Good day, and thank you for standing by. Welcome to the Fourth Quarter 2024 National Vision Holdings Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Tamara Gonzalez, VP of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to National Vision's fourth quarter and fiscal 2024 earnings call. Joining me on the call today are Reade Fahs, CEO; Alex Wilkes, President; and Melissa Rasmussen, CFO. 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. We will review our 2024 results, then Alex will discuss our 2025 strategic priorities, and then Melissa will provide our financial results and details on our outlook for 2025. 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 would like to draw your attention to Slide 2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. Further, please note that all financial measures in today's commentary are based on a continuing operations basis unless otherwise noted. 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?

Thank you, Tamara, and good morning, everyone. Thank you for joining us today. Before we begin our review of the fourth quarter and fiscal 2024 results, I'd like to take a moment to extend our appreciation to Melissa Rasmussen. Last month, we announced that Melissa is stepping down as CFO and will be taking an opportunity in another industry. Melissa has been instrumental in key aspects of our transformation to date, and we thank her for her dedication to National Vision, in the over 5 years, she's been with us. I've enjoyed our time working together and wish her the very best in her future endeavors. Earlier today, we announced the appointment of Chris Laden as our new CFO, who will begin on March 31. Chris joins us from Community Veterinary Partners, where he served as Chief Financial Officer. He brings with him nearly 2 decades of experience in both health care and optical retail, having also held leadership positions at Pearle Vision, a division of EssilorLuxottica including Head of Finance. We're thrilled to welcome Christopher to the NVI team. To assist with the transition, Patrick Moore, who currently serves as a special adviser and who is recently our COO for just over 2 years and our former CFO for 8 years will serve as interim CFO. Patrick will work closely with Christopher to ensure a smooth transition. 2024 was an important year for National Vision as we took ever more aggressive actions to transform the business. We implemented meaningful change throughout the organization, including adding new members to our leadership team, who bring deep optical and retail expertise and new approaches that will help accelerate our transformation efforts particularly across managed care, pricing and our field leadership organization. The early success of these results is evident in our strong…

Thank you, Reade, and good morning, everyone. I'll start by saying just how encouraged I am by the momentum we saw during the fourth quarter. Our teams are embracing our strategic priorities with excitement and that is evident in both the stores and our retail support center. I'm impressed with the way in which our teams are engaged to drive improvement. And as Reade mentioned, the entire team is executing with a transformation mindset. Since joining the team in August, I spent my time with our team developing a framework that aligns our investment decisions with our operational action plan. We're getting the organization focused on creating an improved store experience and building our brand around our expanded customer view. All with intense focus on disciplined expense management to improve profitability. As we shared on our third quarter call, 2025 will be a year to continue to strengthen our core business and to accelerate long-term growth. We are being thoughtful and are focused on all aspects of demand generation and cost efficiency in the next phase of our transformation. Our priorities for 2025 begin with our customer in mind and their journey with us. We know that we attract a wider audience than we have historically targeted and one that is much more skewed to middle income households, similar to that of the U.S. population. We are making rapid advances to ensure we provide value across this wide audience that is unique to each of our customer segments with an emphasis on managed care, our fastest-growing customer cohort. Over the years, we have seen a broadening of our customer base, demonstrating that America's Best has diverse appealed and importantly, validates our go-forward approach to targeting value-seeking consumers across need basis and income demographics. As we continue to enhance our customer…

