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Here's Why You Should Retain National Vision (EYE) For Now

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National Vision Holdings, Inc. (EYE - Free Report) is gaining from favorable industry trends and new store openings. The company exited second-quarter 2021 with better-than-expected results. The expansion of both margins and an upbeat guidance for 2021 buoy optimism for the stock. However, escalating expenses and stiff competition do not bode well.

Over the past year, this Zacks Rank #3 (Hold) stock has charted a solid trajectory, appreciating 57.5% compared with 11.6% growth of the industry and 33.6% rise of the S&P 500 composite.

The renowned U.S. optical retailer has a market capitalization of $4.8 billion. Its earnings surpassed the Zacks Consensus Estimate by 108.7%.

Over the past five years, the company has gained 11.1% growth, ahead of the industry’s 6.2% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate is estimated at 23%, which compares with the industry’s growth expectation of 15.8% and the S&P 500’s estimated 11.3% growth.

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Let’s delve deeper.

Factors at Play

Q2 Upsides: National Vision reported better-than-expected revenues and earnings for second-quarter 2021. The top-line strength was led by growth in Americas Best and Eyeglass World brands along with strength in the company’s legacy segment. The company witnessed comparable growth on increased customer transaction in the reported quarter. The pandemic-induced increased demand for low-cost eye exams, glasses and contact lenses contributed to making an outstanding second quarter. The expansion of both margins bodes well. The extension of the partnership with Walmart through 2024 looks encouraging. The raised guidance for 2021 is indicative that this growth momentum will continue.

Favorable Industry Trends: Overall market growth and significant potential in the global eyewear market bode well for National Vision. The frequent replacement cycle marked with the repetitive and foreseeable nature of customer behavior resulting in a substantial volume of recurring revenue for the optical retail industry is another trending factor. Per National Vision’s management, four key growth trends will continue to contribute to the growing U.S. optical retail industry. An aging population is believed to be a major contributing factor.

Encouraging New Store Growth: National Vision’s latest store openings in the second quarter of 2021 raise optimism. The company opened a total of 20 new stores during the quarter, which included 18 new America's Best stores and two new stores for the Eyeglass World brand. The company boasts a total of 1,249 stores to date, reflecting a 5.5% increase in store count compared to the last year.  Further, National Vision plans to open 75 new stores in 2021.

Downsides

Rising Costs: Escalating operating expenses are building pressure on National Vision’s bottom line. During the second quarter of 2021, the company’s selling, general and administrative expenses rose 71.5% on higher stock compensation expenses, increased performance-based incentive compensation and higher advertising investment.

Tough Competition: National Vision faces stiff competition from national retailers like LensCrafters, Pearle Vision and Visionworks in the broader optical retail industry. The company also faces competitive threat from online sellers of contact lenses and eyewear. Companies like Warby Parker and Zenni Optical are focused on selling eyeglasses online.

High Dependence on Vendors: National Vision procures majority of its eyeglass frames, eyeglass lenses and contact lenses from a very limited number of suppliers. This form of high dependence on a limited number of suppliers exposes the company to concentration of supplier risk. Further, the company is susceptible to vendor concentration risks since in 2019, 92% of its contact lens expenditure was with three vendors, 51% of frame expenditure was with two and 88% of lens expenditure was with one vendor.

Estimate Trend

National Vision has been witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved 20% north to $1.32.

The Zacks Consensus Estimate for its third-quarter 2021 revenues is pegged at $501.7 million, suggesting a 3.37% rise from the year-ago reported number.

Key Picks

Better-ranked stocks from the Medical-Products industry include VAREX IMAGING (VREX - Free Report) , Envista Holdings Corporation (NVST - Free Report) and BellRing Brands, Inc. (BRBR - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

VAREX has a long-term earnings growth rate of 5%.

Envista Holdings has a long-term earnings growth rate of 27.4%.

BellRing Brands has a long-term earnings growth rate of 29.1%.