NATIONAL VISION HOLDINGS, INC. The following contains management's discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q (this "Form 10-Q") and the audited consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onJanuary 2, 2021 (the "2020 Annual Report on Form 10-K"). This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the 2020 Annual Report on Form 10-K and in the "Risk Factors" section of this Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with theSEC . Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note Regarding Forward-Looking Statements" in this Form 10-Q. Overview We are one of the largest and fastest growing optical retailers inthe United States and a leader in the attractive value segment of theU.S. optical retail industry. We believe that vision is central to quality of life and that people deserve to see their best to live their best, regardless of their budget. Our mission is to make quality eye care and eyewear affordable and accessible to all Americans. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers. We deliver exceptional value and convenience to our customers, with an opening price point that strives to be among the lowest in the industry, enabled by our low-cost operating platform. We reach our customers through a diverse portfolio of 1,262 retail stores across five brands and 19 consumer websites as ofOctober 2, 2021 . COVID-19 The COVID-19 pandemic and its macroeconomic effects continue to present ongoing and evolving challenges to our business. We remain focused on our strategy to provide our customers and patients reliable and quality low cost eye care and eyewear by prioritizing the health and safety of our associates, customers and patients. For a discussion of measures we have previously taken in response to the pandemic, and the impact of the COVID-19 pandemic on our operations and performance, please see Part I. Item 1A. "Risk Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2020 Annual Report on Form 10-K. We continue to monitor and, where applicable, respond to the several macroeconomic effects resulting from, the pandemic, including materials and labor shortages and supply chain constraints. In particular, we are monitoring these effects in light of variant outbreaks and governmental vaccination and testing requirements. OnSeptember 9, 2021 ,President Biden announced the Path Out of the Pandemic: COVID-19 Action Plan. As part of the COVID-19 Action Plan,President Biden directed theOccupational Safety and Health Administration ("OSHA") to develop an Emergency Temporary Standard ("ETS") mandating either the full vaccination or weekly testing of employees for employers with 100 or more employees. OnNovember 4, 2021 , the OSHA ETS was released. Following the issuance of the ETS, litigation was filed challenging the ETS, and onNovember 6, 2021 , theU.S. Court of Appeals for the Fifth Circuit issued an order temporarily staying the effect of the ETS until a decision is reached. In addition, onSeptember 9, 2021 ,President Biden issued an executive order on ensuring adequate COVID-19 safety protocols forU.S. federal contractors as part of his COVID-19 Action Plan. OnSeptember 24, 2021 , in furtherance of the executive order, theU.S. Safer Federal Workforce Task Force ("Task Force ") issued guidance requiring federal contractors and subcontractors to comply with certain COVID-19 safety protocols, including requiring certain employees to be fully vaccinated against COVID-19 byJanuary 4, 2022 , except in limited circumstances. The vaccination requirements will be incorporated in new government contracts, renewals, extensions and other modifications signed on and afterOctober 15, 2021 . We are evaluating the applicability, scope and potential impacts of the COVID-19 Action Plan, the OSHA ETS and the related executive orders on our business and workforce. It is uncertain to what extent compliance with the applicable orders, regulations and guidance may result in workforce attrition. If attrition is significant, our operations and results could be adversely affected. See Item 1A. Risk Factors in this Form 10-Q, for discussion of risks associated with the potential adverse effects on our workforce of vaccine requirements. In addition, we could experience potential disruptions of product deliveries as a result of supply chain issues caused by the COVID-19 pandemic, including as a result of temporary shutdowns in countries which support our supply chain. Prolonged periods of shutdown in these countries or a deterioration of conditions in other countries that are part of our supply chain as well as increasing strains on international and domestic supply chain infrastructure could result in product availability delays, as well as potential increased costs to obtain and ship these products to meet 25 -------------------------------------------------------------------------------- Table of Contents customer demand. We have made, and may continue to make, inventory forward buys to help manage potential supply chain disruptions. We will continue to evaluate additional measures that we may elect to take as a response to the COVID-19 pandemic, including, where appropriate, future action to reduce store hours and patient appointments, temporarily close stores or make additional forward buys. There can be no assurance whether or when any such measures will be adopted. Our net revenue in the nine months endedOctober 2, 2021 increased compared to the nine months endedSeptember 26, 2020 due in part to the effects of our stores being temporarily closed to the public in fiscal year 2020 and government stimulus as a result of COVID-19. As a result, comparability of our financial performance between these periods may be impacted and our rate of growth should not be viewed as indicative of our potential results in future periods. The disclosures contained in this Form 10-Q are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. For further information, please see "Forward-Looking Statements." Brand and Segment Information Our operations consist of two reportable segments: •Owned & Host - As ofOctober 2, 2021 , our owned brands consisted of 826America's Best Contacts and Eyeglasses retail stores and 123Eyeglass World retail stores. In America's Best stores, vision care services are provided by optometrists employed by us or by independent professional corporations or similar entities. America's Best stores are primarily located in high-traffic strip centers next to value-focused retailers.Eyeglass World locations primarily feature eye care services provided by independent optometrists and optometrists employed by independent professional corporations or similar entities and on-site optical laboratories that enable stores to quickly fulfill many customer orders and make repairs on site.Eyeglass World stores are primarily located in freestanding or in-line locations near high-foot-traffic shopping centers. Our host brands consisted of 54 Vista Optical locations on select military bases and 29 Vista Optical locations within select Fred Meyer stores as ofOctober 2, 2021 . We have strong, long-standing relationships with our host partners and have maintained each partnership for over 21 years. These brands provide eye exams primarily by independent optometrists. All brands utilize our centralized laboratories. This segment also includes sales from our America's Best,Eyeglass World , and Military omni-channel websites. •Legacy - We manage the operations of, and supply inventory and laboratory processing services to, 230 Vision Centers in Walmart retail locations as ofOctober 2, 2021 . This strategic relationship with Walmart is in its 31st year. Pursuant to aJanuary 2020 amendment to our management & services agreement with Walmart, we added five additional Vision Centers in Walmart stores in fiscal year 2020. OnJuly 17, 2020 , NVI and Walmart extended the current term and economics of the management & services agreement by three years toFebruary 23, 2024 . Under the management & services agreement, our responsibilities include ordering and maintaining merchandise inventory; arranging the provision