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 1,249 retail stores across five brands and 19 consumer websites as ofJuly 3, 2021 . COVID-19 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. We have taken a variety of measures, as described in 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, which had a significant impact on our operations and performance of fiscal year 2020 and continue to have a significant impact on our operations and performance of fiscal year 2021. Please also refer to those Items for further discussion regarding the potential future impacts of COVID-19 and related economic conditions on us. We continue to monitor the evolving situation as there remain many uncertainties regarding the pandemic and more recent outbreaks of variants, including its anticipated duration, related healthcare authority guidelines and efficacy of vaccination initiatives. We could experience potential disruptions of product deliveries with the recent 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 could result in product availability delays, as well as potential increased costs to obtain and ship these products to meet customer demand. 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 or temporarily close stores. There can be no assurance whether or when any such measures will be adopted. Our net revenue in the current fiscal period increased compared to prior fiscal period due in part to strong customer demand, including the effects of our stores being temporarily closed to the public in fiscal year 2020 and government stimulus as a result of COVID-19. 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." 24 -------------------------------------------------------------------------------- Table of Contents Brand and Segment Information Our operations consist of two reportable segments: •Owned & Host - As ofJuly 3, 2021 , our owned brands consisted of 813America'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 ofJuly 3, 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 ofJuly 3, 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 six months endedJuly 3, 2021 , sales associated with this arrangement represented 8.0% of consolidated net revenue. This exposes us to concentration of customer risk. 25 -------------------------------------------------------------------------------- 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 6.5% 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, 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 could result in product availability delays. We could experience further material impacts as a result of COVID-19, including, but not limited to, charges from additional asset impairments, deferred tax valuation allowances and further changes in the effectiveness of our hedging instrument. 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 or temporarily close stores. 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 I. Item 1A. "Risk Factors," included in our 2020 Annual Report on Form 10-K. 26 -------------------------------------------------------------------------------- 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 benefited in the current period from the effect of our stores being temporarily closed to the public in the prior year due to the COVID-19 pandemic. The impact of the COVID-19 pandemic on our comparable store sales growth remains uncertain and affects 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. 27 -------------------------------------------------------------------------------- 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. 28 -------------------------------------------------------------------------------- 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. 29 -------------------------------------------------------------------------------- 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 Six Months Ended In thousands, except earnings per share, percentage and store data July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Revenue: Net product sales $ 458,206 $ 209,707 $ 901,273 $ 602,548 Net sales of services and plans 91,283 50,300 182,396 127,163 Total net revenue 549,489 260,007 1,083,669 729,711 Costs applicable to revenue (exclusive of depreciation and amortization): Products 167,028 97,635 326,719 254,005 Services and plans 68,918 43,145 133,917 105,329 Total costs applicable to revenue 235,946 140,780 460,636
359,334
Operating expenses: Selling, general and administrative expenses 234,235 136,582 457,828
330,323
Depreciation and amortization 24,025 21,924 47,580 46,734 Asset impairment 519 2,411 1,478 13,766 Litigation settlement - - - 4,395 Other expense (income), net (65) (92) (130) (158) Total operating expenses 258,714 160,825 506,756 395,060 Income (loss) from operations 54,829 (41,598) 116,277 (24,683) Interest expense, net 10,096 15,502 16,426 22,957 Debt issuance costs 92 136 92 136 Earnings (loss) before income taxes 44,641 (57,236) 99,759
