NATIONAL VISION HOLDINGS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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 1, 2022 (the "2021 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 2021 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.
Insight
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 1,292 retail stores across five brands and 18 consumer websites as ofApril 2, 2022 .
COVID-19[feminine]
The COVID-19 pandemic continued to cause business impacts in the first quarter of 2022 primarily driven by the emergence of the Omicron variant in late 2021, and its further spread in early 2022, which caused a surge in COVID-19 cases globally, and resulted in increased associate and vision care professional absences, adjusted work schedules and reduced consumer traffic for our operations. The ultimate impact of COVID-19 on our operations and financial performance in future periods remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, supplier impacts and related government actions to prevent and manage disease spread, including the implementation of any federal, state, local or foreign vaccine mandates, all of which are uncertain and cannot be predicted. In addition, we could experience disruptions of product deliveries as a result of supply chain issues caused by the COVID-19 pandemic, including as a result of the temporary shutdowns in countries which support our supply chain. Prolonged periods of shutdown in these countries or a deterioration of conditions in other countries that are part of our supply chain as well as increasing strains on international and domestic supply chain infrastructure could result in product and equipment availability delays, as well as increased costs to obtain and ship these items to meet customer demand. We have made, and may continue to make, inventory forward buys to help manage potential supply chain disruptions. We continue to monitor and evaluate additional measures that we may elect to take as a response to the COVID-19 pandemic and the several macroeconomic effects resulting from the pandemic. There can be no assurance whether or when any such measures will be adopted. For a discussion of measures we have previously taken in response to the pandemic, and the impact of the COVID-19 pandemic on our operations and performance, please see Part I. Item 1A. "Risk Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K.
Overall economic situation
Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, the conflict inUkraine , and steps taken by governments and central banks in response to the pandemic as well as other stimulus and spending programs, have led to higher inflation than previously experienced or expected. Consumer preferences and demand, as well as spending habits, including for our goods and services, are impacted by the prevailing macroeconomic conditions, inflation, salaries and wages, consumer confidence and consumer perception.
Business impact
The COVID-19 pandemic, increasing macroeconomic uncertainty of theU.S. economy and emerging constraints to exam capacity adversely affected our sales in the first quarter of 2022 and may continue to impact our performance going forward. Early in the first quarter of 2022, the Omicron variant led to reduced customer demand and constrained the exam capacity of vision care professionals due to labor shortages in an already competitive market 20 -------------------------------------------------------------------------------- Table of Contents for vision care professionals and preferences for adjusted work schedules. Exam capacity, which encompasses the overall availability of vision care professionals, is impacted by several factors including retention, hiring, remote medicine coverage and work schedules. During the quarter, adverse macroeconomic conditions such as inflation also impacted consumer demand and created a temporary challenging environment for our business. We remain focused on our strategy to provide our customers and patients reliable and quality low cost eye care and eyewear, and are taking certain actions to enhance our exam capacity through recruitment, retention and remote medicine initiatives. The disclosures contained in this Form 10-Q are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. For further information, please see "Forward-Looking Statements."
Brand and segment information
Our activities consist of two reportable segments:
•Owned & Host - As ofApril 2, 2022 , our owned brands consisted of 852America's Best Contacts and Eyeglasses retail stores and 127Eyeglass 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 2, 2022 . We have strong, long-standing relationships with our Host partners and have maintained each partnership for over 22 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 2, 2022 . This strategic relationship with Walmart is in its 32nd 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 2, 2022 , sales associated with this arrangement represented 8.0% 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 14 dedicated websites managed byAC Lens . Our e-commerce business consists of five 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 6.7% 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
A variety of 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, vision care professional availability, related healthcare authority guidelines and efficacy of vaccination initiatives, including the impact of, and associated risks regarding, federal, state and local vaccination and testing programs. We continue to monitor potential impacts on our stores and exam capacity, lab network, and potential disruptions of product and equipment deliveries. To date, we have been able to meet customer demand with operations at our laboratories and our supply chain partners. However, prolonged shutdowns in countries which support our supply chain or a deterioration of conditions in such countries and others or increasing strains on international and domestic supply chain infrastructure could result in product and equipment availability delays in the future. We could experience further material impacts as a result of COVID-19, including, but not limited to, charges from additional asset impairments and deferred tax valuation allowances. We will continue to evaluate additional measures that we may elect to take as a response to the pandemic, including, where appropriate, future action to reduce store hours and patient appointments, temporarily