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 theSEC . 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 toDecember 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 2021" relate to the 52 weeks endedJanuary 1, 2022 , references herein to "fiscal year 2020" relate to the 53 weeks endedJanuary 2, 2021 and references herein to "fiscal year 2019" relate to the 52 weeks endedDecember 28, 2019 . 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 and fastest growing optical retailers inthe United States and a leader in the attractive value segment of theU.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. Our mission is to make quality eye care and eyewear affordable and accessible to all Americans. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers. We deliver exceptional value and convenience to our customers, with an opening price point that strives to be among the lowest in the industry, enabled by our low-cost operating platform. We reach our customers through a diverse portfolio of 1,278 retail stores across five brands and 18 consumer websites as of fiscal year end 2021.
Brand and segment information
Our activities consist of two reportable segments:
•Owned & Host - As of fiscal year end 2021, our owned brands consisted of 840America's Best Contacts and Eyeglasses ("America's Best") retail stores and 125Eyeglass 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 2021. 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. 47 -------------------------------------------------------------------------------- Table of Contents •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 2021. This strategic relationship with Walmart is in its 32nd year. Pursuant to aJanuary 2020 amendment to our management & services agreement with Walmart, we added five additional Vision Centers in Walmart stores in fiscal year 2020. OnJuly 17, 2020 , NVI and Walmart extended the current term and economics of the management & services agreement by three years toFebruary 23, 2024 ; 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 2021, sales associated with this arrangement represented 8.0% 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 14 dedicated websites managed byAC Lens . Our e-commerce business consists of five proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and nine 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. •AC Lens also distributes contact lenses wholesale to Walmart andSam's Club . We incur costs at a higher percentage of sales than other product categories.AC Lens sales associated with Walmart andSam's Club contact lenses distribution arrangements represented 6.5% of consolidated net revenue. •Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan underCalifornia law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughoutCalifornia , and also issues individual vision plans in connection with our America's Best operations inCalifornia . •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 inthe 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.
Unearned revenue represents the time difference between when we collect money from the customer and delivery/acceptance by the customer, and includes sales of prescription eyewear over the last approximately seven to ten days of the period. of declaration.
48 -------------------------------------------------------------------------------- Table of Contents Trends and Other Factors Affecting Our Business
A variety of trends and other factors will affect or have affected our operating results, including:
Impact of COVID-19
The COVID-19 pandemic and related federal, state and local governmental and healthcare authority guidelines materially impacted our business and results of operations in 2020 and continue to impact our business results. In 2020, the COVID-19 pandemic directly and indirectly impacted our operations, consumer behavior, comparable store sales, our associates and optometrists and the overall market. In the early stages of the pandemic, we temporarily closed all of our stores to the public across theU.S. onMarch 19, 2020 and announced the successful completion of the reopening process with enhanced safety and cleaning protocols onJune 8, 2020 . The decrease in revenue from our temporary store closures was not offset by proportional decreases in expense, as we continued to incur store occupancy costs even while stores were temporarily closed, costs directly related to adapting the Company's operations to the COVID-19 pandemic such as personal protective equipment and other supplies needed to operate our stores safely and certain other costs such as compensation, a tangible appreciation bonus paid to our customer-facing doctors and associates, and other administrative expenses, resulting in a negative effect on profitability. We also implemented capital spending and expense reduction initiatives, including a temporary pause in new store openings between March andJune 2020 , reduced near term marketing, a temporary reduction in compensation across the organization until the second quarter of 2020, a suspension of non-essential travel, implementation of a remote work policy for certain corporate associates, and we worked with a base of vendors and landlords to extend payment terms and modify existing contracts. While we experienced stronger comparable store sales growth in the third and fourth quarters of 2020, the comparable store sales growth figure of (5.6)% for fiscal year 2020 reflected the effects of store closures and the pandemic. During fiscal year 2021, our business continued to be impacted by the pandemic, including continued volatility in the overall market, targeted and temporary reductions in certain store hours and temporary store closures, and changes in consumer purchasing patterns. Despite the continued COVID-19 disruption and volatility, our net revenue in fiscal year 2021 increased compared to fiscal year 2020 due in part to the effects of our stores being temporarily closed to the public in fiscal year 2020 and government stimulus as a result of COVID-19. Our net revenue in 2020 was essentially flat in comparison to fiscal year 2019. As a result, comparability of our financial performance between these periods may be impacted and our rate of growth should not be viewed as indicative of our potential results in future periods. The COVID-19 pandemic has resulted in, and may continue to result in, state, city or local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or voluntary shut-downs of retail locations, supply chain issues, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and could continue to have, adverse impacts on our business, financial condition and results of operations. The scope and nature of these impacts continue to evolve on a daily basis. Although the global distribution of vaccines continues to progress, the future impact of the COVID-19 pandemic remains highly uncertain. Resurgences of COVID-19 cases and the emergence of new variants have led to reduced consumer confidence and changes in shopping patterns, which may adversely impact store traffic. We continue to monitor the evolving situation as there remain many uncertainties regarding the pandemic, its resurgence through new variants, its anticipated duration, related healthcare authority guidelines, efficacy of vaccination initiatives, and potential federal and state level vaccine and testing mandates. We could experience further material impacts as a result of COVID-19. We also continue to monitor any potential COVID-19 related impacts on our domestic labs and our outsourced third party optical laboratories inChina andMexico , 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 inChina and a significant amount of domestically-purchased merchandise is manufactured inChina . We have partnered with our suppliers and third party laboratories to mitigate any potential significant delays in delivery of merchandise. We have made, and may continue to make, inventory forward buys to help manage potential supply chain disruptions. It is possible that our preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations. For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to "Item 1A. Risk Factors."
