appointments online and you try to find an appointment that convenience for you. Generally, what we find is people would really like to get an appointment in the next few days once they get to that point. And again, it can be online, it can be through calling a store, it's a nice mix of both those things with our customer base. But if you're in the mood to act and you can't find an appointment near term, you might think of other options. In addition, there is a walk-in piece, because every day there are walk-ins to all of our store brand, almost all of whom are seeking an eye exam, so that they can update their prescription and start the process. And people tend to buy their glass before they get their eye exams. It's just how that works. So, if one does not have an exam available in the coming few days, then oftentimes there can be people think about -- probably think about other options.

Okay. That's super helpful. Thank you very much.

One moment for our next question. Our next question comes from Kate McShane with Goldman Sachs. Your line is open.

Hi, thanks, good morning. I know a lot has been mentioned about the macroenvironment and exam capacity. But we wondered what you're thinking about the competitive environment. Do you see any changes there, any increased competition from maybe the mass channel that might be having an impact? And then, we just wondered from a housekeeping standpoint, how many remote locations will be rolled out in fiscal year '23?

So, in terms of big trends since we last spoke or recently, the only big trend is sort of the trend of return to stores, during the pandemic era, there was growth in the e-commerce phase and actually, we've been seeing that there has been a return to stores overall and a diminishment of that share. And again, this is a store's purchase, the vast, vast, majority of all purchases happened in stores, primarily because you need to start with an eye exam, which is why the exam capacity is such an important point. But beyond that, we are not seeing any abnormal or heightened competition. What we're seeing overall is the trends we've been talking about since the IPO, which is the traditional sector of the category that tends to be more expensive, much more expensive is gradually losing market share to the value segment and we are one of the winners in the value segment overtime. And that trend, which we've been talking about for years, we continue to believe is going to be the ongoing trend going forward. Patrick, do you want to add anything there?

Yes. Let me take the remote rollout plans. Good morning, Kate. So, we had a great year in 2022. We got this rolled out to over 300 stores. There was lots of good effort, lots of good results and lots of good learnings. This year, similar to last year, we're starting out the year guiding at least 200 stores. That's kind of where we started out last year. Things got a little better, we were able to upgrade that. The other thing I'll mention on the 200, one of our learnings last year was, it's probably better to not be doing implementations during some of our larger peak volume periods. So, we'll be dialing back active implementation of remote and EHR during those peak volume periods. So, that will probably taper our numbers down a bit. But we think that's the right thing to do. Remote is going to be a key unlock. It always -- it has been already. The more stores we can get this in, the more flexibility we have.

Thank you.

One moment for our next question. Our next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hey, everyone. Reade, I have a quick question on the optometric or the optometrist market, and then one on prices. You mentioned that it's a tough market. Is that because like people, like consumers can't get appointments, because just -- there is a shortage? Or is it because that in your segment, there's a lot of square footage growth and there's more of a chase to hire, as opposed to being like a national shortage where we're just underserved where demand is greater than the supply?

Simeon, good morning. There is a national shortage of optometrists. So, what happened during the pandemic year was many more retired than normally would have. And again, we're seeing this -- what we're talking about here is the same for lots of different types of healthcare workers. So, this was part of a broad healthcare trend. So, there were more retirements. And then, those that, that continued to practice, there was, I think, it's called a great rethink, where they said, "You know, I've been practicing for five days, but really maybe four, maybe three days, and I'll cut back on the number of days that people are retiring. So, what it means is that the number of exams out there in America in any given week is less than it was. The schools do not graduate any higher number of students. So, flat number of students coming in and less doctors practicing, and then less days per doctor. And this is something that is discussed throughout the industry at all levels.

Great. And then, the follow-up is on the pricing. You made a change during the COVID timeframe, out of necessity and pragmatism. Have you debated this again? I know you have a competitive set that there is an opening price point and it is part of that value orientation. But is the pricing structure something that you hope changes or you just can't move at this point given where you compete?

We are constantly watching to make sure that there is a nice moat between us and our competition in terms of price, so it's something that we pay a lot of attention to. We are firmly a value player. We also believe that our willingness to pull a price lever is far less than most other groups in the category overall. We do have opportunities around peripheral pricing, especially as it relates to glasses, less so around contact lenses, very transparent, very commoditized products. So that is not one where we'd like to -- where we pull the pricing lever much. But -- so there is still opportunity there and still able to keep our moat and we watch this very judiciously and make decisions here and there about various aspects of the products we offer.

Okay. Thanks, Reade. Good luck in '23.

Thank you. We'll continue to be doing that on an ongoing basis going forward.

