National Vision Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018. This differs from the request metadata identifying 2018 Q1.
Business context and reporting period
National Vision is a value-focused U.S. optical retailer selling eyeglasses, contact lenses, eye exams and related services through owned and host stores, a Walmart store-management arrangement, and e-commerce operations. It had 1,105 retail locations at quarter-end, including 26 openings during the quarter. The first quarter is typically seasonally stronger, partly because of tax refunds and health-plan reset periods.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $461.2 million | $408.0 million |
| Income from operations | $32.4 million | $38.8 million |
| Net income | $17.4 million | $24.5 million |
| Diluted EPS | $0.21 | $0.31 |
| Adjusted EBITDA (non-GAAP) | $63.3 million | $60.7 million |
| Operating cash flow | $83.0 million | $77.8 million |
Revenue grew 13.0%; comparable-store sales increased 6.2% (adjusted comparable-store sales growth was 6.7%). Management attributed revenue growth approximately 50% to comparable-store sales, 40% to new stores and 10% to AC Lens order volume. Product sales rose 13.1% and services and plans sales rose 12.8%.
Profitability weakened despite sales growth: operating margin fell to 7.0% from 9.5%, net margin to 3.8% from 6.0%, and Adjusted EBITDA margin to 13.7% from 14.9%. Costs applicable to revenue increased to 46.0% of revenue from 44.2%. The filing cites the faster growth of lower-margin AC Lens activity, higher optometrist costs and wage pressure. SG&A was 42.0% of revenue versus 41.8%. Net income also reflected a $2.1 million asset impairment and a less favorable income-tax comparison; Q1 2018 benefited from a $2.7 million stock-option-related tax benefit.
Operating cash flow increased by $5.2 million year over year. The filing attributes the change partly to higher noncash expenses and working-capital movements, including increases in accrued liabilities; higher receivables partly offset these sources. Investing cash outflow was $25.8 million, primarily capital spending, and financing cash outflow was $1.4 million. Cash and cash equivalents were $72.5 million at March 30, 2019.
Balance sheet, debt and liquidity
Long-term debt and finance lease obligations totaled approximately $586.9 million on the balance sheet, including current maturities; term-loan debt was $563.1 million before finance leases and related presentation adjustments. The company had $94.5 million available on its $100 million revolving facility, net of letters of credit. Management said operating cash flow and revolver availability should cover working capital, planned capital spending and obligations for at least the next 12 months.
Adoption of the lease accounting standard added operating right-of-use assets and liabilities. At quarter-end, operating lease obligations were $370.2 million and finance lease liabilities were $34.1 million. The filing states adoption did not significantly affect operating results or cash flows; prior-period balance-sheet comparisons do not reflect the new standard.
Outlook, commentary and risks
- Management planned approximately 75 store openings in fiscal 2019, including the 26 already opened through March 30. Approximately 80% of first-quarter capital spending supported growth investments. The filing provides no specific full-year revenue or earnings guidance.
- Management expects depreciation expense to outpace revenue growth over the next few years because of store, laboratory, distribution-center and IT investments.
- Key risks include recruiting and retaining vision-care professionals, dependence on a limited number of suppliers and managed-care payors, competition, consumer spending, store expansion execution, lease commitments, variable-rate debt and the ability to generate cash to service debt. The company said current tariffs did not materially affect results and estimated less than 16% of costs applicable to revenue could be subject to potential Chinese-import tariffs.
- Interest-rate swaps fixed rates on $430.0 million of variable-rate debt. The company estimated that a 1 percentage-point rate increase would add about $1.3 million to annual interest expense on the remaining rate-sensitive debt.
- Management disclosed an unremediated material weakness in internal control over financial reporting, involving entity-level controls for identifying and assessing business changes that could affect financial reporting controls. Disclosure controls were therefore deemed ineffective at quarter-end; management said the reported statements were fairly presented after additional analysis and procedures.
- Legal matters include a California optometry-related class action and a former employee’s California wage-and-hour class action; the company disputes the claims. A separate antitrust class action settlement was $7.0 million, recorded in 2017, without admission of liability.
Most important facts for investors to verify
- Whether comparable-store momentum and planned store openings can sustain growth while margins remain under pressure.
- How much cash flow depends on working-capital and accrued-liability timing, and whether that cash generation is repeatable.
- Progress in remediating the material weakness and the effectiveness of the related controls.
- Debt-service capacity, revolver availability, lease obligations and sensitivity to interest rates.
- Developments in the disclosed litigation, managed-care and supplier concentration risks, and the Walmart-related business relationship.