Good day, and thank you for standing by. Welcome to the Q1 2024 National Vision Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tamara Gonzalez, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to National Vision's First Quarter 2024 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 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 would also 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 investors presentation 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, Tamara, and good morning, everyone. Thank you for joining us today. As you saw in our release this morning, we delivered first quarter top line results in line with our expectations of relatively flat adjusted comparable store sales growth. And we're pleased to report total company adjusted diluted earnings per share of $0.32, which reflects our team's continued disciplined approach to expense management. On a continuing basis, first quarter net revenues increased 4.2% and adjusted comparable store sales increased 0.4%, primarily driven by ongoing strength in our managed care business and growth within America's Best. On our last call, we shared that the softer start to the year was related to weather during January. This, along with the slower start to the tax refund season, adversely impacted sales and transactions in the quarter as consumers remain cautious in their spending. During the quarter, we also saw higher average ticket and higher exam revenues driven by pricing actions we have taken. In addition, the greater percentage of managed care purchases resulted in a mix shift between our 2-pair offer and single-pair eyeglass sales as Melissa will discuss. Our business remains in the midst of a transformation that we began in earnest last year, and we've made significant progress over that time, thus giving us a stronger foundation for future growth. We remain keenly focused on our customers while maintaining a disciplined approach to expense management by closely managing our cost structure, both in the stores and at the corporate level. We are continuing to adapt our model to meet the realities of our industry today and the needs of our customers. With that, I'd like to share my thoughts on the quarter in terms of what went well and where we see opportunities to improve. Let's start with what…

Thank you, Reade, and good morning, everyone. As Reade noted, we delivered first quarter adjusted comparable store sales in line with our expectations on both the total company and a continuing operations perspective. And we have continued to progress our initiatives, including expanding exam capacity by addressing both dark and dim stores. Given the termination of the Walmart management and services agreement in the first quarter, our historical legacy segment is now presented as discontinued operations for the current and prior year period. As we review our financial statements, note that the earnings impact from the termination of the Walmart management and services agreement can be found in one line item entitled Discontinued Operations. Today, my review of first quarter results will be focused on continuing operations unless otherwise noted. Now moving on to first quarter results in more detail. For first quarter, net revenue increased 4.2% compared to the prior year, driven primarily by growth from new store sales, which was partially offset by a slight drag from the conversion of the 20 Eyeglass World stores in California. The converted stores were closed for a short period of time prior to reopening as America's Best locations. These stores will continue to be reflected in total net revenue performance and will be added to the comp base in the 13th full fiscal month following the completion of the conversion, which is consistent with our comp methodology. Adjusted comparable store sales growth for the quarter was 0.4%, driven by an increase in average ticket supported by the pricing actions taken at the end of last year, partially offset by a decrease in customer transactions. The timing of unearned revenue benefited revenue in the period by 50 basis points. We opened 14 new America's Best and converted 20 Eyeglass World stores to…

Thank you, Melissa. To summarize. We're pleased to have delivered sales in line with our guidance on our last call. We remain intently focused on disciplined expense management, which led to stronger-than-expected profits in the quarter. Our doctor retention and recruitment levels during the quarter remain on track, and we're excited to move forward with enabling our stores in Texas with remote technology, which will allow us to improve coverage in that important state. And our Eyeglass World team is making progress to improve and reenergize the brand. While the macroeconomic environment remains uncertain, the National Vision culture remains strong. It gives me great joy to see the passion associates and doctors bring to our stores every day to serve our customers. We're keenly focused on the areas of business that we can control and are committed to continuing to make progress on our strategic initiatives to drive shareholder value. And with that, we'll now turn the call over to the operator for questions.

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

Given the underperformance of the Eyeglass World segment, which tends to cater to a slightly higher income demographic, it does seem like you are seeing different trends by class of income demographics. So are their other factors that play that are weighing on sales outside of just the macro in your view?

