National Vision Holdings, Inc. (EYE) CEO Reade Fahs on Q4 2020 Results - Earnings Call Transcript

National Vision Holdings, Inc. (NASDAQ:EYE) Q4 2020 Earnings Conference Call March 3, 2021 10:00 AM ET

Company Participants

David Mann - Vice President-Investor Relations

Reade Fahs - Chief Executive Officer

Patrick Moore - Chief Financial Officer

Conference Call Participants

Simeon Gutman - Morgan Stanley

Bob Drbul - Guggenheim Securities

Michael Lasser - UBS

Zack Sadam - Wells Fargo

Steph Wissink - Jefferies

Paul Lejuez - Citigroup

Dylan Carden - William Blair

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the National Vision Fourth Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to one of your speakers today, Mr. David Mann, Vice President-Investor Relations. Sir, please go ahead.

David Mann

Thank you, and good morning, everyone. Welcome to National Vision's fourth quarter 2020 earnings call. Joining me on the call today are Reade Fahs, Chief Executive Officer; and Patrick Moore, Chief Financial Officer. 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 in 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 in our filings with the Securities and Exchange Commission.

The release in today's presentation also includes certain non-GAAP measures. Reconciliation of these measures are 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 expects to provide certain supplemental materials or presentations for investor reference on the Investors section of our website.

Now, let me turn the call over to Reade.

Reade Fahs

Thank you, David. Good morning, everyone. I'd like to thank you all for joining us today. I hope you're all staying healthy and safe.

Turning to Slide 4, as I reflect on 2020 in general and the fourth quarter in particular, I could not be more pleased with how the National Vision team rallied to serve our patients and customer needs while maintaining a safety first focus. Our key priority throughout the pandemic remains the health and well-being of our associates and network of doctors, our patients, and our customers. The strong execution of our store teams since the reopening of our stores in June has been remarkable.

For the period from June through December, we generated a 12.6% comp, the best 7 month comp in at least the past 18 years. Our partnership with Walmart now in its 31st year was extended for another three years through 2024. We continue to generate positive results at the five additional Walmart Vision Centers that we added in 2020. We celebrate the opening of our 1,200 store in Deerfield Beach, Florida.

We strengthened our board with the addition of three new independent board members, Naomi Kelman, Susan Somersille Johnson, and Jose Armario, with Jose joining us in February. This group of accomplished executives with diverse backgrounds bring skills and experiences across multiple disciplines, such as marketing technology and business operations.

We finished the year with a stronger balance sheet and the lowest debt leverage in our public company history. For the year, we generated record operating cash flow despite our stores being closed for over two months. And in early February, Moody's upgraded the credit rating on our debt, which returned National Vision to the rating that Moody's ascribe to our debt immediately prior to the onset of COVID.

Our balance sheet positions us well to continue to make investments to further strengthen our competitive moat. Finally, in 2020, we embarked on a journey towards developing a more formal ESG strategy. We published our first philanthropic impact report and progressed our diversity, equity, and inclusion initiatives. We conducted a materiality risk assessment and look forward to sharing more details of our ESG strategy in 2021.

2020 may have been the most difficult and eventful year of our careers. Yet despite a once in a century pandemic, a record economic downturn and many societal challenges, we expanded our footprint, grew market share, achieved record profitability, and continued to invest in our business for further growth. Importantly, this was all accomplished with decisions consistent with our company culture, values, and long-term orientation.

Our life giving culture and our people are our core strength. And this year, we saw their very best. Our teams were truly tested in a variety of ways by COVID and we rose to its many challenges.

Turning to Slide 5 and a summary of Q4 results. I'm pleased with the way we finished 2020 and continue to navigate the pandemic. Q4 was another outstanding quarter for us and further highlights the strength and resilience of our business model. Net revenue for the quarter increased over 23%, adjusted operating income increased 281%, and adjusted EPS increased to $0.45 versus $0.09 last year, which established a record for our fourth quarter profit as a public company.

Adjustable comparable store sales growth increased 10.6% in the quarter. Comps were once again led by our growth brands with a 17.6% increase at Eyeglass World and a 12.2% increase at America's Best. I'll speak more to the comp trends in a few minutes. We opened five new stores during the quarter and ended with 1,205 locations or a 4.7% increase in store count in the past year.

With our exceptional performance, we're pleased to have exceeded our fiscal 2020 outlook and we enter fiscal 2021 with good operating momentum. In a few minutes, Patrick will take you through our Q4 results and our 2021 outlook in more detail.

Turning to Slide 6, as the chart shows, our business has a history of strength and resilience to a variety of economic and external challenges. We’re pleased with our continued strong comps this quarter, and our second consecutive quarter of double-digit comps. This made for the best half year comps in my 18 years with National Vision. Our Q4 comps were consistent with the third quarter trend on a two-year stacked basis even despite rising COVID cases, post election uncertainty and the lack of additional government stimulus.

We believe these strong results were aided by pent-up demand from our patients and customers and by our low cost eye care and eyewear offerings seeming to be even more in need during this pandemic economy. The duration of this heightened level of demand is difficult to predict. We continue to expect it to moderate over time.

