National Vision Holdings Inc
NASDAQ:EYE
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National Vision Holdings Inc
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Good day, ladies and gentlemen, and welcome to National Vision's Second Quarter Fiscal 2018 Financial Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] And as a reminder, this conference is being recorded.
I'd now like to turn the conference over to David Mann, VP of Investor Relations. Please go ahead.
Thank you, James, and good morning, everyone. Welcome to National Vision's Second Quarter 2018 Earnings Call. Joining me on the call today are Reade Fahs, Chief Executive Officer; and Patrick Moore, Chief Financial Officer. Jeff McAllister, our Chief Operating Officer, is also on the call and will be available during the question-and-answer portion of the call.
Our earnings release issued this morning and the supplemental presentation, which will be referenced during the call, are both available on the Investors section of our website, nationalvision.com. In addition, a replay of this morning's conference call will be available later today. The replay number as well as access code can be found in the earnings release. A replay of the audio webcast will also be archived on the Investors section of our website.
Before we begin, let me remind you, our earnings release and today's presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Commission. The release and today's presentation also includes certain non-GAAP measures. Reconciliation of these measures are included in our release and the supplemental presentation, which can be found on our website.
We also would like to draw your attention to Slide 2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. In addition, from time to time, National Vision expects to provide certain supplemental materials or presentations for investor reference on our Investors section of our website.
On today's call, Reade will discuss recent business highlights and provide a business update. Patrick will then review our second quarter 2018 financial performance and our fiscal 2018 outlook. Following these prepared remarks, we will open the call for questions.
Now let me turn the call over to Reade.
Thank you, David. Good morning, everyone. It's a pleasure to be speaking with you today to share our second quarter results. If you'll turn to Slide 4, we are pleased to report our 66th consecutive quarter of positive comparable store sales growth, a streak that began over 16 years ago when a new team of seasoned optical experts formed at National Vision. We are quite proud of the consistency of this track record.
Q2 adjusted comparable store sales growth was up 8.8%. The growth was led by America's Best with a 10.2% comp, and Eyeglass World with a 9.5% comp. We're pleased that our comparable store sales growth showed sequential improvement from the first quarter trend. We generated solid positive comps at all brands, with the exception of our military host stores, which represents less than 2% of our business.
Our teams remain focused on improving our store level execution everyday and in every store, one patient and one customer at a time. Another sign of customer satisfaction is Net Promoter Scores, which we track closely. In the quarter, our Net Promoter Score improved on a consolidated basis, led by America's Best.
We opened 25 stores during Q2 to end the quarter with 1,050 locations, or a 7.1% increase in store count over the second quarter last year. Most of the openings were in our America's Best brand, with two Eyeglass World openings. The unit growth and comparable store sales growth combined to drive a 14.2% increase in net revenue.
Adjusted EBITDA increased 18.2%, and adjusted net income grew 133%. Our second quarter EBITDA growth benefited by approximately 630 basis points from the net change in margin on unearned revenue. Based upon our first half performance, we're reaffirming our 2018 outlook. In a few minutes, Patrick will take you through our Q2 results and 2018 outlook in more detail.
Turning to Slide 05. Our business continues to demonstrate consistency in store performance and comp stores sales gains. The graph highlights our 66 consecutive quarters of comparable store sales growth across the economic cycle, both during strong and weak economic times. As we noted in May, we experienced a traffic rebound in the second quarter, given the extended peak selling season.
This shift was further exacerbated by inclement weather in March. This rebound highlights the resiliency of operating in a category where the purchase is tied to a medical necessity. The comp growth this quarter was driven, once again, primarily by gains in customer count, and to a lesser extent, an increase in average ticket. Our consistent positive comp results highlight the benefits of operating in a growing industry, having a leadership team of optical experts, new store growth as well as comparable store sales growth in our more mature stores, as customers keep coming back.
With our 12% sales growth in the first half, we continue to believe that we're gaining market share with our low-price operating model. Turning to Slide 6. We look to continue to execute on our core drivers of growth. First, new stores are our primary focus given the white space opportunity relative to our current footprint. We opened 25 stores in the second quarter, and continue to plan to open 75 stores this year, executing on the formulas that have worked well for us in the past.
