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National Vision Holdings, Inc. (NASDAQ:EYE)
Q4 2019 Earnings Call
Feb 26, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the National Vision Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your host, Mr. David Mann.

David Mann -- Vice President of Investor Relations

Thank you, and good morning, everyone. Welcome to National Vision's fourth quarter 2019 earnings call. Joining me on the call today are Reade Fahs, Chief Executive Officer and Patrick Moore, Chief Financial Officer. Earnings release this morning and the presentation, which will be referenced during the call are both available on the Investors section of our website, nationalvision.com and a replay of the audio webcast will be archived on the Investors page after the call.

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

The release and today's presentation also includes certain non-GAAP measures. Reconciliation of these measures are included in our release and the supplemental it presentation. We also would like to draw your attention to Slide 2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. As a reminder, National Vision expects to provide certain supplemental materials or presentation for investor reference on the Investors section of our website.

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 sharing our fourth quarter results with you today. If you turn to Slide 4, Q4 was a strong quarter for us, capping off another record year for net revenue and adjusted EBITDA. We are pleased to report our 72nd consecutive quarter of positive comparable store sales growth. That's 18 years of consistently healthy quarterly comp. We remain pleased with the consistency and durability that this track record reflects.

Q4 adjusted comparable store sales growth was up 8.1%. Comps were once again led by our growth brands with a 9% comp increase at America's Best and a 6.4% comp increase at Eyeglass World. Also, I'm quite pleased with another solid quarter at our Legacy segment, which delivered a 5.1% comp increase for its second consecutive quarterly increase over 5%. Note that our Legacy locations averaged 24 years of age. So it's nice to see such strong performance from such established stores.

We opened eight new stores in Q4 and ended the quarter with 1,151 stores for a 6.4% increase in store count in the past year. The comparable store sales growth and unit growth combined to drive a 12.9% increase in net revenue. Adjusted EBITDA increased nearly 38%. And adjusted EPS increased to $0.11 versus $0.01 last year.

An important sign of customer satisfaction and ambassadorship is net promoter scores, which we track closely. Our NPS for each of our brands remained at or near record levels this year. With our 10-K filing today, we're pleased to share that the previously reported material weakness has been remediated. I appreciate all the hard work from our accounting and finance teams to deliver this accomplishment.

Since year-end, we have two additional noteworthy achievements to share as a result of expanding partnerships. First, we announced an amendment to our existing contract with Walmart, our strategic partner for the past 30 years. This amendment added five additional Vision Centers in Walmart stores to our contract to bring our total to 231. This marked the first time in 26 years that Walmart gave us more Vision Center locations to operate. We are excited by this opportunity and are working closely with Walmart regarding the logistics to take over the operations of these Vision Centers as soon as is practicable. The amendment also extended our existing contract for six months to February 23, 2021. Overall, this agreement further strengthens our relationship with Walmart and grows our footprint. Given conversations with Walmart are ongoing, we will not be commenting further on the contract or our relationship on this call.

Second, our merchandising team continued to work delivering assortments that exceed customer expectations all at great values. Last month, we expanded our relationship with the affordable celebrity eyewear brand, Prive Revaux to all our America's Best locations. The expansion comes after a successful pilot program at select America's Best stores last year. With our strong Q4 performance, we're pleased to have exceeded our fiscal 2019 outlook and enter fiscal 2020 with good operating momentum. In a few minutes, Patrick will take you through our Q4 results and our 2020 outlook in more detail.

Turning to Slide 5. 2019 was again filled with a number of highlights at National Vision. We expanded our footprint, increased market share and continued to reinvest in our business toward future growth. The optical retail market remains highly fragmented and we continue to see a large opportunity in front of us. We expanded our centralized lab network with our new Texas facility, which has ramped on schedule and added capacity to support our growth.

Our management team has continued to evolve over the last couple of years. Many of the senior executives that came together to build the company in the early 2000s have reached retirement age. We're pleased that this transition continues to go smoothly as demonstrated by our consistent performance. We are fortunate to have attracted new executives with strong skill sets and fresh perspectives, while continuing to foster the same vibrant culture that has served us quite well.

We continue to enhance our balance sheet with a successful debt refinancing this summer, followed by a $25 million debt pay down in Q4. Our 14-year ownership by private equity came to an end as KKR and Berkshire Partners both exited their remaining ownership positions by last summer. This concluded the chapter of our very successful relationships with both groups. We wish to thank both Berkshire Partners and KKR for the important role they played in our growth. We strengthened our board of directors with the addition of another Independent board member, Heather Cianfrocco who has provided valuable managed healthcare insights and other stewardship since joining in 2019.

Lastly, we also made considerable strides in our social mission at our growth brands. During the month of November and December, our America's Best teams launched a Holiday Give-Back initiative and donated free eye exams and eyeglasses to over 8,100 children in need. During 2019, Eyeglass World rolled out its Made Locally, Given Globally program and made free prescription eyeglasses that are going to 50,000 underprivileged people around the world.

Turning to Slide 6, it was another quarter of positive comps, further demonstrating the consistency in store performance and comp store sales gains. The graph highlights our 72 consecutive quarters of comparable store sales growth. Our comps during this 18-year streak have been consistent over time and across the economic cycle, which we believe is one of the nice benefits of a purchase tied to a medical necessity. People will need to see to get through the day and eyeglasses and contacts remain the primary way to correct for vision loss.

Comps in the quarter were driven primarily by increases in customer transactions as traffic trends accelerated from the third quarter. Our comp trend was consistently strong throughout the quarter. We experienced continued comp strength at our growth brands, continued momentum at our Legacy segment and positive trends at our host brands.

The Legacy segment posted its second consecutive quarterly comp increase in excess of 5%. We are encouraged by the energy and execution being delivered by the team and believe that our patient and customer engagement initiatives are the key factor driving this performance. Overall, our consistent positive comp results continue to reflect the benefit of operating in the growing value segment of an attractive industry, having a leadership team of optical experts focused on customers and patients, marketing, operations and merchandising strength, new store growth, as well as comparable store sales growth in our more mature stores driven by loyal customers and positive word of mouth.

