Vision (EYE 33.12, +1.15, +3.60%) traded lower on Q1 earnings yesterday but is trading higher today.
With the recent IPO having made its debut in October 2017 and not being well
known among investors, we wanted to provide some color on what they do and how
the quarter went. While you may have never heard of National Vision, you have
probably heard of its brands.
It's one of the largest optical retailers (eye exams, eyeglasses, and contact lenses) in the US and it offers an opening price point that strives to be among the lowest in the industry which allows it to focus on the cost-conscious and low-income consumers that make up the value segment. EYE operates 1,000+ 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: the owned & host segment and the legacy segment. The 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 provides low-cost vision care products and services to American military service members by operating Vista Optical locations on military bases across the country. Its legacy segment consists of EYE's 27-year strategic relationship with Walmart to operate Vision Centers in select Walmart stores. In addition, 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.
Eye care purchases are predominantly a medical necessity and are therefore considered non-discretionary in nature. At age 45, the need for vision correction begins to increase significantly. The impact of age is exacerbated by diabetes, increased screen usage, poor diet, and generally less healthy lifestyles. Eye exams, beyond providing a prescription for eyeglasses and contact lenses, can detect hundreds of potential health concerns, ranging from eye diseases, to life threatening conditions such as brain tumors and aneurysms. But for many people, especially the lower-income and the uninsured, eye exams are an expensive, unfamiliar and intimidating experience.
Value chains 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 US optical retail industry is growing at nearly twice the rate of the broader optical retail industry.
The optical retail industry is generally one of the more insulated retail categories when it comes to online competition. 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.
Quickly turning to the Q1 results, non-GAAP EPS declined to $0.35 from $0.40 in the prior year period. Revenue rose 10.3% year/year to $408 mln. The revenue was better than expected but the EPS came up light relative to market expectations. EYE also reaffirmed full year guidance. Comparable store sales growth of +4.6% was driven by increases in both customer transactions and average ticket. That comp was down from +11.5% in Q4. Full year 2017 comps were +8.4%. EYE notes that Q1 was its 65th consecutive quarter of positive comps, so they are consistent. EYE opened 15 stores during Q1, including locations in the greater New York metro area. The company continues to see a long runway for store growth.
In sum, the EPS miss caused the stock to trade lower yesterday. 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 $30's over the past few months. Over the long term, EYE should benefit from several secular growth trends, including an aging population , a frequent replacement cycle, annual eye exams, increased usage of computer and mobile screens and a growing focus on health/wellness.
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