Morning, and welcome again to the Jefferies 2024 Global Healthcare Conference. I'm Brian Tanquilut, healthcare services analyst here at Jefferies. With us this morning is National Vision Holdings, ticker EYE. Joining us are the company's CEO, Reade Fahs, and the company's CFO, Melissa Rasmussen. Reade, maybe let's start with a state of the union.
Good. Well, actually, I'm gonna start with something far more important, Brian. I noticed that you don't wear socks enough, and I thought I'd present you with some of our company socks. We think we spend a lot of time on the top part of the body, so here, there you go. You can keep your feet warm there. So good. All right, so-
I appreciate it. Thank you so much.
There, there... Well, I noticed that, you know, times are tough, and I noticed you're going without, so and that's what we think about. We are a low-cost provider of a medical necessity. Our customers are low income and budget-conscious Americans who have bad eyes and need to see, and we are the place they go to to get that, to get their eyes examined, to get eyeglasses, and contact lenses. Where our largest brand is called America's Best Contacts and Eyeglasses. It's in a strip center next to Marshalls, down the street from a dollar store, and we have an employee doctor there, and so we bundle the cost of the eyeglasses in with the eye exam and contact lenses in with the eye exam.
So we can have our entry price at two pairs of glasses for $79, and we throw in the eye exam for free, and I'm betting no one around here got that deal the last time they solved their vision issue. Prior to COVID, for about 19 years, we were at extremely consistent and predictable business, 72 consecutive quarters of positive comparable store sales, averaging 5% across those years from 2005 to 2020 till COVID, averaging 7% comps for the 4 years leading up to that. COVID was a very disruptive moment for us in a few different ways.
One, it disrupted the purchase cycle 'cause immediately after COVID, when our customer was richer than they've ever been, they went out and bought the nicest pair of glasses they ever bought. So they got the nicest pair of glasses sort of in early 2021. Then they got whacked by inflation, and now our customer is more strapped than they've ever been. The other big COVID disruption was a shortage of optometrists. As you know, Brian, given your healthcare coverage, if you've got doctor before your name in America, there is a shortage of you, whether you're an optometrist, an ophthalmologist, a general physician. There's just a shortage of healthcare providers, and that hit us as well. We are transforming to adapt to the new realities in a variety of ways.
Primary way that we're doing that is through remote exams, whereby the optometrist is sitting at home, and the patient is sitting in our store surrounded by expensive equipment. It is very easy to recruit optometrists to do the eye exam from their home, and that is now over 10% of the exams in the remote-enabled states where we are. We are also attacking our cost structure in a variety of different ways in order to be more profitable amidst this more challenging time on the top line. We do continue to comp positively despite our strapped consumer base and the doctor shortage that is out there.
Managed care, insured business, which represented about 35% of our business at the end of last year, is comping very well. That's where it's not the consumer's money, it's the insurance company's money. So that is comping very well. Our remote efforts are paying great dividends for us as well, and we have a variety of exciting product and promotion offerings for the balance of the year that we think are gonna help us to continue to comp positively the rest of this year. We are positioning ourselves to emerge ever stronger as the purchase cycle normalizes, and given the biology of the human eye and the fact that our vision deteriorates with age, our purchase cycle will eventually normalize.
It was extremely consistent and predictable for decades prior to COVID. It will be consistent and predictable again. And our innovation journey, which is very much up your alley there, Brian, involves. We believe we have among the largest employed network of optometrists in America, over 2,000 optometrists. We believe that we are doing among the most eye exams of anyone out there, out of our 1,200 retail locations. And we sit there and say that due to the combination of various technologies, that I hope we'll get a chance to talk about in a little while, and AI, and various partnerships that we think we can form, that we see ourselves longer term building revenue streams from participating more broadly in the healthcare of our patient base.
Reade, you're always thorough.
Well-
You've answered all my questions.
Ah, no, I hope we get to delve down on some of them. Yeah.
Now, Melissa, maybe just going back to comp performance, as Reade touched on, you know, in Q1, it was a little pressured across the brand. So how are you thinking about the outlook for same-store growth going forward and the factors that would affect your ability to drive positive comp growth in the near future?
