National Vision Holdings, Inc. Q2 FY2023 Earnings Call

Thank you, and 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 material and today's presentation includes 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 and today's presentation also include 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 #2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. As a reminder, National Vision provides investor presentation and supplemental materials for investor reference in the Investors section of our website. I will now turn the call over to Reade.

Thank you, Angie. Good morning, everyone. Thank you all for joining us today. As you likely saw on July 26, 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. Then, Melissa will review our second quarter financial results and 2023 outlook in more detail. As we communicated 2 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 continue 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 to 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 in our July 26 press release, as of February 23, 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 to our AC Lens business when our contract ends on June 30, 2024. While we did not expect this decision from Walmart, for well over a decade, we've been focusing on growing our 2 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've 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 an even greater focus on the core strategic initiatives that will grow our 2 large growth brands and return to a mid-single-digit 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 continued 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 1, 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 platform. We're deploying remote in tandem with electronic health record technology as the 2 work together to drive expanded capacity, improve in-store efficiencies and importantly, improve the patient experience. The combination of these 2 initiatives is resulting in added exam capacity in sales that we would not have had otherwise. And 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, and 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. And 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 listen 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.

Thank you, Reade, and good morning, everyone. As you know, 2 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 1 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 the 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, cost applicable to revenue increased 120 basis points compared with the prior year quarter. As we expected, we continue 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 balance 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 cost and overall service costs, which include investment in doctors. Given our year-to-date results and expectations 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% to 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 6 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 remained 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 5 years through June 13, 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 1.9x. Year-to-date, we generated operating cash flow of $112.2 million. In addition, for the first 6 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 26, 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 2 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 noncash 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.

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 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. And we look forward to being a far simpler, faster-growing company with an increased focus on our 2 strategic growth brands, America's Best and Eyeglass World. Thank you for your time today. We will now open the call for your questions.

Our first question comes from Kate McShane with Goldman Sachs.

I just wondered if you could provide any more detail behind the same-store sales trend difference between America's Best and Eyeglass World and the performance there.

Thank you, Kate. I'm happy to do that. Yes. So America's Best was a 1.8% comp and Eyeglass World was a negative 2.8% comp. I've got to tell you, it's a little bit of the same story of managing doctor coverage and dim stores. Here, we've really been focusing our efforts with remote, which has been a help so far on our AB stores, our America's Best stores. That's where we've been rolling that out and have that going. And 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.

And Kate, I just wanted to add, we did talk about dark stores in our prepared commentary this quarter. And as far as the dark stores go, this is something that we are really focused on working through with our remote enablement but 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. And so we'll continue to attack that through our recruiting and retention efforts as well as our remote. And I'm sorry, those numbers that I quoted were the percent of America's Best fleet. Now 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.

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. And as we said in our remarks, where we have the desired level of capacity, we are able to deliver the comps in line with our historical operating model. So it's just getting back to making sure we have the exams available for the patients who want to take advantage of them.

Our next question comes from Michael Lasser with UBS.

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. So 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% to 7% range. And if that is feasible, what are going to be the key factors and strategies that allow National Vision to get there? Is it simply just going to 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?

Michael, I appreciate your question, and there are several factors at play due to the post-COVID market situation, which are impacting the optical sector as a whole. I want to emphasize that where we can implement our model and have the capacity, we are aligning our comparable sales with our historical performance. We believe reaching a mid-single-digit adjusted operating income margin is our next target, and we anticipate achieving this by late 2024 or certainly in 2025. The removal of our Walmart partnership, which was negatively affecting our margins, will contribute positively to this goal. We see that expanding our capacity will be essential in reaching this milestone, alongside further digitization of our stores and corporate office, enhanced omnichannel capabilities, and adding more locations to capitalize on our growth opportunities. Additionally, since you've been following us for a while, last year at this time, we were navigating numerous challenges that were impacting us and trying to fully grasp the situation with our customers and the increasing inflation, as well as the capacity of doctors in the market. However, we now feel much more proactive with the initiatives we have implemented, particularly in improving retention. We believe our retention rates may reach record levels this year following COVID, along with strong recruitment of students. We're encouraged by the beginning of the third quarter as we enter the back-to-school season, which begins in the Southeast and moves northward across the country, and we are optimistic about the initial trends we are observing.

