Good day, and thank you for standing by. Welcome to the Q2 2023 National Vision Holdings Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Angie McCabe, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to National Vision's Second Quarter 2023 Earnings Call. Joining me on the call today are Reade Fahs, CEO; and 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 accompanying our call are both available in the Investors section of our website, nationalvision.com. A replay of the audio webcast will be archived in the Investors section after the call. Before we begin, let me remind you that our earnings material and today's presentation includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and 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 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 provides investor presentation and supplemental materials for investor reference in the Investors section of our website. I will now turn the call over to Reade.

Thank you, Angie. Good morning, everyone. Thank you all for joining us today. As you likely saw on July 26, we announced our preliminary second quarter financial results in conjunction with the news that our partnership with Walmart will be ending in 2024. This morning, I'll provide some highlights from the second quarter, update you on the progress we're making on our key strategic initiatives with particular emphasis on how we're expanding exam capacity and provide some color on the Walmart transition. Then, Melissa will review our second quarter financial results and 2023 outlook in more detail. As we communicated 2 weeks ago, our second quarter 2023 results were largely in line with our expectations and reflected trends similar to what we experienced in the first quarter. Compared with the second quarter of 2022, we delivered net revenue growth of 3.1% and delivered adjusted comparable store sales growth of 1%. We continue to see strength in our managed care business as well as a further shift in the number of higher income customers who traded into our more value-priced offerings. During the second quarter, we opened 24 new stores and remain on track to open approximately 65 to 70 new stores this year. As I'll discuss later in my remarks, we continue to see tangible results from the execution of our key strategic initiatives. These factors, among others, that Melissa will discuss resulted in adjusted diluted EPS of $0.17 for the second quarter. Importantly, we believe the adjusted operating income and adjusted diluted EPS will be at or above the midpoint of our fiscal 2023 guidance ranges. Regarding our Walmart relationship,, as we detailed it in our July 26 press release, as of February 23, 2024, we will no longer be managing the 229 vision centers in select Walmart locations,…

Thank you, Reade, and good morning, everyone. As you know, 2 weeks ago, along with the news that our partnership with Walmart will be ending in 2024, we announced preliminary second quarter results that were largely in line with our expectations and reaffirmed our fiscal 2023 outlook as we previously communicated on our first quarter earnings call in May. For the second quarter, net revenue increased 3.1% compared with the prior year's quarter. The timing of unearned revenue negatively impacted revenue growth in the period by 90 basis points. We opened 21 new America's Best and 3 Eyeglass World stores and closed 1 store in the second quarter. Unit growth in our America's Best and Eyeglass World brands increased 5.1% on a combined basis over the total store base last year, and we ended the quarter with 1,381 stores. As Reade mentioned, we are still on track to open between 65 and 70 stores in 2023, consistent with our previous guidance. Adjusted comparable store sales grew 1% compared to second quarter of 2022, driven by an increase in average ticket and an increase in customer transactions supported by the continued strength in our managed care business. As a percentage of net revenue, cost applicable to revenue increased 120 basis points compared with the prior year quarter. As we expected, we continue to see deleverage of optometrist-related costs. However, this was partially mitigated by an increase in exam revenue driven by managed care strength and pricing actions. The net impact from deleverage of optometrist-related costs and the increase in exam revenue was approximately 50 basis points and in line with our expectations. In addition, we experienced a 50 basis point headwind due to reduction in other components of service revenue, including decreased warranty plan revenue. Lastly, the remaining 20 basis point…

In closing, let me summarize. Our second quarter performance was largely in line with our expectations, where we have achieved our exam capacity goals, we've delivered positive comparable store sales growth in excess of our overall consolidated growth. Retention trends are encouraging, recruitment trends are encouraging and remote is expected to be EBITDA profitable this year and poised to be an ever more important part of our exam capacity. We are reiterating our full year 2023 outlook with adjusted operating income and adjusted diluted EPS to be at or above the midpoint of their respective full year guidance ranges. And we look forward to being a far simpler, faster-growing company with an increased focus on our 2 strategic growth brands, America's Best and Eyeglass World. Thank you for your time today. We will now open the call for your questions.

[Operator Instructions]. Our first question comes from Kate McShane with Goldman Sachs.

I just wondered if you could provide any more detail behind the same-store sales trend difference between America's Best and Eyeglass World and the performance there.

Thank you, Kate. I'm happy to do that. Yes. So America's Best was a 1.8% comp and Eyeglass World was a negative 2.8% comp. I've got to tell you, it's a little bit of the same story of managing doctor coverage and dim store. Here, we've really been focusing our efforts with remote, which has been a help so far on our AB stores, our America's Best stores. That's where we've been rolling that out and have that going. And at some point, we will turn to Eyeglass World on that front, but it's really so much the story of capacity constraints there, but we do believe that we can continue to improve those over time.

