# National Vision Holdings, Inc. (EYE) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from National Vision Holdings, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1710155/000171015523000011/eye-20221231.htm
Accession: 0001710155-23-000011
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/EYE/
All MD&A years: /company/EYE/mda/
Previous year: /company/EYE/mda/a-0001710155-22-000010/ (FY 2022)
Next year: /company/EYE/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K (this “Form 10-K”). This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section included in Part I. Item 1A. in this Form 10-K, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Form 10-K.

We conduct substantially all of our activities through our indirect wholly-owned subsidiary, NVI, and its subsidiaries. We operate on a retail fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to December 31. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References herein to “fiscal year 2022” relate to the 52 weeks ended December 31, 2022, references herein to “fiscal year 2021” relate to the 52 weeks ended January 1, 2022 and references herein to “fiscal year 2020” relate to the 53 weeks ended January 2, 2021.

The disclosures contained in this Form 10-K are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. For further information, please see “Risk Factors” and “Forward-Looking Statements.”

Overview

We are one of the largest optical retailers in the United States and a leader in the attractive value segment of the U.S. optical retail industry. We believe that vision is central to quality of life and that people deserve to see their best to live their best, regardless of their budget. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers with an opening price point that strives to be among the lowest in the industry. We reach our customers through a diverse portfolio of 1,354 retail stores across five brands and 16 consumer websites as of fiscal year end 2022.

Brand and Segment Information

Our operations consist of two reportable segments:

•Owned & Host – As of fiscal year end 2022, our owned brands consisted of 905 America’s Best Contacts and Eyeglasses (“America’s Best”) retail stores and 136 Eyeglass World retail stores. In America’s Best stores, vision care services are provided by optometrists employed by us or by independent professional corporations or similar entities. America’s Best stores are primarily located in high-traffic strip centers next to value-focused retailers. Eyeglass World locations primarily feature eye care services provided by independent optometrists and optometrists employed by independent professional corporations or similar entities and on-site optical laboratories that enable stores to quickly fulfill many customer orders and make repairs on site. Eyeglass World stores are primarily located in freestanding or in-line locations near high-foot-traffic shopping centers. Our Host brands consisted of 54 Vista Optical locations on select military bases and 29 Vista Optical locations within select Fred Meyer stores as of fiscal year end 2022. We have strong, long-standing relationships with our Host partners and have maintained each partnership for over 20 years. These brands provide eye exams primarily by independent optometrists. All brands utilize our centralized laboratories. This segment also includes sales from our America’s Best, Eyeglass World, and Military omni-channel websites.

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•Legacy – We manage the operations of, and supply inventory and laboratory processing services to, 230 Vision Centers in Walmart retail locations as of fiscal year end 2022. This strategic relationship with Walmart is in its 33rd year. Pursuant to a January 2020 amendment to our management & services agreement with Walmart, we added five additional Vision Centers in Walmart stores in fiscal year 2020. Our current management & services agreement with Walmart expires on February 23, 2024, and will automatically renew for a three-year period unless, no later than July 2023, either party gives written notice of non-renewal; refer to Note 14. “Segment Reporting” included in Part II. Item 8. of this Form 10-K for further information. Under the management & services agreement, our responsibilities include ordering and maintaining merchandise inventory; arranging the provision of optometry services; providing managers and staff at each location; training personnel; providing sales receipts to customers; maintaining necessary insurance; obtaining and holding required licenses, permits and accreditations; owning and maintaining store furniture, fixtures and equipment; and developing annual operating budgets and reporting. We earn management fees as a result of providing such services and therefore we record revenue related to sales of products and product protection plans to our Legacy partner’s customers on a net basis. Our management & services agreement also allows our Legacy partner to collect penalties if the Vision Centers do not generate a requisite amount of revenues. No such penalties have been assessed under our current arrangement, which began in 2012. We also sell to our Legacy partner merchandise that is stocked in retail locations we manage pursuant to a separate supplier agreement, and provide centralized laboratory services for the finished eyeglasses for our Legacy partner’s customers in stores that we manage. We lease space from Walmart within or adjacent to each of the locations we manage and use this space for vision care services provided by independent optometrists or optometrists employed by us or by independent professional corporations or similar entities. During the fiscal year 2022, sales associated with this arrangement represented 7.6% of consolidated net revenue. This exposes us to concentration of customer risk.

Our consolidated results also include the following activity recorded in our Corporate/Other category:

•Our e-commerce platform of 12 dedicated websites managed by AC Lens. Our e-commerce business consists of five proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and seven third-party websites with established retailers, such as Walmart, Sam’s Club and Giant Eagle as well as mid-sized vision insurance providers. AC Lens handles site management, customer relationship management and order fulfillment and also sells a wide variety of contact lenses, eyeglasses and eye care accessories.

•Wholesale contact lenses distribution to Walmart and Sam’s Club by AC Lens. We incur costs at a higher percentage of sales than other product categories. AC Lens sales associated with Walmart and Sam’s Club contact lenses distribution arrangements represented 7.0% of consolidated net revenue during fiscal year 2022.

•Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan under California law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughout California, and also issues individual vision plans in connection with our America’s Best operations in California.

•Unallocated corporate overhead expenses, which are a component of selling, general and administrative expenses and are comprised of various home office expenses such as payroll, occupancy costs and consulting and professional fees. Corporate overhead expenses also include field services for our five retail brands.

Reportable segment information is presented on the same basis as our consolidated financial statements, except reportable segment sales which are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our chief operating decision maker (“CODM”) regularly reviews. Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), specifically the change in unearned and deferred revenues during the period. There are no revenue transactions between reportable segments, and there are no other items in the reconciliations other than the effects of unearned and deferred revenue. See Note 14. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K.

Deferred revenue represents the timing difference of when we collect the cash from the customer and when services related to product protection plans and eye care club memberships are performed. Increases or decreases in deferred revenue during the reporting period represent cash collections in excess of, or below the recognition of, previous deferrals.

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Unearned revenue represents the timing difference of when we collect cash from the customer and delivery/customer acceptance, and includes sales of prescription eyewear during approximately the last seven to 10 days of the reporting period.

Trends and Other Factors Affecting Our Business

We have remained focused on our long-term growth initiatives despite the ongoing macroeconomic uncertainty. We opened 80 new stores in 2022, and as of December 31, 2022 enabled remote medicine in approximately 300 stores.

Our core growth initiatives include, but are not limited to, continuing with the expansion of our remote medicine capabilities; maintaining and improving our optometric retention levels; increasing our marketing efficiency and omnichannel capabilities; increasing our participation in vision insurance programs; the further digitization of our stores and corporate office; continuing to position ourselves to capture whitespace opportunity for our stores; and incorporating our corporate sustainability strategy into our operations.

We operate in the highly competitive and fragmented U.S. optical retail industry. We face competition from mass merchants, specialty retail chains, online retailers and independent eye practitioners and opticians, along with large national retailers. Increased consolidation activity in the industry may enable our competitors to benefit from purchasing advantages and the ability to leverage management capabilities across a larger business base. Along with our competitors, we are affected by a number of various trends and factors, including, but not limited to, economic conditions, inflation, consumer preferences and demand, and the COVID-19 pandemic.

The overall economic environment continues to be challenging and macroeconomic factors that may affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. Rising inflation can result in increased materials costs and greater profitability pressure for us. Changes in raw materials prices did not materially impact our costs applicable to revenue in fiscal year 2022. We anticipate that pressures from increases to our raw materials prices could have an impact on our costs applicable to revenue in fiscal year 2023.

Such an inflationary environment and labor market challenges can also result in wage pressures in certain markets. Wage investments as a result of inflation and an increasingly competitive recruiting market for vision care professionals due to the pandemic and related effects have had, and may continue to have, an impact on our profitability. Targeted wage investments, including increases in compensation for optometrists and associates, impacted costs applicable to revenue and selling, general and administrative expenses in fiscal year 2022. We anticipate that wage pressures in certain markets will continue in 2023. For example, retention bonuses granted to associates in the fourth quarter of fiscal year 2022 resulted in a $5.0 million impact. Wage investment pressure, increases to costs applicable to revenue from increases in raw materials prices and potential freight price increases in fiscal year 2023 may not be able to be fully offset by leverage from revenue growth, productivity efficiency and, as appropriate, various pricing actions.