Michael, thank you for that. Yes, and you are right, the Eyeglass World does appeal to a slightly higher demographic, but we don't really think that that's what is the key challenge for our Eyeglass World business. We really think that we've got a few things that aren't quite an alignment there, that the coverage situation in Eyeglass World has not been as strong. We have a few different models there that we're trying to get to the point of having the coverage we need to handle the consumer demand there. We think that we've been under marketing that, and we're returning to at healthier marketing levels. And we think that there is some operational crispness that we can improve also and so we really would think that there are more internal factors associated with this than really the external -- then the consumer segments that they appeal to. I will say we are adding remote to a number of Eyeglass World stores now. So that's going to -- should be helpful to us in the near future.

My follow-up question is you discussed the low single-digit comps that you've been seeing in March and April. And if that continues, it would take out the high end of the comp range for the year. How should we think about the flow-through or where you would land on the profitability side if you come in at the lower end of your sales range for the year?

Michael, the way that we were considering the guidance with the comp trajectory that we've seen so far, while the March and April comps came in, in the low single digit, that's more in line with the bottom end of our range. And we were hoping for a more robust to March than what we saw. That being said, there are some levers that we're planning to pull related to revenue, one of which being the rollout of remote into Texas. Texas is the largest state with America's Best presence in it. So we do expect a a meaningful impact to the back half of the year related to the remote enablement there. In addition, we're looking to implement some patient access initiatives in the coming weeks that we also expect will be a benefit to revenue. With both of those factors, we were confident in reaffirming the guidance range. Now Texas we're expecting to make up some lost ground from the slower start of the year. And with the overall performance at the bottom line, we did see some benefit from disciplined expense management, but we also had an impact related to incentive compensation, year-over-year, we're accruing a lower incentive compensation that was built into the plan to some extent. However, based on the slower start of performance, you did see a bigger benefit of that this quarter than you'll see in subsequent quarters. We do expect that we'll continue to mitigate expenses to the extent possible and are continuously looking for efficiencies to implement and will maintain our disciplined expense management.

Our next question comes from Simeon Siegel from BMO.

So could you -- just back on the March, April for a second, how was ticket versus transaction in that period? And maybe how are you thinking about the transactions playing out over the course of the year? And then I know this is early, but just any early learnings you can share on the performance of the converted stores? How are their openings or even the ramps you're seeing, how they compare to new store openings?

So there are three parts there. So the March and April period is a little bit more transaction-driven than ticket driven, we think it's -- I think a little different in the 2 quarters there. We're going to check that for sure right now. The converted stores are transitioning well. This is the 20 Eyeglass World converted stores are -- they're transitioning. We're teaching the new model. Just at the end of the quarter, we got to the point where they got to the new model, but now we're training all the stores on how to do the new model. I think it's a very different model. So that's coming along as we had expected.

And there was [indiscernible].

Yes.

Well, I was just thinking through how you expect transactions to progress over the year within high or low end.

I will say right now, the category itself is slow. Right now, overall, it seems from everything we can -- we're hearing from all the different vendor communities that the category is right now going through a slow patch. We do think, and we think that's all related to consumer sentiment. There's not much in the headlines out there that's very encouraging. And we will -- but we do think we have some strong programs that should help us to drive sales going forward, capacity driving programs like Melissa just mentioned. We have some new product introductions that we think are pretty exciting, and we're going to be trialing some new messaging as well, which we're hopeful that can help us in the second half of the year, second quarter of the year, and we are still very encouraged by managed care, which just keeps delivering well for us.

Simeon, I just wanted to clarify that for overall for the quarter, we did see a higher ticket and lower transactions that offset that higher ticket to a slight extent. That being said, we did increase some pricing at the end of '23, which helped contribute to that increased ticket that you were seeing in first quarter.

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

On the risk of getting too granular, in terms of Texas, can you just give us some order of magnitude in terms of the number of dark and dim stores there?

Anthony, it's Patrick. A couple of things I'll mention in Texas. That's a really big market, opened 10 years ago and it has been critical. We have more AB stores in the state of Texas than any other states in the U.S. And certainly, there's going to be some proportionate level of dark and dim there. We're going to be lighting up a 100 plus of those locations now this year as soon as possible and to help remediate any of those that exist. And so it's going to be -- it's a really powerful tool, and we'll be deploying it there soon.

