National Vision Holdings Inc (EYE) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to National Vision's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. David Mann, Vice President, Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to National Vision's Third Quarter 2018 Earnings Call. Joining me on the call today are Reade Fahs, Chief Executive Officer; Jeff McAllister, Chief Operating Officer; and Patrick Moore, Chief Financial Officer.

Our earnings release issued this morning and the supplemental presentation, which will be referenced during the call, are both available on the Investors' section of our website, nationalvision.com.

In addition, a replay of this morning's conference call will be available later today. The replay number as well as access code can be found in the earnings release. A replay of the audio webcast will also be archived on the Investors' section of our website.

Before we begin, let me remind you our earnings release 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 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, which can be found on our website.

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. In addition, from time to time, National Vision expects to provide certain supplemental materials or presentations for investor reference found in our Investors' section of our website.

Turning to Slide 3. On today's call, Reade and Jeff will discuss recent business highlights and provide a business update. Patrick will then review our third quarter 2018 financial performance and provide insights for the remainder of the year. Following these prepared remarks, we will open the call for questions.

Now let me turn the call over to Reade.

Thank you, David. Good morning, everyone. It's a pleasure to be speaking with you today to share our third quarter results.

Turning to Slide 4. Q3 was a real good quarter for us, a quarter to be proud of. We're pleased to report our 67th consecutive quarter of positive comparable store sales growth. We remain quite happy with the consistency and durability that this track record reflects.

Q3 adjusted comparable store sales growth was up 6.8%. The growth was led by our growth brands with an 8.9% comp at Eyeglass World and an 8.4% comp at America's Best. Comps were, once again, driven primarily by customer account, not average ticket, which is the way we like it.

Another sign of customer satisfaction is Net Promoter Scores. Our Net Promoter Scores improved across all brands year-over-year. This is a testament to the focus and store-level execution of our teams every day and in every store 1 patient and 1 customer at a time.

We opened 18 stores this quarter, which brings us to 58 new stores through the third quarter. We ended the quarter with 1,067 locations or a 7.1% increase in store count over the third quarter last year. The unit growth and comparable store sales growth combined to drive an 11.9% increase in net revenue. Adjusted EBITDA increased 7.3%, and adjusted net income grew 57.7%.

Since our last conference call, we have several noteworthy achievements to share. In September, our AC Lens business significantly expanded its contact lens distribution relationship with Walmart, and we now manage most all contact lens fulfillment for Walmart, except store replenishment. We're pleased to further assist Walmart and its customers. Note, this is the first expansion of our overall relationship with Walmart since 2013.

In October, we refinanced $200 million of existing debt under our credit agreement to a lower rate of LIBOR plus 175 basis points. Separately, Moody's upgraded the debt credit rating on National Vision to Ba3 in September. These balance sheet enhancements helped to lower our borrowing costs.

We strengthened our Board of Directors with the addition of Tom Taylor, CEO of Floor & Decor. It's nice to have a fitting CEO of a fast-growing successful public retailer on our board and the fact that he's based in Atlanta is added value as well.

Finally, we're pleased to announce the multiyear extension of our lens purchasing agreement with Essilor. As you probably know, the recently merged entity is now known as EssilorLuxottica. We're excited to extend this relationship with Essilor with a key long-term partner that allows us to continue to provide our patients and customers with world-class quality lenses at the low prices that they've come to expect from us.

In today's earnings release, we provided additional insights regarding the remainder of 2018, which Patrick will take you through in detail. Overall, our third quarter results reflect the ongoing strength of our differentiated value-focused and service-based business model and compelling value proposition that continue to resonate with our customers. This further drives market share gains in our very fragmented optical industry.

Turning to Slide 5. Our business continues to demonstrate consistency in store performance and comp store sales gains. The graph highlights our 67 consecutive quarters of comparable store sales growth across the economic cycle during both strong and weak economic times. We noted continued strong comparable store sales growth as our third quarter comps increased in line with our year-to-date comp trend of 6.6%. This performance highlights the consistency derived from operating in the category with the purchase is tied to a medical necessity.

