# National Vision Holdings, Inc. (EYE) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from National Vision Holdings, Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1710155/000171015524000018/eye-20231230.htm Accession: 0001710155-24-000018 Filing date: 2024-02-27 Report date: 2023-12-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/EYE/ All MD&A years: /company/EYE/mda/ Previous year: /company/EYE/mda/fy2022/ (FY 2022) Next year: /company/EYE/mda/fy2024/ (FY 2024) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K (this “Form 10-K”). This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section included in Part I. Item 1A. in this Form 10-K, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Form 10-K. We conduct substantially all of our activities through our indirect wholly-owned subsidiary, NVI, and its subsidiaries. We operate on a retail fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to December 31. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References herein to “fiscal year 2023” relate to the 52 weeks ended December 30, 2023, references herein to “fiscal year 2022” relate to the 52 weeks ended December 31, 2022 and references herein to “fiscal year 2021” relate to the 52 weeks ended January 1, 2022. The disclosures contained in this Form 10-K are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. For further information, please see “Risk Factors” and “Forward-Looking Statements.” Overview We are one of the largest optical retailers in the United States (the “U.S.”) and a leader in the attractive value segment of the U.S. optical retail industry. We believe that vision is central to quality of life and that people deserve to see their best to live their best, regardless of their budget. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers with an opening price point that strives to be among the lowest in the industry. We reach our customers through a diverse portfolio of 1,413 retail stores across five brands and 13 consumer websites as of fiscal year end 2023. Brand and Segment Information As of December 30, 2023, our operations consisted of two reportable segments: •Owned & Host – As of fiscal year end 2023, our owned brands consisted of 957 America’s Best Contacts and Eyeglasses (“America’s Best”) retail stores and 148 Eyeglass World retail stores. In America’s Best stores, vision care services are provided by optometrists employed by us or by independent professional corporations or similar entities. America’s Best stores are primarily located in high-traffic strip centers next to value-focused retailers. Eyeglass World locations offer eye exams, provided primarily by independent optometrists and optometrists employed by independent professional corporations or similar entities, and have on-site optical laboratories that enable stores to quickly fulfill many customer orders and make repairs on site. Eyeglass World stores are primarily located in freestanding or in-line locations near high-foot-traffic shopping centers. Our Host brands consisted of 54 Vista Optical locations on select military bases and 29 Vista Optical locations within select Fred Meyer stores as of fiscal year end 2023. We have strong, long-standing relationships with our Host partners and have maintained each partnership for over 20 years. These brands provide eye exams primarily by independent optometrists. All brands utilize our centralized laboratories. This segment also includes sales from our America’s Best, Eyeglass World, and Military omni-channel websites. •Legacy – As of fiscal year end 2023, we managed the operations of, and supplied inventory and laboratory processing services to, 225 Vision Centers in Walmart retail locations. On July 20, 2023, we received a notice of non-renewal from Walmart of the Walmart MSA. The Walmart MSA terminated on February 23, 2024 and we no longer operate Vision Centers for Walmart. Refer to Note 2. “Termination of Walmart Partnership” included in Part II. Item 8. of this Form 10-K for further information. During fiscal year 2023, sales associated with this arrangement represented 7.1% of consolidated net revenue. Our consolidated results for all periods presented in this Form 10-K also include the following activity recorded in our Corporate/Other category: 47 Table of Contents •Our e-commerce platform managed by AC Lens comprising multiple proprietary branded websites and third-party websites with established retailers and mid-sized vision insurance providers. AC Lens handles site management, CRM and order fulfillment and also sells a wide variety of contact lenses, eyeglasses and eye care accessories. In 2024, we will wind down AC Lens operations, including the closure of the Ohio distribution center, which largely supported the wholesale distribution and e-commerce contact lens services that the Company has provided to Walmart and Sam’s Club. We are reviewing our portfolio of websites and deciding how best to position the portfolio after the wind down of the AC Lens operations. •Wholesale contact lenses distribution to Walmart and Sam’s Club by AC Lens. We incur costs at a higher percentage of sales than other product categories. AC Lens sales associated with Walmart and Sam’s Club contact lenses distribution arrangements represented 6.9% of consolidated net revenue during fiscal year 2023. In connection with the MSA Termination, AC Lens has delivered notices of non-renewal of the agreements it has with Walmart and Sam’s Club such that those agreements are expected to terminate on June 30, 2024. •Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan under California law, which issues individual vision plans in connection with our America’s Best operations in California and, until the termination of the agreement between FirstSight and Walmart on February 23, 2024, arranged for the provision of optometric services at the offices next to certain Walmart stores throughout California. •Unallocated corporate overhead expenses, which are a component of selling, general and administrative expenses and are comprised of various home office expenses such as payroll, occupancy costs and consulting and professional fees. Corporate overhead expenses also include field services for our five retail brands. Reportable segment information is presented on the same basis as our consolidated financial statements, except reportable segment sales which are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our chief operating decision maker (“CODM”) regularly reviews. Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), specifically the change in unearned and deferred revenues during the period. There are no revenue transactions between reportable segments, and there are no other items in the reconciliations other than the effects of unearned and deferred revenue. See Note 15. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K. Deferred revenue represents the timing difference of when we collect the cash from the customer and when services related to product protection plans and eye care club memberships are performed. Increases or decreases in deferred revenue during the reporting period represent cash collections in excess of, or below the recognition of, previous deferrals. Unearned revenue represents the timing difference of when we collect cash from the customer and delivery/customer acceptance, and includes sales of prescription eyewear during approximately the last seven to 10 days of the reporting period. Trends and Other Factors Affecting Our Business We have remained focused on our long-term growth initiatives despite the ongoing macroeconomic uncertainty. We opened 70 new stores in 2023, and as of December 30, 2023 enabled remote medicine in over 500 stores. Our core growth initiatives include, but are not limited to, continuing with the expansion of our remote medicine capabilities; maintaining and improving our optometric retention levels; increasing our marketing efficiency and omnichannel capabilities; increasing our participation in vision insurance programs; the further digitization of our stores and corporate office; continuing to position ourselves to capture whitespace opportunity for our stores; and incorporating our corporate sustainability strategy into our operations. We operate in the highly competitive and fragmented U.S. optical retail industry. We face competition from mass merchants, specialty retail chains, online retailers and independent eye practitioners and opticians, along with large national retailers. Increased consolidation activity in the industry may enable our competitors to benefit from purchasing advantages and the ability to leverage management capabilities across a larger business base. Along with our competitors, we are affected by a number of various trends and factors, including, but not limited to, economic conditions, availability of vision care professionals, inflation, consumer preferences and demand. 