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 1,230 retail stores across five brands and 19 consumer websites as ofApril 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, and, related healthcare authority guidelines. 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 pent-up demand, including the likely 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." 20 -------------------------------------------------------------------------------- Table of Contents Brand and Segment Information Our operations consist of two reportable segments: •Owned & Host - As ofApril 3, 2021 , our owned brands consisted of 796America's Best Contacts and Eyeglasses retail stores and 121Eyeglass 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 ofApril 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 ofApril 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 three months endedApril 3, 2021 , sales associated with this arrangement represented 8.2% of consolidated net revenue. This exposes us to concentration of customer risk. 21 -------------------------------------------------------------------------------- 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. 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. 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 22 -------------------------------------------------------------------------------- Table of Contents 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 pent-up 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; 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 in California . 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.
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
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costs. Costs of services and plans include costs associated with product
protection plan programs, eye care club memberships, single service eye care
plans in California , 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.
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 supplement U.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.
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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
In thousands, except earnings per share, percentage and store
data April 3, 2021 March 28, 2020
Revenue:
Net product sales $ 443,067 $ 392,841
Net sales of services and plans 91,113 76,863
Total net revenue 534,180 469,704
Costs applicable to revenue (exclusive of depreciation and
amortization):
Products 159,691 156,370
Services and plans 64,999 62,184
Total costs applicable to revenue 224,690 218,554
Operating expenses:
Selling, general and administrative expenses 223,593 193,741
Depreciation and amortization 23,555 24,810
Asset impairment 959 11,355
Litigation settlement - 4,395
Other expense (income), net (65) (66)
Total operating expenses 248,042 234,235
Income from operations 61,448 16,915
Interest expense, net 6,330 7,455
Earnings before income taxes 55,118 9,460
Income tax provision (benefit) 11,686 (282)
Net income $ 43,432 $ 9,742
Operating data:
Number of stores open at end of period 1,230 1,173
New stores opened during the period 25 23
Adjusted Operating Income $ 67,668 $ 38,063
Diluted EPS $ 0.48 $ 0.12
Adjusted Diluted EPS $ 0.48 $ 0.28
Adjusted EBITDA $ 89,350 $ 61,022
Percentage of net revenue:
Total costs applicable to revenue 42.1 % 46.5 %
Selling, general and administrative 41.9 % 41.2 %
Total operating expenses 46.4 % 49.9 %
Income from operations 11.5 % 3.6 %
Net income 8.1 % 2.1 %
Adjusted Operating Income 12.7 % 8.1 %
Adjusted EBITDA 16.7 % 13.0 %
25-------------------------------------------------------------------------------- Table of Contents Three Months EndedApril 3, 2021 compared to Three Months EndedMarch 28, 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 abnormal effect of the 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 endedApril 3, 2021 compared to the three months endedMarch 28, 2020 . Comparable store sales growth(1) Stores open at end of period
Net revenue(2)
Three Months Three Months
In thousands, except Ended Ended March 28, Three Months Ended Three Months Ended
percentage and store data April 3, 2021 March 28, 2020 April 3, 2021 2020 April 3, 2021 March 28, 2020
Owned & Host segment
America's Best 35.3 % (9.3) % 796 747 $ 382,356 71.6 % $ 294,170 62.6 %
Eyeglass World 48.3 % (12.1) % 121 117 60,775 11.4 % 44,486 9.5 %
Military 19.4 % (12.1) % 54 54 6,239 1.2 % 5,642 1.2 %
Fred Meyer 17.0 % (16.0) % 29 29 3,077 0.5 % 2,929 0.6 %
Owned & Host segment total 1,000 947 $ 452,447 84.7 % $ 347,227 73.9 %
Legacy segment 29.8 % (14.0) % 230 226 43,582 8.2 % 36,457 7.8 %
Corporate/Other - - - - 61,218 11.5 % 66,571 14.2 %
Reconciliations - - - - (23,067) (4.4) % 19,449 4.1 %
Total 18.2 % (2.9) % 1,230 1,173 $ 534,180 100.0 % $ 469,704 100.0 %
Adjusted Comparable Store
Sales Growth(3) 35.8 % (10.3) %
(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 13.8% and a decrease of 7.5% from total comparable store sales
growth based on consolidated net revenue for the three months ended April 3,
2021 and March 28, 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 3.8% and an increase of 0.1% from
total comparable store sales growth based on consolidated net revenue for the
three months ended April 3, 2021 and March 28, 2020 , respectively.
Total net revenue of $534.2 million for the three months ended April 3, 2021
increased $64.5 million , or 13.7%, from $469.7 million for the three months
ended March 28, 2020 . This increase was primarily driven by comparable store
sales growth driven by strong customer pent-up demand, including the effect of
our stores being temporarily closed to the public in the first quarter of 2020
and government stimulus, new store growth and maturation, partially offset by
timing of unearned revenue and lower wholesale fulfillment.
