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Operator: Good day, and thank you for standing by. Welcome to the National Vision Holdings First Quarter 2023 Earnings Conference Call. . I would now like to hand the conference over to your speaker today, Caitlin Churchill of Investor Relations. Please go ahead.

Caitlin Churchill: Thank you, and good morning, everyone. Welcome to National Vision’s First Quarter 2023 Earnings Call. Joining me on the call today are Reade Fahs, the 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, which will be referenced during the call, are both available on the Investors section of our website, nationalvision.com, and a replay of the audio webcast will be archived on the Investors page after the call. Before we begin, let me remind you that our earnings materials and today’s presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and our filings with the Securities and Exchange Commission. The release 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 presentations and supplemental materials for investor reference on the Investors section of our website.

Now let me turn the call over to Reade.

Reade Fahs: Thank you, Caitlin. Good morning, everyone. Thank you all for joining us today. Since we last spoke to you in March, we continue to execute our initiatives focused on adapting to the new realities of the post-pandemic marketplace that we believe position us to deliver improved sales and profitability while staying true to our mission to make eye care and eyewear more affordable for all. Before I review our progress on these initiatives, let me review highlights from Q1 performance. Beginning on Slide 4. Q1 came in slightly above expectations with a year-over-year increase in net revenue of 6.6% and adjusted comparable store sales growth of 0.8% compared to Q1 2022. This translated into adjusted EPS of $0.31 for the period.

Overall, the quarter reflected a similar sales mix to what we saw in Q4 with an even stronger performance from our managed care business. Our managed care business is less pressured by inflation since the insurance company pays most of the customers’ bill. Managed care business is typically strongest in the fourth quarter as insured customers are using benefits before they expire and in the first quarter due to benefit plan reset timing. In addition, during the quarter, we continued to see a greater shift in the number of higher-income customers who traded into our more value-priced offerings as tends to happen in a tough economy. These 2 trends helped mitigate the sales impact of inflation on our core budget-conscious uninsured customers as well as the impact from continued exam capacity constraints.

Turning now to Slide 5 and the progress we’re making against our key initiatives. As we discussed last quarter, National Vision is moving rapidly down the path to adapt our business to thrive amidst the new realities facing our business and the industry. These new realities include exam capacity constraints and persistent inflationary pressures on our business and our customers’ wallets. Let’s start with exam capacity. On the whole, in stores where we are achieving capacity objectives, comps are positive, thus demonstrating the strength of our business model. There are 3 components to achieving optimal exam capacity. The first is retention of the optometrists who currently practice in and alongside our stores. As we’ve previously shared, our optometrist retention rate is in the 80% to 90% range.

While there are some variability within that range from 2019 to 2021, mainly due to increased retirements and other pandemic-related factors, our retention rate improved in 2022 compared with 2021. Given our healthy Q1 retention levels, we expect to see another step-up in retention in 2023 over 2022. The second is the recruitment of new optometrists to our network. We are pleased that our recruitment efforts are off to a strong start this year. Both recruitment and retention have been aided by the addition of a menu of more flexible scheduling options available to optometrists in our network. As we discussed last quarter, these updates were piloted late last year, and based on positive results, they are being further rolled out in the first half of this year.

We continue to learn how best to optimize the new schedule management that goes along with this program and balance customer desired shopping patterns with the flexibility desired by the optometrist. Third, we’re deploying our remote medicine capabilities to help improve exam capacity. Remote medicine provides patients with greater access to care and optometrists with the ability to see patients across geographies. This is because remote optometrists can be licensed in multiple states and see patients in remote-enabled exam rooms across the country where they are licensed. Our remote program is a fairly sophisticated start-up within our organization, and we expect it to significantly unlock additional exam capacity over time. While we continue to learn and evolve the program, it remains on track to contribute to profitability this year.

While the greatest benefit, of course, is to dark and dim stores, there’s also an important benefit in covering situations where an in-person optometrist is out of the office and is supplementing the coverage that a live doctor provides in store when there is strong demand. We remain on track with our expansion into at least an additional 200 remote-enabled stores this year, taking into account planned pauses expected for peak volume periods for our stores. I encourage everyone to take a look at the video we recently published on our website, demonstrating a remote exam. In response to the current rising cost environment, we’re driving a variety of efforts which should, over time, help to rightsize both our store and our overall cost structure.

