Over the past six months, National Vision’s stock price fell to $23.82. Shareholders have lost 8.2% of their capital, which is disappointing considering the S&P 500 has climbed by 3.4%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in National Vision, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is National Vision Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons there are better opportunities than EYE and a stock we'd rather own.
1. Stores Are Closing, a Headwind for Revenue
A retailer’s store count often determines how much revenue it can generate.
National Vision listed 1,250 locations in the latest quarter and has generally closed its stores over the last two years, averaging 5.2% annual declines.
When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
National Vision was profitable over the last two years but held back by its large cost base. Its average operating margin of 1.3% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
National Vision historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.5%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.
Final Judgment
National Vision isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 24× forward P/E (or $23.82 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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