The comp growth this quarter was driven, once again, primarily by gains in customer accounts. Our consistent positive comp results highlight the benefits of operating in the growth segment of attractive industry having a leadership team of optical experts, new store growth as well as comparable store sales growth in our more mature stores as customers keep coming back. With our 12% sales growth year-to-date, we continue to believe that we're gaining market share in the $35 billion optical retail industry with our value-oriented operating model.

I want to say a few words about hurricane disruption this quarter. First, our greatest concern, of course, has been for the wellbeing of our associates and optometrists, their families and our customers. Our hearts go out to the communities and people whose lives were so disrupted by the Hurricane Florence this quarter and Hurricane Michael in the fourth quarter.

From a business perspective, the impact of net revenue and comps was more moderate than we experienced last year. We would expect sales in the affected areas to recover as these markets return to normalcy, similar to our past experience with weather events. This, again, reflects the resiliency of a business tied to a medical necessity. However, as a result of severe weather activity this year, we currently have 5 stores that have been closed for an extended period and remain closed today.

Turning to Slide 6. We look to continue to execute on our core drivers of growth. New stores are our primary focus given the white space opportunity relative to our current footprint. We opened 18 stores in the third quarter and remain on track to open about 75 stores this year, following the formulaic approach that has worked so well for us historically. As we look out to 2019, the pipeline for locations look strong.

Our key to our ongoing success is our ability to attract and retain optometrists. We are an optometrist-centric company and strive to be the place where optometrists want to practice and stay for their entire career. Optometrists' retention remained stable for last year, and we work hard every day to fill our constant need for new optometrists to support our growth.

For 2018, our team expects to continue to drive solid comparable store sales growth even as we lap strong multiyear comparisons. Our key comp drivers are the comp waterfall for maturing stores as well as our marketing and vision insurance initiatives. Our new stores gained traction as customer awareness grows over the first few years given an infrequent purchase cycle for eyeglasses that averages 2 to 3 years.

We strive to ensure that our customer gets the best value around and believe that our growth brand offer extreme values that resonate with consumers. 2 pairs of eyeglasses for $69.95, including a free comprehensive eye exam at America's Best or 2 pairs of eyeglasses for $78 at Eyeglass World, along with the opportunity of same-day service from our in-store labs. We believe that this combination of incredible value, backed by excellent customer service leads to satisfied repeat customers. As we have noted, existing customers represented over 60% of total customers at mature stores in 2017.

We continue to invest in television advertising and digital marketing to attract new customers as well as remind existing customers to come back for another great experience. Our owl TV campaign at America's Best and the Mr. World campaign at Eyeglass World are helping to drive traffic to our stores. We believe that our investments in marketing are paying off and a factor in our market share gains.

Participation in vision insurance programs remains a positive comp driver. Net revenue growth tied to these partnerships continued to advance in the third quarter. We remain underpenetrated relative to the industry for the percentage of our business coming from vision insurance.

Let me now turn it over to Jeff, who in Q3 celebrated his 1-year anniversary with us, for a few operational updates.

Thank you, Reade. We have a low-cost culture here at National Vision, and we know that we can't be everyday low price without being everyday low cost. We are pleased with our progress towards opening our new state-of-the-art lab in Texas, and we remain on schedule to be operational in time for the first quarter next year. We believe our centralized lab network is a world-class manufacturing operation that provides a true competitive cost advantage. We continue to make omni-channel investments to improve the customer experience and operating efficiency. We're in the early innings of leveraging our new one view of the customer capability.

In addition, online scheduling of the eye exams continues to trend higher. We believe that an omni-channel approach is going to be an evermore important part of the optical buying process in future years, and we aim to have this be a major competency for National Vision.

I would like to address the topic of tariffs and the potential financial impact to our business. As Reade commented on our last call, eyeglass cases were the only item affected by tariffs imposed earlier this year on imports from China, and these tariffs are not expected to have material impact on our overall product cost. Having said that, this is a fluid situation, and we will continue to monitor the status of trade negotiations. We estimate that less than 15% of our costs applicable to revenue are related to products imported from China and potentially subject to future tariffs. We are currently reviewing our contingency options to mitigate the impact in the event that additional tariffs are enacted.