(47,776)
Income tax provision (benefit) 7,040 (13,403) 18,726 (13,685) Net income (loss) $ 37,601 $ (43,833) $ 81,033 $ (34,091) Operating data: Number of stores open at end of period 1,249 1,184 1,249
1,184
New stores opened during the period 20 17 45 40
Adjusted Operating Income $ 65,581 $ (34,427) $ 133,249 $ 3,638
Diluted EPS $ 0.42 $ (0.55) $ 0.89 $ (0.42)
Adjusted Diluted EPS $ 0.48 $ (0.41) $ 0.97 $ (0.13)
Adjusted EBITDA $ 87,735 $ (14,354) $ 177,085 $ 46,670
Percentage of net revenue:
Total costs applicable to revenue 42.9 % 54.1 % 42.5 % 49.2 %
Selling, general and administrative 42.6 % 52.5 % 42.2 % 45.3 %
Total operating expenses 47.1 % 61.9 % 46.8 % 54.1 %
Income (loss) from operations 10.0 % (16.0) % 10.7 % (3.4) %
Net income (loss) 6.8 % (16.9) % 7.5 % (4.7) %
Adjusted Operating Income 11.9 % (13.2) % 12.3 % 0.5 %
Adjusted EBITDA 16.0 % (5.5) % 16.3 % 6.4 %
30-------------------------------------------------------------------------------- Table of Contents Three Months EndedJuly 3, 2021 compared to Three Months EndedJune 27, 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 endedJuly 3, 2021 compared to the three months endedJune 27, 2020 . Comparable store sales growth(1) Stores open at end of period
Net revenue(2)
Three Months Three Months
In thousands, except Ended Ended June 27, Three Months Ended Three Months Ended
percentage and store data July 3, 2021 June 27, 2020 July 3, 2021 2020 July 3, 2021 June 27, 2020
Owned & Host segment
America's Best 81.8 % (37.1) % 813 752 $ 372,846 67.9 % $ 176,196 67.8 %
Eyeglass World 67.6 % (31.6) % 123 118 58,061 10.6 % 30,357 11.7 %
Military 65.0 % (44.6) % 54 54 6,007 1.1 % 3,328 1.3 %
Fred Meyer 61.1 % (48.6) % 29 29 3,243 0.6 % 1,824 0.7 %
Owned & Host segment total 1,019 953 $ 440,157 80.1 % $ 211,705 81.4 %
Legacy segment 58.2 % (35.8) % 230 231 43,600 7.9 % 25,413 9.8 %
Corporate/Other - % - % - - 61,520 11.2 % 50,472 19.4 %
Reconciliations - % - % - - 4,212 0.8 % (27,583) (10.6) %
Total 99.1 % (44.7) % 1,249 1,184 $ 549,489 100.0 % $ 260,007 100.0 %
Adjusted Comparable Store
Sales Growth(3) 76.7 % (36.5) %
(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 21.6% and an increase of 8.1% from total comparable store sales
growth based on consolidated net revenue for the three months ended July 3, 2021
and June 27, 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 0.8% and an increase of 0.1% from
total comparable store sales growth based on consolidated net revenue for each
of the three months ended July 3, 2021 and June 27, 2020 .
Total net revenue of $549.5 million for the three months ended July 3, 2021
increased $289.5 million , or 111.3%, from $260.0 million for the three months
ended June 27, 2020 . This increase was primarily driven by comparable store
sales growth from the effect of our stores being temporarily closed to the
public in the second quarter of 2020, strong customer demand, government
stimulus, and new store growth and maturation. Total net revenue was also
positively impacted by changes in unearned revenue.
In the three months ended July 3, 2021 , we opened 18 America's Best stores and
two Eyeglass World stores and closed one America's Best store. Overall, store
count grew 5.5% from June 27, 2020 to July 3, 2021 (61 and five net new
America's Best and Eyeglass World were added, respectively and one Legacy store
was closed). The store count as of June 27, 2020 has been updated from the
previously reported number.
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Comparable store sales growth and Adjusted Comparable Store Sales Growth for the
three months ended July 3, 2021 were 99.1% and 76.7%, respectively and were
primarily driven by the effect of our stores being temporarily closed to the
public for a portion of the three months ended June 27, 2020 , strong customer
demand and government stimulus.
Net product sales comprised 83.4% and 80.7% of total net revenue for the three
months ended July 3, 2021 and June 27, 2020 , respectively. Net product sales
increased $248.5 million , or 118.5%, in the three months ended July 3, 2021
compared to the three months ended June 27, 2020 , driven primarily by eyeglass
sales and, to a lesser extent, contact lens sales. Net sales of services and
plans increased $41.0 million , or 81.5%, driven primarily by eye exam sales.
Owned & Host segment net revenue. Net revenue increased $228.5 million , or
107.9%, driven primarily by comparable store sales growth and new store
openings.
Legacy segment net revenue. Net revenue increased $18.2 million , or 71.6%,
driven by comparable store sales growth, as well as increases in fees from our
Legacy partner and eye exams.
