National Vision Holdings, Inc. (EYE) Q2 2018 Earnings Conference Call Transcript

National Vision Holdings, Inc. (EYE -5.89%)
Q2 2018 Earnings Conference Call
Aug. 14, 2018, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to National Vision's second quarter 2018 earnings conference call. At this time, all participants are in a listen only mode. Following prepared remarks, we will host a question and answer session and our instructions will be given at that time. If during your conference, you require operator assistance, please press * and then 0 and an operator will be happy to assist you. As a reminder, this conference call may be recorded for replay purposes.

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

David Mann -- Vice President of Investor Relations

Thank you and good morning, everyone. Welcome to National Vision's second quarter 2018 earnings call. Joining me on the call today are Reade Fahs, Chief Executive Officer, and Patrick Moore, Chief Financial Officer. Jeff McAllister, our Chief Operating Officer, is also on the call and will be available during the question and answer portion of the call. Our earnings release issued this morning and supplemental presentation which will be referenced during the call are both available on the investor section of our website, nationalvision.com.

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

Before we begin, let me remind you our earnings release in today's presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission.

The release and today's presentation also include certain non-GAAP measures. Reconciliation of these measures are included in our release and the supplemental presentation which can be found on our website. We also would like to draw your attention to slide two in today's presentation for additional information about forward-looking statements and non-GAAP measures. In additional, from time to time, National Vision expects to provide certain supplemental materials or presentations for investor reference on our investor section of our website.

On today's call, Reade will discuss recent business highlights and provide a business update. Patrick will then review our second quarter 2018 financial performance and our fiscal 2018 outlook. Following these prepared remarks, we will open the call for questions. Now, let me turn the call over to Reade.

Reade Fahs -- Chief Executive Officer

Thank you, David. Good morning, everyone. It's a pleasure to be speaking with you today to share our second quarter results. If you'll turn to Slide 4, we are pleased to report our 66th consecutive quarter of positive comparable store sales growth, a streak that began over 16 years ago, when a new team of seasoned optical experts formed at National Vision. We are quite proud of the consistency of this track record.

Q2 adjusted comparable store sales growth was up 8.8%. The growth was led by America's Best with a 10.2% comp and Eyeglass World with a 9.5% comp. We're pleased that our comparable store sales growth showed sequential improvement from the first quarter trend. We generated solid positive comps at all brands, with the exception of our military host stores, which represent less than 2% of our business. Our teams remain focused on our store level execution every day and in every store, one patient and one customer at a time. Another sign of customer satisfaction is net promoter scores, which we track closely. In the quarter, our net promoter scores improved on a consolidated basis, led by America's Best.

We opened 25 stores during Q2 to end the quarter with 1,050 locations, or a 7.1% increase in store count over the second quarter last year. Most of the openings were in our America's Best brand, with two Eyeglass World openings. The unit growth and comparable store sales growth combined to drive a 14.2% increase in net revenue. Adjusted EBITDA increased 18.2%, and adjusted net income grew 133%. Our second quarter EBITDA growth benefited by approximately 630 basis points from the net change in margin on unearned revenue. Based upon our first half performance, we're reaffirming our 2018 outlook. In a few minutes, Patrick will take you through our Q2 results and 2018 outlook in more detail.

Turning to Slide 5, our business continues to demonstrate consistency in store performance and comp stores sales gains. The highlights are 66 consecutive quarters of comparable store sales growth across the economic cycle, both during strong and weak economic times. As we noted in May, we experienced a traffic rebound in the second quarter, given the extended peak selling season. The shift was further exacerbated by inclement weather in March. This rebound highlights the resiliency of operating in a category where the purchase is tied to a medical necessity.

The comp growth this quarter was driven once again primarily by gain in customer counts and to a lesser extent an increase in average ticket. Our consistent positive comp results highlight the benefits of operating in a growing industry, having a leadership team of optical experts, new store growth, as well as comparable store sales growth in our more mature stores as customers keep coming back. With our 12% sales growth in the first half, we continue to believe that we are gaining market share with our low-price operating model.

Turning to Slide 6, we look to continue to execute on our core drivers of growth. First, new stores are our primary focus given the white space opportunity relative to our current footprint. We opened 25 stores in the second quarter and continue to plan to open 75 stores this year, executing on the formulas that have worked well for us in the past. As we look out to 2019, the pipeline for locations looks strong.

Optometrists continue to play a key role in our company's success and it's our mission to deliver improved eye care to communities throughout the U.S. We strive to be the place where optometrists want to practice for their entire career. Our optometrists retention rates remain stable to last year, and we work hard every day to fill our ever growing need for new optometrists.