In the three months ended April 3, 2021 , we opened 23 new America's Best stores
and two Eyeglass World stores; Overall, store count grew 4.9% from March 28,
2020 to April 3, 2021 (49, four and four net new America's Best, Eyeglass World
and Legacy stores, respectively, were added during the same period).
Comparable store sales growth and Adjusted Comparable Store Sales Growth for the
three months ended April 3, 2021 were 18.2% and 35.8%, respectively. The
increases in comparable store sales growth and Adjusted Comparable Store Sales
Growth were primarily driven by strong customer pent-up demand, including the
effect of our stores being temporarily closed to the public in the first quarter
of 2020 and government stimulus.
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Net product sales comprised 82.9% and 83.6% of total net revenue for the three
months ended April 3, 2021 and March 28, 2020 , respectively. Net product sales
increased $50.2 million , or 12.8%, in the three months ended April 3, 2021
compared to the three months ended March 28, 2020 , primarily due to increased
eyeglass sales and to a lesser extent increased contact lens sales. Net sales of
services and plans increased $14.3 million , or 18.5%, primarily driven by eye
exam revenue.
Owned & Host segment net revenue. Net revenue increased $105.2 million , or
30.3%, driven primarily by comparable store sales growth and new store openings.
Legacy segment net revenue. Net revenue increased $7.1 million , or 19.5%, driven
by increases in fees from our Legacy partner and stronger customer demand.
Corporate/Other segment net revenue. Net revenue decreased $5.4 million , or
8.0%, due to lower wholesale fulfillment.
Net revenue reconciliations. The impact of reconciliations decreased net revenue
by $42.5 million in the three months ended April 3, 2021 compared to the three
months ended March 28, 2020 . Reconciliations include an increase in unearned
revenue of $14.9 million for the three months ended April 3, 2021 compared to a
decrease in unearned revenue of $19.9 million for the three months ended March
28, 2020 , and an increase in deferred revenue of $8.1 million compared to an
increase of $0.5 million , for the three months ended April 3, 2021 and March 28,
2020 , respectively. The increase in unearned revenue compared to the prior
period is due to stronger sales at the end of the first quarter of 2021 and
lower sales in the first quarter of 2020 due to the impact of store closures.
The increase in deferred revenue is due to higher sales of warranties and club
memberships.
Costs applicable to revenue
Costs applicable to revenue of $224.7 million for the three months ended April
3, 2021 increased $6.1 million , or 2.8%, from $218.6 million for the three
months ended March 28, 2020 . As a percentage of net revenue, costs applicable to
revenue decreased from 46.5% for the three months ended March 28, 2020 to 42.1%
for the three months ended April 3, 2021 . This decrease as a percentage of net
revenue was primarily driven by increased eyeglass mix, higher eyeglass margin,
lower growth in optometrist costs and negative margin impacts from the temporary
closure of our stores in the prior year not recurring in the current period.
Costs of products as a percentage of net product sales decreased from 39.8% for
the three months ended March 28, 2020 to 36.0% for the three months ended April
3, 2021 , primarily driven by increased eyeglass mix, higher eyeglass margin and
impact of the temporary store closures in fiscal year 2020.
Owned & Host segment costs of products. Costs of products as a percentage of net
product sales decreased from 29.1% for the three months ended March 28, 2020 to
26.3% for the three months ended April 3, 2021 driven by increased eyeglass mix,
higher eyeglass margin and impact of the temporary store closures in fiscal year
2020.
Legacy segment costs of products. Costs of products as a percentage of net
product sales increased from 46.7% for the three months ended March 28, 2020 to
46.9% for the three months ended April 3, 2021 . The increase was primarily
driven by a higher mix of non-managed care customer transactions. Decreases in
managed care mix increase costs of products as a percentage of net product sales
and have a corresponding positive impact on costs of services as a percentage of
net sales of services and plans in our Legacy segment. 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.
Costs of services and plans as a percentage of net sales of services and plans
decreased from 80.9% for the three months ended March 28, 2020 to 71.3% for the
three months ended April 3, 2021 . The decrease was primarily driven by higher
eye exam sales, lower growth in optometrist cost and negative margin impacts
from the temporary closure of our stores in the prior year not recurring in the
current period.
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 85.1% for the
three months ended March 28, 2020 to 70.8% for the three months ended April 3,
2021 . The decrease was primarily driven by higher eye exam sales, lower growth
in optometrist costs and impact of the temporary store closures in fiscal year
2020.
Legacy segment costs of services and plans. Costs of services and plans as a
percentage of net sales of services and plans decreased from 54.7% for the three
months ended March 28, 2020 to 38.3% for the three months ended April 3, 2021 .