As part of our growth strategy we have invested in remote medicine capabilities, and as of December 31, 2022 this new technology has been enabled in approximately 300 of our America’s Best locations. We believe remote medicine not only helps provide more access to eye care for patients, it also helps address constraints in exam capacity. Additionally, as part of the remote medicine rollout, we also invested in the transition to an EHR platform as locations became remote enabled. We anticipate continuing the investment in these capabilities primarily in America’s Best stores in the near term. Training our personnel to efficiently use these new technologies may increase our costs and negatively impact our profitability even if exam capacity increases.

We estimate that optical consumers typically replace their eyeglasses every two to three years, and contact lens customers order new lenses every six to 12 months, reflecting the predictability of these recurring purchase behaviors; however, the effects of the current economic environment and the impact of the COVID-19 pandemic on consumer preferences resulted in reduced customer demand in 2022. The predictability of recurring purchase behavior for the future remains uncertain. Additionally, resurgences of COVID-19 cases and the emergence of new variants have led to reduced consumer confidence and changes in shopping patterns, which have adversely impacted store traffic. A significant recession could also negatively impact our results if consumers faced widespread layoffs that resulted in the loss of employer-subsidized managed vision care insurance.

We also continue to monitor any potential COVID-19 related impacts on our domestic labs and our outsourced third party optical laboratories in China and Mexico, and potential disruptions of product deliveries. To date, we have been able to meet customer demand with operations at our laboratories. We source merchandise from suppliers located in China and a significant amount of domestically-purchased merchandise is manufactured in China. We have partnered with our suppliers and third party laboratories to mitigate any potential significant delays in delivery

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of merchandise. We have made, and may continue to make, inventory forward buys to help manage potential supply chain disruptions.

In addition to central factors impacting our business outlined above, we have identified the following key drivers, challenges and risks on which we are focused and which are detailed below.

Vision Care Professional Recruitment, Coverage and Expanded Offerings

Our ability to continue to attract and retain qualified vision care professionals affect exam capacity. Our operations, like those of many of our competitors, depend on our ability to offer both eyewear and eye exams. We believe the impacts of the COVID-19 pandemic on vision care professional availability, including a competitive recruiting market and preferences for adjusted work schedules, and the demand for optometrists exceeding supply in certain areas during fiscal year 2022 have caused constraints in exam capacity which are continuing. Due to these factors the costs to employ or retain optometrists have increased and may increase further, potentially materially. Targeted wage investments, including increases in compensation for our optometrists and associates, and flexibility initiatives have impacted our costs applicable to revenue and selling, general and administrative expenses. We are continuing to strategically invest in recruitment and retention initiatives, including flexible adjusted work schedules, along with continuing our implementation of remote medicine technologies, which has expanded our offerings while also increasing costs.

New Store Openings

We expect that new stores will be a key driver of growth in our net revenue and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. As stores mature, profitability typically increases significantly. The performance of new stores is dependent upon factors such as the time of year of a particular opening, the amount of store pre-opening costs, labor and occupancy costs in the specified market, level of participation in managed care plans, and location, including whether they are in new or existing markets. The impact of the COVID-19 pandemic on our ability to open new stores, the multi-year maturation process of our stores and customer purchasing behaviors and patterns remain uncertain and effects and relevant risk exposures may be exacerbated by the ongoing COVID-19 pandemic.

Comparable Store Sales Growth

Comparable store sales growth is a key driver of our business. Many factors affect comparable store sales, including:

•consumer confidence, preferences and buying trends and overall economic trends including inflation and the amount and timing of tax refunds;

•the availability of optometrists and other vision care professionals;

•advertising strategies;

•participation in managed care programs;

•the recurring nature of eye care purchases;

•our ability to identify and respond effectively to customer preferences and trends;

•our ability to provide an assortment of high quality/low-cost product offerings that generate new and repeat visits to our stores;

•foot traffic in retail shopping centers where our stores are predominantly located;

•the customer experience we provide in our stores;

•our ability to source and receive products accurately and timely;

•changes in product pricing, including promotional activities;

•the number of items purchased per store visit;

•the number of stores that have been in operation for more than 12 months;

•impact of competition and consolidation in the U.S. optical retail industry;

•impact and timing of weather related store closures; and

•public health emergencies, like COVID-19, which may exacerbate the effects and relevant risk exposures listed above.

A new store is included in the comparable store sales calculation during the 13th full fiscal month following the store’s opening. Closed stores are removed from the calculation for time periods that are not comparable. In the past, we have closed stores as a result of poor store performance, lease expiration or non-renewal and/or the terms of our arrangements with our Host and Legacy partners.

Managed Care and Insurance

Managed care has become increasingly important to the optical retail industry. An increasing percentage of our customers receive vision care insurance coverage through managed care payors. Our participation in these programs represent an increasingly significant portion of our overall revenues and represented approximately one third of our

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overall revenues in fiscal year 2022. While we have relationships with almost all vision care insurers in the United States and with all of the major carriers, currently, a relatively small number of payors comprise the majority of our managed care revenues, subjecting us to concentration risk. As our participation in managed care programs continues to expand, we have incurred and expect to incur additional costs related to this area of our business. Our comparable store sales growth as noted above as well as overall future operational success could depend on our ability to negotiate, maintain and extend contracts with managed vision care companies, vision insurance providers and other third-party payors, several of whom have significant market share. Coverage and payment levels are determined at each third-party payor’s discretion, and we have limited control over a third-party payor’s decision-making with respect to coverage and payment levels. Coverage restrictions and reductions in reimbursement levels or payment methodologies may negatively impact our sales and profits. In addition, as our participation in managed care programs continues to approach overall industry penetration levels, we expect our associated managed care revenue growth rate to slow over time.

Infrastructure Investment

Our historical results of operations reflect the impact of our ongoing investments in infrastructure to support our growth, including additional investments in remote medicine and EHR platforms. We have made significant investments in information technology systems, including our point-of-sale system and enterprise resource planning (ERP), supply chain systems, marketing, and personnel, as well as experienced industry executives, and management and merchandising teams to support our long-term growth objectives. We intend to continue to make targeted investments in our infrastructure to support our growth and continue the digitization of our stores and corporate office.

Pricing Strategy

We are committed to providing our products to our customers at low prices. We generally employ a simple low price/high value strategy that consistently delivers savings to our customers without the need for extensive promotions. Inflationary pressures, including wage investments, consumer confidence and preferences and increased raw material costs, could impact our profitability and lead us to attempt to offset such increases through various pricing actions. Effective May 9, 2022 we changed the price of our America’s Best signature offer to “two pairs of eyeglasses for $79.95, including a free eye exam” from its prior $69.95 price. Effective March 14, 2022, we changed the price of our Eyeglass World opening offer to “two pairs of eyeglasses for $89” from its prior price of $78. We believe that these changes will enable us to continue to offer the best possible value and service to our customers at prices that allow us to maintain our brands’ strong value propositions in the marketplace.

Interim Results and Seasonality

Historically, our business has realized a higher portion of net revenue, operating income, and cash flows from operations in the first half of the fiscal year, and a lower portion of net revenue, operating income, and cash flows from operations in the fourth fiscal quarter. The seasonally larger first half of the fiscal year is attributable primarily to the timing of our customers’ income tax refunds and annual health insurance program start/reset periods. Because our target market consists of value seeking and lower income consumers, a delay in the issuance of tax refunds or changes in the amount of tax refunds can have a negative impact on our financial results. Consumers could also alter how they utilize tax refund proceeds. With respect to our fourth quarter results, compared to other retailers, our products and services are less likely to be included in consumer’s holiday spending budgets, therefore reducing spending on personal vision correction during the weeks preceding December 25th of each year. Additionally, although the period between December 25th and the end of our fiscal year is typically a high-volume period, the net revenue associated with substantially all orders of prescription eyeglasses and contact lenses during that period is deferred until the following fiscal period due to our policy of recognizing revenue only after the product has been accepted by the customer. Consumer behavior driven by the COVID-19 pandemic has resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time.

For fiscal years 2022 and 2021, approximately 23% of our revenue was recorded in the fourth quarter, but approximately 26% and 25% of annual SG&A costs were recorded in the respective fourth quarters of these fiscal years.

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How We Assess the Performance of Our Business

We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our consolidated business and operating segments are performing are net revenue, costs applicable to revenue, and selling, general, and administrative expenses, which are described further in Note 1. “Business and Significant Accounting Policies,” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K. In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS.