close stores or make additional forward buys. There can be no assurance whether or when any such measures will be adopted. For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to Part II. Item 1A. "Risk Factors" in this Form 10-Q and Part I. Item 1A. "Risk Factors," included in our 2021 Annual Report on Form 10-K. 22 -------------------------------------------------------------------------------- Table of Contents Overall economic trends, consumer preferences and demand Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer confidence and spending, such as general economic conditions, consumer disposable income, energy and fuel prices, recession and fears of recession, unemployment, minimum wages, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, tax rates and policies, inflation, consumer confidence in future economic conditions and political conditions, war and fears of war (including the recent Russian invasion ofUkraine ), inclement weather, natural disasters, terrorism, outbreak of viruses or widespread illness and consumer perceptions of personal well-being and security. Over the past few years, global markets and economic conditions have been challenging, particularly in light of the COVID-19 pandemic. During periods of economic downturn and uncertainty, our customers especially benefit from our low prices. The long-term effects of the COVID-19 pandemic and other macroeconomic and geopolitical events on consumer preferences and demand remain uncertain. We believe, but cannot be certain, our business model of providing exceptional value and convenience to customers, enabled by our low-cost operating platform will mitigate these impacts to a certain extent; however uncertainties and risk exposures may be exacerbated by the immediate and ongoing impacts of these factors.
Recruitment of eye care professionals, coverage and expanded offers
Our ability to continue to attract and retain qualified vision care professionals affect exam capacity and is critical to our operations. Our operations, like those of many of our competitors, depend on our ability to offer both eyewear and eye exams. We compete with other optical retail companies, health systems and group practices for vision care professionals. We, as well as the professional corporations or similar entities that employ optometrists in certain of our retail locations, could face difficulties attracting and retaining qualified professionals if we or such corporations fail to offer competitive compensation and benefits. Increased compensation for vision care professionals could raise our costs and negatively affect our margins. We believe the impacts of the COVID-19 pandemic on vision care professional availability, including a competitive recruiting market and preferences for adjusted work schedules, and the demand for optometrists exceeding supply in certain areas in the first quarter of 2022 have caused constraints in exam capacity. Due to these factors the costs to employ or retain optometrists may increase, potentially materially, from current levels. We are investing in recruitment and retention initiatives along with continuing our implementation of remote medicine technologies.
Pricing strategy
We are committed to providing our products to our customers at low prices. We generally employ a simple low price/high value strategy that consistently delivers savings to our customers without the need for extensive promotions. Inflationary pressures, including wage investments, consumer confidence and preferences and increased raw material costs, could impact our profitability and lead us to attempt to offset such increases through various pricing actions. EffectiveMay 9, 2022 we changed the price of our America's Best signature offer to "two pairs of eyeglasses for$79.95 , including a free eye exam" from its original$69.95 price. EffectiveMarch 14, 2022 , we changed the price of ourEyeglass World opening offer to "two pairs of eyeglasses for$89 " from its original price of$78 . We believe that this change will enable us to continue to offer the best possible value and service to our customers at prices that allow us to maintain our brands' strong value propositions in the marketplace.
Same store sales growth
Comparable store sales growth is a key driver of our business and our value proposition will continue to drive comparable store sales growth as we attract new customers and increase loyalty with existing customers. During the three months endedApril 2, 2022 comparable store sales growth was negatively impacted due to the Omicron COVID-19 variant, constraints on exam capacity and other overall economic trends impacting consumer preferences and demand. We believe our business model of providing exceptional value and convenience to customers, enabled by our low-cost operating platform will mitigate these impacts to a certain extent. Our strategies to mitigate these effects include, but are not limited to, investing in recruitment and retention initiatives along with continuing our implementation of remote medicine technologies and optimizing our marketing investments. The impact of the COVID-19 pandemic, constraints on exam capacity and macroeconomic factors on our comparable store sales growth remains uncertain, and effects and relevant risk exposures may be exacerbated in the future.
Intermediate 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. Consumer behavior driven by the COVID-19 pandemic, impacts on overall economic trends, consumer preferences and demand has resulted in a departure from seasonal norms we 23 -------------------------------------------------------------------------------- Table of Contents have experienced in recent years and we expect it will continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time. Other factors
We remain committed to our long-term view 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 and other macroeconomic factors. We believe the following factors may continue to influence our results in the short and long term:
•Opening of new stores;
•Managed care and insurance;
•Inflation;
•Investment in infrastructure;
•Our ability to source and distribute products efficiently; and
• Competition and industry consolidation
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. Comparable store sales growth and new store openings are key drivers of net revenue and are discussed below. Also, the timing of unearned revenue can affect revenue recognized in a particular period.