The decrease was primarily driven by lower growth in optometrist costs, higher
management fees from our Legacy partner and higher eye exam sales.
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Selling, general and administrative
SG&A of $223.6 million for the three months ended April 3, 2021 increased $29.9
million , or 15.4%, from the three months ended March 28, 2020 . As a percentage
of net revenue, SG&A increased from 41.2% for the three months ended March 28,
2020 to 41.9% for the three months ended April 3, 2021 . The increase in SG&A as
a percentage of net revenue was primarily driven by the increase in unearned
revenue as well as higher performance-based incentive compensation, partially
offset by leverage of store payroll and advertising expenses. SG&A for the three
months ended April 3, 2021 and March 28, 2020 includes $0.4 million and
$0.6 million , respectively, of incremental costs directly related to adapting
the Company's operations during the COVID-19 pandemic.
Owned & Host SG&A. SG&A as a percentage of net revenue decreased from 38.8% for
the three months ended March 28, 2020 to 33.1% for the three months ended April
3, 2021 , driven primarily by payroll, advertising and occupancy leverage.
Legacy segment SG&A. SG&A as a percentage of net revenue decreased from 37.4%
for the three months ended March 28, 2020 to 32.8% for the three months ended
April 3, 2021 primarily driven by payroll leverage.
Depreciation and amortization
Depreciation and amortization expense of $23.6 million for the three months
ended April 3, 2021 decreased $1.3 million , or 5.1%, from $24.8 million for the
three months ended March 28, 2020 as a result of a temporary pause on new store
investments for a portion of 2020 due to the COVID-19 pandemic.
Asset impairment
We recognized $1.0 million for impairment of tangible long-lived assets and ROU
assets associated with our retail stores during the three months ended April 3,
2021 compared to $11.4 million recognized during the three months ended March
28, 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 $6.3 million for the three months ended April 3, 2021
decreased $1.1 million , or 15.1%, from $7.5 million for the three months ended
March 28, 2020 . The decrease was primarily driven by gains related to changes in
fair value of derivatives due to ineffectiveness of $2.3 million and by a
reduction in our term loan and revolving credit facility utilization partially
offset by interest payments and amortization related to the 2025 Notes of $3.0
million .
Income tax provision
Our income tax provision for the three months ended April 3, 2021 reflected our
statutory federal and state rate of 25.5%, combined with a benefit of $2.1
million 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 three months ended March 28, 2020 reflected our statutory federal and state
rate of 25.5% combined with a benefit of $2.7 million resulting from stock
option exercises.
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
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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.
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:
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Three Months Ended
In thousands April 3, 2021 March 28, 2020
Net income $ 43,432 8.1 % $ 9,742 2.1 %
Interest expense 6,330 1.2 % 7,455 1.6 %
Income tax provision (benefit) 11,686 2.2 % (282) (0.1) %
Stock compensation expense (a) 2,988 0.6 % 2,093 0.4 %
Asset impairment (b) 959 0.2 % 11,355 2.4 %
Litigation settlement (c) - - % 4,395 0.9 %
Amortization of acquisition intangibles (d) 1,873 0.4 % 1,851 0.4 %
Other (g) 400 0.1 % 1,454 0.3 %
Adjusted Operating Income / Adjusted Operating
Margin 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
In thousands April 3, 2021 March 28, 2020
Net income $ 43,432 8.1 % $ 9,742 2.1 %
Interest expense 6,330 1.2 % 7,455 1.6 %
Income tax provision (benefit) 11,686 2.2 % (282) (0.1) %
Depreciation and amortization 23,555 4.4 % 24,810 5.3 %
EBITDA 85,003 15.9 % 41,725 8.9 %
Stock compensation expense (a) 2,988 0.6 % 2,093 0.4 %
Asset impairment (b) 959 0.2 % 11,355 2.4 %
Litigation settlement (c) - - % 4,395 0.9 %
Other (g) 400 0.1 % 1,454 0.3 %
Adjusted EBITDA / Adjusted EBITDA Margin
Three Months Ended
In thousands, except per share amounts April 3, 2021 March 28, 2020
Diluted EPS $ 0.48 $ 0.12
Stock compensation expense (a) 0.03 0.03
Asset impairment (b) 0.01 0.14
Litigation settlement (c) - 0.05
Amortization of acquisition intangibles (d) 0.02 0.02
Amortization of debt discount and deferred financing costs (e) - -
Losses (gains) on change in fair value of derivatives (f) (0.02) -
Other (j) (0.02) 0.02
Tax benefit of stock option exercises (h) - (0.03)
Tax effect of total adjustments (i) (0.01) (0.07)
Adjusted Diluted EPS $ 0.48 $ 0.28
Weighted average diluted shares outstanding 96,025 82,242
Note: Some of the totals in the table above do not foot due to rounding differences
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(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 to 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 to U.S. GAAP. Amortization of debt discount
and deferred financing costs in aggregate total $0.3 million and $0.2 million
for the three months ended April 3, 2021 and March 28, 2020 , respectively.
