Good day, and thank you for standing by. Welcome to the Q4 2023 National Vision Holdings Earnings Call. At this time, all participants are in a 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. 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 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 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 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 presentations and supplemental materials for investor reference in the Investors section of our website. I will now turn the call over to Reade. Reade?

Thank you, Caitlin. Good morning, everyone. Thank you all for joining us today. National Vision finished the year quite strong, with top and bottom line results above our expectations for both the quarter and the year. I'd like to sincerely thank our teams for this accomplishment and their efforts throughout the year. Fourth quarter net revenue grew 8% with adjusted comparable store sales growth of 5.7%. These results reflect ongoing strength within America's Best and sequential improvement in the Eyeglass World further supported by crisp execution from our teams and successful marketing campaigns at the end of the year. This strong top line performance combined with disciplined expense management enabled us to deliver better-than-expected adjusted operating income for the quarter and the year. For the year, total net revenue grew 6% and adjusted comparable store sales grew nearly 3%, resulting in adjusted earnings per share of $0.64 for fiscal 2023. Underlying our top line performance in Q4 and full year was ongoing strength in our managed care business, as our traditional budget conscious customer base continued to feel the impact of inflation and other macro-related headwinds. For the year, managed care represented approximately 35% of overall revenues, an increase of approximately 250 basis points compared to our prior historical trend of one-third of sales. This is another indication of the ongoing trade-down behavior we see from customers with higher incomes than our traditional customer base. We believe that managed care will continue to grow as a percentage of our business as we remain underpenetrated in this sector. And we believe more balanced between our managed care and cash-pay customers will make our business more resilient overall. 2023 was a year in which we began to transform our business to better compete in today's marketplace. When we started the year, we…

Thank you, Reade and good morning everyone. Before I discuss our results, I would like to introduce our new Head of Investor Relations, Tamara Gonzalez. Tamara is an experienced Investor Relations professional, well versed in the consumer sector having spent time on the sell side covering broadline retail companies after starting her career in Investor Relations at The Home Depot. We are excited to have her on board, as we further our Investor Relations efforts. Turning now to our results. As Reade said, we are pleased to have delivered fourth quarter and full year results that came in ahead of our expectations. Our strong year-end results were driven by crisp execution of our strategic initiatives and disciplined expense management, driving both top line improvement in our growth brands and better-than-expected adjusted operating income. Throughout the fiscal year, we made solid progress in improving exam capacity and mitigating the impact of dark and dense stores on our results. For the year, on average, dark stores represented a low single-digit percentage of our America's Best fleet, which is in line with our historical norm and an improvement from the peak mid-single-digit percentage we saw in 2022. Dim stores on average for the year represented a high single-digit percentage of the America's Best fleet, reflecting a trend that is still higher than our historical norm, but an improvement compared to the prior year. As Reade noted, store openings remain an important part of our growth plan and doctor availability, as well as remote capabilities are key considerations in our expansion plans as we select locations for new store openings. Now, moving on to our fourth quarter results in more detail. For the fourth quarter, net revenue increased 8% compared to the prior year, driven by adjusted comparable store sales growth of 5.7% and…

Thank you, Melissa. To summarize our stronger-than-expected end of the year was driven by crisp execution including expanded exam capacity, disciplined expense management, continued strength in our managed care business and effective marketing campaigns. For the full year, we delivered on our initiatives and drove strong improvement at America's Best. We executed on cost and pricing actions, which will benefit 2024 and more than offset the profitability gap from the Walmart partnership termination. In 2024, we're committed to building off the stronger foundation we established in 2023. We remain focused on executing against our initiatives, which have a proven track record as demonstrated in the progress we've made with America's Best. We plan to continue to build on this progress at America's Best and drive improvement in Eyeglass World, all of which is incorporated in our guidance. We believe through this work we are well positioned to drive long-term profitable growth, create value for shareholders and further our mission to make quality eye care and eyewear more affordable and accessible for all. And with that, we will now turn the call over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Michael Lasser with UBS. Your line is now open.

Good morning. Thank you so much for taking my questions. Given the comp performance at Eyeglass World along with your decision to rebrand the 20 locations in California, what's weighing on the performance of that business, especially given that it had been a strong performer historically?