Our team expects to continue to drive comparable store sales growth in 2018, even as we lap strong multi-year comparisons. Our key comp drivers are the comp waterfall for maturing stores, as well as our vision insurance and marketing initiative. Our new stores take several years to fully mature, as customer awareness builds. It can take time for potential customers to find a store after it opens, as the infrequent purchase cycle for eyeglasses averages two to three years.

When our customers are in the market, we strive to deliver incredible values that attracts them to our stores. Our introductory offer at America's Best -- two pairs of eyeglass for $69.95, including a free comprehensive eye exam -- hasn't changed in over a decade. At Eyeglass World, we offer two pairs of eyeglasses for $78.00, along with the opportunity of same-day service from our in-store labs, is also among the lowest in the industry. We believe that this combination of extreme value backed by excellent customer service leads to satisfied repeat customers.

In 2017, existing customers represented over 60% of total customers at mature stores. Participation and vision insurance programs remain a positive comp driver. Strong net revenue growth from these partnerships continued in the second quarter. We believe there are opportunities to further expand our vision insurance business as we remain underpenetrated relative to the industry for the percentage of our business coming from vision insurance.

In terms of marketing, we continue to utilize television advertising to attract customers and drive traffic to our stores. Our Owl TV campaign at America's Best reminds consumers throughout the country that they paid too much if they didn't shop at America's Best. At Eyeglass World, our Mr. World campaign was expanded to the remaining control markets in the second quarter. We're pleased with the customer response since the campaign began in January and believe it's been a factor in the brand's 9.5% Q2 comp and 7.8% comps in the first half. As we noted last quarter, we're more excited than ever about the fresh energy at Eyeglass World and it's opportunity for future growth.

In terms of operating productivity, we can't beat everyday low price without being everyday lost cost. We believe our centralized lab network is a world class manufacturing operation that provides a true competitive cost advantage. We're progressing toward opening our new Texas lab, which will add the necessary capacity to keep up with our growth. We remain on schedule to be operational inside for the first quarter of next year.

Lastly, regard our omnichannel investments and capabilities, we're in the early innings of leverage our new one view of the customer capability. In addition, we continue to see improvements in the online scheduling of eye exams. We believe that an omnichannel approach is going to be an ever more important part of the optical buying process in future years and we aim to have this as a major competency for National Vision. At this point, let me turn the call over to Patrick for more detailed discussion of our financial results.

Patrick R. Moore -- Chief Financial Officer

Thanks, Reade. Good morning, everyone. Turning to Slide 8, as Reade noted, our business continued to perform well in the second quarter. The two fundamental revenue drivers of our business are new store growth and comparable store sales growth. During the quarter, we opened 25 new stores and closed 2 stores. Over the last 12 months, we have added 70 net new stores or a 7.1% year-over-year increase with openings almost entirely in our America's Best and Eyeglass World brands. For these two growth brands, unit growth increased 10.6% in the quarter.

Our 2018 planned openings are slightly skewed toward newer markets and we continue to expand our store base and invest in these markets, where our new stores are still ramping and building awareness. We have noted that new stores have historically taken approximately 3 to 5 years to mature. We're excited about these markets and see a lot of our potential customers there.

The chart of adjusted comparable store sales growth presents our comps calculated on a cash basis. Same store sales growth increased 8.8% versus the 9.1% increase in the second quarter last year. This comp growth was driven by increases in customer transactions and, to a lesser extent, average ticket. This quarter, we experienced a more pronounced difference between adjusted comps and GAAP comps of 10.4%, which primarily reflects the net change in unearned recovery. Recall that unearned revenue depends in great part on customer behavior and is ultimately an issue of timing of sales in the last 7 to 9 days of the quarter compared to the same period in the prior quarter. Hence, unearned revenue can be highly variable, difficult to predict to a precise degree, and will continue to cause quarter-to-quarter fluctuation.

During the second quarter, we generated [inaudible] of comps in 4 of our 5 brands. America's Best and Eyeglass World drove the growth with gains of 10.2% and 9.5%, respectively. Legacy comps increased 4.4% in the second quarter. Of this growth, we estimate 195 basis points of benefit from incremental eye exam revenues tied to the resulting volume shift from FirstSight.

Turning to income statement highlights on Slide 9, as a result of the strong comp in unit growth, net revenue increased 14.2% to $386 million. We also note that revenue growth benefited nearly 100 basis points from the timing of unearned revenue. Finally, as a reminder, during the first three quarters of 2018, the company will experience the elimination of approximately $5.5 million in revenue and cost associated with FirstSight operational changes that occurred in 2017. In the second quarter, the impact was a reduction to net revenue of $1.8 million, which had the effect of lowering revenue growth by 50 basis points, but no material impact on profitability.