Yeah. So when we spoke about when we released earnings for first quarter, we had talked about we had positive comps. The back half of the quarter had accelerated versus the beginning of the quarter, which was pressured by weather and overall macro. We had seen an acceleration towards the back half of the quarter. With that, we were trending at positive, roughly about 2%, the low end of the guidance that we had put out. We have seen a slight deceleration in May, as we have, we've continued to see positive comps, but there has been a slight deceleration, and with that, we are expecting to still take some action with the ongoing things that we have prepared for the back half of the year.
We had spoken about the remote deployment in Texas, in addition to some of our marketing efforts that, that we're going to be changing, in addition to aligning some of the overall store hours with times that patients wanna be seen, and then opening on Sundays in some select stores. So with those initiatives in place, we are expecting to continue to make up some lost ground as it relates to the slow start to the year.
Now, that makes sense. And then maybe, Reade, as I think about comp performance, America's Best stores are performing better. So what do you attribute that outperformance versus, say, Eyeglass World stores and the other brands in the portfolio? And then how do you translate that to drive better performance into the other brands?
Right. So, of our 1,200 stores, 1,000 of them are America's Best stores. We have about 120 Eyeglass World stores now. Eyeglass World is a bigger box with a lab in the store, so it's a value super optical store. It was. It did very well coming out of COVID, and there are a combination of factors that have led that to be underperforming, primarily things relating to optometric capacity. I do get to be a bit of a broken record talking about optometrists and optometric capacity, but it's so core because our purchase experience starts with that eye exam. We have primarily one model of employed doctors in America's Best.
We have a variety of different models, from employed to leased doctors, to master leased doctors in Eyeglass World, and we are working hard to get those pieces together, so it's not as easy to address that as it has been for America's Best. It's not impossible to address that. It just takes a little bit more time when you have a variety of outside parties. In addition, we said that we don't think our operations were as crisp as they needed to be. We have changed leadership there, and we believe we will see a steady, ongoing improvement in Eyeglass World over time with the changes that we've put in place.
Reade, since you mentioned the virtual eye exam, one of the things that I particularly like about your story is the rollout of virtual eye exams.
Yeah
... which we demoed-
Right
in Atlanta last year.
You were one of the first to come see it. Yeah.
But listening to your last earnings call, to me, it's clear that there are still a lot of people who don't understand what virtual eye exam means and think that it's an iPad or iPhone
Right
... consultation. Right? So, maybe if you don't mind explaining to the audience what your virtual strategy is and, more importantly, why that matters.
Sure. And thank you, thank you for that because it is in this day and age where people use the word virtual in so many different ways, it's important to clarify. So, our process begins with an eye exam. There is a shortage of optometrists in America. It is easy to recruit doctors to be to work from home and refract from home. So we've designed a way for the patient to be in our store in the exam room, surrounded by very expensive digital equipment. We do a variety of tests on them that is a pretest that is sent to the doctor. The doctor then comes live on screen in front of the patient in a synchronous interaction, has already assessed all the digital pretests and takes them through the eye exam from their home.
So we all know the traditional, "Do you see number one better or number two better?" And then the lenses change in front of your face, or they ask that question, and then the doctor at home presses a button, and the lenses change in front of the patient's eyes. So a doctor sitting anywhere in America who has a license, say, in the state of New York, can be doing exams in any of our New York stores, no matter where they're sitting at any time. And many of our remote doctors have realized they do better if they have multiple state licenses, so they go out and get a lot of licenses so they can be doing exams all over the country. Not all states allow this.
In our February earnings call, we shared that one of the bigger states, Texas, did not allow it, and that we looked forward to a day when the state did allow it, but we didn't know when that would be. But we thought the trend for all states is ever more towards telemedicine. And who would have guessed, just a few weeks later, Texas did allow it? We were sort of surprised by the speed of it also, but that was a very good and exciting day around our office. It is the state which has the most stores. It has a number of dark stores.
It has a number of dim stores, and so we immediately shifted all of our plans to go and light up Texas with remote quickly, and we think that will be another reason that will be another tailwind for us in the back half of the year.
Maybe, Melissa, just, just to stay on the topic, if we can dive a little into the numbers of what the virtual strategy can do to the business over time, and how much left is there on the implementation of the initiative?
... Yeah, so with the remote initiative, there is the runway for the states that we haven't deployed in. And as far as the overall benefit of the remote exam, each remote exam is an exam that we see as an incremental revenue driver. We wouldn't have otherwise been able to provide that exam, either by a doctor not being in the store or the patient coming in at a time when an exam wasn't available. And so that is an incremental benefit for us. That being said, there are some differences between in-lane and remote that we see benefit from. So with a remote doctor, you never have downtime in between patients. You don't have a no-show. So there are opportunities where the remote capabilities can become ever more beneficial to us as a company.
