National Vision Holdings, Inc. — Form 10-Q
Reporting period: Third quarter and nine months ended September 29, 2018. The filing identifies the period as 2018 Q3, notwithstanding the request metadata’s “2017 Q3.” Comparatives are the periods ended September 30, 2017. Amounts are in U.S. dollars.
Business context
National Vision is a value-focused U.S. optical retailer. It operated 1,067 stores across its owned and host brands and managed Walmart Vision Centers at quarter-end, alongside e-commerce and related businesses. The owned and host segment includes America’s Best, Eyeglass World and Vista Optical; the Legacy segment includes 227 Walmart Vision Centers.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $387.4 million | $346.1 million | $1,180.9 million | $1,053.5 million |
| Operating income (loss) | $(1.2) million | $16.6 million | $64.2 million | $70.1 million |
| Net income | $5.8 million | $1.5 million | $43.9 million | $17.1 million |
| Diluted EPS | $0.07 | $0.03 | $0.56 | $0.29 |
| Adjusted EBITDA | $38.8 million | $36.2 million | $146.7 million | $134.7 million |
| Adjusted EBITDA margin | 10.0% | 10.4% | 12.4% | 12.8% |
- Q3 revenue rose 11.9%; nine-month revenue rose 12.1%. Management attributed growth to comparable-store sales, new stores and AC Lens order volume. Comparable-store sales growth was 7.0% in Q3 and 7.4% year to date; adjusted comparable-store growth was 6.8% and 6.6%, respectively.
- Q3 operating results weakened despite higher sales: SG&A increased 21.9% to $184.4 million, or 47.6% of revenue versus 43.7% a year earlier. Drivers included stock-based compensation, long-term incentives, advertising and public-company costs. The quarter included $10.6 million of stock compensation and $4.6 million of long-term incentive expense, primarily related to the secondary offering.
- Q3 included a $2.1 million impairment charge for underperforming store assets. Nine-month operating income declined 8.3%, while net income increased, reflecting lower interest expense and an $18.0 million discrete tax benefit, primarily related to stock-option exercises. The Q3 tax benefit was $16.4 million, including a $13.9 million discrete benefit; it converted a $10.6 million pretax loss into net income.
- Costs applicable to revenue were 47.1% of revenue in Q3, slightly above 46.9% in the prior-year quarter; year to date they improved to 45.7% from 46.0%. Management cited optometrist cost and wage pressure, offset in part by managed-care exam sales and vendor rebates. Adjusted EBITDA and adjusted net income are non-GAAP measures and exclude specified expenses.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $116.0 million, compared with $96.3 million. Capital expenditures were $78.8 million, and investing cash outflow was $78.7 million. Cash, cash equivalents and restricted cash increased $44.9 million to $50.1 million; balance-sheet cash and equivalents were $48.9 million.
- At September 29, current assets were $211.1 million and current liabilities $197.2 million. Long-term debt, net of current maturities and debt discount, was $566.9 million; current maturities were $7.9 million. The filing separately reports $564.3 million of variable-rate term-loan debt and $20.5 million of capital-lease obligations at carrying value.
- Revolver availability was $94.5 million, net of $5.5 million in letters of credit. Management stated operating cash flow and revolver availability should cover working capital, liquidity needs, planned capital spending and debt payments for at least 12 months.
- All term-loan debt was variable-rate, but $465.0 million was covered by interest-rate swaps; $99.3 million remained exposed to floating rates. A 1 percentage-point rate increase was estimated to add about $1.0 million to annual interest expense.
Outlook, significant developments and risks
- Management planned approximately 75 store openings in fiscal 2018, including 58 opened through September 29. It expected depreciation to continue rising as new stores and infrastructure investments outpaced asset retirements. No broader revenue or earnings guidance is stated in the filing.
- On October 9, 2018, the company established $200 million of new Term A Loans, maturing October 9, 2023, to prepay part of existing first-lien term loans. The new loans have leverage- or rating-based pricing and quarterly amortization; covenants beginning with the quarter ending December 29, 2018 include a maximum total-debt-to-EBITDA ratio of 4.75x and minimum interest coverage of 3.00x. Moody’s had upgraded the borrower to Ba3 (stable), lowering margins on other term loans.
- A November 12, 2018 agreement extended Essilor’s exclusive supply arrangement for certain lenses through May 31, 2023, subject to its terms.
- FirstSight’s California optometry class-action case was revived in part on appeal and remanded; a second amended complaint was filed in October 2018. The company says it will defend the claims. The separate $7.0 million 1-800 Contacts antitrust settlement was recorded in 2017, without admission of liability.
- Key operating risks include recruiting and retaining optometrists, wage and product-cost inflation, reliance on a limited number of suppliers and managed-care payors, competition, store expansion execution, consumer spending, and reliance on the Walmart and host relationships. The Essilor arrangement is exclusive for specified lenses. The filing says current tariffs were not material but identifies possible China-related tariffs as a risk.
- Disclosure controls were deemed ineffective at quarter-end because previously identified material weaknesses in inventory-obsolescence controls and entity-level change assessment had not yet been remediated. Management was testing remediation measures; it said remediation would require controls to operate effectively for a sufficient period.
- Seasonality affects results: revenue, operating income and operating cash flow have historically been higher in Q1 and lower in Q4. Revenue timing also reflects customer tax refunds, insurance resets and delivery/acceptance of prescription eyewear.
Important facts for investors to verify
- Whether margin pressure, elevated SG&A and lower Adjusted EBITDA margin persist as store growth continues.
- How much reported earnings growth depends on discrete stock-option tax benefits and non-GAAP adjustments.
- Execution and economics of the planned store openings, and trends in comparable-store sales and optometrist availability and costs.
- Post-refinancing debt balances, effective interest rates, covenant headroom and cash available after capital spending.
- Progress in remediating the material weaknesses and any developments in the FirstSight litigation.