48 Table of Contents The overall economic environment continues to be challenging and macroeconomic factors that may affect customer spending patterns, and thereby our results of operations, include inflation, employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. As part of our growth strategy we are investing in the digitization of our stores, including remote medicine capabilities and an EHR platform. As of December 30, 2023, remote medicine technology has been enabled in over 500 of our America’s Best locations. We believe remote medicine not only helps provide more access to eye care for patients, it also helps address constraints in exam capacity. We have also invested in the transition to an EHR platform. We anticipate continuing the investment in these capabilities primarily in America’s Best stores in the near term, including implementing the EHR platform in all America’s Best locations by the end of 2024. While the remote medicine and EHR platforms have increased exam capacity, revenue and profitability, we have experienced higher costs applicable to revenue as a percentage of revenue, when compared with in-store exams. Our ability to continue to attract and retain qualified vision care professionals may affect exam capacity. Our operations, like those of many of our competitors, depend on our ability to offer both eyewear and eye exams. We believe the impacts of the COVID-19 pandemic on vision care professional availability, including a competitive recruiting market and preferences for adjusted work schedules, and the demand for optometrists exceeding supply in certain areas during fiscal year 2023 have caused constraints in exam capacity which are continuing. Due to these factors, the costs to employ or retain optometrists have increased and may increase further, potentially materially. Targeted wage investments, including increases in compensation for our optometrists and associates, and flexibility initiatives have impacted our costs applicable to revenue and selling, general and administrative expenses. We anticipate that wage pressures in certain markets will continue in 2024. Wage investment pressure and increases to costs applicable to revenue from increases in raw materials prices may not be able to be fully offset by leverage from revenue growth, productivity efficiency and, as appropriate, various pricing actions. We are continuing to strategically invest in recruitment and retention initiatives, including flexible adjusted work schedules, along with continuing our implementation of remote medicine technologies, which has expanded our offerings while also increasing costs. While there are ranges of customer behaviors based on demographics and other factors, it is estimated that optical consumers typically replace their eyeglasses every two to three years and their contact lenses every six to 12 months, reflecting the predictability of these recurring purchase behaviors; however, the effects of the current macroeconomic environment and geopolitical uncertainty, as well as the ongoing effects of the COVID-19 pandemic, resulted in reduced customer demand in 2023 and have caused shifts in consumer behaviors and preferences, which impact the demand for our products. As a result, the predictability of recurring purchase behavior for the future remains uncertain. In addition to the central factors impacting our business outlined above, we have identified the following key drivers, challenges and risks on which we are focused and which are detailed below. Inflation Rising inflation can result in increased costs and greater profitability pressure for us. While pressures from increases to the price of our raw materials have had an impact on our costs applicable to revenue in fiscal year 2023, we have been able to offset these pressures with efficiencies in our laboratory network, pricing actions and lower freight costs. We anticipate that pressures from increases to our raw materials prices could have an impact on our costs applicable to revenue in fiscal year 2024. Such an inflationary environment and labor market challenges can also result in wage pressures in certain markets. Wage investments as a result of inflation and an increasingly competitive recruiting market for vision care professionals due to the pandemic and related effects have had, and may continue to have, an impact on our profitability. New Store Openings We expect that new stores will be a key driver of growth in our net revenue and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. As stores mature, profitability typically increases significantly. The performance of new stores is dependent upon factors such as the time of year of a particular opening, the amount of store pre-opening costs, labor and occupancy costs in the specified market, level of participation in managed care plans, and location, including whether they are in new or existing markets. Comparable Store Sales Growth Comparable store sales growth is a key driver of our business. Many factors affect comparable store sales, including: •consumer confidence, preferences and buying trends and overall economic trends including inflation and the amount and timing of tax refunds; 49 Table of Contents •the availability of optometrists and other vision care professionals; •advertising strategies; •participation in managed care programs; •the recurring nature of eye care purchases; •our ability to identify and respond effectively to customer preferences and trends; •our ability to provide an assortment of high quality/low-cost product offerings that generate new and repeat visits to our stores; •foot traffic in retail shopping centers where our stores are predominantly located; •the customer experience we provide in our stores; •our ability to source and receive products accurately and timely; •changes in product pricing, including promotional activities; •the number of items purchased per store visit; •the number of stores that have been in operation for more than 12 months; •impact of competition and consolidation in the U.S. optical retail industry; •impact and timing of weather-related store closures; and •public health emergencies, like COVID-19, which may exacerbate the effects and relevant risk exposures listed above. A new store is included in the comparable store sales calculation during the 13th full fiscal month following the store’s opening. Closed stores are removed from the calculation for time periods that are not comparable. In the past, we have closed stores as a result of poor store performance, lease expiration or non-renewal and/or the terms of our arrangements with our Host and Legacy partners. Managed Care and Insurance Managed care has become increasingly important to the optical retail industry. An increasing percentage of our customers receive vision care insurance coverage through managed care payors. Our participation in these programs represent an increasingly significant portion of our overall revenues and represented approximately 35% of our overall revenues in fiscal year 2023. While we have relationships with almost all vision care insurers in the U.S. and with all of the major carriers, currently, a relatively small number of payors comprise the majority of our managed care revenues, subjecting us to concentration risk. As our participation in managed care programs continues to expand, we have incurred and expect to incur additional costs related to this area of our business. Our comparable store sales growth as noted above as well as overall future operational success could depend on our ability to negotiate, maintain and extend contracts with managed vision care companies, vision insurance providers and other third-party payors, several of whom have significant market share. Coverage and payment levels are determined at each third-party payor’s discretion, and we have limited control over a third-party payor’s decision-making with respect to coverage and payment levels. Coverage restrictions and reductions in reimbursement levels or payment methodologies may negatively impact our sales and profits. In addition, as our participation in managed care programs continues to approach overall industry penetration levels, we expect our associated managed care revenue growth rate to slow over time. Infrastructure Investment Our historical results of operations reflect the impact of our ongoing investments in infrastructure to support our growth. We have made and continue to make significant investments in information technology systems, including those to support our point-of-sale system, ERP, supply chain systems, marketing, and personnel, as well as experienced industry executives, and management and merchandising teams to support our long-term growth objectives. We intend to continue to make targeted investments in our infrastructure to support our growth and continue the digitization of our stores and corporate office. Pricing Strategy We are committed to providing our products to our customers at low prices. We generally employ a simple, low price/high value strategy that consistently delivers savings to our customers without the need for extensive promotions. Inflationary pressures, including wage investments, consumer confidence and preferences and increased raw material costs, could impact our profitability and lead us to attempt to offset such increases through various pricing actions. Effective May 9, 2022, we changed the price of our America’s Best signature offer to “two pairs of eyeglasses for $79.95, including a free eye exam” from its prior $69.95 price. Effective March 14, 2022, we changed the price of our Eyeglass World opening offer to “two pairs of eyeglasses for $89” from its prior price of $78. We believe that these changes will enable us to continue to offer the best possible value and service to our customers at prices that allow us to maintain our brands’ strong value propositions in the marketplace. 50 Table of Contents Interim Results and Seasonality Historically, our business has realized a higher portion of net revenue, operating income, and cash flows from operations in the first half of the fiscal year, and a lower portion of net revenue, operating income, and cash flows from operations in the fourth fiscal quarter. The first half seasonality is attributable primarily to the timing of our customers’ income tax refunds and annual health insurance program start/reset periods. We believe that many customers in our target market are value seeking and lower income consumers who rely on tax refunds to pay for eyewear and eye care. A delay in the issuance of tax refunds or changes in the amount of tax refunds can accordingly have a negative impact on our quarterly financial results in the first half of the year. Consumer behavior with respect to the utilization of tax refund proceeds is also subject to change. With respect to our fourth quarter results, compared to other retailers, our products and services are less likely to be included in consumers’ holiday spending budgets, therefore reducing spending on personal vision correction during the weeks preceding December 25th of each year. Additionally, although the period between December 25th and the end of our fiscal year is typically a high-volume period, the net revenue associated with substantially all orders of prescription eyeglasses and contact lenses during that period is deferred until the following fiscal period due to our policy of recognizing revenue only after the product has been accepted by the customer, further contributing to higher revenue results in the first half of the year. Our quarterly results may also be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, the timing of certain holidays, and the timing of weather-related store closures. Changes in consumer behavior driven by lingering effects of the COVID-19 pandemic have resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time. For fiscal years 2023 and 2022, approximately 