New IPO In Optical Retail Calls For Investors To Keep A Close Eye

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The road has never been clearer for National Vision Holdings ( EYE ), a low-cost retailer of eyeglasses, contact lenses and eye exams.

[ibd-display-video id=2700154 width=50 float=left autostart=true] That's the perspective of Chief Executive Reade Fahs, after National Vision filed its initial public offering Oct. 26 at 22 a share. The stock opened at 28.75 and has been on an uphill trajectory ever since, up nearly 50% from its IPO price.

Fahs credits that to National Vision's growth streak. Over the past 15 years, National Vision has achieved 63 straight periods of positive comparable store growth.

The recession-proof nature of vision correction will always be a necessity, regardless of the economy, and offers a peek into what's next for the company, Fahs said.

"Growth, growth, growth," he told Investor's Business Daily. "We just celebrated our 1,000th store and we think America needs at least a thousand more of our key growth brands: America's Best and Eyeglass World and we have been building stores at a rate of about 75 a year. We see that continuing for a nice long time."

Sweet Spot For Growth

Analysts agree that National Vision is in a sweet growth spot. Amid the aging population, the increase in computer screen time and the rise in life expectancy, the optical market is expected to be a $40 billion opportunity by 2020 in the U.S., UBS analyst Michael Lasser said in a recent note to clients.

He expects National Vision to account for 4.4% of the market in 2020, up from his estimate of 3.4% in 2016. On the high end of his expectations, Lasser sees National Vision capturing 4.6% share of a $43 billion pie in 2020.

That would put National Vision's sales between $1.6 billion and $2 billion in 2020. To put that in perspective, earlier this month National Vision reported sales of $346.1 million for its third quarter ended Sept. 30, growing 14.9% and beating views for $344 million.

Lasser forecasts sales growing 9.6% in 2018 and 9.8% in 2019, outpacing the industry, which he pegs for a 4% growth rate both years. But that's unsurprising. The value segment of the eyeglass market has grown at twice the rate of the overall market for the past decade.

National Vision is currently the fourth-largest optical retailer in the U.S. In 2016, No. 1 Vision Source had sales of $2.63 billion, more than double that of National Vision's $1.15 billion.

The top 10 retailers accounted for 32% of the total market in 2016. But the discount segment is growing at a quicker clip than the entire optical market, Lasser said. He estimates National Vision's revenue will grow 500-600 basis points faster than the overall U.S. eyewear market by 2020.

Double-Sided Coin

National Vision's story is really a double-sided coin. The retailer was founded in 1990 as the operator of Vision Centers inside Wal-Mart ( WMT ). It initially went public in 1992 in what Fahs says was one of the most successful IPOs of its time.

But in 2000, the company went through a bankruptcy . When it emerged in 2001, National Vision brought on Fahs, who, in turn, hired a new management team with the goal of taking "a moribund business at the time and restarting it."

A key piece of that was to remain in good standing with Wal-Mart. National Vision generates about 13% of revenues and 15%-16% of profits from its management services agreement with the retail behemoth, Jefferies analyst Daniel Binder wrote in a recent note to clients.

IBD'S TAKE:National Vision leads the Retail-Specialty industry group but its Composite Rating of 74 still trails the best-possible rating of 99. Head to IBD Stock Checkup for a look at how other stocks stack up.

Four years later, Berkshire Partners acquired National Vision and took it private, merging it with newly acquired America's Best Contacts and Eyeglasses. At the time of the acquisition of America's Best, it had just 112 stores, according to National Vision's website.

Since then, National Vision has acquired Eyeglass World and AC Lens, an online contact lenses platform. In 2014, it was acquired byKKR & Co. ( KKR ) in a deal that was valued north of $1 billion, insiders say. Berkshire still has a piece of the business, Fahs says.

Today, National Vision's 1,000 stores are in 44 states under its banner names, America's Best and Eyeglass World, as well as host locations within Wal-Mart, Fred Meyer and military commissary stores.

Low-Cost Model

Fahs says National Vision has a unique model to keep its costs low. Doing so allows the retailer to offer its signature promotion from America's Best: Two pairs of glasses for $69.95 with the eye exam thrown in for free.

National Vision stores tend to be located in strip malls, hire doctors as employees and, in the case of America's Best, have all eyeglasses produced at a centralized lab. It all helps keep costs low for the value-focused shopper, he said.

The goal is to reach underserved and low-income populations, Fahs said. In many cases, these customers have limited interaction with the medical establishment simply by virtue of its cost. Correcting vision, though, can change lives, he said.

"What's the difference between catching the eye problem for a child in second grade vs. fifth grade?" he said. "That could change the entire trajectory of that kid's life by catching the problem a few years earlier. It changes whether they get the fundamentals earlier."

He added: "This product should not be out of the reach of the everyday American bucket. There's stuff like being able to do your job and drive safely, but there's also things like being able to appreciate the leaves."

Challenges Exist

National Vision's goal of adding another 1,000 stores isn't totally out of hand, says Jefferies' Binder. There's significant white space in California and the northeast for National Vision to expand and take share.

But it will have some challenges, Binder said. Its management services agreement with Wal-Mart expires in August 2020 with a three-year renewal option.

And Essilor, the sole and exclusive supplier of some eyeglass lenses to National Vision has an agreement set to expire Dec. 31, 2018. That means National Vision will have to negotiate with Essilor, which is now bigger thanks to a recent merger with Luxottica.

Still, customers tend to be happy with National Vision, Binder said. It has a loyalty program with 1.3 million members, leading to 68% of sales generated by existing customers.

Fahs notes growing the business is entirely reliant on "making customers happy."

"It's not like we're raising our prices because we're a low-cost, budget retailer," he said.

Optical retail is a "fair game," he says. When a customer leaves the store with a new pair of glasses, he or she generally has a good story to tell. That brings in more customers and more potential "positive word of mouth leading to positive traffic."

National Vision shares jumped 4.7% Monday to close at 37.42.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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