Adjusted EBITDA increased 18.2% and adjusted EBITDA margin grew 40 basis points to 12.1% in the quarter. Adjusted EBITDA growth benefited 630 basis points from the net change in margin on unearned revenue. Costs applicable to revenue increased 13.2% or a decrease of 40 basis points, as a percentage of net revenue versus last year. The decrease was primarily driven by a higher mix of eye exam sales as a result of our growing managed care business and increased eyeglass sales. Optometrist-related expenses reflect expanded coverage, as well as wage inflation in certain geographic markets. As Reade noted, we work very hard to attract and retain optometrists and compensation is obviously an important part of this equation.

SG&A expenses increased 14.1%, or a decrease of 10 basis points as a percentage of net revenue versus last year. The decrease was primarily driven by store payroll partially offset by investment in advertising. During the quarter, we also experienced a continuing year-over-year impact of public company cost. Depreciation and amortization expense increased $2.7 million compared to the second quarter last year. The growth reflects our ongoing investments in new stores, our network of optical laboratories, and our omnichannel-related investments.

Interest expense decreased $5.2 million versus the second quarter of last year, primarily due to lower debt levels driven by the $360 million IPO debt paydown in the fourth quarter of last year. Our effective tax rate of 20.1% reflects the company's reduced federal statutory rate of 21% as a result of the 2017 Tax Act. Also included in the income tax provision for the quarter was an approximate $1.4 million income tax benefit from stock option exercises, which decreased our effective tax rate by 8.4%.

Adjusted net income was $16.2 million, compared to $6.9 million in the second quarter of 2017, and excluded the income tax benefit from the option exercised. Adjusted diluted EPS increased 69% to $0.21 compared to $0.12 last year.

Turning to Slide 10 and first half 2018 results, we are pleased with our first half results, with adjusted comparable store sales growth of 6.5%, net revenues up 12%, and adjusted EBITDA up about 10%. Our performance highlights the resiliency and consistency of our business, despite quarter-to-quarter fluctuations. The peak selling season extended between the first and second quarters, primarily due to the timing of tax returns and also exacerbated by inclement March weather. Our business was resilient to these factors and delivered consistent results over the entire first half.

Adjusted EBITDA margin decreased by 30 basis points to 13.6%. Adjusted EBITDA grew at a slower rate than net revenue, primarily due to higher optometrist cost, investment in advertising, and public company cost.

On Slide 11, at the end of the second quarter our total debt was $574 million and our cash balance was $35 million. Net debt to adjusted EBITDA was 3.2x or similar to the first quarter. Year-to-date, we've invested $49 million in capital expenditures with the majority of this capex focus on growth initiatives. Cash flow provided by operating activities increased over $10 million. We continue to assess potential growth investments and would approach such decisions with the strict capital discipline we have always employed, with a goal to deliver investment returns that drive shareholder value. We are also continuing to evaluate options that would result in balance sheet enhancements over time.

Turning to Slide 12, based on our first half performance, we are reaffirming our fiscal 2018 outlook as indicated in our release of preliminary second quarter results on July 23rd. Net revenues of $1.485 billion to $1.515 billion, adjusted comparable store sales growth in the range of 3% to 5%, opening approximately 75 new stores, adjusted EBITDA between $172 million and $177 million, and adjusted net income between $52 million to $56 million. While we are pleased with our first half of adjusted comps of 6.5%, we believe it is prudent and responsible to continue to plan the business in the 3% to 5% comps range.

As a reminder, we are facing more difficult comp comparisons than we faced in the first half of the year, especially in the fourth quarter, and our business can fluctuate quarter to quarter, as demonstrated by our first half performance. Store openings this year will be predominantly America's Best locations, with the remainder being Eyeglass World stores, similar to the mix of openings between these brands in 2017. We have made good progress on our store opening plans for 2018. The remainder of our openings for the year should be relatively consistent between the third and fourth quarters. We project a few closings, as is typical each year.

While we do not provide quarterly specific guidance, we do want to highlight factors that may affect quarterly comparisons for the remainder of 2018. Our adjusted EBITDA outlook includes incremental public company costs, which we now expect to be in the vicinity of $3 million for 2018, up from our previous estimate of over $2 million. You'll recall that the grow over for public company costs end in the third quarter. We are highly focused on managing these, as well as other costs in an environment of rising wages.

We continue to reinvest in growth and build out our omnichannel capabilities. As we've previously noted, unearned revenue is a factor with quarterly fluctuations. Unearned revenue had a favorable 630 basis point benefit to the second quarter adjusted EBITDA, and we extend the trend to reverse with a negative impact in the third quarter.