The continued momentum and Eyeglass World is especially noteworthy and encouraging as the brand's 2020 comps declined only 2.7%, despite being closed for nearly 10 weeks of the year. Eyeglass World has really found its moment in the post-COVID period emerging with consistently strong performance week-in and week-out. Thus far 2021, despite the recent weather disruptions is off to a solid start, likely aided by the refresh of vision insurance benefits, and a second round of direct stimulus payments in late 2020.

We're fortunate to be in a category where the purchase is tied to a medical necessity. Based on industry data, we're confident we have grown share in 2020. The optical industry remains highly fragmented, and we believe that the current environment is hastening the trend that favor larger, better capitalized value retailers like National Vision.

Shifting to Slide 7. As we move into 2021, we're looking to capitalize on our momentum and plan to continue executing on our core growth initiatives and further investing to strengthen our competitive advantages. After a brief pause and openings, early in the pandemic, new stores remain a primary focus given our sizable whitespace opportunity. We plan to return to normalized growth in 2021 and open approximately 75 stores.

We have a solid pipeline of specific locations for this year and into 2022. Our relationships with landlord partners are strong, and our results this year highlight that patients and consumers continue to seek physical locations for their optical needs.

As noted in today's press release, and on Slide 8, we increased the whitespace target for America's Best and Eyeglass World growth brands to at least 2,150 stores or an additional 300 locations. Based on updated modeling by third-party real estate data analytics provider and our internal team, we have identified this additional runway for expansion.

Our updated whitespace target is over 2.4 times our current network for our growth brands with at least 1,300 stores identified for America's Best and at least 850 Eyeglass World stores. We now see an even larger opportunity in front of us.

Additionally, our strong performance this quarter would not have been possible without the tireless hard work and commitment of our network of optometrists. We continue to invest in our optometrist recruitment and retention programs to keep our high retention rates near record levels. With healthy doctor coverage, we're able to meet strong customer demand for eye exams with a safety first approach.

In terms of marketing, we had quite an unusual year with much lower spending in 2020, initially due to cost containment, and then due to the decreased marketing given robust consumer demand. We return to our normal cadence of investment in the fourth quarter, in part to fulfill pre-pandemic commitments, and we plan for 2021 to be more in-line with our historical level. Our focus will be across television and digital media to ensure that our brands are always top of mind for consumers wherever they are on their purchase journey.

During this period of economic stress, we believe optical consumers are even more attracted to our extreme value, such as the introductory offer for our two growth brands, two for $69.95 at America's Best, including a free comprehensive eye exam, and two for $78 at Eyeglass World, with glasses available that same day.

We believe that the combination of low prices and excellent customer service leads to satisfied repeat customers and positive word of mouth as customers tell their friends how little they spent and the great service they received at our stores. In 2020, approximately two-thirds of customers in mature stores were existing customers.

Late last year, we invested in market and consumer research to further understand the optical consumer. The research further confirmed our strategies and we're continuing to use these insights to improve engagement with optical consumers. We continue to experience healthy revenue growth tied to our managed care partnerships. In 2020, revenues tied to vision insurance represented approximately one-third of net revenue, and we remain underdeveloped relative to the category.

We continue to see an ongoing opportunity here as managed care dollars and co-pays tend to go further in our stores than elsewhere. Regarding our supply chain, our lab teams have continued to adeptly handle the elevated business volumes in 2020. Our lab network is well-positioned with the capacity in place to handle the projected 2021 needs and remains a key reason that we are a low cost provider.

We currently face 15% tariffs on products imported from China, which for us are predominantly eyeglass frames. With the new administration, we are monitoring any ongoing developments, while continuing to progress, our tariff mitigation efforts. Our digital and omni-channel initiatives continue to progress. We experienced an acceleration in e-commerce orders compared to pre-COVID levels.

The trend towards omni-channel purchases also accelerated during the pandemic, as we experienced a significant increase in ship-to-home orders in 2020. For the year, our combined e-commerce and omni-channel sales rose to about 12% of net revenue, up from 10.3% in 2019. Lastly, our efforts in remote medicine are continuing as well. And we're pleased with their progress.

Overall, despite the pandemic, we focused on improving our business operations and competitiveness, as we invested towards expanded capacity to see patients, as well as initiatives to improve customer engagement throughout the customer journey that are supported by insights from updated consumer end-market research.

Before I turn the call over to Patrick, let me say that we are very pleased with our Q4 and 2020 performance in this environment. The events of the past year really showcased our strong positioning as an essential health care retailer with thoughtful safety protocols in place to operate through the duration of the pandemic, our proven team of optical veterans, executing our initiatives with both thoroughness, and rigor, our resilient business models as the low price seller of a medical necessity, with the potential for even larger opportunity on the other side of this pandemic, and our great network of optometrists that are associated with the company.

A new year brings new hope, but challenges and uncertainty persist. Yet we're entering 2021 knowing that we have what it takes to navigate the rest of this pandemic and beyond. And I'm confident National Vision will emerge an ever stronger company.

Now to Patrick.

Patrick Moore

Thanks Reade and good morning everyone. Before reviewing the full details for the quarter and fiscal year, let me begin by adding my thanks for the incredible resolve of our team during 2020. Their efforts have been remarkable and instrumental in delivering the strong second half performance and demonstrating our ability to successfully navigate the pandemic.