With our double-digit net revenue growth in 2019, we believe that we continue to gain share in this highly fragmented $36 billion U.S. optical retail market with our low-cost operating model. Of course, our performance is at its core, a testament to the store level execution of our teams and their commitment to customer service every day and in every store one patient and one customer at a time.

Turning to Slide 7. Our strong results were fueled by another quarter of solid operational performance. We look to continue to execute against each of our core growth initiatives. First, new stores are a primary focus as we continue to see a sizable white space opportunity. We plan to open approximately 75 stores in 2020 following the formula-based approach that has worked so well for us historically. We have a solid pipeline of specific locations for this year and into 2021.

A key to our ongoing success is our ability to attract and retain optometrists. We are an optometrist-centric company and want to be the place of choice for optometrists, whether it be new graduates paying off their student loans or experienced optometrists looking for the ability to focus on pure optometry without the burden of running their own stores. As such, we continue to invest in our optometrist recruitment and retention program. We believe these investments are paying off as our overall optometrist retention rate remains at record levels. This quarter we believe that our healthy optometrist coverage helped to drive patients traffic as we work to fill the ever-growing demand for eye exams in our stores.

Second, we believe we are well positioned to deliver another year of comparable store sales growth in 2020. Our key comp drivers remain the comp waterfall from maturing new stores, marketing and vision insurance initiatives. Our stores take several years to mature as the patients and customers awareness builds. It can take time for potential patients and customers to find a store given an infrequent purchase cycle that averages two to three years. When our patients and customers are in the market, we strive to deliver incredible values that attract them to our stores. We have maintained our introductory offer at America's Best, two pairs of eyeglasses for $69.95 including a free comprehensive eye exam for over a decade.

Another great example is our new line of Prive Revaux glasses which are also available at an attractive value. We're pleased to offer this fun and stylish celebrity endorsed assortment to our America's Best customers. And given we have exclusivity for prescription optical products, we are the only U.S. optical retail chain that can offer them.

At Eyeglass World, we offer two pairs of glasses for $78 along with the opportunity of same-day service from our in-store labs, also represents one of the best values in the industry. We believe that the combination of low prices and excellent customer service leads to satisfied repeat customers and positive word of mouth as customers tell their friends how little they've spent and the great service they received at our store. In 2019, approximately 65% of customers in mature stores were existing customers.

We continue to invest in marketing to attract new customers, as well as remind existing customers to come back for another great experience. Television advertising remains our primary marketing vehicle and our marketing team continues to come up with catchy new versions of our Owl and Mr. World advertising campaign. In particular, our Owl campaign has played for years and continues to resonate with customers by humorously reminding them that they paid too much if they didn't shop America's Best. We've provided a link to our website at the end of the presentation where you can watch the newest commercials for our brands.

Our marketing efforts also utilize our robust CRM system. And we believe that our CRM initiatives help to enhance our relationships with existing customers to drive retention. We're quite pleased with the effectiveness of our marketing campaigns this quarter. Overall, we believe that our investments in marketing are paying off and a factor in our strong gains in customer traffic and market share.

Participation in vision insurance programs remains a positive comp driver. Healthy net revenue growth tied to these partnerships continued in the fourth quarter. We believe a factor behind this growth is that vision insurance dollars in general tend to go further at our stores. We remain underpenetrated relative to the industry for the percentage of our business coming from vision insurance. Net revenue tied to vision insurance, while fast-growing, remains a minority of our net revenue. Thus, we see continued opportunity for growth.

As a value retailer, we promote a low cost culture at National Vision. We know we can't be every day low price without every day low cost. As we've noted in the past, our centralized lab network is a key reason that we are every day low cost. Our newest state-of-the-art lab in Texas continues to ramp its production on schedule and we're pleased to have this added capacity to support our future growth.

We continue to progress our omnichannel efforts to improve the customer experience and operating efficiency. We appreciate the importance of data science and are focusing on optimizing the usage of our data. Our focus is on all aspects of the customer journey in order to improve engagement and reduce costs. Our patients and customers appreciate such things as the ease of being able to schedule appointments online.

I'd like to take a moment to provide a brief update on two issues tied to products that we import from China, tariffs and the new coronavirus. Regarding tariff, with the Phase 1 trade deal signed in January, the tariffs on List 4A products, which represents most of our exposure, were reduced from 15% to 7.5% effective in mid-February. We're pleased with this development. We continue to monitor ongoing developments, as well as continued progress, our tariff mitigation efforts.

In terms of the coronavirus, we like everyone else are monitoring the ongoing situation closely. Most importantly, I first want to acknowledge our concern for all the people, including employees of our lab partner and suppliers who -- whose lives are affected by the recent outbreak in China. Our hearts go out for them. To date, we've not observed any significant impact to our business and we're well-inventoried for the first half including our peak season, but this is of course a fluid situation, which we will continue to monitor. Overall, we are real pleased with our Q4 and 2019 performance. As we look at 2020, we continue to believe that we are well positioned in a very attractive industry and are confident in our growth strategies to build the business for the long-term.

At this point, I will hand the call over to Patrick.

Patrick R. Moore -- Chief Financial Officer

Thanks, Reade, and good morning, everyone. Turning to Slide 9. As Reade noted, our business performed very well in the fourth quarter and full year of 2019. During the quarter, we opened eight stores and closed two stores. For the year, we successfully achieved our plan to open 75 stores, while closing six locations. Store openings have been predominantly America's Best locations with the remainder being Eyeglass World stores. For these two growth brands combined, unit growth increased 9.1% over the last 12 months.

