Digital Eyecare Expansion And Aging Demographics Will Drive Durable Long Term Tailwinds

Catalysts

About Kits Eyecare

Kits Eyecare operates a vertically integrated, digital first eyewear and contact lens platform focused on making eye care easy and affordable for consumers.

What are the underlying business or industry changes driving this perspective?

• Scaling high margin proprietary product lines such as Kits branded contact lenses, digital progressives and premium lenses, each growing well above 50% year over year, is expected to structurally lift gross margin and expand EBITDA and net income over time.
• Rising global demand for vision correction as populations age and screen time increases, combined with Kits focus on non discretionary categories like glasses and contacts, supports durable revenue growth and more resilient cash flows across cycles.
• Ongoing shift from in store retail to online, supported by innovations like OpticianAI, enhanced virtual try on and a frictionless digital experience, is likely to accelerate customer acquisition, increase conversion rates and drive higher revenue per visitor.
• Growing repeat customer base, now more than 1 million active customers with repeat purchases contributing over 60% of revenue, creates an expanding annuity like revenue stream that can improve earnings visibility and support operating leverage.
• Geographic and channel expansion from a brand that is still largely concentrated in Vancouver into broader Canada and a reaccelerating U.S. strategy offers significant headroom to grow revenue while leveraging existing infrastructure to improve net margins.
• Continuous fulfillment and logistics efficiencies from the vertically integrated lab and data driven carrier optimization, already reducing fulfillment and G&A as a percentage of revenue, are likely to further enhance operating margins and free cash flow as volumes scale.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Kits Eyecare's revenue will grow by 21.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 8.1% in 3 years time.
• Analysts expect earnings to reach CA$27.9 million (and earnings per share of CA$0.79) by about December 2028, up from CA$5.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$38.9 million in earnings, and the most bearish expecting CA$21.9 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 32.8x on those 2028 earnings, down from 102.8x today. This future PE is greater than the current PE for the CA Specialty Retail industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heightened promotional intensity across retail and optical peers, particularly around key periods such as Black Friday and back to school, could force Kits to discount more aggressively to maintain share. This would compress average order value and erode the recent gains in gross margin and adjusted EBITDA margin over time, ultimately weighing on earnings growth.
• Regulatory and trade uncertainty around the Canada U.S. border, tariffs and postal or carrier disruptions may reemerge. This could increase shipping times and costs or constrain U.S. customer acquisition, which would slow international expansion and top line growth while pressuring net margins through higher fulfillment expenses.
• Overreliance on rapid growth in high margin 50 50 club categories such as Kits branded contact lenses, digital progressives and premium lenses may prove optimistic if consumer preferences shift, competition intensifies or product quality issues arise. This would limit the expected structural uplift to gross margins and constrain future earnings expansion.
• The strategy assumes that current new customer momentum and repeat purchase behavior will persist as the company scales beyond its core Vancouver market. Slower brand awareness gains or weaker unit economics in new cities could reduce customer lifetime value and marketing efficiency, dampening revenue growth and limiting operating leverage in EBITDA and net income.
• Ambitious technology initiatives like OpticianAI and continuous site and logistics optimization require ongoing investment and flawless execution. If adoption is slower than expected or the tools fail to materially improve conversion and basket size at scale, the incremental G&A and development spend could outpace benefits, reducing operating margins and diluting earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$22.64 for Kits Eyecare based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$25.0, and the most bearish reporting a price target of just CA$20.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$346.5 million, earnings will come to CA$27.9 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of CA$17.85, the analyst price target of CA$22.64 is 21.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.