Okay. My follow-up question is that it's clear the purchase cycle for new eyewear had been disrupted over the last couple of years given all that's going on. And now, as you mentioned, you're on front-footing, more firmer footing. And is what you're seeing a sign that there is a 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 years as it was contending with some of the constraints that we're dealing with?

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 start to happen in the second half, but we are not planning for that. It could start to happen in the second half. It's been about 2 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. So it's been about 2 years. So there is a logic that that could happen, but we are not planning for that in our guidance. We are planning that the improved capacity is going to be helping us in the second half. We believe our market share is flat to up and maybe more up in the managed care segment.

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

Thanks for all the helpful information that you shared so far this morning. I guess my question was on dark stores and dim stores. I just want to make sure I have this correct. So a dark store is not offering any eye exams and a dim store is offering some but not at sort of 100% capacity. Is that the right way to think?

Yes. At dark, we do not have a doctor, and we do not have remote. So yes, we can't get an eye exam there. And a dim store has maybe a day, maybe a couple of days, but not at our desired level.

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

Yes, absolutely. Particularly with regard to dark sales, they are quite a challenge. We are proud to have reduced the percentage of dark stores in our fleet by half since last year. This reflects significant progress, and remote services are increasingly contributing to more eye exams in those remote-enabled stores. Additionally, in contrast to what you mentioned, where we can implement our model, we are able to provide eye exams, and the performance of those locations is returning to pre-COVID levels, which is promising. It indicates that when we deliver the model effectively, patients return to us as they did before.

Got it. And just one last question. I don't want to take up too much time in the Q&A session. When you mention mitigating the financial impact of losing the Walmart partnership, are you referring to recapturing the $19 million of EBITDA? Is that the way to understand it, or are we looking at a partial mitigation of that impact?

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 2 avenues. First being the continued increase 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 indirect costs associated with that, that we'll be taking out of our business.

Got it. Thank you.

Our next question comes from Zachary Fadem with Wells Fargo.

This is Sam Reid stepping in for Zach. I wanted to discuss your ongoing relationship with EssilorLuxottica. How has the Walmart contract changed us, if at all? Is there a risk that the decrease in your volumes after exiting Walmart could negatively affect this relationship?

We have a very strong long-term relationship with EssilorLuxottica, supported by long-term contracts for lenses that maintain fixed pricing throughout the contract duration. Even without Walmart, we remain one of the largest optical chains in America, and our partnership is significant. This relationship has a long history, heavily based on contractual agreements, and we do not expect any major changes in this regard.

That's super helpful. And then 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 in 2H and beyond?

Sam, it's Melissa. So 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. Now some of the things that we've been able to look at for this year specifically, our 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.

Our next question comes from Brian Tanquilut with Jefferies.

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

Brian, it's Melissa. With the Walmart information that we've put out, we're ending the Walmart relationship with the stores in February of '24 and with the distribution contract in June of '24. We are assessing and evaluating our opportunities to exit those cost structures at the same time that we'll be exiting the revenue stream. So we're going to marry those up as closely as possible. That's what our planning is working on. And the costs that will come out of the business are, of course, any direct costs related to supporting those relationships. And in addition, with the corporate structure, you have back-office costs. You have overhead related to things, in the last discussion we said like insurance, things like that. Those are types of indirect costs tied to Walmart relationship and the distribution relationships that would look different in the go-forward model than they do today.

Got it. Okay. In your comments, you mentioned that you have rolled out virtual to about half of the target stores. Can you share any insights regarding the performance or the progression you are observing as these rollouts mature? I believe some of them are nearing a year in operation, so I'm curious about what you're experiencing.

