October 21, 2019 BARRON’S 15
While much of Wall Street says National Vision shares are a Buy, they’ve fallen
by half over the past year and more losses could be in store. ByBillAlpert
ASightforShorts’Eyes
NATIONAL VISION HOLDINGS HAS BEEN THE FASTEST-
growing U.S. optical chain for a decade, with 70
quarters of unbroken same-store sales growth.
JustabouteverybrokercallsthestockaBuy.One
might call it the vision of a winner.
In the past year, however, National Vision
shares(ticker:EYE)havefallenbyhalf,andthey
coulddropfurtherasacriticalcontractcomesup
for renewal and bears take aim.
Recent critiques by short-oriented analysts
haveweighedonthestock.Onesuchcritic,invest-
ment researcher Katherine Spurlock of Norne,
saysthatNationalVision’sdiscountoffers,widely
advertisedtolow-incomeconsumers,aren’tappro-
priate for most customers because the material
used to make the glasses is too heavy for strong
prescriptions and too prone to shattering.
National Vision CEO Reade Fahs, in an inter-
viewwith Barron’s ,sayshe’sproudoffindingaway
tomakeeyecareandeyewearaccessibletobudget-
consciousAmericans.“Eyeglassesareexpensivein
America,” he says, “especially since we’re talking
generallyaboutsevenpiecesofplasticheldtogether
bytwoscrews.”Heblamedhisstock’sdeclineoner-
rorsinshortreports,suchastheimportanceofalu-
crative Walmart contract to profitability.
But National Vision’s biggest sellers haven’t
beentheshorts.InAugust,GoldmanSachsunder-
wroteanofferinginwhich KKR (KKR)unloaded
$280millionofNationalVisionstock—theprivate-
equityfirm’slastsharesremainingfromitsinitial
offering of the optical chain two years ago.
Since the IPO, National Vision’s sales growth
andprofitmarginshavecooledabit.Andlooming
next August is the expiration of a contract under
whichthecompanymanagesvisioncentersin
Walmart stores.
Even after falling, National Vision’s stock isn’t
cheap.Atarecent$24anda$2billionmarketcapital-
ization, it trades at 36 times this year’s estimated
earnings.KKRgotoutat$31.Spurlockthinksthat
slowinggrowthcoulddropthestocktothemidteens.
A20timesmultiple,asmallpremiumtothebroader
market,woulddropthestockbymorethanathird.
The Duluth, Ga.–based optical company was
started in 1990 to manage vision centers for Wal-
mart (WMT).Fahsjoinedthecompanyin2002,af-
ter working at LensCrafters during the decade of
its most rapid growth. In 2005, National Vision
mergedwitha112-storechaincalledAmerica’sBest
Contacts & Eyeglasses and began its own growth
spurt,expandingatarateofsome75storesayear.
In2018,revenuereached$1.5billion,withearn-
ingsof$52million,or66centsashare.Two-thirds
ofNationalVision’srevenuecomesfromtheAmer-
ica’s Best discount chain, with the rest from a
chain of superstores called Eyeglass World, the
Walmart contract, and a bunch of websites.
AfterKKRboughtthebusinessin2014,National
Vision widened the cash-flow margin it reports as
earnings before interest, taxes, depreciation, and
amortization,from8.8%in2014to11.3%in2018.But
those Ebitda numbers are “adjusted” and exclude
morethanadozenkindsofexpensesthatNational
Vision says aren’t representative of its operating
performance.Marginsnarrowwhenthey’readded
back,however,to3.8%in2014and7.6%in2018.
Fahssayshewasn’tfazedbyKKR’sexit.When
the private-equity firm bought his business, he
sayshewastoldthatitsholdingperiodaveraged
fiveyears.Thefiveyearswereup.KKRdeclined
to comment.
Forhispart,Fahsplanstokeepdoingwhathe
hasdonefor17years.DrawingintrafficatAmer-
ica’s Best is its offer of a free eye exam with the
purchase of two pairs of eyeglasses, for $69.95.
Ofconcernnowamongsomeanalystsiswhether
WalmartwillrenewNationalVision’smanagement
dealinAugust2020.Walmarthasrunthousandsof
itsownvisioncentersforyears,soit’shardtosee
why it should renew the deal. Comparable-store
salesareroughlyflatatthevisioncentersmanaged
byNationalVision—contrastingwiththemid-to-up-
per-singledigitcompsattheopticalcompany’sown
retailchains.Walmartdeclinedtocomment.
Onethingisclear:LosingWalmartwouldhurt.
WhileNationalVisiongetsonlyabout10%ofitstotal
revenue from the Walmart business, it brings in a
largershareofprofits.Exactlyhowmuchisindis-
pute.Analyzingthecompany’ssegmentreporting,
Spurlockinfersthattheoperatingcashflowfromthe
WalmartdealaccountsforallofNationalVison’sfree
cashflow.That’sanoverstatement,saysNationalVi-
sionfinancechiefPatrickMoore,althoughhewon’t
disclosetheWalmartbusiness’sprofitability.
Fahs thinks Walmart still needs his company.
“This is a way for them to watch and learn,” he
says. “I bring them ideas and perspective.”
WallStreetbullsarecountingonrevenuetorise
astheopticalcompanyincreasesitsownstorecount.
Fahssaysthestrongestpartofopticalretailingthese
daysisthediscountcategory.Thecompany’sretail
economistscalculatethattheU.S.hasroomforabout
1,000ofhisAmerica’sBestdiscountunitsandsome
800ofhisEyeglassWorlds.Sofar,thecompanyhas
about700oftheformerand120ofthelatter.
Thecompany’sprojectionsshouldbetempered
by recent evidence from its stores, however. At
both America’s Best and Eyeglass World, comp-
store sales growth has been easing and the sales
contribution of new stores has been shrinking.
This evidence suggests that the limit of Na-
tionalVision’sstoregrowthmaybecloserthanthe
company’seconomistsestimated,apotentiallywor-
risome sign for an investor like, say, a KKR.
Private-equityinvestorsmaygetabadrapfor
management of their portfolio companies, but
they’re rarely accused of being dumb.
VisionLoss
National Vision’s
stock has tumbled
in recent months as
a key investor sold
shares and shorts
started to circle.
Source: FactSetJan. ’19 May Sept.
20
30
$
Illustration by Robert A. Di Ieso, Jr.
$280 M
Value of the last
shares of National
Vision unloaded
by KKR in August
36
Multiple of National
Vision share
price to estimated
2019 earnings