Corporate/Other segment net revenue. Net revenue increased $11.0 million , or
21.9%, driven primarily by increases in wholesale fulfillment.
Net revenue reconciliations. Net revenue was positively impacted by $31.8
million due to the timing of unearned revenue for the three months ended July 3,
2021 compared to the three months ended June 27, 2020 . The Company experienced a
decrease in unearned revenue of $8.5 million compared to an increase in unearned
revenue of $34.4 million for the three months ended July 3, 2021 and June 27,
2020 , respectively, as well as an increase in deferred revenue of $4.2 million
and a decrease of $6.9 million for the three months ended July 3, 2021 and June
27, 2020 , respectively. The decrease in unearned revenue primarily resulted from
higher sales at the end of the first quarter of 2021 compared to the prior
period in 2020 when stores were temporarily closed to the public. The increase
in deferred revenue is due to higher sales of warranties and club memberships.
Costs applicable to revenue
Costs applicable to revenue of $235.9 million for the three months ended July 3,
2021 increased $95.2 million , or 67.6%, from $140.8 million for the three months
ended June 27, 2020 . As a percentage of net revenue, costs applicable to revenue
decreased from 54.1% for the three months ended June 27, 2020 to 42.9% for the
three months ended July 3, 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,
increased eyeglass mix and lower growth in optometrist costs.
Costs of products as a percentage of net product sales decreased from 46.6% for
the three months ended June 27, 2020 to 36.5% for the three months ended July 3,
2021 , primarily driven by 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 30.9% for the three months ended June 27, 2020 to
27.3% for the three months ended July 3, 2021 . The decrease was primarily 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 55.9% for the three months ended June 27, 2020 to
48.1% for the three months ended July 3, 2021 . The decrease was primarily driven
by the impact of the temporary store closures in fiscal year 2020, increased
eyeglass mix 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 85.8% for the three months ended June 27, 2020 to 75.5% for the
three months ended July 3, 2021 . The decrease was primarily driven by the impact
of temporary closure of our stores in fiscal year 2020, lower growth in
optometrist costs and higher eye exam sales.
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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
decreased from 112.5% for the three months ended June 27, 2020 to 79.3% for the
three months ended July 3, 2021 . The decrease was primarily driven by the impact
of the temporary store closures in fiscal year 2020, lower growth in optometrist
costs and higher eye exam sales.
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 decreased
from 49.9% for the three months ended June 27, 2020 to 38.6% for the three
months ended July 3, 2021 . The decrease was primarily driven by the impact of
the temporary store closures in fiscal year 2020, lower growth in optometrist
costs and higher management fees from our Legacy partner.
Selling, general and administrative
SG&A of $234.2 million for the three months ended July 3, 2021 increased $97.7
million , or 71.5%, from the three months ended June 27, 2020 . As a percentage of
net revenue, SG&A decreased from 52.5% for the three months ended June 27, 2020
to 42.6% for the three months ended July 3, 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 which contributed to leverage of store and corporate payroll and
occupancy expenses as well as the decrease in unearned revenue, partially offset
by higher advertising expenses. SG&A for the three months ended July 3, 2021 and
June 27, 2020 includes $0.3 million and $2.5 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 decreased from 41.0% for
the three months ended June 27, 2020 to 36.1% for the three months ended July 3,
2021 , driven primarily by the impact of the temporary store closures in fiscal
year 2020 which contributed to a leverage of payroll and occupancy expenses,
partially offset by higher advertising expenses.
Legacy segment SG&A. SG&A as a percentage of net revenue decreased from 41.6%
for the three months ended June 27, 2020 to 33.9% for the three months ended
July 3, 2021 , driven primarily by the impact of the temporary store closures in
fiscal year 2020 and payroll leverage.
Depreciation and amortization
Depreciation and amortization expense of $24.0 million for the three months
ended July 3, 2021 increased $2.1 million , or 9.6%, from $21.9 million for the
three months ended June 27, 2020 primarily driven by new store openings.
Asset Impairment
We recognized $0.5 million for impairment primarily of tangible long-lived
assets and ROU assets associated with our retail stores during the three months
ended July 3, 2021 , compared to $2.4 million recognized during the three months
ended June 27, 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.