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
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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.
Same store sales growth
Same-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 theU.S. optical retail industry; •impact and timing of weather related store closures; and •effects and relevant risk exposures may be exacerbated by the ongoing threat of the COVID-19 pandemic 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 overall revenues in fiscal year 2021. While we have relationships with almost all vision care insurers inthe 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.
Recruitment of eye care professionals, coverage and expanded offers
Our ability to continue to attract and retain qualified vision care
professionals is key to store operations, as well as maintaining our
relationships with independent optometrists and professional corporations owned
by eye care practitioners that provide vision care services in our stores. We
have also begun to pilot remote medicine technologies in a limited number of
locations to enable the provision of remote eye examinations, which have
expanded our offerings. The effects and relevant risk exposures of labor
shortages, increased wage rates to attract and retain vision care professionals
or other increases in labor costs may be exacerbated by the ongoing threat of
the COVID-19 pandemic and resulting macroeconomic factors.
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Overall Economic Trends
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. During periods of economic downturn and
uncertainty, our customers especially benefit from our low prices. Additionally,
eye care purchases are predominantly a medical necessity and are considered
non-discretionary in nature. Therefore, the overall economic environment and
related changes in consumer behavior may have less of an impact on our business
than for retailers in other industries; however, the long-term effects of the
COVID-19 pandemic on overall economic trends and consumer spending patterns
remain uncertain.
Inflation
Substantial increases in product costs due to increases in materials cost or general inflation could lead to greater profitability pressure as we may not be able to pass costs on to consumers. To date, changes in materials prices and general inflation have not materially impacted our business. Wage investments, along with increased raw material costs as a result of inflation or supply issues, may have an impact on our profitability that may not be offset by leverage from revenue growth, productivity efficiency and, as appropriate, various pricing actions.
Consumer preferences and demand
Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends. 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 long-term effects of the COVID-19 pandemic on consumer preferences and recurring purchase behaviors remain uncertain.
Our historical results of operations reflect the impact of our ongoing investments in infrastructure to support our growth, including additional investments in remote medicine. We have made significant investments in information technology systems, supply chain systems, marketing, and personnel, including 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.
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.
Our ability to efficiently source and distribute products
Our revenue and operating income are affected by our ability to purchase our products in sufficient quantities at competitive prices. We have made, and may continue to make, inventory forward buys to help manage supply chain disruptions. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of revenue could be adversely affected in the event we face a worsening of constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of merchandise in a manner that is able to match market demand from our customers due to a worsening COVID-19 pandemic or other factors. We rely on a small number of vendors to supply the majority of our eyeglass lenses and contact lenses, and are thus exposed to supplier concentration risk. In particular, we have agreed to exclusively purchase almost all of our spectacle lenses from one supplier. During fiscal year 2021, 90% of spectacle lens expenditures were from this vendor and 92% of contact lens expenditures were with three vendors. We are less exposed to a supplier risk for our eyeglass frames as only 57% of frame expenditures were with two vendors. We source merchandise from suppliers located inChina , a significant amount of our domestically-purchased merchandise is manufactured inChina , and one of our outsourced third-party laboratories is located inChina . Historically, tariffs have not materially affected our financial results, and we believe that less than 15% of costs applicable to revenue are subject to tariffs on Chinese imports. We continue to monitor ongoing political relations betweenChina andthe United States .
Intermediate results and seasonality
51 -------------------------------------------------------------------------------- Table of Contents 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 precedingDecember 25th of each year. Additionally, although the period betweenDecember 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 year 2021, approximately 23% of our revenue was recorded in the fourth quarter, but approximately 25% of annual SG&A costs were recorded in the fourth quarter. Compared to prior fiscal years, in fiscal year 2020, we experienced stronger comparable store sales growth in the fourth quarter from strong customer demand, including the effect of our stores being temporarily closed to the public earlier in the year. Additionally, SG&A costs, primarily advertising expense, during the second and third quarters of fiscal year 2020 were lower than in the corresponding quarters of prior fiscal years due to impacts of the COVID-19 pandemic.