And Kate, I just wanted to add, we did talk about dark stores in our prepared commentary this quarter. And as far as the dark stores go, this is something that we are really focused on working through with our remote enablement but the dark stores were at their worst at second quarter of 2022 at mid-single digits, and we're less than half that amount currently. And so we'll continue to attack that through our recruiting and retention efforts as well as our remote. And I'm sorry, those numbers that I quoted were the percent of America's Best fleet. Now that is something, like I said, that we are working to attack through recruiting remote and we'll move to the Eyeglass World brand once we have established our increases with America's Best.

And finally, Kate, I think the real story here is as we have been improving the capacity in America's Best. We're seeing the comps improve. And as we said in our remarks, where we have the desired level of capacity, we are able to deliver the comps in line with our historical operating model. So it's just getting back to making sure we have the exams available for the patients who want to take advantage of them.

[Operator Instructions]. Our next question comes from Michael Lasser with UBS.

Thank you so much for taking our question. Reade, Patrick, Melissa, Angie, there are so many moving pieces in your model given what's happened over the last few years along with now the divestiture of the Walmart business. So it would be extremely helpful if you could help unpack whether or not National Vision can get back to the average adjusted operating income margin that it regularly achieved prior to the pandemic which was in the 6.5% to 7% range. And if that is feasible, what are going to be the key factors and strategies that allow National Vision to get there? Is it simply just going to be a function of generating consistent same-store sales growth, leveraging expenses, especially in light of the investments that you're having to make in order to attract and retain optometrists at this point?

Michael, I love your question, and there are a few moving pieces really brought on by the post-COVID marketplace. And those moving pieces are affecting the optical category in general. Again, what I'd like to remind you is where we are able to execute our model, where we have capacity, we are driving the comps in line with our historical model. We do believe that mid-single-digit adjusted operating income margin is our next milestone, and we've been talking about how we will get back to that and hope to be back there certainly in 2025 and start seeing that in late 2024. I'll say the elimination of the Walmart part of our business, that was pulling down our margins. So that alone is going to help with that. And we see that expansions in capacity are a key driver in helping us to get there, but also the digitization of our stores, further digitization of our corporate office, more leveraging of omnichannel capabilities, as well as more stores as we take advantage of our white space opportunity. I'll add Michael that since you've been following us so long, at this time last year, I'd say we were sort of feeling more back-footed by a lot of changes that were affecting us and coming our way and sort of coming to understand to the full extent what was happening both to our consumer and the rising inflation environment and to the doctor capacity within the marketplace also. We are feeling far more front-footed now with the programs we put in place, especially flexibility in terms of driving increased and improved retention. And frankly, we think our retention will be at maybe the best year post -- the best year post-COVID and record recruitment of students and the like. And we're encouraged with the start of the third quarter. It's a back-to-school season and back-to-school season does evolve across the country. So it starts more in the Southeast and then goes North and then across the country, but where it has started, we are encouraged by the initial trends we are seeing there.

Okay. My follow-up question is that it's clear the purchase cycle for new eyewear had been disrupted over the last couple of years given all that's going on. And now, as you mentioned, you're on front-footing, more firmer footing. And is what you're seeing a sign that there is a return to normalization of the optical purchase cycle? Or is it more of a sign that National Vision is gaining or retracing some of the share that it might have lost over the last years as it was contending with some of the constraints that we're dealing with?

I think it's a sign of our improved capacity allowing us to offer patients the exams they want to get from us. We have not yet seen a normalization in the purchase cycle. It could start to happen in the second half, but we are not planning for that. It could start to happen in the second half. It's been about 2 years since that big boom of optical purchases for us and others that came about when the government gave out so much money to our customers. So it's been about 2 years. So there is a logic that, that could happen, but we are not planning for that in our guidance. We are planning that the improved capacity is going to be helping us in the second half. We believe our market share is flat to up and maybe more up in the managed care segment.

Our next question comes from Anthony Chukumba with Loop Capital Markets.

Thanks for all the helpful information that you shared so far this morning. I guess my question was on dark stores and dim stores. I just want to make sure I have this correct. So a dark store is not offering any eye exams and a dim store is offering some but not at sort of 100% capacity. Is that the right way to think?

Yes. At dark, we do not have a doctor, and we do not have remote. So yes, we can't get an eye exam there. And a dim store has maybe a day, maybe a couple of days, but not at our desired level.

Got it. And so I think it's pretty safe to say that your dark stores here and dim stores are doing comps that are significantly lower than company average. Is that a fair assessment?