Costs applicable to revenue
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 expenses
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. We expect to open at least 80 stores in the current year. We will continue to monitor and determine our plans for future new store openings based on health, safety and economic conditions. 24 -------------------------------------------------------------------------------- Table of Contents 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. 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 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. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table summarizes the major components of our results of operations for the periods indicated, in dollars and as a percentage of our net revenues.
Three Months Ended In thousands, except earnings per share, percentage and store data April 2, 2022 April 3, 2021 Revenue: Net product sales $ 433,253 $ 443,067 Net sales of services and plans 94,458 91,113 Total net revenue 527,711 534,180 Costs applicable to revenue (exclusive of depreciation and amortization): Products 164,219 159,691 Services and plans 71,818 64,999 Total costs applicable to revenue 236,037 224,690 Operating expenses: Selling, general and administrative expenses 228,554 223,593 Depreciation and amortization 25,151 23,555 Asset impairment 406 959 Other expense (income), net 231 (65) Total operating expenses 254,342 248,042 Income from operations 37,332 61,448 Interest expense (income), net (4,144) 6,330 Earnings before income taxes 41,476 55,118 Income tax provision 11,329 11,686 Net income $ 30,147 $ 43,432 Operating data: Number of stores open at end of period 1,292 1,230 New stores opened during the period 17 25 Adjusted Operating Income $ 45,304 $ 67,668 Diluted EPS $ 0.34 $ 0.48 Adjusted Diluted EPS $ 0.33 $ 0.48 Adjusted EBITDA $ 68,583 $ 89,350 Percentage of net revenue: Total costs applicable to revenue 44.7 % 42.1 % Selling, general and administrative 43.3 % 41.9 % Total operating expenses 48.2 % 46.4 % Income from operations 7.1 % 11.5 % Net income 5.7 % 8.1 % Adjusted Operating Income 8.6 % 12.7 % Adjusted EBITDA 13.0 % 16.7 % 26
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Contents
Three months completed
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 2, 2022 compared to the three months endedApril 3, 2021 . Comparable store sales growth(1) Stores open at end of period
Net sales(2)
Three Months Three Months In thousands, except Ended Ended April 3, Three Months Ended Three Months Ended percentage and store data April 2, 2022 April 3, 2021 April 2, 2022 2021 April 2, 2022 April 3, 2021 Owned & Host segment America's Best (7.3) % 35.3 % 852 796$ 370,038 70.1 %$ 382,356 71.6 % Eyeglass World (6.3) % 48.3 % 127 121 58,774 11.1 % 60,775 11.4 % Military (4.1) % 19.4 % 54 54 5,985 1.1 % 6,239 1.2 % Fred Meyer 1.4 % 17.0 % 29 29 3,122 0.7 % 3,077 0.5 % Owned & Host segment total 1,062 1,000$ 437,919 83.0 %$ 452,447 84.7 % Legacy segment (4.3) % 29.8 % 230 230 42,158 8.0 % 43,582 8.2 % Corporate/Other - - - - 61,697 11.7 % 61,218 11.5 % Reconciliations - - - - (14,063) (2.7) % (23,067) (4.4) % Total (4.9) % 18.2 % 1,292 1,230$ 527,711 100.0 %$ 534,180 100.0 %Adjusted Comparable Store Sales Growth(3) (6.8) % 35.8 % (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 1.8% and an increase of 13.8% from total comparable store sales growth based on consolidated net revenue for the three months endedApril 2, 2022 andApril 3, 2021 , respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the Legacy partner's customers (rather than the revenues recognized consistent with the management & services agreement with the Legacy partner), resulting in a decrease of 0.1% and an increase of 3.8% from total comparable store sales growth based on consolidated net revenue for the three months endedApril 2, 2022 andApril 3, 2021 , respectively. Total net revenue of$527.7 million for the three months endedApril 2, 2022 decreased$6.5 million , or 1.2%, from$534.2 million for the three months endedApril 3, 2021 . The decrease was driven primarily by reduced comparable store sales growth, partially offset by growth from new store sales and recognition of deferred revenue. In the three months endedApril 2, 2022 , we opened 15 new America's Best stores and