National Vision Holdings, Inc.: Form 10-Q for the period ended Mar 30, 2024

The following contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q (this “Form 10-Q”) and the audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2024 (the “2023 Annual Report on Form 10-K.”) This discussion contains forward-looking statements that reflect our plans, estimates and beliefs as of the date hereof and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. These forward-looking statements involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” sections of this Form 10-Q and the 2023 Annual Report on Form 10-K, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Form 10-Q.

Overview

We are one of the largest optical retailers in the U.S. and a leader in the attractive value segment of the U.S. optical retail industry. We believe that vision is central to quality of life and that people deserve to see their best to live their best, regardless of their budget. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers with an opening price point that strives to be among the lowest in the industry, enabled by our low-cost operating platform. We reach our customers through a diverse portfolio of 1,201 retail stores across four brands as well as multiple consumer websites as of March 30, 2024.

Brand and Segment Information

As of March 30, 2024, our operations consisted of one reportable segment. During the three months ended March 30, 2024, our Walmart store operations, including our former Legacy reportable segment, met the requirements to be classified as a discontinued operation; refer to Part I. Item 1. Note 2. “Discontinued Operations” and Note 3. “Costs Related to Wind Down Activities” for more information on the termination of the Walmart MSA and other wind down activities related to our continuing operations.

• Owned & Host - As of March 30, 2024, our owned brands consisted of 990 America’s Best Contacts and Eyeglasses retail stores and 128 Eyeglass World retail stores. Our Host brands consisted of 54 Vista Optical locations on select military bases and 29 Vista Optical locations within select Fred Meyer stores as of March 30, 2024. All brands utilize our centralized laboratories. This segment also includes sales from our America’s Best, Eyeglass World, and Military omni-channel websites.

Our consolidated results also include the following activity recorded in our Corporate/Other category:

• AC Lens retail websites. For the periods presented in this Form 10-Q, AC Lens operations comprise multiple proprietary branded websites and third-party websites with established retailers and mid-sized vision insurance providers. In 2024, we will wind down AC Lens operations, including the closure of the Ohio distribution center, which largely supported the wholesale distribution and e-commerce contact lens services that the Company has provided to Walmart and Sam’s Club. We have begun the process of consolidating our e-commerce websites and the management of our e-commerce business to NVI. This process is expected to be completed by June 30, 2024.
• Wholesale contact lenses distribution to Walmart and Sam’s Club by AC Lens, which represented 7.4% of consolidated net revenue for the three months ended March 30, 2024. In connection with the termination of the Walmart MSA, AC Lens has delivered notices of non-renewal of the agreements it has with Walmart and Sam’s Club and those agreements are expected to terminate on June 30, 2024.
• Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan under California law. In connection with the termination of the Walmart MSA, the agreement between FirstSight and Walmart, which arranged for the provision by FirstSight of optometric services at optometric offices next to certain Walmart stores throughout California, terminated on February 23, 2024.
• Unallocated corporate overhead expenses.

Reportable segment information is presented on the same basis as our condensed consolidated financial statements, except reportable segment sales which are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our CODM regularly reviews. Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance with U.S. GAAP, specifically the change in unearned and deferred revenues during the period. There are no other items in the reconciliations other than the effects of unearned and deferred revenue. See Note 12. “Segment Reporting” in our condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q.

Deferred revenue represents the timing difference of when we collect the cash from the customer and when services related to product protection plans and eye care club memberships are performed. Increases or decreases in deferred revenue during the reporting period represent cash collections in excess of, or below the recognition of, previous deferrals. Unearned revenue represents the timing difference of when we collect cash from the customer and delivery/customer acceptance, and includes sales of prescription eyewear during approximately the last seven to 10 days of the reporting period.

Trends and Other Factors Affecting Our Business

Current macroeconomic conditions, including elevated inflation and interest rates and overall consumer sentiment, could have a material adverse effect on our business, results of operations and financial condition. Inflation can result in increased costs and greater profitability pressure for us. We have experienced wage investment pressure and increases in raw materials prices, which we expect to continue. We generally employ a simple low price/high value strategy that consistently delivers savings to our customers without the need for extensive promotions. Inflationary pressures, including wage investments, consumer confidence and preferences and increased raw material costs could impact our profitability and lead us to attempt to offset such increases through various pricing actions.