As we look out to 2019, the pipeline for locations look strong. Optometrists continue to play a key role in our company's success, and it's our mission to deliver improved eye care to communities throughout the U.S. We strive to be the place where optometrists want to practice for their entire career. Our optometrist retention rates remained stable to last year, and we work hard every day to fill our ever-growing need for new optometrists.
Our team expects to continue to drive comparable store sales growth in 2018 even as we lap strong multiyear comparisons. Our key comp drivers are the comp waterfall for maturing stores, as well as our vision insurance and marketing initiatives. Our new stores take several years to fully mature as customer awareness builds. It can take time for potential customers to find a store after it opens as the infrequent purchase cycle for eyeglasses averages two to three years.
When our customers are in the market, we strive to deliver incredible values that attract them to our stores. Our introductory offer at America's Best, two pairs of eyeglasses for $69.95, including a free comprehensive eye exam, hasn't changed in over a decade.
At Eyeglass World, the offer of two pairs of eyeglasses for $78, along with the opportunity of same-day service from our in-store labs, is also among the lowest in the industry. We believe that the combination of extreme value, backed by excellent customer service, leads to satisfied repeat customers. In 2017, existing customers represented over 60% of total customers at mature stores. Participation in vision insurance programs remain a positive comp driver.
Strong net revenue growth from these partnerships continued in the second quarter. We believe there are opportunities to further expand our vision insurance business as we remain under-penetrated relative to the industry for the percentage of our business coming from vision insurance.
In terms of marketing, we continue to utilize television advertising to attract customers and drive traffic to our stores. Our Owl TV campaign at America's Best reminds consumers throughout the country that they paid too much if they didn't shop at America's Best. At Eyeglass World, our Mr. World campaign was expanded to the remaining control markets in the second quarter. We're pleased with the customer response since the campaign began in January, and believe it's been a factor in the brand's 9.5% Q2 comp, and 7.8% comps in the first half.
As we noted last quarter, we're more excited than ever about the fresh energy at Eyeglass World and its opportunity for future growth. In terms of operating productivity, we can't beat everyday low price without being everyday low cost. We believe our centralized lab network is a world-class manufacturing operation that provides a true competitive cost advantage. We're progressing towards opening our new Texas lab, which will add the necessary capacity to keep up with our growth. We remain on schedule to be operational in time for the first quarter next year.
Lastly, regarding our omni-channel investments and capabilities, we’re in the early innings of leveraging our new One View of the customer capability. In addition, we continue to see improvements in the online scheduling of eye exams. We believe that an omnichannel approach is going to be an ever more important part of the optical buying process in future years, and we aim to have this as a major competency for National Vision. At this point, let me turn the call over to Patrick for a more detailed discussion of our financial results.
Thanks, Reade, and good morning, everyone. Turning to Slide 8. As Reade noted, our business continued to perform well in the second quarter. The two fundamental revenue drivers of our business are new store growth and comparable store sales growth. During the quarter we opened 25 new stores and closed two stores. Over the last 12 months, we have added 70 net new stores, or a 7.1% year-over-year increase with the openings almost entirely in our America's Best and Eyeglass World brands. For these two growth brands, unit growth increased 10.6% in the quarter.
Our 2018 planned openings are slightly skewed towards newer markets, and we continue to expand our store base, and invest in these markets where our new stores are still ramping and building awareness. We have noted that new stores have historically taken approximately three to five years to mature.
We're excited about these markets and see a lot of our potential customers there. The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same store sales growth increased 8.8%, versus the 9.1% increase in the second quarter last year. This comp growth was driven by increases in customer transactions, and to a lesser extent, average ticket.
This quarter, we experienced a more pronounced difference between adjusted comps and GAAP comps of 10.4%, which primarily reflects the net change in unearned revenue. Recall that unearned revenue depends, in great part, on customer behavior, and is ultimately an issue of timing of sales in the last seven to nine days of the quarter compared to the same period in the prior quarter, hence unearned revenue can be highly variable, difficult to predict to a precise degree, and will continue to cause quarter-to-quarter fluctuations.
During the second quarter, we generated positive comps in four of our five brands. America's Best and Eyeglass World drove the growth with gains of 10.2% and 9.5%, respectively. Legacy comps increased to 4.4% in the second quarter. Of this growth, we estimate 195 basis points of benefit incremental eye exam revenues tied to the resulting volume shift from FirstSight.