TheU.S. optical retail industry is highly competitive and fragmented with competition generally based upon brand name recognition, price, convenience, selection, service and product quality. We operate within the value segment, which emphasizes price and value, and compete with mass merchants, specialty retail chains, online retailers and independent eye practitioners and opticians. We also compete with large national retailers such as, in alphabetical order,LensCrafters , Pearle Vision and Visionworks. Ongoing consolidation activity has created, and further consolidation activity may create, organizations that are involved in virtually every sector of the optical industry, from retail and wholesale to frames, spectacle lenses, and managed vision care. This increased consolidation activity may enable these companies to benefit from purchasing advantages and the ability to leverage management capabilities across a larger business base. The COVID-19 pandemic may lead to changes in both the number and positioning of our competitors.
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 expenses
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.
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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 75 stores during fiscal year
2021. We will continue to monitor and determine our plans for future new store
openings based on health, safety and economic conditions.
Adjusted same store sales growth
We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store's opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers. We did not revise our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic. Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful. Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Diluted EPS (collectively, the "Company Non-GAAP Measures") The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use the Company Non-GAAP Measures to supplementU.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. 53 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table summarizes the major components of our results of operations for the periods indicated, in dollars and as a percentage of our net revenues.
In thousands, except earnings per share, percentage and store data Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019
Income:
Net product sales$ 1,718,344 $ 1,418,283 $ 1,426,136 Net sales of services and plans 361,181 293,477 298,195 Total net revenue 2,079,525 1,711,760 1,724,331 Costs applicable to revenue (exclusive of depreciation and amortization): Products 633,116 551,783 574,351 Services and plans 271,663 234,841 232,168 Total costs applicable to revenue 904,779 786,624 806,519 Operating expenses: Selling, general and administrative expenses 900,798 724,985 744,488 Depreciation and amortization 97,089 91,585 87,244 Asset impairment 4,427 22,004 8,894 Other expense (income), net (2,505) (445) 3,611 Total operating expenses 999,809 838,129 844,237 Income from operations 174,937 87,007 73,575 Interest expense, net 25,612 48,327 33,300 Loss on extinguishment of debt - - 9,786 Earnings before income taxes 149,325 38,680 30,489 Income tax provision (benefit) 21,081 2,403 (2,309) Net income$ 128,244 $ 36,277 $ 32,798 Operating data: Number of stores open at end of period 1,278 1,205 1,151 New stores opened during the period 75 62 75 Adjusted Operating Income$ 204,749 $ 134,148 $ 114,300 Diluted EPS$ 1.43 $ 0.44 $ 0.40 Adjusted Diluted EPS$ 1.48 $ 0.91 $ 0.75 Adjusted EBITDA 1$ 294,350 $ 218,307 $ 194,139 Note: Fiscal years 2021 and 2019 include 52 weeks. Fiscal year 2020 includes 53 weeks. 1 Adjusted EBITDA no longer excludes new store pre-opening expenses and non-cash rent. Refer to Non-GAAP Financial Measures section below for our presentation of Adjusted EBITDA. Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019 Percentage of net revenue: Total costs applicable to revenue 43.5 % 46.0 % 46.8 % Selling, general and administrative 43.3 % 42.4 % 43.2 % Total operating expenses 48.1 % 49.0 % 49.0 % Income from operations 8.4 % 5.1 % 4.3 % Net income 6.2 % 2.1 % 1.9 % Adjusted Operating Income 9.8 % 7.8 % 6.6 % Adjusted EBITDA 14.2 % 12.8 % 11.3 % 54
-------------------------------------------------------------------------------- Table of Contents Fiscal Year 2021 compared to Fiscal Year 2020 As a result of the COVID-19 pandemic, our retail stores closed to the public beginning onMarch 19, 2020 . We began reopening our stores to the public onApril 27, 2020 and onJune 8, 2020 , we announced the successful completion of the reopening process. Comparisons of current year results to prior year 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 table presents, by segment and by brand, the growth of comparable store sales, stores open at the end of the period and net revenues for fiscal 2021 compared to fiscal 2020.
Comparable store sales growth(1) Stores open at end of period Net revenue(2)
In thousands, except Fiscal Year Fiscal Year Fiscal Year
percentage and store data 2021 2020 Fiscal Year 2021 2020 Fiscal Year 2021 Fiscal Year 2020
Owned & Host segment
America's 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 - - - - 236,299 11.4 % 234,403 13.7 %
Reconciliations - - - - (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) % _________ 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 newEyeglass World stores and closed two America's Best stores. The total net new locations in fiscal year 2021 for America's Best andEyeglass 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 55 -------------------------------------------------------------------------------- Table of Contents 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 and Hosting segment net revenue. Net sales increased
Legacy segment net revenue. Net income increased
Corporate/Other segment net revenue. Net sales increased
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. 56 -------------------------------------------------------------------------------- Table of Contents 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 expenses
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 of
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 expenses (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.
Provision for income tax
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. 57 -------------------------------------------------------------------------------- Table of Contents Fiscal Year 2020 compared to Fiscal Year 2019
Net revenue
The following table presents, by segment and by brand, the growth of same store sales, stores open at the end of the period and net revenue for fiscal 2020 compared to fiscal 2019.