24% and 23% of our revenue was recorded in the fourth quarter, but approximately 25% and 26% of annual SG&A costs were recorded in the respective fourth quarters of these fiscal years. Walmart partnership termination The termination of the Walmart partnership and related wind down of AC Lens operations will impact our revenues and profitability. Effective as of February 23, 2024, the Company has completed the transition of 229 Walmart Vision Center stores. Additionally, the agreements governing our provision of contact lens distribution and related services to Walmart and Sam’s Club will terminate effective as of June 30, 2024. The Company will wind down its remaining AC Lens operations, including the closure of its Ohio distribution center, which largely supported the whole distribution and e-commerce contact lens services that we provided to Walmart and Sam’s Club. We are planning to transition the order fulfillment functions currently handled by AC Lens to a third-party vendor. While we are seeking to reduce costs and replace lost business with new America’s Best or Eyeglass World stores and by other means, including non-headline pricing actions, we may not be successful in our efforts, which could impact our revenues and profitability. In fiscal year 2023, we have incurred costs in connection with the MSA Termination and related wind down of AC Lens operations. We anticipate that we will incur approximately $8 million of additional costs in fiscal year 2024. How We Assess the Performance of Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our consolidated business and operating segments are performing are net revenue, costs applicable to revenue, and selling, general, and administrative expenses, which are described further in Note 1. “Business and Significant Accounting Policies,” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K. In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. Net Revenue We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services, and plans. Comparable store sales growth and new store openings are key drivers of net revenue and are discussed below. Also, the timing of unearned revenue can affect revenue recognized in a particular period. Costs Applicable to Revenue Customer tastes and preferences, product mix, changes in technology, significant increases or slowdowns in production, and other factors impact costs applicable to revenue. The components of our costs applicable to revenue may not be comparable to other retailers. Selling, General and Administrative 51 Table of Contents SG&A generally fluctuates consistently with revenue due to the variable store, field office and corporate support costs; however, some fixed costs slightly improve as a percentage of net revenue as our net revenues grow over time. New Store Openings The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results. We opened 70 stores during fiscal year 2023. We will continue to monitor and determine our plans for future new store openings based on health, safety and economic conditions. Adjusted Comparable Store Sales Growth We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store’s opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers. We did not revise our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic. Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful. Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Diluted EPS (collectively, the “Company Non-GAAP Measures”) The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. See “Non-GAAP Financial Measures” for definitions of the Company Non-GAAP Measures and for additional information. 52 Table of Contents Results of Operations The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue. [[GREPCENT_TABLE]] [["In thousands, except earnings per share, percentage and store data","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["Revenue:"],["Net product sales","$","1,744,136","","","$","1,648,315","","","$","1,718,344"],["Net sales of services and plans","382,332","","","357,089","","","361,181"],["Total net revenue","2,126,468","","","2,005,404","","","2,079,525"],["Costs applicable to revenue (exclusive of depreciation and amortization):"],["Products","664,589","","","636,324","","","633,116"],["Services and plans","336,321","","","289,263","","","271,663"],["Total costs applicable to revenue","1,000,910","","","925,587","","","904,779"],["Operating expenses:"],["Selling, general and administrative expenses","991,883","","","915,355","","","900,798"],["Depreciation and amortization","98,252","","","99,956","","","97,089"],["Asset impairment","82,413","","","5,783","","","4,427"],["Other expense (income), net","(164)","","","(2,552)","","","(2,505)"],["Total operating expenses","1,172,384","","","1,018,542","","","999,809"],["Income (loss) from operations","(46,826)","","","61,275","","","174,937"],["Interest expense, net","14,339","","","462","","","25,612"],["Loss on extinguishment of debt","599","","","\u2014","","","\u2014"],["Earnings (loss) before income taxes","(61,764)","","","60,813","","","149,325"],["Income tax provision","4,137","","","18,691","","","21,081"],["Net income (loss)","$","(65,901)","","","$","42,122","","","$","128,244"],["Supplemental operating data:"],["Number of stores open at end of period","1,413","","","1,354","","","1,278"],["New stores opened during the period","70","","","80","","","75"],["Adjusted Operating Income (1)","$","72,321","","","$","87,795","","","$","204,749"],["Diluted EPS","$","(0.84)","","","$","0.52","","","$","1.43"],["Adjusted Diluted EPS (1)","$","0.64","","","$","0.65","","","$","1.48"],["Adjusted EBITDA (1)","$","165,322","","","$","180,263","","","$","294,350"],["(1) Refer to Non-GAAP Financial Measures section below for our presentation of Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["Percentage of net revenue:"],["Total costs applicable to revenue","47.1","%","","46.2","%","","43.5","%"],["Selling, general and administrative expenses","46.6","%","","45.6","%","","43.3","%"],["Total operating expenses","55.1","%","","50.8","%","","48.1","%"],["Income (loss) from operations","(2.2)","%","","3.1","%","","8.4","%"],["Net income (loss)","(3.1)","%","","2.1","%","","6.2","%"],["Adjusted Operating Income","3.4","%","","4.4","%","","9.8","%"],["Adjusted EBITDA","7.8","%","","9.0","%","","14.2","%"]] [[/GREPCENT_TABLE]] Fiscal Year 2023 compared to Fiscal Year 2022 Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2023 compared to fiscal year 2022. 53 Table of Contents [[GREPCENT_TABLE]] [["","","Comparable store sales growth(1)","","Stores open at end of period","","Net revenue(2)"],["In thousands, except percentage and store data","","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2023","","Fiscal Year 2022"],["Owned & Host segment"],["America\u2019s Best","","4.0","%","","(7.7)","%","","957","","","905","","","$","1,470,411","","69.1","%","","$","1,366,019","","68.1","%"],["Eyeglass World","","(1.0)","%","","(6.7)","%","","148","","","136","","","225,906","","10.6","%","","217,727","","10.9","%"],["Military","","3.0","%","","(4.3)","%","","54","","","54","","","22,758","","1.1","%","","22,114","","1.1","%"],["Fred Meyer","","(4.6)","%","","(5.1)","%","","29","","","29","","","10,973","","0.5","%","","11,508","","0.6","%"],["Owned & Host segment total","","","","","","1,188","","","1,124","","","$","1,730,048","","81.3","%","","$","1,617,368","","80.6","%"],["Legacy segment","","(0.5)","%","","(8.4)","%","","225","","","230","","","150,894","","7.1","%","","151,877","","7.6","%"],["Corporate/Other","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","252,427","","11.9","%","","242,822","","12.1","%"],["Reconciliations","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(6,901)","","(0.3)","%","","(6,663)","","(0.3)","%"],["Total","","3.1","%","","(7.5)","%","","1,413","","","1,354","","","$","2,126,468","","100.0","%","","$","2,005,404","","100.0","%"],["Adjusted Comparable Store Sales Growth(3)","","2.9","%","","(7.6)","%"]] [[/GREPCENT_TABLE]] _________ (1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 15. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 0.1% and an increase of 0.7% from total comparable store sales growth based on consolidated net revenue for fiscal years 2023 and 2022, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the Legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the Legacy partner), resulting in a decrease of 0.1% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2023 and 2022, respectively. Total net revenue of $2,126.5 million for fiscal year 2023 increased $121.1 million, or 6.0%, from $2,005.4 million for fiscal year 2022. The increase was driven by approximately 55% from growth from new store sales, 40% from Adjusted Comparable Store Sales Growth, 10% by our AC Lens business, partially offset by closed stores and effects of deferred and unearned revenue. During fiscal year 2023, we opened 58 new America’s Best stores and 12 new Eyeglass World stores and closed six America’s Best stores and one Legacy store as a result of our Legacy partner’s decision to cease its overall operations at the location. During the fourth quarter of 2023, we also transitioned four Legacy stores to Walmart leading up to the MSA Termination. The total net new locations in fiscal year 2023 for America’s Best and Eyeglass World are 52 and 12, respectively. Overall, store count grew 4.4% from the end of fiscal year 2022 to the end of fiscal year 2023. Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2023 were 3.1% and 2.9%, respectively, both reflecting an increase in customer transactions and higher average ticket. Net product sales comprised 82.0% and 82.2% of total net revenue for fiscal years 2023 and 2022, respectively. Net product sales increased $95.8 million, or 5.8% during fiscal year 2023 compared to fiscal year 2022, primarily due to a $71.8 million, or 6.4%, increase in eyeglass sales, a $16.1 million, or 4.2%, increase in contact lens sales and a $6.6 million, or 4.7%, increase in wholesale fulfillment. Net sales of services and plans increased $25.2 million, or 7.1%, driven primarily by higher exam revenues of $30.9 million, or 15.8%, increase which was partially offset by a $4.1 million, or 11.7%, decrease in management fees from our Legacy partner and a $3.1 million, or 4.1%, decrease in product protection plan revenues. Owned & Host segment net revenue. Net revenue increased $112.7 million, or 7.0%, driven primarily by new store openings and comparable store sales growth. 