National Vision Holdings: Downgrade To Hold As Initiatives Take Time To Work

seekingalpha11-19

I downgrade National Vision Holdings to a hold rating due to lack of near-term stock price appreciation and the need for tangible growth evidence.3Q24 earnings showed modest growth, with net revenue ...

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Luis Alvarez/DigitalVision via Getty Images  Investment overview  I wrote about National Vision Holdings (NASDAQ:EYE) previously (31st May) with a buy rating as I expected EYE to be at the high end of its FY24 guidance, and when that happens, valuation should get rerated back to 10x forward EBITDA. Fast-forward today, my bullish view did not materialize, and the share price has fallen further. After reviewing the 3Q24 earnings and the new initiatives, I now give a hold rating as I don’t see the stock price appreciating anytime soon. While the initiatives (as discussed below) are positive, they need time to work, and investors are likely to just stay on the sidelines until EYE reports better growth and productivity metrics. 3Q24 earnings (announced on 6th November 2024)  EYE reported 2.9% y/y growth in net revenue to $451.5 million, in line with consensus estimates. Of the 2.9% y/y growth, same-store sales growth [SSSG] contributed 0.9%, driven by an increase in transactions (0.1% contribution) and higher tickets (1.3% contribution). By major brands, America’s Best reported $388.8 million in revenues, and Eyeglass World reported $48.1 million in revenue. Gross margin also came slightly above consensus estimates (57.9% vs. 57.23%) despite the higher optometrist-related costs and a lower eyeglass mix. Adj EBITDA came in at $37 million, an 8.2% margin, which was a 80bps improvement vs. last year. As a result, EYE reported 3Q24 adj. EPS from continuing operations of $0.12, above the consensus estimate of $0.06. Strategic initiatives should rejuvenate growth  In my opinion, the most important takeaway from the 3Q24 results is that management introduced strategic initiatives and provided updates on the review of their store fleet. For strategic initiatives, they include implementation of traffic-driving initiatives like new product launches, expanding optometrist capacity, and new promotions. It was very encouraging to learn that these initiatives have worked in driving in traffic and attracting new customers. For instance, in the quarter, EYE introduced their first progressive offer of two-pairs for $129.95, which includes an eye exam. May Investing IdeasAlthough traffic only contributed 0.1% to SSSG, note that this is because of the tough comp base in 3Q23, which saw 3.6% traffic growth. On a two-year stack basis, traffic growth has accelerated by 150 bps, marking the 2nd consecutive acceleration and proving the strategy has worked. Given the success of this, I am positive that the introduction of an ongoing progressive bundle should continue to attract traffic. While the use of promotions does have an impact on gross margin, I note the increase in traffic has driven an increase in revenue that more than offset this decline. For reference, gross margin only declined by 20 bps, but absolute gross profit dollars grew by 2.6% y/y. Yes, well, promotions are something we're getting good learning on. We've been trying a couple of them in the past few years. We were pretty pleased with the learnings, especially on the Progressive's offer that we had, and we thought that worked so well in driving new Progressive's customers, who are great customers to have, that we implemented an ongoing promotion offer into America's best, even in non-promotional periods, so that's live and going now. These are good at driving in new traffic, and we would expect to continue with promotions in the future, targeting, of course, the cash pay customers. Company 3Q24 earnings Another notable aspect is that management identified that EYE has been operating its store fleet without the right investments (i.e., underinvested), and they have identified some opportunities to reinvest, like improving digital merchandising, making store associates more digitally equipped to help customers, and making their e-commerce platform more like their in-store experience. Although it is a negative point that EYE has underinvested in their stores, the positive takeaway is that this is an area that EYE has full control over (i.e., they can ramp up investments anytime at their own discretion). The fact that management called out this signifies, to me, that they are serious about taking action here, which should drive SSSG improvement. Lastly, EYE has identified 39 stores to be closed through FY26 and pulled back on the number of openings in FY25 from 65-70 openings to 30–35 openings. This should be amazing news for shareholders, as this is a good first step in the right direction to address store productivity. To give readers some perspective on how poor EYE stores’ productivity is, consider that America’s Best store count has increased from 726 in FY19 to 957 in FY23, but sales per store have stayed stagnant at ~$1.5 to ~$1.6 million despite the huge inflation spikes in recent years and increase in industry-wide prices for corrective eyeglasses and contact lenses. This tells us that transactions per store have actually declined in real terms for the average store. The bigger implication here is that, with this, there is upside to consensus FY25 EBIT margin estimates (now only imply ~26 bps improvement vs. FY24). Valuation  Despite the positive takeaways that I have noted above, EYE is in \"show me\" territory now, and until EYE can show that its reinvestments are working to drive growth back to the low-teens pace (pre-covid levels), productivity improves at the store level (which is a main driver to margin upside), and it can open new stores (in FY26) without diluting existing store base productivity and overall sales, I don’t see a path for the share price to appreciate from here. Given that these initiatives take time, it also means any major results will not surface in the near future. As such, I think it is very likely that EYE will continue to trade at a discount (forward EBITDA multiple basis) to its key peer, Warby Parker (WRBY), which is growing at the mid-teens level. Conclusion   I give a hold rating for EYE. While EYE has taken positive steps to address its growth and productivity challenges through strategic initiatives and store fleet optimization, the near-term outlook remains uncertain. Importantly, these initiatives take time to materialize. Given the need for tangible evidence of improvement, I believe the market is not going to rerate the share price upward anytime soon.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484900649"}