Comparable store sales growth(1) Stores open at end of period Net revenue(2)
In thousands, except Fiscal Year Fiscal Year Fiscal Year
percentage and store data 2020 2019 Fiscal Year 2020 2019 Fiscal Year 2020 Fiscal Year 2019
Owned & Host segment
America's Best (5.2) % 7.1 % 773 725 $ 1,131,016 66.1 % $ 1,108,760 64.3 %
Eyeglass World (2.7) % 5.8 % 119 117 179,934 10.5 % 178,841 10.4 %
Military (15.5) % 1.4 % 54 54 20,428 1.2 % 23,694 1.4 %
Fred Meyer (21.6) % (4.4) % 29 29 11,021 0.6 % 13,705 0.8 %
Owned & Host segment total 975 925 $ 1,342,399 78.4 % $ 1,325,000 76.9 %
Legacy segment (12.3) % 3.1 % 230 226 142,017 8.3 % 160,049 9.3 %
Corporate/Other - - - - 234,403 13.7 % 245,218 14.2 %
Reconciliations - - - - (7,059) (0.4) % (5,936) (0.4) %
Total (5.6) % 6.5 % 1,205 1,151 $ 1,711,760 100.0 % $ 1,724,331 100.0 %
Adjusted Comparable Store Sales Growth(3) (6.1) % 6.2 % _________ Note: Fiscal year 2020 includes 53 weeks. Fiscal year 2019 includes 52 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 a decrease of 0.4% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for fiscal year 2020 and fiscal year 2019, 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 0.2% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2020 and 2019, respectively. Total net revenue of$1,711.8 million for fiscal year 2020 decreased$12.5 million , or 0.7%, from$1,724.3 million for fiscal year 2019. This decrease was driven by the temporary closure of our stores to the public for a portion of fiscal year 2020 due to the COVID-19 pandemic, and was partially offset by new store sales as well as$32.2 million of net revenue attributable to the 53rd week in fiscal year 2020. Total net revenue was also negatively impacted by changes in unearned revenue. During fiscal year 2020, we opened 55 new America's Best stores, two newEyeglass World stores, and transitioned five additional Legacy stores to our management. During fiscal year 2020, we closed seven America's Best stores and one Legacy store as a result of our Legacy partner's decision to cease its overall operations at the location. The total net new locations in fiscal year 2020 for America's Best, Eyeglass Word, and Legacy are 48, two and four, respectively. Overall, store count grew 4.7% from the end of fiscal year 2019 to the end of fiscal year 2020. Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2020 were (5.6)% and (6.1)%, respectively. The decreases in comparable store sales growth and Adjusted Comparable Store Sales Growth were driven by the temporary closure of our stores to the public. Net product sales comprised 82.9% and 82.7% of total net revenue for fiscal years 2020 and 2019, respectively. Net product sales decreased$7.9 million , or 0.6% during fiscal year 2020 compared to fiscal year 2019, primarily due to the temporary closure of our stores to the public and lower wholesale fulfillment that was partially offset by additional revenue from the 53rd week and increased sales of contact lenses. Net sales of services and plans decreased$4.7 million , or 1.6%, primarily due to the temporary closure of our stores to the public. 58 -------------------------------------------------------------------------------- Table of Contents Owned & Host segment net revenue. Net revenue increased$17.4 million , or 1.3% as stronger sales in fiscal year 2020, and in the 53rd week, were partially offset by declines due to the temporary closure of our stores to the public.
Legacy segment net revenue. Net income decreased
Corporate/Other segment net revenue. Net income decreased
Net revenue reconciliations. Reconciliations for fiscal year 2020 and fiscal year 2019 include increases in deferred revenue of$2.3 million and$5.1 million , respectively and increases in unearned revenue of$4.8 million and$0.8 million , respectively. The increase in deferred revenue for fiscal year 2020 was driven by growth in eye care club membership sales; we believe that the increases in deferred revenue were limited somewhat by the temporary closure of our stores to the public. The increase in unearned revenue compared to the prior period is due to higher sales in the 53rd week of the fiscal year. In 53-week fiscal years we have historically experienced higher volumes in the 53rd week compared to the 52nd week. Costs applicable to revenue Costs applicable to revenue of$786.6 million for fiscal year 2020 decreased$19.9 million , or 2.5%, from$806.5 million for fiscal year 2019. As a percentage of net revenue, costs applicable to revenue decreased from 46.8% for fiscal year 2019 to 46.0% for fiscal year 2020. This decrease as a percentage of net revenue was driven by higher eyeglass margin, partially offset by increased contact lens mix and optometrist costs while our stores were temporarily closed to the public.
Product costs as a percentage of net product sales decreased from 40.3% in fiscal 2019 to 38.9% in fiscal 2020, due to higher eyewear margin, partially offset by increasing the range of contact lenses.