Thank you, Michael. So two things. Let me first unpack the California Eyeglass World piece a little bit. So we had 76 America's Best stores – have 76 America's Best stores in California and 20 Eyeglass World stores. And the 20 Eyeglass World stores were split between Southern California, San Diego and Northern California, Sacramento. So they were really far away from one another. And we had no America's Best stores in either Sacramento or San Diego. There was no overlap and it's a pretty big state. And so converting the 20 Eyeglass World stores over to America's Best helps us reduce field overhead, leverage national advertising, leverage optometrist deployment, reduce travel, it makes the state more profitable and the company more profitable. But it's a very unique situation there in California. And those California Eyeglass World stores were underperformers versus the average of the fleet. But we're really focused on profitability and this was the way to help profits while concurrently becoming more competitive in the state overall. Now to your other question about Eyeglass World in general again positive comps in Q4, sequential growth in Q4, so that's nice. But we do think Eyeglass World is not yet performing to standard. We don't have the coverage levels, we want yet there. And it's a little different from America's Best. America's Best is an employment model and Eyeglass World is pretty much split between employment model and a lease model. And so we're working on various ways of recruiting, retaining, putting in remote and other things to address the coverage challenge there. As we mentioned, we just put in a leadership change there and we are shifting marketing dollars because I think maybe we were underspending a bit behind that. But the outlook assumes a few scenarios in Eyeglass World, but we think we still have some work to do. Yes, it was a consistent strong performer sort of from the time, we bought it up through 2021, and we're getting it back on its feet again, with the actions I just went through. Q – Michael Lasser: Got you. My follow-up question is on the return to mid-single-digit margin in 2025. What comp is necessary in order to achieve that outcome? And if you do see a sluggish underlying optical retail market, how is that mid-single-digit expectation sensitized? Meaning, would there be other actions you could take to still achieve that outcome even if your comps are a bit lower? Thank you.

Hi, Michael. Yes, the return to mid-single digit in 2025 has a couple of factors tied into that. As we think about the return to mid-single-digit operating margin, the comp that we have factored into that also includes a mid-single-digit comp range. And we expect to get to that point based upon the initiatives that we started last year and continue to accelerate into this year, which includes the improved recruiting and retention and the remote benefit that we've been experiencing to date. So with all of that combined, we expect that to lead to the mid-single-digit range in 2025 Q – Michael Lasser: Got you. Thank you so much and good luck.

Thank you, Michael.

Your next question comes from the line of Anthony Chukumba with Loop Capital Markets. Your line is now open. Q – Anthony Chukumba: HI, good morning. Congrats on a strong finish to the year. So, I guess my first question in terms of the slow start that 2024 has gotten off to and certainly, encouraging to hear that you've seen sequential improvement. But is there any one or two things that you would sort of point to that you think are driving that slow start particularly, coming off the just strong finish to 2023?

Yes. I mean certainly the -- what they call the Arctic blast of early January was a big factor for us. And so that was fun. We don't think it's market share related. We think that remains healthy. But yes, the weather piece was a large component. And again, we're seeing sequential improvement into February. Q – Anthony Chukumba: Got it. And I remember that Arctic blast, well. Yes, I probably wouldn't have gone out and gotten new glasses then either. I guess my second question...

One other thing -- add one other thing, Anthony. We're all reading about the slow and delayed tax refund information tax refunds getting to our customers. And a driver for us Q1 performance is when that those tax refunds get into the hands of our consumer base. Q – Anthony Chukumba: Got it. That all makes perfect sense. And then just one follow-up question. What are your expectations in terms of optometrist wage pressure in 2024? It is certainly, encouraging to hear about the improvements in recruitment and retention. But just wanted to see, what your thoughts were there. Thank you.

Hi, Anthony, we have seen the low single-digit inflation in optometrist-related cost bump up to mid-single digits in 2023, and we expect that to continue into 2024, and beyond. We'll have continued pressure based on that. However, with pricing initiatives that we've put in place was advanced, we feel that we'll be able to offset some of that pressure. Q – Anthony Chukumba: Got it. Thank you so much. Keep up the good work.