We are pleased with our 2019 store additions. These stores were both in existing markets, as well as in-fill and newer markets. In our newer markets, we continue to expand our store base and invest where our new stores are ramping and building awareness. We note that the majority of our new stores have historically taken approximately three to five years to mature and payback invested capital. We remain positive about these newer 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 increased 8.1% during the quarter. Once again, we experienced comp growth in both eyeglass and contact lens categories. The comp growth was driven primarily by an increase in customer transactions, more importantly, eyeglass comps were driven entirely by the increase in customer transactions. In terms of contact lenses, comps were primarily driven by average ticket as our contact lens customers are increasingly adopting newer technology lenses that have higher prices, which is a trend that we expect will continue.

In the fourth quarter, we generated robust comps in our growth brands as America's Best and Eyeglass World produced gains of 9% and 6.4% respectively. Legacy comps increased 5.1% in the fourth quarter. Of this growth, we estimate 140 basis points of benefit from incremental eye exam revenues tied to a shift in optometrist from our FirstSight subsidiary to the legacy segment. As a reminder, this will be the final quarter in which this shift will have an impact on legacy comps as it was completed in the fourth quarter of 2018. Overall, we are extremely pleased with the continued top-line momentum in our business.

Turning to the income statement highlights on slide 10, as a result of the solid comp and unit growth, net revenue increased 12.9%. Cost applicable to revenue increased 8.1% or a decrease of 200 basis points as a percentage of net revenue versus last year, which was favorable as compared to the range we provided last quarter. The improvement primarily reflected higher eyeglass margin, a higher mix of reimbursed eye exam sales and lower growth in optometrists related costs despite increases in store coverage levels.

SG&A expenses increased 7.2% or a decrease of 240 basis points as a percentage of net revenue versus last year. Adjusted SG&A expenses increased 12.1% in the fourth quarter versus last year or a decrease of 30 basis points as a percentage of net revenue. We are pleased with the leverage of store payroll that we achieved this quarter, which was partially offset by higher performance-based incentive compensation.

Adjusted EBITDA increased 37.9% and adjusted EBITDA margin increased 180 basis points to 9.9% in the quarter. The increase in adjusted EBITDA margin was primarily due to our higher eyeglass margin, store payroll expense leverage, and the net change in margin on unearned revenue. The net change in margin on unearned revenue lifted adjusted EBITDA growth by 14.6% and we would expect that this timing benefit will reverse to some extent in the first quarter of 2020.

Adjusted net income increased to $8.7 million in the quarter, adjusted diluted EPS increased to $0.11 versus $0.01 last year. Bottom line, we achieved solid flow through again this quarter as we generated strong incremental margin on higher sales. In addition, while the fourth quarter is our seasonally low period for sales and profitability, we are very pleased by the strong level of earnings that were generated.

Turning to slide 11 and 2019 results, our full-year '19 results reflect the consistency and predictability of our business model with adjusted comparable store sales growth, up 6.2%, net revenue up over 12% and adjusted EBITDA growth, up 15%. Adjusted EBITDA growth was negatively impacted by 0.5% due to the net change in margin from unearned revenue. Adjusted EBITDA margin increased 30 basis points to 11.6% and improved despite two factors. First, the incremental AC Lens contact lens distribution business growth resulted in an approximate 30 basis point headwind. In addition, adjusted EBITDA margin included a 25 basis point impact from the significant cyber security investments we made. National Vision has now completed its second full year as a public company. Compared to our 2017 results, net revenue and adjusted EBITDA have risen at a compound average growth rate of 12% and 12.5%, respectively. As we have said, our business has performed consistently over time.

Before shifting to the balance sheet, please note that we have again included an explanatory slide on unearned revenue in the Appendix section. This illustration is intended to help unpack how unearned revenue is somewhat unique to our service-based business model versus more traditional retailers, as well as the typical seasonal impact on our income statement.

Now turning to slide 12, at the end of the fourth quarter, our total debt was $570 million. Our cash balance was $39 million, were up over $22 million year-over-year. During the quarter, we used cash on hand to make a voluntary $25 million prepayment on our Term Loan. Net debt to adjusted EBITDA was 2.6 times, an improvement from 3.2 times in the fourth quarter of last year and our pre-IPO ratio of approximately 6 times. We remain committed to further deleveraging our balance sheet and are targeting the 2.0 times range over time organically and with future potential debt repayments.

In 2019, we invested $101 million in capital expenditures, slightly below the 2018 level. The majority of the capex was focused on growth initiatives. With our 12% top-line growth and stable capex, we reduced our capital intensity to 5.9% in 2019 from 6.8% during 2018, which remains an ongoing strategic focus.

Another 2019 highlight was the accelerating free cash flow characteristics of our business, which reflect our consistent performance and reduced capital intensity. Cash flow provided by operating activities increased $58 million versus last year. During the year we deployed $50 million in cash toward stock repurchase and debt pay down, while ending the year with a higher cash balance versus the prior year.

Overall, we made tremendous progress in enhancing our balance sheet and debt profile this year, including the term loan refinancing in July, which lowered our borrowing cost. While we look to achieve continued improvements in our leverage ratios, we remain comfortable with our leverage levels today, given our health services business tends to perform well across the economic cycle.

Before I discuss 2020 outlook, please turn to slide 13. As noted in today's earnings release, we're making several changes to our key, non-GAAP financial measures that are incorporated in our 2020 outlook and will be effective in our reporting during the first quarter of 2020. Let me take just a moment to unpack these changes. First, we're introducing two new non-GAAP measures, adjusted operating income and adjusted operating margin. You can see that adjusted operating income is included in our 2020 outlook. As we continue our evolution as a public company, we will be transitioning in 2020 to place more emphasis on adjusted operating income in lieu of adjusted EBITDA, with adjusted EBITDA being a measure that is more commonly used in the private equity sector. For consistency and transparency, we will continue to provide adjusted EBITDA as a reported measure and in our 2020 outlook. Similarly, we are also transitioning this year to emphasize adjusted diluted EPS in lieu of adjusted net income.

Second, we are presenting new definitions of certain non-GAAP measures that include fewer adjustments. Specifically, in 2020, we will no longer adjust for new store pre-opening expense and non-cash rent in adjusted EBITDA or adjusted diluted EPS. These changes are being implemented, as a result of our ongoing review of our reporting measures, as well as to enhance comparability with our peers.

