Business context and reporting period
National Vision Holdings, Inc. filed this unaudited Form 10-Q for the 13-week quarter and 26 weeks ended July 1, 2023; comparable periods ended July 2, 2022. The filing period is 2023 Q2, notwithstanding the request metadata. The company is a U.S. value optical retailer, operating 1,381 locations across its brands and segments at quarter-end.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $525.3m (+3.1%) | $509.6m | $1,087.7m (+4.9%) | $1,037.3m |
| Operating income | $7.7m | $18.4m | $41.0m | $55.7m |
| Net income | $5.6m | $9.7m | $23.9m | $39.9m |
| Diluted EPS | $0.07 | $0.12 | $0.30 | $0.47 |
| Adjusted EBITDA | $39.5m | $51.2m | $102.3m | $119.7m |
Q2 operating margin fell to 1.5% from 3.6%; net margin was 1.1% versus 1.9%. First-half operating margin was 3.8% versus 5.4%, and net margin was 2.2% versus 3.8%. Adjusted EBITDA margin was 7.5% in Q2 versus 10.0%, and 9.4% for the first half versus 11.5%. These adjusted measures are non-GAAP.
Q2 comparable store sales were down 0.1%, while adjusted comparable store sales grew 1.0%; first-half figures were growth of 1.5% and 0.9%, respectively. Revenue growth reflected new stores, higher average ticket and transactions, and managed-care participation. The company opened 32 stores in the first half and expects to open 65–70 in fiscal 2023.
Costs applicable to revenue increased to 47.2% of revenue in Q2 from 46.0%; SG&A rose to 46.4% from 44.7%. Management cited increased optometrist-related costs, payroll, incentive compensation and occupancy, among other factors. The Q2 effective tax rate was 4.7%, versus 32.4%, reflecting employee-related federal tax credits and other items; the first-half rate was 30.4%, versus 28.6%.
Cash, debt and liquidity
First-half operating cash flow was $112.2m, up from $88.0m; investing cash outflow was $54.8m, including $54.1m of property and equipment purchases; financing cash outflow was $32.1m. Operating cash flow benefited from working-capital and liability movements, including higher compensation-related accruals. Cash and cash equivalents were $254.6m at July 1, 2023, versus $229.4m at December 31, 2022.
Debt principal comprised $402.5m of 2.50% convertible notes due May 2025 and $150.0m of Term A Loans; no revolving loans were drawn. The company reported $293.6m of revolver availability, including $6.4m in letters of credit, and compliance with debt covenants. The credit agreement was refinanced in June, extending the facility to 2028, subject to a springing maturity provision tied to minimum liquidity and the 2025 notes. The balance sheet also included finance lease obligations.
Material changes, outlook and risks
- Walmart partnership termination: After quarter-end, Walmart notified the company it would not renew the management and services agreement, which is scheduled to end February 23, 2024. Related FirstSight arrangements also end then; AC Lens agreements with Walmart and Sam’s Club are scheduled to end June 30, 2024. The Walmart Vision Center business represented 7.3% of first-half revenue, and wholesale contact lens distribution represented 6.8%.
- The company expects approximately $60m of noncash goodwill impairment and $10m of noncash intangible-asset impairment in fiscal Q3 2023 related to the Walmart termination. Management warns that lost business, transition disruption, retention challenges and efforts to replace revenue could materially affect revenue, profitability and cash flows.
- Management cited inflation, raw-material and wage pressure, constrained optometrist availability and exam capacity, and ongoing investment in recruitment and remote medicine. It expects wage pressures in some markets to continue. The filing does not provide a full-year earnings or revenue outlook.
- Other notable matters include California wage-and-hour and representative actions and a securities class action; the company disputes the allegations and intends to defend itself. It recorded store-asset impairment of $0.9m in Q2, primarily related to lower-than-projected sales at certain stores.
Important facts for investors to verify
- Assess the revenue and cash-flow effects of Walmart-related agreement expirations, including the transition timeline and the company’s ability to retain staff and replace lost business.
- Track the expected $70m noncash impairment charges and any further impairment, restructuring or transition costs.
- Monitor margins, optometrist costs, managed-care mix, comparable sales and store-opening performance as revenue grew while GAAP and adjusted profitability declined.
- Review liquidity and debt terms, particularly the 2025 convertible-note maturity and the credit agreement’s springing maturity condition.
- Follow developments in the disclosed litigation and any changes to management’s store-opening or financial outlook.