Let me hand the call over to Patrick.

Thanks, Jeff, and good morning, everyone. As Reade noted, our business continued to perform well in the third quarter. The 2 fundamental revenue drivers of our business are new store growth and comparable store sales growth. During the quarter, we added 18 new stores and closed 1 store. Over the last 12 months, we've added 71 net new stores or a 7.1% year-over-year increase, with the openings almost entirely in our America's Best and Eyeglass World brands. For these 2 growth brands combined, unit growth increased 2.5% in the quarter.

We're on track for approximately 75 store openings this year, which should be about 65 America's Best locations with remaining being Eyeglass World stores similar to the mix of openings between these brands in 2017. Year-to-date, we have closed 4 stores. As Reade noted, our total store count is 1,067 locations as of the end of the quarter.

Our 2018 openings have been balanced between newer and existing markets. In our newer markets, we continue to expand our store base and invest where our new stores are still lapping and building awareness. We have noted that new stores have historically taken approximately 3 to 5 years to mature. We're excited about these markets and see a lot of our potential customers there.

The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same-store sales growth increased 6.8% versus the 7.0% increase in the third quarter of last year. This comp growth was driven primarily by increases in customer transactions.

During the third quarter, we generated strong comps in our growth brands. America's Best and Eyeglass World drove the growth with a change of 8.4% and 8.9%, respectively. Legacy comps were flat in the third quarter. The comps for our legacy stores were impacted by approximately 100 basis points by Hurricane Florence, given the segment store concentration in the Carolinas.

Turning to income statement highlights on Slide 9. As a result of the solid comp and unit growth, net revenue increased 11.9% to $387.4 million. Revenue growth was negatively impacted by about 40 basis points by the timing of unearned revenue.

Finally, as a reminder, year-to-date, the company has experienced the elimination of approximately $5.4 million in revenue and cost associated with FirstSight operational changes that occurred in 2017.

In the third quarter, which is the final quarter in which we experienced this rollover, the impact was a reduction to net revenue of $1.8 million, which had the effect of lowering revenue growth by 50 basis points, but with no material impact on profitability.

Net revenue included approximately $3 million from the new contact lens distribution relationship with Walmart that began in September. This expanded role involves contact lens orders that are shipped to Walmart corporate stores for customer pickup. Similar to other contact lens distribution that our AC Lens business provides for Walmart, this agreement is accounted for on a retail basis, though National Vision earns a modest packing and shipping fee. As a result, this business is expected to provide minimal contribution to overall profitability.

Regarding store impacts this quarter from Hurricane Florence and other weather events, we estimate that over 37 stores were affected for an overall impact on net revenue of approximately $1.3 million. As Reade mentioned, we have 5 stores that remain closed as of today's call.

Costs applicable to revenue increased 12.5% or an increase of 20 basis points as a percentage of net revenue versus last year. The increase was primarily driven by higher optometrist costs and the impact from the expanded contact lens distribution relationship with Walmart, with a partial offset from a higher mix of eye exam sales as a result of our growing managed care business as well as vendor rebates driven by volume growth. Costs applicable to revenue before the impact of the new Walmart business increased 10.5% or a decrease of 20 basis points as a percentage of net revenue versus last year.

Optometrist-related expenses reflect expanded coverage as well as wage inflation in certain geographic markets. As Reade noted, we work very hard to attract and retain optometrists, and compensation is an important part of this equation.

SG&A expenses increased to 21.9% or an increase of 390 basis points as a percentage of net revenue versus last year. This increase was driven by stock compensation expense, cash expenses related to a long-term incentive plan for nonexecutive employees, our investment in advertising and the continuing year-over-year impact of public company cost. These factors were partially offset by the impact of our expanded contact lens distribution relationship.

The stock compensation and long-term incentive plan expenses represented approximately 360 basis points of the total 390 basis point increase. The expanded contact lens distribution relationship aided expense leveraging by approximately 40 basis points.

The long-term incentive plan applied to nonexecutive employees who were not part of our management equity plan. The plan was put in place with the KKR acquisition in 2014 and the cash payments were triggered by the reduction in KKR ownership below 50%.