of optometry services; providing managers and staff at each location; training personnel; providing sales receipts to customers; maintaining necessary insurance; obtaining and holding required licenses, permits and accreditations; owning and maintaining store furniture, fixtures and equipment; and developing annual operating budgets and reporting. We earn management fees as a result of providing such services and therefore we record revenue related to sales of products and product protection plans to our legacy partner's customers on a net basis. Our management & services agreement also allows our legacy partner to collect penalties if the Vision Centers do not generate a requisite amount of revenues. No such penalties have been assessed under our current arrangement, which began in 2012. We also sell to our legacy partner merchandise that is stocked in retail locations we manage pursuant to a separate supplier agreement, and provide centralized laboratory services for the finished eyeglasses for our legacy partner's customers in stores that we manage. We lease space from Walmart within or adjacent to each of the locations we manage and use this space for vision care services provided by independent optometrists or optometrists employed by us or by independent professional corporations or similar entities. During the nine months endedOctober 2, 2021 , sales associated with this arrangement represented 8.0% of consolidated net revenue. This exposes us to concentration of customer risk. 26 -------------------------------------------------------------------------------- Table of Contents Our consolidated results also include the following activity recorded in our Corporate/Other category: •Our e-commerce platform of 15 dedicated websites managed byAC Lens . Our e-commerce business consists of six proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and nine third-party websites with established retailers, such as Walmart,Sam's Club and Giant Eagle as well as mid-sized vision insurance providers.AC Lens handles site management, customer relationship management and order fulfillment and also sells a wide variety of contact lenses, eyeglasses and eye care accessories. •AC Lens also distributes contact lenses wholesale to Walmart andSam's Club . We incur costs at a higher percentage of sales than other product categories.AC Lens sales associated with Walmart andSam's Club contact lenses distribution arrangements represented 6.4% of consolidated net revenue. •Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan underCalifornia law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughoutCalifornia , and also issues individual vision plans in connection with our America's Best operations inCalifornia . •Unallocated corporate overhead expenses, which are a component of selling, general and administrative expenses and are comprised of various home office expenses such as payroll, occupancy costs, and consulting and professional fees. Corporate overhead expenses also include field services for our five retail brands. Reportable segment information is presented on the same basis as our condensed consolidated financial statements, except reportable segment sales which are presented on a cash basis including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our CODM regularly reviews. Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance withU.S. GAAP, specifically the change in unearned and deferred revenues during the period. There are no revenue transactions between reportable segments, and there are no other items in the reconciliations other than the effects of unearned and deferred revenue. See Note 10. "Segment Reporting" in our condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q. Deferred revenue represents the timing difference of when we collect the cash from the customer and when services related to product protection plans and eye care club memberships are performed. Increases or decreases in deferred revenue during the reporting period represent cash collections in excess of or below the recognition of previous deferrals. Unearned revenue represents the timing difference of when we collect cash from the customer and delivery/customer acceptance, and includes sales of prescription eyewear during approximately the last seven to 10 days of the reporting period. Trends and Other Factors Affecting Our Business Various trends and other factors will affect or have affected our operating results, including: Impact of COVID-19 The COVID-19 pandemic has had far-reaching impacts, directly and indirectly, on our operations. We continue to monitor the evolving situation as there remain many uncertainties regarding the pandemic and more recent outbreaks of variants, including anticipated duration, related healthcare authority guidelines and efficacy of vaccination initiatives, including the impact of, and associated risks regarding, federal, state and local vaccination and testing programs. We also continue to monitor potential impacts on our lab network and potential disruptions of product deliveries. To date, we have been able to meet customer demand with operations at our laboratories and our supply chain partners. However, prolonged shutdowns in countries which support our supply chain or a deterioration of conditions in such countries and others or increasing strains on international and domestic supply chain infrastructure could result in product availability delays in the future. We could experience further material impacts as a result of COVID-19, including, but not limited to, charges from additional asset impairments and deferred tax valuation allowances. We will continue to evaluate additional measures that we may elect to take as a response to the pandemic, including, where appropriate, future action to reduce store hours and patient appointments, temporarily close stores or make additional forward buys. There can be no assurance whether or when any such measures will be adopted. For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to Part II. Item 1A. "Risk Factors" in this Form 10-Q and Part I. Item 1A. "Risk Factors," included in our 2020 Annual Report on Form 10-K. 27 -------------------------------------------------------------------------------- Table of Contents Comparable store sales growth Comparable store sales growth is a key driver of our business. The comparable store sales growth and Adjusted Comparable Store Sales Growth for the nine months endedOctober 2, 2021 were impacted by our stores being temporarily closed to the public in the prior year due to the COVID-19 pandemic, and also include the effect of pent-up demand for our products and services after our stores reopened. The impact of the COVID-19 pandemic on our comparable store sales growth remains uncertain, and effects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic. Interim results and seasonality Historically, our business has realized a higher portion of net revenue, operating income, and cash flows from operations in the first half of the fiscal year, and a lower portion of net revenue, operating income, and cash flows from operations in the fourth fiscal quarter. This seasonality, and our interim results were impacted during fiscal year 2020 because our stores were temporarily closed to the public for a portion of the first half of the year due to the COVID-19 pandemic. Our net revenue in the current fiscal period is higher compared to the sales prior to the pandemic due to new store openings and strong customer demand, including the likely effects of our stores being temporarily closed to the public in fiscal year 2020 and government stimulus. Other factors We remain committed to our long-term vision and continue to position ourselves to make progress against our key initiatives while balancing the near-term challenges and uncertainty presented by the COVID-19 pandemic. We believe the following factors may continue to influence our short-term and long-term results: •New store openings; •Managed care and insurance; •Vision care professional recruitment and coverage; •Overall economic trends; •Consumer preferences