Turning to income statement highlights on Slide 9. As a result of the strong comp and unit growth, net revenue increased 14.2% to $386 million. We also note that revenue growth benefited nearly 100 basis points from the timing of unearned revenue. Finally, as a reminder, during the first three quarters of 2018, the company will experience the elimination of approximately $5.5 million in revenue and costs associated with FirstSight operational changes that occurred in 2017.
In the second quarter, the impact was a reduction to net revenue of $1.8 million, which had the effect of lowering revenue growth by 50 basis points, but with no material impact on profitability. Adjusted EBITDA increased 18.2%, and adjusted EBITDA margin grew 40 basis points to 12.1% in the quarter. Adjusted EBITDA growth benefited 630 basis points from the net change in margin on unearned revenue.
Costs applicable to revenue increased 13.2%, or a decrease of 40 basis points as a percentage of net revenue versus last year. The decrease was primarily driven by a higher mix of eye exam sales as a result of our growing managed care business and increased eyeglass sales. Optometrist-related expenses reflect expanded coverage as well as wage inflation in certain geographic markets.
As Reade noted, we work very hard to attract and retain optometrists, and compensation is obviously an important part of this equation. SG&A expenses increased 14.1%, or a decrease of 10 basis points as a percentage of net revenue versus last year. The decrease was primarily driven by store payroll, partially offset by investment in advertising. During the quarter, we also experienced the continuing year-over-year impact of public company costs.
Depreciation and amortization expense increased $2.7 million, compared to the second quarter last year. The growth reflects our ongoing investments in new stores, our network of optical laboratories, and our omnichannel-related investments. Interest expense decreased $5.2 million versus the second quarter of last year, primarily due to lower debt levels driven by the $360 million IPO debt paydown in the fourth quarter of last year.
Our effective tax rate of 20.1% reflects the company's reduced federal statutory rate of 21% as a result of the 2017 Tax Act. Also included in the income tax provision for the quarter was an approximate $1.4 million income tax benefit from stock option exercises, which decreased our effective tax rate by 8.4%. Adjusted net income was $16.2 million, compared to $6.9 million in the second quarter of 2017, and excluded the income tax benefit from the option exercises. Adjusted diluted EPS increased 69% to $0.21, compared to $0.12 last year.
Turning to Slide 10 and first half 2018 results. We are pleased with our first half results, with adjusted comparable store sales growth of 6.5%, net revenues up 12%, and adjusted EBITDA up about 10%. Our performance highlights the resiliency and consistency of our business despite quarter-to-quarter fluctuations. The peak selling season extended between the first and second quarters, primarily due to the timing of tax refunds and also exacerbated by inclement March weather.
Our business was resilient to these factors, and delivered consistent results over the entire first half. Adjusted EBITDA margin decreased by 30 basis points to 13.6%. Adjusted EBITDA grew at a slower rate than net revenue, primarily due to higher optometrist costs, investment in advertising and public company costs.
On Slide 11, at the end of the second quarter, our total debt was $574 million and our cash balance was $35 million. Net debt-to-adjusted EBITDA was 3.2x or similar to the first quarter. Year-to-date, we have invested $49 million in capital expenditures with the majority of this CapEx focused on growth initiatives.
Cash flow provided by operating activities increased over $10 million. We continue to assess potential growth investments and would approach such decisions with the strict capital discipline we have always employed, with the goal to deliver investment returns that drive shareholder value. We are also continuing to evaluate options that would result in balance sheet enhancements over time.
Turning to Slide 12. Based on our first half performance, we are reaffirming our fiscal 2018 outlook as indicated in our release of preliminary second quarter results on July 23. Net revenues of $1.485 billion to $1.515 billion; adjusted comparable store sales growth in the range of 3% to 5%; opening approximately 75 new stores, adjusted EBITDA between $172 million and $177 million; and adjusted net income between $52 million and $56 million.
While we are pleased with our first half adjusted comps at 6.5%, we believe it is prudent and responsible to continue to plan the business in the 3% to 5% comps range. As a reminder, we are facing more difficult comp comparisons than we faced in the first half of the year, especially in the fourth quarter, and our business tend to fluctuate quarter-to-quarter, as demonstrated by our first half performance. Store openings this year will be predominantly America's Best location, with the remainder being the Eyeglass World stores, similar to the mix of openings between these brands in 2017.