Thank you.

And your next question comes from the line of Kate McShane with Goldman Sachs. Your line is now open.

Kate, are you there?

Kate, your line is now open.

Okay. Maybe we'll move on and see if Kate wants to come in later.

All right. Moving on. Your next question is coming from the line of Paul Lejuez with Citi. Your line is now open, Paul.

Hi, everyone. This is Brandon Cheatham on for Paul. Thanks for taking our question. I wanted to also ask on like America's Best versus Eyeglass World if we could dig in on that. Do you think there's any cannibalization between the two brands? And then I understand the decision to convert some of the Eyeglass Worlds in California to America's Best. Is that something if that's successful you might look at doing in other states or regions?

Thank you for that. A few things. First of all to be clear in California there was clearly no cannibalization, because America's Best and Eyeglass World there's no overlap in the markets there. Second, we have found in general these two brands can coexist in the same trading area as well, because they do have sort of a -- they have a different positioning. One is designed really for people who are very low cost driven, the free exam, absolute price -- absolute money out of pocket. The other has a broader assortment, more designer frames and are more time-conscious consumers. So there is differentiation that goes on there between them. And we think that California is and was a pretty unique situation. So we're not currently discussing and thinking about doing this elsewhere.

Got it. Thanks. And the pricing change that you took on stand-alone exams, can you detail the timing on that? And did you see consumer's shift their purchasing behavior after you took that pricing that they take advantage more of the Q4, two pairs of glasses eye exam for $79?

So we took a pricing action for Eyeglass World in November pricing for America's Best in December on exam pricing. And let me point out something on that that it's a minority of people who end up paying for an exam in the America's Best experience. If you buy two pairs the exam is free. The managed care customers who are now 35% of the business their eye exam is paid for by their insurance. So those who in effect individually are pretty small in that way. We also took some pricing action in the area of various medical services that our optometrists provide. That was in the summer that we did that and that was -- we just realized that we were under the market on that. And that was one of the findings from the pricing study that we talked about in prior calls. And so again medical services in summer Eyeglass World November and America's Best in December.

Got it. Thanks very much and good luck.

Thank you.

One moment for the next question. And your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

Hey, good morning, everyone. My first question it's on the adjusted operating income for the year. At the midpoint, it's still lower than the prior year. And even if you net out the savings, the $25 million some of that needs to annualize I think I get that versus what's being lost. I guess at the midpoint, there's still year-over-year decline or pressure. Melissa mentioned amortization costs maybe still weighing on it. But can you give us what's inside like the core even with the pricing actions, it looks like still declining year-over-year so if you can talk about the drivers behind that please?

Hi, Simeon. If you refer to Page 17, you'll see that the midpoint of our guidance range is 3.4% and we ended 2023 with an adjusted operating margin of 3.4%.

Yeah. I was referring to the dollars.

Oh. Yes. The dollars -- with these dollars we have worked in a range of scenarios. And with the loss of the Walmart -- with the loss of the Walmart and AC Lens business, while the adjusted margins will improve, we do have some factors incorporated in there with the top line revenue loss. The overall guide takes into consideration several scenarios at the high end, which include improved consumer sentiment the productivity expansion and improvement in our Eyeglass World performance. On the low end, we have the opposite of that as far as decreased consumer sentiment which may lead to demand issues and less traction in improving our Eyeglass World brands. We've rationalized our home office and taking out various expenses as we said we would last year to offset the Walmart profit loss in addition to taking price increases. And with the two of those, we've more than offset it. However, we have in fact lost that business which is a top line impact.

And maybe as a follow-up and I apologize if this was asked, on any of the headline pricing items, I don't know if anyone asked if that's exam or product, and are you seeing any elasticity or negative elasticity on some of these actions?

When we refer to headline price that's the two for $79 offer. That is the key headline price for America's Best. And we are not believing that that has affected our trend.

Yeah. Thanks guys. Good luck.

Thank you, Simeon.

Your next question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Good morning. Taji Phillips on for Brian. Thank you for taking my question. So my first question has to do with the guidance for same-store comps for the year. I appreciate the call out that Q1 will be softer, right? But just curious if you could provide some commentary on how we should be thinking about the ramp throughout the year?

