National Vision - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Q2 2023 National Vision Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Angie McCabe, Investor Relations. Please go ahead.

Angie McCabe (Director of Investor Relations)

Thank you. Good morning, everyone. Welcome to National Vision's second quarter 2023 earnings call. Joining me on the call today are Reade Fahs, CEO, and Melissa Rasmussen, CFO. Patrick Moore, COO, is also with us and will be available during the Q&A portion of the call. Our earnings release, issued this morning, and the presentation accompanying our call are both available in the Investors section of our website, nationalvision.com. A replay of the audio webcast will be archived in the Investors section after the call. Before we begin, let me remind you that our earnings materials 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 our filings with the Securities and Exchange Commission. The release in today's presentation also includes certain non-GAAP measures. Reconciliation of these measures is included in our release and the supplemental presentation. We also would like to draw your attention to slide two in today's presentation for additional information about forward-looking statements and non-GAAP measures. As a reminder, National Vision provides investor presentations and supplemental materials for investor reference in the Investors section of our website. I will now turn the call over to Reade. Reade?

Reade Fahs (CEO)

Thank you, Angie. Good morning, everyone. Thank you all for joining us today. As you likely saw, on July 26th, we announced our preliminary second quarter financial results in conjunction with the news that our partnership with Walmart will be ending in 2024. This morning, I'll provide some highlights from the second quarter, update you on the progress we're making on our key strategic initiatives, with particular emphasis on how we're expanding exam capacity, and provide some color on the Walmart transition. Melissa will review our second quarter financial results and 2023 outlook in more detail. As we communicated two weeks ago, our second quarter 2023 results were largely in line with our expectations and reflected trends similar to what we experienced in the first quarter.

Compared with the second quarter of 2022, we delivered net revenue growth of 3.1% and delivered adjusted comparable store sales growth of 1%. We continued to see strength in our managed care business, as well as a further shift in the number of higher-income customers who traded into our more value-priced offerings. During the second quarter, we opened 24 new stores and remain on track to open approximately 65-70 new stores this year. As I'll discuss later in my remarks, we continue to see tangible results from the execution of our key strategic initiatives. These factors, among others that Melissa will discuss, resulted in adjusted diluted EPS of $0.17 for the second quarter. Importantly, we believe the adjusted operating income and adjusted diluted EPS will be at or above the midpoint of our fiscal 2023 guidance ranges.

Regarding our Walmart relationship, as we detailed it in our July 26th press release, as of February 23rd, 2024, we will no longer be managing the 229 Vision centers in select Walmart locations, nor will we be providing our related optometric services for Walmart in California. Consequently, we made the decision to end the wholesale distribution and e-commerce contact lens services that we provide to Walmart and Sam's Club through our AC Lens business when our contract ends on June 30th, 2024. While we did not expect this decision from Walmart, for well over a decade, we've been focusing on growing our two larger, more strategic brands, America's Best and Eyeglass World, driving the revenue from Walmart stores down to about 8% of our net revenue in fiscal 2022.

We have created a dedicated transition team, and over the coming months, it will be focused on executing a successful transition of the vision centers we operate to Walmart. In addition, we are focused on ensuring we align our cost structure with our go-forward business model and expect to provide more details on this when appropriate. As we look ahead, as a less complex and more streamlined organization, we will be able to have even greater focus on the core strategic initiatives that will grow our two large growth brands and return to a mid-single-digit adjust- adjusted operating margin milestone while solidifying our leadership position in the marketplace. We continue to make progress on our strategic initiatives, which underscores our confidence in our ability to adapt our business to thrive in this new and evolving environment. Our primary strategic focus has been on expanding exam capacity.

In Q2, as in Q1, the stores that achieved our capacity goals produced positive comparable sales growth above our reported consolidated comp. We are laser-focused on improving coverage and are making progress on this front. One example is in dark stores, where there is no in-store optometrist coverage or remote exam enablement. In America's Best, dark stores were at their highest level in the second quarter of 2022, and are now at less than half that, even while we have increased our store base. We are also focused on improving coverage in our dim stores, which are generally stores with some coverage, but well below our desired levels. The number of dim stores can fluctuate throughout the year. We've been attacking coverage and continue to attack it through recruiting and retention efforts and deployment of our remote technology.

