National Vision Holdings (EYE) is in the midst of a volume recovery which began with the 4- to- 6- week lockdowns following the onset of COVID-19. Despite the run in the stock in recent months, there remains an unappreciated opportunity for post-COVID "snapback plus" theme within the health care sector and ophthalmology will be one of the earliest and biggest beneficiaries. We believe the demonstrated recovery and relative predictability of their business model is a good place to be within the #Quad 2 framework and one that can generate upside of 20%-30% over the next 3 to 9 months.
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BACKGROUND
National Vision Holdings (EYE) is one of the largest optical retail companies in the United States operating 5 retail brands (America's Best, Eyeglass World, etc.) over 1,200 stores in 44 states. Given the face-to-face nature of performing an optical exam, EYE was significantly impacted by COVID-19. Noteworthy impacts include: volume reduction to 25% of pre-COVID levels, care was and is continuing to be deferred by at- risk patients, and the company's routine store opening- focused growth was paused temporarily. While 2021 revenue estimates have recovered to $1,952M, estimates remain below the pre- pandemic high of $2,042M. In recent months, the stock has performed well alongside the recovery in volume reaching an all- time high of $50, following a post- lockdown low of $14. We believe there remains to be material upside given the opportunity to return to trend, alongside the gradual drawdown of its backlog and an opportunity to take share from smaller competitors.
THESIS
Following the initial COVID-19 lockdowns, EYE was forced to close stores for 4 to 6 weeks. During this time, volumes fell to 25% of the prior week as business continued through phone calls and orders being filled virtually. Deemed an essential business, EYE re- opened stores and began its volume recovery between 3 and 5 weeks into 2Q 2020. By September, volumes had recovered to approximately ~90% of pre- COVID levels regardless of subsequent regional lockdowns throughout the summer. Using our proprietary claims data, we have been able to map and measure the return to trend within vision and will have additional visibility into the mix of new and existing patients going forward.
Despite recovering back to near pre-COVID trend, we believe there remains a considerable backlog of deferred care that will return as the COVID vaccines are rolled out. In particular there is a good overlap between the early recipients of vaccines and eyewear demographics. There is a subset of the population deferred care to allow the "vaccine to take hold." These expect these patients will begin scheduling at a gradual pace (and likely return to in person care with greater need) once they feel safe, providing an incremental source of revenue as they draw down their backlog alongside the business's return to trend.
During the shutdown, National Vision recognized the importance of retaining its employees following the "flattening of the curve." Not only did the company continue optometrist compensation while stores were closed, but it also granted a one-time bonus payment to all front- line associates. In an environment where the supply of qualified workers is declining and cost of temporary workers' wages is inclining, health care offices are finding it difficult to meet the additional demand needs they are experiencing. Given the investment in their people during the pandemic and the scale of their network, we believe EYE has positioned themselves to take advantage of labor supply issues among smaller competitors. We expect smaller competitors relinquish share due to inordinate wait times and that EYE should be able to offer additional time slots and scheduling days to meet pent- up demand.
VALUATION
Given the popularity of the re- opening story within US retailers, EYE trades at a high multiple of sales against NTM consensus revenue, ranging from an initial fall- out low of 1.1x to its current level of 2.6x. Based on the potential for a "snapback plus," we have modeled 2021 sales to $2,125 versus consensus of $1,952M, and 2022 of $2,470M versus consensus of $2,133M. Given the opportunity to return to trend, as well as recover revenue lost to deferred care, we expect the stock to support its current multiple and provide a 20% to 30% return over the next 3 to 9 months.
CATALYSTS
- Routine Visits Claims Tracker | Optometrist appointments are billed under a set of CPT codes which can be followed using our proprietary claims data. Within the data, we have visibility into the overall recovery in appointments, as well as the distribution between new and existing patients.
- Core Business Forecast Algorithms | Using an AI- powered forecasting tool, we can reasonably predict any aspect of the model based on a set of highly- correlated, publicly available features. We found it most useful to point this method at EYE's core businesses', America's Best and Eyeglass World, comparable store sales growth.
- Vision Related BLS, BEA Series | Despite the retail nature of EYE's business, we believe we add an edge through the "health care- ization" of the name. This process includes tracking and understanding the health care nature of optometry in addition to the series which underlie it.
RISKS
- Inefficiency in Vaccine Roll- Out | Any sort of lag in the distribution or administration of vaccines leading to extended deferrals of care or a lasting change in behavior away from in- person care would negatively impact EYE's ability to return to trend and recoup their existing backlog generated in 1H 2020.
- Shortages in Qualified Staffing | Supported both anecdotally and within our data, we have identified a significant concern over the ability to secure qualified supporting medical workers at a reasonable price. This constraint in supply has made it difficult for some institutions to meet the demand they are experiencing resulting in extensive wait times that cause customers to look elsewhere. Inability to find workers or extend hours to meet additional demand would be a hindrance to recovery.
- Stalling of Regular Store Openings | America's Best and Eyeglass World are positioned to grow from consistent, targeted store openings. If cash flow constraints or an unfavorable shift in mix to e-commerce occurred, the company's established growth strategy would be challenged.
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