Got it. That's helpful. And then just quickly changing gears here. In terms of Toku and this BioAge, is that -- what's the charge for that? And is that covered by insurance? Or is that something that customers have to pay for out of pocket?

It is -- so it is -- we bundle it in with a few other tests. It is not covered by insurance. The way it works is that you get a result that gives you your biological age, and if your biological age is 5 years or more older than your chronological age, then we really suggest you go seek medical help. And I've been, frankly, pleasantly surprised by the uptake of it. Again, it's just a handful of stores, and it's early days. And what we're doing with all these things with AI is we're learning our way through this, and the BioAge thing does not require FDA approval, but the big news will be when the FDA blesses both cardiovascular and the kidney AI assessments because I think that really will be something that can play a role in the health care of our patients. And we're learning through this, but AI is a big, new, exciting world, and we want to find a variety of different ways that it can impact both our patient and customer facing side of our business as well as our back office.

Our next question comes from Simeon Gutman from Morgan Stanley.

Reade, I want to ask first on remote. We talked a bit about Texas and exams and driving some sales. Can you give us maybe a preview or tour of how remote evolves or shows up on the P&L. Obviously, sales -- do we have the embedded cost, I guess there's fixed cost of optometrists already in your P&L? Are there other technology? Are there more rollout costs or we're at the embedded run rate and now it's all the benefits start to accrue once you roll it out to more markets.

Simeon, with the remote rollout, we largely see a benefit that's similar as in-lane versus remote. There are some puts and takes that go into that. Now to implement the remote technology, there is an incremental cost associated with that. You have the capital expenditure in addition to the teams that are deploying this technology. We do have it embedded into our run rate. Now that we have been doing remote in earnest since 2022, we have been incurring the ongoing expense and seeing the ongoing benefit that, that provides to us. We do see a lift in productivity as the store has -- as the store and the doctors have become more comfortable with that technology. And overall, we are seeing positive margins and operating margin related to the remote technology as a whole.

And Simeon, I do think this quarter was another step change in our evolution on remote overall. I mean, the Texas [ news ] was wonderful. It was a surprise. It was far earlier than we expected. So that was great, and that's why we're raising the number of stores we're going to enable this year. But also just the fact that the doctors are as productive and that now we've got several stores that can do remote in a way that allows them to do as many ads as they did with live doctor. All those things combined to just take us to a new level and see it achieving its potential ever more. So we think it was a really good quarter for remote all around.

Okay. And then follow-up, just two parts. The price increases on exams, I'm assuming you're competitive within the market, but any other competitive changes on price, are you at a value to the market? And then Melissa said -- sorry, go ahead.

I was just going to say, of course, we did a lot of analysis and checking, and we're still really are great value. I mean, the exam price are $69 for the exam. By the way, for an extra $10, you can get two pairs of glasses, so it makes that value look even more exciting. But yes, we -- it's still a great value relative to what you're going to find almost any place else.

And then the incentive comp, I think Melissa said that you were accruing a certain amount, but you took it down a little further. Can you quantify that? And will that benefit remain the entire year. This 100 basis points? I guess that depends on sales, but roughly what you're accruing now, does that hold? And is that a good guide now to the P&L for the rest of the year.

Simeon, with the incentive compensation, year-over-year, we did take down the accrual in 2023 with the year being better than we had originally expected, we did pay out a bit above target. Our plan this year contemplated that we would accrue incentive compensation at target. So there was a little bit of a benefit baked into the plan anyway. Now what we did see as we went into the first quarter was with the soft start, there was more of a benefit than what was originally baked into the plan. I would expect that you'll continue to see some benefit in each quarter as the year progresses, but not to expect it to be as large as it was in the first quarter.

Our next question comes from Adrienne Yih from Barclays.