Finally, to assist for modelling purposes, we have included supplemental tables that provide historical reconciliations of these measures to the 2020 definition for the last eight quarters in the appendix of today's presentation. This supplemental information was included in the 8-K filed this morning and is also available on our website.

Turning now to our 2020 outlook on Slide 14. Let me begin by pointing out that fiscal 2020 is a 53 week year for National Vision. We estimate that the 53rd week will add approximately $35 million to net revenue with an approximately breakeven impact to adjusted diluted EPS. The projected minimal profitability is due to the expected net change in margin on unearned revenue in the 53rd week. As we included in today's earnings release, our 2020 outlook is as follows: net revenue of $1.875 billion to $1.905 billion, adjusted comparable store sales growth in the range of 3% to 5%, opening approximately 75 new stores, adjusted EBITDA between $210 million and $215 million, adjusted operating income between $120 million and $125 million, and adjusted diluted EPS between $0.80 and $0.85, assuming a diluted share count of approximately 82.4 million shares.

We project another year, our 19th consecutive year of positive same-store sales growth in 2020. It is important to remember that, while we expect our growth brands to continue to perform well, we will be facing challenging comparisons from the strong comp trend for the last five years, especially for our growth brands. As a result, we believe it is responsible to plan a business in the 3% to 5% comp range as reflected in our outlook.

Store openings this year will continue to be predominantly America's Best locations, with the remainder being Eyeglass World stores. Most of our store growth will be in existing markets and continued infill and newer markets. Similar to last year, openings are also expected to be skewed toward the first half of the year. We project a few closings, as is typical each year.

We estimate a slight decline in adjusted operating margin at the midpoint of our guidance range. For full year 2020, as a percentage of net revenue, we expect cost applicable to revenue to increase 20 to 40 basis points as compared to fiscal 2019. For Q1, we expect cost applicable to revenue to be flat to down 10 basis points. As Reade noted, products that we import from China are now subject to the 7.5% tariffs. Our 2020 outlook takes into account these tariffs.

We would expect adjusted SG&A to be relatively flat to slightly leverage as a percentage of net revenue in our outlook. We expect continued wage inflation, as well as investments in marketing this year, while looking to tightly manage growth in corporate expenses. We project depreciation and amortization in the range of $97 million to $98 million including amortization of acquisition intangibles of approximately $7.5 million. Depreciation and amortization in 2020 is expected to grow more in line with the rate of revenue growth, unlike recent years, as capital intensity has improved in recent years. Finally we estimate annual interest expense of $29 million to $30 million and 2020 capital expenditures in the range of $100 million to $105 million.

Regarding the coronavirus, we have not included any impact in our 2020 outlook. As a reminder, as we enter our peak selling season, the timing of tax refunds is a variable that can affect our performance between our first and second quarters. Consequently, we like to look at our business on a semi-annual and annual basis. We would also remind everyone that unearned revenue can affect our quarter-to-quarter comparisons. Unearned revenue had a favorable benefit to the fourth quarter results and we expect the favorable shift to reverse in the first quarter. While the net change in unearned revenue is typically a headwind in the first quarter, we estimate a greater impact this year with net change in margin on unearned revenue projected to impact Q1 adjusted operating income by approximately $3 million or $0.03 in adjusted diluted EPS.

Turning to slide 15, we have included a supplemental table that allows investors to see our 2020 adjusted EBITDA guidance and 2019 results on a comparable basis under the 2020 definition. Adjusted EBITDA of $200.7 million in 2019 that we reported today would have been $194 million under the new 2020 definition. Thus our outlook projects 2020 adjusted EBITDA to grow between 8% and 11% on a comparable basis.

In summary, we are extremely pleased with our consistent performance in 2019. We are focused on executing our 2020 strategic growth initiatives and look forward to delivering another year of consistent growth. At this point, I'll turn the call back over to Reade.

Reade Fahs -- Chief Executive Officer

Thank you, Patrick. Turning to slide 16 and our Moment of Mission, let me introduce Dr. Frank Ptak, an optometrist who practices inside the America's Best in Fort Worth, Texas. Dr. Ptak recently saw a male patient who had been released from the hospital two days earlier with a diagnosis of a concussion and high blood pressure. The patient and his sister came to Dr. Ptak's office straight from a three hour visit with his primary care physician to confirm the concussion and high blood pressure diagnosis and said the patients dizziness was because he had, for some reason, been wearing his sister's glasses. During the eye exam, Dr. Ptak informed the patient that he had or was having a stroke in the back of the left side of his brain. Dr. Ptak immediately referred them to the emergency room and made the sister sign the referral form to show the importance of going. Six days later, the patient and the sister returned to thank Dr. Ptak. They did go to the emergency room and MRI results confirmed the stroke was happening at that moment. The sister expressed that if Dr. Ptak had not had her sign the referral, they would not have gone and her brother would have died. As we've said many times, a routine eye exam is routine until it isn't and Dr. Ptak saved a life that day.

While it's easy to focus on our sales of eyeglasses and contacts, do note that in each of our stores, every day, thousands of patients, primarily uninsured, are receiving sight saving and even lifesaving healthcare from optometrists like Dr. Ptak.

In summary, we are extremely pleased with our fourth quarter and 2019 results, as well as our outlook for another year of consistent growth in 2020. I want to thank our entire team at National Vision, including the over 2000 optometrists, like Dr. Ptak, who provide much needed medical services to patients at our over 1100 storefronts every day. Each year, millions of patients and customers come to us for affordable eyecare and eyewear. We continue to strive to be the best at providing low price exams, glasses and contact lenses, while both at home and abroad, we work to bring glasses and consequently sight and improved quality of life to those who would not be able to see well otherwise. This is why, we believe, optical retailing is a noble profession. With that I'd like to turn the call back to the operator to start the question and answer portion of the call.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Simeon Gutman of Morgan Stanley, your line is open.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, good morning everyone. I have one for Patrick, one for Reade. First on the fourth quarter, can you separate out how much operating margins improved if you want to focus on EBIT or the new adjusted EBITDA margins? If you remove the benefit from unearned revenue, how much of the core underlying? And just to clarify, you said that your adjusted EBIT margin for 2020 is slightly or I think it was flat or slightly down as implied for next year.