twoEyeglass World stores and closed three America's Best stores; Overall, store count grew 5.0% fromApril 3, 2021 toApril 2, 2022 (56, and six net new America's Best andEyeglass World stores were added, respectively). Comparable store sales growth and Adjusted Comparable Store Sales Growth for the three months endedApril 2, 2022 were (4.9)% and (6.8)%, respectively, primarily due to a decrease in customer transactions and, to a lesser extent, lower average ticket. Comparable store sales growth andAdjusted Comparable Store Sales Growth were negative during the three months endedApril 2, 2022 due to the Omicron COVID-19 variant impacting customer transactions, emerging constraints affecting exam capacity and other overall economic trends impacting customer demand. Net product sales comprised 82.1% and 82.9% of total net revenue for the three months endedApril 2, 2022 andApril 3, 2021 , respectively. Net product sales decreased$9.8 million , or 2.2%, in the three months endedApril 2, 2022 compared to the three months endedApril 3, 2021 , primarily due to a$12.8 million , or 4.1% decrease in eyeglass sales which was partially offset by a$2.2 million , or 2.3% increase in contact lens sales. Net sales of services and plans increased$3.3 million , or 3.7%, driven by a$3.7 million , or 22.7% increase in product protection plan revenue and a$1.5 million , or 2.9% increase in eye exam revenue that were partially offset by lower management fees from our Legacy partner. 27 -------------------------------------------------------------------------------- Table of Contents Owned & Host segment net revenue. Net revenue decreased$14.5 million , or 3.2%, driven primarily by negative comparable store sales growth partially offset by new store openings.
Legacy segment net revenue. Net income decreased
Corporate/Other segment net revenue. Net sales increased
Net revenue reconciliations. The impact of reconciliations positively impacted net revenue by$9.0 million in the three months endedApril 2, 2022 compared to the three months endedApril 3, 2021 . Net revenue was positively impacted by$1.0 million due to the timing of unearned revenue. Net revenue was positively impacted by$8.0 million due to lower sales of product protection plan and club memberships in the three months endedApril 2, 2022 .
Costs applicable to revenue
Costs applicable to revenue of$236.0 million for the three months endedApril 2, 2022 increased$11.3 million , or 5.1%, from$224.7 million for the three months endedApril 3, 2021 . As a percentage of net revenue, costs applicable to revenue increased from 42.1% for the three months endedApril 3, 2021 to 44.7% for the three months endedApril 2, 2022 . This increase as a percentage of net revenue was primarily driven by higher optometrist-related costs, lower eyeglass margin and reduced eyeglass mix. Costs of products as a percentage of net product sales increased from 36.0% for the three months endedApril 3, 2021 to 37.9% for the three months endedApril 2, 2022 , primarily driven by lower eyeglass margin and reduced eyeglass mix. Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 26.3% for the three months endedApril 3, 2021 to 28.2% for the three months endedApril 2, 2022 driven by lower eyeglass margin and reduced eyeglass mix. Legacy segment costs of products. Costs of products as a percentage of net product sales decreased from 46.9% for the three months endedApril 3, 2021 to 46.7% for the three months endedApril 2, 2022 . The decrease was primarily driven by 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 increased from 71.3% for the three months endedApril 3, 2021 to 76.0% for the three months endedApril 2, 2022 . The increase was primarily driven by higher growth in optometrist-related costs which were partially offset by higher eye exam revenue. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 70.8% for the three months endedApril 3, 2021 to 82.0% for the three months endedApril 2, 2022 . The increase was primarily driven by higher optometrist-related costs which were partially offset by higher eye exam revenue. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 38.3% for the three months endedApril 3, 2021 to 42.8% for the three months endedApril 2, 2022 . The increase was primarily driven by higher growth in optometrist-related costs.