Owned & Host segment costs of products. Costs of products as a percentage of net product sales decreased from 28.9% for fiscal year 2019 to 28.0% for fiscal year 2020 driven by higher eyeglass margin, partially offset by increased contact lens mix. Legacy segment costs of products. Costs of products as a percentage of net product sales increased from 46.2% for fiscal year 2019 to 47.8% for fiscal year 2020. The increase was primarily driven by increased contact lens mix and a higher mix of non-managed care customer transactions versus 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. Decreases in managed care mix increase costs of products as a percentage of net product sales and have a corresponding positive 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 77.9% for fiscal year 2019 to 80.0% for fiscal year 2020. The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public. 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 83.2% for fiscal year 2019 to 86.0% for fiscal year 2020. The increase was driven by optometrist and technician costs incurred during the temporary closure of our stores to the public. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 46.3% for fiscal year 2019 to 46.5% for fiscal year 2020. The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public.
Selling, general and administrative expenses
SG&A of$725.0 million for fiscal year 2020 decreased$19.5 million , or 2.6%, from fiscal year 2019. As a percentage of net revenue, SG&A decreased from 43.2% for fiscal year 2019 to 42.4% for fiscal year 2020. This decrease as a percentage of net revenue was primarily driven by lower advertising investment partially offset by store and corporate payroll and occupancy costs incurred during the temporary closure of our stores to the public. SG&A for fiscal year 2020 includes$8.6 million 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. Owned & Host segment SG&A. SG&A as a percentage of net revenue decreased from 38.4% for fiscal year 2019 to 36.5% for fiscal year 2020. This decrease as a percentage of net revenue was primarily driven by lower 59 -------------------------------------------------------------------------------- Table of Contents advertising investment partially offset by store payroll and occupancy costs incurred during the temporary closure of our stores to the public. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 35.1% for fiscal year 2019 to 36.5% for fiscal year 2020 primarily driven by store payroll costs incurred during the temporary closure of our stores to the public.
Depreciation and amortization
Depreciation and amortization expense of$91.6 million for fiscal year 2020 increased$4.3 million , or 5.0%, from$87.2 million for fiscal year 2019 primarily driven by new store openings and investments in information technology and doctor equipment. Our property and equipment balance, net, decreased$25.5 million , or 6.9%, during fiscal year 2020, reflective of$76.2 million in purchases of property and equipment,$1.1 million in new finance leases, less$84.2 million in depreciation expense and$18.6 million in impairment and other adjustments. Asset impairment We recognized$22.0 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores in fiscal year 2020 compared to$8.9 million recognized in fiscal year 2019. Expenses recognized in fiscal year 2020 were related to impairments of long-lived tangible assets at our retail stores and right of use ("ROU") assets related to our retail stores. The increase in store asset impairment charges during fiscal year 2020 was primarily related to our Owned & Host segment and was 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; the historical performance of the stores before the temporary closure of our stores to the public; the effect of store closures and uncertainty in store revenues over the remaining useful life of the asset group as a result of the COVID-19 pandemic; and the remaining useful lives of the assets. The asset impairment expense for fiscal year 2020 also includes$1.1 million related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other. Interest expense, net Interest expense, net, of$48.3 million for fiscal year 2020 increased$15.0 million , or 45.1%, from$33.3 million for fiscal year 2019. The increase was primarily driven by losses related to immediate recognition of changes in fair value of ineffective hedges of$4.0 million and charges related to interest payments and amortization of debt discounts related to the 2025 Notes of$17.3 million that were partially offset by a reduction in our term loan and Revolving Credit Facility utilization. Income tax provision
Our income tax provision for fiscal 2020 reflected our federal and state statutory rate of 25.5%, combined with a discrete benefit of
primarily related to the exercise of stock options. In comparison, the tax benefit associated with fiscal year 2019 reflected an income tax expense at our statutory federal and state rate of 25.5%, offset by a