Patrick R. Moore -- Chief Financial Officer

Hey, Simeon, good morning. I'll answer the second question first. As we look at margins in the guidance and we're pleased to lay out guidance that shows another good year of consistent growth. At the operating margin level, they are down 10 to 20 bps in terms of the middle of the range. Do note that they're approximately flat at the high end of the outlook. These are based on 3% to 5% comps and obviously we'd look to leverage, should our results be above that range. I would note that there is 10 to 15 basis points of negative impact in those margins relative to the unearned revenue that we'll see next year and in the 53rd week, we'll have none of that revenue, we'll defer a lot of that and we'll have some of the fixed cost, so that's a -- that's certainly a factor but again at the upper-end of the range, we do expect to see flat margins.

In terms of the impact on the growth, I think I noted of the EBITDA growth of 37% or so, about 14%, 15% or I guess 1,460 basis points was due to the unearned. We saw similar occurrence last year and we'll see that turn to a degree in Q1 of 2020.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks for that. My follow-up maybe for Reade. If you look at Q4, it was a strong quarter. The stacks looked pretty good and definitely a sequential acceleration. Can you talk about the impact of flexible Spending, people rushing to use whatever insurance money year-end. And when you do this well in the 4th quarter, does it rob anything from Q1? And then wrapped into that, you must be tracking tax refunds. Is that going to dictate the cadence of Q1?

Reade Fahs -- Chief Executive Officer

So let's see, a few parts. We do benefit from the -- the fourth quarter does benefit from flex spending accounts and people using their insurance and that generally starts through the day after Christmas and that's been a factor in optical retailing for years and years now. So that is real. We don't necessarily see that as something that feels from Q1 because Q1 people sort of reup and a lot of people who had already used their accounts or whatever, get new insurance benefits. And so it's not really -- so the answer is no to that. And what was the second part again?

The refund. Yeah, we are always impacted by tax refunds. That's sort of the timing of them and the extent of them is a factor in our business, and we monitor that on an ongoing basis. But we like to -- this is why we always like to focus people on half, as well as quarters because those things spread out over time. And in the past few years, we've talked about, yeah, please don't look at end of Q1 early Q2, tax refund timing effects that and you look at us over half, it all sort of washes out.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks for the color.

Reade Fahs -- Chief Executive Officer

Thank you, Simeon.

Patrick R. Moore -- Chief Financial Officer

Thanks, Simeon.

Operator

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

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. Patrick, you mentioned in your prepared remarks that you will be facing difficult comparisons and that's one of the reasons why you guided 3% to 5% comp growth for this year. But you've really been facing difficult comparisons for the last few years. So was your comment intended to signal that there is anything different on the horizon?

Patrick R. Moore -- Chief Financial Officer

Good morning, Michael. The short answer is no, we've been pretty consistent about guiding in the 3% to 5% comp range and that's also where we set frankly operating plan expense targets. We think that's kind of a nice conservative approach and had enjoyed seeing what happens with leverage beyond that. So not intending to signal anything different. I'll tell you, we have had a nice five year run of AB comps that were very strong in Q1. That was only the point I was trying to do -- make is remind folks that AB has been strong every quarter. So it's early in the year. We are right out of the gate. We're excited about 2020. Really pleased with what we delivered in '19, as well as '18 and have a tendency to take a prudent posture early in the year.

Reade Fahs -- Chief Executive Officer

And just to add on to that. I mean if you look at our last 18 years, we've averaged about a 5% comp. So again, we've been saying for a long time, we're consistent predictable business over time and through all the economic cycles. But that's how we get to that range.

Michael Lasser -- UBS -- Analyst

Thank you very much. And my follow-up is, you mentioned that the cost applicable to revenue improved in part driven by higher eyeglass margin and lower growth in optometrists-related costs in the fourth quarter. So can you explain what drove those improvements and why would that not continue into 2020?

Patrick R. Moore -- Chief Financial Officer

Okay, sure. In terms of the gross margin in the quarter, we did have -- we did experience higher eyeglass margins. Recall back that we had a new lens contract into effect at about mid-year. And also recall that we had some telegraph to dilution in terms of our new Texas lab ramping. So both of those were helpful to margins in fourth quarter as we saw the results come in.

In terms of the margins for 2020 and Q1, we certainly provided some guidance around that. We do expect to have the full impact of the 15% tariffs, which is kind of level where we were buying inventories for our peak season for a little while longer. But certainly do expect to see gross margins on the year slightly lower, but in the first quarter, a little higher.

Michael Lasser -- UBS -- Analyst

Do you think you've reached this inflection point where optometrists wage pressure is starting to abate?

Patrick R. Moore -- Chief Financial Officer

Yeah. So second part of your question, optometrist wage pressure. In the quarter, we saw a little lower benefit cost per optometrist and we benefited from that in the quarter. I would really point you more to the full year, the full year numbers for optometrists. So in the quarter, revenue growth outpaced optometrist costs. For the full year, those were much closer. I think the cost were just a shade higher than the annual rate of revenue. I am not ready to signal an inflection point, but we have seen some stabilization in that. We do expect -- our guidance assumes that there is continued inflation for wages for optometrists and associates, but again in a more stabilized cut.

Reade Fahs -- Chief Executive Officer

And we are very encouraged by our record levels of OD retention. That says a lot and is a real positive sign for us.

Michael Lasser -- UBS -- Analyst

Thanks a lot, and good luck.

Reade Fahs -- Chief Executive Officer

Thank you, Michael.

Patrick R. Moore -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Kate McShane of Goldman Sachs. Your line is open.

