KITS EYECARE $KITS.TO $KTYCF - Deep Dive Research Report #9
KITS Eyecare: Vision Set on $500M Revenue and $75M EBITDA in Five Years
Business Model:
KITS makes eyecare easy. KITS is a fast growing, vertically integrated, vision care brand providing eyecare for eyes everywhere. We offer our KITS community access to a vast selection of the highest-quality contact lenses and glasses, including our own exclusive KITS designed products, and an advanced suite of online vision tools. Our efficient digital platform, backed by our in-house design, distribution, and state-of-the-art manufacturing, removes intermediaries and enables us to offer the highest quality products, fast service, vast selection, great prices, and delivers made-to-order personalized products with incredible care and accuracy. We strive to delight our customers with competitive prices, a convenient digital shopping experience, fast and reliable delivery options – including our convenient "Autoship" subscription program for contact lenses – and an unrelenting focus on earning our customers’ lifelong loyalty.
Customer Segments
Primary Customers:
Individuals requiring prescription glasses, contact lenses, or sunglasses.
Tech-savvy customers looking for convenience through online purchasing.
Secondary Customers:
Businesses or organizations that purchase eyewear in bulk for employees or events.
Niche audiences (e.g., gamers needing blue-light blocking glasses).
2. Value Propositions
Affordable Pricing: Competitive prices for prescription eyewear compared to traditional brick-and-mortar stores.
Convenience: A seamless online shopping experience with virtual try-ons.
Fast Delivery: Quick fulfillment and shipping for eyewear and contact lenses.
Quality & Design: High-quality lenses and stylish frame designs.
Subscription Options: Recurring delivery for contact lenses.
Health & Wellness: Accessibility to free online vision tests.
Sustainability: Eco-friendly materials for frames and packaging.
3. Channels
Online Platform:
Website (main sales channel).
Mobile app for an optimized shopping experience.
Social Media: For marketing, promotions, and customer engagement (e.g., Instagram, Facebook, TikTok).
Affiliate Partnerships: Partnerships with optometrists and influencers.
Direct Shipping: Reliable logistics partners for product delivery.
4. Customer Relationships
Self-Service: Easy-to-navigate website and app for direct ordering.
Virtual Assistance: Online vision tests and virtual try-on tools.
Support Channels: Dedicated customer service team for order assistance and inquiries (via chat, email, and phone).
Community Engagement: Educational blogs and videos on eye care.
Loyalty Programs: Rewards for repeat customers, discounts on referrals, and membership benefits.
5. Revenue Streams
Direct Sales: Revenue from eyewear and contact lens purchases.
Subscription Services: Recurring revenue from contact lens delivery plans.
Premium Add-Ons: Anti-glare coating, progressive lenses, and blue-light blocking upgrades.
Collaborations: Brand collaborations and co-branded eyewear.
Affiliate Marketing: Commissions earned through referral traffic and partnerships.
6. Key Resources
Technology: E-commerce platform, virtual try-on, and online vision testing tools.
Product Inventory: Diverse range of eyewear and contact lenses.
Logistics & Warehousing: Efficient fulfillment centers for fast shipping.
Brand Reputation: Established trust and recognition in the eyewear market.
Data Analytics: Insights into customer preferences and purchasing behaviors.
7. Key Activities
Product Development: Designing trendy, functional, and high-quality eyewear.
Platform Maintenance: Ensuring a smooth online user experience.
Marketing: Running digital marketing campaigns to attract and retain customers.
Supply Chain Management: Partnering with suppliers and optimizing inventory.
Customer Support: Ensuring excellent post-purchase care.
Data Analysis: Leveraging customer insights to refine offerings.
8. Key Partnerships
Suppliers: For raw materials and finished eyewear.
Optometrists: To integrate professional eye care recommendations.
Logistics Providers: For efficient delivery systems.
Tech Developers: Enhancing virtual try-on and online testing tools.
Eco-Friendly Partners: For sustainable production and packaging.
Competitive Advantage:
Speed and Convenience
Faster Delivery:
KITS focuses on same-day or next-day shipping for contact lenses and glasses, which is faster than Warby Parker’s typical delivery time of 5-10 days.
Its in-house manufacturing and fulfillment center in Vancouver allow for quicker order processing and delivery.