Thank you, Alex, and good morning, everyone. As discussed, we are pleased to have delivered a strong end to the year, reflecting the acceleration of our transformation effort. While the first phase of our transformation initiatives, have been critical in stabilizing the foundation of our business. This next phase will enhance focus on accelerating demand generation and aligning our pricing and cost structure to reinvigorate the organization. The team is building a stronger foundation for sustainable long-term growth through the actions currently underway, and our fourth quarter results provide the team with conviction as they move forward. Before we review our outlook, let me provide more details on our fourth quarter results. For the fourth quarter, net revenue increased 3.9% compared to the prior year driven by growth from new store sales and adjusted comparable store sales growth of 1.5%, partially offset by the effect of converted and closed stores and lower revenue from our DiscountContacts.com website as expected. The timing of unearned revenue benefited revenue in the period by 80 basis points. Unit growth in our America's Best and Eyeglass World brands increased 4.4% on a combined basis over the total store base last year. During the quarter, we opened 20 new America's Best stores, while also executing our fleet optimization plans by closing 7 America's Best stores and 4 Eyeglass World stores. In addition, we converted 4 Eyeglass World stores to America's Best stores, and we ended the quarter with a total of 1,240 stores. For the year, on average, dark stores continue to represent a low single-digit percentage of our America's Best fleet, while dense stores on average continue to represent a high single-digit percentage of the America's Best fleet. As a reminder, we define dark stores as stores that do not have doctor coverage and are…

In summary, we hope you are taking away a greater understanding of our transformation game plan and the tangibility of how we have been and will continue to bring it to life at National Vision. The first phase of our transformation involves addressing our exam capacity constraints via retention, recruitment, remote and hybrid remote initiatives. This next phase, which started to impact the fourth quarter involved significantly heightening segmentation, personalization and digitization in our messaging, experience and product offerings. We are targeting the segments of our customer base where we've already shown growth and success in recent years, especially managed care, which is now 40% of our customer base and growing at high single-digit comps. The segments that are most insulated from today's economic challenges and the segments that are the most valuable to us as they currently represent 50% of our customers, but a much higher percentage of our sales. We are doing this in ways that we think should broaden our appeal to new potential customers. We're doing this in ways that we believe will allow us to concurrently maintain our historical target of the most price-driven and budget-conscious customers. We're doing this with the help of world-class partners like Accenture, Adobe and a new highly digitally focused ad agency, and we're doing this in a way that is ever watchful of keeping our costs and expenditures under control. Most importantly, the organization is embracing this as the right way forward for us to expand and profitably grow in 2025 and the years to come. We think our results in the fourth quarter demonstrate encouraging green shoots and momentum that we hope to build upon throughout 2025. And with that, I'll open the line for questions.

[Operator Instructions]. Our first question comes from Michael Lasser with UBS.

Reade, can you give us a sense for how you have factored in any resources and risks from what seems like a significant pivot not away from your core more need-based customer to this more moderate middle income type consumer. In addition, how do you balance the expectations of what's probably a higher expectation consumer as you expand the focus for the model?

Michael, thank you so much for that. The good thing about how we're approaching this is, this is a significant part of our current customer base that we're talking about here. So these are customers who have found us and enjoy the value that we offer. As we said, customers like managed care customers, progressive customers and customers who come to us within Rx, they got someplace else to take advantage of our great prices on a wide array of products. So the fact that we're leveraging what is currently about half of our customer base already brings us a lot of security that this is the right direction. And these people have been coming to us. They're all three are sort of growing segments. And what we're trying to do is make the experience ever better for them. And that -- and this is the customer experience work that Alex has been talking about. We're doing this through enhanced training. We're doing this enhanced product. We're doing this through just really thinking through their customer journeys and how they just make it even better for them.

My follow-up question is, can you give us a little bit more context on what you've seen quarter-to-date? Has it been broad-based, more specific to certain geographies? And if it persists over the course of the year? How should we think about the achievability of your full year guidance?

I'm sorry, were you talking about our reference in the last 2 weeks of February?

Yes, sir.

Sorry, there was a little breakup in the line there. Yes. So again, Q4 was really encouraging. We put in a lot of programs mid-quarter and saw them take root. So we're happy with that. And January was quite strong, so we were very encouraged that. The last 2 weeks were choppy and a little surprising. So that's why we decided to call that out. We're pretty sure we're not alone in that. We're hearing that from our category. We're hearing that throughout a lot of consumer retail. We think our initiatives are the right initiatives, but we just wanted to be a little bit more conservative in our guide given the audit of the past 2 weeks.

Our next question comes from Andy Chukumba with Loop Capital Markets.