Turning to Slide 10, let's dive right into Q4 results. We opened five new America's Best stores and closed one America's Best in the quarter with 1,205 stores for a 4.7% increase in store count in the past year. For our America's Best and Eyeglass World both brands combined unit growth increased 5.9% over the last 12 months. Our store growth rate this year was impacted by the temporary pause in new store openings during the second quarter.

As Reade noted, we have increased our projected whitespace opportunity based on refreshed modeling by third-party experts and our internal teams. The demonstrated strength of our new store performance, as well as the outstanding post reopening performance across store vintages further reinforces management's confidence in our store model. New stores continue to generate favorable returns and cash flows and historically breakeven in the second year with payback in three years to five years.

The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same store sales increased 10.6% during the quarter on a 13-week basis. At our growth brands, comps at Eyeglass World increased 17.6% and America's Best was up 12.2%. As Reade noted, we are especially pleased with the continued robust performance at Eyeglass World. This quarter same store sales were driven by an increase in average ticket.

By category, we experienced positive comps in both eyeglasses and contact lens with especially strong performance in eyeglasses. Eyeglass comps were driven by increases in both customer transactions and average ticket, especially at our growth brands. The contact lens category continued to see growth in average ticket as our contact lens customers are gravitating to newer technology lenses that have higher prices. Our customers are also tending to purchase more units per transaction.

Turning to income statement highlights on Slide 11. Our Q4 results reflect the continued strong momentum in our business since June. The fourth quarter consisted of 14 weeks this year, and the 14th week added 32.2 2 million to net revenue and approximately $0.01 to adjusted diluted EPS for the quarter and the year.

Net revenue increased 23.6% for the quarter. Excluding the impact of the 14th week, net revenue grew 15.6%. Unearned revenue had a positive impact this quarter, as net revenue growth benefited 2.8%, due to the timing of unearned revenue recognition.

Costs applicable to revenue increased 15.4% or a decrease of 310 basis points as a percentage of net revenue versus last year. The decrease as a percentage of net revenue reflected both higher eyeglass mix and higher eyeglass margin, as well as lower growth in optometrist costs, which continued the trends we experienced in the third quarter.

Adjusted SG&A expenses increased 13.2% in the fourth quarter versus last year or a decrease of 370 basis points as a percent of net revenue. The key factor behind this decrease was the leveraging of store and corporate payroll, occupancy expense, and corporate overhead.

Additionally, the company incurred incremental COVID-related expenses of approximately $800,000 in the quarter primarily for the acquisition of protective equipment and other supplies. Adjusted EBITDA increased 118% to $83.5 million and adjusted EBITDA margin increased 730 basis points in the quarter. Adjusted operating income increased 281% to $62.8 million, and adjusted operating margin increased 850 basis points to 12.6%.

The increase in adjusted operating margin was driven by the strong comp leverage of fixed costs, higher eyeglass mix and eyeglass margin, and the timing of unearned revenue recognition. As a result of these factors, we experienced another unusually strong quarter of flow through. Adjusted diluted EPS increased $0.45 versus $0.09 last year.

Beginning in Q4, EPS is calculated using the if-converted method of accounting. Thus our diluted share count of 95.9 million shares reflects the fully converted impact of the convertible senior notes. In summary, for the quarter, by all measures, this was another stellar quarter for the company.

Turning to Slide 12, our fiscal 2020 results reflect the exceptionally strong second half recovery in our business that resulted in increased profitability, despite the decline in net revenue from temporary store closures during spring and early summer. While adjusted comparable store sales growth declined 6% and net revenue fell 1%, adjusted operating income increased 17%, and adjusted EPS increased 22% to $0.91 on the year.

Now, turning to Slide 13 and our balance sheet. At the end of the fourth quarter, our total debt was $655 million. Our cash balance was $374 million, net debt to adjusted EBITDA was 1.3 times or a 50% decrease from 2.6 times in the fourth quarter last year. Year-to-date, we invested approximately $77 million in capital expenditures. The lower level of CapEx versus last year generally resulted from cash preservation strategies deployed during the second quarter, including the timing of new store capital investments.

In terms of capital allocation, our primary focus is investing for growth, and our financial strength gives us the opportunity to make ongoing investments in our people and our business. We believe that our ability to invest remains a competitive advantage. As such, we are continuing to invest to support future growth. For 2021, we project CapEx again to be in the range of $100 million to $105 million.

We've been very focused on reducing our capital intensity, with the mid-point of our 2021 CapEx outlook approaching 5% of net revenue. Our CapEx outlook at the beginning of each year has not changed since our IPO, despite projected 2021 net revenue being over 25% higher than the 2018 level. I'm especially proud of our demonstrated ability to continue to drive business growth and then the CapEx curve over time.

We enter 2021 in a very strong financial position, with $668 million of liquidity from our cash balances and available capacity from our revolver. In February, we were pleased to receive an upgrade from Moody's that returned our corporate credit rating to its pre-pandemic level. As we proceed this year, we will look to balance a conservative cash posture against this period of continued uncertainty with our key stated priority of balance sheet improvement.