Yes. Hi, Taji. The rate throughout the year, first quarter is historically a very strong quarter for us. It's an important quarter for the overall year. And with that coming in flat to slightly negative that has been factored into the overall guidance range. With that, we historically have seen increased comps as the year progresses and that too has been built into the range of scenarios.

Okay. Great. And then kind of looking to Page 17 appreciate the breakdown of the margin progression through 2025. As we think about the three key drivers of that improvement right, just curious if you could bucket them by importance or by influence on the margin, which is the most important or most key to actually drive that mid single digits? Or is it essentially a split between all three?

Yes. So the path to mid single-digit adjusted comparable store sales is an important factor as is gross margin expansion and expense management. So all three of the factors are certainly important in the path to mid single-digit operating margins in 2025.

Got it. And just one more question if I can. I wanted to clarify on Michael's question earlier, when he was asking about like what improvement in mid single-digit mid in the comps is necessary to reach your 2025 target. Was that an application to Eyeglass World, specifically where you're saying like mid single digits needed for Eyeglass World to bridge to 2025? Do I have that right?

No that is for overall National Vision.

Okay. Understood. Thank you.

Thank you.

Your next question comes from the line of Adrienne Yih with Barclays. Your line is now open.

Good morning. Reade, just a couple of ones for you. The average managed care kind of percentage from an industry standpoint, how should we be thinking about that maybe amongst your other competitors? Are there any accelerants to kind of doing that -- getting that managed care higher? And what was the impetus sort of for double -- the 250 basis points improvement to 35%? Thanks. And the most valuable for you as well.

Absolutely. Thank you. So we have always been underpenetrated versus the category in managed care, a few reasons. One is because we're overdeveloped in cash pay, because when it's your money and you don't have vision insurance you seek out great value and that's what we provide. In addition, when we bought America's Best in 2005, they didn't even accept insurance at that point in time. So we started from a base of zero. For the majority of the category, especially the independents, especially the more mid to high-end retailers, it is the majority of their business. So we are underpenetrated. We're pleased that it's been progressing in the way it has. And I think what that shows is that consumers are realizing that their managed care dollars go further with us than with other places. We do some marketing to reinforce that. And then, of course, there's a really nice word of mouth component to this business, because you tend to have the same insurance as the person sitting next to you in your office or that you work with so you can spread the word in that way. So it's been steadily increasing for years increased even more last year and we think that it should continue to increase as a percentage of our sales. And I think that what's especially nice about that is as that grows it makes us ever more resilient to difficult economic times. But we've got a long way to go before we're anywhere near a category average.

Absolutely. And is there -- typically I know last year the cash customer, the cash comp was a little bit under pressure. It seems like the fourth quarter was an inflection in both -- well managed care probably accelerate, but is this the inflection point in the cash comp -- cash customer comp?

Well, spotted. Good catch. Yes. Yes, indeed Q4 we did have positive comps for cash pay consumers also. So yes it was both. So that was that was very nice as well. Good catch. And again what reinforced Q4 was based on -- it was primarily driven by transactions not average ticket. And we do like to grow by customer count that is the best way to be growing our business and the way we've historically done a majority through transactions more than average sales.

Absolutely on the transactions. Melissa for you. The 1Q comp guidance so I guess when you guys have looked at sort of correlation to tax refunds I assume -- I mean, they're down right? They're kind of double-digit. That will fix itself over time kind of due to the delay. So how highly correlated is that? And I think the answer is highly. So that's number one. And then any help kind of on that flat to slightly negative comp? How should we think about deleverage the gross margin? Should it be more kind of measured over the four quarters or is it pretty even over the fourth quarter we could start kind of like layering that in Q1 to offset the comp deleverage? Thanks so much.

Hi, Adrienne. As we think about the first quarter, we do certainly factor in tax refunds in that guidance which we've got range is factored into the outlook that we've provided and we feel comfortable with the first quarter guidance that we've provided. Now with that being said if the first quarter comes in on the lower end it is harder to leverage that cost structure that we have in place. As you move into the back half of the year all of the gross margin expansion will come in the back half of the year once we have exited the Walmart and AC Lens business. So for modeling purposes that's where you should see the gross margin improvement.