60 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures We define Adjusted Operating Income as net income, plus interest expense and income tax provision (benefit), further adjusted to exclude stock 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 other expenses. We define Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock compensation expense, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and 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 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 of our 2025 Notes when not required underU.S. GAAP to be added back for diluted earnings per share, losses (gains) on change in fair value of derivatives, other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments. In 2020, we introduced Adjusted Operating Income and Adjusted Operating Margin as measures of performance we planned to use in addition to Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. We believe Adjusted Operating Income and Adjusted Operating Margin enhance an understanding of our performance by highlighting the results from ongoing operations and the profitability of our business. 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. Further, consistent with our presentation of Adjusted Operating Income, we no longer exclude new store pre-opening expenses and non-cash rent from our presentation of Adjusted EBITDA and Adjusted Diluted EPS. New store pre-opening expenses totaled$3.4 million ,$2.6 million and$3.3 million for the fiscal years 2021, 2020 and 2019, respectively; and non-cash rent totaled$1.3 million ,$2.6 million and$3.2 million for fiscal years 2021, 2020 and 2019, respectively. The presentation of Adjusted EBITDA and Adjusted Diluted EPS for the fiscal year end 2019 has been recast to reflect these changes. See our Form 8-K filed with theSEC onFebruary 26, 2020 for more information. 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 withU.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 supplementU.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 supplementsU.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business thanU.S. GAAP results alone. EBITDA and the Company Non-GAAP Measures are not recognized terms underU.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 withU.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 ourU.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures. 61 -------------------------------------------------------------------------------- Table of Contents 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 underU.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, 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 expense or the cash necessary to pay income taxes; •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, the Company’s EBITDA and non-GAAP measures should not be considered 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 and net income; and adjusted diluted EPS for the periods presented:
In thousands Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019 Net income$ 128,244 6.2 %$ 36,277 2.1 %$ 32,798 1.9 % Interest expense 25,612 1.2 % 48,327 2.8 % 33,300 1.9 % Income tax provision (benefit) 21,081 1.0 % 2,403 0.1 % (2,309) (0.1) % Stock compensation expense (a) 14,886 0.7 % 10,740 0.6 % 12,670 0.7 % Loss on extinguishment of debt (b) - - % - - % 9,786 0.6 % Asset impairment (c) 4,427 0.2 % 22,004 1.3 % 8,894 0.5 % Litigation settlement (d) 1,500 0.1 % 4,395 0.3 % - - % Secondary offering expenses (e) - - % - - % 401 - % Management realignment expenses (f) - - % - - % 2,155 0.1 % Long-term incentive plan (g) - - % - - % 2,830 0.2 % Amortization of acquisition intangibles (h) 7,488 0.4 % 7,426 0.4 % 7,405 0.4 % Other (k) 1,511 0.1 % 2,576 0.2 % 6,370 0.4 % Adjusted Operating Income / Adjusted Operating Margin$ 204,749 9.8 %$ 134,148 7.8 %$ 114,300 6.6 % Note: Fiscal years 2021 and 2019 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. 62 -------------------------------------------------------------------------------- Table of Contents In thousands Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019 Net income$ 128,244 6.2 %$ 36,277 2.1 %$ 32,798 1.9 % Interest expense 25,612 1.2 % 48,327 2.8 % 33,300 1.9 % Income tax provision (benefit) 21,081 1.0 % 2,403 0.1 % (2,309) (0.1) % Depreciation and amortization 97,089 4.7 % 91,585 5.4 % 87,244 5.1 % EBITDA 272,026 13.1 % 178,592 10.4 % 151,033 8.8 % Stock compensation expense (a) 14,886 0.7 % 10,740 0.6 % 12,670 0.7 % Loss on extinguishment of debt (b) - - % - - % 9,786 0.6 % Asset impairment (c) 4,427 0.2 % 22,004 1.3 % 8,894 0.5 % Litigation settlement (d) 1,500 0.1 % 4,395 0.3 % - - % Secondary offering expenses (e) - - % - - % 401 - % Management realignment expenses (f) - - % - - % 2,155 0.1 % Long-term incentive plan (g) - - % - - % 2,830 0.2 % Other (k) 1,511 0.1 % 2,576 0.2 % 6,370 0.4 % Adjusted EBITDA / Adjusted EBITDA Margin$ 294,350 14.2 %$ 218,307 12.8 %$ 194,139 11.3 % Note: Fiscal years 2021 and 2019 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.
In thousands, except per share amounts Fiscal year 2021 Fiscal year 2020
Fiscal Year 2019 Diluted EPS $ 1.43 $ 0.44 $ 0.40 Stock compensation expense (a) 0.15 0.13 0.16 Loss on extinguishment of debt (b) - - 0.12 Asset impairment (c) 0.05 0.27 0.11 Litigation settlement (d) 0.02 0.05 - Secondary offering expenses (e) - - 0.00 Management realignment expenses (f) - - 0.03 Long-term incentive plan expense (g) - - 0.03 Amortization of acquisition intangibles (h) 0.08 0.09 0.09 Amortization of debt discounts and deferred financing costs (i) 0.02 0.14 0.02 Losses (gains) on change in fair value of derivatives (j) (0.03) 0.05 - Other (n) (0.01) 0.03 0.08 Tax benefit of stock option exercises (l) (0.15) (0.10) (0.12) Tax effect of total adjustments (m) (0.08) (0.19) (0.16) Adjusted Diluted EPS $ 1.48 $ 0.91 $ 0.75 Weighted average diluted shares outstanding 96,134 82,793 81,683
Note: The 2021 and 2019 fiscal years include 52 weeks. Fiscal 2020 consists of 53 weeks. Some of the totals in the table above do not add up due to rounding differences.