So Reade, I guess, I get two kind of more broad questions. So it sounds like you had even more confidence on sort of the remote uptake and believe in it very, very strongly over the long term. Just trying to figure out how you think about sort of Walmart's virtual health exit. I know they're still running the 3,000 Vision Care centers. But they talked about sort of the increasing costs and perhaps not seeing as much uptake. Hardly any stores out there, but just kind of get yours thoughts on that, how you marry it to the Vision Care? And then with your broad -- your increase in the kind of white space opportunity. Can you talk about the competitive backdrop in the white space? Are you entering markets where there really isn't anybody? Are you filling in space that others can't go. So any color on that would be great.

Thank you, Adrienne. And yes, of course, we've all read how Walmart has exited their major health care initiative, which -- of which [ tells ] was actually, I think, just one of the offerings that they had, it was a much more elaborate offering, as you know, on that. For us, I think teleoptometry in the way we do it, is very different from traditional telehealth. Traditional telehealth is about a consumer sitting at home and interacting with their optical provider. This is the same customer journey, our patient journey that has always been the case for our source and for the category with a patient walking into an exam environment that is filled with expensive equipment that is used to assess their eye health and determine their prescription. The patient experience is the same with the exception that the doctor is on a screen, a few feet from them, live and synchronous but they are still sitting in the store. So I don't think that there's -- I don't think it's a real analogy to what Walmart's telehealth experience was overall. But all I know is this, this is working well for us. It is solving our challenges of the fact that there are optometric shortages throughout the country. We are able to hire doctors pretty easily for this mode of practice. Patients are good with it. Our stores have figured out how to work with it. So we are just real proud and real optimistic, and we're not trying to predict where this will go. We're going to let sort of the marketplace, predict what percentage it achieved, but the fact that it's in low double digits already and we're so relatively new to it. I think it all says that when we started out on this road, we said, we want this to be a [ soul ] for our doctor capacity challenges, and we are ever more believers in that.

And then I'll take the white space question. Adrienne, it's Patrick. We recently updated our white space. The last time we updated and shared it was 2020 and across the pandemic era, we looked at it once more, but there was just so much volatility across that era. We waited until now to kind of update it and reshared those stats with you repeat on. And what I'll say is, I think -- we think the white space is kind of the theoretical potential target. And then as we think about actual entries, we take up a variety of things into consideration. You're absolutely right. Is it a new market? Is it an existing market? Is it a highly competitively intensive market. What are our doctor capacity challenges, do we have remote in that market? What are rents et cetera. So all of that factors in as we create our kind of updated annual plan where actually where we're taking stores. And that would also include brands, which brands we'll be opening in, in which markets. A couple of things I'll add that it really changed over time. We have improved exam capacity. And while there are still pockets of that, that we've got to improve. Remote as a backup has actually become a very powerful tool. This is true of the existing stores as well as new stores. So our remote enabled stores give us more confidence heading into and realizing and converting that white space into profit-generating stores for us.

Our next question comes from Brian Tanquilut from Jefferies.

Maybe, Reade, just thinking about how you were highlighting, how managed care penetration helps or has been helping drive the comp right? So as we think about initiatives that you're rolling out or what are you doing -- maybe a better question to drive increased managed care penetration, number one, and also parsing that out between the America's Best and Eyeglass World in terms of strategies to push managed care penetration in those two different brands?

So what is nice about the managed care piece is you generally have the same -- I mean you have the same insurance as all your coworkers. So there is a very nice word-of-mouth element to that. You see someone in new glasses, you comment and you both know you have the same insurance and so that is helpful. So there is a strong word of mouth component. We do have various marketing initiatives that we put in place to try to boost that part of the business. And again, it's been a consistent grower for us for years now and with very healthy comps there, and we expect that to continue going forward. And in terms of -- it's been strong for both Eyeglass World and for America's best in terms of growth. But we do believe we're growing share in the managed care area. And I think it is the discovery that your money goes further with us, your managed care funds go further with us than they do in most places.

That makes sense. And then maybe going back to the Toku question. So as we think about longer term, I mean, your vision for how Toku or AI factors into the strategy, right? So is this something that will eventually evolve to where you're hoping or looking for managed care reimbursement for the screening? Or is this always going to be a consumer out-of-pocket type of service offering?