We have made good progress on our store opening plans for 2018. The remainder of our openings for the year should be relatively consistent between the third and fourth quarters. We projected few closes as is typical each year. While we do not provide quarterly specific guidance, we do want to highlight factors that may affect quarterly comparisons for the remainder of 2018.
Our adjusted EBITDA outlook includes incremental public company costs, which we now expect to be in the vicinity of $3 million for 2018, up from our previous estimate of over $2 million. Recall that the grow over for public company costs end in the third quarter. We are highly focused on managing these as well as other costs in an environment of rising wages. And we continue to reinvest in growth and build out our omnichannel capabilities.
As we previously noted, unearned revenue is a factor in quarterly fluctuations. Unearned revenue had a favorable 630 basis point benefit to the second quarter adjusted EBITDA, and we expect the trend to reverse with a negative impact in the third quarter. Finally, as a reminder, average rising expense was leveraged in the third quarter of 2017 due to timing. Consequently, we expect to incur higher advertising expense in the third quarter this year.
For modeling purposes, we continue to expect our full year of 2018 tax rate to be approximately 26%, excluding the impact of stock option exercises, which could cause some fluctuations in our quarterly effective tax rate. Finally, we reiterate our estimates of annual interest expense of $37 million to $39 million; depreciation and amortization of about $72 million to $73 million; and capital expenditures between $100 million and $105 million.
As a result of stock option exercises, we would expect continued growth in our shares outstanding. In summary, we remain focused on delivering our financial commitments for 2018 and executing our key growth initiatives.
Now I'll turn the call back to Reade.
Thank you, Patrick. Turning to Slide 13. I want to point out that the month of August takes on a special importance in the optical industry. August is National Eye Exam Month, Children's Eye Health and Safety month, and Children's Vision and Learning month. Annual eye exams are important for everyone, but especially kids and teens. As the back-to-school season kicks off, it's estimated that approximately 50% of children have not had an exam in the past two years.
Beyond our company, our work and support of global optical philanthropic efforts continues. As evidence of their importance, a landmark study published last month in the global health Journal, The Lancet, quantitatively proved the immense impact that improved eyesight can have on productivity and income, especially in low and middle-income countries. Eyeglasses were provided to a group of tea pickers in India, and their productivity improved 22%. And for those over age 50, it improved 32%.
As quoted last quarter from a New York Times article, untreated vision problems are the biggest health crisis you've never heard of. In summary, I'm pleased with our second quarter and first half results. I want to thank our entire team at National Vision, the 11,000-plus associates, including the 2,000 optometrists, who everyday, provide much needed medical services to patients at our over 1,000 storefronts.
We strive to be the best at providing low-priced exams, eyeglasses and contact lenses, while both at home and abroad, we work to bring glasses, and consequently, sight and improved quality of life to those who would be unable to see well otherwise. As I noted on past calls, this is why we believe optical retailing is a noble profession. This concludes our prepared remarks, and at this time, I'll turn the call back to James to start our Q&A session.
Thank you. [Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Your line is now open.
Thanks, good morning. It's Simeon Gutman. Reade, I want to start with two longer-tailed revenue questions. First on managed care, if you could talk about if there's any longer term percentage of sales that the business could eventually derive from that segment. And two, Walmart, I think we talk about this pretty often, but potentially expanding the relationship over time.
Yes. So on both those, our managed care has for years, been a steady grow as a percentage of sales for us, and that is expected to continue along the way. We came to managed care sort of late to the party. When we bought America's Best, it had no managed care, so we were starting from scratch on that and we've grown consistently since then. But we remain underpenetrated relative to the category on managed care given that a lot of our target audience has – doesn't have vision insurance. And when it's your money, you seek out the best value, and we think we provide the best value in optics in America.
So managed care continues to grow; still underpenetrated, still under half our business. In terms of the Walmart relationship, the Walmart relationship is strong. We've been Walmart's partner for over 27 years now, and I've been the Walmart account executive for the past 16 years. So it's a very good, healthy relationship, and we're pleased to be able to partner with them. And one of our key strategies is to strive to be the best partner Walmart has ever had, but no further news there.
Great. My follow-up is – you mentioned some advertising, I think, incremental in the third quarter. Has that been planned from the beginning of the year? And is that related to America's Best, EGW? Just put some color on that, please.
