National Vision Holdings (EYE) - Bristlemoon Shorts, Edition #1
EYE and the upcoming Walmart contract loss
In this post we are providing a look-in at the Bristlemoon short book. We plan on this to be an ongoing series where we present a brief overview of a short idea. Some words of caution before reading further. Shorting is a difficult way to make money and if you’re an individual investor then shorting stocks is an ill-advised way to try to generate investment returns (we will in the future write a piece on the perils of shorting). None of the following is investment advice and we reserve the right to change our view.
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National Vision Holdings (NASDAQ: EYE)
Price: $21.00 (8 January 2024)
Market cap (diluted): $1.6 bn
Short interest: 9.5%
Days to cover: 7 days
P/E fwd: 35x
What the business does
National Vision Holdings (NASDAQ: EYE) is one of the largest optical retailers in the U.S., providing eye exams, eyeglasses and contact lenses to mostly lower income consumers. Many of EYE’s customers rely on tax refunds to pay for eyewear and eye care, making the period after U.S. tax refunds in March the seasonally largest revenue period for the company.
About one-third of EYE’s customers are insured, with the remaining two-thirds uninsured. The corollary of this is that the majority of EYE’s customer base must reach into their own pockets to fund their eyecare purchases. According to the company at the UBS Global Consumer and Retail Conference in 2023, “We're less developed in the insurance category than most other chains because our budget-conscious consumer isn't insured. They don't have a job that gives them business insurance.”
EYE’s owned brands include America’s Best and Eyeglass World, as well as Vista Optical located in select Fred Meyer Stores.
Source: Company filings
Source: Company filings
The company prides itself on being able to offer two pairs of eyeglasses for $79 with the eye exam included. 82% of EYE’s revenue, and 94% of its gross profit, is from products. Some portion of this spend is non-discretionary (i.e., contact lenses or replacing broken glasses which typically follows a 1.5-2 year replacement cycle). This non-discretionary component of EYE’s business is reflected in the fact that existing customers represented 65% of EYE’s total customers in 2022.
Lower income consumers getting squeezed
EYE’s lower income consumers are getting squeezed worse than any other socioeconomic group from the inflation-driven cost of living crisis. The company acknowledged this at a recent UBS conference: “the brunt of the inflation is borne by our customers, and so they are very strapped.” Student loan payments resumed in October 2023 and inflation, while moderating, is still exacerbating the financial difficulties faced by lower income Americans.
The risk for EYE, particularly given two-thirds of their customer base is uninsured, is that eyewear purchase cycles elongate as these consumers look to stretch the dollars they have by delaying purchases of eyewear. Furthermore, to the extent that the unemployment rate increases from its low level at present, part of the managed care customer base (i.e., insured customers who represent one-third of EYE’s customer base) could lose their jobs, lose their optical insurance coverage (which is typically tied to their employment), and this could further slow demand for EYE’s products and services. The company’s comps are expected to decelerate, with management mentioning on the 3Q23 call: “we do expect some deceleration in the implied Q4 comp”. Prior year comps will also get progressively more difficult over the next four quarters.
Walmart contract termination
Perhaps the most interesting angle of the EYE short thesis is the fact that on July 26, 2023, National Vision Holdings announced that its Walmart partnership had been unexpectedly terminated and will formally end in February 2024. In connection with the non-renewal of the Walmart contract, AC Lens, one of National Vision’s subsidiaries notified Walmart that it is not renewing its agreement for wholesale and e-commerce contact lenses distribution, and that the AC Lens agreement will terminate on June 30, 2024.