We've made investments for growth and encouraged some incremental expenses that were not contemplated when we provided our 2018 outlook back in March, which I'll cover in more detail at the end of my remarks.

I do want to mention that one such investment related to a citizens' initiative in Oklahoma. We invested a total of $1 million in support of this initiative, with half occurring in this quarter and half in the fourth quarter. This onetime expense was an investment in growth potential in Oklahoma where we currently have no store presence. The initiative would have allowed the provision of optical services and eye exams in big-box retail locations. Unfortunately, the initiative failed to be approved by a narrow margin.

Adjusted EBITDA increased 7.3%, and adjusted EBITDA margin fell 40 basis points to 10% in the quarter. As expected, adjusted EBITDA growth was negatively impacted by 280 basis points from the net change in margin on unearned revenue.

Depreciation and amortization expense increased $3.7 million compared to the third quarter last year. The growth primarily reflects our ongoing investment in new stores, our network of optical laboratories and our omni-channel-related investments.

Interest expense decreased $5.4 million versus the third quarter of last year, primarily due to lower debt levels driven by the $360 million IPO debt pay down in the fourth quarter of last year.

In terms of taxes, we recorded a $16.4 million income tax benefit this quarter compared to a $200,000 tax provision in the third quarter of 2017, reflecting a benefit from pretax losses at our statutory tax rate and a $13.9 million income tax benefit from stock option exercises. We expect our full year 2018 tax rate to be approximately 48%, excluding the impact of stock option exercises, which primarily reflects the nondeductibility of certain items, including the investment to support the citizens' initiative in Oklahoma.

Adjusted net income increased 58% to $9.2 million and excluded the income tax benefit from option exercises. Adjusted diluted EPS increased 16% to $0.12 compared to $0.10 last year.

Turning to Slide 10 in our year-to-date results. For 9 months, our adjusted comparable sales growth was 6.6%, net revenues were up 12% and adjusted EBITDA was up about 9%. Our performance highlights the consistency of our business over time. Adjusted EBITDA margin decreased 40 basis points to 12.4%, primarily due to higher optometrist costs, investments in advertising, managed care and support of the Oklahoma citizens' initiative as well as higher public company expenses.

On Slide 11, at the end of the third quarter, our total debt was $574.8 million and our cash balance was $48.9 million. Net debt to adjusted EBITDA improved to 3.1x, down from 3.2x at the end of the second quarter. Year-to-date, we have invested $78.8 million in capital expenditures with the majority of CapEx focused on growth initiatives. Cash flow provided by operating activities increased almost $20 million.

In terms of our capital structure, we completed the $200 million term loan refinancing in October, which lowered the interest rate on that tranche by 75 basis points for the existing loan rate.

In addition, we were pleased to receive a corporate credit rating upgrade to Ba3 from Moody's, which triggered a provision in our credit agreement that lowered the interest rate on our term loan debt by 25 basis points. Overall, we're very pleased with these improvements in our borrowing costs.

Turning to Slide 12. As you saw from our press release, we're providing the following insights for the remainder of fiscal 2018. We expect adjusted same-store sales growth to be at or above the top end of the range of 3% to 5% in our previously provided 2018 outlook. While we're pleased with our year-to-date adjusted comp of 6.6%, we are facing our most difficult quarterly comp comparison of 10.4% in the fourth quarter, which benefited from storm recovery last year.

In addition, our AC Lens business is generating higher net revenue, including the expanded contact lens distribution relationship with Walmart that is estimated to add at least $10 million to 2018 net revenue. As a result, we expect net revenue to be above the range of our previously provided 2018 outlook. As noted, the expanded Walmart relationship is expected to provide minimal contribution to profitability and no impact on same-store sales growth.

We expect to incur, during the year, approximately $4 million to $5 million for certain growth investments and incremental operating expenses by the end of 2018 that were not contemplated in our original 2018 outlook. These items primarily include investments to support our strong managed care growth, the Oklahoma citizens' initiative and cybersecurity upgrades. Also, as noted last quarter, public company expenses have been running higher than initially expected as we work toward serving [optical] compliance this year. As a result, we expect both adjusted EBITDA and adjusted net income to be in the lower half of their respective ranges in our previously provided 2018 outlook.