In addition to that, we've also been digitizing our stores to have store flow become more efficient. We're digitizing our back office with an ERP implementation that's focused on finance and merchandising, and continuously looking for better, more efficient ways to do processes to leverage our cost structure more effectively.
Can I just build on that for one second? So the big mantra around our office for the past year and a half has been "champions adapt." Although I've got to admit that prior to COVID, we were probably a little bit more analog than you'd wanna be. We're a traditional retailer. There was a lot of paper around, and even in our offices, paper records and things like that. I am so proud of the fact that this traditional, probably too analog company, was able to sort of build the Uber for eye exams inside our company and have it be delivering over 10% of our exams in the states where it's enabled. I still think, though, we are only in the middle innings on what remote can do for us.
We, the doctors are now as productive as in-lane doctors, and we wouldn't be surprised in later innings if they get more productive. Some of our stores are just as productive as if they had a live doctor there, but once you've got some of the stores, ever more of them can accomplish that. So I just think it's a great example of us being able to adapt to the new realities, even though the skill set to do this wasn't in our core competencies. But this is why we believe that we will be able to adapt to this, the new world, in such a way that we can emerge stronger once the purchase cycle normalizes.
So maybe just to clarify: so is it right to think that over time, as the initiative matures, that it will be a driver of same-store growth and margins?
Yes.
It should be right?
Yes.
Okay, got it. And then maybe Reade, shifting gears, you know, in your comment earlier, you talked about how folks with vision insurance generally do better or are better patients for you guys because they're less sensitive to the macro environment.
Yeah.
What are the initiatives, or how should we be thinking about the opportunity to drive share or drive more, you know, insured folks to come into your stores?
Right. Well, it's been doing pretty darn well organically. As I said, if we happen to be 80% or 90% managed care versus 35% managed care, we'd be sitting around drinking champagne most of the day. It would be very good. It is. There is a, there's marketing that you can communicate the number of plans that you take, and we have that as part of our marketing efforts. But generally, all your work colleagues have the same vision insurance that you do. You show up in a new pair of glasses, and there's a reference point there, and you say, "Oh, yes, and I got them at America's Best," which takes our insurance. So there is that part, too.
We're always looking for more ways to get that communication out there on that, but it's been growing very nicely for quite some time through this environment. And from a profitability standpoint, it's, we're pretty agnostic as to which patient walks in the door, but the patients walking in the door now are those who are having their insurance company fund most of the purchase.
Got it. That makes sense. And then maybe, Melissa, another topic that I think has been on investors' minds and somewhat misunderstood is the impact of Walmart's decision to bring in-house the operation of the clinics that you previously ran, and as well as the online contact lens business. Can we level set what that business was, and what the impact would be on 2024 results, and how you feel or why you feel that despite the Walmart loss, once we anniversary that, you know, you're actually in a better position, a better place?
Yeah. So the Walmart business, when Reade originally started with the company decades ago, that was 95% of our revenue stream. As we have evolved, that has become a much smaller portion of the business. It was roughly 7% of the revenue stream when the contract was terminated with Walmart. So as far as scale, it was a great opportunity to build our growth brands. We leveraged that opportunity, but it is a distracting business for us, and so the termination of the contract, while it was not expected, it does streamline our business and allow us to be able to focus on the more important growth aspects of our business, and it's only a small portion of the revenue. With that, we were doing the contact lens distribution for Walmart and Sam's Club. That business will be exiting at the end of June.
That was a high-revenue, low-profit business, and so the impact of both for 2024 is roughly $140 million for the year of 2024. That's what we expect to have in revenue through the first half, with profitability between both revenue streams of roughly $1 million. So, razor-thin margins on that business, so that now that we're exiting that, we'll be able to focus entirely on our growth brands, which is where the profitability and the growth potential comes for National Vision as a whole.
And I do think it's gotta be frustrating for investors, the noise that the end of the Walmart source relationship had in Q1 and the end of the distribution relationship in Q2. By Q3, it will all be behind us. We'll be streamlined and just focusing on our key growth brands there, but it does cause noise right now.