We also continue to drive increased exam capacity through retention of existing optometrists in our network, recruitment of new optometrists to our network, and deployment of our remote medicine capabilities. We believe that the increase in flexible scheduling options that we now offer to new and existing optometrists is one of the key drivers of improved recruitment and retention levels. We're pleased that we remain on track to deliver a second consecutive year of improved retention rates as we work towards returning to retention levels at or above where they were prior to the COVID-19 pandemic. Additionally, we're pleased this year's student recruitment efforts are shaping up to be another record year. We believe the flexible scheduling options offered to graduating optometrists were a key driver of the increase in new graduates joining us.

Now more than ever, new and experienced healthcare professionals want more control over their schedules, including how and when they decide to practice. Scheduling flexibility, combined with other incentives, is resulting in strong levels of interest by new graduates and experienced optometrists in joining the optometrist network since we launched changes to our recruitment approach and benefits earlier this year. Another driver of expanding exam capacity is the continued rollout of our remote medicine technology. Year to date, through July 1st, we deployed remote in nearly half of our 200 targeted locations, mainly in our America's Best locations, and remain on track with our rollout target this year. Notably, more than 40% of our 926 America's Best locations are now enabled with both our remote and electronic health record platforms.

We're deploying remote in tandem with electronic health record technology as the two work together to drive expanded capacity, improve in-store efficiencies, and importantly, improve the patient experience. The combination of these two initiatives is resulting in added exam capacity and sales that we would not have had otherwise, we remain on track for remote to be EBITDA profitable in 2023. Many optometrists enjoy practicing via a remote setting, which helps support both recruitment and retention efforts. While still in the early innings of our remote program, we remain confident in its ability to continue to expand exam capacity over time, thereby allowing remote optometrists to serve even more patients. As we look ahead, we are focused on carefully navigating the evolving and complex state regulatory landscape in future deployment phases.

Before I conclude and turn the call over to Melissa, there are a couple of other recent highlights that I want to touch on. First, as we mentioned in our first quarter earnings call in May, we recently undertook a study of our pricing architecture to complement the internal pricing analysis we do on a regular basis. This study was recently completed. While still early in our evaluation of the findings, we're already implementing some modest non-headline adjustments. Second, we are currently in the midst of back-to-school season, which is our second-largest selling season after the first quarter, when health benefit plans reset and customers receive tax refunds. During back-to-school season, children are getting eye exams and glasses in preparation for returning to school, and we can currently see a seasonal increase in adult customers.

As has been our historical practice prior to the COVID-19 pandemic, over the past several weeks, we conducted robust in-person back-to-school meetings across the country with our store teams, where we listened to our customer-facing associates to ensure we're providing them with everything they need to best serve our patients and customers. We are reinforcing our focus on our field management to improve operations and thereby improve performance. As we look ahead, we remain encouraged by the progress we're making across the business with execution of our strategic initiatives. While our model is evolving, we remain focused on our mission to help people by making quality eye care and eyewear more affordable and accessible. I'll now turn the call over to Melissa for a more detailed discussion of our second quarter financial results and our outlook for the remainder of 2023. Melissa?

Melissa Rasmussen (CFO)

Thank you, Reade, and good morning, everyone. As you know, two weeks ago, along with the news that our partnership with Walmart will be ending in 2024, we announced preliminary second quarter results that were largely in line with our expectations and reaffirmed our fiscal 2023 outlook, as we previously communicated on our first quarter earnings call in May. For the second quarter, net revenue increased 3.1% compared with the prior year's quarter. The timing of unearned revenue negatively impacted revenue growth in the period by 90 basis points. We opened 21 new America's Best and 3 Eyeglass World stores and closed one store in the second quarter.

Unit growth in our America's Best and Eyeglass World brands increased 5.1% on a combined basis over the total store base last year, and we ended the quarter with 1,381 stores. As Reade mentioned, we are still on track to open between 65 and 70 stores in 2023, consistent with our previous guidance. Adjusted comparable store sales grew 1% compared to second quarter of 2022, driven by an increase in average ticket and an increase in customer transactions, supported by the continued strength in our managed care business. As a percentage of net revenue, costs applicable to revenue increased 120 basis points compared with the prior year quarter. As we expected, we continued to see deleverage of optometrist-related costs.

