National Vision Holdings, Inc. — Form 10-K summary
Period clarification: The supplied filing is the annual report for the 52 weeks ended December 28, 2019, not a standalone 2018 Q4 filing. It includes unaudited quarterly results for both FY2019 and FY2018; FY2018 Q4 ended December 29, 2018.
Business context and reporting period
National Vision is a value-focused U.S. optical retailer selling eyewear, contact lenses and eye-care services. Its two reportable segments are Owned & Host (including America’s Best, Eyeglass World and Vista Optical locations) and Legacy (Vision Centers operated under its Walmart agreement). At year-end it operated 1,151 locations, up from 1,082, and had 19 consumer websites. FY2019 and FY2018 each comprised 52 weeks.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $1,724.3 million | $1,536.9 million |
| Operating income | $73.6 million; 4.3% margin | $42.4 million; 2.8% margin |
| Net income | $32.8 million; diluted EPS $0.40 | $23.7 million; diluted EPS $0.30 |
| Adjusted EBITDA (non-GAAP) | $200.7 million; 11.6% margin | $174.4 million; 11.3% margin |
| Operating cash flow | $165.1 million | $106.6 million |
| Capital expenditures | $101.3 million | $104.5 million |
| Cash and cash equivalents | $39.3 million | $17.1 million |
Costs applicable to revenue were 46.8% of revenue, versus 46.4% in FY2018; SG&A declined to 43.2% from 44.7%. Approximate gross margin, calculated as revenue less costs applicable to revenue, was 53.2% versus 53.6%. Total debt principal was $540.4 million, excluding finance leases; reported debt and finance lease obligations, net of debt discount, were $569.7 million. The company had $146.3 million available on its $300 million revolving facility, net of letters of credit. Operating lease obligations were also substantial: $383.7 million present value at year-end.
FY2019 Q4 revenue was $401.8 million, operating income $8.4 million and net income $3.9 million. FY2018 Q4 revenue was $355.9 million, operating loss $19.4 million and net loss $18.4 million; the quarter included impairment charges.
Material changes versus the prior comparable period
- FY2019 revenue increased 12.2%. Management attributed growth approximately 41% to new stores, 45% to comparable-store sales and 14% to AC Lens order volume. Comparable-store sales growth was 6.5% (adjusted measure: 6.2%), compared with 6.7% (adjusted: 5.7%) in FY2018.
- Operating income improved despite revenue costs rising faster than sales. Lower SG&A as a share of revenue and fewer impairment charges helped; FY2019 included $8.9 million of store-asset impairments, versus $17.6 million in FY2018, which included $15.1 million of goodwill impairment at the Military and Fred Meyer brands.
- Net income increased, while interest expense fell to $33.3 million from $37.3 million. FY2019 also recorded a $9.8 million loss on extinguishment of debt related to refinancing.
- Operating cash flow rose by $58.5 million year over year, supported by earnings and working-capital movements. Financing cash flow was negative $42.1 million, including a $25.6 million share repurchase and $25.0 million voluntary term-loan prepayment.
- The company adopted lease accounting in FY2019, recognizing operating right-of-use assets and lease liabilities; reported total assets are therefore not directly comparable with FY2018.
Outlook, commentary, risks and unusual items
Management expected FY2020 capital expenditures of approximately $100–$105 million, mainly for new stores and information technology. It stated operating cash generation and revolver availability should cover working capital, liquidity, planned capital spending and debt payments for at least the next 12 months. The filing provides no specific FY2020 revenue or earnings guidance.
- Growth plans rely on continued store openings, comparable sales, managed-care participation and recruitment of optometrists. FY2019 added 75 stores; America’s Best was the principal growth driver.
- Major risks include intense price competition, dependence on a concentrated supplier base (88% of spectacle-lens expenditures came from one supplier), and reliance on Walmart: the Legacy arrangement represented 9.3% of FY2019 revenue. The Walmart agreement was amended in January 2020, extended to February 23, 2021, and is subject to renewal/non-renewal provisions; five additional centers were planned for FY2020.
- Tariffs on specified Chinese imports increased to 15% in September 2019 and were reduced to 7.5% in February 2020. The company said less than 15% of costs applicable to revenue were subject to China tariffs and mitigation efforts were underway. It also cited possible disruption from the then-ongoing coronavirus outbreak, including effects on sourcing and an outsourced Chinese lab.
- Interest-rate exposure remains: swaps fixed $430 million of variable-rate debt through March 2021; a 1 percentage-point rate increase was estimated to add about $1.1 million in annual interest expense. Debt covenants were in compliance at year-end.
- Contingencies include a FirstSight class action concerning California optometry practices, which the company intends to defend, and a wage-and-hour case with no resolution at the February 2020 mediation. A separate settlement with former employees had a maximum amount of $895,000, subject to approval. The filing does not state a clear estimated loss range for the ongoing matters.
- A previously reported material weakness in internal controls was reported as remediated; management and the auditor concluded controls were effective as of December 28, 2019. The financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Confirm the intended period: this 10-K reports FY2019 and gives FY2018 Q4 comparative figures, rather than being a 2018 Q4 filing.
- Assess the durability and quality of growth, including comparable-store sales, new-store returns, and the contribution and margins of AC Lens and managed-care sales.
- Review debt and lease obligations, refinancing terms, covenant headroom, interest-rate swaps and the substantial 2024 debt maturity.
- Monitor Walmart agreement renewal terms and supplier concentration, particularly the reliance on a single spectacle-lens supplier.
- Track tariff and China-related supply-chain exposure, store impairments, and the status and potential financial impact of legal proceedings.