This includes the ongoing digitization of the store to improve efficiency and productivity. An example of this is our electronic health record or EHR program that we’re rolling out in conjunction with our remote medicine capabilities that is designed to make our stores work more efficiently than with traditional paper records. In addition, as we continue our deep dive into our pricing architecture, we’re conducting a study that will help us update the competitive landscape and our position within it to best determine options for potential pricing changes while executing our mission to provide quality eye care and eyewear at a value to all. Finally, with respect to consumer spending conservatism, we are constantly testing and expanding new marketing programs, including those that attract consumers via a variety of relatively new omnichannel offerings.

We continue to believe that, over time, due to the biology of the human eye, the consumer purchase cycle, which remained consistent in the decades prior to the pandemic, will eventually normalize. Now regarding our ongoing store growth. During the first quarter, we opened 8 new stores and are on track to open approximately 65 to 70 new stores this year. Our new stores opened over the past 12 months are continuing to perform well and in line with our expectations. As illustrated on Slide 6, we continue to see great opportunity to expand our America’s best in eyeglass world store base over time, and we’ll continue to capitalize on the white space opportunity in front of us. In summary, we are taking aggressive action to position National Vision for success in the post-pandemic marketplace.

While April was somewhat softer than we previously anticipated, we’re beginning to see encouraging signs of progress from the actions we are taking, which is giving us confidence in reaffirming our 2023 guidance at this time. I’ll now turn the call over to Melissa for a more detailed discussion of our financial results and the 2023 outlook.

Melissa Rasmussen: Thank you, Reade, and good morning, everyone. As Reade discussed, we had a stronger-than-expected start to the year, driven primarily by managed care sales, leading to adjusted comparable store sales growth of 0.8%, slightly better than originally guided. And we are beginning to see progress based on the actions we are taking. Now I’ll cover our first quarter financial performance in more detail. Turning to Slide 9. Net revenue for the quarter increased 6.6% compared to the prior year. This includes the impact from the timing of unearned revenue, which benefited revenue growth by 2% in the period. During the quarter, we opened 4 new America’s Best and 4 Eyeglass World stores and closed 5 stores. For our America’s Best and Eyeglass World growth brands combined, unit growth increased 5% over the total store base last year, and we ended the quarter with 1,357 stores.

As Reade mentioned, we are on track to open between 65 and 70 new stores this year, consistent with our previous guidance. Adjusted comparable store sales grew 0.8% and compared to the first quarter of 2022 driven by an increase in average ticket and transactions. Turning to Slide 10. As the percentage of net revenue, cost applicable to revenue increased 50 basis points, driven by the deleverage of optometrist-related costs which was partially offset by higher eyeglass margin and increased eyeglass mix. Adjusted SG&A expense as a percentage of revenue increased 140 basis points compared to the first quarter of 2022. The key factors behind this increase included higher performance-based incentive compensation given the normalization of our incentive plans this year versus last year as well as higher store payroll.

The factors were partially offset by advertising expense leverage during the period. Adjusted operating income was $39.9 million compared to $45.3 million in the prior year period. Adjusted operating margin decreased 150 basis points to 7.1%, driven primarily by the increase in optometrist-related costs and the normalization of incentive compensation compared to last year. Net interest expense was $4.9 million, which includes mark-to-market losses on derivative instruments and charges related to amortization of debt discount and deferred financing costs of $3.9 million. Adjusted diluted EPS was $0.31 compared to $0.33 per share in the prior year period. Now turning to Slide 11. Our balance sheet and liquidity remained strong. We ended the quarter with a cash balance of $246.9 million and total liquidity of $540.5 million, including available capacity from our revolving credit facility.

We have total debt outstanding of $566.9 million with no mandatory principal payments due until the term loan matures in July of 2024. We are currently exploring refinancing options for our term loan and revolving credit facility in advance of their maturity, and we expect to provide an update when appropriate. We ended the quarter with net debt to adjusted EBITDA of 1.8x. During the quarter, we generated operating cash flow of $74.1 million. We invested $27.7 million in capital expenditures, primarily focused on new store openings and customer-facing technology investments and remain on track for 2023 CapEx in the range of $115 million to $120 million to support our key growth initiatives. During the quarter, we returned capital to stockholders with the repurchase of 1.1 million shares for $25 million under the share repurchase program at an average share price of $22.90 per share.

We have $25 million remaining under the current share repurchase authorization. Inventory per store declined 8% on a year-over-year basis. Our merchandising and distribution teams continue to execute well, and we are confident our current inventory levels are sufficient to support continued growth in 2023. Overall, we will continue to utilize our strong balance sheet and cash flow to invest in our strategic initiatives to enhance our customer experience and strengthen our market position. Turning now to our outlook on Slide 12. We are reaffirming our 2023 fiscal year outlook for key metrics that we provided on our last earnings call. We continue to expect net revenue between $2.075 billion to $2.135 billion, supported by adjusted comparable store sales growth of 0% to 3% and 65 to 70 new store openings this year.