Online Vision Test: Customers can update prescriptions from the comfort of their homes without needing in-person optometrist visits, something not as streamlined with Warby Parker.
Affordable Pricing
Competitive Pricing Model:
KITS offers eyewear at a lower price point than Warby Parker without compromising quality.
Frequent discounts and promotions help attract price-sensitive customers.
Free First Pair of Glasses: This strategy brings new customers into the KITS ecosystem and differentiates it from competitors.
Direct-to-Consumer Supply Chain: Like Warby Parker, KITS operates with a vertically integrated model, but it emphasizes cost-efficiency to deliver lower prices.
Subscription Model for Contact Lenses
Recurring Revenue Advantage: KITS has a strong focus on its subscription services for contact lenses, ensuring a steady revenue stream and customer retention.
Flexibility: Customers can customize delivery schedules, making KITS more attractive for recurring purchases compared to Warby Parker, which focuses primarily on glasses.
Comprehensive Product Range
Specialization in Contact Lenses: While Warby Parker primarily focuses on glasses, KITS is a leader in contact lenses. This allows KITS to serve a broader customer base.
Diverse Eyewear Options: In addition to prescription glasses, KITS offers blue-light-blocking lenses, sunglasses, and eco-friendly frames, appealing to different customer needs
Canadian Presence and North American Focus
Homegrown Canadian Brand: For Canadian customers, KITS is a local company, offering faster shipping, reduced import duties, and a more personalized shopping experience.
U.S. Expansion: While Warby Parker is already well-established in the U.S., KITS can carve out a niche with competitive pricing and faster delivery options.
Advanced Technology Integration
Virtual Try-On: KITS offers a seamless, AI-powered virtual try-on tool, competing directly with Warby Parker's similar technology.
Proprietary Online Vision Test: KITS’s innovative online prescription renewal system is more accessible and user-friendly than Warby Parker’s in-store exams, giving it an edge in convenience
Operational Efficiency
Vertically Integrated Model: KITS manufactures many of its products in-house, allowing for cost savings that can be passed on to customers.
Lean Operations: KITS's smaller retail footprint (compared to Warby Parker's physical stores) reduces overhead costs, allowing them to focus resources on e-commerce
Customer Loyalty and Rewards
Loyalty Programs: KITS rewards customers for repeat purchases through discounts, referral programs, and exclusive offers.
Personalized Recommendations: By leveraging data analytics, KITS can provide tailored product suggestions based on customer preferences and past purchases
Focus on Niche Markets
Blue-Light Lenses: KITS targets professionals, gamers, and students with affordable blue-light-blocking glasses—a growing niche markets
Key Performance Indicators:
As per Q3 F24 earnings call, KITS is expecting to achieve 1M+ 2-year active customers in 2025.
Financials, F25-F30 Forecast, and Valuation:
Balance sheet:
The balance sheet is in a solid position, with a current ratio exceeding 1. Total assets are more than double the total liabilities. Total assets have grown from $92M in March 2023 to $95M as of September 2024, primarily driven by an increase in inventory. Similarly, total liabilities have increased from $39M to $42M, mainly due to higher accounts payable.
An area of concern, however, is that while the company’s revenue has been increasing year-over-year, shareholder equity has remained steady at approximately $53M over the past seven quarters. This indicates that the growing revenues are not being effectively translated into equity or net income.
Income Statement:
2023
KITS Eye Care experienced strong growth in 2023. Q1 revenue increased by 38% with a 33% gross margin and $300K adjusted EBITDA (1% of revenue). In Q2, YoY revenue growth remained at 38%, with EBITDA rising to $0.5M due to increased online demand for vision products and strong sales of KITS glasses and contact lenses. Q3 revenue rose by 32% YoY, gross margin improved to 34.3%, and EBITDA grew to $0.6M, driven by network effects and the non-discretionary nature of the category. In Q4, revenue grew by 21% YoY, with record gross margins of 35%, supported by strong repeat customer sales, higher average order values, and growth in repeat eyeglass purchases.