Net Revenue

We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services, and plans. Comparable store sales growth and new store openings are key drivers of net revenue and are discussed below. Also, the timing of unearned revenue can affect revenue recognized in a particular period.

Costs Applicable to Revenue

Customer tastes and preferences, product mix, changes in technology, significant increases or slowdowns in production, and other factors impact costs applicable to revenue. The components of our costs applicable to revenue may not be comparable to other retailers.

Selling, General and Administrative

SG&A generally fluctuates consistently with revenue due to the variable store, field office and corporate support costs; however, some fixed costs slightly improve as a percentage of net revenue as our net revenues grow over time.

New Store Openings

The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results. In an effort to conserve cash early in the COVID-19 pandemic, we temporarily paused new store openings during a portion of fiscal year 2020. We opened 80 stores during fiscal year 2022. We will continue to monitor and determine our plans for future new store openings based on health, safety and economic conditions.

Adjusted Comparable Store Sales Growth

We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store’s opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers. We did not revise our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic.

Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful.

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Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Diluted EPS (collectively, the “Company Non-GAAP Measures”)

The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. See “Non-GAAP Financial Measures” for definitions of the Company Non-GAAP Measures and for additional information.

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Results of Operations

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue.

[[GREPCENT_TABLE]]
[["In thousands, except earnings per share, percentage and store data","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["Revenue:"],["Net product sales","$","1,648,315","","","$","1,718,344","","","$","1,418,283"],["Net sales of services and plans","357,089","","","361,181","","","293,477"],["Total net revenue","2,005,404","","","2,079,525","","","1,711,760"],["Costs applicable to revenue (exclusive of depreciation and amortization):"],["Products","636,324","","","633,116","","","551,783"],["Services and plans","289,263","","","271,663","","","234,841"],["Total costs applicable to revenue","925,587","","","904,779","","","786,624"],["Operating expenses:"],["Selling, general and administrative expenses","915,355","","","900,798","","","724,985"],["Depreciation and amortization","99,956","","","97,089","","","91,585"],["Asset impairment","5,783","","","4,427","","","22,004"],["Other income, net","(2,552)","","","(2,505)","","","(445)"],["Total operating expenses","1,018,542","","","999,809","","","838,129"],["Income from operations","61,275","","","174,937","","","87,007"],["Interest expense, net","462","","","25,612","","","48,327"],["Earnings before income taxes","60,813","","","149,325","","","38,680"],["Income tax provision","18,691","","","21,081","","","2,403"],["Net income","$","42,122","","","$","128,244","","","$","36,277"],["Supplemental operating data:"],["Number of stores open at end of period","1,354","","","1,278","","","1,205"],["New stores opened during the period","80","","","75","","","62"],["Adjusted Operating Income (1)","$","87,795","","","$","204,749","","","$","134,148"],["Diluted EPS","$","0.52","","","$","1.43","","","$","0.44"],["Adjusted Diluted EPS (1)","$","0.65","","","$","1.48","","","$","0.91"],["Adjusted EBITDA (1)","$","180,263","","","$","294,350","","","$","218,307"],["Note: Fiscal years 2022 and 2021 include 52 weeks. Fiscal year 2020 includes 53 weeks."],["(1) Refer to Non-GAAP Financial Measures section below for our presentation of Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["Percentage of net revenue:"],["Total costs applicable to revenue","46.2","%","","43.5","%","","46.0","%"],["Selling, general and administrative expenses","45.6","%","","43.3","%","","42.4","%"],["Total operating expenses","50.8","%","","48.1","%","","49.0","%"],["Income from operations","3.1","%","","8.4","%","","5.1","%"],["Net income","2.1","%","","6.2","%","","2.1","%"],["Adjusted Operating Income","4.4","%","","9.8","%","","7.8","%"],["Adjusted EBITDA","9.0","%","","14.2","%","","12.8","%"]]
[[/GREPCENT_TABLE]]

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Fiscal Year 2022 compared to Fiscal Year 2021

Net revenue

The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2022 compared to fiscal year 2021.

[[GREPCENT_TABLE]]
[["","","Comparable store sales growth(1)","","Stores open at end of period","","Net revenue(2)"],["In thousands, except percentage and store data","","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2022","","Fiscal Year 2021"],["Owned & Host segment"],["America\u2019s Best","","(7.7)","%","","23.5","%","","905","","","840","","","$","1,366,019","","68.1","%","","$","1,423,386","","68.4","%"],["Eyeglass World","","(6.7)","%","","25.2","%","","136","","","125","","","217,727","","10.9","%","","225,096","","10.8","%"],["Military","","(4.3)","%","","15.8","%","","54","","","54","","","22,114","","1.1","%","","23,103","","1.1","%"],["Fred Meyer","","(5.1)","%","","13.4","%","","29","","","29","","","11,508","","0.6","%","","12,130","","0.6","%"],["Owned & Host segment total","","","","","","1,124","","","1,048","","","$","1,617,368","","80.6","%","","$","1,683,715","","80.9","%"],["Legacy segment","","(8.4)","%","","19.3","%","","230","","","230","","","151,877","","7.6","%","","165,477","","8.0","%"],["Corporate/Other","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","242,822","","12.1","%","","236,299","","11.4","%"],["Reconciliations","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(6,663)","","(0.3)","%","","(5,966)","","(0.3)","%"],["Total","","(7.5)","%","","22.4","%","","1,354","","","1,278","","","$","2,005,404","","100.0","%","","$","2,079,525","","100.0","%"],["Adjusted Comparable Store Sales Growth(3)","","(7.6)","%","","23.0","%"]]
[[/GREPCENT_TABLE]]

_________

(1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 14. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below.

(2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding.

(3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in an increase of 0.7% from total comparable store sales growth based on consolidated net revenue for fiscal year 2021 and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the Legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the Legacy partner), resulting in a decrease of 0.1% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2022 and 2021, respectively.

Total net revenue of $2,005.4 million for fiscal year 2022 decreased $74.1 million, or 3.6%, from $2,079.5 million for fiscal year 2021. The decrease was driven primarily by reduced Adjusted Comparable Store Sales Growth and to a lesser extent the negative impact of unearned revenue, partially offset by growth from new store sales and recognition of deferred revenue.

During fiscal year 2022, we opened 69 new America’s Best stores and 11 new Eyeglass World stores and closed four America’s Best stores. The total net new locations in fiscal year 2022 for America’s Best and Eyeglass World are 65 and 11, respectively. Overall, store count grew 5.9% from the end of fiscal year 2021 to the end of fiscal year 2022.

Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2022 were (7.5)% and (7.6)%, respectively, primarily due to a decrease in customer transactions, and to a lesser extent, lower average ticket. The decreases in comparable store sales growth and Adjusted Comparable Store Sales growth during fiscal year 2022 reflect overall economic trends impacting customer demand, constraints affecting exam capacity in certain markets and the Omicron COVID-19 variant impacting customer transactions.

Net product sales comprised 82.2% and 82.6% of total net revenue for fiscal years 2022 and 2021, respectively. Net product sales decreased $70.0 million, or 4.1% during fiscal year 2022 compared to fiscal year 2021, primarily due to a $80.7 million, or 6.7%, decrease in eyeglass sales, which was partially offset by a $6.4 million, or 1.7%, increase in contact lens sales and a $4.3 million, or 3.2%, increase in wholesale fulfillment.

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Net sales of services and plans decreased $4.1 million, or 1.1%, driven primarily by a $7.1 million, or 16.9%, decrease in management fees from our Legacy partner, which was partially offset by a $5.6 million, or 2.9%, increase in exam revenues.

Owned & Host segment net revenue. Net revenue declined $66.3 million, or 3.9%, driven primarily by negative comparable store sales growth partially offset by new store openings.

Legacy segment net revenue. Net revenue declined $13.6 million, or 8.2%, driven by negative comparable store sales growth.

Corporate/Other segment net revenue. Net revenue increased $6.5 million, or 2.8%, driven primarily by increases in wholesale fulfillment.

Net revenue reconciliations. The impact of reconciliations negatively impacted net revenue by $0.7 million during fiscal year 2022 compared to fiscal year 2021. Net revenue was negatively impacted by $14.2 million due to the timing of unearned revenue. The balance of unearned revenue reflected increased sales in the last week of fiscal year 2022 compared to the same period in 2021. Net revenue was positively impacted by $13.5 million due to higher sales of product protection plan and club memberships in fiscal year 2021 compared to fiscal year 2022, thus causing recognition of previous deferrals to exceed cash collected for sales in fiscal year 2022.