Finally, as a reminder, advertising expense was leveraged in the third quarter of 2017 due to timing. Consequently, we expect to incur higher advertising expense in the third quarter of this year. For modeling purposes, we continue to expect our full-year 2018 tax rate to be approximately 26%, excluding the impact of stock option exercises, which could cause some fluctuations in our quarterly effective tax rate.

Finally, we reiterate our estimates of annual interest expense of $37 million to $38 million, depreciation and amortization of about $72 million to $73 million, and capital expenditures between $100 million and $105 million. As a result of stock option exercises, we would expect continued growth in our shares outstanding. In summary, we remain focused on delivering our financial commitments for 2018, and executing our key growth initiatives. Now, I'll turn the call back to Reade.

Reade Fahs -- Chief Executive Officer

Thank you, Patrick. Turning to Slide 13, I want to point out that the month of August takes on a special importance in the optical industry. August is national eye exam month, children's eye health and safety month, and children's vision and learning month. Annual eye exams are important for everyone, but especially kids and teens. As the back-to-school season kicks off, it's estimated that approximately 50% of children have not had an exam in the past two years.

Beyond our company, our work and support of global optical philanthropic efforts continues. As evidence of their importance, a landmark study published last month in the global health journal, The Lancet, quantitatively proved the immense impact an improved eyesight can be have on productivity and income, especially in low and middle-income countries. Eyeglasses were provided to a group of tea pickers in India and their productivity improved 22% and for those over age 50, it improved 32%. As quoted last quarter from a New York Times article, "Untreated vision problems are the biggest health crisis you've never heard of."

In summary, I'm pleased with our second quarter and first half results. I want to thank our entire team at National Vision, the 11,000+ associates, including the 2,000 optometrists who every day provide much needed medical services to patients at our over 1,000 storefronts. We strive to be the best at providing low-price exams, eyeglasses and contact lenses, while both at home and abroad we work to bring glasses and consequently sight and improved quality of life to those who would be unable to see well otherwise. As I noted on past calls, this is why we believe optical retailing is a noble profession.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the # key. As well, we do ask that you please place your line on mute once your question has been stated to prevent any background noise during response. Once again, ladies and gentlemen, that is * then 1 to ask a question. Our first question comes from Simeon Gutman with Morgan Stanley. Your line is now open.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks. Good morning. It's Simeon Gutman. Reade, I want to start with two longer-tailed revenue questions. First, on managed care. If you could talk about if there's any longer term percentage of sales that the business could eventually derive from that segment. And two, Walmart. I think we've talked about this pretty often, but potentially expanding the relationship over time.

Reade Fahs -- Chief Executive Officer

On both those, managed care has for years been a steady grower as a percentage of sales for us. That is expected to continue along the way. We came to managed care sort of late to the party. When we bought America's Best, it had no managed care. So, we were starting from scratch on that and we've grown consistently since then. But we remain underpenetrated relative to the category on managed care, given that a lot of our target audience doesn't have vision insurance. When it's your money, you seek out the best value and we think we provide the best value in optics in America. Managed care continues to grow. Still underpenetrated. Still under half of our business.

In terms of the Walmart relationship, the Walmart relationship is strong. We've been Walmart's partner for over 27 years now and I've been the Walmart account executive for the past 16 years. It's a very good, healthy relationship and we're pleased to be able to partner with them. One of our key strategies is to strive to be the best partner Walmart has ever had. But no further news there.

Simeon Gutman -- Morgan Stanley -- Analyst

Great. My follow-up is you mentioned some advertising, I think incremental in the third quarter. Has that been planned from the beginning of the year and is that related to America's Best, EGW? Just put some color on that, please.

Patrick R. Moore -- Chief Financial Officer

I'll take that, Reade. In general, the advertising plans are fairly set at the outset of the year, Simeon. But we'll tweak those a bit as we move through the year. I think one of the main call-outs that I was trying to make as I was discussing a few points on the third quarter was last year in the third quarter of '17, we de-levered in terms of advertising. Actually, we levered. My bad. This year, we expect that to be more normal. We are advertising in EGW. We're running the new ads there. We've been very happy with those results. We're in all stores now and we continue to press the Owl advertising as well.

Reade Fahs -- Chief Executive Officer

That was pretty neat for -- go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Sorry. I was going to connect to that. When you measure ROI on advertising, because it's less of a cyclical business that's just more stable over time, are you measuring it in a 3-month? Are you measuring at 6 months? What's the timeframe? I was asking more in the context of thinking about the sales guidance that said you were being prudent, but I'm thinking if there's a return that comes quicker.

