National Vision Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. Although the request metadata says 2019 Q1, the filing itself is for fiscal 2020 Q1. National Vision operates value-focused optical retail, eye care and e-commerce businesses; it had 1,173 retail locations at quarter-end.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $469.7 million | $461.2 million |
| Operating income | $16.9 million | $32.4 million |
| Net income | $9.7 million | $17.4 million |
| Diluted EPS | $0.12 | $0.21 |
| Operating margin | 3.6% | 7.0% |
| Net margin | 2.1% | 3.8% |
| Operating cash flow | $86.1 million | $83.0 million |
| Net cash used for investing | $12.9 million | $25.8 million |
- Revenue increased 1.8%, but operating income fell 47.8% and net income fell 44.1%. Costs applicable to revenue rose to 46.5% of sales from 46.0%; total operating expenses rose to 49.9% from 47.0%.
- Adjusted EBITDA, a non-GAAP measure, was $61.0 million versus $61.2 million; adjusted EBITDA margin was 13.0% versus 13.3%. Adjusted diluted EPS was $0.28 versus $0.31. These measures exclude specified expenses and are not substitutes for GAAP results or cash flow.
- Cash and cash equivalents were $263.2 million at March 28, versus $39.3 million at December 28, 2019. Operating cash flow was $86.1 million; capital expenditure purchases were $13.1 million. The cash increase principally reflected $146.3 million drawn on the revolver.
- Credit-facility borrowings were $686.6 million, including $392.4 million of term loans and $294.3 million outstanding on the revolving facility; the latter included $5.7 million in letters of credit. Long-term debt and finance lease obligations, net of discount and current maturities, totaled $713.2 million. The company reported compliance with debt covenants at quarter-end.
- Current assets were $441.2 million and current liabilities $287.5 million. Operating lease liabilities totaled $391.2 million; finance lease liabilities were $33.9 million.
Material changes and operating trends
- Comparable-store sales declined 2.9%; adjusted comparable-store sales declined 10.3%. Results reflected stores closing to the public beginning March 19. Comparable sales were up 5.6% for January and February, then down 18.8% in March; adjusted comparable sales in March fell 41.5%.
- Owned & Host revenue fell 4.9% and Legacy revenue fell 18.2%; Corporate/Other revenue increased 4.2%, driven by online retail unit growth. Reported consolidated revenue growth was supported by new-store sales and revenue recognition timing, partly offset by pandemic-related closures.
- Asset impairment charges rose to $11.4 million from $2.1 million, reflecting underperforming stores and uncertainty about future store revenue. A $4.4 million litigation settlement charge was recorded. Interest expense declined 17.7% to $7.5 million, primarily following the 2019 refinancing.
Outlook, risks and unusual items
- COVID-19 caused temporary public closures of the retail stores, with material sales declines and costs that did not fall proportionally, including occupancy and employee costs. Management expected a material adverse effect on fiscal 2020 results, financial condition and cash flows, with a potentially more significant revenue impact in Q2. No numerical earnings or revenue guidance was provided.
- The company furloughed a significant portion of employees, cut compensation and hours, reduced marketing, paused new store openings and sought extended vendor and landlord payment terms. It began selective reopening with enhanced safety measures and targeted having all stores open by early June 2020. Management said it believed cash from operations and the revolver draw would fund needs for at least 12 months, while noting uncertainty and possible additional financing needs.
- On May 5, 2020, after quarter-end, lenders amended the credit agreement. Financial maintenance covenants were suspended until testing at the end of Q2 2021 and replaced during the suspension with liquidity and EBITDA requirements. The amendment also restricted certain transactions and revolver borrowing, required specified debt prepayments from certain capital-raising proceeds, and changed interest margins. Management anticipated compliance based on its plans and assumptions.
- Risks include the duration and severity of the pandemic, store reopening and customer demand, supply-chain and labor disruptions, lease obligations, impairment exposure, variable-rate debt and covenant restrictions. At quarter-end, a 1 percentage-point rise in rates was estimated to increase annual interest expense by about $2.9 million after hedging.
- Other items include a $2.7 million discrete tax benefit, primarily related to stock-option exercises; the CARES Act’s qualified-improvement-property change increased both tax loss carryforwards and gross deferred tax liabilities by about $25 million. A California optometry class-action complaint was amended after a prior dismissal; the company said it would defend the claims. Certain wage-and-hour settlements remained subject to court or tribunal approval.
Important facts for investors to verify
- Store reopening pace, comparable sales recovery and whether revenue and cash flow stabilize after the closures.
- Cash burn, available liquidity, any additional financing, and compliance with the amended credit agreement’s liquidity and EBITDA requirements.
- Debt interest costs and exposure to variable rates, including the effect of the amended interest margins and hedges.
- Further store or goodwill impairments, and the impact of lower sales or prolonged disruptions on asset valuations.
- Outcomes and final costs of pending litigation and settlements, including required court approvals.