Yes, for sure. And especially those dark sales, they are quite a quite a drag. And again, the fact that we've cut the dark stores in half as a percentage of our fleet since the low about this time last year. We're pretty proud of that. We think that shows nice progress and also remote is helping to ever more exams in those -- in the remote-enabled stores. But yes, and the converse of what you said, Anthony, is where we're able to deliver our model, where we are able to offer the eye exams that comps are doing what they were doing historically prior to COVID. And that's encouraging, too. What it says is, hey, deliver the model and the patients show up for you like they used to.

Got it. And just one last question. I don't want to bogart the Q&A session here. But -- okay, when you say, mitigate the financial impact of losing the Walmart partnership, are you talking about -- are we mitigating that impact, like literally getting the recapture of the $19 million of EBITDA? Is that the way to think about it? Or is it like sort of partially mitigating that?

Anthony, it's Melissa. When we're talking about mitigating the impact of Walmart, we do understand that there is a profit hole to fill. And so we're going to mitigate that through 2 avenues. First being the continued increase store count as we expand our America's Best and EGW fleet and the other portion of that will be through cost reductions related to the Walmart exit. There's both indirect costs associated with that indirect costs associated with that, that we'll be taking out of our business. In addition, we're committed to rightsizing the structure of our go-forward model to the new operating model that we have, which is a less complex operating model now that we'll be exiting the Walmart relationship.

Our next question comes from Zachary Fadem with Wells Fargo.

This is Sam Reid pitching in for Zach here. Wanted to touch on your ongoing relationship with EssilorLuxottica. How does the Walmart contract change -- or the change in the Walmart contract impacted us, if at all? And is there a risk of the reduction in your volumes post the Walmart exit could be a headwind to this relationship?

I think we have a very strong long-term relationship with EssilorLuxottica and we have long-term contracts in place on the lens side, and we talked about last year, how that's a fixed price through the length of the contract there. And we are still -- even without Walmart, we are one of the top couple largest optical chains in America. And so we're still a big customer and a big partner, but that relationship goes back a long way and a lot of it is contractual, and we are not anticipating any significant change in that.

That's super helpful. And then one quick follow-up if I could. Can you walk us through some of the non-headline price actions you've taken thus far in a bit more detail? It doesn't sound like they've really impacted transactions. So are there any specific areas where you might have additional runway in 2H and beyond?

Sam, it's Melissa. So we have taken price actions where we have been able to increase that weren't originally contemplated in our guidance. As we have seen continued cost increases, we evaluate the price increases to follow that. Now some of the things that we've been able to look at for this year specifically, our private label contact lenses, for example, and some ancillary exam add-ons. Those are two of the major areas that we've been able to contemplate and increase additional price actions.

Our next question comes from Brian Tanquilut with Jefferies.

I guess just to follow up on some of the Walmart questions. In your prepared remarks, you alluded to maybe some cost adjustments that you're contemplating. Just curious what those are and the timing and the magnitude of cost opportunities that you think you can realize over the next 12 to 24 months.

Brian, it's Melissa. With the Walmart information that we've put out, we're ending the Walmart relationship with the stores in February of '24 and with the distribution contract in June of '24. We are assessing and evaluating our opportunities to exit those cost structures at the same time that we'll be exiting the revenue stream. So we're going to marry those up as closely as possible. That's what our planning is working on. And the costs that will come out of the business are, of course, any direct costs related to supporting those relationships. And in addition, with the corporate structure, you have back-office costs. You have overhead related to things, in the last discussion we said like insurance, things like that. Those are types of indirect costs tied to Walmart relationship and the distribution relationships that would look different in the go-forward model than they do today.

Got it. Okay. And then in your prepared remarks, you also alluded to the fact that you rolled out virtual to about half of the target stores. Anything you can share with us in terms of the performance that you're seeing or the ramp that you're seeing as some of these rollouts mature? Or -- I think for some of them, you're probably not quite a year but close to a year out now. So just curious what you're seeing.

Sure. We're very encouraged by what remote is doing for us. Reade mentioned earlier in the dark and dim conversation where it's been kind of a game changer even from a new store rollout perspective this year. We've even opened some new stores where we haven't found an inline doctor yet with a remote doctor. So I look back on our decision to start pursuing remote 3 years ago, and really happy with that timing because it's playing a pretty big role. You're right. We've rolled this out to other -- to about 40% of our AB brand. Now we're higher than that. We're going to have 500 of ABs equipped by the end of the year this year. We're evaluating our 2024 plans now, but we expect to continue to be rolling this out to a vast majority of our ABs over time. And I think more recently, we're going to start. We've started testing it in more surgically in EGW, where I think it can be a benefit there as well. So we're on track with remote. And then finally, I would say our wording has been we expect it to be EBITDA profitable this year, and there's -- there couldn't be higher confidence around that.