and demand; •Infrastructure and investment; •Pricing strategy; •Our ability to source and distribute products effectively; •Inflation; •Competition; •Market wage pressure and unemployment levels; and •Consolidation in the industry How We Assess the Performance of Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our consolidated business and operating segments are performing are net revenue, costs applicable to revenue, and selling, general, and administrative expenses. In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. Net Revenue We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services, and plans. Net product sales include sales of prescription and non-prescription eyewear, contact lenses, and related accessories as well as eye exam services associated with our America's Best brand's signature offer of two pairs of eyeglasses and a free eye exam for one low price ("two-pair offer") to retail customers and sales of inventory in which our customer is another retail entity. Net sales of services and plans include sales of eye exams, eye care club memberships, product protection plans (i.e., warranties), and single service eye care plans inCalifornia . Net sales of services and plans also include fees we earn for managing certain Vision Centers located in Walmart stores and for laboratory services provided to Walmart. 28 -------------------------------------------------------------------------------- Table of Contents Costs Applicable to Revenue Costs applicable to revenue include both costs of net product sales and costs of net sales of services and plans. Costs of net product sales include (i) costs to procure non-prescription eyewear, contact lenses, and accessories, which we purchase and sell in finished form, (ii) costs to manufacture finished prescription eyeglasses, including direct materials, labor, and overhead, and (iii) remake costs, warehousing and distribution expenses, and internal transfer costs. Costs of services and plans include costs associated with product protection plan programs, eye care club memberships, single service eye care plans inCalifornia , eye care practitioner and eye exam technician payroll, taxes and benefits and optometric service costs. Customer tastes and preferences, product mix, changes in technology, significant increases or slowdowns in production, and other factors impact costs applicable to revenue. The components of our costs applicable to revenue may not be comparable to other retailers. Selling, General and Administrative Selling, general and administrative expenses, or SG&A, include store associate (including optician) payroll, taxes and benefits, occupancy, advertising and promotion, field services, corporate support and other costs associated with the provision of vision care services. SG&A generally fluctuates consistently with revenue due to the variable store, field office and corporate support costs; however, some fixed costs slightly improve as a percentage of net revenue as our net revenues grow over time. New Store Openings The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results. In an effort to conserve cash early in the COVID-19 pandemic, we temporarily paused new store openings during a portion of the fiscal year 2020. We expect to open approximately 75 stores in the current year. We will continue to monitor and determine our plans for future new store openings based on based on health, safety and economic conditions. Adjusted Comparable Store Sales Growth We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store's opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers. We did not revise our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic. Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful. 29 -------------------------------------------------------------------------------- Table of Contents Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS (collectively, the "Company Non-GAAP Measures") The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use the Company Non-GAAP Measures to supplementU.S. GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. See "Non-GAAP Financial Measures" for definitions of the Company Non-GAAP Measures and for additional information. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue. Three Months Ended Nine Months Ended In thousands, except earnings per share, percentage and store data October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Revenue: Net product sales $ 425,594 $ 403,336 $ 1,326,867 $ 1,005,884 Net sales of services and plans 92,411 82,017 274,807 209,180 Total net revenue 518,005 485,353 1,601,674 1,215,064 Costs applicable to revenue (exclusive of depreciation and amortization): Products 158,371 148,274 485,090 402,279 Services and plans 68,087 62,535 202,004 167,864 Total costs applicable to revenue 226,458 210,809 687,094 570,143 Operating expenses: Selling, general and administrative expenses 218,214 190,518 676,042 520,841 Depreciation and amortization 25,059 22,236 72,639 68,970 Asset impairment - 7,150 1,478 20,916 Litigation settlement - - - 4,395 Other expense (income), net (2,437) (154) (2,567) (312) Total operating expenses 240,836 219,750 747,592 614,810 Income from operations 50,711 54,794 166,988 30,111 Interest expense, net 5,743 12,475 22,169 35,432 Debt issuance costs - - 92 136 Earnings (loss) before income taxes 44,968 42,319 144,727 (5,457) Income tax provision (benefit) 3,976 7,030 22,702 (6,655) Net income $ 40,992 $ 35,289 $ 122,025 $ 1,198 Operating data: Number of stores open at end of period 1,262 1,201 1,262 1,201 New stores opened during the period 14 18 59 57 Adjusted Operating Income $ 54,736 $ 67,742 $ 187,985 $ 71,381 Diluted EPS $ 0.45 $ 0.42 $ 1.34 $ 0.01 Adjusted Diluted EPS $ 0.38 $ 0.54 $ 1.35 $ 0.42 Adjusted EBITDA $ 77,923 $ 88,127 $ 255,008 $ 134,797 Percentage of net revenue: Total costs applicable to revenue 43.7 % 43.4 % 42.9 % 46.9 % Selling, general and administrative 42.1 % 39.3 % 42.2 % 42.9 % Total operating expenses 46.5 % 45.3 % 46.7 % 50.6 % Income from operations 9.8 % 11.3 % 10.4 % 2.5 % Net income 7.9 % 7.3 % 7.6 % 0.1 % Adjusted Operating Income 10.6 % 14.0 % 11.7 % 5.9 % Adjusted EBITDA 15.0 % 18.2 % 15.9 % 11.1 % 31
-------------------------------------------------------------------------------- Table of Contents Three Months EndedOctober 2, 2021 compared to Three Months EndedSeptember 26, 2020 As a result of the COVID-19 pandemic, our retail stores were temporarily closed to the public beginning onMarch 19, 2020 . We began reopening our stores to the public onApril 27, 2020 , and onJune 8, 2020 , we announced the successful completion of the reopening process. Comparisons of current year results to prior year results reflect the material and unprecedented impact of these temporary store closures. Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for the three months endedOctober 2, 2021 compared to the three months endedSeptember 26, 2020 . Comparable store sales growth(1) Stores open at end of period Net revenue(2) Three Months Three Months Ended In thousands, except Ended September 26, September 26, Three Months Ended Three Months Ended percentage and store data October 2, 2021 2020 October 2, 2021 2020 October 2, 2021 September 26, 2020 Owned & Host segment America's Best 0.0 % 13.6 % 826 769$ 351,706 67.9 %$ 334,716 69.0 % Eyeglass World 1.7 % 18.4 % 123 119 55,520 10.7 % 52,837 10.9 % Military (0.6) % (4.6) % 54 54 5,865 1.1 % 5,820 1.2 % Fred Meyer (1.6) % (7.8) % 29 29 3,011 0.6 % 3,027 0.6 % Owned & Host segment total 1,032 971$ 416,102 80.3 %$ 396,400 81.7 % Legacy segment 0.0 % 3.3 % 230 230 40,842 7.9 % 40,232 8.3 % Corporate/Other - % - % - - 58,063 11.2 % 57,906 11.9 % Reconciliations - % - % - - 2,998 0.6 % (9,185) (1.9) % Total 3.4 % 11.6 % 1,262 1,201$ 518,005 100.0 %$ 485,353 100.0 %Adjusted Comparable Store Sales Growth(3) 0.2 % 12.4 % (1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 10. "Segment Reporting" in our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 3.0% and an increase of 0.9% from total comparable store sales growth based on consolidated net revenue for the three months endedOctober 2, 2021 andSeptember 26, 2020 , respectively, and (ii)Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner's customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in a decrease of 0.2% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for the three months endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Total net revenue of$518.0 million for the three months endedOctober 2, 2021 increased$32.7 million , or 6.7%, from$485.4 million for the three months endedSeptember 26, 2020 . Of the increase, approximately 50% was driven by new stores, approximately 40% was driven by changes in unearned revenue and recognition of deferred revenue, and approximately 10% was driven by comparable store sales and wholesale fulfillment. In the three months endedOctober 2, 2021 , we opened 14 America's Best stores and closed one America's Best store. Overall, store count grew 5.1% fromSeptember 26, 2020 toOctober 2, 2021 (57 and four net new America's Best andEyeglass World were added, respectively). 