I'll take that, Reade. In general, the advertising plans are fairly set at the outset of the year, Simeon, but we'll tweak those a bit as we move through the year. I think one of the main callouts that I was trying to make, as I was discussing a few points on the third quarter was, last year, and the third quarter of 2017, we delevered in terms of advertising. Actually, we levered – we levered, my bad. And this year, we expect that to be more normal. We're advertising in EGW. We're running the new ads there that's been – we've been very happy with those results. We're in all stores now, and we continue to press the Owl advertising as well.
That was pretty neat – go ahead.
Sorry, I was going to connect to that. When you measure ROI on advertising, because it's less of a cyclical business, and, right, just more stable over time, are you measuring it in that three months? Are you measuring it six months? Like what's the time frame? I was asking more in the context of thinking about the sales guidance that – you said you're being prudent, but thinking if there's a return that comes quicker?
We monitor different aspects of the ROI on our advertising in different ways. There are some of it that is very quantifiable, like direct mail and our online advertising that's very tangible. And with advertising, we tend to test different levels at different times on a test versus base versus control basis. So if that answers that, we are always -- we look at it in different ways depending on the medium.
Thank you. Our next question comes from Matt Fassler with Goldman Sachs. Your line is now open.
Thanks a lot and good morning, everyone. My first question relates to EGW. You talked about the Mr. World campaign. You talked about extending that. Can you just give us a bit more color on the timing of that rollout, the impact that you think it's had, and the progression of any additional impact you think you might have as that business has had two very good comp performances in a row relative to America’s Best.
It's Jeff McAllister, I'll be happy to take that. So as you commented, we're very excited about EGW's advertising campaign. We think Mr. World has had a very positive impact in the marketplace. Customer response as well as our associates response has been quite good. We continue to reinvest in that and tool for the future so that we can build on that campaign. I think you'll see even more innovation in time to come.
But it's not just advertising. There's been a lot of operational pieces, too, that have gone into that. And it's – there are a few different levers, advertising has been one, but there are many. I just would like to point out, for the first half, Eyeglass World's comps were actually better than America's Best.
And then secondly, just on the net margin on unearned revenue, we continue to get our feet wet with this convention and learn how to model that. Can you talk a bit about where that is evident? I know you quantified it, which is very helpful, in your presentation, in your remarks. Where we see it in the P&L, and to the extent that we model some giveback in the second half of the year as per your indication, where we would withhold that from?
Yes. So as you think about the unearned revenue, that's really – it's a timing adjustment, GAAP adjustments that we make. It affects the last seven to nine days of the quarter. It's essentially, at the end of one quarter, you defer revenues and you recognize, you do the same, you compare that year-over-year. Typically, the pattern is, for companies that are growing like ours, it's going to be a net negative, by the time we get to the end of the year. If I look at 2016 and 2017, Matt, that was like negative $1.5 million and negative $2 million net on the year. There's some seasonality that affects that.
There's also customer behavior, in terms of how quick they get their glasses as you can see weather interruptions. So it was a negative in Q1. We called it out. It was a positive in Q2. Net at midyear, it's a net positive. We expect it to go a little negative, to reverse and go negative again in Q3. And in Q4, again, I would just do the math – assume that we would probably be in that negative one, two, low single-digit millions number for the full year.
Thank you.
It's very difficult to model. We're happy to spend more time offline talking through that, but that will always get you in the vicinity.
Got it, appreciate it.
And in terms of the vicinity, in terms of our P&L, it's in that reconciliation column. The unearned revenue is in the products section, and the deferred is in the services. And then you also can see the costs, so you can see the margin on the unearned revenue, but it's in segment reporting in the reconciliations, It's very clearly called out.
Thank you. Our next question comes from Zach Fadem with Wells Fargo. Your line is now open.
Hey, good morning. Can you talk a little more about managed care? Nice to see that business continues to gain traction but across your stores, do you tend to see a greater incremental benefit at Eyeglass World just given a higher price point in branded sales? Or would you say that when you penetrate managed care, that new impact is spread more evenly across the business?
