National Vision Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2019 (13 and 26 weeks, respectively); filed August 6, 2019. The filing is for 2019, notwithstanding the request metadata’s 2018 period. Financial statements are unaudited.
Business context
National Vision is a value-focused U.S. optical retailer. It operated 1,128 locations at quarter-end, across owned and host brands and its Walmart legacy arrangement, and also runs e-commerce and contact-lens distribution businesses. It opened 24 stores in Q2 and 50 in the first half.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net revenue | $429.5m (+11.4%) | $385.5m | $890.7m (+12.2%) | $793.5m |
| Income from operations | $21.7m | $25.0m | $54.1m | $63.8m |
| Net income | $10.3m | $12.5m | $27.7m | $36.9m |
| Diluted EPS | $0.13 | $0.16 | $0.34 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $49.8m | $46.5m | $113.1m | $107.2m |
| Adjusted EBITDA margin (non-GAAP) | 11.6% | 12.1% | 12.7% | 13.5% |
Q2 revenue growth was attributed approximately 45% to new stores, 30% to comparable-store growth, and 25% to AC Lens order volume. Comparable-store sales growth was 4.4% in Q2 versus 10.4% a year earlier; the company’s adjusted measure was 3.8% versus 8.8%. First-half comparable-store growth was 5.4% versus 7.5%; adjusted growth was 5.3% versus 6.5%.
Costs applicable to revenue rose to 47.2% of revenue in Q2 from 45.9%; first-half costs rose to 46.5% from 45.1%. Management cited the faster-growing, lower-product-margin AC Lens business and higher optometrist costs. SG&A declined as a share of revenue to 42.4% in Q2 from 43.0%, and to 42.2% for the first half from 42.4%. Operating margin fell to 5.1% in Q2 from 6.5%, and to 6.1% for the first half from 8.0%. Net margin was 2.4% and 3.1%, respectively, compared with 3.2% and 4.7%.
Cash flow and liquidity: First-half operating cash flow was $119.3m, up from $80.1m; investing cash outflow was $51.8m, primarily capital expenditures, versus $48.6m; financing cash outflow was $1.6m. Cash and cash equivalents were $82.8m at June 29, 2019, versus $17.1m at December 29, 2018. Management reported $94.5m available under the then-existing revolver, after $5.5m of letters of credit, and expected operating cash and revolver availability to cover anticipated needs for at least 12 months.
Debt and leases: At June 29, the company reported $561.8m of first-lien term loans outstanding and compliance with debt covenants. The balance sheet also included $378.1m of operating lease liabilities and $35.6m of finance lease liabilities. Adoption of the new lease standard added approximately $349.7m of operating lease liabilities at the start of fiscal 2019; comparative periods were not restated. First-half capital purchases were $52.1m.
Material changes and unusual items
- After quarter-end, on July 18, 2019, the company refinanced its existing credit agreement: new first-lien term loans totaled $420m and a new $300m revolver was established, of which $148m was drawn at closing. Pricing varies with leverage; term-loan amortization is 2.5% annually for the first three years and 5.0% thereafter. The new facility includes leverage and interest-coverage tests beginning with the quarter ending December 28, 2019.
- Asset impairment charges were $1.8m in Q2 and $3.9m for the first half, related to store assets; no comparable charges were recorded in the 2018 periods.
- Lease accounting adoption increased reported assets and liabilities. It did not significantly change results of operations or cash flows, according to the company.
- First-half cash generation benefited from working-capital movements, including inventory reductions and increases in other liabilities and accounts payable; receivables growth partly offset these benefits.
Outlook, risks and contingencies
Management planned to open approximately 75 stores in fiscal 2019, including the 50 opened through June 29. It expects depreciation expense to outpace revenue growth over the next few years because of store, laboratory, distribution, and technology investments. The filing gives no quantified revenue or earnings guidance.
Key risks include execution of store expansion; hiring and retaining vision-care professionals; reliance on a limited number of suppliers, including an exclusive source for almost all spectacle lenses; managed-care payor concentration; consumer spending and tax-refund seasonality; competition; variable-rate debt and potential LIBOR replacement costs; and operational, regulatory, cybersecurity, and lease-related exposures. Management said current tariffs did not materially affect results and estimated less than 16% of costs applicable to revenue was subject to potential Chinese-import tariffs.
Legal matters include a California eye-exam class action against FirstSight and a former-employee wage-and-hour class action, for which mediation was scheduled for Q1 2020. The company said it believes the claims lack merit and intends to defend them. It had previously settled the 1-800 Contacts matter for $7.0m, without admitting liability.
Controls: Disclosure controls and procedures were deemed ineffective at June 29 because a previously reported material weakness remained unremediated. The weakness concerned entity-level controls for identifying and assessing business-environment changes that could affect financial reporting. Management said the financial statements were fairly presented after additional analysis and post-closing procedures, and described remediation work in progress.
Important facts for investors to verify
- Whether revenue growth from new stores and AC Lens can translate into improved operating and adjusted EBITDA margins, given rising product and optometrist costs.
- Comparable-store sales trends and the contribution and economics of AC Lens distribution growth.
- Final terms, drawn balances, pricing, covenant headroom, and refinancing costs under the July 2019 credit agreement.
- Progress in remediating the material weakness and management’s subsequent assessment of control effectiveness.
- Developments in the disclosed litigation, supplier commitments, and lease obligations.
- The filing’s non-GAAP Adjusted EBITDA and Adjusted Net Income measures alongside GAAP results; management cautions these measures are not substitutes for GAAP performance or liquidity measures.