Buy KITS Eyecare on weakness, this analyst says

Beacon Securities analyst Doug Cooper said KITS Eyecare (KITS Eyecare Stock Quote, Chart, News, Analysts, Financials TSX:KITS) remains in the early stages of a strong growth cycle, arguing that recent share-price weakness is unwarranted ahead of an expected Q3 update that should confirm both revenue growth and margin expansion.

Cooper reiterated his “Buy” rating and $25.00 target price for the stock.

Vancouver-based KITS is a digital eyecare company that sells contact lenses, eyeglasses and frames under its own and third-party brands through online platforms in Canada and the United States.

KITS shares have drifted lower since the company reported its Q2/FY25 results on Aug. 5, closing that day at $16.93 and recently at $16.24, down 4%. Over the same period, Cooper noted, the peer group is up an average of 14.5%.

“In our view, the underperformance is clearly unwarranted and represents an excellent opportunity, especially given we believe KITS will update its Q3 guidance next week,” he said in an Oct. 2 update.

Second-quarter results were strong, with revenue of $49.6-million, up 31% year over year and 6.4% sequentially, and EBITDA of $2.6-million for a 5.2% margin. Cooper emphasized that growth is being driven by both new and repeat customers, with the latter indicating high satisfaction levels with KITS’ products and service.

Q3 guidance issued alongside Q2 results called for revenue between $52-million and $54-million with an EBITDA margin of 5%–7%, implying continued top-line growth of around 30% and margin expansion of roughly 100 basis points sequentially. Cooper expects KITS to confirm this guidance next week, noting that the company has historically issued conservative EBITDA forecasts.

If Q3 revenue lands at the midpoint of $53-million with a 7% EBITDA margin, that would imply $3.7-million of EBITDA — a record level, representing growth of 130% year over year and 44% quarter over quarter. Cooper said this would also translate to positive net income of about $2.3-million, or $0.07 per share.

He also highlighted new data underscoring KITS’ core investment thesis: rising customer spend, especially in glasses, a higher-margin segment driving operating leverage and EBITDA expansion. In Q3, KITS surpassed one million active users, and quarterly revenue per active customer reached $53, up 6% sequentially, 13% year over year, and 41% over two years.

Cooper stressed that KITS’ demographic mix is highly favourable, with 50% of customers being Millennials, 25% Gen Z and 25% Gen X. Millennials and Gen Z are not only large cohorts but are also in their prime glasses-wearing years and comfortable buying online.

“We find it particularly interesting that Gen Z represents 25% of its customer base as we have been highlighting that the historic average age when people need corrective lenses (40 years) has been dropping significantly, primarily due to increased screen time. This opens a huge new opportunity for KITS,” he said.

Cooper said that the lifetime value of KITS’ active customers is very high, yet the market is undervaluing them. At a share price of $16.25 and enterprise value of roughly $500-million, the market is assigning a value of $500 per active customer, versus US$1,320 for U.S. peer Warby Parker. As KITS grows its customer base and average revenue per customer, Cooper expects the valuation gap to narrow. He projects the company could reach 1.25 million customers over the next few years with quarterly revenue per customer of about $80, which at a $1,000–$1,200 per-customer valuation would imply a $1.37-billion market cap, or around $40 per share — roughly 22 times EBITDA assuming a 15% margin.

“KITS remains in the very early stages of its growth cycle,” Cooper said. “As it grows its customer base and its revenue per active customer, we believe investors will be rewarded to our $25.00 target price, but that is only a stop on its way much higher.”

He forecasts that KITS will generate approximately $12.2-million in Adjusted EBITDA on revenue of $207.7-million in fiscal 2025, improving to $22.4-million in EBITDA on revenue of $258.7-million in fiscal 2026.

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