Our next question comes from Adrienne Yih with Barclays.

This is Michael Vu on for Adrien. So I wanted to start off with a more broad question. I know that you mentioned that you saw higher average ticket and an increase in customer transactions. Would you please share some additional color around why you're seeing consumers buying higher ticket? Is this maybe attributable to the new store openings and the additional capacity? Or are you also seeing any kind of trade-down effects?

Michael, it's Melissa. So there are a couple of factors tied to the higher ticket, but first and foremost being the managed care strength that we're seeing. Managed care customers tend to have a higher ticket than the nonmanaged care customers just based on spending somebody else's money versus spending your own money. In addition to that, we have seen a continued trade down from the income levels of higher than $100,000. And with both of those factors combined that's what's driving the higher ticket. We provide value to many customers. And with the continued managed care strength, where we believe that they come to see our stores because they get more value for their benefits in our stores.

Perfect. And as a follow-up to that, I know that you just mentioned the higher household income. And as we are like starting to shortly see the repayment of student loans, I was just wondering whether or not that's going to be positive or accretive related to the increase in customer transactions in the overall business. Or are you more seeing that as a headwind? And what kind of assumptions are you making related to that if any at all since you were just mentioning the $100,000 to $125,000 range?

So related to the student loans, while there may be a broader consumer sentiment implication, we do expect that with the higher income bands, we'll likely see some additional trade down into our brands because of the value that these consumers can get at shopping at one of our stores. Now our target customer -- our data shows us that a smaller portion of our target consumer has student loan debt.

Our final question comes from Dylan Carden with William Blair.

Just curious if you might be willing to express explicitly of the data you provided on the Walmart business, it's accretive from an EBIT net income standpoint. And is the idea here that through indirect cost reductions, ultimately you'll be able to mitigate kind of the margin implications of losing that business next year?

Dylan, it's Melissa. Yes, you are correct that Walmart is accretive at the EBIT level. It will take some time to fill that profit hole. However, that has been a declining portion of our business over the past couple of decades as we've grown our America's Best and Eyeglass World brands. And we continue to expand our fleet so that is a factor in the growth. In addition, the Walmart business has lower margins than what our growth brands have. So through cost reductions in addition to new store openings, we'll continue to fill that profit hole. If we weren't in an intensive investment cycle on our growth brands, you wouldn't have seen as much of an accretive margin -- or I'm sorry, an accretive profit hole that we needed to fill because you would have seen more of the margin drop down to the bottom line based on our growth brands, but our investment cycle is a factor in that currently.

So if you were to dial it back to '18, '19 pre-pandemic, you would see the Walmart business be dilutive on the EBIT line? Is that what you're saying?

I'm not saying you would see it to be dilutive on the EBIT level. You would just see it as a lower portion of our overall profit.

Okay. And then with the doctors that are coming out of the Walmart stores, stores in stores. Can you kind of speak to the capacity for you to retain those doctors, maybe deploy them across the fleet? Any comments there about what that might actually do from a capacity standpoint?

Yes. Our contract has a transition period where various groups are able to talk to the doctors there. It's sort of a complex thing because it relates to sort of state-by-state, location-by-location, doctor-model-by-doctor-model, but doctors are going to be making a variety of choices based on the stake.

So it's not sort of an immediate windfall, I guess. We should back away from thinking that it might be from a capacity utilization.

I don't think we should think of it as an immediate windfall. You've got to have a new store nearby if a doctor wants to shift over a similar model piece. So I wouldn't say an immediate windfall, but it will be -- yes, doctors will be making various decisions.

Great. And then last question on the pricing. The reviews over you've kind of taken some action here on the periphery. Is that -- it sounds like there still might be some more that you can do kind of going into the back part of this year into next year. Is that right? And how should we sort of think about -- I know that's just a big focus of a lot of investors here, your capacity to kind of close the gap if you would. Please kind of speak to what you expect in the coming quarters on the pricing, particularly your approach.

And by the way, periphery makes it sound a little smaller. We're thinking nonheadline price. The terms mean the same thing. But yes, we believe that more pricing actions will come into play in the second half of the year. We're very vigilant about pricing. We mentioned the study that's causing us to ask a lot of other questions, too. So we think there is more juice in the pricing lever going forward.

Thank you. At this time, I would now like to turn the conference back to Reade for closing remarks.

Thank you all for joining us today. We appreciate your interest and support, and we look forward to speaking to you next on our Q3 earnings call. Thank you all very much.

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