Costs applicable to revenue

Costs applicable to revenue of $925.6 million for fiscal year 2022 increased $20.8 million, or 2.3%, from $904.8 million for fiscal year 2021. As a percentage of net revenue, costs applicable to revenue increased from 43.5% for fiscal year 2021 to 46.2% for fiscal year 2022. This increase as a percentage of net revenue was primarily driven by higher growth in optometrist-related costs, reduced eyeglass mix and lower eyeglass margin.

Costs of products as a percentage of net product sales increased from 36.8% for fiscal year 2021 to 38.6% for fiscal year 2022 primarily driven by reduced eyeglass mix and lower eyeglass margin.

Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 27.4% for fiscal year 2021 to 28.9% for fiscal year 2022 primarily driven by reduced eyeglass mix and lower eyeglass margin.

Legacy segment costs of products. Costs of products as a percentage of net product sales decreased from 47.7% for fiscal year 2021 to 46.8% for fiscal year 2022. The decrease was primarily driven by a higher mix of managed care customer transactions versus non-managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Increases in managed care mix decrease costs of products as a percentage of net product sales and have a corresponding negative impact on costs of services as a percentage of net sales of services and plans in our Legacy segment.

Costs of services and plans as a percentage of net sales of services and plans increased from 75.2% for fiscal year 2021 to 81.0% for fiscal year 2022. The increase was primarily driven by higher growth in optometrist-related costs, which were partially offset by higher eye exam revenue.

Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 80.1% for fiscal year 2021 to 88.6% for fiscal year 2022. The increase was primarily driven by higher growth in optometrist-related costs, which were partially offset by higher eye exam revenue.

Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 40.7% for fiscal year 2021 to 44.9% for fiscal year 2022. The increase was primarily driven by higher growth in optometrist-related costs.

Selling, general and administrative

SG&A of $915.4 million for fiscal year 2022 increased $14.6 million, or 1.6%, from fiscal year 2021. As a percentage of net revenue, SG&A increased from 43.3% for fiscal year 2021 to 45.6% for fiscal year 2022. The increase in SG&A as a percentage of net revenue was primarily driven by increases in store payroll, other corporate overhead, including legal, professional, travel and entertainment, and occupancy expense, partially offset by lower performance-based incentive compensation and lower advertising expense. The Company paid $5.0 million of discretionary bonuses during fiscal year 2022.

SG&A for fiscal year 2022 and fiscal year 2021 includes $0.6 million and $1.5 million, respectively, of incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic.

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Owned & Host segment SG&A. SG&A as a percentage of net revenue increased from 36.7% for fiscal year 2021 to 38.9% for fiscal year 2022 driven primarily by higher payroll and occupancy expense, partially offset by lower advertising expense.

Legacy segment SG&A. SG&A as a percentage of net revenue increased from 35.0% for fiscal year 2021 to 38.3% for fiscal year 2022 driven primarily by higher payroll expense.

Depreciation and amortization

Depreciation and amortization expense of $100.0 million for fiscal year 2022 increased $2.9 million, or 3.0%, from $97.1 million for fiscal year 2021 primarily driven by new store openings and investments in remote medicine.

Asset impairment

We recognized $5.8 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores in fiscal year 2022 compared to $4.4 million recognized in fiscal year 2021. The store asset impairment charge is primarily related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. The asset impairment expense for fiscal year 2021 also includes $0.8 million, related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other.

Other expense (income), net

We recognized a gain of $2.7 million and $2.4 million in Other expense (income), net in fiscal years 2022 and 2021, respectively, in connection with the acquisition of our equity method investee by a third party. See Note 1. “Business and Significant Accounting Policies” for further details.

Interest expense, net

Interest expense, net, of $0.5 million for fiscal year 2022 decreased $25.2 million, or 98.2%, from $25.6 million for fiscal year 2021. The decrease was primarily a result of lower derivative costs of $19.0 million on our interest rate derivatives, reduced term loan outstanding balance and income on cash balances.

Income tax provision

Our effective tax rate for fiscal year 2022 was 30.7%, reflecting our statutory federal and state rate of 25.4% and effects of other permanent items. Our effective tax rate for fiscal year 2021 was 14.1%, reflecting a benefit of $16.5 million primarily from the exercise of stock options and stranded tax effect associated with our matured interest rate swaps during the first quarter of 2021.

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Fiscal Year 2021 compared to Fiscal Year 2020

As a result of the COVID-19 pandemic, our retail stores closed to the public beginning on March 19, 2020. We began reopening our stores to the public on April 27, 2020 and on June 8, 2020, we announced the successful completion of the reopening process. Comparisons of fiscal year 2021 results to fiscal year 2020 results reflect the material and unprecedented impact of these temporary store closures. Fiscal year 2021 consists of 52 weeks compared to 53 weeks in fiscal year 2020.

Net revenue

The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2021 compared to fiscal year 2020.

[[GREPCENT_TABLE]]
[["","","Comparable store sales growth(1)","","Stores open at end of period","","Net revenue(2)"],["In thousands, except percentage and store data","","Fiscal Year 2021","","Fiscal Year 2020","","Fiscal Year 2021","","Fiscal Year 2020","","Fiscal Year 2021","","Fiscal Year 2020"],["Owned & Host segment"],["America\u2019s Best","","23.5","%","","(5.2)","%","","840","","","773","","","$","1,423,386","","68.4","%","","$","1,131,016","","66.1","%"],["Eyeglass World","","25.2","%","","(2.7)","%","","125","","","119","","","225,096","","10.8","%","","179,934","","10.5","%"],["Military","","15.8","%","","(15.5)","%","","54","","","54","","","23,103","","1.1","%","","20,428","","1.2","%"],["Fred Meyer","","13.4","%","","(21.6)","%","","29","","","29","","","12,130","","0.6","%","","11,021","","0.6","%"],["Owned & Host segment total","","","","","","1,048","","","975","","","$","1,683,715","","80.9","%","","$","1,342,399","","78.4","%"],["Legacy segment","","19.3","%","","(12.3)","%","","230","","","230","","","165,477","","8.0","%","","142,017","","8.3","%"],["Corporate/Other","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","236,299","","11.4","%","","234,403","","13.7","%"],["Reconciliations","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(5,966)","","(0.3)","%","","(7,059)","","(0.4)","%"],["Total","","22.4","%","","(5.6)","%","","1,278","","","1,205","","","$","2,079,525","","100.0","%","","$","1,711,760","","100.0","%"],["Adjusted Comparable Store Sales Growth(3)","","23.0","%","","(6.1)","%"]]
[[/GREPCENT_TABLE]]

_________

Note: Fiscal year 2021 includes 52 weeks. Fiscal year 2020 includes 53 weeks.

(1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 14. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below.

(2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding.

(3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in an increase of 0.7% and a decrease of 0.4% from total comparable store sales growth based on consolidated net revenue for fiscal year 2021 and fiscal year 2020, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the Legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the Legacy partner), resulting in a decrease of 0.1% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2021 and 2020, respectively.

Total net revenue of $2,079.5 million for fiscal year 2021 increased $367.7 million, or 21.5%, from $1,711.8 million for fiscal year 2020. Of the increase approximately 90% was driven by comparable store sales growth driven by customer demand, primarily the effect of our stores being temporarily closed to the public for a portion of fiscal year 2020 and government stimulus, approximately 20% was driven by new store growth and maturation and was partially offset by $32.2 million (or approximately 10%) of net revenue attributable to the 53rd week in fiscal year 2020.

During fiscal year 2021, we opened 69 new America’s Best stores and six new Eyeglass World stores and closed two America’s Best stores. The total net new locations in fiscal year 2021 for America’s Best and Eyeglass World are 67 and six, respectively. Overall, store count grew 6.1% from the end of fiscal year 2020 to the end of fiscal year 2021.

Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2021 were 22.4% and 23.0%, respectively. The increases in comparable store sales growth and Adjusted Comparable Store Sales Growth were primarily driven by an increase in customer transactions and, to a lesser extent, higher average ticket as a result

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of customer demand, primarily the effect of our stores being temporarily closed for a portion of fiscal year 2020 and government stimulus.

Net product sales comprised 82.6% and 82.9% of total net revenue for fiscal years 2021 and 2020, respectively. Net product sales increased $300.1 million, or 21.2% during fiscal year 2021 compared to fiscal year 2020, primarily due to a $255.3 million, or 27.0% increase in eyeglass sales and to a lesser extent, a $35.0 million, or 10.3% increase in contact lens sales.