Adjusted operating income between $48 million and $66 million; and adjusted diluted EPS between $0.42 and $0.60 per share, assuming 80.2 million weighted average diluted shares. Embedded in our guidance is the expectation for the 2023 fiscal year tax rate to be in the range of 26% to 28%, which includes the impact of reduced deductibility of certain expenses as a result of the expiration of the Consolidated Appropriations Act of 2021. From a quarterly cadence perspective, we expect our tax rate to decrease in the second quarter from the first quarter of 2023, resulting in a second quarter tax rate below the full year expectation. As we move into the back half of 2023, we expect our tax rate to be more in line with our full year guidance. As Reade stated previously, April was somewhat softer than we anticipated due to ongoing macro-related headwinds our core uninsured patients and customers are facing, including lower tax refunds this year versus last year.

Given this and the timing of expected increased product costs, doctor-related investments and SG&A deleverage with adjusted SG&A dollar growth in the high single-digit range, we continue to expect adjusted operating margin in the second quarter of this year to be pressured. Looking beyond the second quarter, we continue to expect sales trends to improve in the back half of this year as we execute our strategic initiatives, including addressing doctor capacity constraints. In summary, we remain focused on executing our strategy and believe we are on track to achieve our objectives for this year. As Reade mentioned, while still early, we are encouraged by the progress we are making, especially with respect to our efforts in expanding exam capacity through our recruiting and retention initiatives as well as the further implementation of our remote exam technology.

As we move beyond the initial implementation phase for remote technology, we continue to expect operating margins to improve, especially as we drive further efficiencies with our store and corporate digitization initiative. In addition, we continue to evaluate our pricing structure and opportunities to further offset increased costs while maintaining our position within the industry. Thank you for your time today. I’ll now turn the call back to Reade.

Reade Fahs: Thank you, Melissa. Turning to Slide 13 and our moment of mission, which focuses on our latest technology investment in an early-stage health care, artificial intelligence start-up called Toku, which we’re investing in alongside Topcon Healthcare. Eye exams are more than simply getting an eyeglass or contact lens prescription. They also assess ocular and overall health. The picture of the retina that we’re able to take in most of our stores provides a treasure trove of valuable information then a optometrist can use to assess ocular and overall health and identify potential diseases that otherwise may go undetected for a long period of time, thus helping to improve the health outcomes for our patients. Through our investments in Toku, we’re enhancing these capabilities.

Toku analyzes retinal images for biometric markers linked to overall health and risk of cardiovascular events, including stroke, which is highly prevalent in people living with diabetes. Theirs is among the first AI screening approaches designed primarily with optometry in mind. In addition, Toku is working on validating an AI assessment of cardiovascular risk from the retinal photo, which would be a first, connecting optometry and primary care. In supporting Toku, National Vision is investing in a future for optical care in which more people are able to have affordable access to potentially life-saving health data to an easily accessible, noninvasive test. In summary, the key takeaways from today’s call are: we are rapidly adapting our business to thrive amidst the new realities of the post-pandemic marketplace.

Our retention, recruitment and remote medicine efforts are all heading in the right direction towards improved exam capacity. The digitization of our stores, corporate office and marketing efforts continue to progress towards improved productivity. And longer term, we’re making investments for improved patient care and optometric experience, including investments in AI. While our more budget-conscious consumer remains pressured, we are reiterating our guidance for the year and reiterating our conviction that the optical purchase cycle will eventually return to the normal historical patterns. Now I’d like to turn the call back to the operator to start our Q&A session.

Operator: . Our first question comes from Michael Lasser of UBS.

Michael Lasser: Reade, if you had to mention the improvement in your comp in the most recent quarter between the cycle getting better, meaning we’re getting closer to the replacement of glasses that were purchased in the last few years, the improvement in optometrist capacity and the trade-down benefit that you might be seeing because of the challenging economic conditions, how would you disaggregate and quantify those 3 factors?

Reade Fahs: Thank you, Michael. Great, great question. I would rank order them in this way. I would manage — I would begin with capacity, with improvements on the eye exam appointment and availability or eye exam availability front. Your second piece was — the second one would be the trade-down piece, but I’d actually not say it as trade down. I’d say it has increased in managed care because the increase in managed care does a bit correlate with the trade-down effect in that wealthier people tend to have managed care benefit. So I’d say capacity, managed care and I think it’s premature to talk about normalization of the cycle just yet. I’m looking forward to the day, Michael, when we can announce that. It will come. I am confident it will come, but I think it’s premature to point at that at this point.