However, this was partially mitigated by an increase in exam revenue, driven by managed care strength and pricing actions. The net impact from deleverage of optometrist-related costs and the increase in exam revenue was approximately 50 basis points and in line with our expectations. In addition, we experienced a 50 basis point headwind due to reduction in other components of service revenue, including decreased warranty plan revenue. Lastly, the remaining 20 basis point increase was associated with an increase in contact lens product costs, which was partially offset by additional pricing actions, as well as favorability with freight expense management. As a reminder, for the year, we initially expected a gross margin headwind of approximately 100 basis points, balanced between higher product costs and investments in doctors.

Given the mitigating actions we are taking across both product costs as well as overall service costs, we now believe it is best to look at this breakdown as a split between product costs and overall service costs, which include investment in doctors. Given our year-to-date results and expectation for the remainder of this year, we now expect the 100 basis point gross margin headwind for the full year to be skewed to service cost versus product cost. Adjusted SG&A expense as a percentage of revenue increased 140 basis points compared with the second quarter of 2022. The increase was primarily driven by higher payroll and performance-based incentive compensation, as we expected, and higher occupancy, partially offset by other expenses.

As a reminder, we expected adjusted SG&A to grow in the high single-digit range in the second quarter, but saw a slightly lower increase due to the timing of certain expenses that we now expect to incur in the third quarter. Depreciation and amortization expense decreased 1.3% to $24.9 million from the prior year period, primarily due to a shift in cloud-based software investments that are amortized in SG&A, partially offset by our ongoing investments in remote medicine technology and new store openings. Adjusted operating income was $16.4 million, compared to $27.8 million in the prior year period.

Adjusted operating margin decreased 240 basis points to 3.1%, driven primarily by the factors discussed, as well as the $3.5 million negative impact from the margin on unearned revenue in the period. Net interest expense was $1.8 million, which includes mark-to-market gains and losses on derivative instruments and changes related to amortization of debt discount and deferred financing costs of $1.3 million. The year-over-year decline in net interest expense was primarily due to income on cash balances and higher derivative income, partially offset by higher term loan interest expense. Our effective tax rate in the second quarter was 4.7%. As we move into the second half of 2023, we continue to expect our tax rate to be more in line with our full year guidance of 26%-28%.

Adjusted diluted EPS was $0.17 per share, compared to $0.21 per share in the prior year period. Turning to our financial results for the six months to date as compared with the prior year period, net revenue increased approximately 5%, driven by new stores and adjusted comparable store sales growth of nearly 1%. Adjusted operating margin declined 180 basis points compared to the prior year period, driven primarily by the aforementioned factors that impacted the second quarter. Our balance sheet and liquidity remain strong. During the second quarter of 2023, we successfully refinanced our term loan and revolving credit facility, extending our access to $300 million in liquidity through the revolving credit facility for an additional five years through June 13th, 2028.

We ended the quarter with a cash balance of $254.6 million and total liquidity of $548.3 million, including available capacity from our revolving credit facility. As of July 1, our total debt outstanding was $565.7 million, and for the trailing 12 months through July 1, 2023, we ended the period with net debt to adjusted EBITDA of 1.9 times. Year to date, we generated operating cash flow of $112.2 million. In addition, for the first six months of fiscal 2023, we invested $54.1 million in capital expenditures, primarily driven by investments in new stores, our lab and distribution center, and our remote medicine technology.

We remain on track for capital expenditures to be in the range of $115 million to $120 million in 2023 to support our key growth initiatives. Moving now to a discussion of our 2023 outlook. Consistent with what we communicated on July 26th, with the exception of our outlook for depreciation and amortization expense, we are reaffirming our previous guidance ranges for fiscal 2023. Our revenue guidance continues to incorporate ongoing execution of our strategic initiatives focused on expanding exam capacity, as well as a range of scenarios pertaining to consumer sentiment. We believe we are well within our provided range and well positioned to deliver on the expected sales trend improvement in the back half, supported by the timing of new doctors joining and the ongoing execution of our strategic initiatives.