We're very encouraged by the impact of remote services. Reade mentioned earlier how it has significantly changed the game, especially for new store rollouts this year. We have even opened some new stores without having an in-store doctor by utilizing a remote doctor. Looking back at our decision to pursue remote services three years ago, I am pleased with the timing since it has become a crucial part of our strategy. Currently, we've expanded this service to about 40% of our AB brand, and we're aiming to equip 500 AB locations by the end of this year. As we assess our plans for 2024, we anticipate continuing this rollout across the majority of our ABs. Recently, we have also begun testing it in a more targeted way in EGW, where it could also be beneficial. Our progress with remote services is on track, and we expect it to be EBITDA profitable this year, with strong confidence in that outcome.

Our next question comes from Adrienne Yih with Barclays.

This is Michael Vu on for Adrien. So 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 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?

Michael, it's Melissa. So there are a couple of factors tied to the higher ticket, but first and foremost being the managed care strength that we're seeing. Managed care customers tend to have a higher ticket than the nonmanaged care customers just based on spending somebody else's money versus spending your own money. In addition to that, we have seen a continued trade down from the income levels of higher than $100,000. And 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, where we believe that they come to see our stores because they get more value for their benefits in our stores.

Perfect. And as a follow-up to that, I know that you just mentioned the higher household income. And as we are like starting to shortly see the repayment of student loans, I was just wondering whether or not that's going to be positive or accretive related to the increase in customer transactions in the overall business. Or are you more seeing that as a headwind? And what kind of assumptions are you making related to that if any at all since you were just mentioning the $100,000 to $125,000 range?

Regarding student loans, while there may be a wider consumer sentiment impact, we anticipate that households with higher incomes will likely trade down to our brands due to the value they find when shopping at our stores. Our data indicates that a smaller segment of our target customers carry student loan debt.

Our final question comes from Dylan Carden with William Blair.

Just curious if you might be willing to express explicitly of the data you provided on the Walmart business, it's accretive from an EBIT net income standpoint. And 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?

Yes, you are correct that Walmart contributes positively at the EBIT level. However, it will take time to address the profit gap. This gap has become less significant in our business over the past couple of decades as we have developed our America's Best and Eyeglass World brands. We are also working on expanding our store fleet, which contributes to growth. Additionally, the Walmart business has lower margins compared to our growth brands. Through cost reductions and the opening of new stores, we will continue to address that profit gap. If we weren't in a significant investment phase for our growth brands, the profit gap would not be as pronounced, as more of the margin would contribute directly to the bottom line from our growth brands. However, our current investment cycle plays a role in this situation.

So if you were to dial it back to '18, '19 pre-pandemic, you would see the Walmart business be dilutive on the EBIT line? Is that what you're saying?

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

Okay. And then with the doctors that are coming out of the Walmart stores, stores in 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?

Yes. Our contract has a transition period where various groups are able to talk to the doctors there. It's sort of a complex thing because it relates to sort of state-by-state, location-by-location, doctor-model-by-doctor-model, but doctors are going to be making a variety of choices based on the stake.

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

I don't think we should view it as an immediate windfall. A new store needs to be nearby for a doctor to consider switching to a similar model. So, I wouldn't describe it as an immediate windfall, but doctors will indeed have various decisions to make.

Great. For the last question regarding pricing, it seems like you have taken some actions recently. It appears there may still be more opportunities to address this as we move toward the end of the year and into next year. Is that correct? Also, could you elaborate on how we should view your ability to bridge any gaps in pricing, which has been a significant concern for many investors? Please share what you anticipate in the upcoming quarters related to pricing, especially your strategy.

And by the way, periphery makes it sound a little smaller. We're thinking nonheadline price. The terms mean the same thing. But yes, we believe that more pricing actions will come into play in the second half of the year. We're very vigilant about pricing. We mentioned the study that's causing us to ask a lot of other questions, too. So we think there is more juice in the pricing lever going forward.

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

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.

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