54 Table of Contents Legacy segment net revenue. Net revenue decreased $1.0 million, or 0.6%, driven primarily by negative comparable store sales growth. Corporate/Other segment net revenue. Net revenue increased $9.6 million, or 4.0%, driven primarily by increases in wholesale fulfillment. Net revenue reconciliations. The impact of reconciliations negatively impacted net revenue by $0.2 million during fiscal year 2023 compared to fiscal year 2022. Net revenue was positively impacted by $5.0 million due to the timing of unearned revenue. Net revenue was negatively impacted by $5.2 million due to higher sales of club memberships and product protection plans, and lower recognition of product protection plan revenue in fiscal year 2023 compared to fiscal year 2022. Costs applicable to revenue Costs applicable to revenue of $1,000.9 million for fiscal year 2023 increased $75.3 million, or 8.1%, from $925.6 million for fiscal year 2022. As a percentage of net revenue, costs applicable to revenue increased from 46.2% for fiscal year 2022 to 47.1% for fiscal year 2023. This increase as a percentage of net revenue was primarily driven by higher growth in optometrist-related costs of 150 basis points and by 60 basis points due to reduction in components of service revenue, including product protection plan revenue, and other mix and margin effects. These costs were partially offset by a 90-basis point effect from higher exam revenue and a 30-basis point effect from increased eyeglass mix and higher eyeglass margin. Costs of products as a percentage of net product sales decreased from 38.6% for fiscal year 2022 to 38.1% for fiscal year 2023 primarily driven by increased eyeglass mix and higher eyeglass margin. Owned & Host segment costs of products. Costs of products as a percentage of net product sales decreased from 28.9% for fiscal year 2022 to 28.7% for fiscal year 2023 primarily driven by increased eyeglass mix and higher eyeglass margin. Legacy segment costs of products. Costs of products as a percentage of net product sales decreased from 46.8% for fiscal year 2022 to 45.2% for fiscal year 2023. The decrease was primarily driven by a higher mix of managed care customer transactions versus non-managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Increases in managed care mix decrease costs of products as a percentage of net product sales and have a corresponding negative impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Costs of services and plans as a percentage of net sales of services and plans increased from 81.0% for fiscal year 2022 to 88.0% for fiscal year 2023. The increase was primarily driven by higher growth in optometrist-related costs, lower product protection plan revenues and lower management fees from our Legacy partner, partially offset by higher eye exam revenue. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 88.6% for fiscal year 2022 to 93.1% for fiscal year 2023. The increase was primarily driven by higher growth in optometrist-related costs, partially offset by higher eye exam revenue. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 44.9% for fiscal year 2022 to 50.6% for fiscal year 2023. The increase was primarily driven by lower management fees from our Legacy partner and growth in optometrist-related costs. Selling, general and administrative SG&A of $991.9 million for fiscal year 2023 increased $76.5 million, or 8.4%, from fiscal year 2022. As a percentage of net revenue, SG&A increased from 45.6% for fiscal year 2022 to 46.6% for fiscal year 2023. The increase in SG&A as a percentage of net revenue was primarily driven by higher performance-based incentive compensation of 70 basis points, higher payroll of 50 basis points, as well as 50 basis points of other expenses, such as stock-based compensation and expenses related to the termination of the Walmart partnership, partially offset by lower advertising expense of 50 basis points and other operating expenses of 20 basis points. Owned & Host segment SG&A. SG&A as a percentage of net revenue decreased from 38.9% for fiscal year 2022 to 38.7% for fiscal year 2023 driven primarily by lower advertising expense, partially offset by higher payroll. Legacy segment SG&A. SG&A as a percentage of net revenue decreased from 38.3% for fiscal year 2022 to 37.6% for fiscal year 2023 driven primarily by lower payroll and lower advertising expense. 55 Table of Contents Depreciation and amortization Depreciation and amortization expense of $98.3 million for fiscal year 2023 decreased $1.7 million, or 1.7%, from $100.0 million for fiscal year 2022 primarily driven by a decrease in amortization of intangible assets as a result of impairing the Walmart contracts and customer relationship asset during fiscal year 2023 and a shift to cloud-based software investments that are amortized in SG&A, partially offset by investments in remote medicine technology and new store openings. Asset impairment We recorded impairment charges of $82.4 million for fiscal year 2023 compared to $5.8 million recognized in fiscal year 2022. The majority of the impairment charges in the current period were recorded in connection with the termination of the Walmart partnership and included impairments at our Legacy and AC Lens operating segments. Refer to Note 2 “Termination of Walmart Partnership” included in Part II. Item 8. of this Form 10-K for further information. In addition, we recorded impairment charges of $2.8 million related to tangible long-lived assets and ROU assets associated with our Owned & Host segment for fiscal year 2023, which were driven by lower than projected customer sales volume in certain stores, and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. Asset impairment expenses were recognized in Corporate/Other. Other expense (income), net Other expense (income), net was $(0.2) million for fiscal year 2023 compared to $(2.6) million for fiscal year 2022. This change was primarily a result of a gain of $2.7 million in Other expense (income), net in fiscal year 2022 that did not occur in fiscal year 2023 in connection with the acquisition of our equity method investee by a third party. See Note 1. “Business and Significant Accounting Policies” for further details. Interest expense, net Interest expense, net, of $14.3 million for fiscal year 2023 increased $13.9 million, or 3001%, from $0.5 million for fiscal year 2022. The increase was primarily a result of lower derivative income of $15.8 million and higher Term Loan A expense of $5.4 million, partially offset by higher income on cash balances of $6.8 million. Income tax provision Our effective tax rates for fiscal year 2023 and fiscal year 2022 were (6.7)% and 30.7%, respectively. The change in effective tax rates reflects our statutory federal and state rate of 25.2% and 25.4%, respectively, the disallowance of the Legacy segment goodwill impairment loss for income tax purposes and other permanent items. 56 Table of Contents Fiscal Year 2022 compared to Fiscal Year 2021 Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2021 compared to fiscal year 2020. [[GREPCENT_TABLE]] [["","","Comparable store sales growth(1)","","Stores open at end of period","","Net revenue(2)"],["In thousands, except percentage and store data","","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2022","","Fiscal Year 2021"],["Owned & Host segment"],["America\u2019s Best","","(7.7)","%","","23.5","%","","905","","","840","","","$","1,366,019","","68.1","%","","$","1,423,386","","68.4","%"],["Eyeglass World","","(6.7)","%","","25.2","%","","136","","","125","","","217,727","","10.9","%","","225,096","","10.8","%"],["Military","","(4.3)","%","","15.8","%","","54","","","54","","","22,114","","1.1","%","","23,103","","1.1","%"],["Fred Meyer","","(5.1)","%","","13.4","%","","29","","","29","","","11,508","","0.6","%","","12,130","","0.6","%"],["Owned & Host segment total","","","","","","1,124","","","1,048","","","$","1,617,368","","80.6","%","","$","1,683,715","","80.9","%"],["Legacy segment","","(8.4)","%","","19.3","%","","230","","","230","","","151,877","","7.6","%","","165,477","","8.0","%"],["Corporate/Other","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","242,822","","12.1","%","","236,299","","11.4","%"],["Reconciliations","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(6,663)","","(0.3)","%","","(5,966)","","(0.3)","%"],["Total","","(7.5)","%","","22.4","%","","1,354","","","1,278","","","$","2,005,404","","100.0","%","","$","2,079,525","","100.0","%"],["Adjusted Comparable Store Sales Growth(3)","","(7.6)","%","","23.0","%"]] [[/GREPCENT_TABLE]] _________ (1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 15. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in an increase of 0.7% from total comparable store sales growth based on consolidated net revenue for fiscal year 2021 and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the Legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the Legacy partner), resulting in a decrease of 0.1% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2022 and 2021, respectively. Total net revenue of $2,005.4 million for fiscal year 2022 decreased $74.1 million, or 3.6%, from $2,079.5 million for fiscal year 2021. The decrease was driven primarily by reduced Adjusted Comparable Store Sales Growth and to a lesser extent the negative impact of unearned revenue, partially offset by growth from new store sales and recognition of deferred revenue. During fiscal year 2022, we opened 69 new America’s Best stores and 11 new Eyeglass World stores and closed four America’s Best stores. The total net new locations in fiscal year 2022 for America’s Best and Eyeglass World are 65 and 11, respectively. Overall, store count grew 5.9% from the end of fiscal year 2021 to the end of fiscal year 2022. Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2022 were (7.5)% and (7.6)%, respectively, primarily due to a decrease in customer transactions, and to a lesser extent, lower average ticket. The decreases in comparable store sales growth and Adjusted Comparable Store Sales growth during fiscal year 2022 reflect overall economic trends impacting customer demand, constraints affecting exam capacity in certain markets and the Omicron COVID-19 variant impacting customer transactions. Net product sales comprised 82.2% and 82.6% of total net revenue for fiscal years 2022 and 2021, respectively. Net product sales decreased $70.0 million, or 4.1% during fiscal year 2022 compared to fiscal year 2021, primarily due to a $80.7 million, or 6.7%, decrease in eyeglass sales, which was partially offset by a $6.4 million, or 1.7%, increase in contact lens sales and a $4.3 million, or 3.2%, increase in wholesale fulfillment. 