Kate McShane -- Goldman Sachs -- Analyst

Hi. Thank you. Good morning. With regards to the contact growth that you saw during the quarter, I think you said a lot of it had been driven by ticket. But I wondered if there was any traffic commentary that you can point to that's going on in contacts and has it deferred much from what you saw earlier in the year versus Q4?

Patrick R. Moore -- Chief Financial Officer

Yeah. In general, in the quarter, we saw overall comps traffic driving -- outpacing ticket and in eyeglasses it was pretty much a total traffic story. For content lens, we saw good growth there. It was more balanced. I don't think I have a ratio off the cuff to provide, but there was a little more ticket than traffic. And again, that's principally driven by what are consumer patients selecting. And in general, there has been an overall trend in the industry where consumers are picking better technology, more daily lens and certainly the prices are reflecting that.

We obviously can't -- it's an area that we monitor closely in terms of pricing because in general contact lens are a fairly commoditized product, you can get them online, as well as in-store and we want to make sure our prices are competitive. So the price impact of the contact lens is more about what are patients choosing versus what are we selling and at what price.

Reade Fahs -- Chief Executive Officer

But it was nice that we saw traffic growth on contact lenses as well as ticket growth.

Kate McShane -- Goldman Sachs -- Analyst

Okay, great. And then my follow-up question is, you've talked about the opportunity of getting more growth from being cited in the insurance plans, etc. I just wondered how we should think about the contribution of this possible growth opportunity in 2020 and its contribution to comp?

Reade Fahs -- Chief Executive Officer

Well, we think that managed care will continue to grow. It's been steadily growing over the years. And as we've always said, we're underpenetrated in the area of managed care. We -- our customers and we are underpenetrated for two reasons. One, sort of America's Best got a late start. When we took over America's Best, they didn't even accept insurance. So we are starting from a dead start there, but also our consumer base is underpenetrated relative to insurance. When it's your own money, you go and seek out through value. So that's probably,strong but that's why the majority of our customers still are non-insurance customers, but it's steadily growing. And I think it grows because people have figured out your dollars go further when you use your managed care benefits at National Vision brands, our low prices mean you get more for your money and more for your insurance benefit from us.

Kate McShane -- Goldman Sachs -- Analyst

Thank you.

Reade Fahs -- Chief Executive Officer

Thank you, Kate.

Operator

Thank you. Our next question comes from Adrienne Yih of Barclays. Your line is open.

Adrienne Yih -- Barclays -- Analyst

Good morning everybody, congratulations on a great quarter.

Patrick R. Moore -- Chief Financial Officer

Thank you.

Adrienne Yih -- Barclays -- Analyst

Patrick, my first question is for you. Can you talk about -- you had mentioned 30 basis points of cyber security investment throughout FY19. How should we think about that line item? Either that specifically or really SG&A dollar growth into FY20, should we think that, that kind of maintains as a percent of sales or actually gains leverage?

And then for Reade, can you talk about the newer markets where you're opening stores? How far apart are the different store? And do you see any impact to the nearest store, and then remind us what the ultimate potential for each of AB and Eyeglass World. Thank you very much.

Patrick R. Moore -- Chief Financial Officer

Sure thing. I'll start with the cyber and SG&A leverage. Overall, as we look at 2020, we do expect to be flat to slight leverage in SG&A costs. On the headwind side, as I had said earlier, we still are planning to see some degree of wage inflation for both doctors as well as associates. We are planning to continue to invest in advertising as we are a growth company that is certainly intending to continue to take share. I do expect to see us leverage corporate cost a little more. So that would be offsetting to get to that flat to slightly leverage.

As it relates to cyber, that was an important effort last year. We feel like we have done the things that we needed to do. I think we guided that we would spend about $4 million last year and pretty close to that. I wouldn't see that cost being ever mentioned as a grow over pressure, as long as things are going smoothly. So I don't think you'll hear me talking about that and in fact, we may even see that dialed back just a slight amount coming out of the build year and now we're in more run mode. So overall, expecting to see flat to slight leverage in SG&A.

Adrienne Yih -- Barclays -- Analyst

Great.

Reade Fahs -- Chief Executive Officer

And on the store count to front, we still believe that America needs at least 1,000 America's Best stores and 850 Eyeglass World stores. We continue to focus on America's Best because the ROIC is a little better and because we have the network effect now of network television and just the more stores you have, the more awareness people have of your stores. And when they move to new places and they see you again it reinforces that you're a strong national brand.

In terms of our stores near one another, it's sort of -- we factor in cannibalization into our models and into our pro formas when we -- when we built the stores and so that is something that we have already taken into account when we select where to open our stores.

Adrienne Yih -- Barclays -- Analyst

Okay, and then my last final question is on Prive Revaux. I would assume -- how long is the length of the exclusivity and how much of the comp was driven by --did you do -- I know you did advertising specifically for that because I saw that throughout the fourth quarter. Was there anything that you did that was over indexing to highlighting Prive Revaux?

Reade Fahs -- Chief Executive Officer

Yeah, in terms of our advertising sort of in this year, not in '19, but this year, we started the year with a strong advertising focus on it. So in terms of that, that was the key communication. I think those has been posted. So you can see them. I hope you like them. I think they're great.

Adrienne Yih -- Barclays -- Analyst

They're great, they're great.

Reade Fahs -- Chief Executive Officer

Yeah, right. They're a lot of fun. In fact, we're just having a lot of fun with this. We've had movie stars show up at our stores and we get nice crowds and they're sort of -- these people have very large Instagram followers. So that's very -- for competitive reasons, we aren't going into a lot of specific. By the way, you should check them out. I wear them and they're just fun styles too and they're very enjoyable in that way, but we don't like to get into the details of the exclusivity or the exact part of the business attributable to this, but it's a nice relationship and we're real happy and we're having a lot of fun with it.

Operator

Thank you. Our next question comes from Paul Lejuez of Citigroup. Your line is open.