32 -------------------------------------------------------------------------------- Table of Contents Comparable store sales growth and Adjusted Comparable Store Sales Growth for the three months endedOctober 2, 2021 were 3.4% and 0.2%, respectively and were driven by an increase in customer transactions, partially offset by lower average ticket. Net product sales comprised 82.2% and 83.1% of total net revenue for the three months endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Net product sales increased$22.3 million , or 5.5%, in the three months endedOctober 2, 2021 compared to the three months endedSeptember 26, 2020 , driven primarily by eyeglass sales and to a lesser extent, contact lens sales. Net sales of services and plans increased$10.4 million , or 12.7%, driven primarily by higher product protection plan revenue and eye exam revenue. Owned & Host segment net revenue. Net revenue increased$19.7 million , or 5.0%, driven primarily by new store openings. Legacy segment net revenue. Net revenue increased$0.6 million , or 1.5%, driven by higher management fees from our Legacy partner. Corporate/Other segment net revenue. Net revenue increased$0.2 million , or 0.3%, driven primarily by increases in wholesale fulfillment, partially offset by lower online retail business. Net revenue reconciliations. Net revenue was positively impacted by$12.2 million due to the timing of unearned revenue and recognition of deferred revenue for the three months endedOctober 2, 2021 compared to the three months endedSeptember 26, 2020 . Net revenue was positively impacted by$6.3 million as the Company experienced a decrease in unearned revenue during the three months endedOctober 2, 2021 , compared to an increase in unearned revenue during the three months endedSeptember 26, 2020 . The decrease in unearned revenue primarily resulted from higher sales at the end of the third quarter of 2020, compared to sales at the end of the current fiscal period. Additionally, net revenue was positively impacted by$5.9 million due to higher recognition of deferred revenue related to our product protection plans in the current period, compared to prior period; the higher deferred revenue recognition is a result of increased sales of product protection plans in periods after our stores reopened to the public in the second quarter of 2020. Costs applicable to revenue Costs applicable to revenue of$226.5 million for the three months endedOctober 2, 2021 increased$15.6 million , or 7.4%, from$210.8 million for the three months endedSeptember 26, 2020 . As a percentage of net revenue, costs applicable to revenue increased from 43.4% for the three months endedSeptember 26, 2020 to 43.7% for the three months endedOctober 2, 2021 . This increase as a percentage of net revenue was primarily driven by higher optometrist-related costs and, to a lesser extent, freight costs partially offset by higher deferred revenue. Costs of products as a percentage of net product sales increased from 36.8% for the three months endedSeptember 26, 2020 to 37.2% for the three months endedOctober 2, 2021 , primarily driven by higher freight costs partially offset by higher contact lens margin. Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 26.9% for the three months endedSeptember 26, 2020 to 28.0% for the three months endedOctober 2, 2021 . The increase was primarily driven by increased contact lens mix, lower eyeglass and contact lens margin, and higher freight costs. Legacy segment costs of products. Costs of products as a percentage of net product sales increased from 46.9% for the three months endedSeptember 26, 2020 to 48.2% for the three months endedOctober 2, 2021 . The increase was primarily driven by lower contact lens margin and a lower mix of managed care customer transactions versus non-managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Increases in managed care mix decrease costs of products as a percentage of net product sales and have a corresponding negative impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Costs of services and plans as a percentage of net sales of services and plans decreased from 76.2% for the three months endedSeptember 26, 2020 to 73.7% for the three months endedOctober 2, 2021 . The decrease was primarily driven by higher deferred revenue, partially offset by higher optometrist-related costs. 33 -------------------------------------------------------------------------------- Table of Contents Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans in the Owned & Host segment increased from 76.0% for the three months endedSeptember 26, 2020 to 79.9% for the three months endedOctober 2, 2021 . The increase was primarily driven by higher optometrist-related costs. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans in the Legacy segment increased$0.3 million from 39.8% for the three months endedSeptember 26, 2020 to 40.2% for the three months endedOctober 2, 2021 . Selling, general and administrative SG&A of$218.2 million for the three months endedOctober 2, 2021 increased$27.7 million , or 14.5%, from the three months endedSeptember 26, 2020 . As a percentage of net revenue, SG&A increased from 39.3% for the three months endedSeptember 26, 2020 to 42.1% for the three months endedOctober 2, 2021 . The increase in SG&A as a percentage of net revenue was primarily driven by higher advertising expenses, partially offset by recognition of performance-based incentive compensation and corporate payroll leverage. SG&A for the three months endedOctober 2, 2021 andSeptember 26, 2020 includes$0.7 million and$4.7 million , respectively, of incremental costs directly related to adapting the Company's operations during the COVID-19 pandemic; these costs were not reflected as adjustments for the Company's presentation of non-GAAP measures below. Owned & Host SG&A. SG&A as a percentage of net revenue increased from 32.3% for the three months endedSeptember 26, 2020 to 37.7% for the three months endedOctober 2, 2021 , driven primarily by increases in advertising, payroll and occupancy expenses. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 32.5% for the three months endedSeptember 26, 2020 to 35.2% for the three months endedOctober 2, 2021 , driven primarily by higher payroll expenses. Depreciation and amortization Depreciation and amortization expense of$25.1 million for the three months endedOctober 2, 2021 increased$2.8 million , or 12.7%, from$22.2 million for the three months endedSeptember 26, 2020 primarily driven by new store openings. Asset Impairment We recognized no impairment of tangible long-lived assets and ROU assets associated with our retail stores during the three months endedOctober 2, 2021 , compared to$7.2 million recognized during the three months endedSeptember 26, 2020 . The store asset impairment charge is primarily related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores, and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. Asset impairment expenses were recognized in Corporate/Other. Other expense (income), net The Company recorded a gain of$2.4 million in Other expense (income), net for the three months endedOctober 2, 2021 in connection with the acquisition of its equity method investee by a third party. See Note 1. "Business and Basis of Presentation" for further details. Interest expense, net Interest expense, net, of$5.7 million for the three months endedOctober 2, 2021 decreased$6.7 million , or 54.0%, from$12.5 million for the three months endedSeptember 26, 2020 . The decrease was primarily driven by lower interest expense on the 2025 Notes of$3.7 million as a result of the adoption of ASU 2020-06, lower term loan outstanding balance as a result of voluntary prepayment and lower derivative costs. Income tax provision (benefit) Our income tax provision for the three months endedOctober 2, 2021 reflected our statutory federal and state rate of 25.5%, offset by a discrete benefit of$9.1 million associated primarily with the exercise of stock options. In comparison, the income tax provision associated with the three months endedSeptember 26, 2020 reflected income tax expense at our statutory federal and state rate of 25.5% offset by a discrete benefit of$3.0 million resulting from stock option exercises. 34 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedOctober 2, 2021 compared to Nine Months EndedSeptember 26, 2020 As a result of the COVID-19 pandemic, our retail stores were temporarily closed to the public beginning onMarch 19, 2020 . We began reopening our stores to the public onApril 27, 2020 , and onJune 8, 2020 , we announced the successful completion of the reopening process. Comparisons of current year results to prior year results reflect the material and unprecedented impact of these temporary store closures. Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 . Comparable store sales growth(1) Stores open at end of period Net revenue(2) Nine Months Ended In thousands, except Nine Months EndedSeptember 26 ,September 26 , Nine Months Ended Nine Months Ended percentage and store dataOctober 2, 2021 2020October 2, 2021 2020October 2, 2021 September 26, 2020 Owned & Host segment America's Best 31.8 % (10.4) % 826 769$ 1,106,907 69.1 % $ 805,081 66.3 %Eyeglass World 33.9 % (8.6) % 123 119 174,356 10.9 % 127,680 10.5 % Military 22.6 % (20.2) % 54 54 18,112 1.1 % 14,790 1.2 % Fred Meyer 21.2 % (24.6) % 29 29 9,331 0.6 % 7,780 0.6 % Owned & Host segment total 1,032 971$ 1,308,706 81.7 % $ 955,331 78.6 % Legacy segment 25.5 % (15.4) % 230 230 128,024 8.0 % 102,102 8.4 % Corporate/Other - - - - 180,801 11.3 % 174,950 14.4 % Reconciliations - - - - (15,857) (1.0) % (17,319) (1.4) % Total 30.3 % (11.7) % 1,262 1,201$ 1,601,674 100.0 %$ 1,215,064 100.0 %Adjusted Comparable Store Sales Growth(3) 31.1 % (11.1) % (1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 10. "Segment Reporting" in our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in an increase of 0.9% and an increase of 0.5% from total comparable store sales growth based on consolidated net revenue for the nine months endedOctober 2, 2021 andSeptember 26, 2020 , respectively, and (ii)Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner's customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in a decrease of 0.1% and an increase of 0.1% from total comparable store sales growth based on consolidated net revenue for the nine months endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Total net revenue of$1,601.7 million for the nine months endedOctober 2, 2021 increased$386.6 million , or 31.8%, from$1,215.1 million for the nine months endedSeptember 26, 2020 . This increase was primarily driven by comparable store sales growth driven by strong customer demand, including the effect of our stores being temporarily closed to the public for a portion of the nine months endedSeptember 26, 2020 , government stimulus, and new store growth and maturation. Total net revenue was also positively impacted by changes in unearned revenue. In the nine months endedOctober 2, 2021 , we opened 55 new America's Best stores and fourEyeglass World stores and closed two America's Best stores; Overall, store count grew 5.1% fromSeptember 26, 2020 toOctober 2, 2021 (57, and four net new America's Best andEyeglass World stores were added, respectively). Comparable store sales growth and Adjusted Comparable Store Sales Growth for the nine months endedOctober 2, 2021 were 30.3% and 31.1%, respectively. The increases in comparable store sales growth and Adjusted Comparable Store Sales Growth were primarily driven by strong customer demand, including the effect of our stores being temporarily closed for a portion of the nine months endedSeptember 26, 2020 and government stimulus. 35 -------------------------------------------------------------------------------- Table of Contents Net product sales comprised 82.8% and 82.8% of total net revenue for the nine months endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Net product sales increased$321.0 million , or 31.9%, in the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 , primarily due to increased eyeglass sales and to a lesser extent increased contact lens sales. Net sales of services and plans increased$65.6 million , or 31.4%, primarily driven by eye exam revenue. Owned & Host segment net revenue. Net revenue increased$353.4 million , or 37.0%, driven primarily by comparable store sales growth and new store openings. Legacy segment net revenue. Net revenue increased$25.9 million , or 25.4%, driven by comparable store sales growth and higher management fees from our Legacy partner. Corporate/Other segment net revenue. Net revenue increased$5.9 million , or 3.3%, due to increases in wholesale fulfillment. Net revenue reconciliations. The impact of reconciliations positively impacted net revenue by$1.5 million in the nine months endedOctober 2, 2021 compared to the nine months endedSeptember 26, 2020 . Net revenue was positively impacted by$14.4 million due to the timing of unearned revenue. The balance of unearned revenue as ofSeptember 26, 2020 reflected pent-up demand following the temporary closure of our stores to the public. Net revenue was negatively impacted by$12.9 million due to higher product protection plan and club membership deferred revenue balances in current period compared to the prior year period. Product protection plan and club membership deferred revenue balances were lower in the prior year period due to store closures. Costs applicable to revenue Costs applicable to revenue of$687.1 million for the nine months endedOctober 2, 2021 increased$117.0 million , or 20.5%, from$570.1 million for the nine months endedSeptember 26, 2020 . As a percentage of net revenue, costs applicable to revenue decreased from 46.9% for the nine months endedSeptember 26, 2020 to 42.9% for the nine months endedOctober 2, 2021 . This decrease as a percentage of net revenue was primarily driven by negative margin impacts from the temporary closure of our stores in the prior year that were not experienced in the 2021 period, lower growth in optometrist-related costs, increased eyeglass mix and higher eyeglass margin. Costs of products as a percentage of net product sales decreased from 40.0% for the nine months endedSeptember 26, 2020 to 36.6% for the nine months endedOctober 2, 2021 , primarily driven by the impact of the temporary store closures in fiscal year 2020, increased eyeglass mix and higher eyeglass margin. Owned & Host segment costs of products. Costs of products as a percentage of net product sales decreased from 28.6% for the nine months endedSeptember 26, 2020 to 27.2% for the nine months endedOctober 2, 2021 driven by the impact of the temporary store closures in fiscal year 2020, increased eyeglass mix and higher eyeglass margin. Legacy segment costs of products. Costs of products as a percentage of net product sales decreased from 49.1% for the nine months endedSeptember 26, 2020 to 47.7% for the nine months endedOctober 2, 2021 . The decrease was primarily driven by impact of the temporary store closures in fiscal year 2020 and a higher mix of managed care customer transactions versus non-managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Increases in managed care mix decrease costs of products as a percentage of net product sales and have a corresponding negative impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Costs of services and plans as a percentage of net sales of services and plans decreased from 80.2% for the nine months endedSeptember 26, 2020 to 73.5% for the nine months endedOctober 2, 2021 . The decrease was primarily driven by the impact of the temporary store closures in fiscal year 2020, lower growth in optometrist-related costs and higher eye exam revenue. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans decreased from 86.7% for the nine months endedSeptember 26, 2020 to 76.5% for the nine months endedOctober 2, 2021 . The decrease was primarily driven by the impact of the temporary store closures in fiscal year 2020, lower growth in optometrist-related costs and higher eye exam revenue. 36 -------------------------------------------------------------------------------- Table of Contents Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans decreased from 47.3% for the nine months endedSeptember 26, 2020 to 39.0% for the nine months endedOctober 2, 2021 . The decrease was primarily driven by the impact of the temporary store closures in fiscal year 2020, higher management fees from our Legacy partner and lower growth in optometrist-related costs. Selling, general and administrative SG&A of$676.0 million for the nine months endedOctober 2, 2021 increased$155.2 million , or 29.8%, from the nine months endedSeptember 26, 2020 . As a percentage of net revenue, SG&A decreased from 42.9% for the nine months endedSeptember 26, 2020 to 42.2% for the nine months endedOctober 2, 2021 . The decrease in SG&A as a percentage of net revenue was primarily driven by negative impacts from the temporary closure of our stores in the prior year that were not experienced in the 2021 period and leverage of store payroll and occupancy expenses, partially offset by higher advertising expenses and higher performance-based incentive compensation. SG&A for the nine months endedOctober 2, 2021 andSeptember 26, 2020 includes$1.4 million and$7.8 million , respectively, of incremental costs directly related to adapting the Company's operations during the COVID-19 pandemic; of these costs,$0.6 million were reflected as adjustments for the Company's presentation of non-GAAP measures below for the nine months endedSeptember 26, 2020 . Owned & Host SG&A. SG&A as a percentage of net revenue decreased from 36.6% for the nine months endedSeptember 26, 2020 to 35.6% for the nine months endedOctober 2, 2021 , driven primarily by the impact of the temporary store closures in fiscal year 2020 and payroll and occupancy leverage, partially offset by higher advertising expense. Legacy segment SG&A. SG&A as a percentage of net revenue decreased from 36.5% for the nine months endedSeptember 26, 2020 to 33.9% for the nine months endedOctober 2, 2021 primarily driven by the impact of the temporary store closures in fiscal year 2020 and payroll and occupancy leverage. Depreciation and amortization Depreciation and amortization expense of$72.6 million for the nine months endedOctober 2, 2021 increased$3.7 million , or 5.3%, from$69.0 million for the nine months endedSeptember 26, 2020 primarily driven by new store openings. Asset impairment We recognized$1.5 million for impairment of tangible long-lived assets and ROU assets associated with our retail stores during the nine months endedOctober 2, 2021 compared to$20.9 million recognized during the nine months endedSeptember 26, 2020 . The store asset impairment charge is primarily related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores, and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. Asset impairment expenses were recognized in Corporate/Other. Other expense (income), net The Company recorded a gain of$2.4 million in Other expense (income), net for the nine months endedOctober 2, 2021 in connection with the acquisition of its equity method investee by a third party. See Note 1. "Business and Basis of Presentation" for further details. Interest expense, net Interest expense, net, of$22.2 million for the nine months endedOctober 2, 2021 decreased$13.3 million , or 37.4%, from$35.4 million for the nine months endedSeptember 26, 2020 . The decrease was primarily driven by lower derivative costs of$7.2 million , reduced term loan outstanding balance and credit facility utilization, and lower interest expense on the 2025 Notes as a result of the adoption of ASU 2020-06. Income tax provision (benefit) Our income tax provision for the nine months endedOctober 2, 2021 reflected our statutory federal and state rate of 25.5%, combined with a benefit of$15.7 million primarily from the exercise of stock options and for the stranded tax effect associated with our interest rate swaps that matured in the first quarter of 2021. In comparison, the income tax benefit for the nine months endedSeptember 26, 2020 reflected our statutory federal and state rate of 25.5% combined with a benefit of$6.0 million resulting from stock option exercises. 37 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS We define Adjusted Operating Income as net income, plus interest expense and income tax provision (benefit), further adjusted to exclude stock compensation expense, asset impairment, litigation settlement, amortization of acquisition intangibles, and other expenses. We define Adjusted Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock compensation expense, asset impairment, litigation settlement, and other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue. We define Adjusted Diluted EPS as diluted earnings per share, adjusted for the per share impact of stock compensation expense, asset impairment, litigation settlement, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our term loan borrowings, amortization of costs related to our 2025 Notes, losses (gains) on change in fair value of derivatives, other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments. We adjust for amortization of costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share according toU.S. GAAP. EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below. EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance withU.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplementU.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplementsU.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business thanU.S. GAAP results alone. EBITDA and the Company Non-GAAP Measures are not recognized terms underU.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance withU.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management's discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In evaluating EBITDA and the Company Non-GAAP Measures, we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on ourU.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures. 38 -------------------------------------------------------------------------------- Table of Contents The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported underU.S. GAAP. Some of these limitations are: •they do not reflect costs or cash outlays for capital expenditures or contractual commitments; •they do not reflect changes in, or cash requirements for, our working capital needs; •EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; •EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes; •they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and •other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. The following table reconciles our Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin to net income; and Adjusted Diluted EPS for the periods presented: Three Months Ended Nine Months Ended In thousands October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net income$ 40,992 7.9 %$ 35,289 7.3 %$ 122,025 7.6 %$ 1,198 0.1 % Interest expense 5,743 1.1 % 12,475 2.6 % 22,169 1.4 % 35,432 2.9 % Income tax provision (benefit) 3,976 0.8 % 7,030 1.4 % 22,702 1.4 % (6,655) (0.5) % Stock compensation expense (a) 3,665 0.7 % 2,890 0.6 % 13,866 0.9 % 8,335 0.7 % Asset impairment (b) - - % 7,150 1.5 % 1,478 0.1 % 20,916 1.7 % Litigation settlement (c) - - % - - % - - % 4,395 0.4 % Amortization of acquisition intangibles (d) 1,872 0.4 % 1,851 0.4 % 5,616 0.4 % 5,554 0.5 % Other (g) (1,512) (0.3) % 1,057 0.2 % 129 - % 2,206 0.2 % Adjusted Operating Income / Adjusted Operating Margin$ 54,736 10.6 %$ 67,742 14.0 %$ 187,985 11.7 %$ 71,381 5.9 %