Net sales of services and plans increased $67.7 million, or 23.1%, primarily driven by a $38.4 million, or 25.4% increase in eye exam revenue and a $15.9 million, or 26.4% increase in product protection plan revenue, primarily the effect of our stores being temporarily closed for a portion of fiscal year 2020.

Owned & Host segment net revenue. Net revenue increased $341.3 million, or 25.4%, driven primarily by comparable store sales growth and new store openings.

Legacy segment net revenue. Net revenue grew $23.5 million, or 16.5%, driven by comparable store sales growth.

Corporate/Other segment net revenue. Net revenue increased $1.9 million, or 0.8%, due to increases in wholesale fulfillment.

Net revenue reconciliations. The impact of reconciliations positively impacted net revenue by $1.1 million during fiscal year 2021 compared to fiscal year 2020. Net revenue was positively impacted by $7.6 million due to the timing of unearned revenue. The balance of unearned revenue as of fiscal year 2020 reflected pent-up demand following the temporary closure of our stores to the public. Net revenue was negatively impacted by $6.5 million due to higher product protection plan and club membership deferred revenue balances in current period compared to the prior year period. Product protection plan and club membership deferred revenue balances were lower in the prior year, primarily due to the effect of our stores being temporarily closed for a portion of fiscal year 2020.

Costs applicable to revenue

Costs applicable to revenue of $904.8 million for fiscal year 2021 increased $118.2 million, or 15.0%, from $786.6 million for fiscal year 2020. As a percentage of net revenue, costs applicable to revenue decreased from 46.0% for fiscal year 2020 to 43.5% for fiscal year 2021. This decrease as a percentage of net revenue was primarily driven by increased eyeglass mix and lower growth in optometrist-related costs, primarily due to the effect of our stores being temporarily closed for a portion of fiscal year 2020 not experienced in fiscal year 2021.

Costs of products as a percentage of net product sales decreased from 38.9% for fiscal year 2020 to 36.8% for fiscal year 2021 primarily driven by increased eyeglass mix and higher eyeglass and contact lens margin, primarily the effect of our stores being temporarily closed for a portion of fiscal year 2020 not experienced in fiscal year 2021.

Owned & Host segment costs of products. Costs of products as a percentage of net product sales decreased from 28.0% for fiscal year 2020 to 27.4% for fiscal year 2021 driven by increased eyeglass mix and higher eyeglass margin, primarily the effect of the temporary store closures in fiscal year 2020.

Legacy segment costs of products. Costs of products as a percentage of net product sales decreased slightly from 47.8% for fiscal year 2020 to 47.7% for fiscal year 2021. The decrease was primarily driven by the effect of the temporary store closures in fiscal year 2020, which was partially offset by a lower mix of managed care customer transactions versus non-managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Increases in managed care mix decrease costs of products as a percentage of net product sales and have a corresponding negative impact on costs of services as a percentage of net sales of services and plans in our Legacy segment.

Costs of services and plans as a percentage of net sales of services and plans decreased from 80.0% for fiscal year 2020 to 75.2% for fiscal year 2021. The decrease was driven by lower growth in optometrist-related costs and higher eye exam revenue, primarily due to the impact of the temporary store closures to the public in fiscal year 2020 not experienced in fiscal year 2021. These improvements were partially offset by the deferred revenue effects mentioned above.

Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans decreased from 86.0% for fiscal year 2020 to 80.1% for fiscal year 2021. The decrease was driven by lower growth in optometrist-related costs and higher eye exam revenue, primarily the impact of the temporary store closures to the public in fiscal year 2020.

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Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans decreased from 46.5% for fiscal year 2020 to 40.7% for fiscal year 2021. The decrease was primarily driven by higher management fees from our Legacy partner and lower growth in optometrist-related costs, the effect of the temporary store closures to the public in fiscal year 2020.

Selling, general and administrative

SG&A of $900.8 million for fiscal year 2021 increased $175.8 million, or 24.3%, from fiscal year 2020. As a percentage of net revenue, SG&A increased from 42.4% for fiscal year 2020 to 43.3% for fiscal year 2021. This increase as a percentage of net revenue was primarily driven by increases in advertising and performance-based incentive compensation partially offset by decreases in store payroll and occupancy expenses, which were primarily due to the effect of temporary store closures to the public in fiscal year 2020 not experienced in fiscal year 2021, and an individual one-time cash bonus paid in fiscal year 2020 to our front-line associates and doctors.

SG&A for fiscal year 2021 and fiscal year 2020 includes $1.5 million and $8.6 million, respectively, of incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic; of these costs, $0.6 million were reflected as adjustments for the Company’s presentation of non-GAAP measures below for fiscal year 2020.

Owned & Host segment SG&A. SG&A as a percentage of net revenue increased from 36.5% for fiscal year 2020 to 36.7% for fiscal year 2021. This increase as a percentage of net revenue was primarily driven by higher advertising expense partially offset by payroll and occupancy leverage, the effect of the temporary store closures to the public in fiscal year 2020.

Legacy segment SG&A. SG&A as a percentage of net revenue decreased from 36.5% for fiscal year 2020 to 35.0% for fiscal year 2021 primarily driven by payroll and occupancy leverage, the effect of the temporary store closures to the public in fiscal year 2020.

Depreciation and amortization

Depreciation and amortization expense of $97.1 million for fiscal year 2021 increased $5.5 million, or 6.0%, from $91.6 million for fiscal year 2020 primarily driven by new store openings.

Asset impairment

We recognized $4.4 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores in fiscal year 2021 compared to $22.0 million recognized in fiscal year 2020. The store asset impairment charge is primarily related to our Owned & Host segment and is driven by lower than projected customer sales volume in certain stores and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; and the remaining useful lives of the assets. The asset impairment expense for fiscal years 2021 and 2020 also includes $0.8 million and $1.1 million, respectively, related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other.

Other expense (income), net

We recognized a gain of $2.4 million in Other expense (income), net in fiscal year 2021 in connection with the acquisition of our equity method investee by a third party. See Note 1. “Business and Significant Accounting Policies” for further details.

Interest expense, net

Interest expense, net, of $25.6 million for fiscal year 2021 decreased $22.7 million, or 47.0%, from $48.3 million for fiscal year 2020. The decrease was primarily driven by lower derivative costs of $10.9 million, reduced term loan outstanding balance and credit facility utilization, and lower interest expense on the 2025 Notes as a result of the adoption of ASU 2020-06.

Income tax provision

Our income tax provision for fiscal year 2021 reflected our statutory federal and state rate of 25.5%, offset by a benefit of $16.5 million primarily from the exercise of stock options and stranded tax effect associated with our interest rate swaps that matured in the first quarter of 2021. In comparison, the income tax provision associated with fiscal year 2020 reflected our statutory federal and state rate of 25.5% combined with a benefit of $8.0 million associated primarily with the stock option exercises.

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Non-GAAP Financial Measures

Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS

We define Adjusted Operating Income as net income, plus interest expense (income), net and income tax provision (benefit), further adjusted to exclude stock based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles and certain other expenses. We define Adjusted Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense (income), net, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and certain other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue. We define Adjusted Diluted EPS as diluted earnings per share, adjusted for the per share impact of stock based compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our term loan borrowings, amortization of the conversion feature and deferred financing costs related to our 2025 Notes when not required under U.S. GAAP to be added back for diluted earnings per share, losses (gains) on change in fair value of derivatives, certain other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments. We adjust for amortization of costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share according to U.S. GAAP.

EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below. EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with U.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements U.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. We continue to evaluate our use of the Company Non-GAAP measures in the context of the development of our business, and may introduce or discontinue certain measures in the future as we deem appropriate.

EBITDA and the Company Non-GAAP Measures are not recognized terms under U.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with U.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In evaluating EBITDA and the Company Non-GAAP Measures we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our U.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

•they do not reflect costs or cash outlays for capital expenditures or contractual commitments;

•they do not reflect changes in, or cash requirements for, our working capital needs;

•EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense (income), net or the cash requirements necessary to service interest or principal payments, on our debt;

•EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect period to period changes in taxes, income tax provision or the cash necessary to pay income taxes;

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•they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and

•other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness.

