Audiology Expansion And Primary Eye Care Transformation Will Drive Long Term Earnings Power

Catalysts

About Fielmann Group

Fielmann Group is an international optical and hearing care retailer that provides eyewear, hearing aids and primary eye care services across Europe and the United States.

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

• Ongoing transformation of the U.S. business model, including expansion of doctor capacity and integrated primary eye care, is expected to support higher like-for-like growth and lift group revenue and EBITDA as U.S. margins move closer to European levels.
• Dedicated investment in audiology as a standalone business unit with its own P&L responsibility positions Fielmann to capture structurally rising demand for hearing aids, supporting a faster growth mix and higher gross margins over time.
• Consistent double digit growth in markets such as Spain, Switzerland, Austria and Poland, combined with further store expansion in optical retail and Eastern Europe, provides a diversified growth engine that can contribute to group sales and earnings even if Germany remains subdued.
• Structural improvements to the cost base, including more flexible personnel deployment and disciplined overhead management, create operating leverage so that even mid single digit organic growth can translate into larger gains in EBITDA margin and net income.
• Rising demand for vision and eye health services, supported by aging populations and increasing screen use, underpins long term volume growth in eyewear, contact lenses and adjacent healthcare services, which may support top line expansion and stable to improving net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fielmann Group's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.6% today to 9.7% in 3 years time.
• Analysts expect earnings to reach €276.7 million (and earnings per share of €3.3) by about December 2028, up from €182.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €313.6 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 22.1x on those 2028 earnings, up from 19.6x today. This future PE is greater than the current PE for the GB Specialty Retail industry at 19.2x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistently weak consumer sentiment in Germany, Fielmann Group's largest market, combined with weather related disruption to in store visits, could structurally cap like for like demand growth and slow revenue expansion across the group.
• If the transformation of the U.S. business model takes longer than management anticipates, or fails to reach the targeted 7% to 10% growth range, the company may not achieve planned scale and productivity gains in that market, limiting revenue growth and pressuring earnings.
• Ongoing depreciation of the U.S. dollar against the euro, as indicated by the recent 10% move and the forward curve pointing to further weakening, could erode reported top line growth and dilute margin expansion, resulting in lower reported revenue and net income than underlying trends suggest.
• A sustained shortage of skilled opticians and audiologists, even if currently easing, may re emerge as Fielmann expands primary eye care and hearing services, forcing higher wage costs or constraining capacity, which would pressure net margins and restrict earnings growth.
• Any delay or mis execution in integrating U.S. acquisitions and building out doctor capacity, including defining the new organizational structure and leadership, could increase operating complexity and costs, which would weigh on EBITDA margins and reduce long term earnings potential.

Valuation

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

• The analysts have a consensus price target of €61.0 for Fielmann Group 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 €68.0, and the most bearish reporting a price target of just €55.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €2.8 billion, earnings will come to €276.7 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of €42.65, the analyst price target of €61.0 is 30.1% 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.