Additionally, our ability to continue to attract and retain qualified vision care professionals may affect exam capacity. We believe the impacts of the COVID-19 pandemic on vision care professional availability, including a competitive recruiting market and preferences for adjusted work schedules, and the demand for optometrists exceeding supply in certain areas have caused constraints in exam capacity which are continuing. Due to these factors, the costs to employ or retain optometrists have increased and may increase further, potentially materially.

We believe that many customers in our target market are value seeking and lower income consumers who rely on tax refunds to pay for eyewear and eye care. Historically, our business has experienced seasonality in the first half of the year that we believe is primarily attributable to the timing of customers’ income tax refunds and health insurance start/reset periods. A delay in the issuance of tax refunds or changes in the amount of tax refunds can accordingly have a negative impact on our quarterly financial results in the first half of the year. Consumer behavior with respect to the utilization of tax refund proceeds is also subject to change.

In the first quarter of 2024, we incurred costs related to the termination of the Walmart MSA and the wind-down of AC Lens operations, as well as an immaterial amount of costs related to the actions taken in fiscal year 2023 to streamline corporate overhead. We may incur other exit-related costs in connection with the termination of the Walmart MSA and wind-down of AC Lens operations, which may be material. In addition, while we seek to reduce costs and replace lost business with new America’s Best or Eyeglass World stores and by other means, including anticipated non-headline pricing actions, we may not be successful in our efforts, which could impact our revenues and profitability. Refer to Part I. Item 1. Note 3. “Costs Related to Wind Down Activities,” in this Form 10-Q for more details.

How We Assess the Performance of Our Business

We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our consolidated business and operating segments are performing are net revenue, costs applicable to revenue, and selling, general, and administrative expenses. In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS.

Net Revenue

We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services and plans. Comparable store sales growth and new store openings are key drivers of net revenue and are discussed below. Also, the timing of unearned revenue can affect revenue recognized in a particular period.

Costs Applicable to Revenue

Customer tastes and preferences, product mix, changes in technology, significant increases or slowdowns in production, and other factors impact costs applicable to revenue. The components of our costs applicable to revenue may not be comparable to other retailers.

Selling, General and Administrative

SG&A generally fluctuates consistently with revenue due to the variable store, field office and corporate support costs; however, some fixed costs slightly improve as a percentage of net revenue as our net revenues grow over time.

New Store Openings

The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results. We expect to open 65 to 70 stores in the current year. We will continue to monitor and determine our plans for future new store openings based on health, safety and economic conditions.

Adjusted Comparable Store Sales Growth

We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store’s opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers.

Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful.

Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS (collectively, the “Company Non-GAAP Measures”)

The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. See “Non-GAAP Financial Measures” for definitions of the Company Non-GAAP Measures and for additional information.

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue.

In thousands, except earnings per share, percentage and store data

26

Three Months Ended March 30, 2024 compared to Three Months Ended April 1, 2023

During the three months ended March 30, 2024, our Walmart store operations, including our former Legacy reportable segment, met the requirements to be classified as discontinued operations. Refer to Part I. Item 1. Note 2. “Discontinued Operations” for information related to our discontinued operations. Unless otherwise noted, the discussion of U.S. GAAP results below is based on results from continuing operations.

Net revenue

The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue from continuing operations for the three months ended March 30, 2024 compared to the three months ended April 1, 2023.

In thousands, except percentage and store data

(1) We calculate total comparable store sales from continuing operations based on consolidated net revenue from continuing operations excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 12. “Segment Reporting” in our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q.

(2) Percentages reflect line item as a percentage of net revenue, adjusted for rounding.

(3) Adjusted Comparable Store Sales Growth from continuing operations includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 1.0% and a decrease of 2.1% from total comparable store sales growth from continuing operations based on consolidated net revenue for the three months ended March 30, 2024 and April 1, 2023, respectively.