One last housekeeping item to note on the balance sheet. In the first quarter of 2021, we intend to early adopt the new accounting standard regarding accounting for convertible notes. We expect the adoption of this standard to result in a reclassification of conversion feature balances tied to our convertible notes from equity to debt, and a decrease in reported non-cash interest expense.

We currently expect the net impact of the re-class to result in an increase to long-term debt of approximately 83 million with a corresponding reduction to equity, which will be reflected beginning in our first quarter 2021 financials.

Now, turning to Slides 14 and 15. I'll conclude with some commentary regarding our 2021 outlook, which we included in today's earnings release. While the operating and macro environments remain uncertain. Our performance since reopening our stores gives us heightened confidence in our business, and we are continuing our practice of providing selected full-year outlook for fiscal 2021 based on the factors we know today.

Our outlook reflects the currently expected impacts related to COVID. However, we anticipate potential significant volatility driven by ongoing uncertainty related to the pandemic. The outlook currently assumes no material deterioration in the company's current business operations as a result of COVID, government actions, or regulations. Also as a reminder, fiscal 2021 is comparing to the 53-week period in 2020.

With that setup, our 21 outlook projects net revenue of 1.93 billion to 1.98 billion, adjusted comparable store sales growth in the range of 13% to 16%. The opening of approximately 75 new stores, adjusted operating income between 130 million and 137 million, adjusted diluted EPS between $0.88 and $0.93 assuming 96 million weighted average diluted shares reflecting the treatment of our convertible notes under the if-converted method.

I would like to provide some additional color to our historical practices given the unique comparisons from 2020 into each half. We expect our first half results to benefit from easier sales comparisons, due to the 2020 temporary store closures. As a result, we expect strong net revenue and profit growth in the first half, compared to 2020. However, in the second half, we will face grow over challenges from record double-digit comps and exceptional margin expansion that is not expected to be sustained.

Thus, we project second half net revenue growth to be generally flat, with a meaningful decline in our profit metrics. For modeling purposes, we expect the quarterly cadence of results to be more in-line with 2019.

As Reade noted, we're off to a solid start to the first quarter despite the weather impacts in February. While we would project first half comps to benefit from negative year-over-year comparisons, we continue to expect the underlying level of heightened demand to moderate further. Also, as we enter what is our historical peak selling season, we remind everyone that both the timing and magnitude of tax refunds are an important variable that can affect our performance in our first and second quarters, and which may be further affected by COVID conditions.

Store openings this year will continue to be predominantly America's Best locations, with the remainder being Eyeglass World stores. Store openings are also expected to be skewed towards the first half of the year. We project a few closing as is typical each year. For full-year 2021, as a percentage of net revenue, we expect cost applicable to revenue to increase 50 basis points to 70 basis points versus last year.

Our record performance in 2020 benefited from product mix shifts that we expect to normalize in 2021, with benefits in the first half and cost pressure in the second half. Our outlook also takes into account the 15% tariffs on products that we import from China. For Q1, we expect costs applicable to revenue to be down 100 basis points to 120 basis points and reflect our highest margin for the year.

We would expect adjusted SG&A to be up 70 basis point to 90 basis points as a percentage of net revenue in our outlook. Our marketing spend is projected to return to a more normalized percentage of net revenue this year. We also expect some degree of continued wage inflation, while looking to tightly manage growth in corporate expenses. As a result, we estimate an adjusted operating margin of approximately 6.8% at the mid-point of our guidance range.

While this margin would represent an approximately 100 basis point declines in 2020, given the abnormally high flow through in the second half of last year, our adjusted operating margin outlook is 20 basis points above the 2019 level, and 50 basis points higher than 2018. We are projecting depreciation and amortization in the range of 97 million to 98 million, interest expense of approximately 28 million, and ongoing COVID-related costs of about $1 million per quarter, based on current pandemic and related conditions. Our fiscal 2021 tax rate is estimated to be approximately 26%, and does not consider the tax benefit due to the impact of option exercises that may occur in fiscal 2021.

Lastly, we would remind everyone that unearned revenue recognition timing can affect our quarter-to-quarter comparisons. Last year, the closing of our stores at the end of March added approximately 28 million in unearned revenue in the first quarter, which we would expect to mostly reverse in the first quarter of 2021.

However, the sales during the last week of the first quarter are highly dependent on tax refund volume and time and are difficult to predict. Hence we could see a material swing in unearned revenue and its associated impact versus our estimate. As always, we will clearly communicate the 7 day to 10 day accounting timing impact, so that investors always understand the underlying cash momentum of the business.

In summary, I just want to say how delighted that we are with our exceptional second half performance, and the momentum that it provides for fiscal 2021. 2020 was an incredibly challenging year, but it also highlights the strength and durability of our growth model and the relentless commitment and focus of our teams. We continue to feel very well-positioned to effectively navigate this challenge and emerge as an even stronger business.

At this point, I'll turn the call back to Reade.

Reade Fahs

Thank you, Patrick. Turning to Slide 16 and our moment of mission. Last quarter, we shared that we've begun the process of creating an Environmental Social Governance or ESG strategy. In many ways, ESG and corporate responsibility have been core to our D&A for almost two decades. We simply haven't had it formalized or explicitly talked about it in this language before. The development of our ESG strategy, which includes board level oversight, will use the recently completed materiality risk assessment as its compass.