So this is a longer-term innovation you pointed that out. We have what we believe is the largest employee network of optometrists in America, and they're tied together on a common EHR platform. And we think that, that is a significant asset, especially in an era of -- it's not just optimistic shortages out there, their health care provider shortages throughout out American Medicine. We find that the back of the eye is the treasure trove of medical information, and we have retinal cameras in all of our stores. And we think this combination of large network of employee doctors, common EHR amongst them, the advancements in AI and the shortages of healthcare professionals throughout the land, we think that those things should come together to allow us to perhaps play a broader role in the health care of our patient's lives and perhaps participate in ways that insurance companies and pharmaceutical companies might find beneficial. And so we don't really think this will be as much cash pay oriented. We do think that we'd like to, over time, find partnerships with insurers and other health care providers where we can be playing a role in helping them save money while keeping their patients healthier. Value-based health care is a thing and a growing trend in America. We think that keeping people healthier is a key piece of that value-based care. So again, it's long range in nature. You've heard me list sort of all the elements that we think should be able to combine together to create value for patients and create value for insurers. And we're still in the early stages of figuring out and talking to lots of different groups to see how we could add value to what they're trying to do relative to their patient care.

Our next question comes from Zachary Fadem from Wells Fargo.

Reade, starting with your core lower-income consumer and if there's any extra color you could describe on the incremental behaviors you're seeing in terms of trade down versus deferral of purchase? And then do you think there was any impact at all in light of some of the recent pricing actions you've taken?

So in terms of trade down, the majority of that relates to our growth in managed care. Those are generally better off consumers. So that's the biggest factor there. And in terms of the pricing actions, we did a lot of study work to make sure that we are still providing really great value and still very, very competitive in the markets in which we compete. And these are still really great prices, $69 for an eye exam is really a great price. And so we feel pretty good about those decisions.

Got it. And then circling back on the March, April acceleration. Was this more about tax refund catch ups? Or did you start to see any incremental traction on dark to dim stores or doctor availability. And then as you think about the current low single-digit run rate, is this the right way to think about Q2 as a whole as well as the rest of the year? Or is there anything else we should keep in mind?

So we all know that the tax refunds were delayed. And again, we find consistent positive low single-digit comps in March and April. We are hoping for a more robust tax season, and we know the category really saw that, which we think relates primarily to consumer sentiment, but we are hopeful that some of the initiatives that we can put in place and some of the things that we've referenced like Texas remote and other pieces that we can get some acceleration for their rest of the year, but it's a very uncertain time. And our crystal balls are not -- are cloudier than they normally are in this strange macro environment.

Our next question comes from Dylan Carden from William Blair.

Just to simplify this a little bit, looking at your 10-K disclosures, you've added around 1,000 doctors in the last two years, you've added about 120 stores over that same period. So just the overall exam capacity has increased rather meaningfully. And if you're kind of looking at stack trends, I know the sort of inclination here is to blame some of the macro. But just relative to yourself, why -- what would be the answer to why you're not seeing that flow through to more demand generation at this point?

So where we have coverage and demand, we are strong and healthy, where we have coverage and low demand, we are still positive, where we are lacking coverage, things are tough. We have remote that is helping us and is going to help us ever more. And we are -- we continue to work on recruitment and retention, which, again, is progressing fine. But we do think that we are getting ever better at having the coverage we need, and now we are looking for macro demand.

Dylan, it's Patrick. The other thing I would just add to that is whereas in 2019, a doctor was a doctor was a doctor, and they were all working kind of 5 days a week on certain hours, it's a very different world now. And we have 3-day doctors and 4-doctors and 5-day doctors. We have part-time doctors. We have casual part-time doctors. We have a lot more doctors, but they're working a far more varied kind of work scheduled than say they were in 2019, and that also contributes to that.

Just when I talk to people in other aspects of health care, sort of they glibly say things like, yes, if you have a doctor in front of your name, you are working less days than you were in 2019. And that's truly a lot of health care and certainly true for...