We expect capital expenditures to be near the high-end of the range in our previously provided outlook, driven by growth investments. On several previous calls, we've noted that unearned revenue can cause material swings in quarterly results. Unearned revenue is associated with purchases in the last week of the reporting period and can be difficult to predict. Historically due to the significant revenue in the last week of the fourth quarter, the net change in unearned revenue is largest in this quarter and is seasonally negative.

We are currently in the planning process for 2019. Consistent with last year, we look forward to providing fiscal 2019 outlook on our year-end conference call in late February.

This concludes my remarks. I will turn the call back to Reade.

Thank you, Patrick. Turning to Slide 13. In honor of Veterans Day on Sunday, we thank veterans for their service. At National Vision, we've developed an active veterans' recruiting effort and now employ nearly 1,000 veterans and veteran spouses. We work hard to honor them in every way we can.

For our moments of mission, let me introduce Dr. Dan Knepper, an optometrist at one of our America's Best stores in Nashville. Dr. Knepper recently saw a male patient who presented with numerous retinal hemorrhages. With some convincing from Dr. Knepper, the patient went straight to the emergency room where, while he was waiting to be seen, he suffered a heart attack. As I've said, a routine eye exam is routine until it isn't, and Dr. Knepper saved a life that day. This moment of mission does not end there. Less than 2 weeks later, Dr. Knepper saw a female patient with sudden vision loss and retinal hemorrhages and sent her straight to the emergency room, too, and probably saved her life as well.

I want to thank our entire team at National Vision, these 11,000-plus associates, including the 2,000 optometrists and including Dr. Knepper who provides much needed medical services to patients at our over 1,000 storefronts every day. We strive to be the best at providing low-priced exams, glasses and contact lenses while both at home and abroad, we work to bring glasses and consequently sight and improved quality of life to those who would be unable to see well otherwise.

We are helped to fulfill this mission by our long-term relationships with others in the optical ecosystem. Essilor is one of those relationships. Essilor has been a great business partner for us for over a decade as well as a great philanthropic partner on a variety of fronts. Together, we share a common value of trying to bring improved sight to all, especially the low income and disadvantaged as a business and through philanthropic efforts and partnerships both in the U.S. and throughout the developing world. These efforts and these partnerships are part of the beauty of the work we do. Many of you have heard me say this before, but this is why we believe optical retailing is a noble profession.

This concludes our prepared remarks. And at this time, I'll turn the call back to the operator to start our Q&A session.

(Operator Instructions) Our first question will come from the line of Simeon Gutman with Morgan Stanley.

I wanted to ask first about some of the added investments for the back half of the year. Can you talk about the planned paybacks, either sales to margins and their timing as we think about it into 2019?

Simeon, it's Patrick. Thanks for the question. Yes, I would just start off by saying it's -- I want to note that we set a fairly tight range for EBITDA back in March, and we're still in that range. We have guided a little lower. As we kind of thought about those factors, we did call out $4 million to $5 million. And I put those in a couple of categories of the managed care incremental investments, we're very happy with our managed care growth, and we're simply making incremental investments to continue that. The Oklahoma initiative was -- effectively, we took a onetime shot, cost us about $1 million. Unfortunately, it didn't work, that's a nonrecurring component. And then we've also gotten some of the public company costs. As we think about the investments of advertising, the managed care, we do expect that to continue to drive revenue, I don't have specific return metrics to provide today, but we wouldn't be making those investments if we felt like those wouldn't pay off.

Okay. And then a follow-up on the Essilor contract you signed. I think you've teed it up to tell us that it was coming due at some point. Just wanted to check the expiration I think was June of next year. So this was sort of normal course to renegotiate this at this point. Just that's my first part of the question. And then any changes to consider? Are you giving up anything now that you have an extra 5 years or it's normal course and steady as she goes?

Right. So the timing is normal course, and we -- this is an extension of an agreement on favorable terms that we're happy with.