Earlier this year, through our foundation 2020 quest, National Vision coordinated the donation of more than 40,000 eyeglasses – eyeglass frames to the non-profit [grades for impact] to use in a Eye Care Clinic serving the rural poor in Nigeria. As a result of this successful collaboration with our optical partners, we are now preparing an even larger eyeglass donation this spring, [two grades for impact] to be deployed in free clinics in rural poor areas around the world. This is an example of how we can work with our partners to exponentially extend our mission and create profound impacts on the world.

Closer to home, we recently announced the sponsorship of six scholarships over the next two years. Through The Vision Council’s, Open Your Eyes Scholarship Program, which supports high-schoolers in marginalized communities who want to pursue a career in the optical industry. Our investment in this scholarship improves access to optical education for talented ambitious students, while honoring our commitment to build a more inclusive future for the next generation of optical professionals.

We're also focusing on improving the hearing now. We are proud that today the percentage of black optometrists in our doctor network is three times that of the percentage represented in the optical industry. We're also proud to be majority, minority company with BIPOC associates and optometrist, that's black indigenous people of color, making more than half of our 14,000 associates and optometrist in our network. This includes black and latinx associates being overrepresented in our population versus the U.S. population.

We understand we still have important work to do and are committed to advanced diversity equity inclusion throughout our company and the optical industry. Having diversity represented amongst our associates and doctors is a driver of our success as a company, but it doesn't stop there. The three newly added board members help maintain a gender balance among our independent directors, while broadening the diversity and expertise across our board.

Ultimately, being responsible corporate citizens and stewards and empathetic human beings is at the core of how we carry out our mission and achieve our success. The National Vision ESG journey is clarifying and expanding our capacity to best impact the world, including the development of environmental programs to manage our energy and climate impact. I'm excited to continue sharing more details as this process progresses, especially as we determine our areas of focus amid the formal ESG framework.

In summary, for a year like 2020 to culminate in overall growth and success for our company is remarkable. It truly reflects the durability of our business model year-in and year-out, and positions us for a larger long-term opportunity. I also believe it's a direct result of the character and commitment of our associates a network of doctors, no matter the challenges they showed up for and leaned into our mission again and again this year. I'm so proud to be a part of this and look forward to seeing what we can achieve and what I hope will be a far healthier 2021 for all of us.

With that, I'd like to turn the call back to the operator to start the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.

Simeon Gutman

Hi, good morning, everyone. My first question, I want to ask about everyone's favorite topic about operating margins. Patrick you mentioned the 6.8 mid-point and I think 2020 adjusted was close to 8%. And I realized, you know, it's going to be higher in 2021 than where you were over the past few years. Can you talk about that 8% level, I realized that was a function of, you know some costs coming in some costs going away or margins being better, but is that a good feeling level for this business to think about over time or there's no reason why you can't get to that level and then move past it over time?

Patrick Moore

Thanks Simeon. Good morning. You know, if you think about the margin that we saw, particularly after our store opening periods from June through December, you know, we used the word exceptional purposefully that they were very high margins, there was a lot of great work being done in our stores, demand was high, there was some stimulus benefit, we were seeing mixed benefits in terms of a little more eyeglass and contact lens versus historical patterns.

We were seeing the stimulus benefits lift tickets, and that's just customers, you know, picking out incremental things that they wanted to add, because they could. We were in a fairly low to moderate position in terms of our typical advertising spend. We obviously weren't traveling, and due to the double digit comps, we were really well beyond our comp leverage point. So, you know, I would say like this, if we had another period where we were 2 x or more on our comp leverage point and found that advertising wasn't necessary that could be a nice benchmark. I don't think there's anything.

So, elements of that are going to moderate back to a norm. But again, our norm has been improving, we, we lifted operating margins, 30 basis points from 2018 to 2019, another 20 from 2019 to 2020. You know, management team is focused on that. We hope to, you know, have a shot at delivering some more that lift again, but I do want to cordon off those months of June through December as being just outside of the norm.

Now, in the fourth quarter, we did see advertising moderate back to more normal levels. And it was a great high watermark. I don't know if that makes sense in the next two years to be able to shoot for that, but I can promise you that management is always looking for ways to improve margins without you know, providing any negative consequences for the mission of the company.

Simeon Gutman

Okay. And then, I guess shifting topics to the new store targets. The higher numbers, do you intend to open at a same rate that you're opening now? And then how do you think about EGW versus America's Best? And obviously EGW is less mature and they're growing faster, but why shouldn't those two store totals look similar over time?

Reade Fahs

So, we are sticking with opening 75 stores a year. That's been very successful for us in the past that it works well with our doctor recruitment cadence overall. So, we're sticking with that in 2021. Eyeglass World, oh my gosh we’re so pleased with the performance of Eyeglass World. It's just been the brands of the post-COVID moment. We are working on ways of getting the ROIC closer to America's Best and the improved performance.

Sure it helps. With that, there is a bit of lead time required to plan out and acceleration in any growth and of course the Eyeglass World was – got very strong late last year, but couldn't be happier with the performance ROIC is closing the gap with EGW and – but for sticking with 75 stores a year.