____________ (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 deferred financing fees related to the extinguishment of debt. (c)Reflects write-off of primarily property, equipment and lease related assets on closed or underperforming stores. (d)Expenses associated with settlement of certain litigation. (e)Expenses related to our secondary public offerings. (f)Expenses related to a non-recurring management realignment described on Form 8-K filed with theSEC onJanuary 10, 2019 . (g)Expenses pursuant to a long-term incentive plan for non-executive associates who were not participants in the management equity plan. This plan was effective in 2014 following the acquisition of the Company by affiliates of KKR & Co. Inc. (the "KKR Acquisition"). 63 -------------------------------------------------------------------------------- Table of Contents (h)Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting to the KKR Acquisition. (i)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 adjusting these costs is not required in the calculation of diluted earnings per share in accordance with the if-converted method underU.S. GAAP. Amortization of debt discount and deferred financing costs total$2.1 million ,$11.9 million and$1.3 million for the fiscal years 2021, 2020 and 2019, respectively. (j)Reflects losses (gains) recognized in interest expense on change in fair value of de-designated hedges of$(3.3) million and$4.0 million for fiscal years 2021 and 2020. (k)Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA) including our share of (gains) losses on equity method investments of$(2.4) million and$1.8 million for fiscal years 2021 and 2019, respectively; and other expenses and adjustments which are primarily related to excess payroll taxes on stock option exercises, executive severance and relocation. (l)Tax benefit associated with accounting guidance requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur. (m)Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates. (n)Reflects other expenses in (k) above, including the impact of stranded tax effect of$(2.1) million for fiscal year 2021 associated with our interest rate swaps that matured in 2021.
Cash 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 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. We continue to prioritize cash conservation and prudent use of cash, while safely conducting normal operations. 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. While we have historically exercised prudence in our use of cash, the COVID-19 pandemic has required us to 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 2021, we had$305.8 million in cash and cash equivalents and$293.6 million of availability under our revolving credit facility, which includes$6.4 million in outstanding letters of credit. The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated: Fiscal Year Fiscal Year Fiscal Year In thousands 2021 2020 2019 Cash flows provided by (used for): Operating activities$ 258,938 $ 234,981 $ 165,081 Investing activities (92,897) (76,410) (100,631) Financing activities (234,324) 176,281 (42,141) Net increase (decrease) in cash, cash equivalents and restricted cash$ (68,283) $
334,852
Note: The 2021 and 2019 fiscal years include 52 weeks. Fiscal 2020 consists of 53 weeks.
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Net cash from operating activities
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. 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. Cash flows provided by operating activities increased by$69.9 million to$235.0 million , or 42.3%, during fiscal year 2020 from$165.1 million during fiscal year 2019. The increase in net cash provided by operating activities consisted of an increase in net income of$3.5 million , and an increase in non-cash expense items of$12.0 million including asset impairment charges of$13.1 million , amortization of debt discount and deferred financing costs of$10.6 million , depreciation and amortization of$4.3 million , deferred income tax expense of$2.1 million and losses recognized for the changes in fair value of derivatives of$4.0 million partially offset by a decrease in loss on extinguishment of debt of$9.8 million , decrease of stock compensation expense of$1.9 million , and decrease of$11.0 million in other non-cash expenses. Changes in net working capital and other assets and liabilities contributed an additional$54.5 million in cash compared to fiscal year 2019. Increases in other liabilities contributed$17.6 million in year-over-year cash primarily due to an increase in deferral of employer payroll taxes of$12.8 million as a result of the CARES Act, increases in compensation related accruals of$2.2 million due primarily to timing, increases of$3.1 million due to lease concessions and deferrals and other increases in miscellaneous accruals due to timing, partially offset by decreases in accrued advertising and payments of litigation settlements during the year. Increases in accounts payable contributed$26.9 million in year-over-year cash, primarily as a result of increased purchases and replenishing activity due to both store growth and increased sales in December of 2020 as compared to the same period of 2019 and increases in advertising. Decreases in inventory contributed$27.3 million in year-over-year cash, primarily due to no forward buys occurring after the first quarter of 2020. Offsetting these items were increases in other assets which used$14.0 million in year-over-year cash, consisting of$8.9 million of cloud hosted software asset development costs,$6.2 million in rent-related items and other prepaid balances. Additionally, accounts receivable balances used$6.8 million in year-over-year cash, primarily reflective of year-over-year increases in outstanding credit card receivables due to higher sales in the last week of 2020 as compared to the same period of 2019 and timing of credit card processing. Changes in deferred revenue contributed$2.8 million less cash when compared to 2019 driven by decreased sales of our eye care club membership and product protection plans. This was more than offset by a$3.9 million increase in year-over-year cash due to timing of unearned revenue.
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. We purchased$95.5 million in capital items during fiscal year 2021. Approximately 80% of our capital spend is related to our expected growth (i.e., new stores, 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 decreased by$24.2 million , to$76.4 million , during fiscal year 2020 from$100.6 million during fiscal year 2019. The decrease was primarily due to cash conservation measures during the temporary store closure period, which resulted in reduced store openings and lower IT investment for the full year. 65
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Net cash provided by (used for) financing activities
Net cash provided by (used for) financing activities decreased$410.6 million , from$176.3 million provision of cash to$234.3 million use of cash during fiscal year 2021. The decrease in cash provided by financing activities 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 in the current fiscal year 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. Net cash provided by (used for) financing activities increased$218.4 million , from$42.1 million use of cash to$176.3 million provision of cash during fiscal year 2020. The increase in cash provided by financing activities was primarily due to lower repayments on long-term debt of$222.6 million and decreased purchases of treasury stock of$25 million , offset by decreases in cash provided by borrowings on long-term debt of$17.8 million and an increase in cash used for payments of debt issuance costs of$9.5 million .