Patrick R. Moore -- Chief Financial Officer

We monitor different aspects of the ROI on our advertising and in different ways. There's some of it that is very quantifiable like direct mail and our online advertising that's very tangible. With advertising, we tend to test different levels at different times on a test versus base versus control basis. If that answers that. We look at it in different ways depending on the medium.

Operator

Thank you. Our next question comes from Matt Fassler with Goldman Sachs. Your line is now open.

Matthew Fassler -- Goldman Sachs -- Analyst

Thanks a lot and good morning, everyone. My first question relates to EGW. You talked about the Mr. World campaign. You talked about extending that. Could you just give us a bit more color on the timing of that rollout, the impact that you think it's had and the progression of any additional impact you think it might have, as that business has had two very good comp performances in a row relative to America's Best.

Jeff McAllister -- Chief Operating Officer

This is Jeff McAllister. I'd be happy to take that. As you commented, we're very excited EGW's advertising campaign. We think Mr. World has had a very positive impact on the marketplace. Customer response as well as our associate response has been quite good. We continue to reinvest in that and tool for the future so that we can build on that campaign. I think you'll see more innovation in time to come.

Reade Fahs -- Chief Executive Officer

It's not just that. I think there's been a lot of operational pieces too that have gone into that. There are a few different levers. Advertising has been one, but there are many. I just would like to point out for the first half, Eyeglass World's comps were actually better than America's Best.

Matthew Fassler -- Goldman Sachs -- Analyst

And then secondly, just on the net margin on unearned revenue, we continue to get our feet we with this convention and learn how to model it. Can you talk a bit about where that is evident? I know you quantified it, which was very helpful, in your remarks. Where we see it in the P&L and to the extent that we model some give back in the second half of the year as per your indication, where we would withhold that from?

Patrick R. Moore -- Chief Financial Officer

As you think about the unearned revenue, it's a timing adjustment, GAAP adjusted that we make. It affects the last 7 to 9 days of the quarter. It's essentially at the end of one quarter you defer revenues and you recognize, you do the same, you compare that year-over-year. Typically, the pattern is for companies that are growing like ours, it's going to be a net negative. By the time we get to the end of the year. If I look at 2016 and 2016, Matt, that was like negative $1.5 million and negative $2 million net only year. There's some seasonality that affects that.

There's also customer behavior in terms of how quick they get their glasses. You can see weather interruption. It was a negative in Q1. We called it out. It was a positive in Q2. Net at mid-year, it's a net positive. We expect it to go a little negative, to reverse and go negative again in Q3 and Q4. Again, I would just do the math and assume that we would probably be in that negative 1 to low single digit millions number for the full year.

Matthew Fassler -- Goldman Sachs -- Analyst

Thank you.

Patrick R. Moore -- Chief Financial Officer

It's very difficult to model. We're happy to spend more time offline talking through that. But that will at least get you in the vicinity.

Matthew Fassler -- Goldman Sachs -- Analyst

Got it. Appreciate it.

Patrick R. Moore -- Chief Financial Officer

And in terms of our P&L, it's in that reconciliation column. The unearned revenue is in the product section and the deferred is in the services. Then you also can see the cost, you can see the margin on the unearned revenue. But it's in segment reporting in the reconciliation. It's very clearly called out.

Operator

Thank you. Our next question comes from Zach Fadem with Wells Fargo. Your line is now open.

Zachary Fadem -- Wells Fargo -- Analyst

Good morning. Can you talk a little more about managed care? Nice to see that business continues to gain traction, but across your stores, do you tend to see a greater incremental benefit at Eyeglass World, just given the higher price point and branded sales or would you say that when you penetrate managed care, that new impact is spread more evenly across the business?

Reade Fahs -- Chief Executive Officer

I think the factor that influences this the most is sort of when certain plans became available to certain brands. So, you're 30,000-foot logic is there, and so there's nothing wrong with that logic, but it's sort of different plans and payers came live with different brands at different times. There's a ramping as new plans come to this and that's a larger factor in the percent managed care that each different brands achieves. It is different for each brand, but again, the broad trend is an upward slope.

Patrick R. Moore -- Chief Financial Officer

I would add, and I think we've said this before, we've started from zero with America's Best in 2005. So, it's also a function of how long has that been a component of the brand's customer base?

Zachary Fadem -- Wells Fargo -- Analyst

Got it.

Reade Fahs -- Chief Executive Officer

Hope that answers your question.

Zachary Fadem -- Wells Fargo -- Analyst

Yeah, thank you. That's helpful. Then just also, I'm sorry, did you have something else to add?

Reade Fahs -- Chief Executive Officer

No, but it's a lot about the consistency of the story. It's a steady thing.