Selling, general and administrative expenses
SG&A of$228.6 million for the three months endedApril 2, 2022 increased$5.0 million , or 2.2%, from the three months endedApril 3, 2021 . As a percentage of net revenue, SG&A increased from 41.9% for the three months endedApril 3, 2021 to 43.3% for the three months endedApril 2, 2022 . The increase in SG&A as a percentage of net revenue was primarily driven by higher advertising, store payroll and occupancy expenses, partially offset by lower performance-based incentive compensation. SG&A for the three months endedApril 2, 2022 andApril 3, 2021 includes$0.2 million and$0.4 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 increased from 33.1% for the three months endedApril 3, 2021 to 36.0% for the three months endedApril 2, 2022 , driven primarily by higher advertising, occupancy and store payroll expenses. 28 -------------------------------------------------------------------------------- Table of Contents Legacy segment SG&A. SG&A as a percentage of net revenue increased from 32.8% for the three months endedApril 3, 2021 to 35.8% for the three months endedApril 2, 2022 driven primarily by higher payroll expenses.
Depreciation and amortization
Depreciation of
Asset impairment
We recognized$0.4 million for impairment of tangible long-lived assets and ROU assets associated with our retail stores during the three months endedApril 2, 2022 compared to$1.0 million recognized during the three months endedApril 3, 2021 . The store asset impairment charge is primarily related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores, and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. Asset impairment expenses were recognized in Corporate/Other.
Interest expense (income), net
Interest expense (income), net was$(4.1) million for the three months endedApril 2, 2022 , compared to$6.3 million for the three months endedApril 3, 2021 . The change was primarily driven by gains on our interest rate collar as a result of increasing interest rates.
Provision for income tax
Our effective tax rates for the three months endedApril 2, 2022 andApril 3, 2021 were 27.3% and 21.2%, respectively, reflecting our statutory federal and state rate of 25.5% and effects of other permanent items as well as a stranded tax effect of$2.1 million associated with our matured interest rate swaps during the three months endedApril 3, 2021 .
Non-GAAP Financial Measures
Adjusted operating profit, adjusted operating margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted EPS
We define Adjusted Operating Income as net income, plus interest expense (income), net and income tax provision (benefit), further adjusted to exclude stock compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, and certain 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), net, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and certain 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, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our term loan borrowings, amortization of the conversion feature and deferred financing costs related to our 2025 Notes when not required underU.S. GAAP to be added back for diluted earnings per share, losses (gains) on change in fair value of derivatives, certain other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments. We adjust for amortization of costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share according toU.S. GAAP. EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below. 29 -------------------------------------------------------------------------------- Table of Contents EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance withU.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplementU.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplementsU.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business thanU.S. GAAP results alone. EBITDA and the Company Non-GAAP Measures are not recognized terms underU.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance withU.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management's discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In evaluating EBITDA and the Company Non-GAAP Measures, we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on ourU.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures. The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported underU.S. GAAP. Some of these limitations are: •they do not reflect costs or cash outlays for capital expenditures or contractual commitments; •they do not reflect changes in, or cash requirements for, our working capital needs; •EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense (income), 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 provision 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, the Company’s EBITDA and non-GAAP measures should not be considered 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 and net income; and adjusted diluted EPS for the periods presented:
Three Months Ended In thousands April 2, 2022 April 3, 2021 Net income$ 30,147 5.7 %$ 43,432 8.1 % Interest expense (income) (4,144) (0.8) % 6,330 1.2 % Income tax provision 11,329 2.1 % 11,686 2.2 % Stock compensation expense (a) 3,734 0.7 % 2,988 0.6 % Asset impairment (b) 406 0.1 % 959 0.2 % Amortization of acquisition intangibles (c) 1,872 0.4 % 1,873 0.4 % Other (f) 1,960 0.4 % 400 0.1 % Adjusted Operating Income / Adjusted Operating Margin$ 45,304 8.6 %$ 67,668 12.7 %
Note: Percentages reflect line item as a percentage of net revenue, after rounding
Some of the percentage totals in the table above do not add up due to rounding differences