57 Table of Contents Net sales of services and plans decreased $4.1 million, or 1.1%, driven primarily by a $7.1 million, or 16.9%, decrease in management fees from our Legacy partner, which was partially offset by a $5.6 million, or 2.9%, increase in exam revenues. Owned & Host segment net revenue. Net revenue declined $66.3 million, or 3.9%, driven primarily by negative comparable store sales growth partially offset by new store openings. Legacy segment net revenue. Net revenue declined $13.6 million, or 8.2%, driven by negative comparable store sales growth. Corporate/Other segment net revenue. Net revenue increased $6.5 million, or 2.8%, driven primarily by increases in wholesale fulfillment. Net revenue reconciliations. The impact of reconciliations negatively impacted net revenue by $0.7 million during fiscal year 2022 compared to fiscal year 2021. Net revenue was negatively impacted by $14.2 million due to the timing of unearned revenue. The balance of unearned revenue reflected increased sales in the last week of fiscal year 2022 compared to the same period in 2021. Net revenue was positively impacted by $13.5 million due to higher sales of product protection plan and club memberships in fiscal year 2021 compared to fiscal year 2022, thus causing recognition of previous deferrals to exceed cash collected for sales in fiscal year 2022. Costs applicable to revenue Costs applicable to revenue of $925.6 million for fiscal year 2022 increased $20.8 million, or 2.3%, from $904.8 million for fiscal year 2021. As a percentage of net revenue, costs applicable to revenue increased from 43.5% for fiscal year 2021 to 46.2% for fiscal year 2022. This increase as a percentage of net revenue was primarily driven by higher growth in optometrist-related costs, reduced eyeglass mix and lower eyeglass margin. Costs of products as a percentage of net product sales increased from 36.8% for fiscal year 2021 to 38.6% for fiscal year 2022 primarily driven by reduced eyeglass mix and lower eyeglass margin. Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 27.4% for fiscal year 2021 to 28.9% for fiscal year 2022 primarily driven by reduced eyeglass mix and lower eyeglass margin. Legacy segment costs of products. Costs of products as a percentage of net product sales decreased from 47.7% for fiscal year 2021 to 46.8% for fiscal year 2022. The decrease was primarily driven by a higher mix of managed care customer transactions versus non-managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Increases in managed care mix decrease costs of products as a percentage of net product sales and have a corresponding negative impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Costs of services and plans as a percentage of net sales of services and plans increased from 75.2% for fiscal year 2021 to 81.0% for fiscal year 2022. The increase was primarily driven by higher growth in optometrist-related costs, which were partially offset by higher eye exam revenue. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 80.1% for fiscal year 2021 to 88.6% for fiscal year 2022. The increase was primarily driven by higher growth in optometrist-related costs, which were partially offset by higher eye exam revenue. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 40.7% for fiscal year 2021 to 44.9% for fiscal year 2022. The increase was primarily driven by higher growth in optometrist-related costs. Selling, general and administrative SG&A of $915.4 million for fiscal year 2022 increased $14.6 million, or 1.6%, from fiscal year 2021. As a percentage of net revenue, SG&A increased from 43.3% for fiscal year 2021 to 45.6% for fiscal year 2022. The increase in SG&A as a percentage of net revenue was primarily driven by increases in store payroll, other corporate overhead, including legal, professional, travel and entertainment, and occupancy expense, partially offset by lower performance-based incentive compensation and lower advertising expense. The Company paid $5.0 million of discretionary bonuses during fiscal year 2022. SG&A for fiscal year 2022 and fiscal year 2021 includes $0.6 million and $1.5 million, respectively, of incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic. 58 Table of Contents Owned & Host segment SG&A. SG&A as a percentage of net revenue increased from 36.7% for fiscal year 2021 to 38.9% for fiscal year 2022 driven primarily by higher payroll and occupancy expense, partially offset by lower advertising expense. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 35.0% for fiscal year 2021 to 38.3% for fiscal year 2022 driven primarily by higher payroll expense. Depreciation and amortization Depreciation and amortization expense of $100.0 million for fiscal year 2022 increased $2.9 million, or 3.0%, from $97.1 million for fiscal year 2021 primarily driven by new store openings and investments in remote medicine. Asset impairment We recognized $5.8 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores in fiscal year 2022 compared to $4.4 million recognized in fiscal year 2021. The store asset impairment charge is primarily related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. The asset impairment expense for fiscal year 2021 also includes $0.8 million, related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other. Other expense (income), net We recognized a gain of $2.7 million and $2.4 million in Other expense (income), net in fiscal years 2022 and 2021, respectively, in connection with the acquisition of our equity method investee by a third party. See Note 1. “Business and Significant Accounting Policies” for further details. Interest expense, net Interest expense, net, of $0.5 million for fiscal year 2022 decreased $25.2 million, or 98.2%, from $25.6 million for fiscal year 2021. The decrease was primarily a result of lower derivative costs of $19.0 million on our interest rate derivatives, reduced term loan outstanding balance and income on cash balances. Income tax provision Our effective tax rate for fiscal year 2022 was 30.7%, reflecting our statutory federal and state rate of 25.4% and effects of other permanent items. Our effective tax rate for fiscal year 2021 was 14.1%, reflecting a benefit of $16.5 million primarily from the exercise of stock options and stranded tax effect associated with our matured interest rate swaps during the first quarter of 2021. 59 Table of Contents Non-GAAP Financial Measures Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS We define Adjusted Operating Income as net income, plus interest expense (income), net and income tax provision (benefit), further adjusted to exclude stock-based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, ERP implementation expenses and certain other expenses. We define Adjusted Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock-based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, ERP implementation expenses and certain other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue. We define Adjusted Diluted EPS as diluted earnings per share, adjusted for the per share impact of stock-based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our term loan borrowings, amortization of the conversion feature and deferred financing costs related to our 2025 Notes when not required under U.S. GAAP to be added back for diluted earnings per share, derivative fair value adjustments, ERP implementation expenses, certain other expenses, and tax expense (benefit) from stock-based compensation, less the tax effect of these adjustments. EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below. EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with U.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements U.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. We continue to evaluate our use of the Company Non-GAAP measures in the context of the development of our business, and may introduce or discontinue certain measures in the future as we deem appropriate. EBITDA and the Company Non-GAAP Measures are not recognized terms under U.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with U.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In evaluating EBITDA and the Company Non-GAAP Measures we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our U.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures. The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: •they do not reflect costs or cash outlays for capital expenditures or contractual commitments; •they do not reflect changes in, or cash requirements for, our working capital needs; •EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense (income), net or the cash requirements necessary to service interest or principal payments, on our debt; •EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect period to period changes in taxes, income tax provision or the cash necessary to pay income taxes; 60 Table of Contents •they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and •other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. The following table reconciles our Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin to net income; and Adjusted Diluted EPS to diluted EPS for the periods presented: [[GREPCENT_TABLE]] [["In thousands","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["Net income","$","(65,901)","","","(3.1)","%","","$","42,122","","","2.1","%","","$","128,244","","","6.2","%"],["Interest expense, net","14,339","","","0.7","%","","462","","","0.0","%","","25,612","","","1.2","%"],["Income tax provision","4,137","","","0.2","%","","18,691","","","0.9","%","","21,081","","","1.0","%"],["Stock-based compensation expense (a)","20,174","","","0.9","%","","13,512","","","0.7","%","","14,886","","","0.7","%"],["Loss on extinguishment of debt (b)","599","","","0.0","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Asset impairment (c)","82,413","","","3.9","%","","5,783","","","0.3","%","","4,427","","","0.2","%"],["Litigation settlement (d)","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","1,500","","","0.1","%"],["Amortization of acquisition intangibles (e)","5,251","","","0.2","%","","7,488","","","0.4","%","","7,488","","","0.4","%"],["ERP implementation expenses (h)","484","","","0.0","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Other (i)","10,825","","","0.5","%","","(263)","","","(0.0)","%","","1,511","","","0.1","%"],["Adjusted Operating Income / Adjusted Operating Margin","$","72,321","","","3.4","%","","$","87,795","","","4.4","%","","$","204,749","","","9.8","%"],["Note: Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["In thousands","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["Net income","$","(65,901)","","","(3.1)","%","","$","42,122","","","2.1","%","","$","128,244","","","6.2","%"],["Interest expense, net","14,339","","","0.7","%","","462","","","0.0","%","","25,612","","","1.2","%"],["Income tax provision","4,137","","","0.2","%","","18,691","","","0.9","%","","21,081","","","1.0","%"],["Depreciation and amortization","98,252","","","4.6","%","","99,956","","","5.0","%","","97,089","","","4.7","%"],["EBITDA","50,827","","","2.4","%","","161,231","","","8.0","%","","272,026","","","13.1","%"],["Stock-based compensation expense (a)","20,174","","","0.9","%","","13,512","","","0.7","%","","14,886","","","0.7","%"],["Loss of extinguishment of debt (b)","599","","","0.0","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Asset impairment (c)","82,413","","","3.9","%","","5,783","","","0.3","%","","4,427","","","0.2","%"],["Litigation settlement (d)","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","1,500","","","0.1","%"],["ERP implementation expenses (h)","484","","","0.0","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Other (i)","10,825","","","0.5","%","","(263)","","","(0.0)","%","","1,511","","","0.1","%"],["Adjusted EBITDA / Adjusted EBITDA Margin","$","165,322","","","7.8","%","","$","180,263","","","9.0","%","","$","294,350","","","14.2","%"],["Note: Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences."]] [[/GREPCENT_TABLE]] 61 Table of Contents [[GREPCENT_TABLE]] [["In thousands, except per share amounts","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["Diluted EPS","$","(0.84)","","","$","0.52","","","$","1.43"],["Stock-based compensation expense (a)","0.26","","","0.17","","","0.15"],["Loss on extinguishment of debt (b)","0.01","","","\u2014","","","\u2014"],["Asset impairment (c)","1.05","","","0.07","","","0.05"],["Litigation settlement (d)","\u2014","","","\u2014","","","0.02"],["Amortization of acquisition intangibles (e)","0.07","","","0.09","","","0.08"],["Amortization of debt discounts and deferred financing costs (f)","0.04","","","0.04","","","0.02"],["Derivative fair value adjustments (g)","0.12","","","(0.20)","","","(0.03)"],["ERP implementation expenses (h)","0.01","","","\u2014","","","\u2014"],["Other (l)","0.14","","","(0.00)","","","(0.01)"],["Tax expense (benefit) from stock-based compensation (j)","0.02","","","(0.00)","","","(0.15)"],["Tax effect of total adjustments (k)","(0.23)","","","(0.04)","","","(0.08)"],["Adjusted Diluted EPS","$","0.64","","","$","0.65","","","$","1.48"],["Weighted average diluted shares outstanding","78,313","","","80,298","","","96,134"],["Note: Some of the totals in the table above do not foot due to rounding differences."]] [[/GREPCENT_TABLE]] ____________ (a)Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions. (b)For fiscal year 2023, reflects the extinguishment loss related to the repurchase of $100 million of the 2025 Notes on November 14, 2023. (c)Reflects write-off related to impairment of long-lived assets, primarily goodwill of the Legacy Segment, Walmart contracts and relationship asset, property and equipment at Walmart stores and associated with our AC Lens business, and impairment of property, equipment and lease-related assets on closed or underperforming stores. (d)Expenses associated with settlement of certain litigation. (e)Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting following the KKR Acquisition. (f)Amortization of deferred financing costs and other non-cash charges related to our long-term debt. We adjust for amortization of deferred financing costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share under U.S. GAAP. (g)The adjustments for the derivative fair value (gains) and losses have the effect of adjusting the (gain) or loss for changes in the fair value of derivative instruments and amortization of AOCL for derivatives not designated as accounting hedges. This results in reflecting derivative (gains) and losses within Adjusted Diluted EPS during the period the derivative is settled. (h)Costs related to the Company’s ERP implementation. (i)Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA), which are primarily related to the termination of the Walmart partnership of $7.0 million for fiscal year 2023, costs associated with the digitization of paper-based records of $2.2 million for fiscal year 2023, excess payroll taxes on vesting of restricted stock units and exercises of stock options, executive severance and relocation and other expenses and adjustments, including our share of (gains) losses on equity method investments of $(2.7) million and $(2.4) million for fiscal years 2022 and 2021, respectively, and losses on other investments of $0.3 million for fiscal year 2022. (j)Tax expense (benefit) associated with accounting guidance requiring excess tax expense (benefit) related to vesting of restricted stock units and exercises of stock options to be recorded in earnings as discrete items in the reporting period in which they occur. (k)Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates excluding Walmart goodwill impairment charges of $60.1 million for fiscal year 2023. (l)Reflects other expenses in (i) above, including the impact of stranded tax effect of $(2.1) million for fiscal year 2021 associated with our interest rate swaps that matured in 2021, and $0.2 million and $0.1 million of debt issuance costs for fiscal years 2023 and 2021, respectively. Liquidity and Capital Resources Our primary cash needs are for inventory, payroll, store rent, advertising, capital expenditures associated with new stores and updating existing stores, as well as information and remote medicine technology and infrastructure, including our corporate office, distribution centers and laboratories. When appropriate, the Company may utilize excess liquidity towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, as well as repurchases of common stock or other securities, based on excess cash flows. The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued 62 Table of Contents expenses. We exercise prudence in our use of cash and closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding. We continue to be focused on these items in addition to other key measures we use to determine how our consolidated business and operating segments are performing. We believe that cash on hand, cash expected to be generated from operations and the availability of borrowings under our revolving credit facility will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures and payments due under our existing debt for the next 12 months and thereafter for the foreseeable future. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the prepayment, refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as modifications to our term loan where possible. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. We primarily fund our working capital needs using cash provided by operations. Our working capital requirements for inventory will increase as we continue to open additional stores. As of fiscal year end 2023, we had $149.9 million in cash and cash equivalents and $293.6 million of availability under our revolving credit facility, which includes $6.4 million in outstanding letters of credit. The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated: [[GREPCENT_TABLE]] [["In thousands","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["Cash flows provided by (used for):"],["Operating activities","$","173,033","","","$","119,198","","","$","258,938"],["Investing activities","(115,822)","","","(110,894)","","","(92,897)"],["Financing activities","(136,808)","","","(84,556)","","","(234,324)"],["Net increase (decrease) in cash, cash equivalents and restricted cash","$","(79,597)","","","$","(76,252)","","","$","(68,283)"]] [[/GREPCENT_TABLE]] Net Cash Provided by Operating Activities Cash flows provided by operating activities increased by $53.8 million to $173.0 million, during fiscal year 2023 from $119.2 million during fiscal year 2022 as a result of changes in net working capital and other assets and liabilities, which contributed an additional $81.9 million in cash, partially offset by a decrease in net income and non-cash reconciling items of $28.0 million as compared to fiscal year 2022. Working capital was most significantly impacted by changes in other liabilities and accounts receivable. Increases in other liabilities contributed $54.6 million in year-over-year cash primarily due to increases in compensation related accruals. Decreases in accounts receivable balances contributed $17.0 million in year-over-year cash primarily due to payments of deferred social security taxes in fiscal year 2022 pursuant to the CARES Act that did not recur in fiscal year 2023, and a decrease in managed care receivables due to timing. Cash flows provided by operating activities decreased by $139.7 million to $119.2 million, during fiscal year 2022 from $258.9 million during fiscal year 2021 as a result of a $86.1 million decrease in net income, changes in net working capital and other assets and liabilities, which used an additional $39.9 million in cash and a decrease in non-cash expense adjustments of $13.7 million, in each case, as compared to fiscal year 2021. Working capital was most significantly impacted by changes in other liabilities, accounts receivable and inventories. Decreases in other liabilities used $30.9 million in year-over-year cash primarily due to decreases in compensation related and advertising accruals, partially offset by increases in payroll taxes payable. Increases in accounts receivable balances used $26.0 million in year-over-year cash primarily due to year-over-year increases in trade and credit card receivables as a result of higher sales in the last week of fiscal year 2022 when compared to the same period of 2021, as well as increases in other receivables. Decreases in inventory contributed $13.0 million in year-over-year cash primarily due to increased purchases, including inventory forward buys, during 2021. 