So in terms of -- I just wanted to clarify. So -- okay, so the guidance midpoint is for 50 basis points of expansion. And previously, and I know it was very preliminary, but you previously expected our operating margin to be essentially flat year-over-year. So I just wanted to understand, is the 50 basis points? Is that just the $12 million of cost reduction. Or are there other aspects to it?

Anthony, it's Melissa. Apologies in advance. I'm a little under the weather. Yes, as far as the 50 basis point expansion, when we have referred to the flat operating margin year-over-year. That was taking into consideration the things that we had announced at the time. We had talked about our fleet optimization, and we have talked about the infinite compensation grow over. We had also talked about we expected our initiative to be upside from that. Those were the factors that were incorporated into that discussion. With that, we had also subsequent to that point, taking out about $12 million in reductions in expense primarily focused on SG&A. So with that, that is what gets you to that midpoint of that 50 basis point improvement in profitability year-over-year.

Got it. That's helpful. And then you also talked about the fact that you now offer remote over 730 stores. What's the plan for a remote rollout in 2025?

We'll continue to open whereas laws allow and that sort of thing as we progress and fill in where we need to. And of course, our new stores in the states where it's allowable will be remote enabled. And this is a balancing act, so as we have retention of doctors. We don't need to use the remote as much, but where we need it, we use it. The nice thing is, and I'd certainly like to make this clear, we now define this as just part of our business. We've rolled it out and we're using it, that this is now just an ongoing part of our offering. So we're probably not going to be talking about the ingest a whole lot because we've done it. We put it in.

Got it. And Melissa, good luck on your newest opportunity.

Thank you, Anthony.

Our next question comes from the line of Zachary Fadem with Wells Fargo.

This is Taylor Bernard on for Zach. Can you elaborate on the drivers of comps in 2025? And what was implied in the top and bottom of the guide? And any color on cadence expected throughout the year?

It's Alex. Thanks so much for the question. Yes, as we look at the composition of comp going into '25, we think it's equal parts traffic and equal parts average ticket. Again, as we mentioned in our prepared statements, we've seen nice growth on ticket from the initiatives that we've put in place in Q4, and we're seeing those whole as well as our conversion rates. So we feel incredibly bullish about our ticket and the actions that we've taken there. But again, we started Q1 in January, pretty strong, in the last couple of weeks as Reade mentioned, we saw some wobble in the consumer. But go forward, we're super bullish on what we're going to achieve through both ticket and through customer count growth.

Okay. Great. And then for my follow-up, how do you think about integration policy potential impacts? And how is that reflected in your guide if it is reflected in your guide?

We see immigration as one of the many factors affecting consumer sentiment out there. And so it's part of the combination package of trying to assess just the direction of the consumer. One factor.

Our next question comes from Paul Lejuez with Citi.

Brandon Cheatham on for Paul. I was just wondering; can you break out how you're thinking of managed care in 2025 in terms of top line guidance versus your cash paying customer we think about managed care is 40% of the business growing high single digits. That would seem to imply if those trends kind of continue, that's roughly like 3%. So I'm just wondering if you can help us parse out managed care versus cash paying in '25?

So managed care is now 40% of the business growing at high single-digit. Comps managed care customer is just more insulated from the challenging economic times we live in because so much of the purchase is covered. By their insurance, we sort of said that we believe this will keep growing. And again, the cash pay consumer is the one that is most challenged. And we -- so we're saying that we think the next milestone is 50% for managed care, but we aren't saying when we think we'll get there. I just want to reinforce, though, even though we're talking about sort of these higher-value consumers, groups and segments. We still love our core cash pay, budget-conscious consumer. We are still there for them, and they are still a key part of what we are. We just see the opportunity, especially in this economic moment of riding the momentum that we've shown that we can drive with the higher value of consumers to us.

Got it. And my follow-up, just anything in January that made you feel encouraged that maybe the repurchasing cycle was coming back? And then beginning in on the last 2 weeks of February, I understand it's choppy. There's some weather concerns. Were there any differences by geography? I think the West was not nearly as cold as the rest of the nation. So was the West segment also choppy?