Note: Percentages reflect line item as a percentage of net revenue, adjusted for rounding
Some of the percentage totals in the table above do not foot due to rounding differences
39--------------------------------------------------------------------------------
Table of Contents
Three Months Ended Nine Months Ended
In thousands October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020
Net income $ 40,992 7.9 % $ 35,289 7.3 % $ 122,025 7.6 % $ 1,198 0.1 %
Interest expense 5,743 1.1 % 12,475 2.6 % 22,169 1.4 % 35,432 2.9 %
Income tax provision
(benefit) 3,976 0.8 % 7,030 1.4 % 22,702 1.4 % (6,655) (0.5) %
Depreciation and amortization 25,059 4.8 % 22,236 4.6 % 72,639 4.5 % 68,970 5.7 %
EBITDA 75,770 14.6 % 77,030 15.9 % 239,535 15.0 % 98,945 8.1 %
Stock compensation expense
(a) 3,665 0.7 % 2,890 0.6 % 13,866 0.9 % 8,335 0.7 %
Asset impairment (b) - - % 7,150 1.5 % 1,478 0.1 % 20,916 1.7 %
Litigation settlement (c) - - % - - % - - % 4,395 0.4 %
Other (g) (1,512) (0.3) % 1,057 0.2 % 129 - % 2,206 0.2 %
Adjusted EBITDA / Adjusted
EBITDA Margin $ 77,923 15.0 % $ 88,127 18.2 %
%
Note: Percentages reflect line item as a percentage of net revenue, adjusted for rounding Some of the percentage totals in the table above do not foot due to rounding differences
Three Months Ended Nine Months Ended
September 26, September 26,
In thousands, except per share amounts October 2, 2021 2020 October 2, 2021 2020
Diluted EPS $ 0.45 $ 0.42 $ 1.34 $ 0.01
Stock compensation expense (a) 0.04 0.03 0.14 0.10
Asset impairment (b) - 0.09 0.02 0.25
Litigation settlement (c) - - - 0.05
Amortization of acquisition intangibles (d) 0.02 0.02 0.06 0.07
Amortization of debt discount and deferred
financing costs (e) 0.00 0.05 0.02 0.09
Losses (gains) on change in fair value of
derivatives (f) (0.01) 0.00 0.00 0.06
Other (j) (0.02) 0.01 (0.02) 0.03
Tax benefit of stock option exercises (h) (0.09) (0.04) (0.14) (0.07)
Tax effect of total adjustments (i) (0.01) (0.05) (0.06) (0.16)
Adjusted Diluted EPS $ 0.38 $ 0.54 $ 1.35 $ 0.42
Weighted average diluted shares outstanding 96,508 83,795 96,193 82,718
Note: Some of the totals in the table above do not foot due to rounding differences
(a)Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions. (b)Reflects write-off of property, equipment and lease related assets on closed or underperforming stores. (c)Expenses associated with settlement of significant litigation. (d)Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting following the acquisition of the Company by affiliates of KKR & Co. Inc. (e)Amortization of deferred financing costs and other non-cash charges related to our long-term debt. We adjust for amortization of costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share according toU.S. GAAP. (f)Reflects losses (gains) recognized in interest expense on change in fair value of de-designated hedges. (g)Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA), including our share of (gains) losses on equity method investments of$(2.4) million for each of the three and nine months endedOctober 2, 2021 and other expenses and adjustments which are primarily related to excess payroll taxes on stock option exercises, executive severance and relocation. (h)Tax benefit associated with accounting guidance requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur. (i)Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates. (j)Reflects other expenses in (g) above, including the impact of stranded tax effect of$(2.1) million for the nine months endedOctober 2, 2021 associated with our interest rate swaps that matured in 2021. 40 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our primary cash needs are for inventory, payroll, store rent, advertising, capital expenditures associated with new stores and updating existing stores, as well as information technology and infrastructure, including our corporate office, distribution centers, and laboratories. When appropriate, the Company may utilize excess liquidity towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, as well as repurchases of common stock, based on excess cash flows. We continue to prioritize cash conservation and prudent use of cash, while safely conducting normal operations. The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued expenses. While we have historically exercised prudence in our use of cash, the COVID-19 pandemic has required us to closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding. We continue to be focused on these items in addition to other key measures we use to determine how our consolidated business and operating segments are performing. We believe that cash on hand, cash expected to be generated from operations and the availability of borrowings under our revolving credit facility will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures, and payments due under our existing debt for at least the next 12 months. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as further modifications to our term loan where possible. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside our control. We primarily fund our working capital needs using cash provided by operations. Our working capital requirements for inventory will increase as we continue to open additional stores. As ofOctober 2, 2021 , we had$439.1 million in cash and cash equivalents and$293.6 million of availability under our revolving credit facility, which includes$6.4 million in outstanding letters of credit. As ofOctober 2, 2021 , we have outstanding$402.5 million aggregate principal of the 2025 Notes. The 2025 Notes are senior unsecured obligations, and interest on the 2025 Notes is paid semi-annually. As ofOctober 2, 2021 , the 2025 Notes can be converted by holders. Upon conversion of the 2025 Notes we can choose to settle in cash, shares or a combination. Based on the initial conversion rate, the 2025 Notes are convertible into 12.9 million shares of our common stock; however we reserved for the possible issuance of 16.5 million shares, which is the maximum amount that could be issued upon conversion. See Note 11. "Earnings Per Share" for the treatment of earnings per share in relation to the 2025 Notes. As ofOctober 2, 2021 , we had$200.0 million of term loan outstanding under our credit agreement. We were in compliance with all covenants related to our long-term debt as ofOctober 2, 2021 . The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated: Nine Months Ended In thousands October 2, 2021 September 26, 2020 Cash flows provided by (used for): Operating activities$ 233,807 $ 203,716 Investing activities (56,445) (40,514) Financing activities (112,065) 174,906
Net increase in cash, cash equivalents and restricted cash $ 65,297 $ 338,108