Patrick Moore

Hey, and I would just add Simeon. We did a nice analytical update this year in terms of new store performance and payback and even after the last few years where we entered some really large urban markets we went West Coast, we've gone East Coast. We're delighted that our new store metrics are really the same as they were before we extended into those major urban areas there.

We're still seeing payback in that, you know kind of early mid-second year of operations for the bulk of those stores were – are breakeven. And we're still seeing cash on cash payback between [year and five]. So, the company really expanded the types of places where it's putting new boxes. And I'm delighted to report that the same numbers that were used back at the IPO still make sense. Gives us a lot of confidence.

Operator

Thank you. And our next question comes from the line of Bob Drbul with Guggenheim Securities. Your line is open. Please go ahead.

Bob Drbul

Hi, good morning. I guess two questions. I think first Reade bigger picture, as you guys talk about the increased store counts. Can you just give us an update, where you think the industry contraction in terms of, you know, as part of what you're seeing, because there's been store closures and you know, if you have any estimates on what you saw, you know, in 2020, in terms of the industry contraction, an update on that would be great? And then I guess just the second question for Patrick is, on the gross margin piece, can you just talk a little bit more about I mean, the trends have been really good, you know, are they sustainable? And can you just maybe just help us understand the puts and takes a little bit better? As you think about what you said earlier for this year? That'd be great. Thanks.

Reade Fahs

Good Bob. Thank you very, very much for that. You know, what we've seen is a hastening of the trends that we've been talking about, ever since our IPO roadshow, that that the, you know, we call it the rising tide, and the rising tide, and the rising tide category, growth, that that the chains are gaining market share at the expense of the independence, the largest chains are, have been gaining market share value chains have been the biggest grower of market share, and that has all favored us. And we see that that continuing.

The industry seems to have closed this industry data. 2% to 3% of stores have closed since the since the pandemic or over the past year or so. So, there's a contraction in store count and some of it’s, you know, independent doctors saying I'm not going to reopen. I'm close to retirement, so I'm not going to reopen there, some of it is a decline in Mall and Big Box store count there. We're also seeing, by the way, sort of doctors opening with just less slots, shorter hours, less exams per hour, again, all favoring us along the way.

And so, we just have seen this as an overall continuation of the trends that we thought we've been talking about for years now, and the larger whitespace opportunities, further reinforcement of that.

Patrick Moore

Yeah, and then following on the gross margin, just to level set, we have been seeing significant gross margin benefit in the second half of 2020. And that was really related to a little heavier shift over to eyeglasses versus contacts and our business inside of eyeglasses, nice customer driven traffic demand and nice customer ticket elevations. Those have, you know, we're expecting to see some moderation in that over time for the full-year guide.

On gross margins, we, you know, had basically said, we expect it to be down in the 50 basis points to 70 basis points range, but for Q1, up about 100 basis points to 120 basis points. So, Q1 should probably be the high watermark for gross margins. And then we just will also have to understand what swings we get out of the unearned revenue component that I mentioned a few minutes ago in terms of call comments.

Operator

Thank you. And our next question comes from the line of Michael Lasser with UBS. Your line is open. Please go ahead.

Michael Lasser

Good morning. Thanks a lot for taking my question. Do you think you're seeing a continuation of pent-up demand in the fourth quarter and so far, year to date? Or is this just more reflection of National Vision taking market share and a realistic run rate of the business despite offering what seems like conservative guidance for the year ahead?

Reade Fahs

We believe it's both. We believe that there is pent up demand. We believe there's less supply as I detailed a moment ago, and we believe we are building market share. We believe all those things are combining together.

Michael Lasser

And Reade, how long would you expect that pent up demand to persist? Is it fair to think that this is just going to stall out after the next two weeks or could it go longer than that?

Reade Fahs

It's hard to predict how long that will go. We have said that Q1 has had a solid start to it, suggesting we're still seeing sort of continued momentum there, despite the crazy storms of February, and there sort of data out there suggesting a lot of customers are still hesitant to go back. And my favorite example is are you are you going to your dentist as frequently as you used to that there are a lot of consumers out there just sort of saying. You know, maybe I will just hold off a little longer. So, I can't predict it, but I think it will continue and eventually moderate.

Michael Lasser

Okay. I want to come back to the profitability discussion. You had indicated that relative to 2019, your margin will be up at about 20 basis points. So, two questions on that, is that a realistic run rate? Should I think about over the long run, assuming that you're able to maintain your algorithm? And two, isn't there anything that you've learned in the last, call it 12 months that that would make National Vision and more efficiently run business such that you could generate more operating margin expansion than that modest rate that you're implying for this year?

Patrick Moore

Yeah, I'll start that one Reade, and maybe back to you. Yeah. So, I think that when we look at what the operating margin has done, since – through 2018, 2019. 2020 was a very abnormal year. We had a loss period followed by exceptional margins. Our guide at the midpoint has that moving backwards a little bit. We're still focused on eking out some margin gains, you know, most every year, if possible.

So, you know, the guide has to be 2021 over 2020, which is one of the oddest years ever to do kind of grow over and think about it, especially on quarters and seasonality. But I do think there's continued upside moving from 2018, 2019, let’s skip 2020 into 2021 and then 2022 and beyond. I think if we go back and look at that period, our intent is that you will see gradual operating margin improvement.