We now expect depreciation and amortization to be in the range of $99 million to $101 million, given lower depreciation in the first half of this year, the timing of capital expenditures, and the anticipated impact of the intangible asset impairment related to the Walmart exit. In addition, we expect adjusted operating income and adjusted diluted EPS to be at or above the midpoint of our guidance ranges of $48 million to $66 million and $0.42 per share to $0.60 per share, respectively. Our guidance for adjusted diluted EPS assumes approximately 79 million weighted average diluted shares outstanding. Finally, with respect to our relationship with Walmart, as Reade discussed, Walmart's contribution to our overall revenue and EBITDA has declined over time, in large part due to our efforts to grow America's Best and Eyeglass World.

Consistent with what we communicated two weeks ago when we announced the ending of our relationship with Walmart, for fiscal 2023, we expect the EBITDA contribution from Walmart to be lower in fiscal 2023 than fiscal 2022. We also expect to record non-cash goodwill and intangible asset impairment charges of approximately $60 million and $10 million, respectively, in the third quarter of fiscal 2023. Given the termination of our Walmart relationship, we are taking a close look at our cost structure and remain committed to making the necessary changes to align it with our go-forward operating model. We believe through the elimination of the direct and indirect costs associated with these businesses, combined with our growth in America's Best and Eyeglass World brands, we will be able to mitigate the financial impact from exiting these agreements.

We expect to share more on these plans as appropriate at a later date. As we look ahead, our focus remains on operational execution, delivering further progress on our strategic initiatives, and returning to mid-single digit adjusted comparable store sales growth and mid-single digit adjusted operating margin. Thank you for your time today. I will now turn the call over to Reade for closing remarks before we open the call to your questions. Reade?

Reade Fahs (CEO)

In closing, let me summarize. Our second quarter performance was largely in line with our expectations. Where we have achieved our exam capacity goals, we've delivered pro- positive comparable store sales growth in excess of our overall consolidated growth. Retention trends are encouraging, recruitment trends are encouraging, and remote is expected to be EBITDA profitable this year and poised to be an ever more important part of our exam capacity. We are reiterating our full year 2023 outlook with adjusted operating income and adjusted diluted EPS to be at or above the midpoint of their respective full-year guidance ranges. We look forward to being a far simpler, faster-growing company with an increased focus on our two strategic growth brands, America's Best and Eyeglass World. Thank you for your time today. We will now open the call for your questions.

Operator (participant)

Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Kate McShane with Goldman Sachs. Please proceed.

Kate McShane (Managing Director)

Hi, good morning. Thanks for taking our question. I just wondered if you could provide any more detail behind the same-store sales, trends difference between America's Best and Eyeglass World and the performance there?

Reade Fahs (CEO)

Thank you, Kate. I'm happy to, to do that. Yes, America's Best was a 1.8% comp, Eyeglass World was a -2.8% comp. I've, I've got to tell you, it's a little bit of the same story of managing doctor coverage and dime stores here. We've really been focusing our, our efforts for with remote, which has been a help so far on our AB stores, on our America's Best stores. That's, that's where we've been rolling that out and have that going. At some point, we will turn to Eyeglass World on that front, but it's really so much the story of capacity constraints there, but we do believe that we can continue to improve those over time.

Melissa Rasmussen (CFO)

... Kate, I just wanted to add, we did talk about dark stores in our prepared commentary this quarter. As far as the dark stores go, this is something that we are really focused on working through with our remote enablement. The dark stores were at their worst at second quarter of 2022, at mid-single digits, and we're less than half that amount currently. So we'll continue to attack that through our recruiting and retention efforts, as well as our remote. I'm sorry, those numbers that I quoted were the % of America's Best fleet. That is something, like I said, that we are working to attack through recruiting remote, and we'll move to the Eyeglass World brand once we have established our increases with America's Best.