Zachary Fadem -- Wells Fargo -- Analyst

Okay, thanks, Reade. Just now that you're a full year in on some of your newer market stores, California, for example, I'm curious if you could talk about how those stores have performed relative to your internal expectations, both in terms of Year 1 sales and also payback versus your internal models?

Reade Fahs -- Chief Executive Officer

We really, both in terms of geographies and in terms of vintages, for competitive reasons, we don't like to go into detail on either of those pieces often because of vintages and the geographies are known by our competitors, so we really don't drill down that deeply.

Zachary Fadem -- Wells Fargo -- Analyst

Understood. Thanks, Reade.

Patrick R. Moore -- Chief Financial Officer

I would just add, like all new markets, we're continuing to ramp, continuing to build awareness, especially in new markets. These typically take historically 3 to 5 years to mature and we've been pleased in our new markets in terms of ramping and finding the customers and developing more customers that we think can be long-term loyal customers.

Reade Fahs -- Chief Executive Officer

That is the nice thing about this industry is with a roughly 2-year purchase cycle, that first year we saw new customers for the first year or two and then the third and fourth year is when you compound on top and you still have new customers coming in, but you also get repeat customers and that's just a nice thing about the industry and the ongoing ramp that comes of it.

Zachary Fadem -- Wells Fargo -- Analyst

Thanks, guys.

Operator

Thank you. Our next question comes from Paul Lejuez with Citi Research. Your line is now open.

Paul Lejuez -- Citigroup -- Analyst

Thanks. Just curious, as you look back at the first half, obviously there was some shift between the first quarter and second quarter. But curious when you look at the first half as a whole. Where did you outperform your expectations versus where you think you might have been able to perform a little bit better?

Reade Fahs -- Chief Executive Officer

Well, we're happy with the first half and we said frequently it's a business better looked at it has than in quarters, especially, I think this is a great example, sort of all those storms in March and timing of factory [inaudible] spread things, the March, April spread, which now one could see when you look at the first 6 months. But we're pretty darn happy with the first half because there was nice consistency across the business. So, I'm not sure what to add there. We're pretty happy.

Patrick R. Moore -- Chief Financial Officer

Obviously, Paul, our comps were outside of the north end of the range. We're pleased with that. We like to stay a little conservative on that as we look out over longer periods of time. Revenues outpaced profit growth. We listed a few of the factors, the wage pressure and investments in advertising, and then the pub co. None of those were really unexpected. I would say looking at the balance for the first half, we are happy with the foundation that created for the rest of the year.

Reade Fahs -- Chief Executive Officer

Maybe in foresight saying we're pleased with what Mr. World's delivered for us on Eyeglass World. The first quarter was more in test mode. We're in the majority of the markets, but still in test mode. As that caught fire, that was good.

Paul Lejuez -- Citigroup -- Analyst

Gotcha. Thanks. Are there any other signs of relaxation of the cost pressures on the optometrists' wages that you're seeing now or should we expect that's going to be a continued drag for the foreseeable future?

Jeff McAllister -- Chief Operating Officer

This is Jeff. The first thing I'd say is that we're just really delighted to be able to attract and retain our doctors. We think that's the way to continue to drive a healthy business. We feel like, again, it will continue to be an opportunity for us to be able to pay them appropriately and we're going to maintain what is competitive in the marketplace and that's very local in the way that we think about it. So, again, we're pleased with the current performance. We think that we can continue to be the best place for an optometrist to join us and to stay for their entire career. We actually think that, again, they provide a great service to our customers, so we're delighted to pay them what's appropriate for that role.

Paul Lejuez -- Citigroup -- Analyst

Thanks, guys. Good luck.

Reade Fahs -- Chief Executive Officer

Thanks, Paul.

Operator

Thank you. Our next question comes from Michael Lasser with UBS. Your line is now open.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. As we model your comp in the back half of the year, should we just extend out the two years back run rate that you've been experiencing the last few questions and why would it be any less than that?

Patrick R. Moore -- Chief Financial Officer

Well, as I had said, we were pleased with the 6.5% being north of the guidance range, but we're going to probably push you toward our guidance, Michael. We do look at the stacks and understand the stacks. I would simply say the comps in the second half are a little tougher, even with the two hurricanes in third quarter, we produced a 7% last year in Q3 and then part of that recovery shifted in Q4, where we produced a 10.5%. In terms of guidance and giving that, we're pointing you toward that range. We do see the quarter-to-quarter fluctuations. One thing that we have noticed in the past is sometimes with major election cycles, and we have a midterm coming up, we can get a little bit of advertising disruption as local races have priority. I'm not saying we're going to get that, but that's one of the reasons that we're being maybe a little bit careful looking at the second half of the year. So, declaring victory of first half, but it's only half of the year and we just want to be prudent about it.