The following table reconciles our Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin to net income; and Adjusted Diluted EPS to diluted EPS for the periods presented:

[[GREPCENT_TABLE]]
[["In thousands","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["Net income","$","42,122","","","2.1","%","","$","128,244","","","6.2","%","","$","36,277","","","2.1","%"],["Interest expense","462","","","0.0","%","","25,612","","","1.2","%","","48,327","","","2.8","%"],["Income tax provision","18,691","","","0.9","%","","21,081","","","1.0","%","","2,403","","","0.1","%"],["Stock based compensation expense (a)","13,512","","","0.7","%","","14,886","","","0.7","%","","10,740","","","0.6","%"],["Asset impairment (b)","5,783","","","0.3","%","","4,427","","","0.2","%","","22,004","","","1.3","%"],["Litigation settlement (c)","\u2014","","","\u2014","%","","1,500","","","0.1","%","","4,395","","","0.3","%"],["Amortization of acquisition intangibles (d)","7,488","","","0.4","%","","7,488","","","0.4","%","","7,426","","","0.4","%"],["Other (g)","(263)","","","(0.0)","%","","1,511","","","0.1","%","","2,576","","","0.2","%"],["Adjusted Operating Income / Adjusted Operating Margin","$","87,795","","","4.4","%","","$","204,749","","","9.8","%","","$","134,148","","","7.8","%"],["Note: Fiscal years 2022 and 2021 include 52 weeks. Fiscal year 2020 includes 53 weeks. Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["In thousands","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["Net income","$","42,122","","","2.1","%","","$","128,244","","","6.2","%","","$","36,277","","","2.1","%"],["Interest expense","462","","","0.0","%","","25,612","","","1.2","%","","48,327","","","2.8","%"],["Income tax provision","18,691","","","0.9","%","","21,081","","","1.0","%","","2,403","","","0.1","%"],["Depreciation and amortization","99,956","","","5.0","%","","97,089","","","4.7","%","","91,585","","","5.4","%"],["EBITDA","161,231","","","8.0","%","","272,026","","","13.1","%","","178,592","","","10.4","%"],["Stock based compensation expense (a)","13,512","","","0.7","%","","14,886","","","0.7","%","","10,740","","","0.6","%"],["Asset impairment (b)","5,783","","","0.3","%","","4,427","","","0.2","%","","22,004","","","1.3","%"],["Litigation settlement (c)","\u2014","","","\u2014","%","","1,500","","","0.1","%","","4,395","","","0.3","%"],["Other (g)","(263)","","","(0.0)","%","","1,511","","","0.1","%","","2,576","","","0.2","%"],["Adjusted EBITDA / Adjusted EBITDA Margin","$","180,263","","","9.0","%","","$","294,350","","","14.2","%","","$","218,307","","","12.8","%"],["Note: Fiscal years 2022 and 2021 include 52 weeks. Fiscal year 2020 includes 53 weeks. Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["In thousands, except per share amounts","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["Diluted EPS","$","0.52","","","$","1.43","","","$","0.44"],["Stock based compensation expense (a)","0.17","","","0.15","","","0.13"],["Asset impairment (b)","0.07","","","0.05","","","0.27"],["Litigation settlement (c)","\u2014","","","0.02","","","0.05"],["Amortization of acquisition intangibles (d)","0.09","","","0.08","","","0.09"],["Amortization of debt discounts and deferred financing costs (e)","0.04","","","0.02","","","0.14"],["Losses (gains) on change in fair value of derivatives (f)","(0.20)","","","(0.03)","","","0.05"],["Other (j)","(0.00)","","","(0.01)","","","0.03"],["Tax benefit of stock option exercises (h)","(0.00)","","","(0.15)","","","(0.10)"],["Tax effect of total adjustments (i)","(0.04)","","","(0.08)","","","(0.19)"],["Adjusted Diluted EPS","$","0.65","","","$","1.48","","","$","0.91"],["Weighted average diluted shares outstanding","80,298","","","96,134","","","82,793"],["Note: Fiscal years 2022 and 2021 include 52 weeks. Fiscal year 2020 includes 53 weeks. Some of the totals in the table above do not foot due to rounding differences."]]
[[/GREPCENT_TABLE]]

____________

(a)Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions.

(b)Reflects write-off of primarily property, equipment and lease related assets on closed or underperforming stores.

(c)Expenses associated with settlement of certain litigation.

(d)Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting to the KKR Acquisition.

(e)Amortization of deferred financing costs and other non-cash charges related to our long-term debt, including amortization of the conversion feature related to the 2025 Notes of $10.0 million for fiscal year 2020. We adjust for amortization of deferred financing costs related to the 2025 Notes only when adjustment for these costs is not required in the calculation of diluted earnings per share under U.S. GAAP.

(f)Reflects losses (gains) recognized in interest expense on change in fair value of de-designated hedges.

(g)Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA), which are primarily related to excess payroll taxes on stock option exercises, executive severance and relocation and other expenses and adjustments, including our share of (gains) losses on equity method investments of $(2.7) million and $(2.4) million for fiscal years 2022 and 2021, respectively, and losses on other investments of $0.3 million for fiscal year 2022.

(h)Tax benefit associated with accounting guidance requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur.

(i)Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates.

(j)Reflects other expenses in (g) above, including the impact of stranded tax effect of $(2.1) million for fiscal year 2021 associated with our interest rate swaps that matured in 2021, and $0.1 million and $0.2 million of debt issuance costs for fiscal years 2021 and 2020, respectively.

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Liquidity and Capital Resources

Our primary cash needs are for inventory, payroll, store rent, advertising, capital expenditures associated with new stores and updating existing stores, as well as information and remote medicine technology and infrastructure, including our corporate office, distribution centers and laboratories. When appropriate, the Company may utilize excess liquidity towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, as well as repurchases of common stock, based on excess cash flows. The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued expenses. We exercise prudence in our use of cash and closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding. We continue to be focused on these items in addition to other key measures we use to determine how our consolidated business and operating segments are performing. We believe that cash on hand, cash expected to be generated from operations and the availability of borrowings under our revolving credit facility will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures and payments due under our existing debt for the next 12 months and thereafter for the foreseeable future. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as modifications to our term loan where possible. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. We primarily fund our working capital needs using cash provided by operations. Our working capital requirements for inventory will increase as we continue to open additional stores.

As of fiscal year end 2022, we had $229.4 million in cash and cash equivalents and $293.6 million of availability under our revolving credit facility, which includes $6.4 million in outstanding letters of credit.

The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated:

[[GREPCENT_TABLE]]
[["In thousands","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["Cash flows provided by (used for):"],["Operating activities","$","119,198","","","$","258,938","","","$","234,981"],["Investing activities","(110,894)","","","(92,897)","","","(76,410)"],["Financing activities","(84,556)","","","(234,324)","","","176,281"],["Net increase (decrease) in cash, cash equivalents and restricted cash","$","(76,252)","","","$","(68,283)","","","$","334,852"],["Note: Fiscal years 2022 and 2021 include 52 weeks. Fiscal year 2020 includes 53 weeks."]]
[[/GREPCENT_TABLE]]

Net Cash Provided by Operating Activities

Cash flows provided by operating activities decreased by $139.7 million to $119.2 million, during fiscal year 2022 from $258.9 million during fiscal year 2021 as a result of a $86.1 million decrease in net income, changes in net working capital and other assets and liabilities, which used an additional $38.6 million in cash and a decrease in non-cash expense adjustments of $15.0 million, in each case, as compared to fiscal year 2021.

Working capital was most significantly impacted by changes in other liabilities, accounts receivable and inventories. Decreases in other liabilities used $30.9 million in year-over-year cash primarily due to decreases in compensation related and advertising accruals, partially offset by increases in payroll taxes payable. Increases in accounts receivable balances used $26.0 million in year-over-year cash primarily due to year-over-year increases in trade and credit card receivables as a result of higher sales in the last week of fiscal year 2022 when compared to the same period of 2021, as well as increases in other receivables. Decreases in inventory contributed $13.0 million in year-over-year cash primarily due to increased purchases, including inventory forward buys, during 2021.

Cash flows provided by operating activities increased by $24.0 million to $258.9 million, or 10.2%, during fiscal year 2021 from $235.0 million during fiscal year 2020 as a result of net income of $92.0 million, offset by a decrease in non-cash expense items of $13.2 million, and changes in net working capital and other assets and liabilities, which used an additional $54.8 million in cash compared to fiscal year 2020.