Total net revenue of $542.5 million for the three months ended March 30, 2024 increased $21.7 million, or 4.2%, from $520.8 million for the three months ended April 1, 2023. The increase was driven by approximately 75% growth from new store sales, 15% by our AC Lens business, 15% from the timing of unearned revenue, and 5% by Adjusted Comparable Store Sales Growth from continuing operations, partially offset by closed and converting stores.

Comparable store sales growth from continuing operations and Adjusted Comparable Store Sales Growth from continuing operations for the three months ended March 30, 2024 were 1.4% and 0.4%, respectively, primarily due to higher average ticket, partially offset by a decrease in customer transactions.

In the three months ended March 30, 2024, we opened 14 new America’s Best stores and converted 20 Eyeglass World stores to America’s Best stores. Overall, store count grew 6.5% from April 1, 2023 to March 30, 2024 (65 and 8 net new America’s Best and Eyeglass World stores, respectively).

Net product sales comprised 82.5% and 83.7% of total net revenue for the three months ended March 30, 2024 and April 1, 2023, respectively. Net product sales increased $11.7 million, or 2.7%, in the three months ended March 30, 2024 compared to the three months ended April 1, 2023, primarily due to a $5.9 million, or 1.9%, increase in eyeglass sales, a $2.7 million, or 7.2%, increase in wholesale fulfillment and a $2.6 million, or 2.7%, increase in contact lens sales.

Net sales of services and plans for the three months ended March 30, 2024 increased $10.0 million, or 11.8%, compared to the three months ended April 1, 2023, driven primarily by higher exam revenues of $9.5 million, or 17.9%.

Owned & Host segment net revenue. Net revenue increased $14.9 million, or 3.2%, driven primarily by new store openings and comparable store sales growth, partially offset by closed and converting stores.

Corporate/Other segment net revenue. Net revenue increased $3.1 million, or 4.8%, driven primarily by increases in wholesale fulfillment.

Net revenue reconciliations. The impact of reconciliations positively impacted net revenue by $3.7 million in the three months ended March 30, 2024 compared to the three months ended April 1, 2023. Net revenue was positively impacted by $2.8 million due to the timing of unearned revenue. Net revenue was positively impacted by $0.9 million primarily due to lower sales of product protection plans and higher recognition of product protection plan revenue in the three months ended March 30, 2024 compared to the three months ended April 1, 2023.

Costs applicable to revenue

Costs applicable to revenue of $248.7 million for the three months ended March 30, 2024 increased $13.3 million, or 5.6%, from $235.4 million for the three months ended April 1, 2023. As a percentage of net revenue, costs applicable to revenue increased from 45.2% for the three months ended April 1, 2023 to 45.8% for the three months ended March 30, 2024. This increase as a percentage of net revenue was primarily driven by lower eyeglass mix of 100 basis points, higher growth in optometrist-related costs of 80 basis points and by 20 basis points from other mix and margin effects. These costs were partially offset by a 140 basis point effect from higher exam revenue.

Costs of products as a percentage of net product sales increased from 36.8% for the three months ended April 1, 2023 to 37.1% for the three months ended March 30, 2024, primarily driven by lower eyeglass mix and other product mix and margin effects.

Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 28.1% for the three months ended April 1, 2023 to 28.2% for the three months ended March 30, 2024, primarily driven by lower eyeglass mix and other product mix and margin effects.

Costs of services and plans as a percentage of net sales of services and plans decreased from 88.7% for the three months ended April 1, 2023 to 86.9% for the three months ended March 30, 2024. The decrease was primarily driven by higher exam revenue, partially offset by growth in optometrist-related costs.

Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans decreased from 86.2% for the three months ended April 1, 2023 to 85.5% for the three months ended March 30, 2024. The decrease was primarily driven by higher exam revenue, partially offset by growth in optometrist-related costs.

