Business context and reporting period
National Vision Holdings, Inc. is a U.S. value optical retailer operating 1,145 locations across its store brands and partner arrangements as of September 28, 2019. This filing is the Form 10-Q for the quarter ended September 28, 2019, comparing the third quarter and first nine months of fiscal 2019 with the corresponding 2018 periods. The filing’s stated period differs from the “2018 Q3” request metadata.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net revenue | $431.9 million | $387.4 million | $1,322.6 million | $1,180.9 million |
| Operating income (loss) | $11.1 million | $(2.1) million | $65.2 million | $61.7 million |
| Net income | $1.2 million | $5.2 million | $28.9 million | $42.1 million |
| Adjusted EBITDA | $47.9 million | $38.4 million | $161.1 million | $145.6 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $170.9 million | $116.0 million |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $76.5 million | $78.8 million |
- Q3 revenue increased 11.5%; comparable-store sales growth was 5.7% (adjusted: 6.2%). Nine-month revenue increased 12.0%; comparable-store sales growth was 5.5% (adjusted: 5.6%).
- Q3 net margin was approximately 0.3%, versus 1.3%; nine-month net margin was 2.2%, versus 3.6%. Adjusted EBITDA margin was 11.1% for Q3 versus 9.9%, and 12.2% year to date versus 12.3%.
- Cash and cash equivalents were $94.1 million at September 28, 2019. Revolver availability was $146.5 million, after $148.0 million drawn and $5.5 million of letters of credit. Management said expected operating cash and revolver availability would cover needs for at least 12 months.
- Term loans and revolver borrowings totaled $568.0 million; finance lease obligations were $34.2 million. The balance sheet also reported $383.3 million in operating lease liabilities. The company reported compliance with its debt covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue growth reflected store expansion and maturation, comparable-store sales growth, and AC Lens contact-lens distribution. The company opened 67 stores in the first nine months and planned approximately 75 openings for fiscal 2019.
- Despite higher revenue and operating income, nine-month net income declined $13.2 million, primarily reflecting the prior-year period’s larger discrete tax benefit from stock-option exercises and 2019’s debt-extinguishment charge. Q3 included a $9.8 million loss on extinguishment of debt related to refinancing.
- Costs applicable to revenue rose to 46.8% of revenue for the first nine months from 45.7%, partly because AC Lens has a higher product-cost ratio and because of higher optometrist costs. SG&A improved to 42.8% of revenue from 44.1%, reflecting revenue growth and operating leverage.
- Operating cash flow increased $55.0 million year over year, helped by noncash expenses and working-capital movements. Investing cash outflow was $75.9 million; financing cash outflow was $17.7 million, including a $25.0 million share repurchase.
- The company adopted lease accounting in fiscal 2019, recognizing operating lease right-of-use assets and liabilities. This increased reported assets and liabilities; management said adoption did not significantly change results or cash flows.
Outlook, commentary, risks and unusual items
- Management planned approximately 75 store openings in fiscal 2019 and stated that growth requires continued investment in stores, laboratories, distribution, and technology. The filing provides no specific revenue or earnings guidance.
- Management cited lower-than-projected sales at certain stores as the principal driver of impairment charges: $3.5 million in Q3 and $7.4 million year to date, versus $2.1 million for the first nine months of 2018. Depreciation and amortization increased and management expected it to outpace revenue growth over the next few years.
- On July 18, 2019, the company refinanced its credit agreement, establishing $420 million of term loans and a $300 million revolving facility. On October 31, after quarter-end, it used cash to prepay $25 million of term-loan principal.
- Tariffs on specified Chinese imports took effect September 1, 2019. Management described mitigation efforts but said the full impact was too early to predict. Other key risks include supplier and managed-care payer concentration, competition, recruiting vision-care professionals, consumer spending, leverage and variable interest rates. A 1 percentage-point rate increase was estimated to raise annual interest expense by about $1.4 million, after swaps.
- The Walmart legacy agreements expire August 23, 2020, with automatic three-year renewal unless a party opts out. Legacy-related sales represented 9.3% of consolidated revenue in the first nine months.
- Disclosure controls and procedures were deemed ineffective because a previously identified material weakness in entity-level controls remained unremediated at quarter-end. Management said the financial statements were fairly presented after additional procedures and described remediation work that would be monitored through year-end.
- Contingencies include a California optometry class action and a California wage-and-hour class action scheduled for mediation in Q1 2020; the company says it intends to defend both. The $7.0 million 1-800 Contacts antitrust settlement had been recorded in 2017.
Important facts for investors to verify
- Confirm the correct requested period: the filing covers Q3 2019, not Q3 2018.
- Assess whether revenue growth and store expansion can sustain margins amid rising product and optometrist costs, impairment charges, and higher depreciation.
- Review debt terms, leverage and covenant headroom, revolver usage, the post-quarter $25 million prepayment, and exposure to interest-rate changes.
- Track tariff-related cost impacts, supplier concentration, and the renewal or continuation of the Walmart legacy agreements.
- Monitor remediation of the material weakness and developments in the disclosed litigation.