Yes. And that makes sense that you're seeing that's part of the answer. But then I guess the question that sense from that is so what's the ramification for the model at that point, right? If you're seeing that less efficiency in your doctor base and cost of doctors going up, how does that flow through if you're not seeing the demand?

This is why we are emphasizing the successes that we had with remote in the first quarter because, a, it's very flexible. A remote doctor never has a no show they appear. Where they're needed, they appear where a patient is. But these advances in remote where we are able to recruit, where there are ever more doctors who want to do this, this is the piece that really we think is going to be the big sold for this and allows us to deliver our model in ways that we can if we don't have a live doctor in our store historically.

Our next question comes from Paul Lejuez from Citi.

It's Brandon Cheatham on for Paul. You mentioned that remote doctors see the same number of patients as live ones. I guess I do find that a little surprising. As you just mentioned, I would have thought they'd have better throughput because they don't have no missed appointments as a factor. So do you expect that to increase over time? And how much of a factor, if any, is that in achieving your mid-single-digit EBIT margin target in 2025?

It's Patrick. I'll take the first part of that question. So our remote doctors as we were ramping up the [indiscernible] -- there was just -- there were long ramps of learning and training, and we were trading out some equipment and software optimizing. And frankly, it took us a while to get to a point that we were comfortable with the overall machine, those doctors are now doing right at the same amount of exams per day that an in-line doctor is doing. We still believe that, that can exceed that of in line for the reasons you said. We're not quite there yet. But I would tell you in the last 6 months, we have made a ton of progress on doing the right things, balancing supply and demand of the doctors and giving them as frictionless and it's easy of a process to conduct a remote exam. So I have every intention, hope in the world that we're going to be at a point near term, medium term, where I get to say, our remote doctors are performing even more exams than our in line for exactly the reasons you say. We're not there yet, but while we made some great progress in the last 2 quarters.

Got it. And I mean how much of a factor is that in achieving the mid-single-digit EBIT margin in 2025?

Yes. So remote is certainly a factor in achieving the mid-single-digit operating margin in 2025. When we laid out our plan, we had a multitude of scenarios built into that. Remote has really become embedded into our overall business, and the benefits of remote has been factored into our guidance as a whole. One thing that we do see some benefits -- that we're expecting some incremental benefit from is the remote rollout in Texas. While that was not built into our guide necessarily from the start of the year because at the beginning of the year, we weren't expecting to go into Texas. We do expect to be able to make up some revenue ground from the beginning of the year starting slower than expected. So we do have line of sight to the 2025 mid-single-digit adjusted operating margin goal, and we plan to continue to pull the levers that we've talked about and do tightly disciplined expense management and expect to be able to get there.

Got it. That makes sense. And then I was just wondering if you could talk about what surprised you to the positive side or the negative side in the quarter, did the America's Best perform better than you expected and Eyeglass World was a little worse. And then sounds like March was below your expectations. Did you expect April to also kind of get back to mid-single-digit comp? Or is that not [ integrated ] and that you were expecting things to go?

Yes. So I'll start with -- we had hoped to see a more robust tax return piece that we're pleased that we came in on our guide, but we had to hope to beat it. We'd hope to have another data point of [indiscernible], things are getting a bit back to normal. And I think that with what's happening overall in the economy in the world with consumer sentiment that did not come about in March and April. However, we are still comping positively. So that is encouraging from that front. And according to the things that went well for us with all aspects of remote went well for us, and that was really encouraging in terms of our long-term future. And we like the reaffirmation that the white space analysis suggests that American needs ever more stores from us. And we like the fact that the pricing initiative seems to have worked out well for us. What end us was just the category was slower than we had anticipated.

This concludes the Q&A session. I will now turn it back over to Reade Fahs for closing remarks.

Antoine, thank you for your help today, and thank you to the rest of you for joining us today. We appreciate your interest and support and looking forward to talking to you next on our Q2 earnings call. Thank you all very much. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.