Paul Lejuez -- Citi -- Analyst

Thanks, guys. Just going back to Kate's question and your answer, Reade. I'm just curious how much of the higher mix of exam sales are being driven by those customers using insurance versus whether or not you're seeing exam sales increase for cash paying customers. And then second, I'm curious if you could talk about the performance of mature stores, how that shook out in 2019, but also curious about the 2018 store class, how they comped in their first year. And then just last one from me is on the Walmart conversions, Just curious what changes need to be made on the back-end from what you need to do from a systems perspective versus what changes will the customers see, if any. Thanks.

Reade Fahs -- Chief Executive Officer

I'll just -- let me start with the Walmart question and Patrick will follow on with the other piece. So actually, that's the key point is the long lead time item and taking over one of these Walmart stores is inputting or putting in our POS system and our sort of IT infrastructure and getting sort of all the -- everything in place to do that in ways that provide all the right security for us and for Walmart. So that is the long lead time and then sort of we put in our approach to managing the stores in terms of all the operational pieces, the product pieces and the like. So although we are granted the five stores a few weeks ago, it's going to be a little while before we take them over and we sort of do it in phases. We will probably take over one and then sort of see what we learn there and take up the other four soon thereafter.

Patrick R. Moore -- Chief Financial Officer

Hey, Paul. So following up on the other two questions. the real driver in the exam growth is managed care and the reason there is, when cash pay patients come in, those patients are more applicable or more likely to take our two pair offer and those that come in with the managed care insurance card, they are fitting into whatever providers schedule, which has exam separate from frames and lenses. And so, it's simply a function of we're growing managed care penetration, we still feel like we've got great runway left there, but that's the bulk of that dynamic.

And then in terms of store performance, we are happy with what we're seeing across years and cohorts. We -- there's not a lot -- we have mature stores comping probably, on average, across multiple quarters at the lower end of that 3% to 5% range. There are quarters like Q4 where that was a larger number for mature stores. So as you think about our increasing managed care penetration, that doesn't really toggle between existing and new. It's more ubiquitous across the entire classes. '18, I don't have any specific comments to offer up there. We are a little careful with geographies and years specifically, but I can tell you '18 was one of those classes where we were entering new markets and we feel like we continue to take share in those new markets and see a lot of our potential customers there.

Operator

Thank you. Our next question comes from Robbie Ohmes of BofA Global Research. Your line is open.

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

Hey, guys, thanks for taking my question and congrats on a great quarter. Actually two questions, the first, Reade, I constantly get questions about the changing competitive environment and what's going on out there and maybe, could you just speak to any thing you're seeing, any changes and maybe work into that, you know, America's Best positioning versus Eyeglass World and what would it take to get Eyeglass World comps to be more in line with what America's Best has been able to achieve.

Reade Fahs -- Chief Executive Officer

Yes. So, the optical industry continues to shift to the value segment. When we went public, we talked about we're a rising tide in a rising tide in a rising tide, the market's growing, there is a shift to change and within the shift to change, there is a shift to value and we are the key beneficiary of it. I think the most interesting competitive change of the past few months has been that the Sears Optical has closed all its remaining locations. So they, in essence, are -- there is no more Sears Optical, so that has happened, it's been happening gradually over the years. We do think that our key brands are gaining market share and America's Best, especially but America's Best and Eyeglass World are both gaining market share and we are working on ways to continue to get the Eyeglass World comps a little closer to the America's Best comps, but there are a lot of retailers out there in the world who'd be pretty darn pleased with the 6.4% comp for Q4. And the Eyeglass World team though there were little in the America's Best shadow is still or rather proud to have delivered 6.4% comp.

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

That's a very good point. Just one follow-up question, just on coronavirus. What -- can you give us any kind of thought on what your exposure might be under scenarios where there's a lot of bottlenecks coming out of China? How exposed would you be to that or not be to that?

Reade Fahs -- Chief Executive Officer

Well, Robbie, I was waiting for that question. I'm surprised that hasn't come up so far. So yeah, given how much this is a topic go throughout the world. To date, we have had no significant impact on our supply chain. We are well-inventoried for the first half of the year and that includes our peak season. Our China lab is up and going after Chinese New Year and delivering to our needs and expectations. Of course, this is an ever evolving situation, so we're monitoring it closely. But we are very pleased with our inventory levels and with the continuation of our supply chain via the Chinese lab, which is of course, one of our six labs out there and the only one in China. So of course, we have four domestic labs, one lab in Mexico and then one in China.

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

Great. Reade, that's really helpful. Thanks so much.

Reade Fahs -- Chief Executive Officer

Yeah.

Operator

Thank you. Our next question comes from Zack Fadem of Wells Fargo. Your line is open.

Eric Cohen -- Wells Fargo -- Analyst

Hi. This is Eric on for Zach. Thanks for taking the question. You guys had another quarter of 5% comps on Walmart. But if you look at on a two year stack, it actually slowed notably. So just curious when maybe that comp, which should have been higher? And as you look into fiscal '20, what we should expect given that comps in that segment are going to get tougher?

Reade Fahs -- Chief Executive Officer

Okay. So again, we had a 5% comp in Q4 and that's our second consecutive quarter of over 5%. We have -- sort of our execution we think is getting tighter and better and we're pleased that we've got sort of a fresh new leadership team that started in Q4 of 2018. And we saw it sort of jump starting of the business there. So we feel like there's good momentum there. And...

Patrick R. Moore -- Chief Financial Officer

I would say we're also -- if you look at the three year stack, it's a little better. We saw like 5.5% in Q4 of '17.

Reade Fahs -- Chief Executive Officer

Yeah. And the average of our 226 opened Walmart stores, the average age is 24 years. I mean, these are hyper mature stores. So I think positive trends in this way say a lot.

Eric Cohen -- Wells Fargo -- Analyst

And then just as we look -- last year you lapped -- you're lapping the cyber security and the new processing lab. Is it fair to think that fiscal '20 will sort of be the bottoming of EBIT margins?

