National Vision Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparative periods ended July 1, 2017. The filing is for fiscal Q2 2018, notwithstanding the request metadata indicating 2017 Q2. National Vision is a value-focused U.S. optical retailer, operating 1,050 stores across its brands and Walmart-managed locations.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $385.5 million | $337.5 million | $793.5 million | $707.4 million |
| Operating income | $25.8 million | $13.8 million | $65.4 million | $53.5 million |
| Net income (loss) | $13.1 million | $(1.5) million | $38.1 million | $15.6 million |
| Diluted EPS | $0.17 | $(0.03) | $0.49 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $46.8 million | $39.6 million | $107.9 million | $98.5 million |
| Adjusted EBITDA margin (non-GAAP) | 12.1% | 11.7% | 13.6% | 13.9% |
Q2 revenue grew 14.2%; six-month revenue rose 12.2%. Q2 comparable-store sales growth was 10.4% (adjusted: 8.8%); six-month growth was 7.5% (adjusted: 6.5%). Store expansion and comparable sales were the main growth drivers. Q2 operating margin improved to 6.7% from 4.1%; six-month operating margin was 8.2% versus 7.6%. Cost of revenue as a share of sales improved modestly, while six-month SG&A rose to 42.2% of revenue from 41.6%, principally reflecting advertising expense.
- Q2 interest expense fell 35.5% to $9.4 million; six-month expense fell 28.2% to $18.7 million, mainly following debt repayments in late 2017. Effective tax rates were 20.1% for Q2 and 18.4% year to date, reflecting the lower federal statutory rate and tax benefits from stock-option exercises.
- Six-month operating cash flow was $80.1 million, compared with $67.9 million. Investing cash outflow was $48.6 million, primarily capital spending; financing cash outflow was $0.9 million. Cash, cash equivalents and restricted cash ended at $35.8 million. Capital expenditures were $48.7 million.
- At June 30, cash and cash equivalents were $34.6 million. Current assets were $199.4 million and current liabilities $189.3 million. Reported current and long-term debt totaled approximately $574.3 million, net of debt discount as presented. The company had $94.5 million of available revolver capacity, after letters of credit.
Changes, outlook and management commentary
- Revenue growth reflected comparable-store sales, new stores and AC Lens e-commerce activity. The company opened 40 stores in the first half and planned approximately 75 openings for fiscal 2018.
- Management said operating cash flow and revolving credit availability should support working capital, liquidity, planned capital expenditures and debt payments for at least the next 12 months. No specific revenue or earnings forecast was provided.
- Adoption of ASC 606 increased first-half net income by $1.0 million and reduced deferred revenue liabilities; the filing says the impact was primarily timing-related for eyecare club memberships. Prior-period results were not recast.
- Interest-rate swaps covered $465.0 million of variable-rate debt; $100.7 million remained exposed to variable rates. A 1 percentage-point rate increase was estimated to add about $1.0 million in annual interest expense.
- After quarter-end, certain existing shareholders and managers sold 16.6 million shares in a secondary offering. The company received no sale proceeds and expected $8.5–$10.5 million of non-cash stock compensation and $4.0–$5.0 million of cash incentive-plan expense in Q3. The offering ended its status as a controlled company under Nasdaq rules.
- Risks include competition, dependence on a limited supplier base (including exclusive sourcing of almost all spectacle lenses from one supplier), recruiting vision-care professionals, managed-care payor concentration, and reliance on Walmart-related arrangements, which represented 10.3% of first-half revenue. The Walmart agreements expire in August 2020, subject to automatic renewal unless a party opts out.
- A California class action involving FirstSight was revived in part when the Ninth Circuit reversed and vacated portions of the dismissal in July 2018; the company disputes the claims and intends to defend them. The separate 1-800 Contacts antitrust matter was settled for $7.0 million without admission of liability, with $3.5 million deposited in escrow.
- Management reported disclosure controls were not effective at quarter-end because previously identified material weaknesses had not yet been remediated. The weaknesses concerned controls over damaged or expired contact-lens inventory and entity-level assessment of business changes. Remediation was underway, but management had not completed sufficient testing to conclude the weaknesses were resolved.
Important facts for investors to verify
- Whether store growth and comparable sales can be sustained without further margin pressure, particularly from advertising, wages and optometrist costs.
- Debt terms, covenant headroom, interest-rate exposure and the adequacy of operating cash flow after capital spending and lease obligations.
- Progress and testing results for remediation of the disclosed internal-control material weaknesses.
- Developments in the FirstSight litigation and the final distribution or status of the 1-800 Contacts settlement escrow.
- Execution of the 2018 store-opening plan, Walmart agreement renewal prospects, and the financial effects of the post-quarter secondary-offering-related compensation expenses.