Interest expense, net
Interest expense, net, of $10.1 million for the three months ended July 3, 2021
decreased $5.4 million , or 34.9%, from $15.5 million for the three months ended
June 27, 2020 . The decrease was primarily driven by changes in fair value of
derivatives of $2.5 million and by a reduction in our term loan and revolving
credit facility utilization.
Income tax provision
Our income tax expense for the three months ended July 3, 2021 reflected our
statutory federal and state rate of 25.5%, offset by a discrete benefit of $4.1
million associated primarily with the exercise of stock options. In comparison,
the income tax provision associated with the three months ended June 27, 2020
reflected income tax expense at our statutory federal and state rate of 25.5%
and was reduced by a $0.3 million income tax benefit resulting from stock option
exercises.
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Six Months Ended July 3, 2021 compared to Six Months Ended June 27, 2020
As a result of the COVID-19 pandemic, our retail stores were temporarily closed
to the public beginning on March 19, 2020 . We began reopening our stores to the
public on April 27, 2020 , and on June 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 six months ended
July 3, 2021 compared to the six months ended June 27, 2020 .
Comparable store sales growth(1) Stores open at end of period Net revenue(2)
Six Months
In thousands, except Six Months Ended Ended June 27, Six Months Ended Six Months Ended
percentage and store data July 3, 2021 June 27, 2020 July 3, 2021 2020 July 3, 2021 June 27, 2020
Owned & Host segment
America's Best 54.9 % (22.2) % 813 752 $ 755,201 69.7 % $ 470,366 64.5 %
Eyeglass World 57.1 % (21.2) % 123 118 118,836 11.0 % 74,843 10.3 %
Military 38.1 % (27.8) % 54 54 12,246 1.1 % 8,970 1.2 %
Fred Meyer 36.1 % (32.5) % 29 29 6,321 0.6 % 4,753 0.7 %
Owned & Host segment total 1,019 953 $ 892,604 82.4 % $ 558,932 76.6 %
Legacy segment 42.6 % (24.4) % 230 231 87,182 8.0 % 61,870 8.5 %
Corporate/Other - - - - 122,738 11.3 % 117,044 16.0 %
Reconciliations - - - - (18,855) (1.7) % (8,135) (1.1) %
Total 48.9 % (23.0) % 1,249 1,184 $ 1,083,669 100.0 % $ 729,711 100.0 %
Adjusted Comparable Store
Sales Growth(3) 53.3 % (22.6) %
(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 4.4% and an increase of 0.3% from total comparable store sales
growth based on consolidated net revenue for the six months ended July 3, 2021
and June 27, 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 an increase of 0.1% from total comparable store
sales growth based on consolidated net revenue for the six months ended June 27,
2020 .
Total net revenue of $1,083.7 million for the six months ended July 3, 2021
increased $354.0 million , or 48.5%, from $729.7 million for the six months ended
June 27, 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 six months ended
June 27, 2020 , government stimulus, and new store growth and maturation. Total
net revenue was also positively impacted by changes in unearned revenue.
In the six months ended July 3, 2021 , we opened 41 new America's Best stores and
four Eyeglass World stores and closed one America's Best store; Overall, store
count grew 5.5% from June 27, 2020 to July 3, 2021 (61, and five net new
America's Best and Eyeglass World stores were added, respectively, and one
Legacy store was closed during the same period). The store count as of June 27,
2020 has been updated from the previously reported number.
Comparable store sales growth and Adjusted Comparable Store Sales Growth for the
six months ended July 3, 2021 were 48.9% and 53.3%, 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 six months ended June 27, 2020 and
government stimulus.
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Net product sales comprised 83.2% and 82.6% of total net revenue for the six
months ended July 3, 2021 and June 27, 2020 , respectively. Net product sales
increased $298.7 million , or 49.6%, in the six months ended July 3, 2021
compared to the six months ended June 27, 2020 , primarily due to increased
eyeglass sales and to a lesser extent increased contact lens sales. Net sales of
services and plans increased $55.2 million , or 43.4%, primarily driven by eye
exam revenue.
Owned & Host segment net revenue. Net revenue increased $333.7 million , or
59.7%, driven primarily by comparable store sales growth and new store openings.
Legacy segment net revenue. Net revenue increased $25.3 million , or 40.9%,
driven by comparable store sales growth, increases in fees from our Legacy
partner and eye exams.