Reade Fahs (CEO)

And finally, Kate, I think the real story here is, as we have been improving, the capacity in America's Best, we're seeing the comps improve. As we said in our remarks, where we have the desired level of capacity, we are able to deliver the comps in, in line with our historical operating model. It's just getting back to making sure we, we have the exams available for all the patients who want to take advantage of them.

Kate McShane (Managing Director)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from Michael Lasser with UBS. Please go ahead.

Michael Lasser (Equity Research Analyst)

Good morning. Thank you so much for taking our question. Reade, Patrick, Melissa, Angie, there are so many moving pieces in your model, given what's happened over the last few years, along with now, the divestiture of the Walmart business. It would be extremely helpful if you could help unpack whether or not National Vision can get back to the average adjusted operating income margin that it regularly achieved prior to the pandemic, which was in the 6.5%-7% range. If that is feasible, what are the gonna be the key factors and strategies that allow National Vision to get there?

Is it simply just gonna be a function of generating consistent same-store sales growth, leveraging expenses, especially in light of the investments that you're having to make in order to attract and retain optometrists at this point? Thank you.

Reade Fahs (CEO)

Michael, I, I, I love your question. There are a few moving pieces really brought on by the post-COVID marketplace, and those moving pieces are affecting the optical category in general. Again, what I like to remind you is, where we are able to execute our model, where we have capacity, capacity, we are driving the comps in line with our historical model. We do believe that mid-single digit adjusted operating income margin is our next milestone, and we've been talking about how we will get back to that and hope to be back there certainly in 2025, and start seeing that in late 2024.

I'll, I'll say the elimination of the Walmart part of our business, you know, that, that was pulling down our margins, so that alone is going to help with that. And we see that expansions in capacity are a key driver in helping us to get there, but also the digitization of our stores, further digitization of our corporate office, more leveraging of omnichannel capabilities, as well as more stores as we take advantage of our white space opportunity

I'll add, Michael, that, since you've been following us so long, you know, this time last year, I'd say we were, we were sort of feeling more backfooted by the, a lot of changes that were affecting us and coming our way, and sort of coming to understand to the full extent what was happening, both to our consumer in the rising inflation environment and to the, the doctor capacity within the marketplace also. We are feeling far more front-footed now with the programs we've put in place, especially flexibility, in terms of driving, you know, increased and improved retention.

Frankly, we think our retention will be at the, maybe, the best year post the best year post-COVID, and, you know, record recruitment of students and, and the like. We're encouraged with the start of the third quarter. We, you know, it's a back-to-school season, and back-to-school season does evolve across the country. You know, it starts more in the southeast and then goes north and then across the country. Where it has started, we are encouraged by the initial trends we are seeing there.

Michael Lasser (Equity Research Analyst)

Okay. My follow-up question is that it's clear the, the purchase cycle for new eyewear has been disrupted over the last couple of years, given all that's going on. Now, as you mentioned, you're, you're on front footing, more, more firmer footing, and, is, is what you're seeing a sign that there's return to normalization of the optical purchase cycle, or is it more of a sign that National Vision is gaining or retracing some of the share that it might have?... lost over the last year as it was contending with some of the constraints it was dealing with?

Reade Fahs (CEO)

I think it's a sign of our improved capacity, allowing us to offer patients the exams they want to get from us. We have not yet seen a normalization in the purchase cycle. It could, it could start to happen in the second half, but we are not planning for that. It could start to happen in the second half, since it's been about two years since that big boom of optical purchases for us and others that came about when the government gave out so much money to our customers. It's been about two years. There is a logic that could happen, but we are not planning for that in our guidance.

We are, we are planning that the improved capacity is gonna be helping us in the second half. We, we believe our market share is, is flat to up, and maybe, maybe more up in the managed care segment.

Michael Lasser (Equity Research Analyst)

Okay. Thank you very much. Good luck.

Reade Fahs (CEO)

Thank you, Michael.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from Anthony Chukumba with Loop Capital Markets. Please proceed.

Anthony Chukumba (Managing Director)

Good morning, thanks for taking my question and for all the helpful information that you've shared so far this morning. I guess my question was on dark stores and dime stores. I just wanna make sure I have this correct. So a dark store is not offering any eye exams, and a dime store is offering some, but not at, you know, sort of 100% capacity. Is that, is that the right way to think about that?