Yeah, that makes sense. Reade, let's talk about healthcare-
Okay.
and AI. We're at a healthcare conference.
Yes.
No, so, where do you see National Vision factoring in the healthcare world, and how are you strategizing around that?
Okay.
Maybe let's start there.
So again, one of the largest networks of optometrists in America, and I think aside from Walmart, we right now have more America's Best locations than any other brand out there with our 1,000th store opening last Friday. So, large number of optometrists, all employed and connected on the same EHR system. This does not exist since optometry tends to be more independently minded. And with advances in technology, like AI, we can do a lot of things we couldn't do before. So, every one of our stores has a retinal camera, so this takes a picture of the back of your eye.
The back of your eye is a treasure trove of medical information, not just vision information, all sorts of different information about the extent to which you might have diabetes or hypertension or cardiovascular issues or kidney issues, on and on and on, can be read from the retinal scan via AI. And we believe that this is going to be in a world of shortages of doctors and in a world where consumers are even taking it upon themselves to self-monitor. I've, I've been so surprised by the amount of, "Oh, you wanna, you wanna go get an MRI? $395 for this," the, the number of consumer-driven pieces of that.
Part of that, we now have in a small number of stores, you can go in, get the picture taken of the back of your eye, and get an assessment of your biological age as opposed to your chronological age, and to the extent to which your biological age is more than five years off your chronological age, you probably should seek treatment from a doctor and change your lifestyle. But we see that both through technologies like AI readings of retinal scans and through potential partnerships with various insurance companies or other retail health-related groups, we think we can leverage the infrastructure that was built through building a company that sells glasses and contacts and participate more broadly in the healthcare of our patients, both with them paying and traditional insurance paying.
That is our innovation journey going down that road and are in quite a variety of fascinating conversations on that. We are the largest investor in an AI reading group called Toku that will assess the level of your chronological, of your cardiovascular issue and your kidney issue, and they are right now going through a breakthrough designation process with the FDA. We expect by next year that that will be blessed by the FDA.
So maybe, Reade, just to follow up on that, so Toku, you're the biggest investor. Once that is FDA approved, you'll roll that out into your stores and find a way to commercialize-
Yes
... and get revenue out of it.
Right. Right. And there are direct-to-consumer aspects, and there are also, partnerships with insurance companies, with cardio, with cardiologist groups, and with other retail health that we're all exploring there. It's not gonna affect the balance of this year, okay? It's not gonna affect the balance of this year. It's our longer-term innovation journey, but we clearly have a right to win there.
So we have a minute left, so maybe I'll, I'll throw it to Melissa. Let's talk about how you view the financial metrics for National Vision once things normalize, presumably in 2025, as it relates to, like, margin, same store, and EBITDA growth.
Yeah, so once things normalize, we'll expect in the balance of 2024, so the back half of the year, we'll see some pretty significant margin expansion based on how low margin Walmart and AC Lens was. So we'll see about 200 basis points of margin expansion for the remainder of this year. We will see some SG&A deleverage as a percentage of revenue just because the revenue base will be changing with the Walmart and AC Lens exit. You'll see that same phenomenon at the beginning of 2025. So for first half of 2025, you can expect to see the tailwind of the gross margin impact for the first half of the year, in addition to the SG&A deleverage.
The back half of 2025 will be our normalized go-forward business as it will be National Vision's growth brands from that point forward.
Sort of, yeah, what kind of growth rate should we be thinking about from that point forward?
The growth rate in 2025, we have previously talked about getting to a mid-single-digit margin for 2025. That's predicated on 2024 being able to hit the midpoint of our range for 2024, in addition to getting to comps of mid-single digits as we enter 2025. So we would expect to get to a more normalized operating margins of mid-single digits in 2025.
Awesome. And then, Reade, maybe just closing remarks. I mean, what should investors... What do you wanna leave investors with as they think about National Vision and the opportunities-
Right
... that are in front of you?
In an ever-changing and rapidly changing world, the one thing that doesn't change is the biology of the human eye. As we age, our vision deteriorates. You need to solve it, and the way people solve it is through glasses and contact lenses. People are always seeking value, and we are among the best values out there. As our consumer gets a little better, as the purchase cycle starts to normalize, as it inevitably will, we will be emerging stronger and be ready to take advantage of that.
Awesome. Thank you so much. Thank you, everyone.
Good. Thank you!
Thanks for the socks.
Yeah!