Selling, general and administrative

SG&A of $245.4 million for the three months ended March 30, 2024 increased $12.0 million, or 5.2%, from the three months ended April 1, 2023. As a percentage of net revenue, SG&A increased from 44.8% for the three months ended April 1, 2023 to 45.2% for the three months ended March 30, 2024. The increase in SG&A as a percentage of net revenue was primarily driven by litigation settlement of 80 basis points and legal and professional expenses of 30 basis points as well as other operating expenses, partially offset by decreases in performance-based incentive compensation of 100 basis points and stock-based compensation expense of 30 basis points.

Owned & Host SG&A. SG&A as a percentage of net revenue increased from 36.3% for the three months ended April 1, 2023 to 37.7% for the three months ended March 30, 2024, driven primarily by higher payroll, occupancy expense and advertising expense.

Depreciation and amortization

Depreciation and amortization expense of $23.6 million for the three months ended March 30, 2024 increased $0.9 million, or 4.0%, from $22.7 million for the three months ended April 1, 2023 primarily driven by new store openings and investments in remote medicine technology.

Asset impairment

We recognized $0.5 million primarily for impairment of tangible long-lived assets and ROU assets associated with our retail stores during the three months ended March 30, 2024, compared to $0.4 million impairment recognized during the three months ended April 1, 2023. The store asset impairment charge is related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores, and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. Asset impairment expenses were recognized in Corporate/Other.

Interest expense, net

Interest expense, net was $4.3 million for the three months ended March 30, 2024, compared to $4.9 million for the three months ended April 1, 2023. The change was primarily a result of higher derivative income of $1.0 million and lower interest expense on our long-term debt of $0.4 million, partially offset by lower income on cash balances of $0.8 million.

Income tax provision

Our effective tax rates for the three months ended March 30, 2024 and April 1, 2023 were 39.3% and 34.0%, respectively. The change in effective tax rates reflects our statutory federal and state rates of 25.2% and 25.4%, respectively, and non-deductible compensation expense as well as effects of other permanent items.

Discontinued Operations

Income (loss) from discontinued operations, net of tax of $(0.6) million for the three months ended March 30, 2024, decreased $2.9 million from $2.3 million for the three months ended April 1, 2023. Net revenue, costs applicable to revenue and SG&A from discontinued operations decreased by $23.2 million, $9.4 million and $5.2 million, respectively, as compared to the three months ended April 1, 2023, primarily due to the current year including the results of the Walmart store operations, including our former Legacy segment, for a partial period prior to the Walmart MSA termination date. Income tax expense (benefit) decreased by $4.2 million, due to lower income before income taxes in the current period as compared to the prior year, as well as other permanent items related to discontinued operations, primarily related to tax impacts of consolidated VIEs.

Non-GAAP Financial Measures

Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS.

We define Adjusted Operating Income as net income, plus interest expense (income), net and income tax provision (benefit), further adjusted to exclude stock-based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, ERP implementation expenses and certain other expenses. We define Adjusted Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock-based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, ERP implementation expenses and certain other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue. We define Adjusted Diluted EPS as diluted earnings per share, adjusted for the per share impact of stock-based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our term loan borrowings, amortization of the conversion feature and deferred financing costs related to our 2025 Notes when not required under U.S. GAAP to be added back for diluted earnings per share, derivative fair value adjustments, ERP implementation expenses, certain other expenses, and tax expense (benefit) from stock-based compensation, less the tax effect of these adjustments.

When presenting Adjusted Operating Income from continuing operations, EBITDA from continuing operations and Adjusted EBITDA from continuing operations we use the same definitions for Adjusted Operating Income, EBITDA and Adjusted EBITDA, respectively, and also exclude income (loss) from discontinued operations, net of tax. When presenting Adjusted Diluted EPS from continuing operations, we use the same definition for Adjusted Diluted EPS, and also exclude diluted earnings per share from discontinued operations. When presenting Adjusted Operating Margin from continuing operations, we use Adjusted Operating Income from continuing operations as a percentage of total net revenue. When presenting Adjusted EBITDA Margin from continuing operations, we use Adjusted EBITDA from continuing operations as a percentage of total net revenue.

EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below.

EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with U.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements U.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. We continue to evaluate our use of the Company Non-GAAP measures in the context of the development of our business, and may introduce or discontinue certain measures in the future as we deem appropriate.

EBITDA and the Company Non-GAAP Measures are not recognized terms under U.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with U.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In evaluating EBITDA and the Company Non-GAAP Measures, we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our U.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

• they do not reflect costs or cash outlays for capital expenditures or contractual commitments;
• they do not reflect changes in, or cash requirements for, our working capital needs;
• EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense (income), net, or the cash requirements necessary to service interest or principal payments, on our debt;
• EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect period to period changes in taxes, income tax provision or the cash necessary to pay income taxes;
• they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
• other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness.

The following table reconciles our Adjusted Operating Income from continuing operations, Adjusted Operating Margin from continuing operations, EBITDA from continuing operations, Adjusted EBITDA from continuing operations, and Adjusted EBITDA Margin from continuing operations to net income from continuing operations; and Adjusted Diluted EPS from continuing operations to diluted EPS from continuing operations for the periods presented:

In thousands

In thousands

31

In thousands, except per share amounts

(a) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions.

(b) Reflects write-off related to impairment of long-lived assets, primarily impairment of property, equipment and lease-related assets on closed or underperforming stores.

(c) Expenses associated with settlement of certain litigation.

(d) Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting following the acquisition of the Company by affiliates of KKR & Co. Inc.

(e) Amortization of deferred financing costs and other non-cash charges related to our long-term debt. We adjust for amortization of deferred financing costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share under U.S. GAAP.

(f) The adjustments for the derivative fair value (gains) and losses have the effect of adjusting the (gain) or loss for changes in the fair value of derivative instruments and amortization of AOCL for derivatives not designated as accounting hedges. This results in reflecting derivative (gains) and losses within Adjusted Diluted EPS during the period the derivative is settled.

(g) Costs related to the Company’s ERP implementation.

(h) Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA), which are primarily related to costs associated with the digitization of paper-based records of $1.8 million, costs primarily related to the wind down of AC Lens of $0.9 million, excess payroll taxes on vesting of restricted stock units and exercises of stock options, executive severance and relocation and other expenses and adjustments for the three months ended March 30, 2024.

(i) Tax expense (benefit) associated with accounting guidance requiring excess tax expense (benefit) related to vesting of restricted stock units and exercises of stock options to be recorded in earnings as discrete items in the reporting period in which they occur.

(j) Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates.

Liquidity and Capital Resources

Our primary cash needs are for inventory, payroll, store rent, advertising, capital expenditures associated with new stores and updating existing stores, as well as information and remote medicine technology and infrastructure, including our corporate office, distribution centers, and laboratories. When appropriate, the Company may utilize excess liquidity towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, as well as repurchases of common stock or other securities, based on excess cash flows. The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued expenses. We exercise prudence in our use of cash and closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding. We continue to be focused on these items in addition to other key measures we use to determine how our consolidated business and operating segments are performing. We believe that cash on hand, cash expected to be generated from operations and the availability of borrowings under our Revolving Loans will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures, and payments due under our existing debt for the next 12 months and thereafter for the foreseeable future. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the prepayment, refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as modifications to our Term Loan A where possible. Our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. We primarily fund our working capital needs using cash provided by operations. Our working capital requirements for inventory will increase as we continue to open additional stores.

As of March 30, 2024, we had $150.0 million in cash and cash equivalents and $293.6 million of availability under our Revolving Loans, which includes $6.4 million in outstanding letters of credit.

As of March 30, 2024, we had $144.4 million of Term Loan A outstanding under our credit agreement. We were in compliance with all covenants related to our long-term debt as of March 30, 2024.

The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated:

In thousands

Net Cash Provided by Operating Activities

Cash flows provided by operating activities decreased by $50.1 million to $24.0 million, during the three months ended March 30, 2024 from $74.1 million for the three months ended April 1, 2023 as a result of changes in net working capital and other assets and liabilities, which used $38.2 million of cash year-over-year, also driven by a decrease in net income and non-cash reconciling items of $11.9 million, as compared to the three months ended April 1, 2023.