Michael Lasser: Okay. And the softness in April that you talked about, you would attribute that mostly just to tax refunds and not any sort of internal execution challenges that a reversal of the benefits that you were seeing that drove the improvement in the first quarter. And I want you to clarify, I was hoping you could clarify the comments you were making — you made about potential price changes. Does that mean you could continue to take prices up while at the same time trying to maintain the deep value offering of National Vision.

Reade Fahs: Let me start with your first point. Yes, I think April is more related to tax — tax refund related softness than other things. And again, we are reiterating our guidance for the balance of year, but we did want to point out that April was a little softer than anticipated. And I do think it was the tax refund piece. On the pricing side, that’s something that we’re always looking at, especially in an inflationary world. There’s a small amount of pricing baked into our guidance, but we’re looking at other pieces. So yes, on a regular basis, we do sort of price checks on various aspects relative to the industry as a whole. We shared in our comments there we’re doing a little deeper dive in getting some fresh perspectives on it also because we think that there may be some opportunities there also that we’re looking at.

So always good to have fresh perspectives on that in an inflationary environment. And Michael, you are absolutely correct. We are committed to being a value player. We are committed to having a nice price gap between us and the competition. That is what people come to us for. That is what we are known for, and that is what we want to constantly deliver. But in this world, there may still be opportunities for further pricing actions.

Operator: Our next question comes from Zach Fadem from Wells Fargo.

Zachary Fadem: Reade, you called out encouraging results from your optometrist recruiting and retention initiatives. Could you talk a bit about what that means for existing versus new stores and whether it’s has an impact on your new store openings? And then separately, curious what type of things you’re looking for as proof points that remote medicine is working.

Reade Fahs: Okay. Yes, in terms of the existing versus new stores. So again, what we said on the recruitment front — on the retention front is that it looks like this year is going to be better than last year, and last year it was better than the year before. So we are encouraged by that trajectory in terms of retention. And recruitment is also healthy. I didn’t point out, but our student recruitment is tracking ahead of last year, and last year was a record. So a little early in the season. A lot of students so we don’t make decisions until the very end there. But in Q1, we’re tracking ahead there. So what does that mean for new stores? We also pointed out that new stores, if you look at the stores we opened over the past 12 months, they’re in line with expectations, which reinforces our conviction in the white space opportunity ahead of us.

And we think, relating to the remote piece, that remote can help us even more in terms of white space opportunities. What do we look for in terms of the remote for success, what we want, of course, is we want to expand our capacity in a cost-efficient manner and make more exam slots available to the customers who want to come to us. Really important point, I wanted to just reinforce where we are achieving our capacity objectives, our comps are positive. So that’s — it just reinforces the model is great. What we’re doing in this environment, where optometrists are harder to get is we’re sort of chasing — getting those optometrists so that we’re able to deliver our model. But where we can deliver our model, comps are positive, and that’s all good.

Zachary Fadem: Got it. And Reade, now that we are a solid 2 years away from the pandemic and the stimulus gains of 2021, can you talk about the impact of a multiyear replacement cycle in the category? And just considering the pull forward we saw in ’21 and just a 3- to 4-year replacement cycle, to what extent would you expect 2024 and ’25 to be a year of accelerated growth for the category?

Reade Fahs: So as — this challenge that we’re facing of the normalization of the purchase cycle is a category-wide challenge. The category last year around March or April, it’s a dip throughout the category. To the extent to which you have a high penetration in managed care, you were a bit insulated from it. We, of course, have a low percentage of managed care because most of our customers are paying cash themselves. They’re sort of lower-income budget conscious consumers. But the entire category is believing that the purchase cycle has not normalized and the entire category is believing that the purchase cycle will eventually normalize because it’s been a very consistent category for decades prior to the pandemic. It was quite a boom for the year or so after the reopening.

That was — lots and lots of people bought classes, and they tended to buy nicer glasses at the time. Then they were, in general, hit with this inflation, and that has pulled back the entire category. And we believe the purchase cycle will normalize eventually. We believe the purchase cycle must normalize eventually given the biology of the human eye and a lot of trends like all of the screen usage, which makes — which contributes to eye strain, which will increase the category and bring younger people into the category also. I just can’t tell you when this is unusual and this is unprecedented.

Operator: Our next question comes from Taj Phillips of Jefferies.

Brian Tanquilut: It’s Brian Tanquilut from Jefferies. Congrats on the quarter. Reade, I guess my first question for you. As we think about remote eye exams and the virtual strategy, are there any metrics that you can see from your early rollout in terms of maybe improvement in clinician capacity or store productivity or recruitment or reducing the days or hours that you don’t have a clinician in the store and can’t see patients that way?

