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Company Name New Look Eyewear Inc. Initiating Coverage (BCI – T) BUY $24.00 Previous Close $16.43 12-month Target Price $24.00 Death, Taxes and Wearing Potential Return 46% Glasses Dividend Yield 3.65% 52 Week Price Range $9.25-$16.79 March 10, 2014 Doug Cooper, MBA Estimates (416) 643-3863 YE: Dec 31 FY13E FY14E FY15E [email protected] Revenue ($MM) $87.6 $134.6 $141.8 Margaux Berry, Associate EBITDA ($MM) $16.1 $26.2 $28.4 (416) 364-5148 Adj. EPS $0.72 $0.92 $1.06 [email protected] Valuation FY13E FY14E FY15E The global eyewear market is very large and is EV/Sales 3.1x 2.0x 1.9x seeing positive growth driven by the aging EV/EBITDA 16.9x 10.4x 9.6x demographic trend. P/E 22.9x 17.9x 15.5x The Canadian market is benefiting from these Stock Data same trends with median age of 40.7; the exact Shares Outstanding (MM) age when most people will need to wear glasses. Basic 12.6 New Look Eyewear is the leading retail chain in FD 12.7 Quebec with 76 stores. It is vertically integrated Market Cap ($MM) from having its own facility (to grind lenses and fit Basic $206.3 frames) to having optometrists in all of its stores to FD $208.5 give exams and write prescriptions. Net Debt ($MM) $64.0 Its TTM results of $86.3 million in sales, $16.2 million of EBITDA, $0.69 EPS and 28% RoE speak to the strong EV ($MM) $272.5 financial metrics of the company. About the Company With 50%+ of the market still held by independents, New Look Eyewear, Inc. provides eye care service and eyewear products in Eastern Canada. It operates a complete lens processing along with several mid-sized chains, we believe the facility and a distribution centre located in Montreal. The company industry is ripe for consolidation. provides customer services such as warranties, contact lens reorder and eye exam. Its products include lens, eyeglasses, sunglasses and Given the above and with a new leadership team, contact lens. New Look Eyewear was converted from an income fund New Look has embarked on a strategic acquisition into a corporation on March 2, 2010 and is headquartered in Montreal, campaign with its recent purchase of Maritime- Canada All prices in C$ unless otherwise stated based Vogue Optical. We believe the transaction Stock Performance is accretive to EPS by ~$0.13 or 16%. Volume (Thousands) Price (CAD) Ultimately, we believe New Look itself could be 20 $18 acquired by one the industry giants (Luxottica, HAL $16 15 Trust or Essilor International). $14 10 We are initiating coverage with a BUY rating and a $12 5 12-month target price of $24.00 $10 0 $8 Mar May Jul Sep Nov Jan Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca New Look Eyewear Inc. Table of Contents Death, Taxes and Wearing Glasses ......................................................................................... 3 Seeing is Believing – Demographics Driving Global Growth in Eyewear ..................................... 5 Industry Has Attracted Large Global Players ............................................................................. 8 New Look Eyewear - An Ideal Consolidator ............................................................................ 11 Acquisition Strategy Is In Motion – First One Very Accretive ..................................................... 14 Financial Forecast ................................................................................................................. 15 Valuation – What’s It Worth? ................................................................................................. 17 Risks .................................................................................................................................... 18 Initiating Coverage with BUY ................................................................................................. 19 Appendix A: Comparable Companies ................................................................................... 20 Appendix B: Financial Statements .......................................................................................... 