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
2021:
Amount Available
Amount for Additional
In thousands Interest Rate (2) Outstanding Borrowing
2025 Notes, due May 15, 2025 Fixed $ 402,500 $ -
Term loan, due July 18, 2024 Variable 150,000 -
Revolving credit facility, due July 18,
2024(1) Variable - 293,619
Total $ 552,500 $ 293,619
____________
(1)At January 1, 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 of 1.25% for LIBOR Loans with
LIBOR to not be lower than 0.00% in any period, and an Applicable Margin of
0.25% for ABR Loans, as of fiscal year end 2021. 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%.
EffectiveNovember 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. OnNovember 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. OnFebruary 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 throughDecember 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 and general market and economic conditions. The Company expects to fund the share repurchases using cash on hand. During fiscal year 2021, the Company repurchased 1.4 million shares of its common stock for$69.9 million under the share repurchase program. After these repurchases,$130 million remains available under the share repurchase authorization.
Capital expenditure
In thousands Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019 New stores (owned brands) $ 40,058 $ 27,865 $ 37,734 Laboratories, distribution centers and optometric equipment 20,900 19,882 19,690 Information technology and other 34,557 29,076 43,901 Total $ 95,515 $
$76,823,101,325 Note: Fiscal years 2021 and 2019 include 52 weeks. Fiscal 2020 consists of 53 weeks.
66 -------------------------------------------------------------------------------- Table of Contents We expect capital expenditures in fiscal year 2022 to be approximately between$110 million and$115 million and to be used primarily in supporting the Company's growth through investments in new stores and information technology improvements. 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 needs
At the end of fiscal 2021, our current and long-term significant cash requirements include the following commitments and contractual obligations:
In thousands 2022 2023 2024 2025 2026 Thereafter Total Term loan(a) $ - $ -$ 150,000 $ - $ - $ -$ 150,000 2025 Notes(b) - - - 402,500 - - 402,500 Revolving credit facility(c) - - - - - - - Estimated interest(d) 12,808 12,808 11,189 3,773 - - 40,578 Noncancelable operating leases(e) 77,373 84,471 73,461 68,409 51,160 111,468 466,342 Finance leases(f) 6,752 6,252 4,753 4,913 4,519 6,917 34,106 Other commitments(g) 48,035 28,589 21,623 19,244 524 84 118,099 Total$ 144,968 $ 132,120 $ 261,026 $ 498,839 $ 56,203 $ 118,469 $ 1,211,625 ____________ (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 long-term debt. (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 our current interest elections described in "Liquidity and Capital Resources." Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings and interest rate fluctuations. Expected obligations on our hedging instruments are excluded from estimated interest presented in the table above. (e)We lease our retail stores, optometric examination offices, distribution centers, office space and all of our optical laboratories with the exception of ourSt. 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$30.6 million during fiscal year ended 2021. 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 cash on hand and cash expected to be generated from operations. We followU.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.
Significant Accounting Policies and Estimates
The preparation of financial statements in accordance withU.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. 67 -------------------------------------------------------------------------------- Table of Contents 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 2021 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 2021 by approximately$4 million , which would ultimately have been recorded in the next fiscal year. The Company considers its revenue from managed care customers to include variable consideration and estimates such amounts associated with managed care customer revenues using the history of concessions provided and cash receipts from managed care providers; a 100 basis point change in our rate of concessions granted would have reduced our revenues in fiscal year 2021 by approximately$2 million .
See Note 7. “Revenue from contracts with customers” in our audited consolidated financial statements included in Part II. Point 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 a rate of 7.5% in fiscal year 2021. We had$346.4 million of property and equipment, net, and ROU assets of$354.9 million as ofJanuary 1, 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. 68 -------------------------------------------------------------------------------- Table of Contents Impairment ofGoodwill 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 ofJanuary 1, 2022 , we had$777.6 million of goodwill,$240.5 million of non-amortizing intangible assets, and$42.0 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 the impairment analysis for goodwill, fair value exceeded carrying value by at least 30% for all of our reporting units. Future changes in reporting unit's business profitability, expected cash flows, changes in business strategy and external market conditions, among other factors, could require us to record an impairment charge for goodwill. A 100 basis point increase in discount rates used to estimate the fair value of the Company's reporting units would not result in an impairment of the Company's goodwill balance at fiscal year-end. When evaluating indefinite-lived, non-amortizing trademarks and trade names for impairment, we use the relief-from-royalty method to estimate fair value, whereby an estimated royalty rate is determined based on comparable licensing arrangements, which is then applied to the revenue projections for the subject asset. The estimated fair value is calculated using a discounted cash flow analysis. We record an impairment charge as the excess of carrying value over estimated fair value. 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. 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. We did not test any finite-lived intangible assets for impairment in fiscal year 2021.
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 ofJanuary 1, 2022 was$82.8 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 January 1, 2022 , our total inventory balance was $123.7
million . A 10% increase in the obsolescence and shrinkage reserves will not have
a material impact on our financial position. See Note 2. "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 more 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.
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