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Working capital was most significantly impacted by changes in inventories, accounts payable, other liabilities, and accounts receivable. Increases in inventory and decreases in accounts payable, which used $26.3 million and $24.6 million in year-over-year cash, respectively, were primarily due to increased purchases including inventory forward buys and other payments during 2021. Decreases in other liabilities used $17.8 million in year-over-year cash primarily due to decreases in compensation related accruals of $17.1 million including payment of CARES Act deferred employer payroll taxes and lease concessions and deferrals of $5.9 million, partially offset by lower payments of litigation settlements and increases in advertising and promotional efforts during the year. Offsetting these items were decreases in accounts receivable balances, which contributed $14.9 million in year-over-year cash, primarily due to year-over-year decreases in outstanding credit card receivables as a result of lower sales in the last week of fiscal year 2021 when compared to the same period of 2020.

Net Cash Used for Investing Activities

Net cash used for investing activities increased by $18.0 million, to $110.9 million, during fiscal year 2022 from $92.9 million during fiscal year 2021. The increase was primarily due to increased capital investments in remote medicine and new store openings. We purchased $113.5 million in capital items during fiscal year 2022. Approximately 80% to 85% of our capital spend is related to our expected growth (i.e., new stores, remote medicine infrastructure, EHR, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including omni-channel platform related investments).

Net cash used for investing activities increased by $16.5 million, to $92.9 million, during fiscal year 2021 from $76.4 million during fiscal year 2020. The increase was primarily due to new store openings, offset partially by proceeds of $2.4 million in connection with the sale of the Company’s equity method investee. Refer to Note 1. “Business and Significant Accounting Policies” for more information on the sale.

Net Cash Provided by (Used for) Financing Activities

Net cash used for financing activities decreased $149.8 million, from $234.3 million use of cash during fiscal year 2021 to $84.6 million use of cash during fiscal year 2022. The decrease in cash used for financing activities was primarily due to voluntary term loan prepayments of $167.4 million in fiscal year 2021 that did not recur in fiscal year 2022, partially offset by increases in purchases of treasury stock of $11.1 million and decreases in proceeds from issuance of common stock of $8.1 million during fiscal year 2022.

Net cash provided by (used for) financing activities decreased $410.6 million, from $176.3 million provision of cash during fiscal year 2020 to $234.3 million use of cash during fiscal year 2021. The decrease was primarily due to the prepayment of our term loan of $167.4 million and increases in purchases of treasury stock of $72.6 million during fiscal year 2021 compared to proceeds of $548.8 million from the issuance of the 2025 Notes and borrowings on our revolving credit facility partially offset by principal payments on long-term debt of $369.3 million during fiscal year 2020.

Long-term Debt

The following table sets forth the amounts owed under our term loan and the 2025 Notes and the interest rate on such outstanding amounts, and the amount available for additional borrowing thereunder, as of the end of fiscal year 2022:

[[GREPCENT_TABLE]]
[["In thousands","","Interest Rate (2)","","Amount Outstanding","","Amount Available for Additional Borrowing"],["2025 Notes, due May 15, 2025","","Fixed","","$","402,497","","","$","\u2014"],["Term loan, due July 18, 2024","","Variable","","150,000","","","\u2014"],["Revolving credit facility, due July 18, 2024(1)","","Variable","","\u2014","","","293,619"],["Total","","","","$","552,497","","","$","293,619"]]
[[/GREPCENT_TABLE]]

____________

(1)At December 31, 2022, the amount available under our revolving credit facility reflected a reduction of $6.4 million of letters of credit outstanding.

(2)The interest rate on the term loan and revolving credit facility pursuant to the Credit Agreement is at an Applicable Margin range from 1.25% to 2.00% for LIBOR Loans with LIBOR to not be lower than 0.00% in any period, and an Applicable Margin range from 0.25% to 1.00% for ABR Loans, as of fiscal year end 2022. The 2025 Notes pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2020, at an annual rate of 2.50%.

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Share Repurchase Authority

Effective November 8, 2021, the Company's Board of Directors authorized the Company to repurchase up to $50 million aggregate amount of shares of the Company's common stock. On November 29, 2021, the Company’s Board of Directors authorized an increase from $50 million to $100 million in aggregate amount of shares of the Company’s common stock that may be repurchased under the Company’s current share repurchase program. On February 23, 2022, our Board of Directors authorized a $100 million increase to the share repurchase authorization, for a total authorization of $200 million. Repurchases may be made from time to time in the Company’s discretion through one or more open market or privately negotiated transactions, and pursuant to pre-set trading plans meeting the requirements of all applicable securities laws and regulations. Shares may be repurchased under the program through December 30, 2023. The timing and amounts of any such repurchases will depend on a variety of factors, including the market price of the Company’s shares, general market and economic conditions, legal requirements and tax implications. The Company expects to fund the share repurchases using cash on hand. During fiscal years 2022 and 2021, the Company repurchased 2.7 million shares of its common stock for $80.0 million, and 1.4 million shares of its common stock for $69.9 million, respectively, under the share repurchase program. After these repurchases, approximately $50 million remains available under the share repurchase authorization as of December 31, 2022.

Capital Expenditures

[[GREPCENT_TABLE]]
[["In thousands","Fiscal Year 2022","","Fiscal Year 2021","","Fiscal Year 2020"],["New stores (owned brands)","$","49,761","","","$","40,058","","","$","27,865"],["Laboratories, distribution centers and optometric equipment","30,073","","","20,900","","","19,882"],["Information technology and other","33,713","","","34,557","","","29,076"],["Total","$","113,547","","","$","95,515","","","$","76,823"],["Note: Fiscal years 2022 and 2021 include 52 weeks. Fiscal year 2020 includes 53 weeks."]]
[[/GREPCENT_TABLE]]

We expect capital expenditures in fiscal year 2023 to be approximately between $115 million and $120 million and to be used primarily in supporting the Company’s growth through investments in new stores, remote medicine, EHR, optical laboratories, and IT infrastructure. We expect to fund capital expenditures with cash flows from operations, but may also use existing cash balances or funds available through our revolving credit facility.

Material Cash Requirements

As of fiscal year end 2022, our current and long-term material cash requirements include the following commitments and contractual obligations:

[[GREPCENT_TABLE]]
[["In thousands","","2023","","2024","","2025","","2026","","2027","","Thereafter","","Total"],["Term loan(a)","","$","\u2014","","","$","150,000","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","150,000"],["2025 Notes(b)","","\u2014","","","\u2014","","","402,497","","","\u2014","","","\u2014","","","\u2014","","","402,497"],["Revolving credit facility(c)","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Estimated interest(d)","","18,513","","","14,757","","","3,773","","","\u2014","","","\u2014","","","\u2014","","","37,043"],["Noncancelable operating leases(e)","","86,429","","","91,376","","","87,377","","","68,295","","","54,316","","","111,803","","","499,596"],["Finance leases(f)","","5,569","","","4,734","","","4,888","","","4,496","","","3,623","","","3,265","","","26,575"],["Other commitments(g)","","49,203","","","37,495","","","30,238","","","3,662","","","\u2014","","","\u2014","","","120,598"],["Total","","$","159,714","","","$","298,362","","","$","528,773","","","$","76,453","","","$","57,939","","","$","115,068","","","$","1,236,309"]]
[[/GREPCENT_TABLE]]

____________

(a)Refer to Note 4. “Long-term Debt” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K for more information on our term loan.

(b)Refer to Note 4. “Long-term Debt” for more information on the 2025 Notes and Note 13. “Earnings Per Share” for the treatment of earnings per share in relation to the 2025 Notes.

(c)Refer to Note 4. “Long-term Debt” for more information on our revolving credit facility.

(d)We have estimated our interest payments on our term loan based on LIBOR as of the end of fiscal year 2022. Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings, interest rate fluctuations and the expected discontinuation of LIBOR. Expected obligations on our hedging instruments are excluded from estimated interest presented in the table above. Refer to Note 1. “Business and Significant Accounting Policies” for more information on the cessation of LIBOR.

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(e)We lease our retail stores, optometric examination offices, distribution centers, office space and all of our optical laboratories with the exception of our St. Cloud, Minnesota lab, which we own. The vast majority of our leases are classified as operating leases under current accounting guidance. Although rent expense on operating leases is recorded in SG&A on a straight-line basis over the term of the lease, contractual obligations above represent required cash payments. Our lease arrangements require us to pay executory costs such as insurance, real estate taxes and common area maintenance and some of our leases are based on a percentage of sales. These expenses are generally variable, not included above, and were approximately $33.1 million during fiscal year ended 2022. Refer to Note 8. “Leases” for our current and long-term lease payment obligations.