21 March 10, 2014 | Page 2 Doug Cooper | 416-643-3863 | [email protected] Margaux Berry, Associate| 416-364-5148 | [email protected] New Look Eyewear Inc. Death, Taxes and Wearing Glasses Most people would agree that the ultimate stock in which to invest is one that: a) Participates in a long, multi-generational trend; b) Has a market leading position; c) Generates recurring revenues; d) Generates an above average RoE; e) Pays a dividend with a low payout ratio. The one theme that is multi-generational is demographics. Father Time catches up with everyone. With declining birth rates in the industrialized world, populations of those countries are aging very quickly. Companies who have a leadership position catering to this demographic trend are incredibly well positioned for long-term growth. If there is one undeniable fact of life, it is that (almost) everyone will need glasses in their lifetime. To paraphrase Benjamin Franklin, “…In this world nothing can be certain except death, (and) taxes”, and wearing glasses. Reduced vision in middle age (typically starting at age 40), known medically as presbyopia (Greek root meaning “old eyes”) is inevitable. In fact, a 2005 study from the Eyecare Trust indicated that 96% of the UK population aged 55 and over wore glasses. A simple math calculation of half the industrialized world’s population, or 0.5 billion people (median age of 40 years) times 20 years (a life expectancy of 80 years and needing to upgrade one’s prescription every 3 years) times 2 pair of glasses (regular and sunglasses) times $225 (average cost of a pair of glasses, including an eye exam) equates to a market within the industrialized world of $3.2 trillion over the next 40 years or $80 billion per year. A strong retail presence is very important in the eyewear industry. As glasses are both a fashion item and, much more importantly, have to be prescribed by either an optometrist or ophthalmologist and fitted by an optician, we believe selling through “brick and mortar” will remain the preferred distribution method. Furthermore, as prescriptions should be updated every 3 years, strong customer retention and a recurring revenue stream are created with specific retail outlets. The Internet, on the other hand, which has cannibalized the retail distribution of many other products, has, thus far, remained essentially insignificant with less than a 3% market share for eyeglasses (albeit it has been more successful with contact lenses with a market share of approximately 10%). The size of this market has attracted some major global companies who are trying to consolidate the industry including The Luxottica Group (LUX- March 10, 2014 | Page 3 Doug Cooper | 416-643-3863 | [email protected] Margaux Berry, Associate| 416-364-5148 | [email protected] New Look Eyewear Inc. MIL, €19 billion market cap), HAL Trust (optical focused subsidiary of HAL Holdings, HAL-AMS, €7.2 billion market cap ) and Essilor International (EI- EN, €16 billion market cap). However, in Canada, much of the market is still dominated by small chains and independent operators. New Look Eyewear (BCI – T) is the largest optical chain in Eastern Canada with a vertically integrated lens facility and a central distribution facility in Montreal. It also carries the most recognized and trusted brand in Quebec. However, it still commands less than a 20% market share. From a base of 74 corporate and 2 affiliated stores, New Look posted TTM (period ended September 30, 2013) revenue of $86.3 million, EBITDA of $16.2 million (18.8% margin) and EPS of $0.69 versus $83.5 million, $14.3 million (17.1% margin) and $0.60 in the prior TTM period. While New Look will continue to grow organically by greenfielding new stores and acquiring independent operators (who still command over 50% of the market), New Look has recently started its strategic acquisition program through the purchase of Vogue Optical. The $74 million acquisition brings 65 new stores into the corporate fold as well as $40 million of high margin revenue. It also secures New Look a leadership position in the Maritimes. We believe the Company is contemplating more strategic acquisitions that would establish its presence in Ontario, the West and/or further cement its position as the leading eyewear retailer Eastern Canada. We believe there are a few chains that would satisfy such aspirations and thus both entrench as well as expand New Look’s Canadian market presence. We believe New Look’s balance sheet can support further acquisitions through additional debt, albeit an additional large one may require some equity component. On a pro forma basis, New Look has net debt of ~$64 million for a debt-EBITDA ratio of 2.4x and a debt-equity ratio of 1.3x. Given that we assume any acquisition will be EBITDA positive, we believe New Look can add further leverage to its balance sheet. With a market well supported by strong demographic trends, we believe New Look represents an excellent risk-return proposition. Downside is supported by strong profitability, a 3.7% dividend yield based on a payout ratio equal to 28% of FY14E EBITDA and a forecast RoE of ~24%. Upside is based on significant growth driven by those strong demographic trends supplemented by the acquisition of Vogue as well as the potential for further acquisitions, most likely in Ontario and/or Quebec. As it looks to aggressively expand its Canadian presence,
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