A Small Cap Equity holding: National Vision Holdings, Inc. (EYE $59.98): “Keeping Our EYE on the Long-Term Prize”
By: Madi
Daleiden, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
- National Vision
Holdings, Inc. (NASDAQ: EYE) is the second largest optical retailer in
the United States. There are 1,249 stores and 19 consumer websites across
5 brands. EYE operates under its Owned and Host Brand segment (77% FY20
Revenue) and Legacy brand segment (6%).
- In
2Q21, EYE’s net store count increased by 19 stores with rebounding
brick-and-mortar traffic as a possible secular tailwind through 2022.
- EYE’s
balance sheet is improving. Management is actively controlling debt
balances and thus improving LTM leverage ratios.
- Operating
margins have expanded 125% from pre-pandemic levels due to lower
optometrist costs, increased eyeglass mix, and higher eyeglass-specific
margins.
Key points:
One of EYE’s competitive
advantage versus peers is its robust store network. The store count increased 23%
since 2017 with a rolling average store success rate of 97% over the same
period. 20 new stores were added in 2Q21 alone. Store performance has also been
improving. 2Q21 adjusted comparable store sales were up 76.7% and 23.5% vs.
2Q20 and 2Q19, respectively.
E-commerce sales only made
up 12% of EYE’s 2020 revenues, so EYE is heavily exposed to traditional retail
trends. The NPD Group, a market research firm, concludes that brick-and-mortar
sales have exceeded pre-pandemic levels over the last 15 weeks ending May 15,
2021—$1.7B greater than 2020 and $400M above 2019 levels. Given its 2Q21
performance, EYE is benefitting from this return to brick-and-mortar retail. While
e-commerce will continue to be a prominent vehicle for retail, its erosion
effect on in-store sales may not be as dramatic as originally anticipated.
Furthermore, EYE’s service offerings (i.e eye exams) cannot easily or
realistically be replaced by e-commerce thus strengthening EYE’s barriers to
entry.
Considered a main risk in the original
pitch, debt has been a main focus for EYE’s management team. In 2Q21,
management voluntarily prepaid $117.4M of term loans, lowering the overall debt
balance by 16%. In June 2021, they renegotiated their credit agreement which
resulted in the removal of a 1% LIBOR floor and improved all credit tiers’ margins
by 50bps. The lower debt balances caused EYE’s LTM D/E ratio to drop to 1.00 in 2Q21 from
1.19 in 1Q21. LTM Net Debt to Adj. EBITDA dropped to 0.69 from 1.23 over the
same time period. Notably, their Moody’s credit
rating has improved to Ba2.
Margins are also a key focus of EYE’s low cost
operating model. 2Q21 operating margins were 11.9%—an 125% increase from 6.8%
in 2Q2019. Costs applicable to revenue as a percentage of net revenue also
decreased 400 bps to 42.5% over the same period. With margins expanding while
maintaining low price points, EYE is scaling successfully and fortifying
barriers to entry.
What has the stock done
lately? Since
reporting 2Q21 earnings and beating consensus on 8/12/21, the stock has rallied
19%. Reaching its new 52-week high on 8/31/21, EYE has now caught the attention
of many momentum investors; however, this run is backed by the company’s strong
fundamentals as well as consistent earnings beats.
Past Year Performance: EYE is up 20% YTD as it benefitted from the 1H21 value outperformance. Despite exceeding its estimated price target of $46.23 in November 2020, EYE’s growth story remains very much intact. Now trading at $59.96 as of 8/31/2021 market close, EYE has produced a 60% return since its addition to the portfolio.
My Takeaway
Despite the recent rally and new
52-week high, there is still room in this growth story. The company’s
fundamentals are strong and the original investment thesis remains intact.
EYE’s resilient revenues should continue as brick-and-mortar retail returns
fully in 2022 and low-cost options become more in-demand after COVID-19 stimulus
checks dry up. With less debt on the balance sheet, EYE will achieve a more
flexible model allowing increased investment in its improving operating
productivity through technology capex. With high barriers to entry like its
store network, eye exam business, and scale with expanding margins, EYE is
expected to continue delivering strong results.