Michael Lasser -- UBS -- Analyst

Can you give us a sense of any capacity constraints within your business, if you were to see a significant ramp up in some of these growth initiatives? Do you have the capacity to take on more business, for example, from Walmart?

Jeff McAllister -- Chief Operating Officer

I think notwithstanding any specificity, I would say that we continue to look at our long-range planning and evaluate the needs of the business based on customers' demand and then determine what we need in order to be able to provide that. Whether it be RODs, whether it be the equipment, the stores, access, convenience. So, we don't see any constraints that we can't manage in that process and feel like we've got a good idea what it takes to continue to grow year-over-year and to continue to provide outstanding customer service and offer a tremendous value for customers.

Likewise, we build for the future relative to our manufacturing. That's something that takes us at least a year to two to be able to ramp with a new lab, as we've talked about, going in place and we'll be online in spring of next year in Texas. We're excited about that. Again, staying ahead of what we anticipate to be the growth curve. So, again, feel like everything that we can manage is within our control and feel very good about our ability to serve customers based on when they're ready and come to the store.

Reade Fahs -- Chief Executive Officer

Michael, there was another side to your question about sort of talent capacity at the management level. One thing I've always found remarkable about this company is that for most of the leadership of the company, this is one of the smaller companies they've ever worked for. It's not that this is the largest piece, but rather we've been able to attract people who are used to larger entities.

Jeff McAllister -- Chief Operating Officer

I would tag onto that. Frankly, it's just back to the point of our people truly do make the difference in terms of serving our customers, whether optometrists or associates. I think this business and this company has done a great job of staying core to the optometry practice and been a great place for people to come and grow their career. I feel like we've got real opportunities from a tailwind to attract the best talent, not just talent.

Reade Fahs -- Chief Executive Officer

Also, one of the things I've really enjoyed about Jeff being here after coming to us from Walmart, the largest company in America, he's got a lot of ways that just help to make a larger company feel small. I think as we continue to grow in numbers of people and find ways to maintain the intimacy and family like atmosphere of a smaller company, that's useful, and Jeff has brought a lot of that perspective. Because I think that's frankly something Walmart does pretty darn well.

Michael Lasser -- UBS -- Analyst

Thanks for all the helpful color.

Operator

Thank you. Our next question comes from Robbie Ohmes with Bank of America. Your line is now open.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Congrats on another great quarter. My first question is, can you give us any color on that you guys had mentioned the expectation for sales recapture this quarter? Can you give us any color on how much that might've helped on comps? Was it more of an Eyeglass World or where did it help the most?

Patrick R. Moore -- Chief Financial Officer

Thanks, Robbie. Last year in the third quarter, I'm working from memory, I think we listed revenue was impacted in third quarter by about $3.5 million to $4 million, maybe it was $4.1 million. It was about 150 basis points of shift. So, as I talked about that 7% comp in third and 10.5% in fourth, I'd probably normalize that by about 150 bps between the two quarters. The Houston storm affected mainly AB, but there were a few other Walmart brand stores affected. And then Irma, Florida store, heavy impact to EGW. A lot of our EGW stores are in Florida and so we saw a more pronounced impact. I remember from the comps in fourth quarter, you saw that in both brands was very pronounced in EGW.

Reade Fahs -- Chief Executive Officer

Again, the business is just resilient over time. We sell a medical necessity. Good weather and bad. Hurricanes and weird economic cycles. People's eyes just tend to go bad as they age and we provide great value on that. Over time, it all washes out, but it's just over time.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

The other question I had was outside of optometrists, what does the outlook for wages and freight costs and other things look like? It is upticking any faster than you would've been expecting in your plans?

Jeff McAllister -- Chief Operating Officer

This is Jeff again. We continue to see wages within our current plans and don't see anything that's hopping necessarily. Again, I think one of the opportunities that we have is given the fact that we're very core in this space and I think we attract people who really see this as part of a greater calling and part of a mission, if you will, and so we feel like in many respects we're competitive, but we don't have to overpay in order to attract the best talent. Again, that's at the associate level and I think same for the doctors as well.

Relative to freight cost, I think, again, it's a small portion of our overall business. We don't see anything material at this point generating any concern and we continue to find ways to save money as we continue to look for more efficiency and more effectiveness in the way we do our work.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Great. Thanks very much.

Operator

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press * then 1 on your telephone keypad. Our next question comes from Stephanie Wissink with Jefferies. Your line is now open.