Corporate/Other segment net revenue. Net revenue increased $5.7 million , or
4.9%, due to increases in wholesale fulfillment.
Net revenue reconciliations. The impact of reconciliations decreased net revenue
by $10.7 million in the six months ended July 3, 2021 compared to the six months
ended June 27, 2020 . Reconciliations include an increase in unearned revenue of
$6.5 million for the six months ended July 3, 2021 compared to an increase in
unearned revenue of $14.5 million for the six months ended June 27, 2020 , and an
increase in deferred revenue of $12.4 million compared to a decrease of $6.4
million , for the six months ended July 3, 2021 and June 27, 2020 , respectively.
The increase in deferred revenue is due to higher sales of warranties and club
memberships. Unearned revenue increased net revenue in the current year compared
to prior year primarily due to higher sales at the end of the second quarter of
2020 after our stores reopened and customers made purchases reflective of demand
that was not met during the temporary closure period.
Costs applicable to revenue
Costs applicable to revenue of $460.6 million for the six months ended July 3,
2021 increased $101.3 million , or 28.2%, from $359.3 million for the six months
ended June 27, 2020 . As a percentage of net revenue, costs applicable to revenue
decreased from 49.2% for the six months ended June 27, 2020 to 42.5% for the six
months ended July 3, 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 costs, increased eyeglass mix and higher eyeglass margin.
Costs of products as a percentage of net product sales decreased from 42.2% for
the six months ended June 27, 2020 to 36.3% for the six months ended July 3,
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 29.8% for the six months ended June 27, 2020 to
26.8% for the six months ended July 3, 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 50.4% for the six months ended June 27, 2020 to
47.5% for the six months ended July 3, 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 82.8% for the six months ended June 27, 2020 to 73.4% for the six
months ended July 3, 2021 . The decrease was primarily driven by the impact of
the temporary store closures in fiscal year 2020, lower growth in optometrist
cost and higher eye exam sales.
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 94.6% for the six
months ended June 27, 2020 to 74.9% for the six months ended July 3, 2021 . The
decrease was primarily driven by the impact of the temporary store closures in
fiscal year 2020, lower growth in optometrist costs and higher eye exam sales.
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Legacy segment costs of services and plans. Costs of services and plans as a
percentage of net sales of services and plans decreased from 52.7% for the six
months ended June 27, 2020 to 38.5% for the six months ended July 3, 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, higher eye
exam sales and lower growth in optometrist costs.
Selling, general and administrative
SG&A of $457.8 million for the six months ended July 3, 2021 increased $127.5
million , or 38.6%, from the six months ended June 27, 2020 . As a percentage of
net revenue, SG&A decreased from 45.3% for the six months ended June 27, 2020 to
42.2% for the six months ended July 3, 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 and corporate payroll and occupancy
expenses, partially offset by higher advertising expenses and higher
performance-based incentive compensation. SG&A for the six months ended July 3,
2021 and June 27, 2020 includes $0.7 million and $3.1 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
six months ended June 27, 2020 .
Owned & Host SG&A. SG&A as a percentage of net revenue decreased from 39.6% for
the six months ended June 27, 2020 to 34.6% for the six months ended July 3,
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 39.1%
for the six months ended June 27, 2020 to 33.4% for the six months ended July 3,
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 $47.6 million for the six months ended
July 3, 2021 increased $0.8 million , or 1.8%, from $46.7 million for the six
months ended June 27, 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 six months ended July 3,
2021 compared to $13.8 million recognized during the six months ended June 27,
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.
Interest expense, net
Interest expense, net, of $16.4 million for the six months ended July 3, 2021
decreased $6.5 million , or 28.4%, from $23.0 million for the six months ended
June 27, 2020 . The decrease was primarily driven by changes in fair value of
derivatives of $4.7 million and by a reduction in our term loan and revolving
credit facility utilization, partially offset by expenses related to the 2025
Notes.
Income tax provision
Our income tax provision for the six months ended July 3, 2021 reflected our
statutory federal and state rate of 25.5%, combined with a benefit of $6.6
million primarily with 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 six months ended June 27,
2020 reflected our statutory federal and state rate of 25.5% combined with a
benefit of $3.0 million resulting from stock option exercises.
