National Vision (EYE 43.47, -0.28, 0.64%) has seen mixed trading activity after
reporting Q2 earnings this morning. With it being a relatively recent IPO (debuted
in October 2017) and not well known among investors, we wanted to provide some
color on their operations in general as well as their latest financial results.
While you may have never heard of National Vision, you have probably heard of
National Vision is one of the largest optical retailers (providing eye exams, eyeglasses, and contact lenses) in the U.S. with a focus on the value segment (cost-conscious and low-income consumers). It offers an opening price point that strives to be among the lowest in the industry. EYE operates circa 1,050 retail stores across five brands and 19 consumer websites. Its flagship brand is America's Best, which operates close to 600 optical stores in high-traffic strip centers.
EYE has two reportable segments: its owned & host segment and its legacy segment. Its owned & host segment includes its two owned brands -- America's Best and Eyeglass World -- and its Vista Optical locations in Fred Meyer stores. Within this segment, EYE also operates Vista Optical locations on military bases across the country to provide low-cost vision care products and services to service members. Its legacy segment reports on Vision Centers operating in select Walmart stores, building on a 27-year strategic relationship. Through its FirstSight unit, EYE arranges for the provision of optometric services at almost all of the optometric offices next to Walmart and Sam's Club stores in California.
EYE believes its bundled offerings, including 2-pairs of eyeglasses plus an eye exam for $69.95 at America's Best and 2-pairs of eyeglasses for $78 at Eyeglass World, represent among the lowest price offerings of any national chain. Also, eye care purchases are predominantly a medical necessity and are therefore considered non-discretionary in nature.
As people age, their eyesight diminishes. This tendency is exacerbated by diabetes, increased screen usage, poor diet, and less healthy lifestyles in general. Eye exams, beyond providing a prescription for eyeglasses and contact lenses, can detect hundreds of potential health concerns, ranging from eye diseases, to general health concerns, to life threatening conditions such as brain tumors and aneurysms. This is why regular eye exams are so important. But for many people, especially those who are lower-income or uninsured, eye exams are an expensive, unfamiliar, and intimidating experience.
Value chains that can help to improve the affordability and accessibility of optical services for those populations are gaining market share in the optical retail industry. Larger optical retailers have gained market share from independent practitioners over the past 20 years. Despite this growth, the top ten optical retailers still have a relatively small share of the overall market. The value segment of the U.S. optical retail industry is growing at nearly twice the rate of the broader optical retail industry.
The optical retail industry is generally better insulated from online competition than other retail categories. This is due to inherent penetration barriers that make optical retail better suited for omni-channel offerings rather than pure e-commerce. Although contact lenses lend themselves more to online purchases than do eyeglasses, users still generally need to visit an eye care practitioner or a store to update their prescription. Such visits present an opportunity to sell an annual supply of contact lenses to the customer.
Quickly turning to the Q2 results, non-GAAP EPS jumped 75% year/year
to $0.21/share from $0.12/share in the prior year period. Revenue rose 14.2%
year/year to $385.5 mln. The results were slightly better than expected. EYE
also reaffirmed full year guidance. Comparable store sales growth was +10.4%
while adjusted comps were +8.8%, primarily driven by increases in customer
transactions and, to a lesser extent, average ticket.
Of note, this was EYE's 66th consecutive quarter of positive comps, driven primarily by customer transactions. EYE saw an acceleration in customer traffic into Q2 that benefited from an extended peak selling season. The company opened 25 new stores, closed two stores, and ended the quarter with 1,050 stores. EYE remains on track for its 2018 store opening plans of approx. 75 stores. Overall, store count grew 7.1% year/year.
In sum, the quarter came in pretty much as expected. The stock has been on a bit of a roller coaster since its IPO debut in October. By January, it was trading near $44 but pulled back to the low $30s in Spring 2018. It has since returned to the mid-$40s range. Over the long term, EYE should benefit from several secular growth trends, including an aging population (at age 45, the need for vision correction begins to increase significantly), a frequent replacement cycle (annual eye exams), increased usage of computer and mobile screens, and a general trend toward increasing focus on health and wellness.