Net Cash Provided by Operating Activities Cash flows provided by operating activities increased$30.1 million from$203.7 million during the nine months endedSeptember 26, 2020 to$233.8 million for the nine months endedOctober 2, 2021 . The increase in net cash provided by operating activities consisted of an increase in net income of$120.8 million , due primarily to growth in sales during the nine months endedOctober 2, 2021 , and an increase of non-cash expense items of$4.5 million including an increase in deferred income taxes of$30.3 million partially offset by a decrease in asset impairment charges of$19.4 million . Changes in net working capital and other assets and liabilities used$95.3 million in cash compared to the nine months endedSeptember 26, 2020 . Working capital was most significantly impacted by changes in other liabilities, 41 -------------------------------------------------------------------------------- Table of Contents inventories, accounts payable, and other assets. Decreases in other liabilities during the nine months endedOctober 2, 2021 used$51.5 million in year-over-year cash primarily due to decreases in compensation related accruals of$31.9 million including payment of CARES Act deferred employer payroll taxes, timing of litigation settlements, and decreases in lease concessions and deferrals of$9.0 million . Increases in inventories used$27.3 million in year-over-year cash, primarily due to increased purchases including forward buys. Decreases in accounts payable during the nine months endedOctober 2, 2021 used$16.6 million in year-over-year cash, primarily due to timing of payments. Increases in other assets used$7.9 million in year-over-year cash consisting of$9.7 million of prepaid tax-related items offset by smaller decreases in other prepaid and non-current asset balances during the nine months endedOctober 2, 2021 when compared with the nine months endedSeptember 26, 2020 . Offsetting these items were decreases in accounts receivable, which contributed$8.4 million in year-over-year cash, primarily reflective of year-over-year decreases in credit card receivables during the nine months endedOctober 2, 2021 compared to the same period of 2020.Net Cash Used for Investing Activities Net cash used for investing activities increased by$15.9 million , to$56.4 million , during the nine months endedOctober 2, 2021 from$40.5 million during the nine months endedSeptember 26, 2020 . The increase was primarily due to increased new store openings, offset partially by proceeds of$2.4 million in connection with the sale of the Company's equity method investee. Refer to Note 1. "Description of Business and Basis of Presentation" for more information on the sale. Approximately 80% of our capital spend is related to our expected growth (i.e., new stores, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including omni-channel platform related investments). Net Cash Provided By (Used For) Financing Activities Net cash provided by (used for) financing activities decreased$287.0 million , from$174.9 million provision of cash during the nine months endedSeptember 26, 2020 to$112.1 million use of cash during the nine months endedOctober 2, 2021 . The decrease in cash provided by financing activities was primarily due to the prepayment of our term loan long-term debt in the current fiscal year compared to borrowings of long-term debt partially offset by principal payments in the prior year. The Company made voluntary term loan prepayments of$117.4 million during the nine months endedOctober 2, 2021 compared to proceeds of$548.8 million from the issuance of the 2025 Notes and borrowings on our revolving credit facility partially offset by principal payments on long-term debt of$369.3 million during the nine months endedSeptember 26, 2020 . Credit Agreement Amendment The Company also amended its credit agreement to, among other things, add customary LIBOR replacement provisions, modify the applicable margins used to calculate the rate of interest payable on the first lien term loans thereunder, modify certain financial covenants related to maximum leverage and minimum interest coverage and remove the LIBOR floor, such that LIBOR shall be deemed to be no less than 0.00% per annum (instead of 1.00% per annum previously in effect). Capitalized terms used but not defined herein shall have the meanings assigned to such terms in our credit agreement. Pursuant to our credit agreement, the Company will not permit (i) the Consolidated Total Debt to Consolidated EBITDA Ratio to be negative or greater than (x) 4.50 to 1.00 with respect to the last day of the Company's second and third fiscal quarters of 2021 and (y) 4.25 to 1.00 from and after the last day of the Company's fourth fiscal quarter of 2021, subject to certain step-ups after the consummation of a Material Acquisition, or (ii) the Consolidated Interest Coverage Ratio of the Company as of the last day of any fiscal quarter of the Company to be less than 3.00 to 1.00. We were in compliance with all covenants related to our long-term debt as ofOctober 2, 2021 . Refer to Notes 4. "Long-term Debt" and 14. "Subsequent Events" for more information on our credit agreement and debt balance.Share Repurchase Authority EffectiveNovember 8, 2021 , the Company's board of directors authorized the Company to repurchase up to$50 million aggregate amount of shares of the Company's common stock. Repurchases may be made from time to time in the Company's discretion through one or more open market or privately negotiated transactions, and pursuant to pre-set trading plans meeting the requirements of all applicable securities laws and regulations. Shares may be repurchased under the program throughDecember 30, 2023 . The timing and amounts of any such repurchases will depend on a variety of factors, including the market price of the Company's shares and general market and economic conditions. 42 -------------------------------------------------------------------------------- Table of Contents Off-balance Sheet Arrangements We followU.S. GAAP in making the determination as to whether or not to record an asset or liability related to our arrangements with third parties. Consistent with current accounting guidance, we do not record an asset or liability associated with long-term purchase, marketing and promotional commitments, or commitments to philanthropic endeavors. We have disclosed the amount of future commitments associated with these items in the 2020 Annual Report on form 10-K. We are not a party to any other material off-balance sheet arrangements. Contractual Obligations There were no material changes outside the ordinary course of business in our contractual obligations and commercial commitments from those reported in the 2020 Annual Report on Form 10-K. Critical Accounting Policies and Estimates Management has evaluated the accounting policies used in the preparation of the Company's unaudited condensed consolidated financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the 2020 Annual Report on Form 10-K, in the "Critical Accounting Policies and Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the 2020 Annual Report on Form 10-K, except for the adoption of ASU 2020-06. These changes are discussed in Note 1. "Description of Business and Basis of Presentation" to our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q. Adoption of New Accounting Pronouncements The information set forth in Note 1. "Description of Business and Basis of Presentation" to our unaudited condensed consolidated financial statements under Part I. Item 1. under the heading "Adoption of New Accounting Pronouncements" of this Form 10-Q is incorporated herein by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have market risk exposure from changes in interest rates. When appropriate, we use derivative financial instruments to mitigate the risk from such exposure. A discussion of our accounting policies for derivative financial instruments is included in Note 3. "Fair Value Measurement" and Note 5. "Interest Rate Derivatives" to our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q. A portion of our debt bears interest at variable rates. If market interest rates increase, the interest rate on our variable rate debt will increase and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. Our interest rate collar is intended to mitigate some of the effects of increases in interest rates. As ofOctober 2, 2021 ,$200.0 million of term loan borrowings were subject to variable interest rates, with a weighted average borrowing rate of 2.5%. An increase to market rates of 1.0% as ofOctober 2, 2021 would not result in a material increase to interest expense. Assuming a decrease to market rates of 1.0% as ofOctober 2, 2021 , the resulting increase to interest expense related to the interest rate derivative would be approximately$9 million . For more information about quantitative and qualitative disclosures about market risk, please see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in Part II. of the 2020 Annual Report on Form 10-K. 43
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