Simeon, it's Patrick. I think I missed one part of your question and I wanted to circle back to. We did guide back in August that we expected our [Club Co] cost to be a little higher this year. I do think this should be the peak year assuming things go fairly well for us and certainly [nicely]. So those costs will obviously continue, but I think at a little more moderated level as we move beyond this critical first year.

And your next question will come from the line of Bob Drbul with Guggenheim Securities.

A couple of questions from me. The first one's just on the Eyeglass World business continued strength, can you just give us any update on the new marketing campaign? What's working there? And then the other question I had was can you talk about the Sears bankruptcy and the opportunity or market share you think is available with what's going on there from your perspective?

So thank you, Bob. It's Reade here. We're pleased with the performance of Eyeglass World, 8.2% comp. That's real nice, and we think the marketing was a factor in that. We do face a tough Q4 comp comparison, we were up 11.6% last year during -- due to hurricane benefit, but we think that we're pleased with the formula. We think the new ad campaign is helping us a lot and operationally, we've got fresh energy in the group there. So that is your first question in terms of Sears, there are a little over 200 Sears stores with optical in them. Of course, this year's bankruptcy, this is not very encouraging for their future. There's disruption there that provides market share, that provides doctors for us. And so yes, we see this as being a nice part of -- it helps our growth and helps to market share gain.

Great. And I guess just one last question. Can you talk a little bit about as you continue to expand stores, store employee availability and optometrist availability, can you just talk about the trends you're seeing in both of those areas?

Yes, we're -- we are finding availability even in a tight marketplace. As you know, sort of optic is a quirky little field and a lot of people who work in optic like us say, "Hey, this is our field. This is what we're going to do," and don't sort of look at other places. So, and we're finding both in terms of optical people and frankly I was talking to a store manager the other day, who had started as a receptionist and worked her way up, and we -- that's a great part about being a growing company, you're able to provide those sorts of career growth opportunities and people see that with us. So that's encouraging. With optometrists, we are always out there recruiting optometrists, we -- with our growth, optometrists feed our growth, but we're not seeing any change in trends in that area, but we're always recruiting and that is part of being an optical retailer that's growing lots of stores every year.

And our next question will come from the line of Paul Lejuez with Citigroup.

Just curious on that $4 million to $5 million, how much is that -- the incremental cost there was third quarter versus fourth quarter? Is there any specifics you can provide in terms of what incremental investments are necessary to support that managed care business? And if you can give us an update on where managed care revenues were this quarter versus last year? Where you expect 2018 to come out versus 2017? And what's the right number long term?

Hey, Paul, it's Patrick. The $4 million to $5 million is generally balanced across third and fourth quarters, so I'd probably model it that way. In terms of the incremental costs, as we think about managed care again and a very important growth driver. We want to continue that growth. There are both internal and external types of costs internally. You've got billing and systems support. And externally, you've got reimbursement rates and fees. So there's a whole portfolio of things that kind of come into that expense bucket necessary to drive it, to manage it and drive it. So I hope that gives you a little more color there. And then finally, in the third quarter, we continue to see our penetration increase. We are still well under-indexed to U.S. national average, but we don't disclose those specifics anymore, but we did see penetration continue to tick up?

Continues to be a nice part of our growth. Expect that to continue.

And our next question will come from the line of Zack Fadem with Wells Fargo.

Could you talk about the moving parts on the gross margin line? It looks like both your product and services margins were positive, but total gross margin's down about 20 basis points. How much of this is the impact of unearned revenue? And if it is, should we expect the impact to reverse out in Q4 and turn positive again?

Yes. So in terms of the gross margin, Zack, you're right. The costs applicable to revenue went up about 20 bps. And if I normalize that for this new Walmart business that we talked about in AC Lens, that will be down around 20 bps. So generally, I would characterize our margins is relatively stable. We continue to see a little OD cost pressure although most of that, in the quarter, was really more concentrated on our Legacy segment. I saw a little bit of moderation in the OD cost pressure in our owned and host segment. The [SAV] or unearned revenue was essentially flat on a year-over-year basis for the year-to-date. So not a lot of contact there, and it was about $1 million hurt in 3Q.

