National Vision Holdings, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2019 Q3, but the supplied filing is for the quarter ended September 26, 2020, with comparisons to September 28, 2019. Amounts below are in millions of dollars unless noted.
Business context and reporting period
National Vision is a value-focused U.S. retailer of eyeglasses and contact lenses, operating 1,201 locations across its owned, host and Walmart-managed brands at quarter-end. The filing covers the third quarter and first nine months of fiscal 2020. Stores closed to the public beginning March 19 and were all reopened by June 8, 2020, with enhanced safety protocols.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $485.4 | $431.9 | $1,215.1 | $1,322.6 |
| Income from operations | $54.8 | $11.1 | $30.1 | $65.2 |
| Net income | $35.3 | $1.2 | $1.2 | $28.9 |
| Diluted EPS | $0.42 | $0.01 | $0.01 | $0.35 |
| Adjusted EBITDA (non-GAAP) | $88.1 | $46.6 | $134.8 | $155.8 |
| Cash provided by operating activities | Not separately reported | Not separately reported | $203.7 | $170.9 |
Q3 revenue increased 12.4%, and adjusted comparable store sales growth was 12.4% (reported comparable store sales growth was 11.6%). Management attributed the rebound in part to strong customer demand after earlier store closures. For the first nine months, revenue declined 8.1%, comparable store sales fell 11.7%, and adjusted comparable store sales fell 11.1%, mainly because of the closures.
Q3 operating margin was 11.3% versus 2.6% a year earlier; net margin was 7.3% versus 0.3%. For the nine-month period, operating margin was 2.5% versus 4.9%, and net margin was 0.1% versus 2.2%. Costs applicable to revenue were 43.4% of revenue in Q3 versus 47.3%; nine-month costs were 46.9% versus 46.8%. Q3 improvement reflected product mix, higher eyeglass margins and lower growth in optometrist costs. Nine-month results included costs incurred while stores were closed.
At September 26, cash and cash equivalents were $377.0, compared with $39.3 at December 28, 2019. Current assets were $555.4 and current liabilities $356.0. Nine-month capital expenditures were $40.8. Cash provided by operations rose to $203.7 from $170.9; investing used $40.5, while financing provided $174.9, substantially reflecting debt issuance and repayment activity.
Debt included $402.5 principal of 2.50% convertible notes due 2025 and $317.4 of term-loan borrowings; the revolving facility had no balance. Reported long-term debt and finance lease obligations, net of the notes’ discount and current maturities, totaled $651.7. The company reported $294.3 of revolving-credit availability, including $5.7 of outstanding letters of credit. Cash plus stated facility availability was approximately $671.3.
Material changes versus the prior comparable period
- Q3 performance rebounded, while year-to-date revenue and net income remained below 2019 because of pandemic-related store closures and disruption.
- Q3 SG&A was nearly flat in dollars and declined to 39.3% of revenue from 44.1%. For the nine months, SG&A declined 8.1% in dollars but edged up as a share of revenue, to 42.9% from 42.8%.
- Nine-month asset impairment charges increased to $20.9 from $7.4; charges reflected underperforming stores, pandemic-related uncertainty and $1.1 of obsolete software write-offs.
- Nine-month interest expense rose to $35.4 from $25.9, including convertible-note discount amortization and derivative losses. The prior-year comparison included a $9.8 debt-extinguishment loss.
- Cash increased following the May 2020 convertible-note issuance and related debt refinancing. The company also issued shares, and the notes’ conversion feature contributed to additional paid-in capital.
Outlook, commentary, risks and unusual items
- Management said it expected cash on hand, operating cash flow and revolving-credit availability to cover working capital, liquidity needs, anticipated capital expenditures and debt payments for at least the next 12 months. No specific revenue or earnings forecast was provided. The company expected to open 57 stores in fiscal 2020, subject to health, safety and economic conditions.
- Management warned that pandemic resurgence, customer behavior, store staffing or closures, consumer demand, supply-chain disruption and continued occupancy and operating costs could materially affect results, liquidity and cash flows. Management said Q3 demand benefited from customer activity following closures; the durability of that demand was uncertain.
- The May credit amendment suspended specified maintenance covenants until testing at the end of fiscal Q2 2021, replacing them with interim EBITDA and minimum-liquidity requirements and restricting certain transactions. The company said it was compliant as of quarter-end and anticipated compliance based on current plans. Modified leverage and interest-coverage tests are scheduled to resume thereafter.
- The CARES Act employee-retention credits reduced expenses by $11.0 for the nine months. This benefit, impairment charges, litigation costs, derivative effects and convertible-note accounting affected reported results. Q3 included $4.7 of pandemic-related operating costs; nine-month costs were $7.8.
- The company disclosed ongoing legal matters, including a California optometry class action it intended to defend, and settlements of $3.5 for a wage-and-hour matter and $7.0 for an antitrust matter. A separate settlement of up to $0.895 remained subject to tribunal approval in the filing.
- The convertible notes could result in dilution: the initial conversion rate equated to about 12.9 million shares, with a maximum possible issuance of 16.5 million shares. Interest-rate derivatives and LIBOR transition exposure, supplier concentration, and Walmart-related revenue concentration are also relevant risks.
Important facts for investors to verify
- Confirm the period: this is a 2020 Q3 filing, not a 2019 Q3 filing.
- Assess whether post-reopening sales strength persisted, given Q3 adjusted comparable sales growth of 12.4% and the severe nine-month comparison impact from closures.
- Separate underlying operating performance from CARES Act credits, impairment, litigation, derivative losses and other non-GAAP adjustments; review the company’s reconciliation of adjusted metrics.
- Track liquidity and covenant compliance, including the scheduled covenant reinstatement, restrictions under the credit amendment and the company’s ability to generate sustainable operating cash flow.
- Evaluate total debt service and potential dilution from the 2025 convertible notes, as well as interest-rate and benchmark-transition exposure.
- Monitor impairment assumptions, legal proceedings, supplier and customer concentration, and the effects of pandemic resurgence on stores, staffing and demand.