Decreases in other liabilities during the three months ended March 30, 2024 used $26.2 million in year-over-year cash primarily due to decreases in compensation-related accruals. Decreases in accounts payable used $16.1 million in year-over-year cash, primarily as a result of timing of payments. These were partially offset by decreases in accounts receivable which contributed $12.7 million in year-over-year cash, primarily due to decreases in managed care accruals and credit card receivables during the three months ended March 30, 2024, compared to the three months ended April 1, 2023.

Net Cash Used for Investing Activities

Net cash used for investing activities decreased by $9.4 million, to $18.2 million, during the three months ended March 30, 2024 from $27.6 million during the three months ended April 1, 2023. The year-over-year decrease was primarily due to lower doctor and in-store lab equipment investments, partially offset by store remodeling costs.

Net Cash Used For Financing Activities

Net cash used for financing activities was $5.2 million during the three months ended March 30, 2024 as compared to $28.7 million during the three months ended April 1, 2023. The $23.5 million year-over-year decrease in cash used for financing activities was primarily due to decreased purchases of treasury stock of $24.9 million during the three months ended March 30, 2024.

Share Repurchases

Effective February 23, 2024, the Board authorized the Company to repurchase up to $50 million aggregate amount of shares of the Company’s common stock until January 3, 2026. During the three months ended April 1, 2023, the Company repurchased 1.1 million shares of its common stock for $25.0 million. As of March 30, 2024, $50 million remains available under the share repurchase authorization.

Material Cash Requirements

There were no material changes outside the ordinary course of business in our material cash requirements and commercial commitments from those reported in the 2023 Annual Report on Form 10-K.

We follow U.S. GAAP in making the determination as to whether to record an asset or liability related to our arrangements with third parties. Consistent with current accounting guidance, we do not record an asset or liability associated with long-term purchase, marketing and promotional commitments, or commitments to philanthropic endeavors. We have disclosed the amount of future commitments associated with these items in the 2023 Annual Report on Form 10-K. We are not a party to any other material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Management has evaluated the accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the 2023 Annual Report on Form 10-K, in the “Critical Accounting Policies and Estimates” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the 2023 Annual Report on Form 10-K.

Adoption of New Accounting Pronouncements

There have been no material changes due to recently issued or adopted accounting standards since those disclosed in our 2023 Annual Report on Form 10-K.

We have market risk exposure from changes in interest rates. When appropriate, we use derivative financial instruments to mitigate the risk from such exposure. A discussion of our accounting policies for derivative financial instruments is included in Note 5. “Fair Value Measurement” and Note 7. “Interest Rate Derivatives” to our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q.

A portion of our debt bears interest at variable rates. If market interest rates increase, the interest rate on our variable rate debt will increase and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. Our interest rate collar is intended to mitigate some of the effects of increases in interest rates.

As of March 30, 2024, $144.4 million of term loan borrowings were subject to variable interest rates, and we had total borrowings of $446.9 million with a weighted average borrowing rate of 3.4%, inclusive of the effects of our interest rate collar. An increase to market rates of 1.0% as of March 30, 2024 would not result in a material increase to interest expense. Assuming a decrease to market rates of 1.0% as of March 30, 2024, the resulting increase to interest expense related to the interest rate derivative would be approximately $1 million. Our exposure to risk from changes in the interest rates will change upon the maturity of our interest rate collar on July 18, 2024. For more information about quantitative and qualitative disclosures about market risk, please see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in Part II. of the 2023 Annual Report on Form 10-K.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In accordance with Rule 13a-15(b) of the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of its management, including its CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 30, 2024. Based on that evaluation, the CEO and the CFO have concluded that the Company’s current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company’s periodic filings with the SEC is made known to them in a timely manner.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal year 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed in Part I. Item 1A. “Risk Factors” in our 2023 Annual Report on Form 10-K. There have been no material changes to the risk factors described in our 2023 Annual Report on Form 10-K.