63 Table of Contents Net Cash Used for Investing Activities Net cash used for investing activities increased by $4.9 million, to $115.8 million, during fiscal year 2023 from $110.9 million during fiscal year 2022. The increase was primarily due to investments in our labs and distribution centers, and store remodeling costs, partially offset by decreased investments in remote medicine. We purchased $114.8 million in capital items during fiscal year 2023. Approximately 80% to 85% of our capital spend is related to our expected growth (i.e., new stores, remote medicine infrastructure, EHR, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including ERP and omni-channel platform related investments). Net cash used for investing activities increased by $18.0 million, to $110.9 million, during fiscal year 2022 from $92.9 million during fiscal year 2021. The increase was primarily due to increased capital investments in remote medicine and new store openings. We purchased $113.5 million in capital items during fiscal year 2022. Net Cash Provided by (Used for) Financing Activities Net cash used for financing activities increased $52.3 million, from $84.6 million use of cash during fiscal year 2022 to $136.8 million use of cash during fiscal year 2023. The increase in cash used for financing activities was primarily due to a repurchase of $100.0 million aggregate principal amount of the 2025 Notes for an aggregate cash repurchase price of $99.3 million in fiscal year 2023, partially offset by decreases in purchases of treasury stock of $56.0 million during fiscal year 2023 as compared with 2022. Net cash used for financing activities decreased $149.8 million, from $234.3 million use of cash during fiscal year 2021 to $84.6 million use of cash during fiscal year 2022. The decrease in cash used for financing activities was primarily due to voluntary term loan prepayments of $167.4 million in fiscal year 2021 that did not recur in fiscal year 2022, partially offset by increases in purchases of treasury stock of $11.1 million and decreases in proceeds from issuance of common stock of $8.1 million during fiscal year 2022. Long-term Debt The following table sets forth the amounts owed under our term loan and the 2025 Notes and the interest rate on such outstanding amounts, and the amount available for additional borrowing thereunder, as of the end of fiscal year 2023: [[GREPCENT_TABLE]] [["In thousands","","Interest Rate (2)","","Amount Outstanding","","Amount Available for Additional Borrowing"],["2025 Notes, due May 15, 2025","","Fixed","","$","302,497","","","$","\u2014"],["Term Loan A, due June 13, 2028","","Variable","","146,250","","","\u2014"],["Revolving Loans, due June 13, 2028(1)","","Variable","","\u2014","","","293,619"],["Total","","","","$","448,747","","","$","293,619"]] [[/GREPCENT_TABLE]] ____________ (1)At December 30, 2023, the amount available under our revolving credit facility reflected a reduction of $6.4 million of letters of credit outstanding. (2)Refer to Note 5. Long-term Debt for the interest rates used on the term loan and revolving credit facility. The 2025 Notes pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2020, at an annual rate of 2.50%. Share Repurchase Authority Effective November 8, 2021, the Company's Board of Directors authorized the Company to repurchase up to $50 million aggregate amount of shares of the Company's common stock. On November 29, 2021, the Company’s Board of Directors authorized an increase from $50 million to $100 million in aggregate amount of shares of the Company’s common stock that may be repurchased under the Company’s current share repurchase program. On February 23, 2022, our Board of Directors authorized a $100 million increase to the share repurchase authorization, for a total authorization of $200 million. During fiscal years 2023, 2022, and 2021, the Company repurchased 1.1 million shares of its common stock for $25.0 million, 2.7 million shares of its common stock for $80.0 million, and 1.4 million shares of its common stock for $69.9 million, respectively, under the share repurchase program. The Company’s original share repurchase authorization expired on December 30, 2023, and had remaining capacity of $25 million. Effective February 23, 2024, the Board authorized the Company to repurchase up to $50 million aggregate amount of shares of the Company’s common stock until January 3, 2026. The authorization permits the Company to make purchases of its common stock from time to time in the open market or privately negotiated 64 Table of Contents transactions, and pursuant to pre-set trading plans meeting the requirements of all applicable securities laws and regulations. The timing and amounts of any such repurchases will depend on a variety of factors, including the market price of the Company’s shares, general market and economic conditions, legal requirements and tax implications. The Company expects to fund the share repurchases using cash on hand. Capital Expenditures [[GREPCENT_TABLE]] [["In thousands","Fiscal Year 2023","","Fiscal Year 2022","","Fiscal Year 2021"],["New stores (owned brands)","$","51,938","","","$","49,761","","","$","40,058"],["Laboratories, distribution centers and optometric equipment","26,030","","","30,073","","","20,900"],["Information technology and other","36,806","","","33,713","","","34,557"],["Total","$","114,774","","","$","113,547","","","$","95,515"]] [[/GREPCENT_TABLE]] We expect capital expenditures in fiscal year 2024 to be approximately between $110 million and $115 million and to be used primarily in supporting the Company’s growth through investments in new and existing stores, remote medicine, EHR, optical laboratories, and IT infrastructure, including ERP. We expect to fund capital expenditures with cash flows from operations, but may also use existing cash balances or funds available through our revolving credit facility. Material Cash Requirements As of fiscal year end 2023, our current and long-term material cash requirements include the following commitments and contractual obligations: [[GREPCENT_TABLE]] [["In thousands","","2024","","2025","","2026","","2027","","2028","","Thereafter","","Total"],["Term loan(a)","","$","5,625","","","$","9,375","","","$","7,500","","","$","7,500","","","$","116,250","","","$","\u2014","","","$","146,250"],["2025 Notes(b)","","\u2014","","","302,497","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","302,497"],["Revolving credit facility(c)","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Estimated interest(d)","","17,540","","","13,367","","","8,934","","","8,412","","","3,679","","","\u2014","","","51,932"],["Noncancelable operating leases(e)","","96,270","","","108,628","","","87,129","","","72,277","","","52,762","","","118,181","","","535,247"],["Finance leases(f)","","4,129","","","4,625","","","4,252","","","3,379","","","1,973","","","1,091","","","19,449"],["Other commitments(g)","","76,586","","","54,146","","","43,510","","","37,578","","","25,621","","","6,146","","","243,587"],["Total","","$","200,150","","","$","492,638","","","$","151,325","","","$","129,146","","","$","200,285","","","$","125,418","","","$","1,298,962"]] [[/GREPCENT_TABLE]] ____________ (a)Refer to Note 5. “Long-term Debt” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K for more information on our term loan. (b)Refer to Note 5. “Long-term Debt” for more information on the 2025 Notes and Note 14. “Earnings Per Share” for the treatment of earnings per share in relation to the 2025 Notes. (c)Refer to Note 5. “Long-term Debt” for more information on our revolving credit facility. (d)We have estimated our interest payments on our term loan based on Term Secured Overnight Financing Rate as of the end of fiscal year 2023. Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings and interest rate fluctuations. Expected obligations on our hedging instruments are excluded from estimated interest presented in the table above. (e)We lease our retail stores, optometric examination offices, distribution centers, office space and all of our optical laboratories with the exception of our St. Cloud, Minnesota lab, which we own. The vast majority of our leases are classified as operating leases under current accounting guidance. Although rent expense on operating leases is recorded in SG&A on a straight-line basis over the term of the lease, contractual obligations above represent required cash payments. Our lease arrangements require us to pay executory costs such as insurance, real estate taxes and common area maintenance and some of our leases are based on a percentage of sales. These expenses are generally variable, not included above, and were approximately $36.4 million during fiscal year ended 2023. Refer to Note 9. “Leases” for our current and long-term lease payment obligations. (f)For leases classified as finance leases, the finance lease asset is recorded as property and equipment and a corresponding amount is recorded as a long-term debt obligation in the Consolidated Balance Sheets at the net present value of the minimum lease payments to be made over the lease term for new finance leases. We allocate each lease payment between a reduction of the lease obligation and interest expense using the effective interest method. Finance lease amounts above represent required contractual cash payments in the periods presented. Refer to Note 9. “Leases” for our current and long-term lease payment obligations. (g)Other commitments include minimum purchase commitments with certain trade vendors and contractual agreements to purchase goods or services in the ordinary course of business. 65 Table of Contents In addition to lease commitments and contractual obligations, our material cash requirements also include operating expenses such as payroll, store rent, and advertising expenses, which we expect to fund primarily with existing cash balances and cash flows from operations. We follow U.S. GAAP in making the determination as to whether to record an asset or liability related to our arrangements with third parties. Consistent with current accounting guidance, we do not record an asset or liability associated with long-term purchase, marketing and promotional commitments, or commitments to philanthropic endeavors. We have disclosed the amount of future commitments associated with these items in our consolidated financial statements. We are not a party to any other off-balance sheet arrangements. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates the accounting policies, estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We have evaluated the accounting policies used in the preparation of the Company’s consolidated financial statements and related notes and believe those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. More information on all of our significant accounting policies can be found in Note 1. “Business and Significant Accounting Policies,” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K, as well as in certain other notes to the consolidated financial statements as indicated below. Revenue Recognition At our America’s Best brand, our signature offer is two pairs of eyeglasses and a free eye exam for one low price. Since an eye exam is a key component in the ability for acceptable prescription eyewear to be delivered to a customer, we concluded that the eye exam service, while capable of being distinct from the eyeglass product delivery, was not distinct in the context of the two-pair offer. As a result, we do not allocate revenue to the eye exam associated with the two-pair offer, and we record all revenue associated with the offer in net product sales when the customer has received and accepted the merchandise. We recognize revenue across our product protection plan and club membership contract portfolio based on the value delivered to the customers relative to the remaining services promised under the programs. We determine the value delivered based on the expected timing and amount of customer usage of benefits over the terms of the contracts. A 100 basis point change in our estimate of value delivered to customers compared to expected customer usage of benefits would have affected revenues in fiscal year 2023 by approximately $2 million; this amount would have been recognized at different times over the contract period. Unearned revenue at the end of a reporting period is estimated based on processing and delivery times throughout the current month and generally ranges from approximately seven to 10 days. All unearned revenue at the end of a reporting period is recognized in the next fiscal period. A one-day increase in our estimate of the average days needed to process delivery would have affected revenues in fiscal year 2023 by approximately $5 million, which would ultimately have been recorded in the next fiscal year. The Company considers its revenue from managed care customers to include variable consideration and estimates such amounts associated with managed care customer revenues using the history of concessions provided and cash receipts from managed care providers; a 100 basis point change in our rate of concessions granted would have reduced our revenues in fiscal year 2023 by approximately $2 million. See Note 8. “Revenue from Contracts with Customers” in our audited consolidated financial statements included in Part II. Item 8. of this Form 10-K for additional information. Impairment of P&E and ROU assets 66 Table of Contents In evaluating store-level property and equipment and ROU assets for recoverability and impairment, we may consider multiple factors including financial performance of the stores, regional and local business climates, future plans for the store operations and other qualitative factors. We estimate the fair value of the asset group using an income approach based on discounted cash flows, which requires estimates and assumptions of forecasted store revenue growth rates and store profitability. We consider market-based indications of prevailing rental rates, lease incentives and discount rates for retail space when estimating the fair value of ROU assets. Developing the estimates and assumptions used in our recovery and impairment evaluations require significant judgment. The cash flows used in estimating fair value of property and equipment and ROU assets were discounted using market rates from 7.8% to 11.5% in fiscal year 2023. We had $362.6 million of property and equipment, net, and ROU assets of $406.6 million as of December 30, 2023. Changes in estimates and assumptions used in our impairment testing of property and equipment could result in future impairment losses, which could be material. We recognized impairments of property and equipment and ROU assets of $13.3 million, $5.8 million and $4.4 million in fiscal years 2023, 2022 and 2021, respectively. The impairment charges in fiscal year 2023, were primarily related to impairments related to the termination of the Walmart partnership. The impairment charges in fiscal years 2022 and 2021 were primarily related to our long-lived tangible store assets and ROU assets. Refer to Note 2. “Termination of Walmart Partnership” and Note 10. “Fair Value Measurement” included in Part II. Item 8. of this Form 10-K for further information on impairments recognized in fiscal year 2023. Impairment of Goodwill and Intangible Assets We calculate the fair value of our reporting units using the income approach based on discounted cash flows analysis whereby estimated after-tax cash flows are discounted using a weighted average cost of capital. The cash flows used in the analysis are based on financial forecasts developed internally by management and require significant judgment. Significant unobservable inputs used in the fair value measurement of the reporting units include revenue growth rates, payroll and other expense growth rates, capital expenditures and discount rates. These assumptions are sensitive to future changes in the business profitability, changes in our business strategy, customer concentration risk and external market conditions, among other factors. See Note 4. “Goodwill and Intangible Assets” included in Part II. Item 8. of this Form 10-K for further detail on goodwill impairment. As of December 30, 2023, we had $717.5 million of goodwill, $240.5 million of non-amortizing intangible assets, and $20.3 million of other intangible assets, net of accumulated amortization. Changes in estimates and assumptions used in our impairment testing could result in future impairment losses, which could be material. Significant judgments and assumptions are required in our impairment evaluations. We determined that the various terminations of agreements with Walmart Inc. as well as the subsequent decision to consolidate our distribution network and close the distribution center in Ohio constituted triggering events, and accordingly, performed impairment tests on our Legacy and AC Lens operating segments during the year ended December 30, 2023 on assets related to the Walmart partnership. See Note 2. “Termination of Walmart Partnership” included in Part II. Item 8. of this Form 10-K for further information. The fair values of our reporting units with goodwill exceeded their respective carrying values by at least 30%. Future changes in a reporting unit’s business profitability, expected cash flows, changes in business strategy and external market conditions, among other factors, could require us to record an impairment charge for goodwill. A 100 basis point increase in discount rates used to estimate the fair value of the Company’s reporting units would not result in an impairment of goodwill at fiscal year-end. When evaluating indefinite-lived, non-amortizing trademarks and trade names for impairment, we use the relief-from-royalty method to estimate fair value, whereby an estimated royalty rate is determined based on comparable licensing arrangements, which is then applied to the revenue projections for the subject asset. The estimated fair value is calculated using a discounted cash flow analysis. We record an impairment charge as the excess of carrying value over estimated fair value. The fair value of the Eyeglass World trade name asset exceeded its carrying value by approximately 10%; changes to the growth assumptions or future strategy for this brand may negatively affect the fair value of this asset. A 100 basis point increase in discount rates used to estimate the fair value of the Company’s trademarks and trade names would not result in an impairment of these assets at fiscal year-end. A 10 basis point decrease in the royalty rates used in the analyses would not result in an impairment of these assets at fiscal year-end. If impairment indicators related to finite-lived, amortizing intangible assets are present, we estimate cash flows expected to be generated over the remaining useful lives of the related assets based on current projections. If the projected net undiscounted cash flows are less than the carrying value of the related assets, we then measure impairment based on a discounted cash flow model and record an impairment charge as the excess of carrying value over the estimated fair value. 67 Table of Contents Income Taxes Calculations and assessments of uncertain tax positions involve estimates and complex judgments because the ultimate tax outcomes are uncertain and future events are unpredictable. Our net deferred liability balance as of December 30, 2023 was $87.9 million. Changes in assumptions in our estimates could result in material changes to these balances. See Note 7. “Income Taxes” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K. Inventories Inventory shrinkage is estimated and recorded throughout the period in cost of sales based on historical results and current inventory levels. Inventory values are adjusted for estimated obsolescence and written down to net realizable value (“NRV”) based on estimates of current and anticipated demand, customer preference, merchandise age, planned promotional activities, compliance with contact lens vendor return policies, and estimates of future retail sales prices. Actual shrinkage is recorded throughout the year based upon periodic physical counts. As of December 30, 2023, our total inventory balance was $119.9 million. A 10% increase in the obsolescence and shrinkage reserves will not have a material impact on our financial position. See Note 1. “Business and Significant Accounting Policies” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K. Recently Issued Accounting Pronouncements For information on recently issued accounting pronouncements, see Note 1. “Business and Significant Accounting Policies” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K.