Reade Fahs (CEO)

Yes. Yeah, yeah. A dark, a dark, we do not have a, a doctor, and we do not have remote. Yep, you can't get an eye exam there. A, a dime store has maybe a day, maybe a couple of days, but not at our desired level.

Anthony Chukumba (Managing Director)

Got it. I think it's pretty safe to say that your dark stores and your dime stores are doing comps that are significantly lower than company average. Is that a fair assessment?

Reade Fahs (CEO)

Yes, for, for sure, especially those dark stores, they are quite a drag. Again, the fact that we've cut the dark stores in half as a percentage of our fleet since the lows of about this time last year, we're pretty proud of that. We think that shows nice progress, and also remote is helping too. Evermore exams in those in the remote enabled stores. The converse of what you said, Anthony, is where we're able to deliver our model, where we are able to offer the eye exams, the comps are doing what they were doing historically prior to COVID. That's encouraging too.

What it says is, "Hey, deliver the model, and the patients show up for you like they used to.

Anthony Chukumba (Managing Director)

Got it. And just one last question. I don't wanna bogart the Q&A session here. Okay, when you say mitigate the financial impact of losing the Walmart partnership, are you talking about fully mitigating that impact, like literally getting a recapture of the $19 million of EBITDA? Is that, is that the way to think about it, or is, is it like sort of partially mitigating that?

Melissa Rasmussen (CFO)

Hey, Anthony, it's Melissa. When we're talking about mitigating the impact of Walmart, we do understand that there is a profit hole to fill, and so we're going to mitigate that through two avenues. First, being the continued increase in store count as we expand our America's Best and EGW fleet, and the other portion of that will be through cost reductions related to the Walmart exit. There's both indirect costs associated with that and direct costs associated with that, that we'll be taking out of our business. In addition, we're committed to right-sizing the structure of our go-forward model to the new operating model that we have, which is a less complex operating model now that we'll be exiting the Walmart relationship.

Anthony Chukumba (Managing Director)

Very helpful. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from Zachary Fadem with Wells Fargo. Please go ahead.

Sam Reed (Executive Director Equity Research of Home Builders and Building Products)

Thanks so much for taking my question. This is Sam Reid pitch sitting for Zach here. Wanted to touch on your ongoing relationship with EssilorLuxottica. How does the Walmart contract change-- or the change in Walmart contract impact this, if at all? Is there a risk that the reduction in your volumes post the Walmart exit could be a headwind to this relationship? Thanks so much.

Reade Fahs (CEO)

I think we have a very strong long-term relationship with EssilorLuxottica, and we have long-term contracts in, in place. On the lens side, we talked about last year how that's a fixed price for the length of the contract there.

We are still, even without Walmart, we are one of the top couple largest optical chains in America, and so we're still a big, a big customer and a big partner. That relationship goes back a long way, and a lot of it is contractual, and we are not anticipating any significant change in that.

Sam Reed (Executive Director Equity Research of Home Builders and Building Products)

No, thanks, Reade. That's super helpful. One quick follow-up, if I could: Can you walk us through some of the non-headline price actions you've taken thus far in a bit more detail? It doesn't sound like they've really impacted transactions, so are there any specific areas where you might have additional runway into 2H and beyond? Thanks

Melissa Rasmussen (CFO)

Yeah, yeah.

Sam Reed (Executive Director Equity Research of Home Builders and Building Products)

Oh, go ahead. Go ahead.

Melissa Rasmussen (CFO)

Hi, Sam, it's Melissa. We have taken price actions where we have been able to increase that weren't originally contemplated in our guidance. As we have seen continued cost increases, we evaluate the price increases to follow that. Some of the things that we've been able to look at for this year specifically are private label contact lenses, for example, and some ancillary exam add-ons. Those are two of the major areas that we've been able to contemplate and increase additional price actions.