Stephanie Wissink -- Jefferies -- Analyst

Thanks. Hi, everybody. We have two questions just in follow-up to, I think it was Paul's earlier question on optometrists' wage inflation. Just curious if you can give us a little bit of a view into is it a supply and-demand issue? Or is it a mix of experience? Are we seeing wage inflation there? It seems like a little bit ahead of what we're hearing broadly across some of the medical industries. So, if you could talk a little bit about is it a pipeline of new optometrists graduating and just seeing less of a supply? Or is it really around the quality, mix of experience and other?

Then Reade, I want to just come back to something you said at the very tail end of your prepared remarks on the pediatric opportunity. Is that, as you look at the business mix, is that a market share opportunity for you to penetrate more deeply into the household budget around optometry or is there something unique that's going on with respect to just the timing of back-to-school and so you made mention of it? Thank you.

Jeff McAllister -- Chief Operating Officer  

Again, we're in a great place for new grads coming out of school as we are for those who have practiced on another form of practice, whether it be an independent or a competitor, if you will. We feel like we can be extraordinarily competitive in a way that causes them to feel like this is a great place to practice and offer them the kind of technology and tools, if you will, in our process is to give them the freedom to really practice optometry as they see best. We think it attracts a certain type of optometrists, but at the same time, we want to make sure that we maintain quality, and so we have a lot of process to ensure that our doctors are practicing with the most care with the patient interest in mind. So, from that perspective, again, we will be competitive from a wage standpoint, but we'll also choose our doctors carefully to make sure that they fit what our needs are and that we have somebody that we can continue to work with for their career.

Reade Fahs -- Chief Executive Officer

You'd also asked about the schools. Actually, schools keep opening, so I think it was a decade ago there were 18 optometry schools in the U.S. and now there are 25, with discussion of adding more. So, that should be a help to us over the long-term. On your question about the pediatric side, I would say overall there is nationally and internationally a heightened awareness that kids' vision plays a role in their education and their potential. There's more and more realization of oh, my goodness, a portion of educational shortfalls relates to a kid not being able to see well.

So, this is one of the rising tides of our industry domestically and globally that often when you think about demographics in our category, you think about people get older and their eyes go bad. But there is a heightened awareness that vision plays a role in education and the things I alluded to were just part of the drip, drip, drip of added awareness to this. I'm not expecting on our next call to say that children's glasses is a wildly bigger percentage of our business than it was this time last year, but I will say that I think it's a trend over the next 5 to 10 years, a higher percentage of kids, we're going to catch their vision problems and there are probably going to be more vision problems given the differences in eye strain associated with screens.

Frankly, there's a lot of studies out of China now talking about how kids not spending enough time outside stunts their vision. Of course, that's something that's happening here as well. So, broad trends, yes. Near term jump, no. Just another factor in why we are confident in the long-term faith in this industry overall. Again, another reason why we're so involved in the Boys and Girls Club program, because that's philanthropically a place where we can really make a big impact on the education of kids in America.

Stephanie Wissink -- Jefferies -- Analyst

Very helpful. Thank you. I just have one housekeeping. I'm just curious, can you remind us what your sourcing structure looks like and if you're seeing any vendor surcharges or projected cost impediments from some of the trade conversations?

Reade Fahs -- Chief Executive Officer

The only trade-related thing is eyeglass cases, which is just not material. So, no dramas there.

Stephanie Wissink -- Jefferies -- Analyst

Thank you.

Operator

Thank you. I'm showing no further questions in queue, so I'd like to turn the conference back over to Mr. Fahs for closing remarks.

Reade Fahs -- Chief Executive Officer

Thank you so much. We want to thank you all for joining us today on this, our fourth quarterly investor call. We thank you for your continued interest in National Vision. If you have a minute, I'd invite you to go online and watch our latest television ads. We've got them both for America's Best, the Owl campaign, and the Mr. World campaign for Eyeglass World. It's on a link on page 22 of our presentation.

For all the reasons I hope you heard here, we remain excited about the opportunities for the rest of 2018 and for years and years to come. We're looking forward to speaking with you again later this fall, when we report our third quarter results. Thank you all very much.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.

Duration: 50 minutes

Call participants:

Reade Fahs -- Chief Executive Officer

Patrick R. Moore -- Chief Financial Officer

Jeff McAllister -- Chief Operating Officer

David Mann -- Vice President of Investor Relations

Simeon Gutman -- Morgan Stanley -- Analyst

Matthew Fassler -- Goldman Sachs -- Analyst

Zachary Fadem -- Wells Fargo -- Analyst

Paul Lejuez -- Citigroup -- Analyst

Michael Lasser -- UBS -- Analyst

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Stephanie Wissink -- Jefferies -- Analyst

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