And your next question comes from the line of Dylan Carden with William Blair. Your line is now open.

Appreciate. Just trying to understand the deceleration in remote care rollout, and I guess with the seeming discrepancy between about 60% of America's Best stores now having remote capacity only 5% of exams, if I had that statistic right. Is the deceleration more a result of cost consciousness in the sort of year of some noise around costs? Or is it that you're seeing better progression on dim and dark stores from a recruitment standpoint? I guess, maybe let's start there.

Hey, Dylan, it's Patrick. Good morning. You're right remote has been a really important and high-impact program for us. You get a couple of my stats which was 5% of all exams and in states where we are running remote it's significantly higher. The slowdown in the rollout this year or the deployment is really a function of our comfort level of taking our remote model into specific states. And so as of the end of 2023, we had taken it into all states that we consider effectively green go states. There are a few large ones that we would really like to go to but they're still in the yellow zone. We're monitoring that closely. And over time, telemedicine laws and approaches remain fluid, I think we'll have a shot at that. So, this is really all about where do we feel good about taking our remote exams and doing that lawfully and according to state rules and regulations. I will say this, even in light of us only taking it to 50 more ABs this year and that's basically mostly new stores there will be a few EGWs in there, we will continue to reap the benefits of getting better and better at remote for those 500-plus that we've already rolled it out to. So we've made great advances this year in terms of making remote way of life. It's having nice impacts for the business. But even in stores that have been running it for a year, or so hey there's still low-hanging fruit to grab there as our store teams get more and more comfortable and our doctors get more and more productive.

Well, I guess, that's where I was going to go with this. As you do slow the pace of the rollout, it's always felt to me like a pretty not an insignificant margin opportunity and that you're sort of cutting down on dead share time, which I think you run higher than the industry average. I mean, should you is there any sort of embedded benefit this year or next to the mid-single-digit target sort of from maturing remote capabilities that you can either quantify or speak towards?

There are definitely benefits included in the guidance. We expect to see increasing levels of remote doctor productivity based on us getting kind of the supply and demand balance that are aligned. And frankly, Dylan, we've seen some really nice improvements thus far this year that we think will aid our performance. And that's included in what Melissa shared.

Got it. And finally just on pricing, it sounds -- I know you've taken headline price up in the last couple of years at America's Best. But on more recent late '23 price, that sounds almost entirely related to exams. Any update or thinking around maybe sort of peripheral product price opportunity?

We did that study last year. Pricing is a lever we use. We're always looking at different pieces. We thought the lowest hanging fruit came in the exam and medical services areas since we provide a nice added value there and where we are relative to competition. But we are -- we do not have -- we do not -- we're not planning on taking action right now. We're sort of just sitting on what we've done and continuing to watch and learn. There was one Lens opportunity we also -- did take also.

Got it. Great. All right. And then on new openings I mean keeping...

Yes?

More speed not America's Best it sounds like. But just a lot going on in the business to kind of keep that number stable. Just how you're thinking about, particularly as you're now at a relatively significant scale, why maybe that continues to make sense to maintain that level of new openings. Thanks.

It's Patrick. I'll take that one. Unit growth remains a major component of our core strategy. We still have a lot of white space out there for AB and EGW and we will continue to open stores. We opened 70 last year. We're driving at 65 to 70 this year. And so this is still a big part of our growth and market share expansion plan. This year we expect it to be heavily skewed towards AB. We also expect the year to be fairly ratably spread across first and second half. We were a little more skewed to second half last year due to some timing delays, but we're expecting less of those this year. So it should be fairly smooth. But make no mistake unit growth remains a full part of the strategy. We're happy with kind of how our new stores performed last year. We're still seeing those stores hit the overall profitability metrics that we need. And there's no signals telling us not to keep doing that.

Great. Thank you, very much guys.

And we have no further questions at this time. I will now turn the call back over to Reade Fahs.

Thank you very much for your help today and thank you to all of you for joining us today. We appreciate your interest and support and look forward to talking to you next on our Q1 earnings call. Thank you all very much.

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