2024
Momentum continued into 2024. Q1 revenue increased by 24% YoY as all product categories and geographies outperformed the market. In June, a partnership with TELUS Health enabled direct billing to 38 insurance companies, covering 70% of Canadians and giving KITS the widest direct billing coverage in Canada for optical products. Q2 revenue hit a record $38M (+26% YoY) with $1.3M adjusted EBITDA, fueled by strong customer referrals. Q3 saw $42M in revenue and $1.6M adjusted EBITDA, driven by increased brand recognition and new product launches such as KITS Daily and KITS Daily Colour contact lenses, which now account for 3% of total Canadian contact lens orders.
2025 Outlook
KITS Eye Care anticipates continued growth, with a projected revenue increase of at least 20% to $191M and adjusted EBITDA reaching $9M (4.5% of revenue), supported by a 7%-9% average growth in two-year active customers reaching to a 1M active customers in 2025 and ongoing product development initiatives.
Company’s 5 year plan is to reach $500M in revenue and 15% EBITDA of $75M.
Assuming 10% discount rate and 5 years to achieve EBITDA target of $75M, PV of $75M EBITDA in $46M
Valuation:
Share price: $7.9 CAD
Shares outstanding: 31.46M
Market Cap: $249M
EV: $234M
F24 EV/REV: 1.6x
F25 EV/REV: 1.2x
F30 EV/REV: 0.5x
F24 EV/ADJ. EBITDA: 37.9x
F25 EV/ADJ. EBITDA: 25.8X
F30 EV/ADJ.EBITDA: 5x
Warby Parker Inc. (WRBY) trading on NASDAQ is currently trading at 3.9x EV/sales and at a forward PE ratio of 74 at $24.58 per share on January 19th 2025. In comparison to WRBY, KITS is trading at a reasonable discount.
New Initiatives:
Q3 F24:
The KITS brand is increasingly recognized within the eyecare community, fueled by our new product launches such as KITS Daily and KITS Daily Colour contact lenses, now representing 3% of our total Canadian contact lens orders which demonstrates promising early adoption. Looking at our strategic initiatives, the sellout of our Pangolin smart glasses demonstrates our commitment to innovation and positions us at the forefront of the evolving eyewear industry. The strong momentum, with 51.4%vof smart glasses orders opting for prescription lens upgrades, further validates our strategy in this emerging category and highlights the growing consumer interest in integrating technology with vision correction.
Q2 F24:
Fueled by the increasing popularity of technology-integrated eyewear, our smart eyeglasses revenue nearly doubled in July compared to Q2 2024. In response to this growth, we are expanding the selection of additional AIpowered Smart Glasses lines. On July 22,2024, we unveiled our limited-edition KITS Pangolins Smart Glasses, featuring a sleek design, prescription lenses, a charger, and a suite of AI-enhanced features, all for $149. This launch, alongside an expanded range of AI-enhanced frames and lenses, underscores our commitment to making eyecare easy and accessible while consistently delivering innovative products and an exceptional customer experience. We do not anticipate any significant increase in production and marketing costs in the short term due to the rapid expansion of our smart glasses product line.
Financing:
1) IPO: 6.5M shares @ $8.50: $55M CAD in Q1 F21
Kits Eyecare Ltd. has successfully completed a secondary offering, including a concurrent block trade of 1 million common shares at $10.15 per share. This transaction reflects a strategic move by insiders to sell their shares at a premium, as the current trading price of the shares is below the offering price.
Insider Ownership:
~ 75%
Risk/Concerns:
Tariffs are biggest concern to KITS. I expect the company to share potential impact of tariffs and what they are doing to protect tariffs on their sales to USA.
Conclusion:
With KITS Eyecare trading at a discount compared to WRBY, the market is closely monitoring the company’s stance on tariffs, its five-year goal of achieving $75 million in EBITDA and $500 million in revenue, its high insider ownership, and its commitment to holding onto the business until it reaches a billion-dollar valuation. In my opinion, this company becomes a strong buy as soon as it announces its strategy to mitigate the impact of tariffs.
Disclosure:
1. No compensation was received for the preparation of this report.
2. The information presented in this report is based on publicly available data and sources believed to be reliable. However, I make no guarantees regarding its accuracy or completeness.
3. This report is for informational purposes only and should not be considered as investment advice. Investors should conduct their own research or consult a financial advisor before making investment decisions. All investments involve risk
4. I and my immediate families do not have any conflicts of interest with this company.
5. This report is for informational purposes only and does not constitute investment advice.