(f)Reflects losses (gains) recognized in interest expense on change in fair
value of de-designated hedges of $(2.3) million for the three months ended April
3, 2021 .
(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 ended April 3, 2021 and March 28, 2020 ; costs of severance
and relocation of $0.2 million and $0.3 million for the three months ended April
3, 2021 and March 28, 2020 , respectively; excess payroll taxes related to stock
option exercises of $0.3 million for the three months ended March 28, 2020 ;
incremental costs directly related to adapting the Company's operations during
the COVID-19 pandemic of $0.6 million for the three months ended March 28, 2020 ;
and other expenses and adjustments totaling $0.1 million and $0.2 million for
the three months ended April 3, 2021 and March 28, 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 three months ended April 3, 2021 associated with
our interest rate swaps that matured in the first quarter of 2021.
Liquidity and Capital Resources
As described in Part II, Item 8. "Financial Statements and Supplementary Data",
Note 4. "Long-term Debt", of our 2020 Annual Report on Form 10-K, on May 5,
2020 , we entered into a credit agreement amendment with the lenders under our
credit facility in order to prevent the effects of the COVID-19 pandemic,
including the temporary closure of our stores, from creating uncertainty
relative to our ability to comply with certain financial covenants and allow the
Company to focus on prudent management of the business over the quarters ahead.
In addition, on May 12, 2020 , we completed the issuance of the 2025 Notes and we
used the net proceeds of this offering to repay the full amount outstanding
under our revolving credit facility and part of our outstanding borrowings on
our Term Loan. 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 modifications to our term loan where possible. The
Company is exploring whether to seek an amendment to its credit facility to,
among other things, reduce required interest payments. Such an amendment would
be dependent on a number of factors, including conditions in the capital
markets, and it is not certain whether or when such an amendment would be
implemented. 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 of April 3, 2021 , we had $453.8 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.
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As of April 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 of April 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 and 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 of April 3, 2021 , we had $317.4 million of term loan outstanding under our
credit agreement. We were in compliance with all covenants related to our
long-term debt as of April 3, 2021 . Our working capital requirements for
inventory will increase as we continue to open additional stores.
The following table summarizes cash flows provided by (used for) operating
activities, investing activities and financing activities for the periods
indicated:
Three Months Ended
In thousands April 3, 2021 March 28, 2020
Cash flows provided by (used for):
Operating activities $ 97,652 $ 86,060
Investing activities (16,374) (12,854)
Financing activities (1,089) 150,601
Net increase in cash, cash equivalents and restricted cash
Net Cash Provided by Operating Activities Cash flows provided by operating activities increased$11.6 million from$86.1 million during the three months endedMarch 28, 2020 to$97.7 million for the three months endedApril 3, 2021 . The increase in net cash provided by operating activities consisted of an increase in net income of$33.7 million , due primarily to growth in sales during the three months endedApril 3, 2021 , and a decrease of non-cash expense items of$3.5 million including a decrease in asset impairment charges of$10.4 million . Changes in net working capital and other assets and liabilities used$18.6 million in cash compared to the three months endedMarch 28, 2020 . Working capital was most significantly impacted by changes in accounts receivable, operating lease assets and liabilities, deferred and unearned revenue, and other liabilities. Increases in accounts receivable used$19.1 million in year-over-year cash, primarily reflective of year-over-year increases in credit card receivables due to increased sales during the three months endedApril 3, 2021 compared to the same period of 2020. Increases in operating lease assets and liabilities used$8.0 million in year-over year cash, primarily due to timing of rent payments. Decreases in other liabilities during the three months endedApril 3, 2021 used$21.5 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 and payments of litigation settlements. Offsetting these items were changes in deferred and unearned revenue, which contributed$42.0 million in year-over-year cash primarily due to a$34.4 million increase in year-over-year cash due to timing of unearned revenue.Net Cash Used for Investing Activities Net cash used for investing activities increased by$3.5 million , to$16.4 million , during the three months endedApril 3, 2021 from$12.9 million during the three months endedMarch 28, 2020 . The increase was primarily due to increased new store openings. We purchased$16.4 million in capital items in the three months endedApril 3, 2021 . 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$151.7 million , from$150.6 million provision of cash during the three months endedMarch 28, 2020 to$1.1 million use of cash during the three months endedApril 3, 2021 . The decrease in cash provided by financing activities was primarily related to the reduction in our revolving credit facility utilization during the three months endedApril 3, 2021 when compared to the three months endedMarch 28, 2020 . 32
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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.
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