Sam Reed (Executive Director Equity Research of Home Builders and Building Products)

Really helpful. Thanks so much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from Brian Tanquilut with Jefferies. Thank you.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT/Digital Health Equity Research)

Hey, good morning, guys. I guess just to follow up on some of the Walmart questions. In your prepared remarks, you alluded to, you know, maybe some cost adjustments that you're contemplating. Just curious, you know, what those are and the timing and the magnitude of, you know, cost opportunities that you think you can realize over the next, you know, 12 to 24 months.

Melissa Rasmussen (CFO)

Hi, Brian, it's Melissa. With the Walmart information that we've put out, we are ending the Walmart relationship with the stores in February of 2024 and with the distribution contract in June of 2024. We are assessing and evaluating our opportunities to exit those cost structures at the same time that we'll be exiting the revenue stream. We're gonna marry those up as closely as possible. That's what our, our, our planning is working on. The costs that will come out of the business are, of course, any direct costs related to supporting those relationships. In addition, with the corporate structure, you have back office costs, you have overhead related to things. In the last discussion, we said, you know, like insurance, things like that.

Those are types of indirect costs tied to the Walmart relationship and, the distribution relationship that would look different in the go-forward model than they do today.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT/Digital Health Equity Research)

Got it. Okay, thank you for that. In your prepared remarks, you also alluded to the fact that you've rolled out virtual to about half of the Target stores. Anything you can share with us in terms of the performance that you're seeing or the ramp that you're seeing as some of these rollouts mature? You know, I think for some of them, you're probably, you know, not quite a year, but close to a year out now. Just curious what you're seeing.

Reade Fahs (CEO)

Sure. We're, we're very encouraged by what remote is doing for us. Reid mentioned earlier in the dark and dime conversation, where it's been kind of a, kind of a game changer. Even from a new store rollout perspective this year, you know, we've even opened some new stores where we haven't found an in-lane doctor yet with a remote doctor. You know, I look back on our decision to start pursuing remote three years ago and really happy with that timing because it's playing a pretty big role. You're right, we've, we've, rolled this out to other, to about 40% of our AB brand now, well, higher than that. We're gonna have 500 of the ABs equipped by the end of the year, this year.

We're evaluating our 2024 plans now, we, you know, expect to continue to be rolling this out to a vast majority of our ABs over time. You know, I think more recently, we've started testing it in, more surgically in EGW, where I think it can be a benefit there as well. We're, we're on track with remote. Finally, I would say, you know, our wording has been we expect it to be EBITDA profitable this year, and, and there's, there couldn't be higher confidence around that.

Brian Tanquilut (Senior Analyst of Healthcare Services and HCIT/Digital Health Equity Research)

Awesome. Thank you.

Operator (participant)

Thank you for your question. Please stand by for our next question. Our next question comes from Adrienne Yih with Barclays. Please go ahead.

Michael Ng (VP)

Good morning, everyone. This is Michael Ng for Adrienne. Thank you very much for taking our question. I wanted to start off with a more broad question. I know that you mentioned that you saw higher average ticket and an increase in customer transactions. Would you please share some additional color around why you're seeing, you know, consumers buying higher ticket? Is this maybe attributable to the new store openings and the additional capacity, or are you also seeing any kind of trade-down effects?

Melissa Rasmussen (CFO)

Hi, Michael, it's Melissa. There are a couple of factors tied to the higher ticket. The first and foremost being the managed care strength that we're seeing. Managed care customers tend to have a higher ticket than the non-managed care customers, just based on, you know, spending somebody else's money versus spending your own money. In addition to that, we have seen continued trade down from the income levels of, you know, higher than $100,000. With both of those factors combined, that's what's driving the higher ticket. We provide value to many customers, and with the continued managed care strength, we're, we believe that they come to see our stores because they get more value for their, their benefits in our stores.

Michael Ng (VP)

Perfect. Thank you very much. As a follow-up to that, I know that you just mentioned the higher household income, and as we're, like, starting to shortly see the repayment of student loans, I was just wondering whether or not that's gonna be positive or accretive related to the increase in customer transactions in the overall business, or are you more seeing that as a headwind? What kind of assumptions are you making related to that, if any at all, since, you know, you were just mentioning the 100K to 125K range?

