Kits Eyecare Ltd - Update
Revenue Growth & Competitive Advantages
See my original investment case on KITS here: Kits Eyecare Ltd
See my second post on KITS here: Kits Eyecare Ltd: FY23Q1 Earnings and DCF
Current price: $5.82
Current market cap: $182.8M
Kits is currently my largest holding (11%) which you can see in my public portfolio here:
Link to public portfolio on Google Sheets
Jeff Bezos:
I very frequently get the question: 'What's going to change in the next 10 years?' And that is a very interesting question; it's a very common one. I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. In our retail business we know that customers want low prices, they want fast delivery, and they want vast selection and I know that's going to be true 10 years from now.
It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish the prices were a little higher,' or 'I love Amazon; I just wish you'd deliver a little more slowly.' Impossible.
When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.
I haven’t posted an update on Kits Eyecare in awhile because nothing unexpected has happened, they continue to execute - significantly growing revenues (>29% YoY last 4 quarters) and reducing their costs as a percentage of revenues.
Since my last post I visited the Kits Warehouse in person and the operations manager Craig showed me around and answered my questions for about an hour and a half. I also had a short chat with Joseph Thompson. Everyone I met was very friendly and knowledgeable. On the business side: I got to see their state of the art equipment in action; their operations looked lean with the warehouse organized for efficiency; and everyone appeared to be happy and engaged in their work - what a positive experience.
In the rest of the article I will go into some noteworthy items I’ve observed from Kits over the last few months.
Kits’ Competitive Advantage
The competitive advantage Kits is trying to build is being the low-cost provider with exceptional customer experiences (fast shipping, large variety, and great customer service) driving high Net Promoter Scores. This is similar to Amazon’s online retail strategy, which is no surprise because Kits' Founder/COO Joseph Thompson spent part of his career there.
Why do I think this is their strategy? Because they've mentioned it and since Black Friday they have been selling all Kits branded glasses, including a prescription lens, for $28 all-in (no lens upgrades) – I haven’t seen a value proposition like this ever in eyeglasses and I started buying glasses online over 10 years ago. Before online shopping I remember paying almost $400 in-store for one pair of glasses (lol).
I think it's plausible Kits could sustain these prices because:
They are already break-even / profitable with their largest segment by far to-date being lower margin contact lenses;
Their warehouse has capacity to approximately double their current production; and,
They up-sell various high-margin options (i.e. lens upgrades) throughout the customization process.
Don’t let the low price point put you off, I have ordered several pairs of glasses from Kits at different times and they have all been good quality. I know what you’re thinking, ‘this is his biggest holding - he’s biased’ and to that I would say: go buy a few pairs and see for yourself.
I’m curious to see going forward (1) if they keep up this significant discounting and (2) what happens to their margins and revenue growth as a result. As of today, Clearly and EyeBuyDirect do not appear to be competing at these prices.
Some eyeglass companies like to grow their revenue by opening up brick-and-mortar locations, especially public companies after their revenue starts to plateau. However, any company with a significant retail presence will not be able to compete at these price-points due to their higher overhead costs, which gives Kits a sustainable competitive advantage over them.
Recent Hire
Two of Kits’ main competitors in Canada are EyeBuyDirect and Clearly, whom are both owned by the $83B giant EssilorLuxottica.
Interestingly, Kits’ new hire, Jean Francois Jupille – Director of User Experience, was most recently head of marketing for Clearly.ca (for 3 years). And previous to Clearly.ca, Jean Francois led creative, design, and UX/UI for EyeBuyDirect.com (for 4 years), based in China.
Sounds like valuable experience to me.
Side note: I would friendly-bet that he has a longer tenure at Kits due to their culture and mission.
Link: KITS - KITS Eyecare Welcomes Jean Francois Jupille as Director of User Experience
Team
I want to reiterate my favourite part of this investment idea isn't the "elegant and superior business model of being an online retailer selling prescription glasses." Although I do think the industry has some nice tailwinds and a large total addressable market, I wouldn't invest in Clearly, Warby Parker, or EyeBuyDirect even if they were all stand-alone public companies. My favourite part of the idea is the highly-aligned and qualified team - for example, Roger Hardy, one of the largest shareholders, sold Clearly (dba Coastal Contacts) in 2014 for ~$435M unadjusted for inflation (which is over a double from today’s prices) and I think the team at Kits can at least do that again. Roger Hardy was on a non-compete for 3 years after the sale and in the meantime he invested in, and sat on the board of, Prive Revaux (designer glasses company) before the company was subsequently sold to Safilo Group in 2020 – Roger knows the optical industry.
Benefit provider partnerships
I think it's interesting to see their partnerships with benefits providers in Canada as well. Here is an image I see on the homepage when I log into my benefits provider:
I don't see any other eyeglass companies there and, while I'm not sure if they have exclusive deals, I think benefits providers prefer to work with a home-grown Canadian-based company.
Needham Growth Conference (Jan 16th)
Link: https://wsw.com/webcast/needham134/kits.to/2746040
Joseph recently presented at the Needham Growth Conference and I’ve noted a few items I thought were interesting below.
My favourite part of the Q&A was in reference to online optical category tailwinds and their total addressable market (TAM). Joseph mentioned (I’m paraphrasing): Online categories are typically very slow to progress initially i.e. it takes time for online stores to take market share from brick-and-mortar stores, but online market share will accelerate once it hits a tipping point. For the optical category, it took a long time for online market share to get to where it is today, approximately 20 - 30% of optical sales, but he expects online market share to grow comparatively more quickly to 40%, then 50%, and beyond.
Every year the entire optical category (~$80B TAM) grows 3 to 5% and online sales grow a multiple of that, making it a very exciting category. I expect (and hope) Kits will continue to capture an expanding share of this growth.
One of the initiatives Kits is investing in is their try-on technology, which I think is a great move. I mentioned when I visited the warehouse that it would be great if the online experience could more closely match the in-store experience and for that to happen the try-on technology is lever to pull on. Additional features I think would help are:
Add a filter you can select to only show glasses with “try-on” functionality;
Seamlessly stay in the try-on software virtual window while browsing glasses;
Easily switch between glasses (i.e. hit an arrow and the next pair comes on) in the try-on software;
Seamlessly save pictures of yourself in different glasses which allows you to (1) compare old pictures to the current glasses you have on and (2) make it easier to share multiple pictures and get opinions from friends and family.
Online shopping for glasses already beats in-person in convenience, price, and selection. Improvements to the try-on software could improve the user experience enough that there is no reason to go in-store to shop; especially once online tools for determining vision prescriptions and pupillary distances reliably reduces the need for in-person optometrists.
Joseph also mentioned they are working on ways to recommend glasses that a user may be interested based on details like the shape of their face - one problem with so much choice/variety is that it’s hard to narrow down options in a short amount of time. In my post on Trustpilot I mentioned in the online age with consumers having an abundance of options, filters are increasingly important and they will continue to gain importance over time.
Finally, a book recommendation: ‘Same as Ever’ by Morgan Housel
Along the same vein as the quote from Jeff Bezos above, ‘Same as Ever’ presents an exploration of the recurring patterns in human behaviour and how they influence our lives. This is an easy ready similar to ‘The Psychology of Money’ which I also recommend and was written by Morgan Housel as well.
Disclaimer: As of February 6, 2024, I am a shareholder of Kits Eyecare Ltd at an average cost base of $3.25. My plan at the time of writing is to hold these shares long-term, but I may have sold my position by the time you’re reading this. This is not a purchase recommendation and I can only hope that I’m right on 3 out of 5 (60%) investments I make — this could be one I’m wrong on. Please do your own research and double-check my data & findings.