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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 (loss), 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 (loss), plus interest expense, income tax provision (benefit) and
depreciation and amortization. We define Adjusted EBITDA as net income (loss),
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 (loss) 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 to U.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 with U.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 supplement U.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 supplements U.S. GAAP results with Non-GAAP financial
measures to provide a more complete understanding of the factors and trends
affecting the business than U.S. GAAP results alone.
EBITDA and the Company Non-GAAP Measures are not recognized terms under U.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 with U.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 our U.S. GAAP results in addition to using EBITDA and the Company Non-GAAP
Measures.
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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 under U.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 Six Months Ended
In thousands July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Net income (loss) $ 37,601 6.8 % $ (43,833) (16.9) % $ 81,033 7.5 % $ (34,091) (4.7) %
Interest expense 10,096 1.8 % 15,502 6.0 % 16,426 1.5 % 22,957 3.1 %
Income tax provision
(benefit) 7,040 1.3 % (13,403) (5.2) % 18,726 1.7 % (13,685) (1.9) %
Stock compensation expense
(a) 7,213 1.3 % 3,352 1.3 % 10,201 0.9 % 5,445 0.7 %
Asset impairment (b) 519 0.1 % 2,411 0.9 % 1,478 0.1 % 13,766 1.9 %
Litigation settlement (c) - - % - - % - - % 4,395 0.6 %
Amortization of acquisition
intangibles (d) 1,871 0.3 % 1,851 0.7 % 3,744 0.3 % 3,702 0.5 %
Other (g) 1,241 0.2 % (307) (0.1) % 1,641 0.2 % 1,149 0.2 %
Adjusted Operating Income /
Adjusted Operating Margin $ 65,581 11.9 % $ (34,427) (13.2) % $ 133,249 12.3 % $ 3,638 0.5 %
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
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Three Months Ended Six Months Ended
In thousands July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Net income (loss) $ 37,601 6.8 % $ (43,833) (16.9) % $ 81,033 7.5 % $ (34,091) (4.7) %
Interest expense 10,096 1.8 % 15,502 6.0 % 16,426 1.5 % 22,957 3.1 %
Income tax provision
(benefit) 7,040 1.3 % (13,403) (5.2) % 18,726 1.7 % (13,685) (1.9) %
Depreciation and amortization 24,025 4.4 % 21,924 8.4 % 47,580 4.4 % 46,734 6.4 %
EBITDA 78,762 14.3 % (19,810) (7.6) % 163,765 15.1 % 21,915 3.0 %
Stock compensation expense
(a) 7,213 1.3 % 3,352 1.3 % 10,201 0.9 % 5,445 0.7 %
Asset impairment (b) 519 0.1 % 2,411 0.9 % 1,478 0.1 % 13,766 1.9 %
Litigation settlement (c) - - % - - % - - % 4,395 0.6 %
Other (g) 1,241 0.2 % (307) (0.1) % 1,641 0.2 % 1,149 0.2 %
Adjusted EBITDA / Adjusted
EBITDA Margin $ 87,735 16.0 % $ (14,354) (5.5) % $ 177,085 16.3 % $ 46,670 6.4 %
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 Six Months Ended
In thousands, except per share amounts July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Diluted EPS $ 0.42 $
(0.55)
0.08 0.04 0.11 0.07
Asset impairment (b) 0.01 0.03 0.02 0.17
Litigation settlement (c) - - - 0.05
Amortization of acquisition intangibles (d) 0.02 0.02 0.04 0.05
Amortization of debt discount and deferred
financing costs (e) 0.01 0.03 0.01 0.03
Losses (gains) on change in fair value of
derivatives (f) 0.02 0.06 - 0.06
Other (j) 0.01 - (0.01) 0.01
Tax benefit of stock option exercises (h) (0.04) - (0.05) (0.04)
Tax effect of total adjustments (i) (0.04) (0.05) (0.05) (0.12)
Adjusted Diluted EPS $ 0.48 $
(0.41)
Weighted average diluted shares outstanding 96,082 80,325 96,044 80,226
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 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. (the "KKR Acquisition"). (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. Amortization of debt discount and deferred financing costs in aggregate total$1.0 million and$2.5 million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, and$1.2 million and$2.7 million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively. (f)Reflects losses (gains) recognized in interest expense on change in fair value of de-designated hedges of$2.4 million and$4.9 million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, and$0.1 million and$4.9 million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively. 