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Table of Contents Three Months Ended In thousands April 2, 2022 April 3, 2021 Net income$ 30,147 5.7 %$ 43,432 8.1 % Interest expense (income) (4,144) (0.8) % 6,330 1.2 % Income tax provision 11,329 2.1 % 11,686 2.2 % Depreciation and amortization 25,151 4.8 % 23,555 4.4 % EBITDA 62,483 11.8 % 85,003 15.9 % Stock compensation expense (a) 3,734 0.7 % 2,988 0.6 % Asset impairment (b) 406 0.1 % 959 0.2 % Other (f) 1,960 0.4 % 400 0.1 % Adjusted EBITDA / Adjusted EBITDA Margin$ 68,583 13.0 %$ 89,350 16.7 % 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, except per share amounts April 2, 2022 April 3, 2021 Diluted EPS $ 0.34 $ 0.48 Stock compensation expense (a) 0.04 0.03 Asset impairment (b) 0.00 0.01 Amortization of acquisition intangibles (c) 0.02 0.02 Amortization of debt discount and deferred financing costs (d) 0.00 0.00 Losses (gains) on change in fair value of derivatives (e) (0.10) (0.02) Other (i) 0.02 (0.02) Tax benefit of stock option exercises (g) 0.00 0.00 Tax effect of total adjustments (h) 0.00 (0.01) Adjusted Diluted EPS
$0.33 $0.48
Weighted average diluted shares outstanding 94,904 96,025
Note: Some of the totals in the table above do not add up 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)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. (d)Amortization of deferred financing costs and other non-cash charges related to our long-term debt. We adjust for amortization of deferred financing costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share underU.S. GAAP. (e)Reflects losses (gains) recognized in interest expense (income), net on change in fair value of de-designated hedges. (f)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), which are primarily related to excess payroll taxes on stock option exercises, executive severance and relocation and other expenses and adjustments, including losses on other investments of$0.3 million for the three months endedApril 2, 2022 . (g)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. (h)Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates. (i)Reflects other expenses in (f) above, including the impact of stranded tax effect of$2.1 million for the three months endedApril 3, 2021 associated with our interest rate swaps that matured in 2021. 31
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Contents
Cash 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 the next 12 months and thereafter for the foreseeable future. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as further modifications to our term loan where possible. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside our control. We primarily fund our working capital needs using cash provided by operations. Our working capital requirements for inventory will increase as we continue to open additional stores.
From
From
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 2, 2022 April 3, 2021 Cash flows provided by (used for): Operating activities$ 47,117 $ 97,652 Investing activities (28,077) (16,374) Financing activities (9,941) (1,089)
Net increase in cash, cash equivalents and restricted cash
Net cash from operating activities
Cash flows provided by operating activities decreased$50.5 million from$97.7 million during the three months endedApril 3, 2021 to$47.1 million for the three months endedApril 2, 2022 as a result of$13.3 million lower net income as compared to the three months endedApril 3, 2021 and a decrease of non-cash expense adjustments of$7.7 million and changes in net working capital and other assets and liabilities, which used$29.6 million in cash compared to the three months endedApril 3, 2021 . Working capital was most significantly impacted by changes in other liabilities, accounts payable, deferred and unearned revenue, accounts receivable, inventories, and other assets. Decreases in other liabilities during the three months endedApril 2, 2022 used$13.5 million in year-over-year cash primarily due to timing of compensation related accruals and payroll taxes. Decreases in accounts payable during the three months endedApril 2, 2022 used$9.9 million in year-over-year cash, primarily due to timing of payments. Decreases in deferred and unearned revenue used$9.2 million in year-over-year cash, primarily as a result of lower sales of product protection plans and club memberships in the current period. Increases in accounts receivable used$3.9 million in year-over-year cash primarily due to increases in managed care receivables. Offsetting these items were decreases in inventories which contributed$3.9 million in year-over-year cash, primarily due to timing of purchases. Decreases in other assets during the three months endedApril 2, 2022 contributed$2.1 million in year-over-year cash consisting primarily of prepaid tax-related items. 32 -------------------------------------------------------------------------------- Table of ContentsNet Cash Used for Investing Activities Net cash used for investing activities increased by$11.7 million , to$28.1 million , during the three months endedApril 2, 2022 from$16.4 million during the three months endedApril 3, 2021 . The increase was primarily due to increased capital investments in doctor and remote medicine equipment. 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 used for financing activities
Net cash used for financing activities was$9.9 million during the three months endedApril 2, 2022 as compared to the use of cash of$1.1 million during the three months endedApril 3, 2021 . The increase in cash used for financing activities was primarily due to increases in purchases of treasury stock of$9.2 million during the three months endedApril 3, 2021 .
In the three months ended
Material cash needs
There were no material changes outside the ordinary course of business in our material cash requirements and commercial commitments from those reported in the 2021 Annual Report on Form 10-K. 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 2021 Annual Report on form 10-K. We are not a party to any other material off-balance sheet arrangements.
Significant 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 2021 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 2021 Annual Report on Form 10-K.
Adoption of new accounting standards
There have been no material changes due to recently issued or adopted accounting standards since those disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 .
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