Reade Fahs: Well, Patrick is our COO. One of his big responsibility, he is looking over our remote program. Patrick, I’ll turn that to you.

Patrick Moore: Yes. Just as a reminder for everybody, our remote care initiative is — it’s a clear win for doctors, patients and our store teams as well. It is a game changer for dark and dim stores. So we do look at coverage and capacity in terms of stores where we have a substantial demand in coverage need. We’ve seen double-digit productivity improvement. So we do track metrics around capacity, matching to demand, doctor and store productivity as well as, frankly, sales comps. We did see benefit in the quarter in terms of EBITDA promote. Last year, we were dilutive in the mid-single-digit millions. We were — it was a positive contribution to EBITDA in Q1. We are expecting to roll out at least 200 new sites this year, bringing that to 500.

We do think remote is also healthy retention. It’s a theme for doctors in general across the industry, and us having that capability is just another form of flexibility to offer doctors practice methodologies that fits their live the best. So the answer to your question is, yes, lots of different things come into play, and we do track and look at all those as we progress these key initiatives.

Brian Tanquilut: And then maybe my follow-up. You talked about Toku here really briefly. But maybe if you can share with us sort of the strategy on how you are intending to — or planning to reach or outreach to health care companies so that you can leverage your capabilities and capabilities and get more into the health care side of things versus just your traditional retail footprint.

Reade Fahs: Yes, that’s a great question. Thank you for that. When I think of sort of optometry and big picture longer-term trends, I think of 3 things. I think first of employment. It seems that ever more, there’s a desire to work in employee situations versus nonemployee situations. I think about flexibility. This generation, this post-pandemic period, that’s flexibility in terms of days, but also modes of practice like our remote initiative. And I also think on a longer-term basis, sort of more medical aspects of practice are also going to be ever more appealing to optometrists. We have had a mantra for the past 15 years of we are creating environments for optometrists who want to spend their entire career. When I say environment, it’s because we have a variety of different environments, everything from leasing to employee to just — if there’s a mode of practice, we like to have it available for optometrists in our various different brands out there.

So the last trend I talked about was, longer term, more medically. As I said, we’re doing millions of eye exams each year. We have thousands of optometrists practicing alongside our stores and in the National Vision network. And these optometrists are trained to not just find prescriptions, but to find all manner of ocular diseases and all manner of health care-oriented diseases. And that is a big part of what they do. Our optometrists are oftentimes to be first person to tell someone they have diabetes or hypertension, something along those lines. For many of our patients, it’s the only interaction with the medical professional that they’re going to have that year. So it’s very important. We regard that as a big responsibility sort of offering the network of optometrists the primary health care.

Some people have said to us, we are sort of an entry point for health care for a lot of our patients. Toku is an early-stage startup. Let’s be clear on that. But the promise of patients being able to come to us and through a simple quick photograph of the back of their eye being able to assess all manner of health care-related things, diabetes, hypertension, cardiovascular disease, we think that, that can be an added value to the overall health care system. Again, this is longer range in nature. This is not about sort of how we’re going to deliver this year’s guidance, but we think that the network of optometrists who are practicing alongside our stores are playing an important role in health care in America and that technologies like AI, like Toku is advancing, can play an even greater role in health outcomes for patients.

And we think that, that could be valuable to the overall health care of America at some point in time. And so we’re signing a few teams to learn ever more about that and see what added value we can provide.

Operator: Our next question comes from the line of Anthony Chukumba from Loop Capital Markets.

Anthony Chukumba: Congrats on the strong start to 2023. Just my question, is there anything that you’re seeing notable in the competitive landscape, whether it’s from the independents or some of the larger chains or some of the stores that are in deep discount retailers like Costco, Walmart? Is there anything you’re seeing from like a promotional perspective or just competition from a — for optometrist perspective.

Reade Fahs: Well, yes. So it’s not new since we’ve been talking about, it sort of since the pandemic, but competition for optometrists is very real. And so this is what all groups’ operating chains of any size are talking about. So that is very real. The growth of managed care and strength of the managed care sector more so than the cash pay sector that also is very real. In terms of sort of market share trends, my sense is we’re at best maintaining or at least maintaining our market share. And I don’t sense large share changes with the exception of a deceleration in the e-commerce space, which is in line with what I think is being seen in other aspects of direct-to-consumer that there was a big high in e-commerce related pieces that sector throughout retail during the pandemic, and now there’s a trend towards back to stores.