39 -------------------------------------------------------------------------------- Table of Contents (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 the amortization impact of adjustments related to the KKR Acquisition, (e.g., fair value of leasehold interests) of$0.1 million for each of the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, and$0.2 million for each of the six months endedJuly 3, 2021 andJune 27, 2020 , respectively; costs of severance and relocation of$0.7 million and$0.2 million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively,$0.8 million and$0.5 million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively; excess payroll taxes related to stock option exercises of$0.2 million for the three months endedJuly 3, 2021 , and$0.3 million for each of the six months endedJuly 3, 2021 andJune 27, 2020 , respectively; incremental costs directly related to adapting the Company's operations during the COVID-19 pandemic of$0.6 million for the six months endedJune 27, 2020 ; and other expenses and adjustments totaling$0.2 million and$(0.7) million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, and$0.3 million and$(0.5) million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively. (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 six months endedJuly 3, 2021 associated with our interest rate swaps that matured in 2021. 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. As ofJuly 3, 2021 , we had$408.3 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 ofJuly 3, 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 ofJuly 3, 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 ofJuly 3, 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 ofJuly 3, 2021 . Our working capital requirements for inventory will increase as we continue to open additional stores. 40
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The following table summarizes cash flows provided by (used for) operating
activities, investing activities and financing activities for the periods
indicated:
Six Months Ended
In thousands July 3, 2021 June 27, 2020
Cash flows provided by (used for):
Operating activities $ 189,808 $ 71,420
Investing activities (38,790) (25,531)
Financing activities (116,529) 171,437
Net increase in cash, cash equivalents and restricted cash
Net Cash Provided by Operating Activities Cash flows provided by operating activities increased$118.4 million from$71.4 million during the six months endedJune 27, 2020 to$189.8 million for the six months endedJuly 3, 2021 . The increase in net cash provided by operating activities consisted of an increase in net income of$115.1 million , due primarily to growth in sales during the six months endedJuly 3, 2021 , and an increase of non-cash expense items of$12.0 million including an increase in deferred income taxes of$28.3 million partially offset by a decrease in asset impairment charges of$12.3 million . Changes in net working capital and other assets and liabilities used$8.8 million in cash compared to the six months endedJune 27, 2020 . Working capital was most significantly impacted by changes in accounts receivable, inventories, deferred and unearned revenue, and other liabilities. Decreases in accounts receivable contributed$16.8 million in year-over-year cash, primarily reflective of the$10.8 million receivable recorded as a result of the employee retention credits made available under the CARES Act for US employees during the six months endedJune 27, 2020 and year-over-year decreases in credit card receivables during the six months endedJuly 3, 2021 compared to the same period of 2020. Increases in inventories used$17.0 million in year-over-year cash, primarily due to increased purchases. Decreases in other liabilities during the six months endedJuly 3, 2021 used$16.3 million in year-over-year cash primarily due to decreases in compensation related accruals primarily due to payment of CARES Act deferred employer payroll taxes, timing of litigation settlements, and decreases in lease concessions and deferrals. Offsetting these items were changes in deferred and unearned revenue, which contributed$10.8 million in year-over-year cash primarily due to a$18.7 million increase in year-over-year cash driven by growth in eye care membership and product protection plan sales, partially offset by year-over-year decreases in unearned revenue during the six months endedJuly 3, 2021 compared to the same period of 2020.Net Cash Used for Investing Activities Net cash used for investing activities increased by$13.3 million , to$38.8 million , during the six months endedJuly 3, 2021 from$25.5 million during the six months endedJune 27, 2020 . The increase was primarily due to increased new store openings. 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$288.0 million , from$171.4 million provision of cash during the six months endedJune 27, 2020 to$116.5 million use of cash during the six months endedJuly 3, 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 in the prior year. The Company made voluntary term loan prepayments of$117.4 million during the six months endedJuly 3, 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 six months endedJune 27, 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). 41
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Table of Contents 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 ofJuly 3, 2021 . Refer to Note 4. "Long-term Debt" for more information. 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.
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