Reade Fahs

Right. And then in terms of, sort of the things that we've been learning, you know, again, sometimes we like to compare things to 2020, and sometimes to 2029. When I think of where we are now, relative to a comparable period or anytime in 2019, I think we are just much more sophisticated than we were. Our data analytics are deeper, you know, we referenced the market research and we realized, sort of post-COVID that we have to just keep our finger even more on the pulse of changing consumers dynamic. So, we've probably done more market research in the past six months than we have in the past two or three years just to make sure we're all over any consumer dynamic, changing our, sort of our consumer technology is more sophisticated, the omni-channel pieces that we're tracking ever more, and we believe that's going to be really helpful to keeping us sharp over the coming periods.

Operator

Thank you. And our next question comes from the line of Zack Sadam with Wells Fargo. Your line is open. Please go ahead.

Zack Sadam

Yeah, hey, good morning. So, Reade could you update us on the state of the category here, coming out of the pandemic? You know, what do you think the underlying growth rate should look like over the next couple of years, particularly for the value segment? And then you touched on the competitive landscape a little bit earlier, but maybe you could also frame the opportunity to take share as Mall-based and mom and pops [exit] the addressable market?

Reade Fahs

Thank you, Zack. You know, what we're seeing is this category is shifting to the value segment. It's been shifting for years. And post-COVID has hastened that. So, I think there's a growing understanding that you don't have to pay what you used to for eyeglasses, especially. And I believe that will – that's not going to go back. You know, once you've experienced the pricing you get from us and a few competitors who are in the game, as well, you don't say, Oh, I think I'd like to go back and pay a lot more the next the next time.

So, I believe that what we're seeing is an ongoing, sort of tailwind to the value segments. And, yeah, it's going to come at the expense of the independent sector, which because they have no economies of scale, aren't able to compete anywhere near the prices we are. It's going to come at the expense of Mall-based retailers, and it's going to come at the expense of, sort of anyone who is focused on just a higher price piece, and I think, all that combines to the larger whitespace opportunity that we're seeing before us, you know we don't just sit here and put a finger in the air on that whitespace opportunity.

We have really deep data scientists working on this and reinforcing this. And that's where the numbers come from, but it's a combination of all these factors coming together that this is what makes us so optimistic in the post-COVID environment.

Zack Sadam

Got it. And then you called out some weather driven disruption early in Q1, curious if you could elaborate here in terms of your trends or whether any stores were offline during this time, and as well as any disruption to the supply chain that we should anticipate as we work through our models?

Reade Fahs

So, the weather pieces I was referencing were about what two weeks ago in Texas and Louisiana primarily, you know that put millions of homes out of power and stores out of power, yeah, so we had lots of closings over it was about a two week periods of storm after storm again late February only is what I was referencing. And, you know, I'm always – always like to compare us to the restaurant industry that if there's a big snowstorm and you were planning on going out to dinner and you don't go out to dinner, while your – that meal is never going to be eaten again. But so – so they lose out, but for us, you stay at home, your eyes just get worse. And you have to come back eventually.

So, that's that – so yeah, storms are and similar disruptions are just short blips for us. But it comes back eventually. We’ve seen it time-after-time, year-after-year we talk about it a lot that's expected in the future, but they come back. It's a medical necessity.

Operator

Thank you. And our next question comes from the line of Steph Wissink with Jefferies. Your line is open. Please go ahead.

Steph Wissink

Thank you. Good morning, everyone. I have two questions. Patrick, the first is a quick one for you, just on your current lab capacity to support the growth behind America's Best; can you remind us how much capacity you have? How far into the future that would support your growth targets in terms of the store unit cadence? And then Reade maybe this one's best for you, just want to give you some space to tell us a little bit about the mix benefits you saw shift from contacts to glasses in 2020, if that's correlated to, kind of the tired eye syndrome, the Zoom effect, or if it's something bigger, if you think there's a fashion trend, or something underlying a shift from lenses to glasses? Thank you.

Patrick Moore

Good morning, Steph. So, on the lab capacity, we built our fourth domestic lab a couple of years ago. The way those labs work is, we, you know we get the shell in place and then we use just in time provisioning for incremental equipment to meet peak season demand each year. We are in great shape on lab capacity. Generally, we're building a new lab every five or so years. We could actually start to have visibility into equipment that may let us stretch that even more. So, I'd be stunned if that ended up being on the three year horizon, maybe not even a [indiscernible] we’re in great shape with our domestic and global lab network.

Reade Fahs

And, and to your to your second question, Steph. So, there are two components of this, both sort of a near-term and a long-term. From a near-term perspective, recall, we didn't actually shut down our stores, we closed our stores to the public, but we continue to man our stores, and staff our stores, socially distance, of course, with people because we're providing necessity and our phones were ringing off the hook. And because our consumers are store based and many are very phone based.

We were still selling a lot of contact lenses, often annual supplies of contact lenses during that period, because it was easy to do, people call up and go online for our e-commerce offerings. And so, we were still in very much in the contact lens business, even during the closure period. Having said that, I do think your comments, your comments on the other side were right. We hear from a lot of people, I'm staring at my screen all day. I prefer or have optical reasons to do that with glasses, our sales of blue light lenses to protect against screen usage and lower fatigue are up a lot.