So again, January was quite positive. It's positive on a 2-year stack basis also. So that was really encouraging, and we saw that continued momentum from the programs we put in, in the middle of the quarter. And yes, in the past 2 weeks, there was some variable geographically. And again, we think weather was a component of the past 2 weeks, we just aren't ready to say that, that was the only component in the past 2 weeks. So we're just being cautiously prudent.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

I want to ask about the improvement in core EBIT in '25, excluding the extra week. Can you frame for us how much comes from the operating businesses, America's Best, Eyeglass World versus some of the -- I guess, the leeway that you get from the corporate overhead reduction. So just thinking about the sources of upside or growth and EBIT on a core basis?

Yes. Simeon, as it relates to the improvement in EBIT year-over-year. A substantial portion of that improvement is coming from the SG&A takeout that we had talked about, that $12 million of improvement. As we had talked about the overall year-over-year performance, we had expected that things would be relatively flat when we factored in the initiatives that we had discussed last year. We do expect that we have some upside related to these initiatives that we're putting in place this year. And we expect that we'll continue to see improvement based upon those actions. With that, we continue to mitigate costs where we can and be financially prudent in taking out expenses where it makes sense to do so without cycling ongoing growth.

That's helpful. Is there a way to quantify the comp that's either required on either side of the business, America's Best or Eyeglass World, where the margin expansion I respect, I guess, yes, there is some leverage in gross margins as well. But so what's the comp that allows the margins of each of the individual segments to start levering or to start expanding.

Well, what we had historically talked about was the mid-single digit. However, we had also talked about taking actions to ensure that we could leverage on less than a mid-single-digit comp. We are looking at it holistically from a business. Obviously, America's Best is our larger of the two brands. and the movement within that brand drives more profitability just from the sheer size of the brand. With that, we'll put more information out as the year unfolds between brands, but we do expect that our Eyeglass World initiatives we'll provide some upside as well. However, again, America's Best is the larger of the two brands.

Our next question comes from Brian Tanquilut with Jefferies.

This is Meghan Holtz on for Brian. Just want to start with things and good luck for Melissa on your next venture. The question we want to ask is about Toku BioAge. How is this reimbursed? Is this something that could gain traction with commercial insurance plans? And then as a quick follow-up to the managed care question that was asked earlier, how are you proactively driving that penetration to get to that 50% target?

Okay. I'll take the first part, and then Alex will take the managed care piece. So Toku BioAge is sort of our first step into the world of using AI to scan for a variety of diseases. The disease states. And these are -- so the key thing that Toku is trying to do is get FDA approval to their AI scan for cardiovascular issue assessment and kidney issue assessment. While we await that, we're trying to build some muscle memory by offering a product in our stores where a patient or a customer can get an assessment of their biological age, biological age as opposed to chronological age. This is something that you read about in the press a lot that people have a lot of interest in. The Wall Street Journal has covered this sort of thing, a lot of part of the longevity movement. And so people are paying to get that assessment. It is not reimbursable. There's no insurance, this is all consumer cash pay. And we've been pleased with the uptake. But primarily, this is "let's develop the muscle memory on how to use AI scans of the retinal images we take in all our stores".

Great. And I'll answer the managed care question. So there's -- think about two primary ways that we're going to manage care consumer. The first is, as we look to personalize our marketing capabilities, we're going to be able to talk to that managed care consumer with a specific managed care message personalized to them. Again, this is something we haven't been able to do in the past. So being able to have a very specific message to a consumer with that type of plan and specific to their plan design is going to be a huge advantage for us. The second thing is as we begin to evolve our product and product offerings, we know we're going to make investments in products and capabilities that are more attractive to the managed care consumer. So not only are we going to be able to talk to them differently. We're going to be able to offer them different experiences. And we think those are 2 significant ways that we're going to increase our Managed Vision Care consumer base.