So I think that the factor that influences this the most is sort of when certain plans became available to certain brands. So your 30,000-foot logic is there, and so there's nothing wrong with that logic. But it's sort of different plans and payers came live with different brands at different times. There's a ramping as new plans come to this, and that's a larger factor in the percent managed care that is – that each different brand achieve. And it is different for each brand. But again, the broad trend is an upward slope.
And I would add, and I think we've said this before, we started from zero with America's Best in 2005, and so it's also a function of how long has that been a component of the brand's customer base.
Got it. Yes, thank you. That’s helpful. And then just also – I'm sorry, did you have something else to add?
Yes, no. But it's a lot about the consistency of the storage, it's very, very – it's a steady thing.
Okay, thanks Reade. And then just now that you're a full year in on some of your newer market stores, California for example, I'm curious if you could talk about how those stores have performed relative to your internal expectations, both in terms of year one sales and also payback versus your internal models.
Yes, we really, sort of both in terms of geographies and in terms of vintages, for competitive reasons, we don't like to go into detail on either of those pieces often, because the vintages and the geographies are known by our competitors. So we really don't drill down that deeply.
Understood, thanks Reade.
I would just add, like all new markets, we're continuing to ramp, continuing to build awareness, especially in new markets. These typically take, historically, three to five years to mature. And we've been pleased in our new markets in terms of ramping and finding the customers and developing more customers that we think can be long-term loyal customers.
And that is the nice thing about this industry, is with a roughly two-year purchase cycle. That first year, it's all new customers, first year or twp. And then the third and fourth years, when you compound it on top and you have the – you still have new customers coming in, but you also get repeat customers. And that's just a nice thing about the industry and the ongoing ramp that comes with it.
Thanks guys.
Thank you. Our next question comes from Paul Lejuez with Citi Research. Your line is now open.
Hi guys. Thanks. Just curious. As you look back at the first half, obviously, there was some shift between the first quarter and second quarter. But curious, when you look at the first half as a whole, when did you outperform your expectation versus where you think you might have been able to perform a little bit better?
Well, we're happy with the first half. And we've said frequently, it's a business better looked at, and it has been in quarters, especially, I think this is a great example, sort of all those storms in March and timing of tax refund spread things, the March-April spread, which now, one can see when you look at the first six months. But we're pretty darn happy with the first half because there was nice consistency across the business. So I don't – I'm not sure what to add there. We're pretty happy, yes.
Yes, I mean, obviously, Paul, our comps were outside of the north end of the range. We're pleased with that. We like to stay a little conservative on that as we look out over longer periods of time. Revenues outpaced profit growth. We listed a few of the factors being wage pressure and some investments in advertising, and then the pub co. None of those were really unexpected. So I would say looking at the balance for the first half, we're kind of happy with the foundation that, that created for the rest of the year.
And maybe, fourth, I'd say, we are pleased with what Mr. World delivered for us in Eyeglass World when we – the first quarter was more in test mode, we were in majority of the markets was still in test mode. And as that caught fire, that was good. Did that answer your question, Paul?
It does, yes. Are there any signs of relaxation of the cost pressures on the optometrists' wages that you're seeing now? Or should we expect that, that's going to be a continued drag for the foreseeable future?
Well, first thing – this is Jeff. First thing I'd say is that we're just really delighted to be able to attract and retain our doctors. We think that's the way to continue to drive a healthy business. We feel like, again, it will continue to be an opportunity for us to be able to pay them appropriately, and we're going to maintain what is competitive in the marketplace. And that's very local in the way that we think about it. So again, we're pleased with the current performance. We think that we can continue to be the best place for an optometrist to join us and to stay for their entire career. And we actually think that, again, they provide a great service to our customers, so we're delighted to pay them what's appropriate for that role.
Thanks guys. Good luck.
Okay, thanks Paul.
Thank you. Our next question comes from Michael Lasser with UBS. Your line is now open.
Good morning. Thanks a lot for taking my question. As we model your comp in the back half of the year, should we just extend now, the two years stack run rate that you've been experiencing in the last few quarters. And why would it be any less than that?
Well, as I had said, we were pleased with the 6.5 being north of the guidance range, but we're going to probably push it towards our guidance, Michael. And we do look at the stack and understand the stack. So I would simply say the comps in the second half are a little tougher.