Got it. So Patrick, is that 20 bps impact from Walmart, should we expect that to carry forward over the next 3, 4 quarters until it anniversaries?

Yes. And actually, I think what I provided in our insights related to outflow, because we expect at least $10 million in revenue there, and it will probably be a little bit higher than that. And I think we actually released that, that was a few million dollars in the quarter, so you'll probably see that grow a little bit as you model in those revenues approaching $10-plus million with frankly low profitability, but that should get you in the ballpark. I will mention a couple of positives on gross margin. As a consequence of our increasing managed care growth, we actually have more eye exams that are reimbursed. I mean, that's -- when managed care patients coming in and they're not able to generally take advantage of our 2-pair offers with free eye exams. So we're seeing higher levels of eye exams reimbursed. And then frankly, we have very good long-term relationships with vendors and we have broken through a couple of new volume levels this year, and that's helped with some of the product rebates. So I wanted to paint the full picture for you in terms of the levers and swing factors that I see in gross margin, but my headline is generally stable.

Got it. That's really helpful. And then briefly, you're now more than a full year in on some of your newer California markets. I'm curious if you could just talk about how those stores have performed in year 1 relative to your internal expectations. And now as these stores begin to enter the comp phase, can you talk about the tailwind that it's expected to have on your comp performance?

Yes, we don't like to comment about specific markets due to competitive reasons. Each market has its own competitive ecosystem and certainly, California is still early in the life cycle there. Our stores are continuing to ramp there as we build awareness. Our store ramp has historically been 3 to 5 years to get to maturity, but we're excited about these markets and there's just lots of potential customers for us in these markets.

And your next question will come from the line of Michael Lasser with UBS.

In light of your expanded contact lens relationship with Walmart, should we -- should that be a prelude of an expansion of the overall business that you're doing with Walmart perhaps getting more stores [to open] in the future?

Well, we're pleased to expand the contact lens distribution business with Walmart. It's the first expansion of a relationship that's since 2003. And what this is, is it's shipping to stores for contact lens orders for Walmart, so it's a nice chunk there. We focus every day on our relationship with them. We've been saying for well over a decade that we want to be a great partner to them and we've been their partner for 27 years. But in terms of their future decisions, you've got to ask them that.

And as a follow-up to that, is it valid on Oklahoma -- ballot measuring Oklahoma? How is that...

Again -- actually, sorry, just wanted to say, I think I misspoke, it's been the first expansion of a relationship since 2013 -- I said -- my friends here told me I said 2003. Sorry about that. And your question?

Yes, the ballot measuring Oklahoma, how are you trying expand the availability of eyeglass locations to big boxes? How does that play into it, the fact that, that did not go through? Is that just [book to] Oklahoma?

Well, so the initiative was very much -- it was all about allowing optical stores and eye exams in big-box locations. Currently, the laws say that you can't have optical stores in big-box locations, it was narrowly defeated. The people in -- my opinion the people in Oklahoma lost out for broader access and lower prices. It doesn't materially impact the white space for our growth brands. It was really only just about big-box retail but we're always looking for opportunities to invest in sort of wealth that are favorable to consumers and favorable to expanding our value.

And then my follow-up question is on the Eyeglass World stores. In light of the tough compare you have in the fourth quarter, but recognizing the strong performance that, that business has achieved in the last couple of quarters, should we be modeling the negative comp for Eyeglass World in the fourth quarter?

It's Patrick. I'll take that. We don't really comment at the brand level in terms of our forward-looking guidance. I can't help you there. Regarding the overall comps, it's this management team's impact to continue that winning streak, consecutive quarters of positive comp, and we look forward to discussing what we see in those specific brands as we cover Q4 in February.

And your next question will come from the line of Robbie Ohmes with Bank of America Merrill Lynch.

This is Marisa Sullivan on for Robbie Ohmes. I just want to pick up on that -- on the last question regarding the same-store sales outlook. The updated guidance implies that you would see a slowdown in 4Q on a 1 and 2-year stack and potentially even negative. So is that just conservatism around the tough compares? Or is there other factors that might be driving that implied outlook?