So that is happening within our category as well. But again, we think we are at least maintaining share, maybe even growing a little bit on the managed care front. And aside from that, the optometrist shortage and the managed care growth, I’m not saying in the deceleration of e-commerce towards more back to store. I don’t — I wouldn’t say there are other changes other than those.

Anthony Chukumba: Got it. And then just a related question. In terms of — given the — as you mentioned, very real competition for optometrists, what does that translate into for optometrist compensation relative to your expectations? I know obviously, you had some new initiatives as well. So maybe that modest a bit.

Melissa Rasmussen: Anthony, it’s Melissa. As we think about the optometrist compensation, we have seen an increase in compensation over the past year. And we had a higher growth in optometrist-related costs for the quarter of about 90 basis points. We continue to see inflationary actions in optometrist costs as well as just overall wage pressure. And we have added significant variable compensation opportunity to our doctors to tie their productivity to their level of pay. And so with the incentive compensation component, that benefits then as they provide more eye exams that are more productive. We are doing a variety of efforts to rightsize our store overall cost structure so that we can offset these increased costs as we become more efficient in the initiatives that we’re putting forward. And we do expect still about 100 basis point headwind related to split evenly between optometrist cost and investment or — and product cost increases throughout the year.

Operator: Our next question comes from Paul Hughes from Citi.

Brandon Cheatham: This is Brandon Cheatham on for Paul. I just wanted to kind of dig in on the capacity-constrained stores. Like are there any similarities with the stores? Are they the same ones? Or is it really just a doctor turnover issue? And do you know where the optometrists are going? Like is it a retirement issue? Or is it really just making sure that you offer a competitive enough package to retain them? Or are they going to kind of open their own practice?

Reade Fahs: So thank you, Brad. In terms of that, there are not broad themes in terms of where optometrists go where they leave us, it’s sort of all over the board. Having said that, they’re leaving up in lower numbers. When I say that our retention was better in ’22 versus ’21, and it looks like we’re on track for a nice improvement in ’23 again, that — what that says is we’re doing a better job of keeping them with — associated with us. So that’s the trend. And again, and recruitment is healthy as well. The — to your point about sorry — yes, the reason is that more retirements — more retirements in the year — following the year of the pandemic. But actually, the bigger or a bigger factor has been a lot of optometrists wanted to cut back the number of days they work.

And if you think about that overall, as a trend, it just means, nationally, there are less exam slots than there would be otherwise. So those are 2 factors, and we have a variety of incentive programs that incentivize doctors to stay at their traditional 5 days or to pick up a day here and there if they want to be at 3 days but during busy times sort of maybe ramp up a bit. Again, when we talk about flexibility, we’re trying to offer all sorts of different options to appeal to the lifestyle decisions of an ever-wider collection of optometrists, which, by the way, change over time through the life cycle of your career. And we are designing our programs to be flexible to change over time throughout optometrists’ career, again, trying to create environments where optometrists who want to spend their entire career.

And we are pleased with the success we’re seeing on those fronts.

Brandon Cheatham: Makes sense. And then on the product cost front, I think most of that, and correct me if I’m wrong, is coming on like the contact side of the business. So can you just kind of walk us through some of the competitive dynamics that you’re seeing in that business? And then what’s flowing through on contact pricing?

Melissa Rasmussen: Yes. As we think about the higher product costs, we announced in March that we were expecting to see about 100 basis point impact split between both the doctor investment and the increase in product costs. We expected those increased product costs to go into effect in the second quarter of the year, and it is primarily related to the contact lens side of the business. That is a product that is easily shoppable. So harder to take price as price comes — as cost goes up. We have taken non-headline pricing where it makes sense to do so, and we have been able to offset some of the cost increases that we have seen to date. That has been factored into our guidance that we released in March, and we’ll continue to evaluate the competitive landscape and take pricing measures where it makes sense.

Operator: Our next question comes from Simeon Gutman of Morgan Stanley.

Simeon Gutman: It’s Simeon. I wanted to ask about price changes. I think we’ve been talking about this for a few quarters. It seems like the — there’s more openness. Can you talk about what’s being contemplated? Is it opening price point? Is it the better invest? And I guess, what time frame are you expecting to make a decision that enact changes?

Reade Fahs: Yes. Thank you, Simeon. Yes, we are talking about non-headline price — pricing actions. And again, some level of those are baked into our guidance, and we have a number of ideas that we’re sort of vetting on how on potential other pricing actions that could be taken. And as we said, we’re doing sort of a deeper dive study and getting some fresh perspectives also in that way, and we’re looking forward to that, and we would feather those in over time. And some are things — generally, these things can be done — generally can be done reasonably quickly, but there are a lot of different aspects of our business beyond the headline price. And we have been — there was a small pricing taken at the very end of Q1. And again, this is something that gets feathered in over time, but we think there could be more opportunity, especially in this environment, where we think our competitors have been more apt to pull the pricing lever than we traditionally are.