Even with the two hurricanes in third quarter, we produced a seven last year at in Q3, and then a part of that recovery shifted into Q4 where we repeat produced a 10.5. But in terms of guidance, I'm giving you the – we're pointing you towards that range. We did see the quarter-to-quarter fluctuations. One thing we have noticed in the past is, sometimes, with major election cycles, and we have a mid-term coming up, we can get a little bit of advertising disruption as local races have priority. I'm not saying we're going to get that.
But that's one of the reasons may be a little bit careful with looking at the second half of the year. So declaring victory in the first half, but it's only half of the year, and we just want to be prudent with that.
And can you give sense of any capacity constraints within your business, if you were to see a significant ramp-up in some of these growth initiatives? Do you have the capacity to take on more business, for example, from Walmart?
I think that our understanding specificity I would say that we continue to look at our long-range planning and evaluate the needs of the business based on customers' demand, and then determine what do we need in order to be able to provide that, whether it be [DRDs], whether it be the equipment, the stores, access, convenience. So we don't see any constraints that we can't manage in that process, and feel like we've got a good idea of what it takes to continue to grow year-over-year and to continue to provide outstanding customer service, and offer a tremendous value for customers.
Likewise, we build for the future relative to our manufacturing. That's something that takes us at least a year to do, to be able to ramp. We have a new lab as we talked about going in place, and we'll be online in spring of next year in Texas. We're excited about that, and again, staying ahead of what we anticipate to be the growth curve. So again, feel like that everything that we can manage is within our control, and feel very good about our ability to serve customers based on when they're ready and come to the store.
And Michael, there was another side to your question about sort of talent capacity at the management level. One thing I've always found remarkable about this company is that for most of the leadership of the company, this is the one of the smaller companies they've ever worked for. So it's not a proof that this is the largest piece, but rather, most – we've been able to attract people who are used to larger entities.
Yeah, I would tag on to that. Frankly, is just back to the point of our people truly do make the difference in terms of serving our customers, whether optometrists or associates. And I think this business, and this company has done a great job of staying core to the optometry practice and being a great place for people to come and grow their careers. So I feel like we've got real opportunities from the tailwind to attract the best talent, not just talent.
I also wanted to think, I really enjoyed about Jeff, being here, after coming to us from Walmart, the largest company in America, is he's got a lot of ways that just helps to make a larger company feel small. And I think that the more we can – as we continue to grow in numbers of people, find ways to maintain the intimacy and family-like atmosphere of a smaller company, that's useful, and Jeff has brought a lot of that perspective, because I think that's frankly does pretty darn well.
Thanks for all the helpful color.
Our next question comes from Robbie Ohmes with Bank of America. Your line is now open.
Hey guys, congrats an another great quarter. My first question is can you give us any color on the – you guys had mentioned the expectation for sales recapture this quarter. Can you give us any color on the – you guys had mentioned the expectation for sales recapture this quarter. Can you give us any color on how much that might have helped comps? And was it more of an Eyeglass World or – where did it help the most?
Yes, so thanks, Robbie. Last year, in the third quarter, I'm just working from memory, I think we listed revenue was impacted in third quarter by up $3.5 million to $4 million, maybe it was 4.1. It was about 150 basis points of shift. So if I talked about the seven comp in third, and 10 5 in the fourth, I'd probably normalize that by about 150 bps between the two quarters.
The Houston storm affected mainly AB, but there were a few under Walmart brand stores affected. And then Ormond, the Florida storm, heavy impact to EGW. A lot of our EGW stores are in Florida, and so we saw a more pronounced impact in, and I remember from the comps in fourth quarter, you saw that in both brands, it was very pronounced in EGW.
And again, this is just resilience over time. We sell a medical necessity. Good weather and bad hurricanes and weird economic cycles. People's eyes just tend to go bad as they age, and we provide great value on that. So over time, it all watch as it happens every time
And the other question I had was just outside of optometrists. Any – what s the general – what is the wage in – what is the outlook for wages in freight costs and other things look like? Is it upticking any faster than you would have been expecting in your plans?
This is Jeff again. We continue to see wages within our current plans, and don't see anything that's popping necessarily. Again, I think one of the opportunities that we have is given the fact that we're very core in the space – and I think we attract people who really see this as also a greater calling and part of a mission, if you will. And so we feel like in many respects, we're competitive, but we don't have to overpay in order to attract the best talent. Again, and that's at the associate level, and I think same for the doctors as well. Relative to freight costs, I think, again, it's a small portion of our overall business. We don't see anything material at this point, generating any concern. And we continue to find ways to save money as we continue to look for more efficiency and more effectiveness in the way we do our work.