[Operator Instructions] One moment for our next question. Our next question comes from Taji Phillips with Jefferies. Your line is open.

Good morning, and thanks for taking my question. So first, I have a question on just adjusted comparable store sales growth this year. The midpoint suggests 1.5% growth, and I'm just curious what is informing this improved outlook relative to last year's negative growth? Is it a matter of easy comps, or are we actually seeing that positive flow through just with the improved macro environment? And then after I have one follow-up.

Hi, Taji. Good morning. So, the midpoint of our guidance is we're going out with larger ranges just due to the uncertainty around the environment. And the high end of our range assumes -- as I laid out in our prepared comments, the high end of the range assumes that the macroeconomic backdrop has improved slightly, customer sentiment has improved slightly, and we see the continued improvement on the capacity constraints that we've been working through. And the low end of that range assumes that there is continued pressure on our core value-conscious consumer and we don't -- we are not as successful at managing that doctor capacity constraints that we are seeing. And the midpoint is just the math between the two.

And I'll say, for the first two months of this year, we've been performing better than our original expectations. We -- March is such an important part month for us, because it's tax return season. Whenever our customer gets found money like from a tax return, it's generally very good for us. So, we don't want to get too excited by the first two months until we see how March plays out because that's really defining for us in Q1.

Great. Thanks. And then, Reade, just referencing your commentary, I think I remember hearing you say that to make sure that you're promoting flexibility for optometrists, right, you have to restrict hours to improve optometrist recruitment and retention. Just curious how do you balance that decision right between just a lack of availability in time from restricting hours and then also making sure that you're able to effectively recruit more optometrists? Like, what does that flow through look like? Has that directly impacted your ability to recruit optometrists?

So, what -- so it used to be, we were very, very strict and we said, "Hey, if you want to be a five-day doctor with us, these are the five-days you're working, and you can take Wednesday off, and you can take Sunday off, but these are the five days. And I'm sorry, you have to work every Saturday." In today's optometric markets, given changing demographics and the like, we have found that was a turn-off to our recruitment efforts and also a factor in why people left us. So, now we have a menu of options of which days they are able to practice with us. And if its greater variety there, we do tend to -- we've always paid additional for weekends and holidays and found that the resulting sales and flow through justify that incremental expense. As doctors sort of trade off and say, I'd like to take some Saturdays off and maybe work Wednesday, instead of Saturday, we tried to fill in the Saturday, and there is expense related to that. It is expense that is fully justified and pays out with sales flow through. But that's what we're talking about here is offering options to shift what days you work around your lifestyle and your schedule and trying to fill in where there is customer demand if that's what they trade-off. And this is part of flexibility that I think is a key part of the workforce going forward that we're all going to be watching. And yes, since we started doing this, we are seeing both recruitment and retention benefits associated with it, that have been encouraging. This is something that we started testing in Q4 of last year and we made some -- we said, wow, this is encouraging for us. And we decided to put another chunk of stores into it later in the year. And then, early this year decided, hey, let's just do it across America's Best and we're looking at similar options for other brands now. And frankly, the last few months of recruitment and retention as we've been announcing or since we've announced that has been the best in the past year and half or so.

Great. Thanks for the information.

One moment for our next question. Our next question comes from Dylan Carden with William Blair. Your line is open.

[indiscernible]

We cannot hear you. I'm sorry, Dylan.

Can you hear me now?

Barely, but go ahead. We'll try.

Sorry. I'm curious how you're thinking about the lapse in SNAP benefit as it relates to your guidance, as well as timing around lapsed customers who deferred the purchase in 2022 kind of coming back in '23? Can you hear me?

Dylan, can you repeat your question, please?

Yes. If you can't hear me, maybe I can take it offline. I'm just curious about the lapse in SNAP benefit as it relates to your guidance and how you're thinking about that, and then, lapsed customers in 2022 coming back to the business in '23 kind of what the expectations are there?

Yes. It's regarding the SNAP benefits, it's another pressure on our lower-income, uninsured customers. But it's -- they've been pressured on a variety of different fronts. So, it's just another -- it is another headache there we do not think it's going to have a dramatic impact on us. And then, in terms of lapsed customers, things -- in terms of the percentage of customers who are new versus repeat has remained pretty constant.

Okay. I'll save my other one, just I have a bad signal here, for offline. Thank you.

Good. Thank you. It is a little hard to hear you. So, thank you. I hope you got that. Good.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Reade for any closing remarks.

Good. Kevin, thank you so much. And thank you very much for everyone who joined the call. Thank you to our shareholders and stakeholders for your ongoing support. And we look forward to speaking to you again when we report our first quarter results. Thank you, all.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.