National Vision Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 2, 2021 (fiscal 2021 Q3), not 2020 Q3. Comparisons are with the quarter ended September 26, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
National Vision is a value-focused U.S. optical retailer, operating 1,262 locations across five brands and 19 consumer websites at quarter-end. Its reportable segments are Owned & Host and Legacy; the latter includes management and services arrangements for Walmart Vision Centers. The quarter and year-to-date periods comprise 13 and 39 weeks, respectively.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $518.0 | $485.4 | $1,601.7 | $1,215.1 |
| Income from operations | $50.7 | $54.8 | $167.0 | $30.1 |
| Net income | $41.0 | $35.3 | $122.0 | $1.2 |
| Diluted EPS | $0.45 | $0.42 | $1.34 | $0.01 |
| Adjusted EBITDA (non-GAAP) | $77.9 | $88.1 | $255.0 | $134.8 |
- Q3 operating margin was 9.8% versus 11.3%; net margin was 7.9% versus 7.3%. Adjusted EBITDA margin declined to 15.0% from 18.2%.
- For the first nine months, operating margin was 10.4% versus 2.5%; net margin was 7.6% versus 0.1%. Adjusted EBITDA margin rose to 15.9% from 11.1%. The prior-year comparison was heavily affected by temporary store closures.
- Q3 revenue increased 6.7%, while income from operations declined 7.5%. Management attributed revenue growth approximately half to new stores, 40% to deferred/unearned revenue timing, and 10% to comparable-store sales and wholesale fulfillment. Q3 comparable-store sales growth was 3.4%; adjusted comparable-store growth was 0.2%.
- Q3 costs applicable to revenue were 43.7% of revenue, up from 43.4%; SG&A was 42.1%, up from 39.3%. Higher optometrist-related and freight costs, advertising, payroll and occupancy pressures weighed on quarterly margins.
- Nine-month operating cash flow was $233.8, capital expenditures were $58.9, and cash and cash equivalents were $439.1 at October 2. Operating cash flow increased from $203.7 in the prior-year period.
- At quarter-end, funded debt principal comprised $402.5 of 2.50% convertible notes due 2025 and $200.0 of term loans due 2024. Cash was $439.1, and revolving-credit availability was $293.6, including outstanding letters of credit. The company reported compliance with debt covenants.
Material changes and unusual items
- Revenue rose 31.8% year to date, but management cautioned that the comparison reflects prior-year COVID-19 store closures, government stimulus, pent-up demand and new-store growth; it should not be treated as a recurring growth rate.
- The company prepaid $117.4 of term-loan principal during the first nine months. Subsequent to quarter-end, it prepaid another $50.0 on November 9, leaving $150.0 of term-loan principal.
- Early adoption of ASU 2020-06 reduced reported interest expense and increased reported net income by $3.2 for Q3 and $9.2 for the nine-month period versus accounting without adoption. Diluted EPS was unchanged by adoption.
- A third party’s acquisition of an equity-method investee generated a $2.4 gain and cash proceeds; the company may receive additional earnout payments if performance conditions are met.
- Q3 had no store-asset impairment charge, compared with $7.2 in the prior-year quarter. Nine-month impairment was $1.5 versus $20.9.
- On November 8, the board authorized up to $50 of share repurchases through December 30, 2023. The filing does not establish that any repurchases had occurred under this new authorization.
Outlook, risks and contingencies
- Management expected to open approximately 75 stores in fiscal 2021, subject to health, safety and economic conditions. The filing provides no specific full-year revenue or earnings guidance.
- Management believed cash, operating cash generation and revolver availability would fund working capital, liquidity needs, capital expenditures and debt payments for at least 12 months.
- Key risks include COVID-19 variants and potential vaccination/testing requirements, possible workforce attrition and recruiting constraints, supply-chain and product-delivery disruption, inflation and wage pressure, competition, managed-care relationships, and dependence on third-party payors. Forward buys of inventory were used to manage potential supply constraints.
- Variable-rate debt exposes cash flow to rising rates; a $1.00 percentage-point rate increase was not expected to materially increase interest expense at quarter-end, while the filing estimates a roughly $9 increase in interest expense from a 1.00-point decrease because of the interest-rate derivative.
- Legal matters include a settled California class action for an immaterial amount and a wage-and-hour settlement capped at $895,000, both paid. In a separate New Mexico dispute, the company said it could not reasonably estimate possible losses and intends to defend the matter.
Important facts for investors to verify
- Confirm the correct reporting period: this is fiscal Q3 2021, despite the request metadata indicating 2020 Q3.
- Assess how much future growth and margin performance depend on new stores and whether the unusually strong nine-month comparison normalizes after COVID-related distortions.
- Track quarterly SG&A, optometrist and freight costs, comparable-store sales, inventory levels and supply-chain availability.
- Review convertible-note dilution exposure: the notes were convertible at quarter-end, with 12.9 million shares based on the initial conversion rate and up to 16.5 million shares reserved for possible issuance.
- Confirm the effect of the subsequent $50 term-loan prepayment and the timing and extent of any share repurchases.