Great, thanks very much.
[Operator Instructions] Our next question comes from Stephanie Wissink with Jefferies. Your line is now open.
Thanks, hi everybody. We have two questions just in follow-up to, I think it was Paul's earlier question, on optometrist wage inflation. Just curious if you can give us a little bit of a view into it. But is it a supply-and-demand issue, or is it a mix of experience? Are we seeing wage inflation there? It seems like a little bit ahead of what we're hearing broadly across some of the medical industries.
So if you could talk a little bit about – is it a pipeline of new optometrists graduating, and just seeing less of a supply? Or is it really around the quality, mix of experience and other? And then Reade, I just want to just come back to something you said at the very tail end of your prepared remarks on the pediatric opportunity. Is that – as you look at the business mix, is that a market share opportunity for you to penetrate more deeply into the, kind of the household budget optometry? Or is there something unique that's going on with respect to just the timing of back-to-school, and so you made mention of it?
I think, again, we're a great place for new grads coming out of school, as we are for those who have practiced on another form of practice, whether it be an independent or a competitor, if you will. We feel like we can be extraordinarily competitive in a way that causes them to feel like this is a great place to practice – and offer them the kind of technology and tools, if you will, and our process is to give them the freedom to really practice optometry as they see best. So we think it attracts a certain type of optometrists, but at the same time, we do want to – we want to make sure that we maintain quality, and so we have a lot of process to ensure that our doctors are practicing with the most care with the patients' interest in mind.
So from that perspective, again, we will be competitive from a wage standpoint, but we'll also choose our doctors carefully to make sure that they fit what our needs are, and that we have somebody that we can continue to work with for their career.
And you also asked about the schools. There are actually – schools keep opening. So I think it was a decade ago, there were 18 optometry schools in the U.S., and now, there are 25, so – with discussion of adding more. So that should be a help to us over the long term.
On your question about the pediatric side, I would say that sort of overall, there is, nationally and internationally, a heightened awareness sort of that – kids' vision plays a role in their education and their potential. There's more and more realization of, oh my goodness, a portion of educational of shortfalls relates to a kid not being able to see well. And so this is sort of part of just – one of the rising tides of our industry, domestically and globally, but sort of – often when you think about demographic, you think about in a category, we think about people who get older, and their eyes go bad.
But there is a heightened awareness that vision plays a role in education, and these – the things I alluded to were just part of the drip, drip, drip of added awareness to this. I'm not expecting on our next call to say that children's glasses is a wildly bigger percentage of our business than it was this time last year, but I will say that, I think, it's a trend that over the course of the next five to ten years a higher percentage of kids are going to be – we're going to catch their vision problems and they're going to be – and there are probably going to be more vision problems given the differences in eyestrain associated with screens.
Frankly, there's a lot of studies out of China now talking about how kids not spending enough time outside stunts their vision. And of course, that's something that's happening here as well. So broad trend, yes. Near-term jump, no. Just another factor in why we are confident in the long-term pace in this industry overall. And again, another reason why were so involved in the Boys & Girls Clubs, our program, because that's philanthropically a place where we can really make a big impact on education of kids in America.
Very helpful thank you. Just a one house-keeping. I am just curious if you can remind us what your store structure looks like, and if you're seeing any vendor surcharges or cost impediments from some of the – projected cost impediments from some of the trade conversation.
The only trade related thing is eyeglass cases, which is just not material. It is a tiny part. So no dramas there.
Thank you.
Thank you. I am showing no further questions in queue, so I'd like to turn the conference back over to Mr. Fahs for closing remarks.
Thank you so much. We want to thank you all for joining us today on this, our fourth quarterly investor call. We thank you for your continued interest in National Vision. If you have a minute, we invite you to go online and watch our latest television ads.
We've got them both for America's Best, the Owl Campaign and Mr. World campaign for Eyeglass World. It's on a link on Page 22 of our presentation. For all the reasons I hope you heard here, we remain excited about the opportunities for the rest of 2018 and for years and years to come. And we're looking forward to speaking with you again later this fall when we report our third quarter results. Thank you all very much.
Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.