Melissa Rasmussen (CFO)

Related to the student loans, while there may be a broader, consumer sentiment implication, we do expect that with the higher income bands, we'll likely see some additional trade down into our brands because of the value that these consumers can get at shopping at one of our stores. Our target customer, our data shows us that a smaller portion of our target consumer has student loan debt.

Michael Ng (VP)

Oh, okay. Awesome. Thank you very much. I appreciate you for answering our questions, and I'll pass it on.

Operator (participant)

Thank you for your question. Please stand by for our final question. Our final question comes from Dylan Carden with William Blair. Please proceed.

Dylan Carden (Research Analyst of Consumer)

Thank you. Just curious if you might be willing to express explicitly, you know, the data you've provided on the Walmart business, it's accretive from an EBIT net income standpoint. Is the idea here that through indirect cost reductions, ultimately you'll be able to mitigate kind of the margin implications of losing that business next year?

Melissa Rasmussen (CFO)

Hi, Dylan, it's Melissa. Yes, you are correct that Walmart is accretive at the EBIT level. It will take some time to fill that profit hole. However, that has been a declining portion of our business over the past couple of decades as we've grown our America's Best and Eyeglass World brands, and we continue to expand our fleet. That is a factor in the growth. In addition, the Walmart business has lower margins than what our growth brands have. Through cost reductions, in addition to new store openings, we'll continue to fill that profit hole.

If we weren't in an intensive investment cycle on our growth brands, you wouldn't have seen as much of an accretive margin, or I'm sorry, an accretive profit hole that we needed to fill because you would have seen more of the margin drop down to the bottom line based on our growth brands. Our investment cycle is a factor in that currently.

Dylan Carden (Research Analyst of Consumer)

If you were to dial it back to 2018, 2019 pre-pandemic, you would see the Walmart business be dilutive on the EBIT line. Is that what you're saying?

Melissa Rasmussen (CFO)

I'm not saying you would see it be dilutive on the EBIT level. You would just see it as a lower portion of our overall profit.

Dylan Carden (Research Analyst of Consumer)

Okay. And then with the doctors that are coming out of the Walmart stores, can you kind of speak to the capacity for you to retain those doctors, maybe deploy them across the fleet? Any comments there about what that might actually do from a capacity standpoint?

Reade Fahs (CEO)

Yeah. Yeah, the, you know, our, our contract has a transition period where the various groups are able to talk to the, the, the doctors there. It, it's sort of a complex thing because it relates to sort of state by state, location, by location, doctor model, by doctor model. You know, doctors are gonna be making a variety of choices based on the state.

Dylan Carden (Research Analyst of Consumer)

It's not sort of an immediate windfall. I guess we should back away from thinking that it might be from a capacity utilization.

Reade Fahs (CEO)

I, I don't, I don't think we should think of it as an immediate windfall. You know, you've got to have a store nearby, a doctor who wants to shift over, a similar model piece. I wouldn't say it's an immediate windfall, but it will be. Doctors will be making various decisions.

Dylan Carden (Research Analyst of Consumer)

Great. Then last question on the pricing, the reviews over, you've kind of taken some action here on, on the periphery. Is, is that- sounds like there still might be some more that you can do, kind of going into the back part of this year and the next year. Is that right? How should we sort of think about, you know, I know that's just a big focus of a lot of investors here, your capacity to kind of close the gap, if you would. Can you just kind of speak to what to expect in the coming quarters on the pricing, specifically your pricing?

Reade Fahs (CEO)

By the way, periphery makes it sound a little smaller. You know, we're thinking non-headline price. The terms mean the same thing, yeah, we believe that more pricing actions will come into play in the second half of the year. We're very vigilant about pricing. We've mentioned this, this study that causing us to ask a lot of other questions too. We think there is more juice in the pricing lever going forward.

Dylan Carden (Research Analyst of Consumer)

Very good. Thank you, guys.

Reade Fahs (CEO)

Thank you.

Operator (participant)

Thank you. At this time, I would now like to turn the conference back to Reade for closing remarks.

Melissa Rasmussen (CFO)

Thank you all for joining us today. We appreciate your interest and support, and we look forward to speaking to you next on our Q3 earnings call. Thank you all very much.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.