Kits Eyecare keeps Buy rating with Roth Capital

After third quarter financials from Kits Eyecare (Kits Eyecare Stock Quote, Charts, News, Analysts, Financials TSX:KITS), Roth Capital Partners analyst Matt Koranda is staying bullish on the digital eye care platform, maintaining a “Buy” rating and $4.00 price target in a recent update on the company.

Direct-to-consumer glasses and digital eye care brand Kits Eyecare reported revenue up 18 per cent year-over-year and up eight per cent sequentially to $23.6 million in its third quarter, announced on November 9. Gross profit increased by 39 per cent year-over-year to $7.2 million and EBITDA came in at $1.1 million compared to a loss of $1.6 million a year earlier.

Kits reported record two-year Active Customers up 20 per cent year-over-year to 765,000. 

“The vision category remains compelling given its legacy actors and KITS is driving improved long-term value for shareholders with a differentiated model in a quickly changing landscape that is resonating with consumers,” said Kits Co-founder and CEO Roger Hardy in a press release.

Looking at the numbers, Koranda said the Q3 topline of $23.6 million was a beat of analysts’ expectations, where the consensus call and Roth’s estimate were both at $22.9 million. Adjusted EBITDA at negative $0.8 million was a little deeper than expected, where the Street and Roth were again both calling for negative $0.5 million.

Koranda said the earnings miss came from modestly softer-than-expected gross margins with in-line opex, while the analyst also noted Kits’ second consecutive quarter of positive free cash flow, commenting that net working capital remained under control.

“We expect Kits to show sustained mid-teens growth into 2023 given decent demand and easier comps, while gross margin improvement should continue to take hold as glasses revenue mix trends higher, resulting in sustained adj EBITDA profit,” Koranda wrote in his November 11 report.

“While free cash flow will likely reverse to a modest ($1.5) million burn in 2023, we view the balance sheet as healthy (net cash of +$6.5 million), enabling strong optionality,” he said.

Breaking down the Q3 revenue, Koranda noted Glasses revenue of $3.2 million, up 81 per cent year-over-year, with Contacts revenue of $20.4 million, up 12 per cent year-over-year.

“Kits glasses production utilization is still likely in the ~25 per cent range, suggesting plenty of unit growth runway ahead (we think higher units would help with glasses gross margins as well, which bodes well for margin improvement in the coming years),” he said.

For the upcoming fourth quarter, Koranda is now estimating revenue of $24.4 million and EBITDA of positive $0.1 million. At the time of publication, Koranda’s $4.00 target represented a projected 12-month return of 44 per cent.