It's Patrick. Thanks for the question. So we're being careful this year. We are providing annual guidance and trying to get into a rhythm being a longer-term focus growth company to not do too specific on the quarters. We haven't really guided at the quarter level. We do manage this on a long-term basis. We did say about 2018 that we expect the comps to be at or above the top end of that 3 to 5 range. So I realize that if you kind of do the math at the bottom end, it can swing to flat or negative. We're not guiding at that point. Our intention is to continue that healthy streak of consecutive positive comp quarters. There are a couple of call outs and if this is redundant I apologize, but we did a [10 4] last year, and it was significant storm recovery that we felt in -- particularly in EGW. But we really felt it in a couple of the other brands as well. Reade mentioned in his remarks and I'm reiterating that we do currently have 5 stores that are closed. We're not exactly sure of the timing of when those will reopen. If those were to remain closed for the entire quarter, you're looking at probably about 0.5 point of comp impact there. And then finally, I would just reiterate the last week of the year is a really big year, it's supercritical. Patients and customers are trying to exhaust in benefits that remain, and so those last remaining 4 to 5 days of the year are really large dates. That can be impacted by this pesky gap unearned revenue timing. And so I don't know if you would call that conservatism, but we did take all of that into consideration as we provided the annual guidance ranges that you can use to interpolate fourth quarter. But again, I'll just -- I'll end kind of by saying we intend to continue to drive positive comps and do similar traffic.

So that's really helpful. And then just as a quick follow-up. You've had very strong comps year-to-date. Just maybe you can comment on the health of your customer? And whether you're seeing any increases in their spending of existing customers, and maybe the more budget conscious customers. And whether with your initiatives and what you're doing around the vision insurance, you're seeing new customers coming in the door and has that accelerated?

Well -- yes, we're seeing new customers come in the door, yes. And we find it hard to extrapolate on sort of broader consumer trends in the marketplace, but we continue to believe that we're building market share.

(Operator Instructions) And our next question will come from the line of Matthew McClintock with Barclays.

Reade, congratulations on the new Walmart deal. I was wondering if you could provide a little bit more context into how that deal got put into place. Was that something that you chipped away at and worked with them over a long period of time? Was that something that they just made a strategic decision all of a sudden? And what you think actually put you over the top for those who go with this new direction?

AC Lens, as I said, our AC Lens division has had a good relationship with Walmart for a great many years and has done really good work for them and provides really good service to them. And we're always saying, "Hey, if you want, we could do this for you, we could do this for you, we could do this for you," and we just always like to be available if they need a partner in any aspects of optics. And so at one point, they said, "Wow, this is a chunk that is being done elsewhere. We'd like you to do it."

And then just as we think through the tariff issue and we think through potentially other inflationary cost pressures, you've been very consistent with your pricing strategy over a very long period of time and provided exceptional values to the consumer. And I was just wondering, is that something that you would ever be open to thinking about? Or is that something that's set in stone and you would try to always find other offsets?

This is Jeff. I'll take that question relative to pricing and anything related to tariffs, if you will. As you spoke to the fact that we are an everyday low price model, we think that, that's really the service that we provide and certainly what our customers and patients have come to expect from us. We'll never say never, given the situation continues to be fluid in tariffs, but it's something that certainly we're going to do everything we can to maintain our price competitive nature and to ensure that we're providing the best value for our customers. So again, we're keeping an eye on all this and we're remodeling different outcomes and we'll make the right call at the point that we have more information.

And I'm showing no further questions in the queue at this time. So now it is my pleasure to hand the conference back over to Mr. Reade Fahs, Chief Executive Officer, for any closing comments and remarks.

Thank you, Brian. We want to thank you all for joining us today and for your continued interest in National Vision. For those of you who have not seen our current television ad for America's Best Eyeglass World, we invite you to go online and they're included in a link on Page 22 of our presentation. We look forward to speaking to you again in early 2019 when we report our fourth quarter results. Thank you all very much.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and you may all disconnect. Everybody, have a wonderful day.