Simeon Gutman: And then my follow-up, I’ll have 2 parts. First, if you look at your comp between managed care and customer pay, that’s the right notation?

Reade Fahs: Yes. Yes.

Simeon Gutman: Can you talk about the spread between those? Is it getting wider and why or narrower and why? And then the second part of my follow-up is the adjusted EBITDA or EBIT, which is down year-over-year, I don’t know if you could talk about it in basis points but the few drivers that are causing it and then how the movement of that throughout the year may abate or not based on investments deleverage, ODs, et cetera?

Reade Fahs: I’m going to take the first part of that, and Melissa is going to take the second part. The difference between our managed care comps and our, call it, cash pay comps is significant. Managed care is very strong, and the cash pay consumer is weaker. So managed care strength played a significant role in delivering the comps — the positive comps of Q1. Do you want to take the second part there, Melissa?

Melissa Rasmussen: Yes. As we think about the decline in adjusted EBITDA year-over-year, many of the factors that are tied into that were what we discussed in March related to the increasing product costs, related to the increasing cost in doctor investment and, in addition, the incentive compensation reset that we spoke about in March. With all of those factors combined, in addition to the initiatives that we’ve been putting in place, that is creating the drag on year-to-year EBITDA that you’re seeing.

Operator: Our next question comes from Robbie Ohmes of BofA Securities.

Molly Baum: This is Molly Baum on for Robbie Ohmes. One clarification question I wanted to ask on gross margin. You mentioned, I think, that you still expect 100 basis points of pressure for the full year. So I just wanted to dive a little bit deeper. Could you provide some details on maybe what your expectations are in terms of the cadence of that? Did 1Q come in ahead of your expectations? Should we anticipate the second quarter maybe to come in a little bit weaker just given some of the year-to-date trends that you’re seeing? Sorry, just any additional details that you might be able to give there.

Melissa Rasmussen: Yes. So as we think about gross margin for the year, the first quarter came in relatively close to expectations. And the reason for that is because the increased product costs that we had referred to in March go into effect largely starting in second quarter. We expect the 100 basis points that we talked about in March to be split between doctor investment, which is pretty ratable throughout the year and then 50 basis points tied to product cost increases, which began in the second quarter.

Molly Baum: Got it. That makes sense. So then in terms of the second quarter, a bigger function is just related to the top line and then maybe some expense deleverage on SG&A. Is that a better way of thinking about it as opposed to the gross margin piece?

Melissa Rasmussen: Yes. So as you think about the SG&A piece, we expect that we’ll have some growth in SG&A as we go into second quarter. The dollars will be slightly lower than what you saw in the first quarter. However, we’re expecting the high single-digit range, largely driven by the incentive compensation reset that we spoke about. And in addition to that, based on the timing of our new store openings, we expect to see occupancy expense to be a little bit higher in second quarter and beyond.

Operator: Our next question comes from the line of Dylan Carden of William Blair.

Dylan Carden: I was just curious, as you speak to sort of encouraging trends in doctor availability capacity, between recruitment, which I would imagine is sort of more of a now and go-forward issue, some of the initiatives you’ve done around sort of more flexible scheduling and remote care and anything else, kind of what you’re seeing is that is working this early in the year and kind of walking through more tangibly how you expect to kind of get your way out of this and maybe some of the timing around that?

Reade Fahs: Okay. So the word I’m using is ever improving retention, improving health, in recruitment and remote creating more capacity so encouraging, improving, those are both words I would like to reinforce that. With recruitment, there’s always a delay of — generally for a working doctor, it’s at least 60 days before they can start from the time they agree. And of course, the students all tend to arrive in the summer along the way. So that’s — again, that’s — as we do our projections and reiterate our guidance, that is baked into that. We are believing in the initiatives we have in terms of the flexibility programs we have in terms of the promise of remote, but it’s not solved yet. We are getting better. The trends are going in the right way, but it’s not solved yet.

But we’re pleased with the direction and confidence in our future. Again, reinforcing where we have the capacity, the comps are positive. And that, to us, is — this is a game of just making sure we can deliver the capacity because the consumers want to come to us.

Dylan Carden: So I’m taking from that, that retention is really driving the encouragement at this point relative to .