(f)For leases classified as finance leases, the finance lease asset is recorded as property and equipment and a corresponding amount is recorded as a long-term debt obligation in the Consolidated Balance Sheets at the net present value of the minimum lease payments to be made over the lease term for new finance leases. We allocate each lease payment between a reduction of the lease obligation and interest expense using the effective interest method. Finance lease amounts above represent required contractual cash payments in the periods presented. Refer to Note 8. “Leases” for our current and long-term lease payment obligations.

(g)Other commitments include minimum purchase commitments with certain trade vendors and contractual agreements to purchase goods or services in the ordinary course of business.

In addition to lease commitments and contractual obligations, our material cash requirements also include operating expenses such as payroll, store rent, and advertising expenses, which we expect to fund primarily with existing cash balances and cash flows from operations.

We follow U.S. GAAP in making the determination as to whether or not to record an asset or liability related to our arrangements with third parties. Consistent with current accounting guidance, we do not record an asset or liability associated with long-term purchase, marketing and promotional commitments, or commitments to philanthropic endeavors. We have disclosed the amount of future commitments associated with these items in our consolidated financial statements. We are not a party to any other off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates the accounting policies, estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

We have evaluated the accounting policies used in the preparation of the Company’s consolidated financial statements and related notes and believe those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. More information on all of our significant accounting policies can be found in Note 1. “Business and Significant Accounting Policies,” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K, as well as in certain other notes to the consolidated financial statements as indicated below.

Revenue Recognition

At our America’s Best brand, our signature offer is two pairs of eyeglasses and a free eye exam for one low price. Since an eye exam is a key component in the ability for acceptable prescription eyewear to be delivered to a customer, we concluded that the eye exam service, while capable of being distinct from the eyeglass product delivery, was not distinct in the context of the two-pair offer. As a result, we do not allocate revenue to the eye exam associated with the two-pair offer, and we record all revenue associated with the offer in net product sales when the customer has received and accepted the merchandise.

We recognize revenue across our product protection plan and club membership contract portfolio based on the value delivered to the customers relative to the remaining services promised under the programs. We determine the value delivered based on the expected timing and amount of customer usage of benefits over the terms of the contracts. A 100 basis point change in our estimate of value delivered to customers compared to expected customer usage of benefits would have affected revenues in fiscal year 2022 by approximately $2 million; this amount would have been recognized at different times over the contract period.

Unearned revenue at the end of a reporting period is estimated based on processing and delivery times throughout the current month and generally ranges from approximately seven to 10 days. All unearned revenue at the end of a reporting period is recognized in the next fiscal period. A one day increase in our estimate of the average days needed to process delivery would have affected revenues in fiscal year 2022 by approximately $5 million, which would ultimately have been recorded in the next fiscal year.

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The Company considers its revenue from managed care customers to include variable consideration and estimates such amounts associated with managed care customer revenues using the history of concessions provided and cash receipts from managed care providers; a 100 basis point change in our rate of concessions granted would have reduced our revenues in fiscal year 2022 by approximately $4 million.

See Note 7. “Revenue from Contracts With Customers” in our audited consolidated financial statements included in Part II. Item 8. of this Form 10-K for additional information.

Impairment of P&E and ROU assets

In evaluating store-level property and equipment and ROU assets for recoverability and impairment, we may consider multiple factors including financial performance of the stores, regional and local business climates, future plans for the store operations and other qualitative factors. We estimate the fair value of the asset group using an income approach based on discounted cash flows, which requires estimates and assumptions of forecasted store revenue growth rates and store profitability. We consider market-based indications of prevailing rental rates, lease incentives and discount rates for retail space when estimating the fair value of ROU assets. Developing the estimates and assumptions used in our recovery and impairment evaluations require significant judgment. The cash flows used in estimating fair value were discounted using market rates from 7.5% to 10% in fiscal year 2022.

We had $359.8 million of property and equipment, net, and ROU assets of $382.8 million as of December 31, 2022. Changes in estimates and assumptions used in our impairment testing of property and equipment could result in future impairment losses, which could be material. We recognized impairments of $5.8 million, $4.4 million and $22.0 million in fiscal years 2022, 2021 and 2020, respectively, primarily related to our long-lived tangible store assets and ROU assets.

Impairment of Goodwill and Intangible Assets

We calculate the fair value of our reporting units using the income approach based on discounted cash flows analysis whereby estimated after-tax cash flows are discounted using a weighted average cost of capital. The cash flows used in the analysis are based on financial forecasts developed internally by management and require significant judgment. Significant unobservable inputs used in the fair value measurement of the reporting units include revenue growth rates, payroll and other expense growth rates, capital expenditures and discount rates. These assumptions are sensitive to future changes in the business profitability, changes in our business strategy, customer concentration risk and external market conditions, among other factors. See Note 3. “Goodwill and Intangible Assets” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K for further detail on goodwill impairment.

As of December 31, 2022, we had $777.6 million of goodwill, $240.5 million of non-amortizing intangible assets, and $34.7 million of other intangible assets, net of accumulated amortization. Changes in estimates and assumptions used in our impairment testing could result in future impairment losses, which could be material. Significant judgments and assumptions are required in our impairment evaluations.

In our most recent goodwill impairment test, the fair value of our Legacy segment, to which $60.0 million of goodwill is allocated, exceeded its carrying value by approximately 9%. Our Legacy segment has been affected by the challenging macroeconomic environment. Considering the challenging environment, the fair value of our Legacy segment assumes lower levels of profitability in the near term than the Legacy segment has historically experienced, followed by a gradual improvement in profitability to the low end of the Legacy segment’s historical profitability range. The fair values of our other reporting units exceeded their respective carrying values by at least 60%. Future changes in a reporting unit’s business profitability, expected cash flows, changes in business strategy and external market conditions, among other factors, could require us to record an impairment charge for goodwill. A 100 basis point increase in discount rates used to estimate the fair value of the Company’s reporting units would result in an approximate $3 million impairment of the Company’s goodwill balance in the Legacy segment at the end of fiscal year 2022. The Legacy segment’s operations are sensitive to customer concentration.

When evaluating indefinite-lived, non-amortizing trademarks and trade names for impairment, we use the relief-from-royalty method to estimate fair value, whereby an estimated royalty rate is determined based on comparable licensing arrangements, which is then applied to the revenue projections for the subject asset. The estimated fair value is calculated using a discounted cash flow analysis. We record an impairment charge as the excess of carrying value over estimated fair value. A 100 basis point increase in discount rates used to estimate the fair value of the Company’s trademarks and trade names would not result in an impairment at fiscal year-end.

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If impairment indicators related to finite-lived, amortizing intangible assets are present, we estimate cash flows expected to be generated over the remaining useful lives of the related assets based on current projections. If the projected net undiscounted cash flows are less than the carrying value of the related assets, we then measure impairment based on a discounted cash flow model and record an impairment charge as the excess of carrying value over the estimated fair value. A 100 basis point increase in the discount rate used to estimate the fair value of the Company’s Legacy segment contracts and relationships asset would not result in an impairment at fiscal year-end.

Income Taxes

Calculations and assessments of uncertain tax positions involve estimates and complex judgments because the ultimate tax outcomes are uncertain and future events are unpredictable. Our net deferred liability balance as of December 31, 2022 was $93.9 million. Changes in assumptions in our estimates could result in material changes to these balances. See Note 6. “Income Taxes” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K.

Inventories

Inventory shrinkage is estimated and recorded throughout the period in cost of sales based on historical results and current inventory levels. Inventory values are adjusted for estimated obsolescence and written down to net realizable value (“NRV”) based on estimates of current and anticipated demand, customer preference, merchandise age, planned promotional activities, compliance with contact lens vendor return policies, and estimates of future retail sales prices. Actual shrinkage is recorded throughout the year based upon periodic physical counts. As of December 31, 2022, our total inventory balance was $123.2 million. A 10% increase in the obsolescence and shrinkage reserves will not have a material impact on our financial position. See Note 1. “Business and Significant Accounting Policies” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K.

Recently Issued Accounting Pronouncements

For information on recently issued accounting pronouncements, see Note 1. “Business and Significant Accounting Policies” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K.