Patrick R. Moore -- Chief Financial Officer

Well, you can -- we've certainly laid out our guidance there. And in terms of EBIT, we're guiding down just 10 bps to 20 bps in the middle point of the range. Well obviously, that looks more like flat at the top-end of the range. And frankly, we think that if comps come in higher than our leverage point, which is in that kind of 4% to 5% range, we should see some continuation of margin improvement.

I'm not saying that out as a given. But in general, the puts and takes we are -- to your point, the Texas lab will not be a drag. We will see -- we took some peripheral pricing actions in 2019. On the headwind side, we're going to see a little bit of inflation. In terms of wages, we're still -- we've still got tariffs baked in. So I think that we did a pretty good job in leveraging especially in the second half of the year in '19. And for 2020, we're guiding at flattish margins and hope to do better.

Operator

Thank you. Our next question comes from Steph Wissink of Jefferies. Your line is open.

Stephanie Wissink -- Jefferies -- Analyst

Thanks. Good morning, everyone. Most of our questions have been asked, but I wanted to unpack three things that you commented on in your prepared remarks, and maybe two of these are for Reade and one is for Patrick. The first, Reade, is just on the success you've had with your marketing campaign in recruiting new customers. I think over the last couple of years about 35% of your customer count have come from new customers. Talk a little bit about the CRM system in combination with the marketing agenda? And what KPIs do you use internally to kind of benchmark the success of that marketing investment?

And then secondly, you mentioned lower optometrists cost despite better coverage. So I'm wondering if you can also talk a little bit about your labor model, if that has changed over the course of the last 6 months to 12 months where you're getting better efficiency out of that optometrists cost investment? And then just last really quick one, Patrick, for you is on working capital efficiency, had a nice benefit to cash flow this year. Is that something we should continue to expect from you, just greater discipline around inventory and working capital? Thank you.

Reade Fahs -- Chief Executive Officer

Good. Thanks so much. So let me start with your comment of the 35% coming from new customers. And again, I think it's important to just view this in context. We're the low cost provider of a medical necessity. We're in a great and growing industry where chains are growing and value chains are growing in particular. We have a great formula and we're very careful to guard our formulas and have had good momentum as you can see over the past several years.

Also OD coverage being strong at the record retention level means that we can deal with the volume of people who want to come to us. That's what happens when you have strong OD retention and good coverage level. I do think our marketing is getting ever smarter, more sophisticated. And that combined with the continued managed care growth in many ways impacting it, helps to drive the new customer count. And there is also just -- the wonderful thing that comes with positive word of mouth. You've heard me say that this is a fair game. And those who take the best care of the patients and customers generate positive word of mouth that brings in more customers on an ongoing basis.

In terms of the details of the CRM system and the KPI, that's a little bit of the secret sauce that we have. I'll just say that there is an integration of traditional and digital and new customer communications vehicles that I think we get ever better at an ever more sophisticated at. And we pay tremendous attention to it and marketing is a key part of what we do. In terms of getting into the specifics of the KPIs, I think that is part of our secret sauce that helps us to be so successful, so I'm hesitant. We're the only public optical retailer out there. And I'm hesitant to share too much of that because it's part of what makes us so successful.

Patrick R. Moore -- Chief Financial Officer

Yeah. And in terms of the lower doctor cost in the quarter, I would say look a little closer at the year, which was much better aligned with revenue growth. We've not -- we've seen -- we've not seen a tipping point in terms of optometrists-related costs, but we have seen good stabilization. And honestly, this is the fulcrum point of the model. We're a patient-focused company. We're a doctor-focused company. The doctor component of the labor structure is pivotal. We put a lot of emphasis there in terms of acquiring and retaining and it's an area where we occasionally make investments. But we did have -- we did see some leverage in the quarter.

In terms of working capital benefit, I guess the way I would say it is, we delivered I think about $60 million in operating cash flow this year. Let's just say that a third of that was favorable working capital timing. And so, that just moves around. In general, we were doing a lot of forward buying at the end of 2018. We think smartly so because of potential tariff impact. So we didn't have as much of that this year at the end of 2019. But our working capital is generally for a lot of periods it will even be negative. We've not made any strides to change that. We like where our inventory levels are especially now staring potentially at this coronavirus situation.

Operator

Thank you. Our last question comes from Anthony Chukumba of Loop Capital Market. Your line is open.

Anthony Chukumba -- Loop Capital -- Analyst

Thanks for taking my question, and congrats on another very strong year. Most of my questions have been answered. I just wanted to get a quick update. I mean I know it's not a significant portion of your business, but I'd like to get an update just in terms of e-commerce, what the penetration rate was for sales for maybe for the full year. And anything that you're seeing any changes from that perspective, that would be helpful. Thank you.

Reade Fahs -- Chief Executive Officer

Our online sales for the year was 4% and we're pleased with that and we're always working on different ways of providing meaningful -- consumer meaningful omnichannel options to our customers. Category-wise, contact lenses is a heavier penetration than eyeglasses and that's the same for us as well.

Operator

Thank you. Now I'd like to turn the call back over to CEO, Reade Fahs for any closing remarks.

Reade Fahs -- Chief Executive Officer

Thank you very much, Valerie, appreciate your help with the call today. In closing, I'd like to congratulate the 13,000 members of the National Vision team on the milestone of 72 consecutive positive comp quarters. We're extremely pleased with both our Q4 performance and our 2019 performance and look forward toward building on that performance in 2020. We'd like to thank you all for joining us today and for your continued interest in and support of National Vision. We look forward to speaking to you again when we report our first quarter results. Thank you all very much.

Operator

[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

David Mann -- Vice President of Investor Relations

Reade Fahs -- Chief Executive Officer

Patrick R. Moore -- Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Michael Lasser -- UBS -- Analyst

Kate McShane -- Goldman Sachs -- Analyst

Adrienne Yih -- Barclays -- Analyst

Paul Lejuez -- Citi -- Analyst

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

Eric Cohen -- Wells Fargo -- Analyst

Stephanie Wissink -- Jefferies -- Analyst

Anthony Chukumba -- Loop Capital -- Analyst

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