National Vision Holdings, Inc. — Form 10-K Summary
Period clarification: The request identifies “2017 Q4,” but the filing is the annual report for fiscal 2018, the 52 weeks ended December 29, 2018. It also reports quarterly results, including the fourth quarter ended December 29, 2018. Unless noted, dollar amounts below are in millions.
Business context and reporting period
National Vision operates value-focused optical retail stores and e-commerce businesses selling eyeglasses, contact lenses and eye exams. Its two reportable segments are Owned & Host, including America’s Best, Eyeglass World and Vista Optical locations, and Legacy, consisting of managed Vision Centers in Walmart stores. At year-end, it operated 1,082 stores, up from 1,013 a year earlier, and opened 74 stores during fiscal 2018.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $1,536.9 | $1,375.3 |
| Costs applicable to revenue | $713.6 | $637.0 |
| Income from operations | $42.4 | $64.3 |
| Net income | $23.7 | $43.1 |
| Adjusted EBITDA (non-GAAP) | $174.4 | $158.4 |
| Operating cash flow | $106.6 | $90.3 |
| Capital expenditures | $104.5 | $93.2 |
- Revenue rose 11.7%; comparable-store sales growth was 6.7% (adjusted comparable-store sales growth, a non-GAAP measure, was 5.7%), versus 8.4% and 7.5%, respectively, in FY 2017.
- Operating margin declined to 2.8% from 4.7%, and net margin to 1.5% from 3.1%. Costs applicable to revenue were 46.4% of sales versus 46.3%. Adjusted EBITDA margin eased to 11.3% from 11.5%.
- Cash provided by operations increased, but was nearly matched by investing outflows, primarily capital spending. Year-end cash and cash equivalents were $17.1; $94.5 was available on the revolving facility after letters of credit.
- Principal term-loan debt was $564.3, excluding capital leases; reported total debt was $578.1 including capital lease obligations. The company had $24.5 of capital lease obligations on the balance sheet. Interest expense was $37.3, down from $55.5.
- Current assets were $214.7 and current liabilities $211.7. Operating lease commitments totaled $407.0; management estimated adoption of the new lease standard would add $325–$345 of operating lease liabilities and right-of-use assets to the balance sheet in 2019.
Material changes and unusual items
- Revenue growth was attributed approximately 45% to comparable-store sales, 40% to new stores and 15% to AC Lens order volume. America’s Best and Eyeglass World grew, while Military and Fred Meyer comparable-store sales declined.
- Operating income fell despite higher sales, reflecting increased SG&A, depreciation and impairment. SG&A rose 14.6% and increased to 44.7% of revenue, including higher stock compensation, long-term incentive plan costs, advertising and public-company expenses.
- FY 2018 included $17.6 of impairment charges, including full impairment of $15.1 of goodwill at the Military and Fred Meyer brands. FY 2017 included a $7.0 litigation settlement charge.
- Tax comparisons are unusual: FY 2017 included a $42.1 tax benefit from the Tax Cuts and Jobs Act; FY 2018 included a $25.5 tax benefit from equity-based compensation deductions. These items materially affect reported net income and effective tax rates.
- FY 2018 adopted ASC 606. The adoption increased FY 2018 revenue by $1.3 and net income by approximately $1.0; prior-year figures were not recast. The company also revised previously issued periods for immaterial lease-accounting errors.
- Fourth-quarter FY 2018 revenue was $355.9, operating loss was $19.4 and net loss was $18.4. The filing cites seasonality and annual impairment charges as factors that can weigh on fourth-quarter results.
Outlook, risks and contingencies
Management expects store growth to remain an important revenue and operating-profit driver and stated that operating cash flow plus revolver availability should cover working capital, anticipated capital expenditures and obligations for at least the next 12 months. The filing does not provide specific numerical earnings or revenue guidance.
- Key risks include execution and profitability of new stores, recruiting optometrists, wage and occupancy-cost increases, intense competition, supplier concentration and potential import tariffs. One supplier accounted for 90% of lens expenditures; three suppliers accounted for 93% of contact-lens expenditures.
- Walmart-related sales represented 10.0% of consolidated revenue. The management and services agreement expires August 23, 2020, subject to automatic renewal unless notice is given.
- Leverage, variable-rate debt, credit-agreement covenants and substantial lease commitments constrain financial flexibility. Interest-rate swaps fixed $465.0 of debt exposure; management estimated a 1 percentage-point rate increase would add about $1.0 of annual interest expense.
- A California class action involving FirstSight was remanded for further proceedings; the company disputes the claims. The separate online contact-lens antitrust case was settled for $7.0 without admission of liability, with half deposited in escrow as described in the filing.
- Management and the auditor identified a material weakness in entity-level controls for assessing changes in the business environment. The auditor issued an adverse opinion on internal control over financial reporting, although it gave an unqualified opinion on the financial statements. A separate inventory-control weakness was reported as remediated.
Important facts for investors to verify
- Reconcile the filing period: it is FY 2018, not a 2017 annual filing; assess the separate fourth-quarter loss and impairment effects.
- Review the sustainability of comparable-store growth, new-store returns and the weaker Military and Fred Meyer businesses.
- Distinguish GAAP profit and cash flow from Adjusted EBITDA, and assess the effect of unusual tax benefits, stock compensation and impairment charges.
- Monitor debt amortization, covenant headroom, interest-rate exposure, lease obligations and the planned lease-accounting transition.
- Track remediation of the material weakness, the FirstSight litigation and renewal of the Walmart agreement before its 2020 expiry.