And Meghan, it's just a great example of when we talk about segmentation, personalization and digitization in our messaging customer experience and product offering, managed care is a great example of how we're going to do that.

Our next question comes from Adrienne Yih with Barclays.

Great. Nice to see the progress in Melissa, congrats, and thanks for all the help over the years. My question is, again, on the managed care piece of this, we talked about kind of how the transaction size is larger versus the cash pay but the margin implications may not be as profitable. So can you talk about the gross margin drivers that we've seen over the past 3 quarters in particular. A lot of that obviously has to do with the Walmart exit. But where can the gross margins go from here? And what would the drivers be? And then secondly, on the store rationalization, can you talk about how many stores would be -- of those would be Eyeglass store closures versus AB?

Adrienne. Yes, as it relates to gross margin, there has been a lot of factors in gross margin in 2024. With that, obviously, the margin profile changes with the Walmart exit with the AC Lens wind down, and we have basically our core business that remains. With that, you see some movement between quarters based upon specials that we were running or promotions that we were running. Where if we were running a 1-pair offer versus a 2-pair offer that margin profile looks a bit different. When we released our guidance for 2025, margin is pretty consistent year-over-year. There is some slight deleverage, but we'll make that up as we progress through the year. We have -- as we think about our fleet closures, that impacts more of our operating margins than our gross margin. The November press release that we had put out related to our fleet optimization has the details that we expected for the revenue reduction as well as the operating margin reduction based on those closures. As we go forward with 2025, we expect that by quarter will be largely consistent with how we were in 2024 as far as the quarter make up. However, that will be based on a continuing operations basis.

Okay. And just very quickly, there's no issue with the -- you're not that levered to the Easter Spring break kind of March to April transition that based on what you said.

With spring break, we don't typically see a significant change based upon spring break. Our historical seasonality period, we have managed care at the beginning of the year, the rush at the end of the year. We have a slight bump with back-to-school season. Those are really what our busy periods are. And with that spring break, sometimes you have kids coming in because they're out of school. But for the most part, those other seasons that I just mentioned are when we have high seasonality.

Perfect. And the store closures?

The store closures, for 2025, we expect that we'll still have 3 America's Best stores closing and Fred Meyer, we will be closing 9 stores. those are primarily going to be focused in the first quarter for Fred Meyer. And again, with that, the release that we put out in November has the detail of the revenue reduction and then the operating margin improvement based upon those closures.

Our next question comes from Molly Baum with Bank of America.

So I just wanted to get a little bit of additional color on the optometrist recruiting. I know you mentioned that for the third year now you've recruited at least 10% of the graduating class. But in 2Q of this year, you had also talked about a little bit of a softer-than-expected optometrist recruiting for the year. So can you just kind of talk about where you stand in that process? What your expectations are for 2025? And then maybe at a higher level, do you need to recruit as many doctors now that you have kind of increasing penetration of remote?

Great. Molly, great questions. Yes, on the recruitment side, so yes, we -- third year in a row, 10% of students. We really like that. I think it really shows that our model, our reputation, our brand, our offering and the flexibility programs that we put in place a while ago are really taking hold with the students. Good observation, Molly, that we were sort of, I think it was midyear talking about recruitment being a little behind where we wanted to be, and the team rallied. It was great that the team rallied and stepped up, and we ended in a healthy place there. So that was good. And yes, on the remote side, we are sort of using remote doctors and learning how to adjust to the right levels. Again, it's now only 12% of exams, but it does provide us a lot more flexibility. We do like sort of have been leaning towards live doctors, but the remote is the thing that allows us to balance it now in a variety of good ways. So as I hope you're taking away that we both ended the year and entered the year in an encouraging place relative to exam capacity. And there's been a lot of work over the years getting to that, and we're pleased to be in the position we're in now.

That concludes today's question-and-answer session. I'd like to turn the call back to Reade for closing remarks.

Good. Elizabeth, thank you so much for your help with this. And thank you all for your time and attention to the call and to our business. We look forward to updating you on the progress of our transformation and our Q1 release in May. Thank you all so much.

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