National Vision Holdings, Inc. — Form 10-Q Summary
Period: The supplied filing is for the quarter ended June 27, 2020, filed August 6, 2020—not 2019 Q2 as stated in the request metadata. Unless otherwise noted, amounts are USD millions.
Business context and reporting period
National Vision is a value retailer of eyewear and contact lenses, operating 1,185 locations across its Owned & Host and Legacy segments, plus e-commerce and other businesses. COVID-19-related closures began March 19, stores reopened gradually starting April 27, and the company reported completing reopening on June 8, with enhanced safety protocols. The quarter and first half each contain 13 and 26 weeks, respectively.
Financial performance
| Metric | Three months ended June 27, 2020 | Prior-year quarter | Six months ended June 27, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $260.0 | $429.5 | $729.7 | $890.7 |
| Operating income (loss) | $(41.6) | $21.7 | $(24.7) | $54.1 |
| Net income (loss) | $(43.8) | $10.3 | $(34.1) | $27.7 |
| Diluted EPS | $(0.55) | $0.13 | $(0.42) | $0.34 |
| Adjusted EBITDA | $(14.4) | $48.1 | $46.7 | $109.3 |
| Operating cash flow | Not presented for quarter alone | $71.4 | $119.3 |
Quarterly revenue fell 39.5% year over year; first-half revenue fell 18.1%. In the quarter, product sales were $209.7 million and services and plans sales were $50.3 million. GAAP operating margin was (16.0)% versus 5.1% a year earlier; costs applicable to revenue were 54.1% of revenue versus 47.2%, and SG&A was 52.5% versus 42.4%. First-half adjusted EBITDA margin was 6.4%, compared with 12.3%.
Quarterly comparable store sales declined 44.7% (adjusted decline: 36.5%); first-half comparable sales declined 23.0% (adjusted decline: 22.6%). Monthly adjusted comparable sales improved from a decline of 86.6% for the month ended April 25 to growth of 19.3% for the month ended June 27. Management attributed the deterioration primarily to store closures and noted that June’s recovery followed the reopening period.
Cash, liquidity and debt
At June 27, cash and cash equivalents were $256.3 million, compared with $39.3 million at December 28, 2019. Current assets were $453.1 million and current liabilities $311.9 million. First-half operating cash flow was $71.4 million, down from $119.3 million; investing cash outflow was $25.5 million, versus $51.8 million. Cash increased by $217.3 million, largely reflecting financing activity.
Debt included $317.4 million outstanding on the term loan and $402.5 million principal amount of 2.50% convertible notes due 2025; the revolving facility was repaid. The company reported $294.3 million of revolver availability, including $5.7 million of letters of credit. The notes generated $390.9 million of net proceeds, used in part to repay $294.3 million on the revolver and $75.0 million on the term loan. The notes are convertible, initially at approximately $31.17 per share, and could result in share issuance depending on conversion and settlement choices.
A May credit amendment suspended specified leverage and interest-coverage maintenance covenants until testing at the end of Q2 2021, replacing them with interim EBITDA and minimum-liquidity requirements and restricting certain transactions. The company said it was compliant with debt covenants at quarter end and believed cash, operating cash flows and revolver availability would meet needs for at least 12 months. These statements depend on assumptions about pandemic impacts and operating performance.
Material changes, outlook and risks
- COVID-19 sharply reduced sales while fixed occupancy, payroll and optometrist costs continued during closures. The company recorded $13.8 million of first-half impairment charges, including a $1.1 million software write-off, and $4.4 million of litigation settlement expense.
- The company recognized $10.8 million of CARES Act employee retention credits as reductions to product costs, service costs and SG&A. The credits supported reported results; the company said it believed it would meet the applicable conditions and receive the credits.
- Interest expense increased to $15.5 million for the quarter and $23.0 million for the first half. Derivative ineffectiveness and fair-value losses, as well as convertible-note discount and issuance-cost amortization, were notable contributors.
- Management expected to open approximately 50 to 55 stores in fiscal 2020, while saying future openings would depend on health, safety and economic conditions. It gave no clear quantitative revenue or earnings forecast in the supplied filing text.
- Risks include further pandemic-related closures or demand weakness, labor and optometrist availability, supply-chain disruption, store lease costs, additional impairments, variable-rate debt and derivative exposure, customer and payor concentration, and restrictions under financing agreements. Management noted goodwill impairment testing was not triggered during the period, but future adverse developments could lead to impairment.
- Legal matters include a proposed California optometry-practices class action and wage-and-hour matters. A $3.5 million employee settlement was preliminarily approved, with final approval scheduled for September 2020; another settlement had a maximum amount of $895,000 and was subject to approval. The company stated it intended to defend the optometry case.
- After quarter end, the Walmart management and services agreement was extended three years to February 23, 2024, with automatic renewal provisions and additional compliance, inspection and audit terms.
Most important facts for investors to verify
- Whether reopened-store sales recovery continued after the June 2020 rebound, and how pandemic conditions affected later results and store openings.
- Cash conversion and liquidity quality, including the timing of CARES Act credits, deferred payroll taxes, rent concessions, working-capital movements and available revolver capacity.
- Debt service capacity and covenant compliance under the amended credit agreement, including the 2021 covenant tests and any mandatory repayment requirements.
- Potential dilution, cash settlement obligations and effective financing costs associated with the $402.5 million convertible notes.
- Further impairment exposure, derivative losses and interest-rate sensitivity, alongside the unresolved legal matters and settlement approvals.