Reade Fahs: No, all 3. I’d say retention is encouraging, and recruitment is encouraging. Remote is still a start-up, still on a learning curve, but it’s generating exams profitably for us, and we see it getting better and better over time.

Dylan Carden: Okay. And then the comments around how managed care maybe is not directly related to trade down impact. Can you help me understand that? And…

Reade Fahs: No, I hope you took away it is directly related. So wealthier people tend to have managed care, managed care benefits go further with us than they do otherwise. And so there’s a strong overlap between the 2. So they — you would think they would go in lockstep.

Dylan Carden: No, I think…

Reade Fahs: I’m sorry if I misstated that before. But you’re correct. They are — there’s overlap.

Dylan Carden: No. It’s my fault. And so is the idea or is the commentary that the trade-down impact that maybe was delayed relative to where people thought last year happening in greater force at this point?

Reade Fahs: It is — yes, trade-down versus prior year is increasing. Yes. And yes, as inflation hits ever wealthier people’s pocket books, that should continue.

Operator: Our next question comes from the line of Robert Drbul from Guggenheim.

Robert Drbul: My question is around like the new store opening plan. I guess, when you look at all the headwinds around optometrists, why does it make sense to keep adding stores at the same pace as recent years? And what do you consider — are you considering maybe slowing the pace of the new store rollout?

Reade Fahs: So again, overall, if you look at the stores we’ve opened over the past 12 months, they continue to perform in line with historical expectations. Where the ability to get doctors is a highly localized thing sort of where you place a store, it may be either an encouraging place to — for doctors to practice or otherwise. So it’s very store related. We’re always striving to not open a dark store. And yet if, for some reason, a doctor doesn’t show up in many of our many places, we can open with remote, and that’s a factor also which we never had in the past. And again, the promise is that, over time, remote could actually increase our white space opportunity. But if the new stores are still working, and we have then we’re still going. We think that white space is very real.

Operator: Our next question comes from Adrian Yih.

Adrienne Yih: Reade, I guess I have a couple of kind of higher-level questions for you. With the comments on April seeing some pressure from tax refunds. I guess my question is how do you now feel about sort of back half macro changes. Is it too early to see any recovery? Is that tax pressure — tax refund pressure was sort of more near term in nature? And then under what kind of assumption are you assuming that as these doctors come on in the summer, what’s the increase in sort of doctor capacity to increase sort of exam — unfulfilled exam — to reduce unfulfilled exams? And then for Melissa, on the SG&A, the SG&A for this year, how should we think about that if we’re thinking out a year or 2 — out into the out-out year? About what portion of that is just heavy up investment and how that streamlines and gets more kind of balanced in 2024?

Reade Fahs: Melissa, why don’t you go through what the guidance contemplated for the second half of the year, the balance of the year in the SG&A? And then I’ll take the question about the increasing capacity from the hiring.

Melissa Rasmussen: Sure. Adrienne, as we think about with April being a little bit softer, we did tie that what we believe to be a lower tax refund season for our low-income consumer. We expect that the initiatives that we’re putting in place to continue to take hold and expand exam capacity. And it’s too soon to talk about May as we’re just a couple of weeks into that period. But we have taken all of the information that we have to date and factored that into the guidance that we reaffirmed today. So we do expect the back half of the year to have slightly better comps than what we’ve seen so far in the first quarter. And as we think about SG&A, the modeling that we’ve talked about this year, we do expect the headwinds related to the incentive compensation reset and the increased occupancy expense that we talked about a few moments ago.

As we think about beyond this year, with the initiatives that we’re putting in place, as we get back to mid-single digits, we expect to leverage many of the investments that we’re putting in place currently. And as we get past the implementation phase, we spoke last March that we expect to see at least 100 basis point improvement in operating margins related to some of those implementation teams being expanded in the productivity that we expect for many of those initiatives.

Reade Fahs: And so the part of your question, Adrienne, about the new hires and the increase in capacity, we’re encouraged by Q1 student hiring. It’s better than Q1 last year. Last year, we had record student hiring, so that’s a plus. Doctors, new doctors coming on is always part of our plan, but right now, it’s looking a little bit more encouraging than what was in the plan, but this is all part of the puts and takes on the balance of the year that Melissa just took you through. This is — there are a lot of factors that you’ve got to balance that you project out through the balance of the year. And — but as we assess all those, we felt quite comfortable reiterating our guidance.

Operator: At this time, I would now like to turn it back to Reade for closing remarks.

Reade Fahs: Good. Thank you very much, Gerald, and thank you all for joining us here today. And thank you for your ongoing support, and we look forward to speaking to you again when we report our second quarter results. Thank you all very much. Have a great day.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.