Hispanolistic/E+ via Getty Images
Hispanolistic/E+ via Getty Images
Readers may find my previous coverage via this link. My previous rating was a hold, as I believed National Vision Holdings (NASDAQ:EYE) long-term growth outlook was uncertain. My thought was to wait for growth normalization in the results before I turned bullish. I am revising my rating to buy as I turn optimistic about management’s ability to steer business growth and margins back to normalized levels. The FY24 and FY25 guide is very positive, and so long as it can continue to execute like it did in 4Q23, I think the stock price will continue to trend upwards.
EYE 4Q23 net revenue grew 8% y/y to $506.4 million, above consensus estimates of $499.8 million. Driving the growth was a comparable store sales growth of 5.7%, driven by both higher transactions and tickets. Gross margin decreased 139 bps y/y to 51.2% as higher optometrist-related costs and a reduction in certain components of service revenue offset strength in exam revenue and a decrease in product costs. That said, adj. EBITDA grew 48.4% y/y to $23.9 million, with adj. EBITDA margin increasing by 128 bps y/y to 4.7%.
Based on author's own math
Based on my view of the business, EYE should be able to grow -6% in FY24 (guidance) and recover growth of 4% in FY25 (guidance for mid-single-digit comparable sales growth). I have revised my FY24 growth assumption upwards by 100bps to reflect the implementation of a pricing increase, which should cushion the impact of the Walmart deal. To reflect the expected improvement from the conversion of stores to America’s Best banner and also a better macro environment (which should improve discretionary spending). I note that my FY25 growth expectation of 4% is conservative as it does not assume any significant store growth contribution, and growth comes at the lower end of the FY25 guide (assuming the mid-single-digit is 4 to 6%). I have stepped up my margin assumption by 100bps in FY25 as well to reflect my optimism in management's ability to drive further margin improvement—from the digitization of stores (more remote capabilities), which improves productivity (lower labor costs), and also from the conversion of lower-unit economic Eyeglass World brands to America’s Best banner. EYE is currently trading at 2-year forward PE of 27x, and given that FY24 is still a year of depressed earnings (still suffering from the loss of the Walmart deal for 1H24), valuing EYE based on FY25 numbers seems more appropriate.
The evidence that I was waiting for seems to be coming through the P&L nicely, and management FY24 guidance really instills a strong boost in confidence. FY24 guidance includes comparable store sales growth of 2% to 4%, which suggests that demand has stabilized against FY23 given that FY23 comparable store sales grew 2.9% (no deterioration in unit economics after the termination of the Walmart deal). There are several encouraging signs that suggest EYE can beat this guidance. Firstly, given that the US was facing bad weather, management comments that trends had improved sequentially in February were very encouraging. Secondly, the lower end of FY24 guidance assumes demand softens and Eyeglass World trends do not improve, which I think it will as I expect the macro environment to improve in 2H24 (i.e., consumers have more discretionary income) and with the expansion of America’s Best banner. Regarding the latter point, management expects to finish rebranding 20 of the California Eyeglass World stores as America's Best by the end of 1Q24. Considering that the California Eyeglass World stores were underperforming the chain average and that the plan to convert the stores seems to be primarily focused on enhancing store economics and overall profitability, I think this conversion will drive a positive impact on P&L. On growth, this should drive a step up in better sales given that they are underperforming stores (changing the store brand should also recapture consumer attention that is not visiting the Eyeglass World brand). On margin, the conversion will drive margin expansion as it is expected to lower field overhead, reduce travel expenses, drive better leverage of national advertising spend, and improve optometrist deployment. Lastly, EYE has already implemented their non-headline pricing increases and cost-saving initiatives, which means the hard comps in 1H24 (due to the loss of Walmart) will be cushioned.
Overall, I am very positive about this FY24 guide, and it has really helped with the stock sentiment—share price is up 10% post-earnings. How EYE executes from here will be the main driver for the share price because it will instill further confidence that the management target for mid-single-digit [MSD] comparable sales growth in FY25 is achievable. Based on what I am seeing, execution seems to be tracking well, and two aspects that really highlight this are the successful implementation of its technology capabilities and business improvement initiatives. On technology, EYE has now equipped more than 500 of America's Best stores with remote eye exam capabilities, and the impacts on the business were clear as EYE delivered 5.7% comparable sales growth in 4Q23. On business improvement initiatives, the key thing to track is how EYE has managed its labor costs given the pressure from a lack of optometrists. The implementation of remote eye exams has effectively addressed this issue by providing optometrists with more flexibility. This, in turn, should continue to aid EYE in improving staff recruitment, retention, and productivity metrics, which in turn lead to gains in both same-store and margin sales. I believe it's important to highlight that these investments are still in their early stages of development; for instance, only 5% of eye exams are conducted remotely. Therefore, I think there is a lot of room for EYE to continue driving growth and productivity on this front.
Looking ahead, I believe all EYE have to do is continue executing what they are doing now, driving margin expansion and productivity, and continuing their store digitization initiative. If management can continue to show progress toward bringing the stability of same-store growth back and getting margins ramped to the mid-single-digit range, I think the stock will do well.
Downside risks include poorer than expected execution, which results in slower-than-expected top line growth, driven by weak comparable store growth as management fails to continue rolling out remote eye exam capabilities in stores, or it is not able to convert the intended number of stores to America’s Best banner. This will impact the narrative that EYE can continue to drive improvement in the business over the near term.
I am recommending a buy rating for EYE, as I have increased confidence in management's ability to deliver on its FY24/25 guidance. Recent results were encouraging, with EYE reporting very positive comparable sales growth of 5.7%. Additionally, FY24 guidance suggests stabilizing demand with potential upside. Their execution on technology initiatives continues to track well – specifically, its remote eye exams which I see as a key driver of growth and productivity. All in all, EYE appears well-positioned to achieve mid-single-digit comparable sales growth and margin expansion in the near-to-mid-term, which if happens should drive the stock price upwards.