And frankly, a lot of people who are spending time looking at screens all day or being looked at on screens all day have realized that a different look plays better in the video world. So, I know a lot of people, including many of my family members who have gotten glasses to look better on Zoom, because that's a different aesthetic than the normal one. So, it's both factors.

Operator

Thank you. And our next question comes from a line of Paul Lejuez with Citigroup. Your line is open. Please go ahead.

Paul Lejuez

Hey, thanks, guys. Just on the raised store target, I'm curious, maybe if you could talk about your most dense markets, how those markets have been performing, if that tied in, to give me more confidence to up that store target further? Also curious if you can talk, what percent of sales are your optometrist wages versus other store personnel in any way you could size those for us and talk about your outlook for each of those two groups in 2021, and then just an update on the converted Walmart stores? Thanks.

Reade Fahs

I'll take the first part. Patrick will take the second part. And I'll take the third part on the updated Walmart stores. You know, we don't like to go into a lot of geographic specifics, but I'll give you a little color, our oldest market is Chicago. It is our most dense market, and actually for a lot of our competitors, it’s also their biggest market. And, gosh, we love building new stores in Chicago. I can't remember the exact number that we’ve built over the past few years, but we've added several stores to Chicago in the past few years. And I wouldn't be surprised if we keep adding them there.

So, that's an old very dense market where we keep successfully adding new stores in to the market and it's continuing to thrive. But similarly, I talk about New York is a fairly new market. The New York Metro, we got lots of stores to continue to build there. You know that's a pretty new entry less than, I think three years of – since entry into there. And so still plenty of whitespace there. Also, just to add one other piece, you know, we've only been on network TV for I think three years. And that just helps us in all categories just build awareness throughout the country and reinforces the whitespace opportunity. Good. Patrick?

Patrick Moore

Thank you, Reade. Hey, Paul. Yeah, in terms of the exact split between optometrists and associate wages, we've not really provided that degree of detail. There's obviously a whole lot more associates and doctors. The way we're thinking about wage inflation, we have seen a couple of quarters where the optometrist, kind of realized wage inflation has looked a little better. I wouldn't say that we're expecting that to be a permanent trend. We – our doctors are a focal point of the business and we like to pay those folks for the great work that they do.

We do expect to see some continued low levels of wage inflation there and then we'll fill that in gross margin. So that's part of the gross margin guide. And then in SG&A, you know, we're aware of some states that are making some minimum wage moves. And we believe like we are prepared for those and how we’ve set up our [labor matrices] and plans for the year. So, I think we've done a pretty good job of balancing those associate wage increases, and haven't had to really point to those as big drivers on the P&L, and we expect to continue to do that at, you know, at the local level.

Reade Fahs

And on your Walmart question, of course, we're now or is now celebrating our 31st year of partnership with Walmart and last year, we extended the contract again for another three years into 2024. Last year, for the first time in over 25 years they gave us some new stores and turned over stores to us that they had been managing, which was the first time that has ever happened. And so we took those over, I think it was in June, we started there. And we're very encouraged by the initial results of these stores. They're doing great and up nicely, and we still think there's the opportunity to build them even further. So, real happy with how those are going.

Operator

Thank you. There's time for one more question. Our next question comes on the line of Dylan Carden with William Blair. Your line is open. Please go ahead.

Dylan Carden

Thank you very much for fitting me in here. Reade, there's been a lot of capital – you've spoken to kind of the competition from the independent side, but there's been a lot of capital fields like in the last year, kind of flowing into the chained value in sort of same day, next day segment. Is that something that you guys kind of anticipate when thinking about availability of doctors? I mean, clearly, the expanded store count and performance speaks for itself, but any comment on that would be appreciated? And then, you know the run that you've had with sort of the higher prices in contacts, any sense of sort of how long that will continue to have a positive benefit in the model or is that normalized, sort of in the coming years? Thank you.

Reade Fahs

On the competition piece, yeah, there, there certainly are sort of some roll ups happening where people are trying to buy up independent pieces and private equity is very involved in our category. We do not see that as a primary factor in our planning for doctor recruitment or having a big effect there, but it is going on and we watch it and monitor it there. And in terms of contact lens, pricing, again, this is primarily driven by doctors saying to patients, here are a few different options for contact lenses that would work well for you here.

The benefits of the different ones, and which one would you like? So, it's sort of their newer technologies, they're higher priced and certainly our bread and butter contact lens buyers are buying sort of the low price because they're very budget oriented, but we are seeing based on doctors presenting options and saying, hey, this solves your optical problem in better ways than your prior piece. And I would sort of expect that to continue over time in an encouraging and helpful way for us. It's not something we drive, it’s medically driven. But I bet it's a trend.

Operator

Thank you. And that does conclude our question-and-answer session. And I would like to turn the conference back over to Mr. Reade Fahs for any further remarks.

Reade Fahs

Thank you very much, Michelle. We'd like to thank you all for joining us this morning and for your continued interest in and support of National Vision. We look forward to speaking to you again when we report our first quarter results later this year. So, thank you very much. And talk to you all soon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.